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SEPTEMBER 2009
Tax Office ignores High Court on Trusts but the decisions keep coming
On 20 August 2009, the Commissioner finally released his Practice Statement on Bamford, PS LA 2009/7. It is a disappointment.
The Bamford decision considered what “share of the income of trust” means as well as “income of the trust”. The decision on the first matter was consistent with the proportionate view. The decision on the second matter held that the trust deed defined what constitutes income and capital of a trust. The taxpayer appealed against the first decision and the Commissioner against the second. No dates for the High Court hearing have been scheduled.
In this Practice Statement, the Commissioner essentially directs his staff to ignore the decision of the Full Federal Court and continue to treat the income of the trust in the same way as accounting concepts (not the trust deeds). Audits won’t be initiated on this issue unless aggressive tax planning is suspected. The Commissioner will try to avoid disputes on the issue in consultation with the taxpayers by deferring decisions until after the High Court decision is handed down.
The Commissioner initially undertook to hand down a position paper by the end of July. We are not holding our breath waiting for that to issue now. It seems that everything will be left in abeyance until the High Court provides a resolution.
Interestingly, in an unrelated case (Wood v Inglis) the NSW Supreme Court accepted that the trust deed is the primary point of reference when determining the nature of trust receipts. Surprisingly, that case has received very little publicity in the tax commentary.
Accounting for Income Tax
Exposure Draft ED 178 has been proposed as a new standard covering accounting for income tax. It was released in April 2009 for public comment. Although officially comments closed in June, the profession has maintained discussion in the financial press.
The new standard, if it passes unchanged, will require reporting entities to disclose in their financial statements all tax matters in relation to which the outcome would be uncertain if the Australian Tax Office had full access to all material facts.
Investment allowance interpretative decisions
The small business and general business tax break (also known as the 'tax break' or 'investment allowance') was originally announced by the Government on 12 December 2008. Subject to expenditure thresholds, it gives small businesses a bonus deduction of 50% (30% or 10% for other businesses) when they acquire depreciating assets acquired between 13 December 2008 and 31 December 2009.
As reported last month, if a taxpayer intends to claim the tax break in respect of an asset they are acquiring under a hire purchase arrangement, the relevant date for establishing eligibility for the tax break is the date of the hire purchase contract and not the time the date the purchase order for the asset was placed with the supplier.
For example, if a taxpayer placed an order with a supplier in August 2008 for a new depreciating asset, but did not enter into the hire purchase agreement with the financier until the asset was delivered in April 2009, then the relevant date for establishing eligibility for the tax break is April 2009, not August 2008.
The Commissioner has also clarified that, in his opinion, a taxpayer who acquires an asset with an intention of entering into a sale and leaseback arrangement in respect of that asset is not eligible for the tax break.
ATO: Be careful when claiming losses on shares
The ATO recognises that the global economic downturn has decreased the value of many people's investments over the past year, and that some taxpayers may be 'confused' about the difference between capital losses (share holding) and revenue losses (share trading).
They remind taxpayers that the taxation of their investments in prior years is relevant when working out the treatment of a loss in the current year, so if there has been minimal change in the nature of their investment activity, it is likely that the same tax treatment applies in the current year.
For example, if a taxpayer has previously sold shares and claimed the 50% CGT discount, and has then realised a loss in the current year, they would be expected to claim this as a capital loss.
Taxpayers who seek to reclassify their activities may be asked to provide evidence that demonstrates a change in the nature of their activities or that they have declared their income incorrectly in the past.
Main residence for NSW land tax denied
A taxpayer who purchased land adjoining his residence has been denied the principal place of residence land tax exemption as there was no ‘unity of title’ because his residence was owned as tenants in common with his wife while the adjoining land was purchased in his own name.
The NSW Administrative Decisions Tribunal rejected the taxpayer’s argument that unity of title could be established because the adjoining property could be redistributed to his wife under the Family Law Act 1975. The relevant test established in Ryan’s case was to determine the title holder/s of the properties. The Tribunal also upheld the Commissioner’s interest charge at the ‘market rate’. (Kleyne v CCSR)
SMSF lends money to related company, pays 45% tax
The Administrative Appeals Tribunal has upheld the decision of the Tax Office (ATO) to make a self-managed superannuation fund (or 'SMSF') 'non-complying' when it breached the investment rules applying to SMSFs. However, the Tribunal held that "it was the correct decision to issue the notice of non-compliance." From 1 July 2009, most income earned by an Australian resident individual from continuous foreign service of more than 90 days will no longer be exempt from income tax (although some income that relates to certain development projects, and charitable or government activities will continue to be exempt).This means that: Reduction of PAYG withholding amounts to take foreign tax into account The increase in the low-income tax offset to $1,350 for 2009/10 (from $1,200 in 2008/09) effectively means that $3,000 can be distributed to minors tax-free in the 2009/10 year. The ESV Grasscutters, ESV’s entry in the 2009 Oxfam 100km Trailwalker Challenge, successfully completed their challenge of getting all four members of the team home. They crossed the finish line at about 7:30pm on Saturday 29 August after 36 1/2 hours of walking, with no sleep breaks. Only half of the teams that started finished in tact. They have so far raised over $7,100 towards their target of $8,000.
An SMSF must be a “complying fund” to access the concessional tax treatment offered by the superannuation provisions (such as the 15% tax rate). That is, the funds must comply with the superannuation law, including the restrictions on what they can invest in.
If a previously complying fund is made 'non-complying' by the ATO, it may need to include the full market value of its assets in its income that year and that amount is taxed at 45% (in that year and all future years the fund remains non-complying).
In the 2004/05 income year, the SMSF (the 'Fund') made loans to a company which was a related party of the Fund. Under the investment restrictions in the superannuation law, a loan to a related party is considered an 'in-house asset', and an SMSF is limited to basically having no more than 5% of its assets as in-house assets.
The trustee’s actions resulted in the fund lending almost all of its assets to the related party, above 95% – well beyond the allowed 5%.
On 23 July 2007, the Fund’s auditor lodged a contravention report with the ATO advising the Fund had contravened the in-house asset rules.
The ATO consequently issued a non-compliance notice in respect of the Fund, and the trustees appealed the decision to the Tribunal.
They argued that the Fund should still be treated as complying despite the contravention of the in-house asset rules, due to other factors, such as the declining fortunes of their business operations at the time, the chronic illness of one of the trustees (who was also the company manager), and the Queensland cyclones in 2004 and 2005.
The Tribunal considered:
The seriousness of the contravention, and the length of time taken to redress it, "weighed most heavily" against treating the Fund as complying despite the contravention of the Act.
Before issuing the non-compliance notice, the ATO rejected two repayment arrangements the trustees put forward because the timeframes were too long. Had they been able to rectify the breach in a more timely fashion, the Fund may not have been made non-complying.
Where an employee's foreign earnings are not exempt from tax in Australia, the employer should reduce the amount of Australian tax that would normally be withheld by the Australian dollar equivalent of the amount of tax to be withheld and paid to the foreign country (and if the resulting Australian withholding amount is zero or negative, there is no amount to withhold).
FBT and changes to foreign employment income
In addition, employers with employees working in a foreign country may also need to reconsider their FBT liability from 1 July 2009, since fringe benefits provided to employees whose foreign employment income is not exempt may be subject to FBT.
Ordinarily, and excluding the offset, once a minor's income exceeds $1,307, the entire amount is taxed at 45%.
However, applying the low-income tax offset of $1,350 means that no income tax will be payable until the minor's taxable income exceeds $3,000, i.e., $1,350 divided by 0.45 = $3,000.
Oxfam 100km Trailwalker Challenge
The ESV Grasscutters send their warmest thanks to everyone that sponsored them or otherwise supported and encouraged them in their physical and fundraising Challenges. Donations can still be made at http://www2.oxfam.org.au/trailwalker/Sydney/team/34
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