Level 18, City Centre,
55 Market Street Sydney 2000
T: +61 2 9283 1666 | F: +61 2 9283 1866
FEBRUARY 2010
Non-commercial loans and corporate beneficiaries
When a private company pays amounts to shareholders, or lends them amounts or forgives debts owed by them, those amounts can be treated as dividends paid by the company on which those shareholders are subject to tax. These provisions, which also relate to associates of shareholders, can often be overcome by putting arrangements on a footing which the Commissioner deems to be commercial.
These rules, known as the Non-Commercial Loan provisions, have been in place since 1997 and most commentators thought that the rules were well understood.
Recently, three major issues have come together to create significant uncertainties in respect of these rules, particularly for taxpayers who use trusts as part of their business or investment structures.
Bamford Decision
The first is the decision in the Bamford Case which we have mentioned often in these client alerts. The appeals against aspects of that case are scheduled to be heard in the High Court in early March 2010.
Corporate beneficiary entitlements
Then, on 16 December 2009, the Commissioner issued Draft Taxation Ruling TR 2009/D8 in which he set out his views on the application of the Non-Commercial Loan provisions to unpaid trust distributions to private companies.
In that draft ruling, the Commissioner overturned the long held principle that a trust distribution which is minuted but not paid is not a loan. Significantly, the Commissioner contends that he has always held this view and that, in most instances the Draft Ruling will apply both before and after the date of issue (18 December 2009). He does, however, concede that in some limited circumstances, he is reversing a previously held position and that the Ruling will only apply going forward.
Most ESV clients should fall into the latter category. However, each situation requires some analysis because of differences between trust deeds and distributions of trust income.
Draft law
The third issue is the release of an exposure draft on proposed legislation which the Treasury hopes will improve the operation of Non-Commercial Loan Provisions. This proposed legislation significantly broadens the reach of those provisions. It also contains a number of miscellaneous provisions to tidy up defects in the current legislation. The main areas of the proposed laws that will affect ESV clients are:
- The definition of payment has been broadened to include a licence or other right to use real property and a lease licence or other right to use other company assets. This rule is alleviated by the inclusion of a minor benefits exemption, and an “otherwise deductible rule” which are similar to carve outs for Fringe Benefits Tax. There is also a very limited exception in respect of certain residences.
- The introduction of anti-avoidance measures including one which makes a structure involving cascading trusts ineffective, or funding repayments from distributions arising from revaluations
- The expansion of the provisions to include closely held limited partnerships.
- Clarification that the provisions can apply to a non-resident company loaning funds to resident shareholders.
The draft legislation proposes that these new provisions will have effect from 1 July 2009.
Overriding all of this, of course, are any changes that may emerge from the Henry Report.
Declare offshore income or wear the consequences The tax commissioner has announced that the net is closing in on tax havens and has made a new offer for people who may not have declared all income from offshore activities.
"This is a chance for people with undeclared income, for example interest earned offshore, to contact the Tax Office and sort out their affairs. The offer is open until 30 June 2010."
The Tax Office made a similar offer in 2007 which produced more than 3,000 disclosures with a total of over $306 million in omitted income.
Compared to 2007, the new offer increases the shortfall penalty from 5% to 10% where a person's additional income from offshore activities is more than $20,000 in a tax year.
Those with additional taxable income of $20,000 or less in a tax year will not have to pay a shortfall penalty for that year.
People can now approach the Tax Office anonymously for an indication of whether it would initiate an investigation to determine whether there is a potential breach of the criminal law.
Defamation payout not assessable
In the Sydney Refractive Surgery Centre case, the Full Federal Court has held that damages awarded to a company which were calculated on a 'lost profits basis' were not assessable.
The taxpayer company was awarded $844,624 in damages against the defendant for publishing false and misleading statements as to the nature and quality of laser eye surgery services provided.
The Court held that even though the damages were based on the anticipated net income that the taxpayer had lost from surgical procedures not performed as a result of the defamatory publications, the damage was to the corporation's reputation and not for “loss of profits”.
Although calculated with reference to the company’s profitability, the nature of the amount was of a capital nature as it was to compensate the company for the injury to its reputation. As such, the compensation was exempt from capital gains tax.
The ATO now considers that the case was correctly decided on the facts.
Five new Tax Alerts
The ATO has issued a number of tax alerts on arrangements that have come to its attention and over which it has concerns. These arrangements are often marketed aggressively and we recommend that clients of ESV either avoid the arrangements or seek advice from us prior to investing any money.
- Life insurance bonds issued by tax haven entities – the alert warns taxpayers to be cautious about investing in life insurance policies issued from insurance companies based in tax havens, such as Vanuatu.
- Offshore super trust arrangements – trust structures that masquerade as superannuation funds to avoid tax on money shifted into Australia.
- Sham mortgage arrangements – promoted as 'mortgage management plans' which promise to help home owners repay their home loan sooner and claim tax deductions to which they are not entitled.
- R&D schemes – this alert warns people to be cautious of investment schemes that abuse the research and development (R&D) tax offset.
- 'Option' arrangements – that attempt to artificially create up-front deductions whereby an employer makes a 'deductible' cash contribution to a trust which then pays it back to acquire options from the employer.
It has become obvious from Operation Wickenby that a real tax audit risk arises simply by having your contact details on the data base of a person under investigation for promoting tax schemes.
ATO appeals case - education expenses/Youth Allowance
The Tax Office has now advised that it has sought special leave to appeal against this decision (the Anstis case) in the High Court. In that case, the Full Federal Court held that a taxpayer, who received a Youth Allowance as a university student, was entitled to a tax deduction for her education expenses.
We understand that the Tax Office intends to ignore the decision of the Federal Court and continue to apply its view that education expenses are not deductible for tax purposes when incurred in deriving income from Commonwealth educational assistance schemes.
Goods taken from stock for private use
The Tax Office has issued a new tax determination which estimates of the value of goods taken from trading stock for private use by taxpayers in certain industries for the 2009/10 income year.
If you can justify a lower value for goods taken from stock than that shown in the schedule you should speak to us.
The Schedule for the 2009/10 income year is:
|
Type of Business
|
Adult/child over 16 $ |
Child 4-16 years $ |
|
Bakery |
1,130 |
565 |
|
Butcher |
760 |
380 |
|
Restaurant/cafe (licensed) |
3,860 |
1,540 |
|
Restaurant/cafe (unlicensed) |
3,080 |
1,540 |
|
Caterer |
3,330 |
1,665 |
|
Delicatessen |
3,080 |
1,540 |
|
Fruiterer/greengrocer |
810 |
405 |
|
Takeaway food shop |
2,920 |
1,460 |
|
Mixed business (includes milk bar, general store and convenience store) |
3,680 |
1,840 |
Liability limited by a scheme approved under Professional Standards Legislation.
The information in this newsletter is quite general in nature and anyone intending to apply it practically to their own circumstances should seek professional advice to verify it’s individual applicability.
If you have any queries regarding the information contained in this
update please do not hesitate to contact us.
To receive future newsletters electronically please visit the
‘Latest News’ section of our website and ‘Subscribe’.