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inside… Editorial: The Tax Office: it’s time!

Year-end tax and superannuation planning checklist

Questions and answers from our helpline

Federal Budget 2013-14The 2013-14 Federal Budget was generally predictable in that a substantial deficit was confirmed, whilst a pathway for a return to surplus over a four year period was outlined. Why any confidence should be placed in the predicted return to surplus is unclear. Comments emanating from Federal Treasury only ten days after the Budget was delivered are already casting significant doubt over the projected return to surplus. The Parliamentary Budget Office indicates that the forecast surplus in four years’ time (according to the Budget Papers) may in fact be a Budget deficit of up to $18 billion.

For those with a focus on the tax and superannuation system, the Budget and announcements leading up to the Budget continued the approach of tinkering with the respective rules without genuinely addressing the need for a holistic review. A wide-ranging examination of the tax and superannuation system is the only way of establishing regimes which are fair and equitable, sustainable and able to be administered in a manner which will instill confidence in the Australian community.

The announced changes to the superannuation system provide a case in point. Some of the proposed changes are positive, such as the increase in concessional contribution caps and changes to the excess contributions tax rules. However a tax on earnings in the pension phase was foreshadowed where earnings exceed $100,000 per annum. It is all a piecemeal approach to an issue of critical importance to the majority of Australians. The Budget should have flagged a comprehensive review of the entire superannuation system to ascertain fairness and sustainability.

A summary of key Budget announcements is set out below.

Individuals & family tax measuresIndividualsPersonal income tax rates: residents

The reduced resident individual tax rates due to apply from 1 July 2015 were announced when the carbon tax legislation was enacted and were confirmed in the previous year’s Budget. The 2013-14 Budget confirmed that the income tax cuts in the 2012-13 year will remain, however the Government has deferred the subsequent rate changes contained in this legislation that were to commence on 1 July 2015. A summary of the revised resident personal rates which will apply are set out in Table 1 on page 322.

The 2015-16 personal tax rates originally proposed but that will now not come into effect are set out in Table 2 on page 322. See page 323 for an example of the effect of the deferral of cuts on taxpayers.

pages 321-352

Continued – page 322

June 2013 www.taxpayer.com.au Issue 11 • 2012/2013

322 | The Taxpayer | June 2013

Federal Budget 2013-14 (continued)

Contents

Federal Budget 2013-14 . . . . . . . . . . . . . . 321

Editorial: The Tax Office: it’s time! . . . . 323

Year-end tax and superannuation planning checklist: 2012-13 . . . . . . . . . . . 340

Questions and answers . . . . . . . . . . . . . . . 349

Go to www.taxpayer.com.au/checklist2013 to download a PDF version of the ‘Year-end tax and superannuation planning checklist’

Commentary

The rates of tax will be left unchanged as a result of the 2013-14 Budget. This will lead to more primary tax being payable than originally planned; however the Government claims that additional payments under the Household Assistance Package and the increase in the tax-free threshold to $18,200 satisfies the Government’s commitment to household assistance. The Budget was largely silent regarding the low income tax offset changes originally announced in the Clean Energy legislation. It is assumed that this offset will still be reduced in the 2015-16 income tax year, leading to additional tax payable for relevant taxpayers. The low income tax offset rates originally proposed in the Clean Energy legislation are reproduced in Table 3 below.

Table 1: Individual resident tax rates per 2013-14 BudgetTaxable income Rates 2012-13, 2013-14 & 2014-15

Lower threshold Upper thresholdTax on income

up to lower thresholdRate of tax for each $1 over lower threshold

- $18,200 - 0%$18,201 $37,000 - 19%$37,001 $80,000 $3,572 32.5%$80,001 $180,000 $17,547 37%

$180,001 - $54,547 45%

Table 2: 2015-16 year individual rates deferred by 2013-14 Budget

Taxable incomeTax on income up to lower

threshold

Rate of tax for each $1 over lower threshold

(up to upper threshold)Lower threshold Upper threshold

- $19,400 - 0%$19,401 $37,000 - 19%$37,001 $80,000 $3,344 33%$80,001 $180,000 $17,534 37%

$180,001 - $54,534 45%

Table 3: Low income tax offset rates originally proposed in the clean energy legislation

2011-12 2012-13 2015-16LITO amount $1,500 $445 $300Taxable income the LITO begins to be reduced at

$30,000 $37,000 $37,000

You are no longer eligible for LITO if your taxable income is

$67,500 & over $66,667 & over $67,000 & over

Withdrawal rate 4% 1.5% 1%

Continued – page 324

June 2013 | The Taxpayer | 323

The Tax Office: it’s time!

There is no doubt the personnel of the Tax Office have a difficult job administering tax laws which are unwieldy, often poorly drafted and commonly amended ‘on the run’ with amending legislation

appearing months (or sometimes years) after announcements of proposed change.

Notwithstanding these difficulties, it is clear that change is needed at the Tax Office. The Government has, in effect, endorsed this view by not reappointing the previous Commissioner of Taxation for a second term and replacing him with an external appointment from the private sector. The recently appointed Commissioner, Mr Chris Jordan, is a former senior partner at KPMG.

Initiatives already begun by Mr Jordan include an internal review of Tax Office structure and operating methods. An early outcome of this review will be the separation of the appeals area within the Tax Office in order to better ensure an objective and independent review of matters in dispute.

This should result in the earlier identification of cases which should be settled whilst placing a sharper focus on cases likely to involve litigation. This is a positive step.

It is reasonable to allow the new Commissioner time to conclude his current review before major changes are sought. The Federal Opposition has foreshadowed a separation of the Tax Office into two groups, broadly described as administrative and technical areas. This would seem premature as the current review remains a work in progress. However, it is clear that change is needed.

There has been no discernible increase in skill levels within the Tax Office in recent years, pockets of the Tax Office display an approach which some see as adversarial and the frustrations of taxpayers and tax agents have never been higher.

This situation prevails notwithstanding increases of approximately 1,500 in Tax Office staff levels over the past five years with a further 500 additional staff provided for in the 2013-14 Federal Budget.

It seems that the ramping up of Tax Office staff numbers is not the answer, they must be groomed to work ‘smarter’. For example: the use of statistical benchmarks to analyse the tax returns of small business in order to detect unreported income by way of cash transactions is a sensible idea which should be successful. However, the results of the small business benchmark strategy have been, at best, patchy (something confirmed by statistics gathered by the Inspector General of Taxation during the course of a recent review of Tax Office activities). This relative failure of the benchmarking initiative to date stems from the fact that the benchmarks themselves have not been well constructed and the interpretation of them indicates a general lack of commercial experience on the part of those who implement the strategy.

A strategy which appears to at least be on the table is the hiring by the Tax Office of individuals with significant private sector commercial experience in order to assist and guide Tax Office staff. It is to be hoped that this initiative comes to fruition as it has much to offer to the organisation and, by extension, the taxpayer community.

The new Commissioner of Taxation has taken the reins at a critical time; it is in the interests of all stakeholders that the success he has enjoyed in other pursuits during his professional career is replicated at the Tax Office. n

Roger Timms - Head of Tax & Superannuation

Editorial


Federal Budget 2013-14 (continued from page 322)

Personal income tax rates: non-residentsThe non-resident individual tax rates to apply

from the 2015-16 year were announced when the carbon tax legislation was enacted and were confirmed in the previous year’s Budget. The Government has now decided to defer the changes to these tax rates. A summary of non-resident individual rates which will apply from the 2012-13 year is set out below:

Summary of individual non-resident tax rates

Taxable income Rates from 2012-13

Lower threshold

Upper threshold

Tax on income up to lower

threshold

Rate of tax for each $1 over lower threshold

- $80,000 - 32.5%

$80,001 $180,000 $26,000 37%

$180,001 - $63,000 45%

Personal income tax: exempting disaster payments from income tax

The Government has made certain payments associated with natural disasters exempt from income tax.

The Disaster Income Recovery Subsidy (DIRS) payments provided between 3 January 2013 and 30 September 2013 were exempted. The DIRS provides financial assistance to employees, small business persons and farmers who experience a loss of income as a direct consequence of a natural disaster occurring in Australia.

Also, income tax ex-gratia payments to New Zealand non-protected Special Category Visa holders affected by natural disasters that occurred in 2012-13 were also exempted. These ex-gratia payments are equivalent to the tax-exempt Australian Government Disaster Recovery Payment (AGDRP) and assist New Zealanders who would have been eligible for the AGDRP, but for their visa status.

Increase in the Medicare levy and Medicare levy low income threshold: DisabilityCare Australia

Increase in the Medicare levy

The Medicare levy is proposed to be raised by half a percentage point from 1.5 to 2% from 1 July 2014. This is proposed to provide strong and stable funding for DisabilityCare Australia.

Low-income earners will continue to receive relief from the Medicare levy through the low

EXAMPLEThe effect of the deferral of cuts to the income tax rate on taxpayers is demonstrated below by using four different levels of income:

Difference in primary tax due to Budget deferral - 2015-16 year

Taxable incomePrimary tax payable

per Budget Primary tax payable

if tax cut retainedAdditional/(decrease)

in tax payable

$25,000 $1,292 $1,064 $228

$55,000 $9,422 $9,284 $138

$93,000 $22,357 $22,344 $13

$200,000 $63,547 $63,534 $13

Changes in the low income tax offset (LITO) have not been factored in to the above analysis. The low income tax offset was also proposed to be reduced. For 2015-16 it is $300 (2012-13 is $445). It was originally $1,500 in the 2011-12 income tax year.

The Medicare levy has not been factored in to either the tax rate table or the example illustrating how the tax rates would apply to various levels of income.


income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

The revenue proposed to be raised by the increase in the Medicare levy will be invested in a new fund — the DisabilityCare Australia Fund (the Fund) — to be drawn on for expenditure directly related to DisabilityCare Australia.

The States and Territories will be able to draw down from the Fund when they meet key conditions, including agreement to the full scheme, and once at least 50% of their eligible population are covered by the scheme.

For further information, see the joint press release of 1 May 2013, issued by the Prime Minister, the Deputy Prime Minister and Treasurer, and the Minister for Disability Reform.

Increase in the Medicare levy flow on effects

A number of other tax rates that are linked to the Medicare levy will also increase. This means that in some cases, tax rates that incorporate the Medicare levy will also increase by half a percentage point.

For example, the rate of tax for Fringe Benefits Tax (FBT) purposes will increase from the current rate of 46.5% to 47% for the FBT year commencing 1 April 2014 and later years of tax.

A summary of the key tax rates that are linked and will be affected by the increase in the Medicare levy is set out below.

Note: Section 29 of the Income Tax Rates Act 1986 specifies the rate of tax payable by trustees of complying and non-complying superannuation funds, and retirement savings account providers in respect

Impact of the Medicare levy increase

Area of tax lawCurrent

rateNew rate Date of effect

Fringe Benefits Tax1 46.5% 47% 1 April 2014 and later tax years

Superannuation

• Excess concessional contributions tax

• Excess non-concessional contributions tax

• Excess untaxed roll-over amounts tax

31.5%

46.5%

46.5%

32%2

47%

47%

2014-15 financial year and later

2014-15 financial year and later

Excess untaxed roll-over amounts paid on or after 1 July 2014

Trusts

• Family trust distributions tax

• Trustee beneficiary non-disclosure tax

46.5%

46.5%

47%

47%

Applies to tax payable on notices given by the Commissioner of Taxation on or after 1 July 2014

2014-15 income year and later income years

Employee share schemes (ESS)

• TFN/ABN withholding tax 46.5% 47% Applies to ‘ESS interests’ provided on or after 1 July 2014

First Home Saver Accounts (FHSA)

• FHSA misuse tax 46.5% 47% Applies to payments from a FHSA made on or after 1 July 2014

Withholding for TFN and ABN not quoted3 46.5% 47% Applies to payments made on or after 1 July 2014

1: Please note that the calculation of ‘Type 1’ and ‘Type 2’ fringe benefit gross up taxable amounts will also change as a result of this increase. Type 1 will be 2.0802 and Type 2 will be 1.8868.

2: Assumes maximum marginal rate applies.

3: The tax rates for TFN and ABN withholding have automatically been revised to 47% to reflect the uplift in the Medicare levy, no amending legislation was required. A common form of TFN withholding is for instance bank interest income where a TFN is not quoted to a bank.



of no TFN contributions income. It should be noted that the rate calculated under that provision, which incorporates the Medicare levy rate, will increase from 1.5 to 2%. This amendment applies to assessments for the 2014-15 income year and later income years.

Medicare levy low-income threshold

The Government will increase the Medicare levy low-income threshold for families to $33,693 for the 2012-13 income year, with effect from 1 July 2012.

The threshold for each dependent child or student will also increase to $3,094. The increase in these thresholds takes into account movements in the Consumer Price Index and ensures that low-income families are not liable to pay the Medicare levy.

The Government increased the Medicare levy low-income thresholds for individuals and pensioners for 2012-13 as part of the Household Assistance Package. The Medicare levy low-income thresholds increased to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

Net medical expenses tax offset phase out

The Government will phase out the net medical expenses tax offset (NMETO) with transitional arrangements for those currently claiming the offset. The NMETO will continue to be available for taxpayers with out of pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019. DisabilityCare Australia is proposed to be fully operational by this time.

From 1 July 2013 those taxpayers who claimed the NMETO for the 2012-13 income year will continue to be eligible for the NMETO for the 2013-14 income year if they have eligible out of pocket medical expenses above the relevant thresholds. Similarly, those who claim the NMETO in 2013-14 will continue to be eligible to claim the NMETO in 2014-15.

This reform is consistent with the recommendations of the Australia’s Future Tax System review.

Work-related self-education expenses capping

An annual $2,000 cap on deductions for work-related self-education expenses is proposed from 1 July 2014. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.

The Government says the potential for uncapped claims for the wide range of expenses that can potentially be claimed under this deduction provides an opportunity for some people to enjoy significant private benefits at taxpayers’ expense.

Employers are generally not liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers. This exemption will be retained, unless an employee salary sacrifices to obtain these benefits.

Savings from this measure will be redirected to the Better Schools — A National Plan for School Improvement package.

Further information can be found in the press release of 13 April 2013 issued by the Deputy Prime Minister and Treasurer. As outlined in this release, the Government will consult closely to better target this deduction while still supporting essential training. A discussion paper will be released in late May 2013 as part of this process of consultation.

Minor amendments • The Government as part of the Anzac

Centenary Program 2014-18 will specifically list the Anzac Centenary Public Fund as a deductible gift recipient (DGR). Taxpayers may claim an income tax deduction for certain gifts of money or property to DGRs.

• The Government will provide an income tax exemption for compensation provided for legal advice to beneficiaries under the Military Rehabilitation and Compensation Act 2004 (MRC Act) from 1 July 2013.

• The Government will make a series of minor amendments to the tax laws to correct


technical defects, remove anomalies and address unintended outcomes which have been recently identified in the tax legislation.

Families

Replacing the Baby Bonus with new family payment arrangements

The Baby Bonus is to be abolished and replaced by an additional Family Tax Benefit Part A (FTB Part A) payment of $2,000. The payment is to be made in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for second and subsequent children. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

Parents who take up Paid Parental Leave (PPL) will not be eligible for the additional FTB Part A component. However, the work test under the PPL scheme will be extended so that parents will be able to count periods of Government PPL as “work”, in the same way as employer-funded PPL.

This measure acts on a recommendation of the Australia's Future Tax System review (the Henry Review). The measure will apply from 1 March 2014.

HECS-HELP discount and voluntary HELP repayment bonus: discounts to end

The following discounts relating to the Higher Education Loan Program will be removed:

• the 10% discount available to students electing to pay their student contribution up-front, and

• the 5% bonus on voluntary payments made to the Tax Office of $500 or more.

This measure will apply from 1 January 2014.

Indexation pausesThe following items will be subject to a pause on

their indexation:

• FTB end of year supplements

• the Child Care Rebate annual per child cap

• the higher income tests for family payments, and

• the income threshold for the dependency tax offsets

These will be extended for a further three years.

2012-13 Budget measures that will not be introduced

The Government will not proceed with the increase to FTB Part A announced in the 2012-13 Budget.

Superannuation measures The superannuation proposals for this

Budget were essentially released jointly by the Treasurer and the Minister for Financial Services and Superannuation on 5 April 2013. They were promoted on the grounds of improving the fairness, sustainability and efficiency of the superannuation system.

The announcements which will have widespread application include:

• an increase in the concessional contribution cap to $35,000 from 1 July 2013 for taxpayers who are at least 60 years of age

• the taxing of excess concessional contributions at the taxpayer’s marginal rate of tax, and

• the imposition of tax at the 15% rate on income received from assets supporting income streams (to the extent that the annual income exceeds $100,000).

Details are available at www.taxpayer.com.au/media/news/government-announces-changes-super-system.html

The following additional items were released on Budget night. These are relatively minor changes.

• Minor amendments to the 2012-13 Budget measure Superannuation — reduction of higher tax concession for contributions of very high income earners, effective from 1 July 2012. This measure is estimated to provide $25.2 million over the forward estimates. These amendments involve:

- exempting from the measure employer contributions for Federal judges sitting on or after 1 July 2012 who are entitled to a benefit payable under the Judges’ Pension Act 1968, and employer contributions made to constitutionally protected funds for State higher level office holders sitting on or after 1 July 2012 (to mitigate constitutional risks)



- using a similar definition of income for the measure to that used for calculating whether an individual is liable to pay the Medicare levy surcharge, and

- refunding former temporary residents the tax paid under the measure as they effectively do not receive any concessional tax treatment on their contributions to superannuation as a result of the operation of other rules.

• The eligibility criteria for the low income superannuation contribution (LISC) will be amended to now pay individuals with an entitlement below $20. Previously, the LISC was not paid if it would be less than $20. Entitlements under $10 will be rounded up to $10.

• Additional funds are provided to compensate members of four APRA-regulated superannuation funds in the Trio Capital Group that suffered losses due to fraudulent conduct. The funds will be recovered through levies on APRA-regulated superannuation funds.

• $200,000 in 2012-13 is earmarked to support a Charter Group that will consult and report on the proposed Charter and Council to advise the Government on appropriate future superannuation changes. Further funding for the Council will be considered once the Charter Group has reported.

For seniors The Government will support senior Australians

with a number of initiatives including $112.4 million for a pilot program to support Age Pensioners and other pensioners over age pension who want to downsize their home, without it immediately affecting their pension.

A new seniors' Work Bonus is intended to ensure pensioners keep more of their pension while working.

Under the Broadband for Seniors program, around 2,000 internet kiosks for seniors around the country will provide free access to broadband internet as well as training to teach seniors new computer skills. The 2013-14 Budget delivers an extra $9.9 million over four years for new technology and training grants for Broadband for Seniors kiosks.

Business tax measuresFor business taxpayers, the Government

proposes to introduce a number of measures with the intention of ‘protecting the corporate tax base from erosion and loopholes’. Other measures that are included in the Budget have been previously announced in the Mid-year Economic and Fiscal Outlook 2012-13 in October last year.

Monthly PAYG instalments extended to entities other than large corporate taxpayers

The Government will extend the requirement to make monthly Pay As You Go (PAYG) income tax instalments to include all large entities in the PAYG instalment system, including trusts, superannuation funds, sole traders and large investors.

This extends the measure previously announced for corporate taxpayers in the Mid-year Economic and Fiscal Outlook 2012-13.

According to the Government, this will be progressively brought in from the third tranche of the already announced move to monthly PAYG instalments for corporate entities.

In particular:

• corporate tax entities with turnover of more than $1 billion will still move to monthly PAYG instalments from 1 January 2014

• corporate tax entities with turnover of $100 million or more will still move to monthly PAYG instalments from 1 January 2015

• corporate tax entities with turnover of $20 million or more, and all other entities in the PAYG instalment system with turnover of $1 billion or more, will move to monthly PAYG instalments from 1 January 2016, and

• all other entities in the PAYG instalment system with turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.

Further:

• entities, other than head companies or provisional head companies, that have a turnover of less than $100 million and report GST on a quarterly or annual basis will not be


required to pay PAYG instalments monthly, and

• entities in the taxation of financial arrangements (TOFA) regime will assess their entry to monthly instalments using a modified turnover test, based on their gross TOFA income, rather than their net TOFA income.

Comment

Ultimately, it appears that this measure allows the Government to bring to account its tax receipts earlier as business are currently only required to pay PAYG instalments on either a quarterly or annual basis.

The announcement extends PAYG monthly withholding to trusts, superannuation funds, sole traders and large investors from:

• 1 January 2016 - if their turnover is $1 billion or more, or

• 1 January 2017 - if their turnover is $20 million or more.

This follows exposure draft legislation that was released by the Government on 25 March 2013 to implement monthly PAYG instalments for large corporate taxpayers only.

The Government’s rationale for these measures is that they better align PAYG instalment payments with the Goods and Services Tax (GST) payments of most large entities that are required to remit GST monthly.

Whilst it is understandable for large business to remit GST on a monthly basis as they are acting as ‘tax collectors’ on a value added tax, this is less so for income tax purposes. Instead, it may pose cash flow issues for large businesses in meeting their expenses on a timely basis.

Consequently, affected businesses are placed under the additional administrative burden of monitoring their cash flow positions closely and working out the relevant amounts to be reported and remitted when the measures come into effect. Careful planning will be required by entities affected by these measures, in order to protect their cash flows.

Measures to prevent ‘dividend washing’ arrangements

Measures will be introduced that will prevent sophisticated investors from engaging in ‘dividend washing’ arrangements from 1 July 2013.

According to the Government, sophisticated investors can currently engage in ‘dividend washing’ to, in effect, trade franking credits. This can result in some shareholders receiving two sets of franking credits for the same parcel of shares. This is outside the intent of the dividend imputation system.

The proposed measure will ensure that when an investor engages in ‘dividend washing’ by selling shares with a dividend and then immediately buying equivalent shares that still carry a right to a dividend, they will only be entitled to use one set of franking credits.

The changes will be targeted to the two-day period after a share goes ex-dividend.

Mining rights and information excluded from immediate exploration deduction

The Government proposes that the immediate deduction for the cost of assets first used for exploration will exclude mining rights and information.

The assets contemplated include mining, quarrying or prospecting rights and/or information that are acquired from another entity.

The current immediate deduction is allowed under s40-80 of the Income Tax Assessment Act 1997 (ITAA97).

Under the proposed measure, mining rights and information first used for exploration will be depreciated over 15 years, or their effective lives, whichever is shorter.

According to the Government, the effective life of a mining right and associated exploration information will be the life of the mine to which it relates. A 15 year effective life is initially used if the life of the right is not known at the time of its acquisition.

If the exploration is unsuccessful, the remaining amount will be written off when this outcome is established.

The measure will not apply to:

• the costs of mining rights from a relevant government issuing authority



• the costs of mining information from a relevant government authority

• the costs incurred by a taxpayer itself in generating new information or improving existing information, and

• the mining rights acquired by a farmee under a recognised ‘farm-in, farm-out’ arrangement — which are often used by small explorers and do not represent a base erosion concern.

These will continue to be immediately deductible.

The measure applies to taxpayers who start to hold the mining right or information after 7.30pm (AEST) on 14 May 2013 unless:

• the taxpayer has committed to the acquisition of the right or information (either directly or through the acquisition of an entity holding the asset) before that time, or

• they are taken by tax law to already hold the right or information before that time. Any commitment will need to be objectively verifiable.

Consultation will be sought in relation to design and implementation of this measure.

CommentFollowing this Budget announcement, the Government released a proposals paper entitled ‘Targeting the immediate deduction for mining rights and information first used for exploration’.

The Government explains the need for amendment to s40-80 ITAA97 in the paper by stating that:

The extension of the concession in this way has opened up opportunities for taxpayers to claim a deduction for a cost relating, in substance, to the cost of gaining access to known resources for subsequent use in development and production. This is because the value of the rights and information will reflect the value of the minerals or petroleum that they are expected to provide access to (discounted for time and risk). As exploration proceeds and the prospectivity of an area is better understood, the value of the rights and information may increase accordingly.

Allowing a concession for what is essentially the cost of acquiring access to natural resources is outside the policy intent of the provision. While the development and production stages may involve considerable risk, this is different in nature

Explore Co Miner Co

Exploration permit

Outcome:

• Miner Co claims a $300 million deduction against current income for the purchase of Explore Co’s rights and information.

• Consequently, Miner Co obtains immediate deductibility for an amount spent on obtaining rights to an underlying resource, rather than on exploration.

Step 1:

• Explore Co obtains a permit and undertakes exploration costing $10 million.

• As these exploration costs were for permits, labour, plant and equipment, the cost of $10 million is immediately deductible.

• Explore Co finds a resource deposit on the site.

Step 3:

• Miner Co undertakes confirmatory exploration which is immediately deductible.

• Miner Co also claims an immediate deduction for the full purchase price of the exploration right and information as the rights acquired were first used in exploration.

Step 2:

• The exploration rights and associated information are sold to Miner Co for $300 million.


to the risk involved in searching and appraising an area for resources that may or may not be present.

The diagram in the paper illustrates the Government’s concern (see page 330).

In lieu of an immediate deduction, the Government’s proposal limits the deduction for certain mining rights and information over the shorter of 15 years or effective life of the mine, quarry or petroleum field to which it relates.

Measures addressing issues related to consolidated groups

The Government has indicated that it will amend the taxation law to address a number of issues relating to consolidated groups that were identified by the Board of Taxation.

Primarily, the Government plans to amend the law to ensure that:

• non-residents are not able to ‘churn’ (ie. buy and sell) assets between consolidated groups to allow the same ultimate owner to claim double deductions

• certain deductible liabilities are not taken into account twice, and

• consolidated groups cannot access double deductions by shifting the value of assets between entities.

These amendments will apply to transactions that take place after 14 May 2013.

In addition, the Government has also announced other changes to the tax consolidation rules which include amendments to:

• ensure that only net gains and losses are recognised for tax purposes for certain intra-group liabilities and assets that are subject to the taxation of financial arrangements regime (TOFA), upon exit of a member from a consolidated group, and

• ensure that multiple entry consolidated (MEC) groups cannot access tax benefits not available to domestic consolidated groups from 1 July 2014. This addresses concerns raised by the Board of Taxation about inconsistencies in the tax treatment for MEC groups used by multinationals and ordinary consolidated groups.

CommentThe Government’s announcement follows two reports issued by the Board of Taxation in relation to the:

• Post-Implementation Review Into Certain Aspects of the Consolidation Regime, and

• Post-Implementation Review of Certain Aspects of the Consolidation Tax Cost Setting Process.

The Board of Taxation outlined a number of recommendations to improve the operation of the consolidation regime in the reports. Some of the measures announced by the Government are in response to those recommendations.

Research and Development (R&D) tax offset limited to certain turnover

The Government proposes to limit access to the R&D tax incentive so that it only applies to companies with annual aggregate Australian turnover of less than $20 billion.

The R&D tax incentive will provide:

• a 45% refundable tax offset to eligible companies with annual aggregate turnover of less than $20 million, and

• a 40% non-refundable tax offset to all other eligible companies.

Large companies with a turnover of $20 billion or more that will no longer be able to access the R&D tax incentive will still be able to claim deductions for the R&D expenditure under general tax law provisions.

The measure will apply to income years starting on or after 1 July 2013.

CommentThe limiting of the R&D tax offset to companies with turnover below a threshold was previously announced by the Government on 17 February 2013. Exposure draft legislation and explanatory materials was recently released for consultation.

Venture Australia: enhancing taxation arrangements

The Government will make changes to the Venture Capital Limited Partnership (VCLP) and the Early Stage Venture Capital Limited Partnership (ESVCLP) regimes.


These changes include:

• deem any gains or losses made by a VCLP on the disposal of an eligible venture capital investment held for 12 months that flow through to partners to be on capital account for eligible domestic partners, and

• lower the minimum investment capital required for entry into the ESVCLP program from $10 million to $5 million to facilitate increased investment by ‘angel’ investors.

These changes will have effect from the date of Royal Assent of the enabling legislation.

Australian Taxation Office compliance measures

The Government will provide additional funding to the Australian Taxation Office (Tax Office) to introduce measures that will tackle perceived problem areas and increase revenue collections.

These measures include:

Tax Office taskforce to target misuse of trusts

The Government will provide $67.9 million over four years to the Tax Office to target the use of complex tax structures by high wealth individuals to avoid tax.

Specifically, the funding will allow the Tax Office to undertake compliance activity in relation to taxpayers who have been involved in tax avoidance and evasion using trust structures.

As a result, the Tax Office will:

• target the exploitation of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax, and

• undertake compliance activity to target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements.

According to the Assistant Treasurer, Mr David Bradbury:

It is important that the ATO has the appropriate resources to tackle tax avoidance through complex structures like trusts.

Emerging evidence, including substantial ATO data from two recent law enforcement

operations, shows a significant increase in the level of trust-based non-compliance.

It is estimated that these measures will increase receipts by $217.1 million (in real cash terms).

Addressing trust taxation reformsAs an aside, the Government has also indicated

that it will use intelligence gathered by the Tax Office to inform the next phase of its consultation on trust taxation reform.

The Government has received a wide range of views on how the tax law could be amended to reduce complexity and compliance costs and ensure that opportunities for manipulation of tax liabilities are minimised. The message from stakeholders is that there is no clear consensus on the best approach to deal with these issues,

according to Mr Bradbury.

The Government has asked Treasury to consult with the Tax Office’s National Tax Liaison Group (NTLG) Trust Consultation Sub-group on the most appropriate way to progress the reform, and in particular to address integrity concerns arising from the mismatch between trust and tax concepts of income.

It is expected that Treasury will report back to Government on the outcomes of the consultation by the end of July 2013.

Comment

Why target trust arrangements when trust taxation law reform is still taking place?

This question might reasonably be posed to the Government in respect of additional funding in establishing a Tax Office trust taskforce.

It is hoped that the purpose of such a Tax Office trust taskforce is to target what would be considered by a reasonable person to be a “misuse” of a trust arrangement (ie. avoidance and evasion) and not the use of trusts as part of ordinary family or commercial dealings.

The fact that the taskforce is undertaking compliance activities whilst trust law is being reformed provides uncertainty to taxpayers using trust structures for business and investment purposes.



Prioritising the re-write of the trust tax law provisions so that a workable model is in place with adequate integrity measures would appear to be a more sensible approach.

Expanding data matching with third parties

The Government has indicated that it will provide $77.8 million over four years to the Tax Office to improve compliance by expanding data matching with third party information.

The information provided to the Tax Office will also improve the pre-filling of tax returns.

The measures will affect the following reporting systems:

• taxable government grants and specified other government payments

• sales of real property, shares (including options and warrants), and units in managed funds

• sales through merchant debit and credit services

• managed investment trust and partnership distributions, company dividend and interest payments, and

• transactions reported to the Tax Office by the Australian Transaction Reports and Analysis Centre.

There will be consultation with States and Territories in the design of these systems.

It is estimated that these measures will increase receipts by $431.7 million (in real cash terms).

Comment

The use of third party data to improve the pre-filling of tax returns is welcomed.

The use of such third party data by the Tax Office for compliance purposes is currently under review by the Inspector General of Taxation (IGT) in relation to individual taxpayers.

The Tax Office currently uses third party data to identify ‘mismatches’ between the tax return data and third party data. Those mismatches that are the subject of Tax Office enquiries may lead to audit and other compliance activities.

According to the IGT’s terms of reference, the following concerns are to be addressed as part of the review:

• the accuracy, reliability and currency of the third party data relied upon by the Tax Office

• the appropriateness of Tax Office actions resulting from identified mismatches including the perception that the Tax Office takes direct action based upon raw data rather than engaging with taxpayers to better understand the reasons for mismatches

• the clarity and adequacy of Tax Office communications, including the identification of the third party data used and any actions the taxpayer may take to ensure the Tax Office has the most accurate information, and

• additional costs and time in understanding the Tax Office’s concerns and resolving disputes.

The IGT’s report is yet to be released.

It is hoped that any recommendations by the IGT in relation to the Tax Office’s use of third party data be fully adopted by the Tax Office given the additional funding provided to expand its data matching capabilities.

Improving administration: Australian Business Number and Australian Business Register

The Government has indicated that it will provide $80.2 million over the next four years to the Tax Office and the Department of Finance and Deregulation to:

• strengthen up-front checks for issuing Australian Business Numbers, and

• encourage the use of AUSkey, which is a secure credential for accessing online services of the Australian Business Register.

This measure will also enhance Standard Business Reporting.

The Government anticipates that this will reduce regulatory costs and minimise the compliance burden for individuals and businesses.


International tax Anti-profit shifting measures

The Government has announced its intention to address profit shifting by multinationals by tightening and improving the integrity of several aspects of Australia’s international tax regimes. In particular, the proposals are intended to prevent multinational enterprises from shifting profits out of Australia by artificially loading debt onto their Australian operations.

The Budget announcement was supplemented by the release of the Treasury proposals paper entitled Protecting the corporate tax base from erosion and loopholes - Addressing profit shifting through the artificial loading of debt in Australia, which contains details of the announced reforms.

Most of the proposed amendments pertain to the thin capitalisation rules (contained in Division 820 ITAA97). These changes involve the following:

• for general entities, the safe harbour debt limit will be reduced from 3:1 to 1.5:1 on a debt to equity basis (or 75% to 60% on a debt to total asset basis)

• for non-bank financial entities, the safe harbour debt limit will be reduced from 20:1 to 15:1 on a debt to equity basis (or 95.24% to 93.75% on a debt to total asset basis)

• for banks, the safe harbour capital limit will be increased from 4% to 6% of the risk weighted assets of their Australian operations

• for outbound investors, the worldwide gearing ratio will be reduced from 120% to 100% (with an equivalent change to the worldwide capital ratio for banks), and

• the de minimis threshold be increased from $250,000 to $2 million of debt deductions.

The rationale underlying the proposed reforms to the safe harbour test is explained in the proposals paper as follows:

• when the current thin capitalisation rules were introduced in 2001, the safe harbour settings were generous when compared with actual gearing levels of most companies with independent arrangements. This divergence has since been exacerbated by the deleveraging that has occurred following the global financial crisis

• the discrepancy means the current rules are ineffective in ensuring that debt is not artificially loaded in the Australian operations

• RBA figures indicate that business gearing levels have remained at relatively low levels, and

• this divergence means taxpayers can load debt into Australia using the difference between debt levels that would be adopted for non-tax reasons and the safe harbour limit.

The proposed reduction in the worldwide gearing test to 100% from the current 120% is so that deductible expenses for gearing in Australia is proportionate to the global gearing of the worldwide group. Further, the test will be extended to inbound investors to better reflect the policy intent of the thin capitalisation rules to prevent the excessive allocation of debt to Australia for tax purposes.

The Government intends to retain the arm’s length test but it will be subject to a Board of Taxation review to make it more effective by reducing compliance costs and making it easier for the Tax Office to administer.

The de minimis threshold will be increased to reduce compliance costs and to exclude small businesses from the regime.

Other anti-profit shifting measures include:

• better targeting the exemption for foreign non-portfolio dividends received by Australian companies (s23AJ ITAA36) by:

- ensuring that the exemption is not available to returns on debt interests or interests that are in fact portfolio in nature (ie. treating arrangements based on substance rather than legal form), and

- ensuring that the exemption will also apply where the foreign non-portfolio dividend income is received via a trust or partnership (by repealing s404 ITAA36), and

• removing s25-90 ITAA97 which currently allows a tax deduction for interest expenses incurred in deriving certain exempt foreign income.

The proposals are intended to take effect for income years commencing on or after 1 July 2014.

The Government will consult with industry on the implementation of these measures. The Tax Office



will also consult with taxpayers and industry to progress any necessary guidance material.

Further detail on the proposed reforms and the Government’s consultation questions are contained in the proposals paper, available on the Treasury website.

CommentThe proposed increase in the thin capitalisation

de minimis threshold from $250,000 to $2 million of debt deductions for the income year is a welcome development for the SME sector and to multinational businesses with annual debt deductions between $250,000 and $2 million. A $2 million threshold means that these businesses would no longer be required to expend money, time and other resources on performing complex thin capitalisation calculations. Further, businesses are now able to consider expansion plans that are to be debt funded without having to factor in the onerous thin capitalisation requirements, so long as there is no risk of breaching the proposed $2 million threshold, which would remove a hindrance to business growth.

However, some larger multinational groups may have to review their global funding arrangements if they satisfy the current safe harbour test or worldwide gearing ratio but may breach the proposed limits. These businesses may also have to reconsider or restructure future expansion plans if those expansions were intended to be heavily funded by debt.

Australian entities with foreign investors may now need to review any potential application of the worldwide gearing test.

The proposed changes to the non-portfolio dividend exemption in s23AJ ITAA36 should not adversely affect investors with shareholdings that are already genuinely non-portfolio in substance. Further, the expansion of the exemption to dividends received via a trust or partnership should encourage international economic activity.

The proposed removal of s25-90 ITAA97 is consistent with the general principle that deductions are allowable only to the extent that the related income is assessable. However the change would result in increased administrative burden for affected taxpayers as they will have to apportion expenses appropriately between different classes of foreign income.

Accruals taxation reformThe reform of the accruals taxation regimes

is currently in progress. The Foreign Investment Funds (FIF) and Deemed Present Entitlement (DPE) provisions have now been repealed. The regime which is to replace FIF is yet to be implemented and the revision of the Controlled Foreign Company (CFC) rules has not been completed.

The OECD is currently reviewing CFC rules as part of its work on base erosion and profit shifting. In the proposals paper, the Government announced that the remaining reforms will be reconsidered after the OECD’s analysis is completed.

CommentThe Government needs to finalise the

reforms process as soon as practicable to end the uncertainty that has been in place in recent years. At a minimum, as an interim measure, the Government should clarify how taxpayers that were formerly subject to the FIF rules should treat their foreign interests in the absences of a finalised replacement regime. The Tax Office issued administrative guidance pertaining to the 2010-11 income year but that is insufficient for taxpayers to plan their tax liabilities and investment affairs with certainty. Legislative direction is needed.

Other measuresThe Government also made the following Budget

announcements:

• the Government signed a tax information exchange agreement with Uruguay on 10 December 2012. The agreement will enter into force once both countries have completed their respective domestic requirements

• the Government will amend the existing Offshore Banking Unit (OBU) regime to better target genuine mobile financial sector activities and address integrity issues with the current regime, with effect from 1 July 2013, and

• the Government will provide $109.1 million over four years to the Tax Office to increase compliance activity targeted at restructuring activity that facilitates profit shifting opportunities.



Capital gains taxForeign resident capital gains tax

The Government intends to make two amendments to the foreign resident CGT regime. These amendments will be made to the principal asset test to ensure that indirect Australian real property interests are taxable if disposed of by a foreign resident.

In addition, the Government has announced that a 10% non-final withholding tax will apply to the disposal by foreign residents of certain taxable Australian property.

Amendments to the principal asset test

The proposed amendments will:

• remove the ability to use transactions between members of the same tax consolidated group to create and duplicate assets, which will ensure that assets cannot be counted multiple times, and

• value intangible assets connected to the rights to mine, quarry or prospect for natural resources (such as mining, quarrying or prospecting information and goodwill) together with the mining rights to which they relate for the purposes of determining the value of the taxable Australian real property (TARP) assets of the entity in which the interest is held.

These amendments will apply to CGT events with effect from 7.30pm (AEST) on 14 May 2013. The Government will consult on the development of the legislation, with a discussion paper scheduled to be released by the end of 2013.

BackgroundCurrently, non-residents are subject to CGT only

where the CGT asset is ‘taxable Australian property’ (TAP). Section 855-15 sets out the five categories of assets that are TAP. One category is indirect Australian real property interests (IARPI).

Under s855-25, a membership interest (eg. a share) held by the non-resident taxpayer in another entity is an IARPI if the interest passes both the ‘non-portfolio interest test’ and the ‘principal asset test’.

The principal asset test is defined in s855-30. The membership interest passes the principal asset test if the sum of the market values of the test entity’s assets that are taxable Australian real property (TARP) exceeds the sum of the market values of its assets that are not TARP.

TARP is defined in s855-20 as being:

(a) real property situated in Australia (including a lease of land situated in Australia), or

(b) a mining, quarrying or prospecting right, if the minerals, petroleum or quarry materials are situated in Australia.

CommentThis proposed amendment to the principal asset test will only affect non-residents that:

• have (direct or indirect) investments in an Australian tax consolidated group, and/or

• have (direct or indirect) investments in an Australian entity involved in the resources sector.

If affected taxpayers intend to dispose of their interests in the Australian entity, they should perform the IARPI calculations based on the proposed law in order to adequately plan for any CGT liability or to assist in making a decision about selling or retaining the interests with regard to this anticipated change in law.

Final withholding taxFrom 1 July 2016, a 10% non-final withholding

tax will apply to the disposal by foreign residents of certain TAP. The purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure will not apply to residential property transactions under $2.5 million.

The withholding regime will also apply where the disposal is likely to generate gains on revenue account which are assessable as ordinary income rather than as a capital gain.

In the Assistant Treasurer’s media release dated 14 May 2013, the Government expressed concerns that under the current law, even where a CGT liability clearly arises, there can be difficulties in collecting tax on gains from foreign resident taxpayers who may have little other connection


to the Australian tax system and who may be in a position to transfer proceeds offshore prior to compliance action being taken.

The Government will consult publicly on the design and implementation of the regime, with a discussion paper scheduled to be released by the end of 2013.

CommentThis proposed amendment does not affect the calculation or imposition of CGT liability where a non-resident disposes of certain TAP assets. Presumably, the withheld amount would be available as a credit against total Australian tax payable on the transaction giving rise to the taxable gain. It should encourage compliance as the non-resident will be made aware that the transaction is in fact subject to Australian tax and there is an attendant need to lodge an Australian tax return.This rule will impose an extra burden on the purchaser. The legislation must clarify the extent of the purchaser’s responsibilities. The Government must also ensure that the timing and administrative requirements are not unnecessarily onerous on any party.The exemption for residential property transactions under $2.5 million is a welcome element as it means that buyers and sellers of many family homes, holiday homes and investment properties will not be subject to these requirements.

Native title benefitsThe Government has announced a measure to

clarify that there are no CGT implications resulting from the transfer of native title rights (or the right to a native title benefit) to an Indigenous holding entity or Indigenous person, or from the creation of a trust that is an Indigenous holding entity over such rights.

The measure also clarifies that capital gains or losses made from surrendering or cancelling such rights are disregarded.

This measure will apply retrospectively to CGT events happening on or after 1 July 2008.

This measure augments a measure announced in the Mid-Year Economic and Fiscal Outlook (MYEFO) 2012-13.

Goods and services taxAllowing businesses in a net refund position to continue to use the GST instalment system

In the 2011-12 Budget, the Government announced a measure which would allow businesses in a net refund position to access the GST instalment system.

The Government has now announced a revision to the previously announced measure so that only those businesses already using the GST instalment system will be allowed to continue to use it if they move into a net refund position.

BackgroundThe existing GST legislation does not allow a

business that is in a net refund position to pay GST by instalments. In its 2011-12 Budget, the Government announced its intention to amend the GST legislation to allow small businesses in a net refund position to choose to access the GST instalments system, with an instalment amount each quarter of zero.

Any refund or liability due to the taxpayer will be reconciled in their annual GST return.

In June 2011, the Government released a consultation paper in relation to the proposed amendment.

The consultation paper proposed an amendment to Subdivision 162-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allowing taxpayers in a net refund position to utilise the GST instalments system. It is likely that s162-5 GST Act will be amended to remove paragraph (e), which excludes taxpayers in a net refund position from eligibility to elect to pay GST by instalments. Consequential amendments to paragraph 162-30(1)(d), subs162-30(6) and subs162 5(3) will also be required to give effect to the desired policy intent.

The Tax Office has previously advised that this proposal would require minor changes to its systems, while no changes will be required to the Business Activity Statement (BAS).

The Government anticipated that this proposal would benefit those taxpayers that temporarily move into a net refund position (for example:


because of a one off acquisition) and those taxpayers normally in a net refund position who consider that the compliance cost advantages of submitting their BAS annually outweigh the cash flow cost of delayed refunds.

Budget announcementIn its 2013-14 Budget, the Government announced

that only those businesses already using the GST instalment system will be allowed to continue to use it if they move into a net refund position.

These revisions address concerns that the original measure could present a revenue risk.

The measure will have effect from the date of Royal Assent of the enabling legislation.

CommentThe ability for eligible entities to choose to remain in the GST instalment system if they move into a net refund position will provide greater flexibility for those businesses, which can elect to opt in if it is beneficial for their administrative arrangements.

Not-for-profit sector measuresThe Government announced two key measures

relating to the reform of the not-for-profit (NFP) sector:

Better targeting of tax concessionsThe Government made some announcements in

relation to the Not-for-profit sector reforms – better targeting of not-for-profit tax concessions measure originally announced in the 2011-12 Budget. The measure announced in the 2013-14 Budget confirms the following:

• the small-scale threshold will be $250,000 of annual accounting revenue. Unrelated commercial activities under this threshold would be exempt from income tax

• in the case of unrelated commercial activities that commenced after 7.30pm (AEST) on 10 May 2011, the measure will apply to activities undertaken form 1 July 2014, and

• in the case of unrelated commercial activities that commenced prior to 7.30pm (AEST) on 10 May 2011, transitional arrangement for these activities will no longer apply from 1

July 2015. The measure will apply to activities undertaken from 1 July 2015.

Note: The new application dates were previously announced in a joint media release between Assistant Treasurer, Mr David Bradbury and Mr Mark Butler, Minister for Social Inclusion, dated 31 January 2013. Prior to the Ministers’ announcement, the intended application date was 1 July 2012.

BackgroundIn the 2011-12 Budget, the Government

announced its intention to introduce legislation under which income tax exempt entities will pay income tax on profits from ‘unrelated commercial activities’ that are not directed back to the entity’s altruistic purpose. Further those entities will also not have access to Fringe Benefits Tax, Goods and Services Tax or Deductible Gift Recipient concessions in relation to those unrelated commercial activities.

A consultation paper Better targeting of not-for-profit tax concessions was released on 27 May 2011. The consultation paper canvasses three options in relation to unrelated commercial activities. The paper also provides for exceptions to the rules, including small-scale and low-risk unrelated commercial activities (eg. lamington drives).

The paper includes a consultation question regarding whether there should be a small-scale threshold, and if so, what would be the appropriate threshold.

The Budget measure addresses this issue by proposing a small-scale threshold of $250,000 of annual accounting revenue.

CommentThe quantification of a small-scale threshold is a welcome development in the NFP reform process as it will enable affected entities to plan their funding activities and tax obligations (if any) with some measure of certainty.However, the Government must ensure that the other NFP sector tax reform measures are finalised as soon as possible. The original Budget announcement and the release of the consultation paper occurred two years ago. The issues facing the NFP sector will not be alleviated until there is some resolution and a certain timeline in relation to the envisaged tax law changes.



Statutory definition of ‘charity’The Government has announced a deferred start

date for the 2011-12 Budget measure Not-for-profit sector reforms – introducing a statutory definition of ‘charity’. This measure will now take effect from 1 January 2014, rather than 1 July 2013 as originally announced.

The new start date will provide time for the Australian Charities and Not-for-profits Commission (ACNC) to develop guidance for charities regarding the definition.

The proposed statutory definition of ‘charity’ preserves common law principles and provides greater clarity and certainty about the meaning of ‘charity’ and ‘charitable purpose’.

Background

Currently, the concepts of ‘charity’ and ‘charitable purposes’, which are integral to the operation of the various NFP tax concessions, are not defined in tax law. Charity is defined at common law. Broadly, under common law there are four ‘heads’ of charity:

1. the relief of poverty

2. the advancement of education

3. the advancement of religion, and

4. other purposes beneficial to the community not falling under any of the preceding heads.

There is also a ‘public benefit’ requirement.

A number of Government reviews have recommended that Australia should adopt a statutory definition of charity.

The former Government had attempted to introduce a statutory definition of charity in the Charities Bill 2003 (the Bill) which has never been enacted.

The core definition proposed by the Bill contains the following key elements:

• the entity must be a not-for-profit entity

• it has a dominant purpose that is charitable

• it is for the public benefit

• it does not engage in activities that do not further, or are not in aid of, its dominant purpose

• it does not have a disqualifying purpose

• it does not engage in, and has not engaged in, conduct that constitutes a serious offence, and

• it is not an individual, a partnership, a political party, a superannuation fund or a Government body.

The Bill also defined charitable purposes as:

• the advancement of health

• the advancement of education

• the advancement of social or community welfare

• the advancement of religion

• the advancement of culture

• the advancement of the natural environment, and

• any other purpose that is beneficial to the community.

In the 2011-12 Budget, the Government announced its intention to introduce a statutory definition of ‘charity’. In October 2011, the Government released a consultation paper A definition of charity which outlines the proposal to develop a single statutory definition of ‘charity’ applicable across all Commonwealth laws. The paper discusses the broad elements that constitute the core definition of charity in the Bill and considers the suitability of each element for inclusion in the proposed statutory definition.

The paper proposes a start date of 1 July 2013, which has now been deferred to 1 July 2014.

CommentThe Government must expedite the finalisation of the necessary legislative changes to introduce the statutory definition of ‘charity’. This certainty is needed so that affected taxpayers can assess whether their organisation is a ‘charity’ and/or activities are ‘charitable’ for tax purposes. With a start date of 1 January 2014, the Government also needs to ensure that the enacting legislation is finalised soon so that the ACNC can develop robust and appropriate guidance before the start date. n


Year-end tax and superannuation planning checklist: 2012-13By Andy Nguyen

It is timely for taxpayers and practitioners to undertake tax and superannuation planning with the income year coming to a close.This checklist outlines a range of year-end tax and superannuation matters to consider for the 2012-13 income year. The list is not exhaustive and should be considered in light of commercial objectives and circumstances of the taxpayer. Specific advice should be sought where necessary.

Individuals

Dividend income

• Has all dividend income been included in the individual’s assessable income upon receipt?

• Have dividends received been correctly grossed-up to reflect any imputation credits or foreign tax credits attached?

• Has the ‘holding period rule’ been satisfied or does the small shareholder exemption apply?

Bonus income • Can receipt of bonus income be deferred until the following income year?

Personal services income (PSI) • Has the individual derived income from personal exertion either as a sole trader or through a structure?

• If so, does the individual satisfy the ‘results test’ under the PSI rules?

• If ‘no’, does the individual satisfy the 80% test and one of the following: - Unrelated clients test - Employment test, or - Business premises test?

The PSI rules do not apply to a personal services business (PSB).

• Has the application of the general anti-avoidance rules contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA36) been considered notwithstanding that an entity is a PSB? For example, PSI being streamed to different taxpayers where the PSB is conducted using a trust structure – see IT 2330 and TR 2001/8.

Non-commercial losses • Has the individual incurred losses from a business activity? If so, tax losses can be applied against

other income of the individual provided the requirements of Division 35 ITAA97 (the non-commercial loss rules) have been satisfied?The non-commercial loss rules would typically not apply to quarantine business losses if one of the following tests are passed: - the business has assessable income of at least $20,000 - the business had a profit for tax purposes in three out of the past five years (including the current

year) - the value of real property, or of an interest in real property used in the business, was at least

$500,000, or - the value of assets (excluding real property, cars, motor cycles and similar vehicles) used in carrying

on the business was at least $100,000.

IMPORTANT: If the individual’s income for non-commercial loss purposes is not less than $250,000 the business loss will be quarantined notwithstanding that one or more of the four tests was satisfied.Note: Different rules apply for primary production and arts businesses.


Capital allowances • Has the taxpayer acquired depreciating assets with a cost of $300 or less?

An immediate deduction may be available if the asset is being used to derive non-business income (eg. salary and wage income).

Prepayments • Did the individual incur non-business expenses where:

- the period to which the expenditure relates is 12 months or less, and - the period ends no later than the last day of the income year following the year in which the expense

was incurred?If so, a deduction is available for the current income year. These conditions also apply to a small business entity except that the expenditure does not have to be in relation to non-business expenses (see below).

Donations • Have donations been made to a Deductible Gift Recipient?

• If so, are there any restrictions placed on the taxpayer being able to claim a deduction? (for example, the donation cannot exceed an entity’s taxable income after disregarding the donation, carry forward tax losses and farm management deposits – see s26-55 ITAA97).

• Can the deduction be claimed over five years instead (see subdivision 30DB ITAA97)?

Tax offsets and levies • Have all relevant offsets and levies been taken into account for the individual (eg. low income tax

offset, etc)? Offsets and levies to consider include:

- Medical expense tax offset: Consider whether the income testing which applies from 1 July 2012 would affect an individual’s entitlement to the medical expense tax offset. Individual taxpayers with ‘adjusted taxable income’ below the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for families) will be able to claim a reimbursement of 20% for net medical expenses over $2,120 for 2012-13. Those above the threshold will only be able to claim an offset of 10% for net medical expenses incurred in excess of $5,000.

- Medicare levy surcharge: Consider whether it would be necessary for an individual to obtain private health insurance cover for the 2013-14 income year in order to avoid the Medicare levy surcharge. From 1 July 2012, the Medicare levy surcharge applies where the income threshold of an individual for the income year is exceeded (ie. $84,000 for singles and $168,000 for families) and the individual does not have sufficient private health insurance cover. The surcharge rate ranges from 1% up to 1.5% depending on a modified income amount.

- Private health insurance rebate: Consider whether an individual would lose their entitlement to the full 30% rebate for private health insurance cover for the 2013-14 income year based on their current taxable income for 2012-13.

From 1 July 2012, income tests have been introduced which impact the ability for an individual to claim the full rebate. A full rebate is available below the Medicare levy surcharge threshold (ie. $84,000 for singles and $168,000 for a couple or family).

The rebate no longer applies where the person’s income exceeds the upper threshold (ie. $130,001 or more for singles, $260,001 or more for families).

A PDF version of this checklist can be downloaded at www.taxpayer.com.au/checklist2013

Continued è


Business taxpayersCapital allowances

• Has the taxpayer written-off any depreciating assets which have been scrapped or are lost, destroyed or obsolete? A deductible balancing adjustment event may arise to the extent that the asset had a ‘tax written down value’.

• Has the taxpayer applied the Commissioner’s effective life rates (see TR 2012/2) in working out the decline in value for depreciating assets acquired during the income year? Where the taxpayer has chosen to self-assess the effective live of the asset, it would be important to document the reasons for adopting an alternative rate.

• Consider whether it would be appropriate to implement: - a low value pool, or - software development pool.

• Consider whether the cost limit for motor vehicles of $57,466 for the 2012-13 income year has been correctly applied.

• Has the taxpayer acquired depreciating assets with a cost of $100 or less? For taxpayers conducting a business (that is not a small business entity – see below) the Tax Office provides for an immediate deduction for assets with a cost of $100 or less (GST-inclusive). See PS LA 2003/8 for details.

• Has the taxpayer incurred business-related capital expenditure such as: - business set-up and/or feasibility costs - business restructuring costs - costs of raising equity or defending a take-over, or - business cessation costs?

If so, such costs may be deductible over five years at 20% each income year (subject to the conditions contained in s40-880 ITAA97). Also see TR 2011/6.

Trading stock • Consider whether it would be beneficial for the taxpayer to revalue trading stock at year end, noting

that stock can be valued at: - cost - market selling value, or - replacement value (see s70-45 ITAA97)

• Notwithstanding the above, has stock been valued or written-off to take into account stock obsolescence or other special circumstances (s70-50 ITAA97)? (see TR 93/23 for conditions)

• Has stock been disposed of by the taxpayer outside the ordinary course of their business?

• If so, such stock is deemed to be disposed of at market value (see s70-90 ITAA36)

• Has stock been taken for personal use or used in the business instead?If so, such stock is deemed to be disposed of at cost and reacquired for the same amount.EXAMPLE: You are a sheep grazier and take a sheep from your stock to slaughter for personal consumption. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock. Although you are also treated as having bought the sheep for the same amount, it would not be deductible because the sheep is for personal consumption.

• Has all trading stock been accounted for as being on-hand at year end? Trading stock is considered to be on-hand where the taxpayer is in the position to dispose of the goods (see tax ruling IT 2670).

Bad debts • Are there any bad debts that can be written off prior to year end? (see TR 92/18 for comment)

• Is the debt prevented from being deducted due to a change in ownership or control of a company or trust structure?

• If so, does the entity satisfy the same business test?

Year-end tax and superannuation planning checklist: 2012-13 (continued)


Prepayments • Has an immediate deduction been claimed for the following prepaid expenses:

- amounts of less than $1,000? - amounts required to be incurred by a law, or by an order of a court, of the Commonwealth, a state

or a territory (eg. car registration, worker’s compensation insurance, etc)? - payments of salary or wages (under a contract of service)? - capital or private in nature?

Otherwise, the deduction is referrable to the ‘eligible service period’ to which it relates for the income year, subject to the 12-month rule which applies to small business entities (see below).

PAYG income tax instalments • Consider whether it would be beneficial to vary PAYG instalment rate downwards for the final quarter.

Note: The General Interest Charge may be imposed where the varied instalment amount is based on an estimate that is less than 85% of the actual tax payable on the company’s business and investment income.

Small business entitiesMeaning of ‘small business entity’ (SBE)

• Is the taxpayer: - carrying on a business, and - does it satisfy the ‘$2 million aggregated turnover test’ (see s328-110 ITAA97)

If so, the entity is an SBE and may be entitled to concessional tax treatment.Note: Tax ruling TR 97/11 outlines some factors in working out whether an entity is ‘carrying on a business’. ‘Aggregated turnover’ is defined under s328-115 ITAA97 and requires the inclusion of income of connected entities and affiliates of the taxpayer.

Simplified depreciation rules • Has the taxpayer ensured that the following simplified depreciation rules have been correctly applied

for the 2012-13 income year: - claimed an immediate deduction for depreciating assets with a cost under $6,500? - claimed an immediate deduction for new or used motor vehicles purchased up to $5,000 (any excess

amount is allocated to a general small business pool)? - where immediate deductions are not allowed, allocated depreciating assets to the small business

general pool?

IMPORTANT: The long life small business pool ceased to exist from 1 July 2012. For SBEs that have both a general pool and long life pool prior to that time, they are required to add the closing balance of both pools to work out the opening pool balance of the general pool for the 2012-13 income year.

• Has the taxpayer correctly accounted for any additions, disposals and changes in business use of assets contained in the small business general pool?

• Have rates been correctly applied (ie. 15% for additions, 30% for existing assets)?

Other concessions • Prepayments: Are there prepayments made that would be immediately deductible under the

12-month rule, in that: - the eligible service period to which the payment relates 12 12 months or less, and - the period ends no later than the last day of the income year following the year in which payment

is made.

• Trading stock: Has a choice been made not to undertake a stocktake of trading stock because the difference between the opening value of stock on hand and an estimate year-end stock value is $5,000 or less?


Trusts

Definition of ‘income’ in the trust deed

• Have the following been considered when determining the meaning of ‘income of the trust’: - How is income defined? - Is there no definition of income? - Are there discretions available to the trustee as to how income and capital items should be treated?

If so, what is required in order to effect an exercise of discretion? - What is the effect of TR 2012/D1? The draft ruling states that the ‘income of the trust estate’ cannot

exceed the net amount of income to which beneficiaries could be made presently entitled or the trustee could accumulate. For example, where a trust deed has an income equalisation clause equating ‘trust income’ with ‘net income’, notional amounts such as franking credits grossed-up are not included in determining ‘income of the trust’.

Note: Labels 64A and 65W in the Trust Tax Return require that taxpayers disclose the ‘total income of the trust' and a beneficiary's ‘share of income of the trust estate' as defined by the Tax Office TR 2012/D1.

Is there trust income?

• If the trust income may be nil, are there any steps which could be taken to appropriately classify other amounts as income so that a distribution can occur (thereby avoiding the operation of s99A ITAA36 which taxes ‘net income’ of the trust at the top marginal rate including Medicare levy)

Implementing the trust distribution

• What are the requirements of the trust deed to create present entitlement? To establish a ‘present entitlement’, the Courts have held that the trustee must, under the terms of the trust, be legally required to pay the trust income to the beneficiary, or deal with the trust income on the beneficiary’s behalf. In the case of a discretionary trust, a beneficiary has no present entitlement to trust income until the trustee exercises a discretion in the beneficiary’s favour.

Identification of beneficiaries

• Are there different classes of beneficiary? Characteristics of the beneficiaries which may impact the distribution (eg. minors, non-residents). For example, non-resident beneficiaries are not entitled to imputation credits from a distribution of franked dividends.

Streaming of some or all of the distribution

• Have the following been considered when streaming income: - Is it intended that classes of income be streamed? - Does the deed confer that power on the trustee? - If not, should an amendment to the deed be considered to grant such a power? - Will the specific requirements of the tax law be satisfied?

Capital gains and franked distributions

• Do franked dividends form part of the trust income? Review definition of ‘income’ in the deed.Matters to consider if franked dividends are derived by the trust include: - Can franking credits be ‘distributed’? - Which beneficiaries can best utilise franking credits? - Will the specific requirements of the tax law be satisfied?



• Do capital gains form part of the trust income? Review definition of ‘income’ in the deed.From the 2010-11 income year, capital gains and franked distributions can be ‘streamed’ where they are included in the net (taxable) income of a trust. It is not necessary that there be an amount of trust income where the streaming provisions are applied. It is however necessary for a ‘specific entitlement’ to be created by way of resolution.

Accumulation of income • Does the trust deed allow income to be accumulated and, if so, are there circumstances which may

warrant accumulating some or all of the income? Accumulated income is typically assessed to the trust under s99A ITAA36, however, special rates may apply to certain trusts (eg. deceased estates under s99 ITAA36).

Interim distributions • Have interim distributions occurred during the year?

If so, ensure that the year-end distribution resolution is appropriately worded to reflect the earlier distribution.

Trust losses • Does the trust have prior year losses and, if so, must they be recouped out of income?

• Will the trust satisfy the loss recoupment rules in Schedule 2F ITAA36?The relevant tests that may require consideration (subject to trust type) include: - control test - 50% stake test - pattern of distributions test - income injection test.

• Is it necessary for the trust to make a Family Trust Election (FTE) (see below)?

Small business CGT concessions • How can distributions be made to maximise the benefit obtained from the small business CGT

concessions?

• Are particular distributions required to ensure that:

- a beneficiary is a ‘controller’ of the trust, or

- a CGT concession stakeholder?

Corporate beneficiary • If a distribution is made to a corporate beneficiary, will there be Division 7A implications?

Consider the implications of TR 2010/3 and PS LA 2010/4.

• Are there any unpaid present entitlements in respect of prior years which have been converted into loans?

Family trust • Has a Family Trust Election (FTE) been made?

• Is an FTE required? An FTE may be necessary for a trust for the following reasons:

- Provide a non-fixed trust (eg. discretionary trust) with concessional treatment in recouping trust tax losses. Certain trust loss tests do not apply or are modified (see trust losses above)

- Allows a non-fixed trust to satisfy the 45-day holding rule (90 days for preference shares) so that beneficiaries presently entitled to trust income which includes franked dividends can obtain the benefit of the franking credits.

- Trusts that have made a FTE or interposed entity election (IEE) are excluded from the trustee beneficiary reporting rules.


Beneficiaries Tax File Number (TFN) provided to the trustee • Ensure that beneficiaries in receipt of a distribution for the first time have provided their TFN to the

trustee by the time of the distribution. These rules apply to ‘closely held trusts’. trusts which have lodged a FTE must comply with these reporting requirements.

Trustee resolution • Has it been completed by 30 June (or such earlier date as is required by the deed)?

• If no, are there ‘default beneficiaries’ who may become presently entitled to the income pursuant to the terms of the trust deed?

Further resolution? • Is any subsequent action required by the trustee to confirm resolutions in relation to income

distributions?

The trustee distributes an asset in specie to satisfy a beneficiary’s entitlement to income or capital

• If the trust is registered for GST will a liability arise? (refer to GSTD 2009/1).GSTD 2009/1 considers that a supply by way of an in specie distribution of an asset that is applied in the enterprise carried on by the discretionary trust is a supply made in the course or furtherance of that enterprise. A GST liability would typically arise in these circumstances.

CompaniesDivision 7A

• Is the taxpayer a ‘private company’ for tax purposes (see s103A ITAA36)?

Payments • Has the private company made a ‘payment’ to a shareholder (or an associate) during the income year?

The meaning of ‘payment’ for Division 7A purposes also includes the provision of property for use by a shareholder (or associate) (eg. use of a holiday home) (see s109CA ITAA36). Certain exceptions apply.

Loans • Has the private company made loans to a shareholder (or an associate) during the income year?

• If so: - Have complying s109N loan agreements been put in place by the lodgment day (ie. due date of

lodgment of company tax return)? - Have minimum principal and interest payments been met for prior year s109N loans? - Have unpaid present entitlements from a trust to a corporate beneficiary been appropriately dealt

with (see Corporate beneficiaries above)?

Debt forgiveness • Has the private company forgiven a debt owed by a shareholder (or an associate)?

Note: The commercial debt forgiveness (CDF) rules would typically not apply to a debt forgiveness treated as a dividend under Division 7A to the extent that dividend is included the relevant entity’s assessable income. Where some amount is not assessable, the CDF rules may apply.

Reductions and exceptions • Is the distributable surplus less than the deemed dividend amount?

The deemed dividend is limited to that amount.

• Have the following payments been made: - Payments of genuine debt? - Payments of other companies? - Payments that are otherwise assessable? - Certain liquidator’s distributions?

These payments are not dividends.



• Have the following loans been made: - Loans to other companies? - Loans that are otherwise assessable? - Loans made in the ordinary course of business that are on commercial terms? - Certain liquidator’s distributions? - Loans to purchase shares or rights under an employee share scheme? - Loans where undue hardship is caused?

These loans are not dividends.

Dividends • Has the application of s254T of the Corporations Act been considered in declaring and payment of

dividends (see TR 2012/5)?

• Have distribution statements for dividends paid been issued?

• Have excess franking credits received by the company been converted into a tax loss?

Franking account • Has the taxpayer considered the following in respect of maintenance of its franking account for the

current year: - Has the benchmark rule been appropriately applied in franking the dividend? If not, has there been

any over or under franking? - Have company tax instalments and paid been credited at time of payment? - Have refunds of tax been debited to the franking account? - Have distributions of franked dividends been debited at the time the distribution is made? - Is there a franking debit at year end? If so, franking deficits tax may be payable and a franking

account tax return may need to be lodged. A franking deficit offset is available. - Has there been excessive over-franking that requires the franking deficit tax offset to be reduced

by 30%?

Company tax losses • If the company has prior year tax losses or wishes to recoup those tax losses, have the conditions

under the continuity of ownership test been satisfied for the relevant period?

• If not, is the company able to demonstrate that is satisfies the ‘same business test’ for the relevant testing times? The SBT is applied narrowly by the Tax Office (see tax ruling TR 1999/9 for comments).

• Is the company eligible to apply the proposed carry-back tax loss rules in the 2012-13 income year?

Loss carry-back will:

- be available to companies and entities taxed like companies who elect to carry-back losses

- be capped at $1 million of losses per year

- apply to revenue losses only

- be limited to the company’s franking account balance.

A one-year loss carry-back will apply in 2012-13, where tax losses incurred in that year can be carried back and offset against tax paid in 2011-12. The law is not yet enacted. The Tax Office had advised that companies should not claim the loss carry back tax offset until the law has received royal assent. Advice will be subsequently issued on tax return amendment.

Research and development • Is the company eligible for the R&D tax incentive?

• Have the relevant activities been registered with AusIndustry?


Capital gains tax

General

• Where a capital gain has been derived was the CGT asset acquired ‘pre-CGT’ (ie. acquired before 20 September 1985)? Consider whether Division 149 ITAA97 or CGT event K6 has possible application in stopping an asset from being a CGT asset.

• Can a capital gain be deferred until the following income year? For example, is it possible to defer entering into a contract of sale to the following income year for CGT event A1 purposes?

• Are there any assets which can be disposed of so that a capital loss may be crystallised to be applied capital gains derived earlier during the income year? Beware of the application of TA 2008/7 which deals with the application the general anti-avoidance provisions to ‘wash sale’ arrangements.

• Has the CGT asset been held for at least 12 months in order to access the general discount?This applies only to taxpayers that who are individuals, trusts or superannuation funds.Note: Non-resident taxpayers will no longer be entitled to the 50% discount on taxable Australian property, such as real estate. Non-residents will still be entitled to a discount on capital gains accrued prior to 8 May 2012, provided they choose to value the asset as at that time. The changes had not been enacted at the time of writing.

• Is there expenditure that can be included in cost base (eg. incidental costs – second element or certain interest costs – third element of cost base)?

• Have appropriate market valuations been obtained in working out capital proceeds where the transaction is not conducted at arm’s length?

Small business CGT concessions - Division 152 ITAA97 • Has a business CGT asset been disposed during the income year that has resulted in a capital gain?

• If so, has the taxpayer satisfied the basic conditions for eligibility (eg. $6 million net asset value test, active asset test, etc)?Note: Additional conditions apply if the CGT asset is an interest in a company or trust. A taxpayer may also be eligible in respect of ‘passive’ assets that are used by a connected entity or affiliated of the taxpayer in carrying on a business.

• Consider whether the taxpayer is eligible to apply the following concessions: - The small business 15 year exemption - The small business 50% reduction - The small business retirement exemption, or - The small business roll-over.

Note: It is only necessary for the basic conditions to apply to access the 50% reduction and small business roll-over. Additional requirements apply to the other two concessions.

Main residence exemption • Has the individual disposed of a dwelling which is their ‘main residence’ during the income year?

• Has a choice been made to apply the ‘absence rule’ to continue to treat the dwelling as a main residence (s118-145 ITAA97)?

• Has the ‘first used to produce income’ rule been applied to determine market value cost base and a deemed acquisition date (s118-192)?

• Has there been any use of the dwelling for income producing purposes that would require the gain to be apportioned (s118-190)?

• Was the dwelling used as a main residence for only part of the ownership period (s118-185)?

• Does the ‘four year rule’ apply in respect of the building, repair or renovation of the dwelling to treat it as a main residence (s118-150 ITAA97)?Note: Notwithstanding that a capital gain may be fully disregarded, it is still necessary to disclose in the tax return that the CGT event had been happened for the income year.



From the helpline: Q&AsIncome taxQUESTION: Does a non-resident have to make compulsory Higher Education Loan Program (HELP) debt repayments if they have Australian taxable income above the repayment income threshold?

ANSWER: Yes, the non-resident will have to make compulsory HELP repayments if their Australian taxable income is above the repayment income threshold.

Legislative backgroundSection 154-1 of the Higher Education Support Act 2003 (HESA) provides as follows:

154‑1 Liability to repay amounts(1) Subject to section 154-3, if:

(a) a person’s *repayment income for an *income year exceeds the *minimum repayment income for the income year; and

(b) on 1 June immediately preceding the making of an assessment in respect of the person’s income of that income year, the person had an *accumulated HELP debt;

the person is liable to pay to the Commonwealth, in accordance with this Division, the amount worked out under section 154‑20 in reduction of the person’s *repayable debt.

(2) A person is not liable under this section to pay an amount for an *income year if, under section 8 of the Medicare Levy Act 1986:(a) no *Medicare levy is payable by the person on the person’s *taxable income for the

income year; or(b) the amount of the Medicare levy payable by the person on the person’s taxable income

for the income year is reduced.Continued è

Superannuation

Contributions

• Has the individual ensured that their contributions caps have not been exceeded? - $25,000 concessional cap for 2012-13 (regardless of age) - $150,000 non-concession cap for 2012-13

Note: Concessional contribution caps for persons at least 60 years of agewill increase from $25,000 to $35,000 from 1 July 2013.

• Does the individual satisfy the ‘10% rule’ for the income year?

• Consider whether it would be beneficial to make a deductible personal contribution (again, beware of the concessional contributions cap and note that a deduction is available when the contribution is received).

• Has the individual considered a superannuation salary sacrifice arrangement for 2013-14? Note concessional contribution caps when making such contributions.

• Is that taxpayer below 65 years of age on 1 July of the financial year? If so, they can apply the ‘bring forward rule’ to make non-concessional contributions of up to $450,000.

• Is the individual eligible for superannuation co-contributions? Note that from 1 July 2012: - the maximum co-contribution entitlement will be $500 - the matching rate to be reduced to 50% - the lower income threshold will remain $31,920 - the higher income threshold will be reduced to $46,920.

Note: These changes were before Parliament at the time of writing.


Exemptions

In s154-1 HESA there is no exemption from making compulsory repayments of HELP debts based on a taxpayer’s residency status.

Under subs154-1(2), a HELP repayment exemption is available to an individual whose Medicare levy liability for the year is either nil or reduced by the operation of s8 Medicare Levy Act 1986 (MLA). That provision makes no direct reference to the person’s residency status.

Further, only an individual who had been a tax resident of Australia at any time during the year is subject to the Medicare Levy (s251S Income Tax Assessment Act 1936 (ITAA36)). Therefore, the nil liability of the non-resident is by virtue of s251S ITAA36 and it cannot be by virtue of s8 MLA as there is no Medicare liability which s8 MLA can operate to reduce.

Conclusion

The non-resident is not exempt from making compulsory HELP debt repayments by virtue of their residency status. The minimum repayment for the income year must be paid as the taxpayer has exceeded the relevant taxable income threshold.

§

QUESTION: A taxpayer (Ralph) has engaged a new tax agent.

His previous agent had provided incorrect tax advice to him which had resulted in an additional capital gains tax (CGT) liability following a Tax Office audit. This was due to the small business CGT concessions being applied incorrectly in respect of the 2009 income year.

There was no scope for Ralph to mitigate the CGT impost and he paid the additional tax to the Tax Office.

Consequently, Ralph took legal action against his former tax agent for negligence, as that person had failed to correctly apply the tax law. The claim was made in the 2013 income year.

The claim was subsequently accepted during the income year and an amount of damages equal to a reimbursement of the income tax paid was made to Ralph by his former agent’s professional indemnity insurer. The compensation was received towards the end of the 2013 income year.

When preparing Ralph’s 2013 income tax return, should the amount of compensation received be included in his assessable income?

All legislative references below refer to the Income Tax Assessment Act 1997.

ANSWER: The payment received by Ralph as reimbursement for income tax paid constitutes capital proceeds in respect of a CGT event happening to a CGT asset. However, the net capital gain that is included Ralph’s 2013 tax return in this case would be nil.

The basis for this conclusion is explained as follows:

Right to seek compensation is a CGT asset

The right to seek compensation from his former tax agent constitutes a CGT asset to Ralph.

Paragraph 108-5(1)(b) states that a CGT asset includes a legal or equitable right that is not property.

Tax ruling TR 95/35 deals with the income tax treatment of compensation receipts. The Commissioner of Taxation in that ruling confirms that a right to seek compensation constitutes a CGT asset by stating at paragraph 3:

From the helpline: Q&As (cont)


The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. A right to seek compensation is an asset for the purposes of Part IIIA. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

[Emphasis added]

CGT event C2 triggered

CGT event C2, which is contained in s104-25, happens when an intangible CGT asset ends by the asset being cancelled, surrendered or a similar ending occurring.

The disposal of Ralph’s right to seek compensation would trigger CGT event C2.

The time that the event is triggered occurs either (i) when the contract is entered into to end the asset, or (ii) if there is no contract - when the CGT asset ends.

In Ralph’s case, the event would be triggered at the time that the agent is found negligent or accepts liability. This is when the right to seek damages is considered to be discharged.

Working out the net capital gain

Any net capital gain derived by a taxpayer is included in their assessable income under s102-5.

For the purposes of CGT event C2, a capital gain arises if the capital proceeds from the disposal of the right exceed the asset’s cost base.

In this case, the capital proceeds would be the consideration received by Ralph in satisfaction of the claim for damages for reimbursement of tax paid. The cost base of the asset is the additional tax that was incurred by him.

As the consideration received is equal to the additional tax incurred, the net capital gain for the 2013 income year in this case would be nil. This outcome assumes that Ralph did not derive any other capital gains or any capital losses during the income year and that there are no carry forward capital losses from prior years.

§

QUESTION: What are the tax implications of a discretionary trust (the profit trust) distributing some of its net income to an unrelated discretionary trust that is in a tax loss position (the loss trust)?

Note the following:

• neither trust has made a Family Trust Election or Interposed Entity Election at the relevant time, and

• the unpaid present entitlement created by this distribution was forgiven by the loss trust soon after it derived the tax distribution.

All legislative references are to the Income Tax Assessment Act 1936.

ANSWER: Pursuant to paragraph 270-15(a), the ‘income injection test’ would operate to disallow the deduction of the losses where they are applied to reduce the assessable income arising from the distribution.

Subsection 270-10(1) Schedule 2F describes the circumstances in which the income injection test will apply. The income injection test will apply where the following conditions are met: (see overleaf)


From the helpline: Q&As (cont)

All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice

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The Copyright is owned exclusively by Taxpayers Australia Inc (ABN 96 075 950 284).

Taxpayers Australia, PO Box 292, Kew East, Victoria 3102 Phone: 1300 657 572 Fax: 03 8851 4588

Taxpayers Australia Inc. ABN: 96 075 950 284 Reg.No A0033789T

# Conditions How it is satisfied

1 A deduction is allowable to a trust for the income year.

Losses are deductible to the loss trust, against assessable income, where the trust loss rules are satisfied.

2 Under a scheme, the following happen (in any order):

A scheme is widely defined in s177A. The arrangement described in the question is considered a 'scheme'.

a. the trust derives an amount of assessable income (the scheme assessable income) in the income year, and

The distribution of the net income is the assessable income in question.

b. an outsider to the trust directly or indirectly provides a benefit to the trustee, to a beneficiary in the trust or to an associate of the trustee or of a beneficiary, and

The profit trust is an outsider to the loss trust because the profit trust is neither a trustee of the loss trust or a person with a fixed entitlement to a share of the income or capital of the loss trust (subs270-25(2) Schedule 2F).

c. the trustee, a beneficiary in the trust or an associate of the trustee or of a beneficiary, directly or indirectly provides a benefit to the outsider to the trust or to an associate of the outsider, and

The forgiveness of the unpaid present entitlement would constitute a benefit (as defined in s270-20 Schedule 2F) being given back to the profit trust.

3 It is reasonable to conclude that:

a. the trust derived the scheme assessable income, or

In this case the trust derived the taxable trust distribution from the profit trust wholly because the deduction in the loss trust would be allowable.

b. the outsider provided the benefit as mentioned, or

N/A

c. the trustee, beneficiary or associate provided the benefit,

N/A

wholly or partly, but not merely incidentally, because the deduction would be allowable, and

4 the trust is not an excepted trust The trust is not an excepted trust under s272-100 Schedule 2F.

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PRINT POST : PP 381667–00041 The Taxpayer...2011-12 2012-13 2015-16 LITO amount $1,500 $445 $300 Taxable income the LITO begins to be reduced at $30,000 $37,000 $37,000 You are no