|
Explanatory Memo (Client Alert in more detail)
December - January 2010
Proposed Amendments
to Tax Laws
On
21 October 2009, the Government introduced the Tax Laws Amendment
(2009 Budget Measures No 2) Bill 2009 (the main Bill) into the House
of Representatives. The main Bill seeks to:
make
changes to the taxation of employee share schemes;
tighten
the application of the non-commercial losses rules in relation to
individuals with an adjusted taxable income of $250,000 or more; and
require
superannuation providers to transfer the balance of a lost member’s
account to the Commissioner of Taxation.
A
discussion of the proposed amendments follows.
Employee
share schemes
The
main Bill and the associated Income Tax (TFN Withholding Tax (ESS))
Bill 2009 propose changes to the taxation of employee share schemes
(ESSs) by:
replacing
the current Div 13A of Pt III of ITAA 1936;
inserting
a new Div 83A into ITAA 1997 dealing with employee share
schemes; and
inserting
a new Subdiv 14-C in Sch 1 to the Taxation Administration
Act 1953 (TAA) dealing with the ESS withholding tax, and a new
Div 392 in Sch 1 to the TAA dealing with ESS reporting.
Under
the proposed provisions, an ESS interest is defined as a beneficial
interest in:
Consistent
with the current law, the proposed law specifically exempts ‘ESS
interests’ acquired under an employee share scheme from being
taxed as a fringe benefit under the Fringe Benefits Tax Assessment
Act 1986.
Upfront taxation
Generally,
any discount to the market value of ESS interests in shares or rights
provided under an employee share scheme is taxed upfront (ie on
acquisition). This means the market value of the discount must be
included in an employee’s assessable income for that income
year.
Employees
participating in ESSs who pay tax upfront may be eligible for a
$1,000 tax concession. That is, an employee does not include a
discount on ESS interests in their assessable income if the value of
the combined discount is $1,000 or less. Where the discounts are
greater than $1,000, the employee is assessed on the excess over
$1,000.
To
be eligible for the upfront concession, an employee must satisfy the
following conditions:
the
employee has a taxable income (after adjustments) of $180,000 or
less. The taxable income of the employee is adjusted by adding the
employee’s reportable fringe benefits, reportable
superannuation contributions and total net investment loss for the
relevant income year;
the
employee must be employed, at the time of acquiring the ESS
interests, by the company offering the scheme or one of its
subsidiaries;
the
scheme must be offered in a non-discriminatory way to at least 75%
of Australian resident permanent employees with three or more years
service (whether continuous or non-continuous service);
the
ESS interests provided must not be at real risk of forfeiture;
the
ESS interests offered under the scheme must relate to ordinary
shares;
the
ESS interests provided cannot be disposed of for three years unless
the employee ceases employment at an earlier time; and
the
employee must not receive more than 5% effective ownership of the
company, or control more than 5% of the voting rights in the
company, as a result of participating in the scheme.
Deferral of taxation
Although
the economic value embodied in employee share scheme shares and
rights is equivalent to any other form of employee compensation and
should generally be taxed upfront in the same manner, the proposed
rules make exceptions to this general principle for two forms of ESS:
For
the deferred tax rules to apply:
the
relevant ESS interests must be acquired at a discount under an
employee share scheme, relate to ordinary shares and be subject to a
real risk of forfeiture. Under the proposed new law, an ESS interest
will be at real risk of forfeiture if a reasonable person would
consider there is a real risk that the employee would lose or
forfeit the interest or never receive it, other than by selling or
exercising it, by intentionally taking no action to realise the
benefit, or through the market value of the ESS interest falling to
nil; or
the
relevant ESS interests must be acquired under a salary sacrifice
arrangement, and the employee must receive no more than $5,000 worth
of shares under those arrangements in an income year. To be eligible
for deferred taxation, a salary sacrifice scheme must relate to
shares (not rights), the employee must receive the shares for no
consideration (discount per share provided through the arrangement
is equal to the market value of the share), and the employee must
receive no more than $5,000 worth of shares.
Real
risk of forfeiture
If
an ESS interest is at real risk of forfeiture and the employee share
scheme meets the other conditions outlined in the proposed rules,
taxation will be deferred until the ESS deferred taxing point (see
below). Therefore, it is necessary to consider whether the ‘real
risk of forfeiture’ test is satisfied.
The
‘real risk of forfeiture’ test is intended to provide for
deferral of tax when there is a real alignment of interests between
an employee and employer, through the employee’s benefits being
at risk. The test is a principle based test, intended to deny a
deferral of tax where schemes contrive to present a nominal risk of
forfeiture, without complying with the intent of the proposed law.
The
test will depend on whether the relevant ESS interest relates to a
share or a right:
in
the case of a share, there must be a real risk under the conditions
of the relevant scheme that the employee will forfeit the share, or
lose it other than by disposing of it; or
in
the case of a right to acquire a beneficial interest in a share:
there
must be a real risk that, under the conditions of the scheme, the
employee will forfeit the right, lose it other than by disposing it,
exercising it or letting it lapse; or
there
must be a real risk that, under the conditions of the scheme, if the
employee exercises the right to get a beneficial interest in a
share, they will forfeit the interest, or lose it other than by
disposing of it.
The
test does not require employers to provide schemes in which their
employee share scheme benefits are at a significant or substantial
risk of being lost. However, under the proposed amendments, ‘real’
is regarded as something more than a mere possibility. Something is
not a real risk if a reasonable person would disregard the risk as
highly unlikely to occur or as nothing more than a rare eventuality
or possibility. Examples of real risk include situations in which:
The
Explanatory Memorandum accompanying the main Bill provides various
examples illustrating the real risk of forfeiture test, including:
compulsory
transfers of an ESS interest may be forfeiture;
contrived
risks;
forfeiture
on cessation of employment;
forfeiture
on cessation of employment — a good leaver who leaves for
reasons beyond their control;
forfeiture
on cessation of employment — retirement;
minimal
risk contrived to gain deferral;
fraud
or gross misconduct;
performance
hurdles — market share;
performance
hurdles — market price increasing;
performance
hurdles — market price maintained;
performance
hurdles over a portion of ESS interests;
employee
controlled risk;
employee
controlled risk — prohibition on sale of original shares; and
ESS
interests likely to be forfeited if employee ceases employment.
ESS
interests provided through salary sacrifice arrangements
The
deferral arrangements also allow for ESS interests received at a 100%
discount through a salary sacrifice arrangement to be subject to the
deferred taxing treatment. The risk of forfeiture is not necessary to
get the deferred taxation treatment through a salary sacrifice
scheme.
For
tax to be deferred under a salary sacrifice arrangement, an ESS
interest must be provided:
because
an employee agreed to acquire the interest in return for a reduction
in salary or wages that would not have happened apart from the
agreement; or
as
part of the employee’s remuneration package, in circumstances
where it is reasonable to conclude that the employee’s salary
or wages would be greater if the interest was not part of that
package.
It
is also a requirement the governing rules of an ESS must expressly
state that the deferred taxation arrangement applies to the taxation
of the scheme. A statement in the scheme’s document would be
sufficient to fulfil this requirement. The Explanatory Memorandum
accompanying the main Bill provides an example of a sentence that
could be included in an offer document:
This
scheme is a scheme to which Subdiv 83A-C of ITAA 1997 applies
(subject to the conditions in that Act).
Deferred
taxing point
The
tax on an ESS discount is deferred until the ‘ESS deferred
taxing point’. The deferred taxing point for shares is the
earliest of:
when
there is no real risk that the employee will forfeit the shares, or
lose the shares other than by disposing of them, and there are no
genuine restrictions preventing disposal; or
when
the employee ceases the employment in respect of which they acquired
the shares; or
seven
years after the employee acquired the shares.
Conversely,
the deferred taxing point for rights is the earliest of:
when
the employee ceases employment in respect of which they acquired the
rights;
when
there are no longer genuine restrictions on the disposal of the
rights (eg being sold), and there is no real risk of the employee
forfeiting the rights;
when
there are no longer any genuine restrictions on the exercise of the
rights, or resulting shares being disposed of (such as by sale), and
there is no real risk of the employee forfeiting the rights or
underlying shares; or
seven
years after the employee acquired the rights.
The
taxing point for a right is the point at which a taxpayer can take
some action to realise the benefit. It does not matter whether or not
the taxpayer chooses to do so. The taxing point for an ESS interest
(an interest in either a share or a right) is moved to the time the
taxpayer disposes of the interest if they dispose of the interest
within 30 days of the original deferred taxing point.
ESS interests and CGT
ESS
interests are exempted from CGT (in most cases) until the interest
has been taxed under the ESS rules. An exception is made where
certain CGT events occur (CGT events E4, G1 and K8) that primarily
affect the cost base of the ESS interests, which apply throughout the
life of the interests.
Once
ESS interests have been taxed under the ESS rules, they are
subsequently taxed consistently with other capital assets (eg under
the CGT regime). The interests will be considered to be reacquired
for their market value immediately after the point they are taxed
under the ESS rules. For an ESS interest that is taxed upfront, the
interest (and the share or right of which it forms part) is taken to
have been acquired for its market value from the point at which the
taxpayer initially acquired the interest. For an ESS interest over
which tax is deferred, the interest (and the share or right of which
it forms part) is taken to have been reacquired immediately after the
ESS deferred taxing point. This resets the cost base of the ESS
interest to market value, and resets the acquisition time, which may
be relevant to an employee’s eligibility for the CGT discount.
Associates
Similar
to the current law, the proposed law treats ESS interests provided to
associates of employees in relation to an employee’s employment
as though the interest was in fact acquired by the employee rather
than the associate. (Note the term ‘associate’ is defined
with reference to s 318 of ITAA 1936.)
The
main Bill proposes that shares provided to an associate of an
employee will be eligible for deferral if an ESS meets the relevant
criteria (see page 2 above). At the deferred taxing point, when the
shares move into the CGT system, any further capital gains or losses
incurred in relation to the shares will be borne by the associate.
Withholding tax
As
an integrity measure, the new law also introduces a withholding tax,
applicable in limited circumstances. Withholding tax will be payable
if an employer provides discounted shares or rights to an employee,
and that employee has not quoted their TFN or their ABN to the
employer by the end of the income year. The withholding tax will be
payable on the amount of ESS discount included in the employee’s
assessable income for an income year under the general ESS rules. It
will be payable 21 days after the end of the income year in which the
ESS interest is included in the employee’s assessable income.
The
rate of withholding tax is calculated by adding the highest
individual marginal tax rate to the rate of the Medicare levy.
Employer deductions
Employers
will be able to deduct an amount for shares or rights they provide to
employees under an ESS if the scheme meets the conditions for an
employee to receive the upfront concession. The income test for the
upfront concession is disregarded when calculating an employer’s
eligibility to claim a deduction.
Under
the proposed law, a general deduction may be available in
relation to the indirect provision of securities to employees under
an ESS. An employer may provide money to an employee share
trust for the purpose of providing its employees with securities in
itself. The employee share trust may acquire the securities
by buying them on the market or by participating in a share issue by
the employer.
The
deduction would generally occur in the income year in which the
employer incurred the loss or outgoing. However, the Government was
concerned that such an arrangement may allow an employer to
artificially bring forward future deductions by making contributions
to the trust that are in excess of its requirements under an employee
share scheme. To prevent an artificial bring forward of these
deductions, the employee share scheme rules delay the deduction until
the employee acquires an ESS interest.
Refund of tax for forfeited
shares
The
proposed law provides for a refund of tax paid in relation to ESS
interests in certain circumstances where those interests are
forfeited after the employee has been taxed on the discount.
The
refund will only be only available where the employee had no choice
but to forfeit the ESS interest (except when that choice was to cease
employment), and where the conditions of the scheme were not
constructed to protect the employee from market risk. Under such
circumstances, the forfeited ESS interest will be treated as never
having been acquired, and the taxpayer can claim a refund of income
tax by requesting the Commissioner amend their income tax assessment
to remove income previously included in their assessable income.
There
will be no time limit on amending an assessment to exclude an amount
from a taxpayer’s assessable income for a share interest which
is forfeited, or for a right which was lost without being exercised.
A
refund will not be available where the share interest is forfeited
due to a choice of an employee (except when that choice was to cease
employment). Such a choice may include a choice not to
exercise or dispose of an ESS interest, or some other choice of the
employee that results in the forfeiture of the ESS interest. Whether
or not forfeiture is a result of a choice the employee made will be
assessed on a case-by-case basis.
Date of effect
The
changes will apply to ESS interests acquired on and after
1 July 2009. A tiebreaker rule provides that if the time of
acquisition differs between the new and current law, the acquisition
time under the current law will be used. That is, the current law
continues to apply to that acquisition.
Note
that shares, rights and stapled securities acquired before this time
will also be brought within the new rules. However, transitional
arrangements will be provided to ensure the effect of the existing
law is maintained for ESS interests acquired before 1 July 2009.
Non-commercial
losses
The
main Bill will amend the non-commercial losses rules contained in Div
35 of ITAA 1997 to prevent high income individuals (ie individuals
with an adjusted taxable income of $250,000 or more) from offsetting
losses from non-commercial activities against their salary, wage or
other income.
Currently,
an individual taxpayer who is carrying on a business either as a sole
trader or a partner in a partnership can only apply losses arising
from the business activity against their other income in an income
year if:
the
activity satisfies at least one of four objective tests in that year
(see below);
the
losses arise from a primary production or professional arts business
and the taxpayer’s assessable income for the income year from
other sources is less than $40,000; or
the
Commissioner exercises the discretion not to apply Div 35 of ITAA
1997.
The
four objective tests are:
assessable
income test — the assessable income generated from the
activity must be at least $20,000, or would reasonably be estimated
to be at least $20,000 if the activity was carried on for the whole
year;
profits
test — the activity must have produced a profit in three of
the last five income years, including the current year;
real
property test — the reduced cost base value of real property
(or interests in real property) used on a continuing basis to carry
out the activity is at least $500,000. Dwellings, and adjacent land
used in association with the dwelling, used mainly for private
purposes are excluded, along with any tenant’s fixtures; and
other
assets test — the reduced cost base of any other assets used
on a continuing basis in carrying on the activity is at least
$100,000. Relevant assets for this test are depreciable assets,
trading stock, assets leased from another entity and trademarks,
patents, copyrights and similar rights. However, cars, motorcycles
and similar vehicles are excluded.
The proposed amendments
The
main Bill proposes to introduce an income requirement that prevents
individuals with an adjusted taxable income of $250,000 or more in an
income year from accessing the existing four objective tests. That
is, losses from non-commercial business activities will be
quarantined where the adjusted taxable income of an individual is
$250,000 or more, unless the Commissioner exercises the discretion
not to apply the non-commercial losses rules (see Commissioner’s
discretion below).
An
individual’s adjusted taxable income for an income year is the
sum of the individual’s:
taxable
income;
reportable
fringe benefits;
reportable
superannuation contributions; and
total
net investment losses.
The
main Bill says that in determining if an individual has met the
income requirement the individual must disregard any excess
deductions from any non-commercial business activity that has excess
deductions subject to Div 35.
Commissioner’s
discretion
Where
a taxpayer does not meet the income requirement (ie the taxpayer’s
adjusted taxable income is $250,000 or more), the taxpayer can apply
to the Commissioner to exercise the discretion not to apply the
non-commercial losses rules. Before exercising the discretion, the
Commissioner must be satisfied, based on an objective expectation,
that the taxpayer’s business activity will produce assessable
income greater than available deductions within a commercially viable
period of the industry concerned.
The
discretion is not intended to be available in cases where the failure
to make a profit is for reasons other than the nature of the
business, such as a consequence of starting out small and needing to
build up a client base, or business choices made by an individual
that are not consistent with the ordinary or accepted practice in the
industry concerned (eg the hours of operation, location, climate or
soil conditions, or the level of debt funding).
To
obtain the exercise of the Commissioner’s discretion, a
taxpayer will need to complete an approved form. The information
required by the form may include:
details
of the nature of the taxpayer’s business activity, including
when the activity commenced;
objective
evidence from independent sources demonstrating that, because of the
nature of the business activity, it does not (or will not) satisfy
the objective tests, or does not produce assessable income greater
than available deductions in a given income year (whichever is
applicable); and
objective
evidence from independent sources that, despite the business not
meeting the tests, the business does not (or will not) satisfy the
tests that are available to the taxpayer, or does not produce
assessable income greater than available deductions in a given
income year but will nonetheless meet the tests or produce
assessable income greater than available deductions (whichever is
applicable) in a period of time that is considered commercially
viable for the industry concerned.
An
individual is required to establish objectively the commercially
viable period for the industry in which their business operates. The
Explanatory Memorandum accompanying the main Bill states that
evidence of what the commercially viable period for the industry is
may include:
current
or projected information about the market for the goods or services
(prices and demand) that the business activity produces;
industry
articles, statistics, analyses and market forecasts that support the
proposals or projections made in any business plan;
suitability
of the particular business activity to the location where it is
undertaken, such as soil and climate conditions, markets for the
products or services and transport requirements;
scientific
research or other papers on relevant industries; and
yield
and price forecasts.
The
Commissioner must look at the most recent income year that has ended
immediately before a taxpayer’s application when deciding
whether to exercise the discretion.
The
examples below, which are from the Explanatory Memorandum, explain
when the Commissioner will and will not exercise the discretion.
Situation
where the Commissioner will
exercise the discretion
Karen
carries on a business of horse breeding, training and selling horses
in partnership. The partnership commenced a breeding program which
will, in time, enable the breeding of high quality, sought-after
animals.
It
is in the nature of breeding and training horses that there will be a
lead time before a profit can be expected. Independent evidence from
the relevant national association supports the view that the
commercially viable period for this industry, in view of the
intensive training involved, would be when a horse reaches five to
six years of age. This period added to the gestation period of 11
months supports a lead time of six to seven years for the industry.
Provided
there is an objective expectation that the partnership business
activity will make a tax profit within this commercially viable
period, the Commissioner may exercise the discretion to allow losses
to be claimed.
Situation
where the Commissioner will not
exercise the discretion
Tracey
carries on a business of primary production from breeding and selling
cattle. Their profit projections indicate that they do not expect to
make a tax profit for six years.
Independent
evidence provided by Tracey indicates the lead time period begins
from the commencement of the activity and includes the time taken to
raise the females to a breeding age, allowing for the gestation
period of those animals to finish, and finishes when the progeny have
reached a saleable age. On the evidence provided, the period for a
typical business activity of breeding and selling cattle to become
commercially viable is no greater than three years. Therefore, Tracey
will not be able to produce a tax profit within a period that is
commercially viable for the industry concerned and the Commissioner
will not be able to exercise the discretion to allow the losses.
Transitional measures
The
main Bill proposes to amend the Income Tax (Transitional
Provisions) Act 1997 to ensure that:
the
non-commercial loss rules will not apply to a business activity that
has greater available deductions than assessable income in a given
income year only because of Div 41 of ITAA 1997 (the small
business and general business tax break); and
any
discretion that has been applied by the Commissioner before the
commencement of these amendments, including about any managed
investment scheme, will continue in effect.
Date of effect
The
amendments will apply to the 2009/10 and later income years.
Payment
of lost member superannuation accounts to the Commissioner
The
main Bill seeks to require superannuation funds to transfer certain
small and unidentifiable accounts of lost members to the Commissioner
as unclaimed monies.
Small and inactive accounts
The
main Bill will amend the Superannuation (Unclaimed Money and Lost
Members) Act 1999 (SUMLM Act) to require superannuation funds and
retirement saving accounts (RSAs) to transfer the balance of a ‘lost
member account’ (other than a defined benefit interest) to the
Commissioner, where the member on whose behalf the account is held is
a ‘lost member’ (as defined in SIS reg 1.03A) and:
the
balance of the account is less than $200 (ie small accounts); or
the
account has been inactive for a period of five years and the trustee
is satisfied it will never be possible to pay an amount to the
member (inactive accounts of unidentifiable members).
Currently,
amounts are only paid to the Commissioner as unclaimed monies when:
a
member reaches age 65 and cannot be found;
a
member dies and the trustee cannot ensure the benefit is received by
the person entitled to receive the benefit; or
the
account holder was identified in a notice under s 20C of the
SUMLM Act (concerning former temporary residents).
Payments to Commissioner
A
trustee of a superannuation fund or RSA will be required to pay to
the Commissioner an amount for a lost member account (generally the
balance of the account) at the end of the ‘unclaimed money
day’. The amount due and payable to the Commissioner under
proposed s 24E(1) of the SUMLM Act is the amount that would have
been due and payable if the lost member had requested that the
balance be rolled over to a complying superannuation fund. GIC will
apply on the amounts that remain unpaid after it was due and payable.
A
trustee of a superannuation fund is discharged from further liability
for amounts paid under proposed s 24E. However, an offence is
committed if a trustee breaches a requirement under s 24E.
A
trustee of a superannuation fund will also be required to give a
statement to the Commissioner (in an approved form) for lost member
accounts. Such reporting will require information to allow the
Commissioner to apply the correct tax treatment to a payment of
unclaimed money made for a person under proposed s 24G of the
SUMLM Act.
Payments from Commissioner
The
Commissioner can pay an amount he receives for a lost member account
to a person, if the person has reached eligibility age or the amount
is less than $200, unless the person directs the Commissioner to pay
the amount to a complying superannuation plan. In the case of
payments to a fund, the Commissioner can only pay to a single fund.
If the amount is less than $200, the Commissioner can pay it to the
person, even if the person is less than age 65.
The
Commissioner can make a payment where he is satisfied that he can
make the payment, either on receipt of an application in the approved
form or by the Commissioner’s own initiative.
If
the person has died, the Commissioner can pay an amount to a death
beneficiary where the Commissioner is satisfied that the
superannuation fund would have been required to pay a death benefit
amount to one or more death beneficiaries as a result of the person’s
death, had it not paid the amount to the Commissioner. If the
Commissioner cannot be so satisfied, he must pay the amount to the
person’s legal personal representative.
Income tax amendments
Consequential
amendments are proposed to ss 307-5, 307-142, 307-300, 307-350 and
307-120 of ITAA 1997 to ensure payments made by the Commissioner
under s 24G in respect of a small and inactive account of a lost
member will be treated and taxed as if they were paid from a
complying superannuation fund.
Amendments
to the Taxation Administration Act 1953 will also provide that
an amount due and payable by a superannuation trustee is a
tax-related liability for the purposes of administrative penalties
and offences under the Act.
Date of effect
The
amendments are proposed to commence on Royal Assent to the main Bill
and apply in relation to the last ‘unclaimed money day’
occurring before 1 July 2010 and later unclaimed money
days. The initial transfer of lost member accounts to the
Commissioner is proposed to take place during the 2010/11 income
year. Transfers will continue to be made for lost member accounts at
times to be determined by the Commissioner by legislative instrument.
Collapsed MISs and
Tax Consequences for Investors
The
Tax Office has released four draft taxation determinations which set
out the Commissioner’s preliminary views on the tax
consequences that may flow from collapsed managed investment schemes
(MISs):
Draft
Taxation Determination TD 2009/D13;
Draft
Taxation Determination TD 2009/D14;
Draft
Taxation Determination TD 2009/D15; and
Draft
Taxation Determination TD 2009/D16.
Note
that the Tax Office has previously released three draft taxation
determinations covering the tax consequences that may flow from
collapsed MISs:
Draft
Taxation Determination TD 2009/D9 — change of responsible
entity of registered agricultural MISs and tax outcomes for
participants;
Draft
Taxation Determination TD 2009/10 — disposal or termination of
an interest in a non-forestry MIS that arises as a result of
circumstances outside the control of participants and deductions
previously allowed under s 8-1 of ITAA 1997;
Draft
Taxation Determination TD 2009/D11 — payments received by
participants in a non-forestry MIS upon the winding-up of a scheme,
that do not involve the disposal of the participants’
interests to another person, and assessable income.
Failure
to plant trees under a forestry scheme
In
Draft Taxation Determination TD 2009/D13, the Commissioner says a
failure to plant trees intended to be established under a forestry
scheme does not affect the timing of deductions for expenditure on
seasonally dependent agronomic activities where s 8-1(b) of ITAA 1997
and s 82KZMG of ITAA 1936 have previously been ruled to be satisfied.
Examples of seasonally dependent agronomic activities include:
tending
seedlings prior to planting, and planting them;
ripping
and mounding the site where the planting is to occur; and
applying
fertiliser, herbicide or pesticide in conjuncture with the planting.
According
to the draft, s 82KZMG(2) requires forestry expenditure to be
incurred ‘in return for the doing of a thing under the
agreement’. Therefore, the draft says if it transpires that the
‘thing’ is not done, for reasons outside the control of
the parties, the timing of the deduction would remain governed by s
82KZMG. In addition, the expenditure may still be relevantly incurred
for the purposes of s 8-1, at the time the expenditure was made.
Example
The
example below from the draft explains the Commissioner’s
preliminary view.
Kane
incurred expenditure under agreements that satisfied ss 82KZMG(2) and
(3) of ITAA 1936 during the 2008 financial year. The nature of the
agreements entered into also indicates that a business is being
carried on. Under the agreement, the trees that were subject of the
agreement were due to be planted by 30 June 2009. Due to the
appointment of a liquidator or administrator, the trees were not
planted by 30 June 2009. Nevertheless, the timing of the deduction
for the expenditure remains within the scope of s 82KZMG of ITAA
1936.
Failure
to plant all trees under a forestry MIS
According
to Draft Taxation Determination TD 2009/D14, a failure to plant all
the trees intended to be established under a forestry MIS covered by
Div 394 of ITAA 1997 means that the conditions under which an amount
can be deducted under the Division are not satisfied. However, the
draft says where a taxpayer is carrying on a business (or a business
was being carried on), the amount may still be deductible under s 8-1
of ITAA 1997 even though the conditions of Div 394 are not satisfied.
The draft also says if the taxpayer is entitled to a deduction under
s 8-1, the amount will be subject to the operation of Subdiv H of Div
3 of Pt III of ITAA 1936 (the prepayment rules).
Example
The
example below from the draft explains the Commissioner’s
preliminary view.
Zane
paid an amount under a forestry managed investment scheme in 2008.
Due to the insolvency of the forestry manager, it is apparent that
all the trees intended to be established under the scheme will not be
planted by 31 December 2009. The content of the agreements indicate
that a business is also being carried on. The amounts incurred remain
deductible under s 8-1 of ITAA 1997 and are subject to the operation
of Subdiv H.
CGT
event and a participant’s interest in a forestry MIS
In
Draft Taxation Determination TD 2009/D15, the Tax Office says a
deduction is not allowable under s 394-10(1) of ITAA 1997 where a CGT
event happens in relation to a participant’s interest in a
forestry MIS within four years after the end of the income year in
which the participant first pays an amount under the scheme.
The
draft says a taxpayer may still be entitled to deduct an amount under
s 8-1 where the taxpayer is carrying on a business (or a business was
being carried on) even though the taxpayer fails the test in Div 394
of ITAA 1997. However, the timing of the deduction will be subject to
the prepayment rules contained in Subdiv H of Div 3 of Pt III of ITAA
1936. In the Commissioner’s view, most arrangements with
features initially designed to satisfy the provisions of Div 394 will
not meet the requirements of s 82KZMG because the agreements will
have an establishment period greater than 12 months. Therefore, the
Commissioner says the timing of the deduction is determined by s
82KZMF of ITAA 1936, subject to s 82KZME of ITAA 1936.
Example
The
example below from the draft explains the Commissioner’s
preliminary view.
Dane
paid amounts under a forestry managed investment scheme during the
2008 financial year. The content of the agreements indicates that a
business is also being carried on. During 2009, as a result of the
liquidation of the forestry manager, Dane gave up all rights under
his forestry interest in return for a share of proceeds from asset
realisations. This is a CGT event (either A1 or C2). As a result of
the CGT event, s 394-10(5) of ITAA 1997 is failed, and there is no
entitlement to claim the deduction for the amounts paid in the 2008
year under s 394-10(1) of ITAA 1997. However, the market vale of the
consideration he received is included in Dane's assessable income.
Moreover, as a business was being carried on, the amounts incurred
would have been deductible under s 8-1 of ITAA 1997 and subject to
the operation of Subdivision H. Due to the contracted period within
which trees were to be planted, s 82KZMG of ITAA 1936 does not apply.
Subject to s 82KZME of ITAA 1936, s 82KZMF of ITAA 1936 would apply
to spread the amount paid over the relevant eligible service period.
(Note
the four-year holding period rule only applies to interests in
forestry MISs.)
CGT
event happens to a taxpayer’s interest in a forestry MIS
According
to Draft Taxation Determination TD 2009/D16, a deduction will not
remain allowable under s 8-1 of ITAA 1997 where a CGT event happens
in relation to a taxpayer’s interest in a s 82KZMG of ITAA 1936
forestry MIS within four years after the end of the income year in
which the taxpayer first incurred expenditure under the agreement.
This is because s 82KZMGA of ITAA 1936 applies to disallow the
previously allowable expenditure.
A
deduction for an amount paid by an initial investor in a forestry MIS
on or after 1 July 2007 and on or before 30 June 2008 may be
allowable under Div 394 of ITAA 1997. Alternatively, the amount may
be deducted under s 8-1 of ITAA 1997 if the requirements of the
section are satisfied. Where the amount is deductible under s 8-1,
the timing of the deduction may be governed by s 82KZMG.
(Note
the four-year holding period rule only applies to interests in
forestry MISs.)
Example
The
following example from the draft explains the Commissioner’s
preliminary view.
Wane
pays an amount under an agreement as part of a managed investment
scheme in June 2006 and claims a deduction in that income year
pursuant to s 8-1 of ITAA 1997 and s 82KZMG of ITAA 1936. The manager
of the scheme is placed in liquidation in June 2009. Wane’s
interest ceases to exist under the terms of a liquidation in December
2009 and he receives nothing in return, as there is no value in the
interest at that time. Section 82KZMGA of ITAA 1936 applies in the
2009 income year to deny the deduction initially claimable in the
2005/06 income year.
Scope
of draft determinations
The
draft determinations apply to participants in schemes that are either
subject to a current product ruling, or were subject to a product
ruling that was withdrawn before any material difference occurred.
Date
of effect
When
finalised, the determinations will apply to income years both before
and after its date of issue.
Proposed
amendments to four-year holding period rule
The
Government has announced that it will amend the tax law to protect
investors in forestry MISs from an unintended and adverse tax
outcome: see Assistant Treasurer’s press release No 074, 21
October 2009.
The
Assistant Treasurer said the collapse of Timbercorp and Great
Southern is expected to lead to a number of forestry MISs being
wound-up or restructured, which could cause investors to fail the
requirement of having held their interest in an MIS for four years as
a condition of an upfront deduction. Therefore, under the current
law, investors in forestry MISs managed by Timbercorp and Great
Southern may have previous years’ deductions clawed back
because they have not held their interest for four years.
To
ensure investors are not unduly penalised for events outside their
control, the Government will amend the four-year holding period for
forestry MISs to ensure it cannot be failed for reasons genuinely
outside the investors’ control, such as the insolvency of an
MIS manager, the death of the investor or where the MIS interest is
cancelled (eg because of trees being destroyed by fire, flood or
drought). The Government will also amend the law to ensure that civil
penalties can still apply to the promoters of forestry MISs even
where the investors’ deductions are allowed to stand because of
the amendment to the four-year holding rules.
GST Consequences
and Partner Taking Goods for Private Use
The
Tax Office has released GST Determination GSTD 2009/2, in which it
states that when a partner in a partnership takes goods held as
trading stock for private or domestic use, there is a supply by the
partnership to the partner in the course or furtherance of the
partnership’s enterprise. A taxable supply by the partnership
to the partner will arise if the requirements of s 9-5 of the
GST Act are satisfied.
According
to the determination, Div 72 of the GST Act will apply if a
partnership supplies goods for a partner’s private or domestic
use other than by way of an in-specie distribution. The determination
says if the requirements of s 9-5 are satisfied, the value of
the taxable supply will be the GST-exclusive market value of the
supply.
In
addition, the determination says Div 130 of the GST Act (which
sets out whether an entity has an increasing adjustment if it applied
solely to private or domestic use goods for which it had claimed a
full input tax credit) does not apply to a partnership. In the
Commissioner’s view, the wording of s 130-5 means that the
Division only applies where the same entity that acquired the goods
also applies the goods to private or domestic use. Therefore, in the
case of the partnership, the entity (ie the partnership) that
acquired the goods is different from the entity (ie a partner) that
applies the goods to private or domestic use.
In
the Commissioner’s view, an in-specie distribution of trading
stock by a partnership to a partner is made for consideration. The
determination says the distribution has the effect of proportionately
reducing the partner’s entitlement to a distribution of any
surplus remaining after the realisation of assets, and payment of
debts and liabilities, on the winding up of the partnership. The
determination also says the consideration for the supply is the
proportion of the partner’s interest in the partnership,
reflected by the value of goods distributed and may be
represented by:
an
amount debited to the capital account of the partner;
an
amount debited to the current account of the partner; or
a
combination of amounts debited to both the partner’s capital
and current accounts.
The
Commissioner says that where a partnership is registered for GST, an
in-specie distribution will be a taxable supply under s 9-5 of
the GST Act to the extent that the supply is not GST-free or input
taxed.
The
determination finalises Draft GST Determination GSTD 2009/D1 and is
essentially the same.
Examples
The
determination provides two examples explaining the Commissioner’s
view.
Example
1
Larry and Ralph are in
partnership. The partnership is registered for GST and operates a
hardware store in Australia. The partnership, as part of a
distribution of partnership profits, supplies Larry, by way of an
in-specie distribution, tools held as trading stock for Larry’s
own private and domestic use. The supply of the tools is for
consideration and is made in the course or furtherance of the
enterprise carried on by the registered partnership. The in-specie
distribution of the tools to Larry by the partnership is a taxable
supply by the partnership to Larry.
Example
2
Alex and Tom are in
partnership operating a corner store in Australia. During the tax
period the partnership supplies Alex with bread, milk, soft drinks,
confectionary and ice creams. Supplies of milk and bread are GST-free
and not taxable supplies. Supplies of soft drinks, confectionary and
ice creams are taxable supplies. The market value of the soft drinks,
confectionary and ice creams is $330 (inclusive of GST). Alex pays
consideration of $100. Division 72 applies to the supplies of the
soft drinks, confectionary and ice creams because Alex is an
associate of the partnership and has provided inadequate
consideration. The GST exclusive market value of the taxable supplies
is $300 (10/11 x $330) and the GST payable by the partnership is $30
($300 x 10%).
Date
of effect
The
determination applies to all income years before and after its issue.
Small Business
Benchmarks
The
Tax Office has released an expanded range of benchmarks, known as the
small business benchmarks. According to the Tax Office, the
benchmarks provide small businesses ‘a snapshot of what, on
average, is happening in businesses operating in a particular
industry by providing a measure of various business costs in relation
to turnover’. In addition, the Tax Office says the benchmarks
are a useful tool to assist business owners in assessing their
business performance.
The
benchmarks
Two
types of benchmarks for the small business sector have been developed
by the Tax Office:
performance
benchmarks, which are based on information small businesses report
to the Tax Office on income tax returns and business activity
statements (BASs); and
input
benchmarks, which are based on information industry participants and
trade associations provide to the Tax Office.
Fifty-eight
benchmarks have been released by the Tax Office. The benchmarks are
grouped into categories based on the business industry codes. The
categories include:
|
Category
|
Benchmarks
developed for …
|
|
Manufacturing
|
bakeries
and hot bread shops
cake shops
and patisseries
|
|
Construction
|
air
conditioning, refrigeration and heating services
bricklaying
blocklaying
concreting
services
electrical
services
fence
construction
painting
services
plasterboard
installers
plastering
and ceiling services
plumbing
services
roof
guttering installation
roof
painting and repair
roof
services (includes roof tiling and metal roofing services)
tiling and
carpeting services
tiling —
floor and wall
timber
floor installation
timber
floor sanding
|
|
Retail
trade
|
clothing
retailing
computer
retailing
floor
covering retail
florists
footwear
retail
fresh fish
and seafood retailing
fresh
poultry retailing
fruit and
vegetable retailing
furniture
retailing
grocery
retailers and general stores
houseware
retailing
liquor
retailing
meat
retailing and butchers
newsagents
tyre retail
|
|
Accommodation and food
services
|
chicken
shops
coffee
shops
fish and
chips shops
kebab shops
pubs,
taverns and bars
restaurants
sandwich
shops
sushi
takeaways
takeaway
food services
takeaway
pizza shops
|
|
Transport, postal and
warehousing
|
courier
services
delivery
services
furniture
removalists
road
freight transport services
taxi
drivers and operators
towing
services
|
|
Rental, hiring and real
estate services
|
video and
other electronic media rental and hiring
|
|
Administrative and
support services
|
building
and other industrial cleaning services
pest
control services
|
|
Other
services
|
barber and
men’s hairdressing
beauty
services
hairdressers
laundry and
dry-cleaning services
nail salons
|
Performance benchmarks
These
benchmarks are designed to allow small business owners to compare
their business performance with other businesses in the relevant
industry. The benchmarks will also assist the owners in checking
whether they are complying with their tax obligations, particularly
in relation to cash income.
Five
ratios are available to help the owners compare and check the
performance of their businesses against other businesses in their
industry. The ratios are:
cost
of goods sold to turnover — this ratio is calculated as (cost
of goods ÷ turnover) x 100;
labour
to turnover — the formula for calculating this ratio is
(labour cost ÷ turnover) x 100;
rent
to turnover — the formula for calculating this ratio is (rent
÷ turnover) x 100;
GST-free
sales to turnover — this ratio is calculated as (GST-free
sales ÷ turnover) x 100; and
motor
vehicle expenses to turnover — this ratio is calculated as
(motor vehicle expenses ÷ turnover) x 100.
(Note
the ratios are expressed as a percentage.)
The
Tax Office says the ratio ranges will assist business owners to work
out whether they fall within or outside the average for their
industry. The ratios will also identify how and why their businesses
may differ from the industry’s average, says the Tax Office.
Input benchmarks
The
Tax Office says these benchmarks show an expected range of income for
tradespeople based on the labour and materials they use. The Tax
Office also says these benchmarks apply to small businesses that work
with domestic customers rather than commercial customers.
The
benchmarks as a compliance tool
The Tax Office says that where
businesses do not report within the ranges of the benchmarks, it may
be an indication that the businesses are not recording and paying tax
on all of their transactions, especially cash transactions. The Tax
Office also says that comparing a business against benchmarks for its
industry is one of the methods it uses to identify businesses for an
audit or a review.
According
to the Tax Office, when it selects a business for audit or review, it
looks at the actual records of the business to assess whether it has
reported all of its cash income. In addition, the Tax Office may use
benchmarks to:
The
Tax Office says that businesses falling outside the benchmarks for a
particular industry are more likely to attract its attention.
However, the Tax Office acknowledges that there is often a reason why
a business falls outside a benchmark, for example, the rent paid by
the business may be higher than average because it is located in a
city centre. In these situations, the Tax Office recommends that the
business:
reviews
its recordkeeping;
considers
how its business operates; and
checks
if it has made a mistake on its tax return or not reported all its
income. If so, the business should correct the information and
advise the Tax Office.
Tax
Office views
In
October 2009, a Second Commissioner of Taxation, Bruce Quigley,
delivered a speech to the Taxation Institute of Australia. One of the
topics covered in his speech was the new small business benchmarks.
Mr
Quigley reiterated that the benchmarks will be used by the Tax Office
to identify business that may be avoiding their tax obligations. The
Second Commissioner also repeated that businesses operating outside
of an industry’s benchmarks would attract the Tax Office’s
attention. ‘Consistent, long-term performance outside the
benchmarks could be a sign a business is not meetings tax
obligations’, said Mr Quigley.
The
Second Commissioner urged tax practitioners to promote the benchmarks
to their clients and network.
The
question of whether an audit would be triggered if a business
performed outside the benchmarks was discussed in the Small Business
Consultative Group meeting held on 24 June 2009. The Tax Office
explained that performance outside the benchmarks may be a sign a
business is not meeting its tax obligation. According to the Tax
Office, it applies a filtering approach that may include:
contacting
the business via phone calls for an explanation;
visiting
the business to obtain further information; and
escalating
the business to audit or review.
Superannuation
Clearing House Service
The
Government has announced a free superannuation clearing house service
for small businesses which will be administered through Medicare
Australia: see Joint Media Release issued by the Minister for
Financial Services, Superannuation and Corporate Law, and the
Minister for Small Business, Independent Contractors and the Service
Economy No 035, 6 November 2009.
The
superannuation clearing house service will commence from July 2010.
Small businesses can register for the service online from May 2010.
The details of how small businesses will be able to register with
Medicare for the service will be announced by the Government in due
course.
Key
features of the superannuation clearing house service include:
the
processing of superannuation contributions made by employers,
including forwarding the contributions to employees’ nominated
superannuation funds. Initially, payments to the clearing house will
need to be made via electronic funds transfer (EFT);
the
discharging of employers’ superannuation guarantee obligations
when payment of the correct amounts (of superannuation guarantee)
are made to the clearing house;
the
superannuation clearing house service will be offered free of charge
to small businesses with less than 20 employees; and
the
processing of choice of fund nominations passed on by small
businesses.
|
Important:
This is not advice. Clients should not act solely on the basis of
the material contained in this Bulletin. Items herein are general
comments only and do not constitute or convey advice per se. Also
changes in legislation may occur quickly. We therefore recommend
that our formal advice be sought before acting in any of the areas.
The Bulletin is issued as a helpful guide to clients and for their
private information. Therefore it should be regarded as confidential
and not be made available to any person without our prior approval.
|
|
