Tax guide - December 2011: Year-end tax round up

By the Institute's Tax Group

Tax reform

This has been a year in which tax reform has been a significant issue, with the government announcing major initiatives in relation to resource taxation, tax advice privilege and carbon pricing, as well as organising the October Tax Forum. The Institute has been heavily involved in all aspects of these tax reform initiatives. Resource taxation, tax advice privilege and carbon pricing are discussed in more detail later in this article.

During the year, the Institute released a tax policy leadership paper Tax Reform: Laying the Foundations that was produced with KPMG. The paper covers a broad spectrum of issues across business and personal taxes, fringe benefits tax, state taxes and tax system governance. The key themes from the paper make important points about the long-term journey that typifies major tax reform in Australia. It identifies a range of reform pathways for significant components of our existing tax system, and highlights the need for ongoing dialogue between policy makers and the community, over several years, regarding the direction and pace of tax reform.

A list of the recommendations of the paper is reproduced here. The Institute also actively participated in the Tax Forum. The Tax Forum built upon the Australia’s Future Tax System review (often referred to as ‘the Henry review’) by providing a broad cross-section of the community with an opportunity to express their views on the priorities and directions for further reform of our tax and transfer system.

While the content of the Tax Forum was constrained due to the non-inclusion of GST and the need for fiscal balance, it did successfully bring together 187 people – each of whom has a major stake in the tax system – to talk about the merits of different reform proposals. Yasser El-Ansary CA, the Institute’s tax counsel, represented the Institute at the Tax Forum and had the honour of being the opening speaker for the section on governance.

As a result of the Tax Forum there is now momentum about the need to implement improved arrangements around the use of company losses. Our proposition is that the same business test and continuity of ownership test should be modernised and that a limited loss carry-back regime should be introduced for small business.

Tax advice privilege 

On 6 April 2011 at the Institute’s inaugural National Tax Conference, the Assistant Treasurer, the Hon Bill Shorten, announced that professional privilege for accountants had been put on the national agenda. On 15 April 2011 the government released a discussion paper that explores the appropriateness of establishing a tax advice privilege, similar to the model currently in place in New Zealand, which would allow non-lawyers to provide privileged tax advice.

This long awaited development had its origins in a 2008 Australian Law Reform Commission report called Client Legal Privilege in Federal Investigations which concluded that a new form of legal professional privilege, tax advice privilege, should be created under statute and granted to professional accountants.

This proposal has the potential to significantly alter the traditional relationship that exists between tax advisors and their clients. We believe that putting in place a robust framework that allows certain taxpayers to be able to provide legally privileged tax advice to their clients is vitally important: it will bolster the strength of our complex tax system and the rights of taxpayers within it. It will also reduce the competitive disadvantage that accountants have compared to lawyers who are able to access legal professional privilege. Given the importance of this issue to the profession, the Institute has been heavily involved in the consultation process. Numerous meetings have been held with Treasury and with the Assistant Treasurer in addition to the lodgement of a comprehensive submission.

The Institute’s submission discusses why the existing accountant’s concession does not provide appropriate protection for taxpayers and why a statutory regime is the only viable solution to delivering better consumer protections for taxpayers. At the moment, the government considers the issue important, but not urgent. More work will need to be undertaken if the government decides to implement the policy proposal.

Resource taxation

One of the major tax reform initiatives this year is the formulation of the Minerals Resource Rent Tax and the proposed extension of the Petroleum Resource Rent Tax. The revenue raised from these taxes is expected to generate more superannuation savings, invest in infrastructure and lower the company tax rate (especially for small business). The Institute has been closely involved in the formulation of these taxes both from a design and an implementation perspective. Yasser El-Ansary CA was an active member of the Resource Tax Implementation Group which comprised of a small number of industry, tax and government representatives. These representatives have conducted extensive confidential consultations during the year regarding the formulation of the legislation.

Other members of the Institute have been heavily involved with confidential consultations with the ATO though their membership of Resource Rent Tax sub-committee of the National Tax Liaison Group. These members have been commenting upon proposed early guidance produced by the ATO on how to implement the resource tax changes. It is expected that the Institute will continue to be heavily involved in the implementation of the legislation during 2012 through its continued participation in these forums.

Carbon pricing

In July 2011, the government announced its Clean Energy Future Plan: a carbon price, measures to promote innovation and renewable energy, incentives for energy efficiency, and emissions reduction opportunities in the land sector. At the time of writing, the Clean Energy Bill and related Bills had just been passed by the Senate and were awaiting royal assent. From 1 July 2012, the carbon price will start at $23 per tonne, moving to a price set by the market under an emissions trading scheme from 1 July 2015.

The Institute attended the Senate inquiry in May 2011 to give evidence on its submission on the carbon price, and in August 2011 consulted with Treasury on the draft Clean Energy taxation amendments. New Division 420 of the Income Tax Assessment Act 1997 (ITAA 1997) will introduce special income tax rules for “registered carbon units” similar to the trading stock rolling balance method, but subject to the ‘no disadvantage’ rule for emissions-intensive trade-exposed (EITE) entities.

A major win is that the supply of “eligible carbon units” will be GST-free under new section 38-590 of the GST Act 1999. However, the normal GST rules will apply to financial derivatives over units.

Trusts

During the first half of the year the Institute was heavily involved in consultation on the design of interim amendments announced by the government on 4 March 2011 to clarify the operation of the trust provisions in Division 6 on the Income Tax Assessment Act 1936 (ITAA 1936) in a post-Bamford environment. The proposed amendments, to apply from the 2011 income year, were initially intended to:

  • Better align the concept of “income of a trust estate” with “net income of a trust estate” in order to reduce anomalous outcomes and opportunities to manipulate tax liabilities and
  • Ensure that capital gains and franked distributions can be streamed to particular beneficiaries.

They were described as “interim” as they were the first step in the government’s commitment to review and update the trust provisions in Division 6 and rewrite them into the ITAA 1997. Following discussions with Treasury and the ATO, on 21 March the Joint Accounting Bodies lodged a submission on Treasury’s discussion paper, Improving the taxation of trust income. In the submission, we successfully argued that the scope of the interim amendments was too broad given the time frame resulting in the proposed alignment of the concept of income being deferred for consideration as part of the broader review of the trust provisions.

The Institute also lodged a detailed submission on the subsequent exposure draft legislation when it was released. The Institute welcomed the legislation to give effect to the interim amendments that were introduced into parliament on 2 June and received royal assent on 29 June. However, the complexity of the legislation and its introduction so close to year end was a concern, given the requirement that, for a beneficiary to be specifically entitled to a franked distribution, the beneficiary’s entitlement must be recorded in the accounts or records of the trust no later than the end of the income year. As a result, the Institute was involved behind the scenes in ensuring that income tax rulings IT 328 and IT 329 remained on foot until 31 August 2011.

At the time of writing, a Treasury discussion paper dealing with the broader review and rewrite of the trust provisions was being prepared for anticipated release before the end of the year.

Managed investment trusts (MITs)

This year the Institute, together with a number of other professional bodies, has been involved in confidential discussions with the government and Treasury on a number of key issues identified in submissions lodged with Treasury on its October 2010 discussion paper, Implementation of a new tax system for managed investment trusts. In anticipation of the new legislation and at the Institute’s suggestion, the ATO established a MIT Working Group to consider matters arising from the proposed new regime for MITs.

At the time of writing exposure draft legislation was expected to be released any day. It is intended that the legislation apply from 1 July 2012 (deferred from 1 July 2011 as a consequence of overwhelming feedback received during the consultation process that further time was necessary to ensure effective operation within the new MIT tax system).

Collective investment vehicles (CIVs)

In February, the Institute lodged a submission with the Board of Taxation in response to its discussion paper Review of the tax arrangements applying to collective investment vehicles. The discussion paper poses a number of questions in relation to the tax treatment of CIVs, having regard to the MIT tax framework, including whether a broader range of tax flow-through vehicles should be permitted. As part of the review, the Board is also examining the treatment of Venture Capital Limited vehicles. The Board is due to report to the Assistant Treasurer by 31 December 2011

International tax

The next stage of consultation on the reform of the foreign source income antitax deferral rules kicked off in February with the release of exposure draft legislation for the new Controlled Foreign Company (CFC) regime and the Foreign Accumulation Fund (FAF) integrity rule.

The CFC changes are designed to modernise the CFC rules by better targeting them, reducing complexity and lowering compliance costs. Other changes involve access to dividend exemptions as well as methods to prevent the double taxation of previously attributed income. In its March submission to Treasury, the Institute recommended that further development of the draft legislation should be undertaken followed by another round of consultation.

Near the end of June, the government announced that the proposed new FAF rule would not apply to the 2010/2011 year. It later became apparent that further development of all the measures would have to give way to higher priorities on the government’s agenda until next year. A very significant development occurred on 1 November with the government announcing that it had asked Treasury to explore reforms to the transfer pricing rules in Division 13 of the ITAA 1936. The announcement also proposed retrospective adjustments effective from 1 July 2004 to settle the argument as to whether the transfer pricing rules in Australia’s tax treaties can operate as an alternative to the rules currently in the domestic law. A consultation paper was also released and at the time of writing, the Institute was working on a response.

Tax consolidation

On 30 March 2011 the Assistant Treasurer unexpectedly initiated a review by the Board of Taxation of the consolidation rights to future income and residual tax cost setting rules a mere nine months after their introduction and following an extremely lengthy period of consultation. In the words of the Assistant Treasurer, the review was needed “due to uncertainty in the scope of application of the rights to future income rules, tax deductibility may be argued for types of assets that were not contemplated when the rules were introduced. This could result in the rules having a substantially greater revenue impact than anticipated.”

After weighing up the divergent views of members, the Institute and The Tax Institute lodged a joint submission with the board on 21 April 2011. The board completed its report and provided it to the Assistant Treasurer on 31 May 2011. Since then the Institute, together with selected other bodies, has been involved in confidential consultations with the government as it grapples to devise a solution which addresses its revenue concerns but also has due regard for corporate taxpayers who have relied on the law.

At the time of writing, the government’s response is expected before the end of the year, with press articles hinting that the government is about to unwind many aspects of these rules.

Research & development

The new R&D Tax Incentive was finally introduced this year, with the bills receiving royal assent in September 2011. The incentive commenced retrospectively from 1 July 2011, providing a 45 per cent refundable R&D tax credit for small firms with turnover of less than $20 million, and a 40 per cent non-refundable R&D tax credit for all other firms. The Institute was successful in influencing some important aspects of the final design of the new R&D Tax Incentive, such as the definitions of ‘core R&D’ and ‘supporting R&D’, and will remain actively involved in the implementation process during 2012 through our participation in the peak consultative forum, the quarterly R&D National Reference Group.

Not-for-profit reforms 

There were significant tax reforms affecting the not-for-profit (NFP) sector announced by the government in the May Budget which form part of a bigger package that included putting in place better regulation, cutting red tape and improving transparency and accountability.

First of all were changes aimed at targeting tax concessions more effectively to those activities that directly further altruistic purposes of NFPs by excluding unrelated commercial activities if certain conditions are not met. Possible design options for the changes were explored in Treasury’s May 2011 consultation paper, Better targeting of not-for-profit tax concessions.

The Institute lodged a submission in July expressing a number of concerns including that the announced changes were being considered in isolation from other reforms and that the proposals lacked detail. The Institute was also critical of ‘tax policy by press release’ given the changes are to apply to unrelated commercial activities (commenced from Budget night) effective from 1 July 2011.

Exposure draft legislation on this measure is expected by the end of 2011. The Institute also made a submission on exposure draft legislation to restate the ‘in Australia’ special conditions for tax concession entities released around July, where we expressed concern that the proposed measures as currently drafted went beyond the stated policy objectives and would have unintended and adverse consequences for NFPs with deductible gift recipient and/or tax exempt status.

We understand that Treasury is planning to release a second exposure draft of this legislation before the end of the year. Other developments affecting the NFP sector included release of a Treasury consultation paper in October on introducing a statutory definition of ‘charity’ applicable across all Commonwealth agencies from 1 July 2013 and establishing the Australian Charities and Not-for-profits Commission.

GST

During 2011, the Institute was involved in consultations with Treasury on the following key GST amendments:

  • New Division 81 on exempt taxes, fees and charges
  • Financial supply provisions, which included increasing the Financial Acquisitions Threshold to $150,000
  • Restructuring margin scheme provisions (Division 75) to clarify the principles and objects
  • The ‘new residential premises’ amendments following the Gloxinia decision on strata-titled units under longterm lease
  • The new self-assessment regime for indirect taxes
  • The GST cross-border provisions to eliminate problems caused by the unnecessary inclusion of non-residents.

The Institute has also had a busy year with submissions to the ATO on a variety of rulings and publications, including:

  • Input tax credit entitlements in relation to merger and acquisition transactions (the ‘Belvedere’ discussion paper)
  • Whether change of use adjustments are required in relation to proposed merger and acquisition transactions
  • ‘Bundling’ of services as reduced credit acquisitions by financial supply providers
  • The GST treatment of the development, lease and disposal of retirement villages under loan-lease arrangements.

In our submission in response the GST Distribution Review consultation paper in October 2011, the Institute again took the opportunity to call for a review of the GST base and rate more broadly as an integral part of Australia’s long-term tax reform agenda.

Tax agents services regime 

The board continued its implementation of the Tax Agent Services Regime during 2011, issuing various guidance materials including:

  • Explanatory papers on: Professional Indemnity Insurance requirements for registered agents from 1 July 2011; and Continuing Professional Education requirements
  • Information Sheets on: BAS agent educational requirements; Trusts and registration; Claiming a lien over client property; and Letters of engagement.

After months of consultation, the Institute helped broker an agreement on the regulation of financial planners who provide tax advice as part of financial planning services. From 1 July 2012, ASIC will be the ‘front of house’ regulator, with the board setting the standards for education and training.

Last word 

The Institute wishes to acknowledge the invaluable contribution made to its tax advocacy and consultation activities by the external expert members of its tax technical committees and various working groups. The assistance of these dedicated members is absolutely vital to the success of the Institute’s work in these areas.

Want to know more?

Visit the tax pages of the Institute’s website for more information – www.charteredaccountants.com.au/tax 

Or view recommendations of the Institute’s tax policy leadership paper on the future design and implementation of a more streamlined tax system that was released in conjunction with KPMG in September 2011 here.

Article last updated 22 December 2011