Tax guide - May 2012

Edited by Susan Cantamessa CA and Karen Smith

Transfer pricing reforms

Last November, the government announced that Treasury would reform the transfer pricing rules in Division 13 of Part III of the Income Tax Assessment Act 1936 (‘Division 13’). On 16 March, the Assistant Treasurer, the Hon David Bradbury MP, released an exposure draft of stage one of the proposed changes for consultation.

Australia’s domestic transfer pricing rules aim to ensure that Australia receives its fair share of tax from international dealings between related parties (often members of large multinational enterprises).

According to the Organisation for Economic Co-operation and Development (OECD), the process should involve adoption of the ‘arm’s length principle’, meaning that profits between related parties should be comparable to the profits that would have been realised in comparable transactions between independent enterprises.

The Full Federal Court’s decision against the commissioner last year in SNF (Australia) Pty Ltd v Commissioner of Taxation [2011] FCAFC 74 (SNF) meant that some changes to Division 13 may be appropriate to bring it into line with international norms. (In broad terms, the court accepted the taxpayer’s evidence that, based on the comparable uncontrolled prices method (a traditional transaction method), it had not paid more than the arm’s length price for products acquired from overseas related parties. The ATO sought unsuccessfully to apply a transactional profit method ie the transactional net margin method).

Controversially, the first stage of the government’s reforms involves retrospective adjustments effective from 1 July 2004 to specify that tax treaties provide a power to make transfer pricing adjustments independently of the transfer pricing rules in Division 13. The government seeks to justify this by stating that the proposed changes merely ‘clarify’ parliament’s intention.

Many tax professionals disagree with this position and it was not tested in SNF. Indeed in its response to the November announcement and accompanying consultation paper (lodged last December), the Institute was critical that yet another retrospective change was being put forward by the government in circumstances where it could not be justified.

The draft legislation proposes inserting Subdivision 815-A into the Income Tax Assessment Act 1997 (ITAA 1997) which will stipulate that the transfer pricing articles in tax treaties are able to be applied and operate to provide assessment authority independent of Division 13. The subdivision will only apply if it would result in a transfer pricing benefit in Australia – ie a greater amount of taxable income or a reduction in a tax loss or net capital loss of an entity.

The amendments will also require the arm’s length principle to be interpreted in accordance with relevant OECD guidance, thus bringing Australia’s transfer pricing rules in line with international best practice.

At the time of writing, the Institute was working on its submission on the exposure draft legislation (which was due to be lodged after Easter). Apart from the retrospective aspect, other issues include the need for the commissioner for taxation’s powers to be clearly and appropriately defined under the proposed provisions. For example, any adjustment under the measures should be linked to an item of assessable income, deduction or capital gain/loss in respect of particular transaction(s).

The submission will be posted on the website once lodged.

The second stage of the reforms, detailed in Treasury’s November consultation paper, is expected soon.

Not-for-profit update

In a move welcomed by the Institute, the government has announced that it will extend the start date for the 2011-2012 Budget measure to better target not-forprofit (NFP) tax concessions from 1 July 2011 to 1 July 2012.

The Budget measure plans to reform tax concessions provided to NFP entities so that they are targeted only at those activities that directly further an NFP entity’s altruistic purposes (by excluding unrelated commercial activities if certain conditions are not met).

The announcement of a delayed start date will allow much needed time for consultation to properly develop the measure. Indeed in its submission on the Treasury consultation paper, Better targeting the not-for-profit tax concessions last July, the Institute was critical of the original timeframe, recommending a start date following Royal Assent of the enacting legislation.

The extended start date of 1 July 2012 will apply to new unrelated commercial activities that commenced after Budget night last year (10 May 2011). This will remove uncertainty for those entities that might have been caught by the measures in respect of the current income year.

As to existing unrelated commercial activities that commenced prior to Budget night last year, the government intends to bring these into the new regime over time. However, no firm details as to how this will be done have emerged.

The next step is for exposure draft legislation to be released for consultation. At the time of writing, the latest Treasury indication was that this would be “early-mid 2012”.

Also expected at any time is a second exposure draft of legislation to restate the ‘in Australia’ special conditions for tax concession entities. The revised version is expected to address concerns that the first exposure draft went beyond the stated policy objectives.

Other developments affecting the NFP sector which touch on taxation include the next step for introducing a statutory definition of ‘charity’ applicable across all Commonwealth agencies from 1 July 2013 (exposure draft legislation expected “late 2012”) and the government’s announcement in March that it would extend the start date of the Australian Charities and Not-for-profits Commission to 1 October 2012.

Trustee resolutions

The ATO will undertake an educational campaign to make representatives of trustees aware that, from the 2012 income year, trustees who make beneficiaries entitled to trust income by way of resolution must do so by the end of an income year (30 June) for that to be effective for determining who is to be assessed on the trust’s income.

Rulings IT 328 and IT 329 were withdrawn with effect from September 2011. These former rulings reflected the commissioner’s administrative treatment of allowing certain trustees up until 31 August that followed the income year, to appoint the income of the trust. The ATO takes the view that following the decision in Colonial First State Investments v FC of T 2011 ATC 20-235, trustees must now resolve to distribute the current year’s income on or before year end – which is usually 30 June.

It follows that in the absence of a default beneficiary clause, if a trustee fails to make a resolution to appoint the income of the trust before the end of an income year the trustee may be assessed on the trust income at the highest marginal tax rate, rather than the intended beneficiary(s).

We understand that the ATO’s campaign will be followed up with some limited compliance activities post 30 June. This will include requests for a selected number of trustees to provide a copy of the trustees’ income resolutions that evidence the fact that the trustee appointed the income of the trust for the 2012 income year before 30 June.

The Institute highlights a further implication of the Colonial decision. Under the interim streaming measures introduced towards the end of the 2011 income year, a trustee who wishes to stream a capital gain to a beneficiary has until 31 August 2012 to make that beneficiary ‘specifically entitled’ to a share of any capital gains. Importantly, an appointment of capital in July or August is likely to be effective under those measures. However, where some or all of a net capital gain is included in the definition of the trust’s income, a specific entitlement created after 30 June is not likely to be effective – see example 2 in Draft Taxation Determination TD 2012/D2.

Legislation update

Tax Laws Amendment (2012 Measures No. 1) Bill 2012 – Anstis amendments

This Bill was introduced into parliament on 21 March 2012 and includes amendments to disallow deductions against government assistance payments. The changes are in response to the decision in Commissioner of Taxation v Anstis [2010] HCA 40 where the High Court held that a university student in receipt of Youth Allowance payments was entitled to claim various self-education expenses as deductions under s 8-1 of the ITAA 1997. Broadly, this was because this (assessable) allowance requires an individual to satisfy an ongoing statutory activity test that the expenses claimed related to.

The amendments will ensure that individuals will no longer be able to claim a deduction for expenses they incur in qualifying for a payment that is eligible for a rebatable benefit (which in effect is tax-free due to the rebate). In addition to Youth Allowance (Student) or (Jobseeker), such payments include Austudy living allowance, ABSTUDY living allowance and Newstart Allowance. The changes apply from 1 July 2011.

The Bill includes amendments announced as part of the 2011-12 Mid-Year Economic and Fiscal Outlook to phase out, from 1 July 2012, the dependent spouse tax offset for taxpayers who maintain a dependent spouse born on or after 1 July 1952 (with some exceptions).

Other measures include removing the ability of complying superannuation entities to treat certain assets as trading stock and providing an exemption from income tax for ex-gratia payments to New Zealand Special Category Visa holders who were affected by the recent floods in New South Wales and Queensland.

Shipping Reform (Tax Incentives) Bill and Tax Laws Amendment (Shipping Reforms) Bill 2012

Also introduced into parliament in March, these bills reform shipping in Australia. The five tax concessions are:

  • Introduction of a new category of exempt income for ship operators under certain circumstances
  • Provision for accelerated depreciation of vessels by capping to 10 years the effective life of those vessels
  • Roll-over relief from income tax on the sale of a vessel
  • An employer refundable tax offset in relation to seafarers
  • An exemption from royalty withholding tax for payments made for the lease of shipping vessels. The changes are to apply from 1 July 2012.

Taxation Administration Amendment Regulation 2012 (No 1) – building contractors

This legislative instrument was registered on 23 March 2012. It sets out the information that businesses in the building and construction industry are required to report to the commissioner in respect of payments made to contractors for the supply of building and construction services.

Want to know more?

The Institute's submissions can be read at www.charteredaccountants.com.au/tax

Article last updated 1 May 2012