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1. Australia’s Future Tax Review papers released
On 10 December, the Australia’s Future Tax System Review Panel (Panel) released its consultation paper. The paper outlines what the Panel has heard so far from people and organisations across the Australian community; it identifies some key issues, draws out the choices that emerge, and outlines further questions. The answers to the questions will help the Panel shape its recommendations for the final report in December 2009.
The key submission points addressed in the paper include:
- The revenue mix – many business submissions, and others, call for a reduction in taxes on capital income, particularly corporate taxes.
- Personal tax and transfers – a number of submissions call for greater progressivity in the tax system (through higher marginal rates for high income earners). Others argue that high personal marginal tax rates reduce incentives for skills acquisition and the ability for Australia to attract and retain high skilled workers. Some also suggest that the top personal tax rate should align with the company tax rate to reduce incentives for tax minimisation.
- The retirement income system – many submissions propose changes while supporting the three pillars system. Examples of suggested changes are increasing the level of compulsory saving and altering the way the pillars are integrated.
- Taxing business and investment – the key theme of most business submission is the need to promote international tax competitiveness. Submissions drew on world-wide reductions in capital income taxation, citing the steady decline in OECD’s company and withholding tax rates.
As reported in Edition 40/2008 of the Tax Bulletin, on 17 October the Institute and KPMG lodged a joint submission with the Panel. In the submission, we focus principally on options associated with reforms to the taxation of capital and, in particular, reforms to the Australian corporate tax system.
The Panel will continue to draw upon the submissions already provided to the review, and plan to build on these initial steps through supplementary submissions. The Panel is inviting supplementary submissions to the review by 1 May 2009.
The Panel also announced that there will be further consultations, a series of technical papers to provide an informed basis for ongoing debate, and a high level conference to consider the major issues.
On the same day, the consultation paper on the retirement income system was also released by the Panel. The Panel calls for submissions on the specific issues facing the retirement income system by Friday 27 February 2009.
The Panel will report to the Treasury by the end of March 2009 so that the Government can examine the findings of Dr Harmer’s review of pensions in conjunction with the Panel’s review of the other aspects of the retirement income system.
Member with comments are encouraged to email them to the Tax Group in relation to either or both of these consultation papers.
The Panel’s press release is available here.
For more information on the Future Tax Review, go here.
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2. Commissioner’s speech, The global financial crisis: an ATO perspective
In a speech addressed to the Victorian Tax Bar Association on 8 December, the Commissioner of Taxation (Commissioner) said that the current global economic crisis will be a challenging experience for many taxpayers, tax professionals and the Australian Taxation Office (ATO). In the current environment, the Commissioner noted that it would be reasonable to expect an increase in losses and some taxpayers may be tempted to use them inappropriately. He also noted that there may be an increased number of debt cases, and depending on behavioural changes, there may be an increased risk of lower disclosure and reporting.
The Commissioner discussed the ATO’s debt collection practices, strategies against cash economy, compliance program in relation to high wealth individuals and large businesses, the role of tax professionals.
The Commissioner concluded the speech by asking tax professionals to give balanced advice to clients including the inherent risks, constructive input on the shape of the tax system, intelligence on how it is operating on the ground, and feedback to the ATO on the quality of tax administration. He said, “[t]he greatest need for high levels of professional standards, fused as they are to social and ethical responsibilities, occurs when the times get tough”.
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3. NTLG – Transfer Pricing sub-group meeting
Anthony Seve (KPMG) and Chris Bowman (Grant Thornton) attended the NTLG – Transfer Pricing sub-group meeting on 5 December as the Institute’s representatives.
Matters discussed included:
- GST and Customs – difficulties are still being experienced by Customs in dealing with transfer pricing adjustments having regard to the processing requirements of the ATO’s GST International business line. The sub-group requested that a briefing paper be issued to them before the end of January 2009 clarifying the key technical and system related issues causing difficulties and recommending a resolution to this matter.
- Litigation – a Decision Impact Statement will be issued by the ATO shortly in relation to the Roche Products Pty Limited v Commissioner of Taxation [2008] AATA 261 decision.
- APA Program Review - it is proposed that an APA co-design committee be established with the view to providing input in directing this project to improve the APA process.
- ATO Transfer Pricing Compliance Program – the ATO reported that it was generally on target to achieve or exceed its objectives in relation to conducting APA cases, transfer pricing reviews and transfer pricing audits this financial year.
- Guarantee Fee and Intra group loans discussion paper – the ATO now intends to focus on the establishment of one working group with the objective of analysing financial market practices and operations that are relevant to the key concepts outlined in the ATO discussion paper.
- Business Restructures – and update was given, including that further advice is to be sought by the ATO on the interaction with tax treaties.
- OECD activities – the ATO provided an update of current developments in relation to business restructures and comparability and profit methods.
Members can contact the Tax Group if they require further information on the above.
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4. Pre-filling future direction workshop
On 11 December, Norman Kang from the Institute attended a Pre-filling Future Direction Workshop. The purpose of the workshop is to understand the current situation regarding pre-filling and the options available moving forward. The three broad areas of opportunity include:
- reduced and/or optional filing of a tax return
- a fully pre-filled tax return;
- enhanced ATO corporate processes.
In addition, a presentation was given on the features of pre-filled tax return systems in selected countries.
The next update will be incorporated into the next Lodgement Working Group meeting in early 2009. If members want to find out more about the workshop or provide comments in relation to pre-filling, please send email to the Tax Group.
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5. Joint submission on draft Goods and Services Tax ruling
The Institute has lodged a joint submission, available on the Institute website, on the following draft Goods and Services Tax Ruling:
GSTR 2008/D4 - Goods and services tax: cancellation fees.
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6. Franking credits quarantined – interaction of consolidation and imputation rules - Hastie Group Ltd v Commissioner of Taxation [2008] FCAFC 187
The Full Federal Court (Ryan, Gordon and Foster JJ) has dismissed the taxpayers’ appeal concerning the quarantining of franking credits.
The (complex) facts in brief were:
- From May 1997 (when the relevant provisions were introduced) to May 2002, Austral Refrigeration Pty Ltd (‘Refrigeration’) was an exempting company pursuant to section 160APHBA of the Income Tax Assessment Act 1936 (ITAA 1936), being effectively owned by non-residents.
- In April 2002, Austral Refrigeration Holdings Pty Limited (‘Holdings’) was incorporated. It was not an exempting company. Holdings acquired Refrigeration the next month so that the latter ceased to be an exempting company and became a former exempting company. The franking credits of Refrigeration (and its subsidiaries) were quarantined (by being converted to exempting credits).
- In November 2002, Holdings elected to form a tax consolidated group with its wholly-owned subsidiaries. The franking surplus and the exempting surplus of each joining company was transferred to Holdings as head company, which became a former exempting entity at the joining time.
- In July 2003, Holdings again became effectively owned by non-residents so it became an exempting entity under section 208-20 of the Income Tax Assessment Act 1997 (ITAA 1997).
- In February 2004, Hastie Holdings Pty Ltd (‘Hastie’), the head company of a consolidated group and not effectively owned by non-residents, acquired Holdings so that it ceased to be an exempting entity.
In short, the appellants contended that Holdings was neither an exempting entity nor a former exempting entity at the time of its acquisition by Hastie. However, the Court found that subsection 208-50(2) of the ITAA 1997 did not operate to exclude Holdings as a former exempting entity at the time of its acquisition by Hastie in February 2004. It followed that section 709-60 of the ITAA 1997 did not operate to transfer Holdings’ franking balance of approximately $8.6m to the franking account of Hastie when Holdings became a member of the Hastie tax consolidated group.
Among its findings, the Court observed that ‘ …although s 709-155(3)(b) provides that Div 208 is to be applied just after Austral Holdings became a member of the Hastie Group and on the assumption that Austral Holdings was not a member of that group, that does not either expressly or impliedly strip away the “tax history” that Austral Holdings inherited when it became the head company of the Austral Group’ [at paragraph 42].
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7. No tax credit for PAYE or PAYG unless Commissioner satisfied tax was deducted or withheld - Perdikaris v Deputy Commissioner of Taxation [2008] FCAFC 186
The Full Federal Court (Sundberg, Jessup and Tracey JJ) has dismissed an appeal from a decision of the Federal Court which upheld a decision of the Commissioner of Taxation (Commissioner) concerning credits for tax instalment deductions claimed to have been made or amounts of tax withheld.
In respect of eight years from 1996 to 2003, the appellant lodged his income tax returns under a single cover letter in 2005, well after the due dates. The appellant claimed credit for amounts of tax said to have been deducted under Pay-As-You-Earn (PAYE) or withheld under Pay-As-You-Go (PAYG) by his employer, a company of which he was a director and shareholder. The Commissioner issued notices of assessment which did not allow the credits claimed on the basis that no evidence other than group certificates/payment summaries was provided in support of the credits and the employer was not at arm’s length. In addition, penalties for late lodgement were imposed.
The appellant raised a number of appeal grounds, however the Full Court held that none had been made out and the primary judge had not erred in law. Their Honours upheld the primary court’s decision that there was no competency to review the Commissioner’s decision under the Administrative Decisions (Judicial Review) Act 1977 (Cth) since the appellant’s legal rights or obligations were not affected. The appellant would be free to prove the tax was deducted or withheld in recovery proceedings. As to the review grounds under section 39B(1) of the Judiciary Act 1903 (Cth) the Court held, amongst other things, that there was no requirement for the Commissioner to make an assessment before making a determination as to whether a deduction was made by the employer (in fact the law required the contrary), that the relevant issue as identified by the trial judge was not the appellant’s income but his entitlement to credits, that there was no denial of procedural fairness by the Commissioner, and that Tax Office information as to whether the employer company had remitted tax on behalf of the appellant was not an irrelevant consideration. The Full Court also upheld the primary judge’s ruling that challenges to penalties were not available in these proceedings.
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8. ‘Special circumstances’ must be evaluated in the context of the ultimate enquiry as to ‘fit and proper person’ – Toohey v Tax Agents’ Board (No 2) [2008] FCA 1796
The Federal Court (Middleton J) has allowed the applicant’s appeal on the issue as to whether he was a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters under section 251BC of the Income Tax Assessment Act 1936.
As reported in Edition 13/2008 of the Tax Bulletin, the Tribunal had found that the appellants circumstances including his various illnesses (physical and mental), his business and staffing difficulties, and his brother’s illness, were part of the exigencies of life and were not special circumstances. Even if there were special circumstances, the Tribunal considered that the errors and acts that arose from those special circumstances should not be disregarded.
The Federal Court held that the Tribunal’s approach failed to adequately evaluate all the matters raised as to ‘special circumstances’ in the context of the ultimate enquiry of whether the appellant was the prescribed fit and proper person. Middleton J found there was a failure to put all the events in context and consider them in the context of later events up to the date of the hearing. The Court observed that the ultimate enquiry is directed not only to whether improper conduct has occurred, but also whether it is likely to occur again, and whether the community will have confidence that it will not occur.
The Federal Court set aside the Tribunal’s decision and remitted the matter to the Tribunal for reconsideration of the question in accordance with the Court’s reasons and in light of the further evidence that was necessary as to the current position of the appellant.
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9. No input tax credit entitlements and penalties imposed for claiming credits on purchase of two properties – Barcia Pty Ltd (as Trustee for Barcia Trust) v Commissioner of Taxation [2008] AATA 1073
The Tribunal has affirmed the decision of the Commissioner of Taxation (Commissioner) that the applicant was not entitled to all of the input tax credits (ITC) that it claimed in respect of the purchase of two properties. The Tribunal also confirmed that there was no basis for further remission of penalties.
The Commissioner assessed the applicant for Goods and Services Tax (GST) shortfalls in several Business Activity Statements (BAS) periods during 2003 to 2005. Three main errors were alleged, firstly that an input tax credit had been claimed in respect of a property acquired under the margin scheme for which there was no entitlement, secondly that an input tax credit had been over-claimed in respect of another property in light of the purchase price, and thirdly that the input tax credit in respect of the latter property purchase had also been claimed in the wrong tax period (too early).
The applicant argued that the input tax credit had been available for the first property as the vendor’s agent had issued a tax invoice showing the GST as 10 per cent of the full value, which varied the contract such that the margin scheme election no longer applied. In relation to the second property, the applicant claimed that the purchase price was made up of the value of the cash paid, plus a “guarantee fee” for extinguishment of a debt payable to the purchaser (for guaranteeing loans to third parties).
The Tribunal found that the agent had no authority to vary the contract by issuing an incorrect invoice. As the applicant was aware the margin scheme was being applied, the Tribunal considered a reasonable person would have enquired with the vendor or the vendor’s agent as to whether the invoice was correct before claiming an ITC for a substantial amount of over $200,000. According to the Tribunal, this lack of enquiry amounted to gross negligence and the penalty of 50 per cent for recklessness was appropriate.
With respect to the second property, the Tribunal agreed with the Commissioner that, on the evidence, the actual consideration should have been $474,500 (the cash paid), rather than $720,000 (which included a “guarantee fee” for a loan that could not be established). A 25 per cent penalty was appropriate for this shortfall, as the Tribunal found that a reasonable person would have maintained proper financial records to support all of the facts relied on. In relation to the input tax credit ‘timing’ issue, a 50 per cent penalty for recklessness was held to be appropriate since the evidence indicated that the applicant was uncertain whether they could claim the credit before settlement, but failed to obtain advice to ascertain the position.
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10. Decision Impact Statement - McNeil case
The ATO has issued a detailed, revised Decision Impact Statement (DIS) for the decision of the High Court in Commissioner of Taxation v McNeil [2007] HCA 5. The DIS outlines the ATO’s response to this case which concerned the assessability of the value of sell-back rights provided to a shareholder of St George Bank Limited. The statement also takes account of the effect of amending legislation, contained in Schedule 1 of Tax Laws Amendment (2008 Measures No 3) Act 2008, on the application of the case. Issues covered in some detail include application to call options, dividends, other types of rights, dividend reinvestment and rights in relation to equity in another entity.
The Institute was heavily involved in providing comments to the ATO as to the matters that should be addressed in the revised DIS.
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11. Taxation Ruling
TR 2008/9 - Income tax: meaning of ‘Australian superannuation fund’ in subsection 295 95(2) of the Income Tax Assessment Act 1997.
This ruling was released in draft form as TR 2008/D5.
The joint submission lodged by the Institute and various other professional bodies on the draft ruling, and the ATO’s response, is available on the Institute website.
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12. Taxation Determination
TD 2008/28 - Income tax: when is income tax of a private company a ‘present legal obligation’ for the purposes of the distributable surplus calculation under subsection 109Y(2) of Division 7A of Part III of the Income Tax Assessment Act 1936?
This ruling was released in draft form as TD 2008/D8.
The joint submission lodged by the Institute and various other professional bodies on the draft ruling, and the ATO’s response, is available on the Institute website.
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13. Draft Determination
TD 2008/D17 - Income tax: in accounting for a Dividend Re investment Plan, can a company taint its share capital account for the purposes of Division 197 of the Income Tax Assessment Act 1997?
The Institute will be preparing or co-ordinating the preparation of a submission to the ATO in respect of this Draft Goods and Services Tax Determination. If you have any comments please e-mail them to us at Tax Group by 20 January 2009.
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14. ATO Interpretative Decisions
ATO ID 2008/161 - Superannuation entities: tax offset - no-TFN contributions income - successor fund
ATO ID 2008/162 - Excess Contributions Tax: notional taxed contributions - PSS Defined Benefit Interest
ATO ID 2008/163 - Capital Allowances: business related costs - taxable purpose
ATO ID 2008/164 - Step 2 of entry: allocable cost amount - deferred tax liabilities
ATO ID 2008/165 - Excise: previously paid duty - recycled product
Withdrawals
ATO ID 2002/1022 (Withdrawn) - Entitlement to Class A franking credits for an early balancing life insurance company where taxable contributions are transferred from a related superannuation fund under section 275 of the Income Tax Assessment Act 1936 (ITAA 1936)
ATO ID 2002/1023 (Withdrawn) - Entitlement to Class A franking credits for an early balancing life insurance company where taxable contributions are transferred from an unrelated superannuation fund under section 275 of the Income Tax Assessment Act 1936> (ITAA 1936)
ATO ID 2002/1024 (Withdrawn) - Entitlement to Class A franking credits for a late balancing life insurance company where taxable contributions are transferred from a related superannuation fund under section 275 of the Income Tax Assessment Act 1936 (ITAA 1936)
ATO ID 2002/1025 (Withdrawn) - Entitlement to Class A franking credits for a late balancing life insurance company where taxable contributions are transferred from an unrelated superannuation fund under section 275 of the Income Tax Assessment Act 1936> (ITAA 1936)
ATO ID 2003/368 (Withdrawn) - Group company loss transfer: Subdivision 170-A - assessable foreign income
ATO ID 2003/1158 (Withdrawn) - GST and flavoured nuts
ATO ID 2004/361 (Withdrawn) - GST and chocolate coated coffee beans
ATO ID 2004/435 (Withdrawn) - GST and pease pudding
ATO ID 2004/479 (Withdrawn) - GST and product consisting principally of fish roe
ATO ID 2004/537 (Withdrawn) - GST and green barley powder
ATO ID 2004/565 (Withdrawn) - Foreign tax credit and refundable tax offsets
ATO ID 2004/941 (Withdrawn) - Assessable foreign income - Australian source loss - whether election to offset tax losses against assessable foreign income applies
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15. Draft Practice Statement
PS LA 2529 (draft) - Time limit on recovery by the Commissioner
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16. Legislation update
The following tax-related Bills received Royal Assent on 9 December:
- Tax Laws Amendment (Education Refund) 2008
- Tax Laws Amendment (2008 Measures No. 5) 2008
- Same-Sex Relationships (Equal Treatment in Commonwealth Laws – General Law Reform) 2008
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17. Recent ATO publications
Booklets and publications
Industry benchmarks can help your clients keep track of their income - Industry benchmarks have been developed in consultation with trade associations to help businesses comply with their tax obligations. The benchmarks indicate an expected range of income for businesses working directly with household consumers.
Jail term for refund and identity fraud - The Southport District Court today sentenced a man to 3 years jail for lodging a series of GST refund claims using false identities.
Alumni Network - The Alumni network will build a stronger sense of community between past and present employees as well as strengthen links to the wider community.
eLink 47/08 - Bulletin to inform tax practitioners of the most recent updates to ato.gov.au including a lead article titled 'Tax Agent Portal eligibility'. Issued on 3 December 2008.
The Tax Agent magazine - issue 42 - December 2008 - Download a PDF version of the December 2008 edition of the Tax Agent magazine.
Demergers: Class Ruling CR 2008/74 - ARC Energy Ltd demerger and merger - ARC Energy Ltd's demerger of Buru Energy Ltd and merger with Australian Worldwide Exploration Ltd - Class Ruling CR 2008/74.
Playing it responsibly - The global financial crisis: an ATO perspective - Speech by Michael D'Ascenzo, Commissioner of Taxation, to the Victorian Tax Bar Association, Melbourne, 8 December 2008
Fact sheet for beekeeping industry - A fact sheet to advise on valuing bees as trading stock, directing attention to two recently released public information documents.
Administration
The BAS service provider - edition 20, November 2008 - Issued 3 December 2008. This edition includes information about time limits for claiming tax refunds, luxury car tax changes, debt collection agency referrals and useful links and key dates for BSPs and their clients.
Keydates for tax agents January - March 2009 - A list of key dates for tax agents for the period January - March 2009.
Superannuation
Super publications and forms summary - Provides a summary of super publications, online resources and forms.
Non-profits
Non-Profit News Service no. 0228 - Sports players appeal to High Court to deduct management fees - Dec 2008. Two professional footballers have been granted special leave by the High Court to appeal a decision that management fees paid to negotiate their playing contracts with sporting clubs were not deductible.
Non-Profit News Service no. 0227 - Consider fringe benefits tax this festive season - Dec 2008. With Christmas just around the corner, the Tax Office is reminding employers to consider FBT obligations when organising office Christmas parties and gifts for employees.
Education Tax Refund
Education Tax Refund - frequently asked questions - Provides answers to common questions and gives examples of how the Education Tax Refund applies in different circumstances.
Education Tax Refund - what you need to know - Information to help you work out if you are eligible for the Education Tax Refund (ETR) and when you can claim.
CGT
Capital gains tax update 2008-09 income year -Update on CGT developments for the 2008-09 income year. Current as at 30 November 2008.
Treaties
Australia - Finland treaty - The Agreement between Australia and Finland was signed by both countries on 20 November 2006. The Agreement entered into force on 10 November 2007.
Australia - France treaty - Australia and France have signed a new treaty to replace the existing treaty. Broadly, the new treaty will reduce withholding taxes on certain dividends, interest and royalties, and update the treatment of capital gains.
Australia - Japan treaty - The new Australia - Japan treaty received Royal Assent on 3 October 2008.
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Monthly Tax Update Series 2009
Throughout 2009 in Sydney, Epping, Doncaster, and Live Online. Every month this essential series covers the most vital legislative changes, tax rulings and developments that impact you, your business and your clients.
FBT and Salary Packaging Workshop
Throughout March 2009 in Perth, Sydney, Brisbane Melbourne and Adelaide. Cover the key issues and updates in Fringe Benefits Tax Legislation and learn how to maximise the benefits of salary packaging for you, your organisation or a client's business.
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Help us to improve the bulletin by sharing your tax issues and experiences that might be of interest to other members. Responses should be emailed to taxgroup@charteredaccountants.com.au
Disclaimer
The Institute has created and maintains this tax bulletin as a service to its members and the community. While some of the information provided is about legal issues and legislation, it is not legal advice. The Institute does not expect or invite any person to act or rely on any statement, view or opinion expressed in this bulletin, and readers should make and rely on their own inquiries in making any decisions or giving any advice.
The Institute accepts no responsibility for any errors or omissions contained in this bulletin, and disclaims all warranties with regard to the information at this bulletin, including all implied warranties of merchantability and fitness for a particular purpose. In no event shall the Institute be liable for any loss or damage arising out of or in connection with the use of this bulletin or the information contained in it, including special, indirect or consequential loss or damage, and whether such loss or damage arises in contract, negligence, tort, under statute, or otherwise.
The material provided in this bulletin is protected by copyright. Apart from any use permitted under the Copyright Act 1968, no part of any material may be reproduced or provided to the public or to any person, in any form or by any means, without written permission from the Institute or the relevant copyright owner.
Any information provided to the Institute in connection with this bulletin shall be provided by the submitter and received by the Institute on a non-confidential basis. The Institute shall be free to reproduce, use, disclose and distribute this information to others without limitation.
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