Tax Facts contains news and alerts relating to tax practice, for the benefit of accountants and other professionals in public practice. Please click on the links below for recent issues. You may also like to peruse Tax Facts by topic category - topics are listed below to the right.
Please note that the information provided in Tax Facts is of a general nature only and should not be acted upon without specific advice based on the precise facts and circumstances of a particular taxpayer.
If you do not already receive Tax Facts direct from us but would like to, please subscribe by entering your details to the right of this message.
The Commissioner has released a Decision Impact Statement on the decision of the Full Federal Court in Macquarie Bank Ltd v C of T last October. The tax issue involved the allocation of Macquarie's Offshore Banking Unit expenses, although that is unimportant to the main point arising from the case.
Following an audit, the ATO advised that amended assessments would be issued for several past years. Macquarie pre-emptively made application to the court seeking to prevent the issue of those amended assessments, arguing that the ATO's position was contrary to earlier statements and conduct. Macquarie sought to have the ATO's views applied for the future only, not to past years. Macquarie failed, the Full Court upholding the primary judge's decision that the Commissioner could not be compelled to adhere to his Practice Statement(PS LA 2011/27) about when a changed ATO view of the law should only be applied prospectively.
The case is a good reminder that the Commissioner is generally not bound by his views other than those expressed in binding rulings – he is bound to apply the law as he believes it to be at any particular time. In the vast majority of cases, the only way to dispute a tax assessment is by the objection and appeal process. It is not much help simply to say, "But the ATO said ….”
An AAT case handed down on Christmas Eve reminds us thatall elements relating to entitlements to the small business CGT concessions must always be checked preciselyin each case. In Gutteridge v C of T, the family patriarch succeeded in arguing that he was the controller of a trust with capital gains, despite his daughter being the sole director of the trustee company. That meant that the trust's turnover did not have to be aggregated with another business controlled by the daughter – consequently, the trust was a small business entity for the purposes of the small business CGT concessions.
The AAT accepted evidence that the patriarch controlled the relevant trust from behind-the-scenes, despite not being a director of the trustee. So it was accepted that the trustee ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes’ (s328-125(3) ITAA97) of the patriarch. The point is that, in the circumstances, one would reach the wrong conclusion by looking solely at formal matters such as the daughter's directorship, without seeking additional information.
Tax planning arrangements can fail for a number of reasons. One of those reasons has little to do with technical tax rules. With a real-life example, this episode of Tax Solutions illustrates how tax planning can go wrong because of a fatal legal flaw in the underlying transactions or circumstances on which the tax plan is based. With the result that the practitioner involved is highly exposed.
The small business CGT concessions provide very substantial benefits in situations where they apply. And given the policy intent to direct the concessions to business assets, one of the central conditions that must normally be satisfied is the ‘active asset test’.
This episode of Tax Solutions emphasises a class of CGT assets that achieve a special status for the purposes of the small business CGT concessions. Those assets continue as active assets indefinitely – retaining that status even long after they have ceased being used in any business controlled by the owners!
Widely drafted beneficiary classes in discretionary trusts can create headaches in dealing with various State taxes. A recent example is Victoria’s new 3% additional duty on foreign buyers of residential property – where a trustee is the buyer and a family beneficiary lives overseas. A starker example that applies in all States and Territories is payroll tax grouping of businesses controlled by family relatives, where at least one of the businesses is operated by a discretionary trust.
Having extraordinarily wide beneficiary classes is an outdated practice that creates problems, rather than serving any useful purpose. There is really no point in including a whole range of relatives who are never intended to benefit. A narrow class of beneficiaries is required, with a simple and practical mechanism to add others to whom it is desired to distribute.
Frustrations with ATO views about UPEs of corporate beneficiaries have led to companies more frequently being used to acquire and operate small and medium sized businesses. But the problem is not discretionary trusts owning businesses, it is Division 7A. And there will usually be ways to deal with Division 7A anyway.
Some advisers believe that a business owner can still access the small business CGT concessions on a future business sale, by selling shares in the company that owns the business. But how realistic is it to hope that that is the way things will turn out. This edition of Tax Solutions emphasises 2 reasons why clients with a business owned by a company may not actually benefit from the CGT concessions.
One of the best things you will ever do for some of your small business clients is to deliberately trigger a CGT event and capture the small business CGT concessions. In the right client circumstances, this strategy can produce several very substantial benefits. That will particularly be so if 100% CGT exemptions can be achieved without duty applying to the transaction.
A restructure for this purpose should always be kept in mind, particularly for clients who may grow to the point where they can no longer satisfy either the $2M turnover test or $6M net asset value test. But it warrants greater consideration at the moment, given the apparent increased political risk of changes to CGT concessions.
