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The full Federal Court dismissed the taxpayer's appeal in this case. It held that annual fees paid by the Australian distributor of software to its Canadian developer were royalties for the purposes of Article 12(3)(a) of Australia's double tax agreement with Canada and liable for withholding tax accordingly. In particular, an exclusion under the treaty for payments for source code in computer software, where ‘the right to use the source code is limited to such use as is necessary to enable effective operation of the program by the user’ (Article 12(7)), did not apply. (Task Technology Pty Ltd v FC of T [2014] FCAFC 113).
In a recent AAT case, an amount of $350,000 received by the taxpayer in settlement of a claim by she and her husband was held to constitute the capital proceeds from CGT event C2. Further, the taxpayer was held not to have satisfied the onus on her to show that legal costs incurred in prosecuting the claim should be included in the cost base of the relevant CGT asset, the cause of action against the defendant. And to make matters worse, the Tribunal upheld a 50% penalty for recklessness.
The CGT principles involved in this case may be uncontroversial, but it is a good reminder. The income tax, CGT and GST implications of settlements can be notoriously difficult. Further, the course of negotiations and settlement documentation usually has a substantial bearing on tax outcomes, so it is often made even more difficult if taxes are not addressed at a very early stage. (Coshott v FC of T [2014] AATA 622)
The big news of late that potentially affects all practitioners is the release by the Commissioner of draft guidelines on how the ATO will assess the risk of Part IVA potentially applying to the allocation of profits from a professional firm carried on through a partnership, trusts or companies (see the link at the end of this item). This risk assessment is to apply for the 2015 and future years of income.
Individual principals of such firms will be regarded as low risk and not subject to compliance action if they meet at least one of the following criteria:
they receive a level of income equivalent to the highest band of professional employees providing equivalent services in the firm or, if there are no such employees in the firm, employed by comparable firms or determined from industry benchmarks;
at least 50% of the income to which the principal and all associated entities become entitled is assessed in the hands of the principal; or
the principal and their associated entities have an effective tax rate of at least 30% on the income from the firm – from examples provided, this seems to imply an average tax rate of at least 30%.
Of course, these criteria have not the slightest basis in law (the High Court in Everett's case in 1980 rejected the Commissioner's submission that the income of partners in the firm of lawyers involved in that case constituted income from personal exertion). Plainly, the aim is to achieve greater adherence to benchmarks that the Commissioner believes appropriate through the threat of, at the very least, the waste of time and costs that will be involved in dealing with ATO audit activity.
All our professional bodies should be protesting loudly!
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.
