Tax Facts

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  • Small Business CGT Concession - Entitlements to All Income & Capital

    An entity's small business participation percentage in a trust or company is relevant in determining whether there are significant individuals and CGT concession stakeholders in a company or trust, as well as where the CGT asset to which a CGT event has happened is a share in a company or interest in trust. And for the purposes of determining direct small business participation percentages in trusts under s152-70(1) of ITAA97, there are different tests depending on whether or not entities have entitlements to all the income and capital.

    The Commissioner in Interpretive Decision ATO ID 2015/8 has expressed the view that a trust is capable of being one where entities have entitlements to all the income and capital, even though the trustee has power to accumulate income or capital of the trust. This interpretation is important because, for example (depending on the terms of a particular unit trust deed and, particularly, the way in which income is defined), a trustee may need to accumulate income to the extent that it exceeds the net income under s95(1) of ITAA36 so as to avoid a potential CGT event E4 for unit holders. However, for other contexts, a power to accumulate income will mean that the trust is not a fixed trust, at least without a favourable exercise of discretion by the Commissioner.

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    18 Mar 2015

    Topic: CGT

  • Appeal over SMSF death benefits doomed for failure

    The Court of Appeal in West Australia last week dismissed an appeal by the executors of a deceased SMSF member against a decision by the sole surviving trustee to pay the death benefits from the deceased's account to himself.

    The sole surviving trustee was the deceased's husband and the executors were 2 of the deceased's children from a former marriage. The deceased in her will had purported to give her entitlements in the SMSF to her 4 children (stating specifically that she did not want any of her super entitlements paid to her husband), but the executors accepted that the deceased's SMSF interest did not form part of her estate. That purported gift in the will was also inconsistent with 2 separate binding nominations by the deceased in favour of her husband, although both had lapsed before the death of the member.

    The executors had little to support their case. Their first argument was that their stepfather was obliged by s17A of the SIS Act (the provision that defines an SMSF) to appoint one of the executors as a co-trustee and not to make any decision about payment of the death benefits relating to their deceased mother until after that appointment. The second main argument was that their stepfather's decision to pay the death benefits to himself was vitiated by a lack of bona fides. However, there was simply no evidence in the case to support that latter argument and the Court of Appeal held that the provisions of s17A allowing the appointment as trustee of a deceased's executor are permissive only – not a mandatory requirement.

    So a purported gift of super benefits in a person's will, or an expression of wishes in a person's will about who should receive super benefits, will be very unlikely to have any effect unless the superannuation death benefits are paid into the deceased's estate. The real lesson from this case is that certainty about who will receive super death benefits is not achieved by leaving the decision as a discretionary one for surviving trustees. And that effective estate planning requires alignment of a person's will with control mechanisms and decision-making powers under associated SMSFs, trusts and companies. (Ioppolo & Hesford v Conti [2015] WASCA 45)

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    18 Mar 2015

    Topic: SMSFs

  • sham borrowings from private samoan bank

    A purported loan of $600,000 arranged by the taxpayers’ long term accountant from a private Samoan bank controlled by the same accountant was held by the AAT to be a sham. Consequently, the 2 taxpayers were liable to be assessed under former s26AFB of ITAA36 on $300,000 each as receipts out of or attributable to assets of their SMSF, in breach of SIS rules. As a condition of the purported loan, the taxpayers’ SMSF had been required to lodge a $600,000 deposit with the same Samoan bank, which was sent to the bank 3 days before the same amount was received back in Australia as a loan. Further, no interest or loan repayments were made by the taxpayers and their SMSF received no interest on its deposit for over 10 years. Presumably, the fund also was or will be assessed on the basis that it became a non-complying fund.

    In the circumstances, the Tribunal also held that there had been evasion of tax and the normal time limits by which the Commissioner is empowered to amend assessments did not apply. And for good measure, the Commissioner's assessments of administrative penalties (75% for the first year when the purported loan of $600,000 was received and 90% for each of the following years) were also upheld.

    The finding of a sham is an extreme one, although plainly the facts in this case were quite extreme – particularly the actions of the accountant, which were effectively imputed to the taxpayers. It can be quite different where there has been an innocent mistake, even a mistaken view of the law held innocently by a taxpayer's tax adviser. The Commissioner may not be empowered in that case to issue amended assessments after the relevant limitation periods have expired. (Morrison and FC of T [2015] AATA 114)

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    18 Mar 2015

    Topic: Income Tax/SMSFs

  • No input tax credits for provision of remote accommodation

    The Federal Court has rejected a mining group's claim to input tax credits for acquisitions made by the group in providing and maintaining residential accommodation for its workers in the Pilbara region. This is a test case and an appeal to the Full Federal Court has already been lodged by the taxpayer.

    There was no dispute about the facts involved. The taxpayer group owns approximately 2,300 houses and apartments in towns that it established to support its Pilbara mining operations. The accommodation is provided to workers on a subsidised basis and expenditure on providing the housing substantially exceeds the rental income received from workers. The Commissioner accepted that the acquisitions fell within the basic test for ‘creditable purpose’, being acquisitions in carrying on the enterprise of the taxpayer. However, the Commissioner’s view was that a creditable purpose was nevertheless denied because the acquisitions related ‘to making supplies that would be *input taxed’ (see s11-15(2)(a) of the GST Act). The Court agreed. The taxpayer argued alternatively that there should be an apportionment of input tax credits on the basis of revenue from its operations – the group’s income from iron ore production was 99.88% of the aggregate income from iron ore and from accommodation rental for the year involved, so it was argued that the taxpayer was entitled to 99.88% of the total input tax credits. However, the Court held that the acquisitions related wholly to the provision of accommodation and no apportionment was warranted.

    This sort of matter also arises where tax consequences depend on the purpose or use of something and there is both an immediate and wider purpose and use involved. An example is an accommodation unit provided in a motel or hotel to the manager – that use of that accommodation unit is plainly a business one from the perspective of the owner, but equally plainly is a private use by the manager to the extent that that is the relevant use. But the tests in the matter before the Court were more difficult for the taxpayer – an acquisition by the group in the course of carrying on its enterprise, as opposed to acquisitions that relate to input taxed supplies. (Rio Tinto Services Ltd v FC of T [2015] FCA 94)

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    18 Mar 2015

    Topic: GST

  • Profits from Sale of property were income, not capital

    The relatively brief reasons of the Administrative Appeals Tribunal in a recent case belie the complexity of the underlying tax concepts involved. The AAT agreed with the Commissioner's private ruling that profits derived by a corporate trustee on the sale of 2 adjoining blocks, after obtaining development approval, were ordinary income and taxable accordingly. The reason was a finding that the profits were derived in the course of the business conducted by the taxpayer and, even if the taxpayer's activities did not amount to the conduct of a business, the purchase of the blocks was for the purpose of profit making.

    The directors of the trustee were 2 experienced builders and developers. They had caused the trustee to acquire the blocks for aggregation and redevelopment in a joint venture with a larger, unrelated company. The JV did not proceed, but the directors’ associated development management company was engaged to obtain development approval for the blocks. No other improvements to the blocks were undertaken and the only use of them during the taxpayer's ownership was for rental. The taxpayer had argued that its intention to develop the blocks had been abandoned when it was unsuccessful in concluding the JV and that the blocks from that time began to be held as capital assets rather than trading stock.

    There was an additional difficulty for the taxpayer in this case since, on an appeal or review to the Federal Court or AAT about a private ruling, the matter must be determined according only to the facts contained in the private ruling (the taxpayer complained that the ruling did not include important facts that had been provided to the Commissioner in support of the ruling application). That is consequently an important consideration about whether to object against a ruling or to object against an assessment arising from lodgement of a tax return. (Re WWXY and C of T [2015] AATA 130)

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    18 Mar 2015

    Topic: Income Tax