Tax Facts

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.

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  • No deductions properly allowable for teacher's self-education expenses

    In brief:  The AAT held in this case that no costs relating to the taxpayer's enrolment in a postgraduate business management course were properly allowable. There was no evidence that the course was required in order for the taxpayer to fulfil his role as a teacher or that it would lead to an increase in income from his current role. There was some prospect that the course might assist the taxpayer to gain promotion, but that could only be to a role quite different from the taxpayer's current position. In the words of the Tribunal, that promotion would mean ‘more pay for doing a different job’ – so the self-education expenses had insufficient nexus to that potential increased income.

    More:  The ATO prior to the hearing had conceded that expenses relating to 4 out of the 6 subjects undertaken by the taxpayer should be allowable. The AAT consequently allowed the taxpayer's objection to the extent of the costs of those 4 subjects, despite its finding that none of the expenses relating to the course were deductible. It may be correct in this fact scenario that no deductions should be allowable, but it is objectionable for the ATO to argue about specific subjects in the course if it is accepted that the course overall has sufficient nexus to the derivation of income. (Re Ting v C of T [2015] AATA 166)

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    01 Apr 2015

    Topic: Income tax

  • 11 year prison sentence for tax fraud

    In brief:  A former tax principal at Ernst & Young has been sentenced to 11 years prison, with a non-parole period of 7 years. The charges on which he was convicted related to conspiring to deal with the proceeds of crime and conspiracy to defraud the Commonwealth, the relevant section of the Criminal Code for that latter offence providing that:

    135.4(5) A person is guilty of an offence if:

    1. the person conspires with another person to dishonestly cause a loss, or to dishonestly cause a risk of loss, to a third person; and 
    2. the first-mentioned person knows or believes that the loss will occur or that there is a substantial risk of the loss occurring; and 
    3. the third person is a Commonwealth entity.

    Although such tax prosecutions are relatively rare, it is worthwhile reminding oneself (and some clients) of the conduct that might lead to prosecution. The relevant provisions of the Criminal Code are broadly based and, in principle, potentially apply irrespective of whether the amounts involved are large or small.

    More:  The case involved false depreciation claims ‘of many hundreds of millions of dollars’ which supposedly offset very substantial income from financing arrangements involving several major banks. The resultant potential tax loss for the Commonwealth was approximately $135M and the defendant and his co-conspirator received over $63M. That latter amount represented funds paid to the conspirators’ company, that were paid overseas before being transferred back into Australia for the benefit mainly of the 2 conspirators. The judge remarked on sentencing that, “Having regard to its size, scale, timespan and tactics [the defendant's] offending falls into the worst category of cases under s 135.4(5).” (R v Dickson (No 18) [2015] NSWSC 268)

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    01 Apr 2015

    Topic: Other news

  • Bill to amend employee share scheme rules

    In brief:  A Bill introduced into Parliament last week is intended, from 1 July 2015, to significantly change the taxation of employees’ shares and share rights acquired under employee share schemes. This has been a controversial topic since changes made by the former Government in 2009, which resulted in a sharp drop in such schemes offered by companies. Also, a new concession for start-up companies is to apply.

    More:  A new form of concession is to be provided in relation to eligible start-up companies (broadly, unlisted companies incorporated for less than 10 years and with group turnover not exceeding $50M). The concession is that no upfront tax is to apply to shares or rights in the start-up and the CGT rules are to apply from the time of acquisition. But to be eligible, shares must be issued at a discount of not more than 15% of the market value and the strike price of rights to shares must not be less than the market value of the shares at the time of issue. Also, the shares or rights must generally be held for at least 3 years.

    For other employee share schemes more generally:

    • tax may be deferred even where there is no real risk of forfeiture, if there are genuine restrictions on disposal;
    • the maximum deferral period will be increased from 7 years to 15;
    • the taxing point on share rights will be the time of exercise (rather than the time when an employee may exercise); and
    • the 5% limit of any employee's holdings in the relevant company issuing the shares or rights will be increased to 10%.

    (Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015)

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    01 Apr 2015

    Topic: Income Tax

  • What's the value of franking credits?

    In brief:  A successful plaintiff in an action for negligent tax advice failed to establish that forfeiture of franking credits in the holding company of his group resulted in any damages to him. In one sense, this outcome was the result of specific facts in the case but, in another sense, it is a reminder to question the value of franking credits in a company. Remember that franking credits only come as an attachment to a franked dividend – that can only have a positive impact on the recipient shareholder if their marginal tax payable on the grossed up dividend is less than the franking credit (such as in the case of retired taxpayers with little other assessable income or an SMSF).

    One would always prefer more franking credits rather than less, since more at least gives some prospect of additional benefits. But, on their own, franking credits in a closely held company generally have no inherent value to the extent that they exceed the amount necessary to frank all profits.

    More:  Following an ATO audit, there was a settlement reached under which the plaintiff in this case (the founder of Aussie Home Loans) paid over $7M to the ATO and the holding company of his group forfeited franking credits of over $5M. The plaintiff then successfully sued lawyers, Gadens, in respect of tax advice relating to the corporatisation of his group, being awarded damages of approximately $5M. The NSW Court of Appeal reduced the damages award by approximately $1.3M (plus associated pre-judgement interest), being the amount relating to the loss of franking credits. This amount had been assessed by reference to the additional tax payable by a shareholder on aggregate dividends unfranked to that extent. But, on appeal, it was held that no damages in that respect had been proven – there was no evidence that the reduction in franking credits made any difference to the price paid by the Commonwealth Bank for the subsequent purchase of 80% of the business or that the company's remaining franking credits would not be sufficient to frank all prospective dividends that the plaintiff might receive. (Gadens Lawyers Sydney Pty Ltd v Symond [2015] NSWCA 50)

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    01 Apr 2015

    Topic: Income Tax

  • Another SMSF death benefits case gone wrong

    In brief:  Death benefit nominations for super death benefits are a vitally important matter and it is wrong to treat them glibly. This case is a stark example because the estate of the deceased was very small. So the practical reality was that all the ‘deceased's wealth’ was contained in the SMSF in which he and his second wife were members. Yet his apparent intentions for death benefits from the fund to benefit his 2 daughters from his first marriage, as well as his second wife, were frustrated. It is a very sad and costly saga that could easily have been avoided.

    The outcome in this case would surprise many practitioners, since a purported binding death benefit nomination made by the deceased nominating the "Trustee of Deceased Estate" was held not to comply with the trust deed requirements for a binding nomination or even with the provisions of the SIS Regulations for cashing benefits. It is a good example of why practitioners need to be very careful about death benefit nominations, particularly given limitations under their professional indemnity insurance policies about legal work. The bottom line is that super death benefit nominations are equally important, and warrant the same level of consideration and advice, as the preparation of a person's will.

    More:  The purported binding nomination with the expression, "Trustee of Deceased Estate", was held not to comply with the trust deed requirements or provisions of the SIS Regulations because super death benefits are generally permitted only to dependents of the deceased or the deceased's ‘legal personal representative’, defined to mean the executor of the deceased's will or administrator of his or her estate. Although not commonly appreciated, it is a trite matter of law that the executor of a deceased estate holds an office quite distinct from that of a trustee of estate property (even though the same persons often hold both offices). The failure to address that distinction has resulted in the trustees of the SMSF in this case being left free to exercise discretion about who is to benefit from the deceased's accumulated benefits. That discretion is consequently one exercisable by the deceased's second wife and her daughter, who was appointed as co-trustee after the deceased's death. (Munro v Munro [2015] QSC 61)

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    01 Apr 2015

    Topic: SMSFs