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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In brief: The new non-resident withholding tax regime on purchases from foreign residents commences on 1 July, for contracts entered into on or after that date. It has very substantial potential implications for both purchasers and vendors. Purchases affected are those of both direct and indirect interests in Australian real property or mining rights, as well as options or other rights to acquire such property. But no withholding is required unless at least one of the vendors is taken to be a foreign resident or, for real property interests in any case, if the purchase price is less than $2M. The tax is a non-final withholding and affected vendors will be entitled to credit the amount withheld from their actual income tax liabilities.
More: The default position under the new withholding regime is that it is assumed to apply (even if the vendor is in fact an Australian resident), unless a particular exclusion applies. This raises issues for conveyancing lawyers, but all advisers need an awareness of the rules – a failure to withhold will not affect the purchaser's obligation to pay 10% of the price to the Commissioner and there might be difficulty recovering that amount then from the vendor. Although the withholding regime partially aligns with the assets to which CGT applies for non-residents (since the Commissioner has had difficulties in the past recovering tax from foreign residents on CGT events), it also applies to relevant assets that constitute trading stock or revenue assets – both capital and revenue assets are CGT assets. One of the exclusion mechanisms is for vendors to obtain a clearance certificate from the Commissioner – an online system for obtaining those certificates is being established by the ATO.
In brief: The Commissioner says in Taxpayer Alert TA 2016/6 that the ATO is reviewing certain arrangements where an individual receives little or no remuneration for services provided to an unrelated party. Instead, income is channelled through another entity to an SMSF in which the individual or their associates are members. The income may be received by the SMSF purportedly as a return on investment in the other entity or on some contractual basis. Apart from the question of whether the income remains assessable to the individual in spite the arrangements, the Commissioner believes that amounts received by the SMSF may constitute contributions to which contributions caps accordingly apply or non-arm's length income to which the highest marginal tax rate applies.
More: The arrangements appear somewhat naive and very unlikely to succeed, at least on the basis of the brief description provided in the Alert. Arrangements to attempt to achieve the sorts of aims involved in such circumstances will always be controversial and anyone contemplating them would be well advised to act cautiously and seek specialist advice.
In brief: The new incentives to encourage innovation will commence from 1 July 2016. For ‘early stage investors’, these comprise a non-refundable, carry-forward tax offset of 20% of their investment (subject to a maximum annual offset cap of $200,000 and a total annual investment limit of $50,000 for retail investors) plus CGT concessions on sales of shares that have been held for at least one year in qualifying innovation companies. An investor may disregard a capital gain from qualifying shares held for between 1 and 10 years. For shares held longer than 10 years, the cost base and reduced cost base will be deemed to be the market value on the 10th anniversary of acquisition, so that only incremental gains or losses after that time will have effect for CGT purposes.
More: The trade-off for investors in early stage innovation companies is that capital losses on qualifying shares will effectively be disregarded, irrespective of how long the shares are owned. Other amendments in the amending act are aimed to improve access to capital and make existing tax regimes for venture capital limited partnerships more attractive to investors.
In brief: This case in the Administrative Appeals Tribunal concerned unfavourable decisions by the Commissioner on objections lodged against private rulings issued to each of the taxpayers. Although the Tribunal agreed with the Commissioner, no order was made and the applications were instead remitted to the Commissioner to request the applicants to make another ruling application. The reason for this unusual outcome was that, in the course of the AAT hearing, additional information provided was ‘materially different’ from the factual scheme on which the rulings were based. The Tribunal referred to the recent case of Rosgoe Pty Ltd v FC of T [2015] FCA 1231 (currently subject to the Commissioner's appeal to the Full Federal Court), in which it was held that the AAT in such a case is confined to the facts stated by the Commissioner in the private ruling.
More: This case emphasises the importance of the scope and accuracy of the factual information provided to the Commissioner in an application for a private ruling. The present law is that the AAT is not free to make its own findings of fact in a review relating to a private ruling – it is confined to the facts stated by the Commissioner in the ruling.
In this case, the issue was whether a $500,000 superannuation death benefit would be exempt from tax. The married taxpayers who received the death benefit had unsuccessfully sought private rulings that they each had an interdependency relationship with their 22 year old son, who was killed in a motorcycle accident. On the basis of the facts contained in the private ruling, the Tribunal agreed that there was no interdependency relationship – but materially different additional facts were provided at the AAT hearing. (Case 2/2016 [2016] AATA 264)
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.
