Division 7A has really changed the way that corporate beneficiaries are used in closely held groups.  Before Division 7A was enacted distributions went to the company and the cash went on personal assets and lifestyle.  Now these companies are really used as financing vehicles.  Profits that are needed to be reinvested in a business are distributed to a corporate beneficiary and the money remains in the trust to help fund the relevant business or investment, essentially becoming a source of long-term finance.  Tax is seen to be capped at ‘only’ 30%.  Reliance upon external finance is reduced and hopefully businesses grow stronger (and more profitable) as a result.  When money is drawn for private purposes then either trust distributions reflect this usage or a dividend is declared to cover the payment.

The result is that monies drawn out of groups with company members for private use are tax-paid monies, which was the policy intent all along.

I’m looking for a tax mischief here that needs fixing by these new draft rules. Nope, none here!

This draft ruling essentially will require the undrawn entitlements that fund a business to come from individuals not drawing down on their entitlements because companies will no longer be able to be used, or can only be used for a few years as the minimum repayment rules forcibly reduce the loan with no regard to business conditions or what loan terms are available in the real world.  In some cases the after-tax monies available to individuals to act as financiers will be higher (if the tax rate is lower for that individual), but in the main the tax cost will increase and so the cash flow pressures experienced by the business will increase.

If the ATO offer a ‘concession’ to treat all undrawn entitlements as loans from the current financial year onwards then the burden on businesses to repay these ‘new yet old’ loans over seven years  could be too much for many.  If the concession requires a ‘new yet old’ loan to be brought up to where it would have been if it had been a loan from the beginning (similar to what was provided under PS LA 2007/20) then the 2010 year could be a very difficult one for small businesses to survive.

This edition of ‘The Assessment’ was prepared by Graeme Prowse If you would like assistance in relation to The ATO Redefines the Rules of the Game please feel free contact Graeme by phone on 03 8662 3200 or by graemep@webbmartinconsulting.com.au

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.

Division 7A has really changed the way that corporate beneficiaries are used in closely held groups.  Before Division 7A was enacted distributions went to the company and the cash went on personal assets and lifestyle.  Now these companies are really used as financing vehicles.  Profits that are needed to be reinvested in a business are distributed to a corporate beneficiary and the money remains in the trust to help fund the relevant business or investment, essentially becoming a source of long-term finance.  Tax is seen to be capped at ‘only’ 30%.  Reliance upon external finance is reduced and hopefully businesses grow stronger (and more profitable) as a result.  When money is drawn for private purposes then either trust distributions reflect this usage or a dividend is declared to cover the payment.

The result is that monies drawn out of groups with company members for private use are tax-paid monies, which was the policy intent all along.

I’m looking for a tax mischief here that needs fixing by these new draft rules. Nope, none here!

This draft ruling essentially will require the undrawn entitlements that fund a business to come from individuals not drawing down on their entitlements because companies will no longer be able to be used, or can only be used for a few years as the minimum repayment rules forcibly reduce the loan with no regard to business conditions or what loan terms are available in the real world.  In some cases the after-tax monies available to individuals to act as financiers will be higher (if the tax rate is lower for that individual), but in the main the tax cost will increase and so the cash flow pressures experienced by the business will increase.

If the ATO offer a ‘concession’ to treat all undrawn entitlements as loans from the current financial year onwards then the burden on businesses to repay these ‘new yet old’ loans over seven years  could be too much for many.  If the concession requires a ‘new yet old’ loan to be brought up to where it would have been if it had been a loan from the beginning (similar to what was provided under PS LA 2007/20) then the 2010 year could be a very difficult one for small businesses to survive.

The ceasing of the practice of allowing undrawn beneficial entitlements to be treated as being outside the meaning of a loan per section 109D may also give rise to the same change of view in relation to the meaning of payment in section 109C, so the redefinition of how Division 7A applies may not be over yet!

This edition of ‘The Assessment’ was prepared by Graeme Prowse If you would like assistance in relation to The ATO Redefines the Rules of the Game please feel free contact Graeme by phone on 03 8662 3200 or by graemep@webbmartinconsulting.com.au

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.

The “screams” were heard. Following consultation with Industry, the current draft law reflects departures (that were foreshadowed in a media release of early July 2009) from the original Budget statement. The broad object of the legislation is to reduce “(tax) scheming” without diminishing genuine employee share acquisition “scheming”.

While Treasury is currently considering comments in relation to the latest draft, several aspects of this are worth highlighting.

The new legislation:

The new legislation will form Div 83A of the ITAA 1997. It will supersede the existing Div 13A of the ITAA 1936. The legislation also amends the TAA and contains a number of consequential amendments of other legislation.

Application:

The EM confirms the June 2009 decision that the changes will apply to “shares, rights and stapled securities acquired on and after 1 July, 2009“.

Legislative Changes relevant to employees:

• “Deferral of tax will be limited to schemes which:
  • require that any benefits provided are at real risk of forfeiture and meet certain other conditions [that are similar to the conditions for ‘qualifying shares/rights' under Div 13A]; or
  • are provided through a salary sacrifice arrangement offering no more than $5,000 worth of benefits [per annum (per commercially distinct employer)] to an employee, and where
    • there is no real risk of forfeiture; and
    • the rules of the scheme explicitly state that tax will be deferred; and
    • [the schemes meet certain other conditions, notably: the salary sacrifice is made in exchange for shares (rather than rights to shares); the shares are received without any consideration payment; and further conditions which are similar to those for ‘qualifying shares/rights' under Div 13A].”

For those attracted to “(tax) scheming”, the EM has some salutary examples of “real risk”!

• “Employees with taxable income (after adjustments) of less than $180,000 will receive the upfront concession and not pay tax on the first $1,000 of discounts received, if the scheme meets certain conditions” (including a minimum ESS holding period) - cf. Div 13A where employees in a qualifying scheme can elect to be taxed upfront and (without a means test) not to pay tax on the first $1,000.
• “Eligibility for the upfront or deferred tax concession is based on characteristics of the employee share scheme” - cf. Div 13A where eligibility for the upfront or deferred tax concession depends on “qualifying” shares or rights and an employee election.
• In an ESS where tax is deferred, the taxing point is the earliest of:
  • “where there is no risk of forfeiture of the benefits and any restrictions on sale or exercise are lifted”;
  • “when the employee ceases employment”; or
  • “seven years after the share or rights are acquired” (cf. Div 13A where a ten year period exists.)
  • “An employee is eligible for a refund of tax on forfeited shares and rights if the forfeiture was not the result of :
  • a choice of the employee; or
  • a condition of a scheme that protects the employee against a fall in market value.”

(cf. Div 13A - eligibility for refund only applies to forfeited rights (not shares) and arises if the employee loses the right without having exercised it.)

• Some more focussed significant points of change are:
  • The measures contemplate a more flexible approach to determination of market value consistent with its ordinary meaning.
  • In relation to deferred taxation of an ESS interest, the amount included in the recipient’s assessable income is the difference between the market value of the interest at the ESS deferred taxing point and the cost base of the interest. By contrast, where tax is payable upfront, the discount (i.e. market value of the ESS less the consideration paid) is included in the recipient’s assessable income.
  • It appears that apportionment is not available for employees who acquire shares/options while a non-resident and a deferred taxing point occurs when they resume Australian tax residency.

Legislative Changes relevant to companies offering an ESS:

• “Employers are subject to annual reporting requirements.”

Legislative Changes relevant to both employees and companies offering an ESS:

• “A limited form of withholding tax will be introduced where an employee fails to provide their employer with a TFN or ABN.”

What has not changed:

• The default position is upfront taxation of any discount to market value of ESS interests in shares or rights.
• Takeovers and restructures - rollover of certain taxing points that would otherwise occur because of corporate restructure is available under Div 83A.

This edition of ‘The Assessment’ was prepared by Andrew Orange & Rob Power. If you would like assistance in relation to taxation of employee shares schemes please feel free contact Rob or Andrew by phone on 03 8662 3200 or by email - Rob Power: robp@webbmartinconsulting.com.au or Andrew Orange: andrewo@webbmartinconsulting.com.au

Disclaimer

‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.

Three NEW consultants - Sydney, Adelaide, Gold Coast - we’ve arrived!!

We are pleased to announce the recent addition of three new highly experienced tax consultants - Meng Lee (based in Sydney), Gary Martin (based in Adelaide) and Richard Gregg (based on the Gold Coast).

Our new arrivals considerably expand the Webb Martin Consulting team’s national presence, experience and skill set. A brief summary of our new team members is shown below.

With a presence in Melbourne, Sydney, Brisbane, Adelaide and the Gold Coast, Webb Martin Consulting is now even better equipped to provide expert tax advice to clients situated anywhere in the country.

Meng Lee (Sydney)

Meng is based in Sydney and is working as a consultant for Webb Martin Consulting in addition to his role as a tax trainer for TaxBanter. Meng has over 12 years’ experience in the tax profession as a tax manager in a 2^nd tier accounting firm and as a tax trainer to clients ranging from the ATO, the Big 4, 2^nd tier and SME accounting firms. Meng’s tax consulting and training experience combines to give him considerable technical expertise and a highly practical understanding and approach to dealing with tax issues in practice. Click here to read more about Meng.

Gary Martin (Adelaide)

Gary has over 19 years’ tax experience in both the public sector and in public practice. Gary’s more recent public practice experience includes working as a Partner with BDO Kendalls and at Deloitte in Adelaide. In these roles, Gary specialised in SME issues such as the small business CGT concessions, Division 7A, indirect tax issues and business purchases and sales. Gary’s tax career commenced with the ATO working in areas ranging from Advisings, Appeals and Review, Business Audit and then subsequently in Policy and Legislation. Gary has also worked in Treasury and worked on the Ralph Review of Business Taxation. Click here to read more about Gary.

Richard Gregg (Gold Coast)

Richard is a GST specialist with over 17 years’ experience gained from working both in Australia in Sydney, Melbourne, Brisbane and the Gold Coast, and internationally in the GST and VAT jurisdictions of Singapore and PNG. For those with good memories, you may recall Richard was instrumental in establishing Webb Martin Consulting in late 2000 and has, for the last several years, been based on the Gold Coast where he was a partner with PKF.

Richard has extensive consulting experience in industries including property, retirement villages, tourism, finance and managed investments, petroleum, local government and retail. Richard takes a proactive and ‘hands-on’ approach with his clients during the process of providing advice on complex and sophisticated transactions. He has extensive experience in assisting with ATO audits and dispute resolution, and regularly liaises with the ATO to obtain private rulings for his clients. As Richard likes to say, ‘he is uniquely qualified to deliver’. Click here to read more about Richard.

Want a Spring Carnival Tip?

Get on board TaxBanter in 2010.

Planning your tax training program for 2010? Take the tip and make sure you speak to TaxBanter about your needs and you can be sure of being on a winner!

The Webb Martin Consulting alliance with TaxBanter offers our clients a one-stop shop for all their Tax Consulting & Training needs.

TaxBanter has grown significantly in 2009 to provide a number of value added services, setting itself apart from other training providers by offering the following:

• Experienced personable trainers - our trainers are excellent presenters and use their depth of practical experience when presenting TaxBanter’s high quality notes. TaxBanter employs some of Australia’s best known trainers including Neil Jones, Veronica Doody and Meng Lee. Click for more info on our trainers.
• Special Topics - TaxBanter clients have full flexibility with respect to Special Topic selections.
• Free Access to Online Database - was implemented in 2009 and allows in-house clients access to Tax Update content at all times, ensuring easy recall of content and issues discussed in previous training sessions. Click for more info.
• GradTraining Seminars - designed to update and train junior staff on fundamental tax issues. Melbourne Seminar Mon 23rd Nov - sign your staff up now! Click for more info.
• Public Sessions - don’t have the need for in-house training? Sign up for our public offer sessions in Sydney and Melbourne in which sole practitioners & others can participate in quality tax training. Click for more info.
• NEW in 2010 - ONLINE training! In 2010 we will be offering training online which will include monthly Tax Updates and a monthly GradTraining program. This will enable regional/rural practices, smaller firms & sole practitioners, and people who just enjoy the comfort of their own office/boardroom to access TaxBanter’s interactive online tax training program. More details to come!

If you wish to discuss your tax training needs, please email enquiries@taxbanter.com.au or call 03 9660 3500.

Please give us a call if you would like more information about anything in this email or require help with any of your tax issues.

Kind regards,

The Webb Martin Consulting Team

Tel: 03 8662 3200
Fax: 03 8662 3232
Email: consult@webbmartinconsulting.com.au

Having considered the parties written submissions, in a 5 minute hearing on 3 November 2009, the Court focussed on whether leave should be granted on all grounds.

The Commissioner argued that:

• the Court should hear both the Commissioner’s and taxpayers’ appeals as they were interrelated, and
• granting special leave on all grounds will allow the court to consider:
  • the meaning of “present entitlement”, “share” and “net income of the trust estate” in section 97 of the ITAA 1936, and
  • Net income vs Distributable income (and where “capital gains” fits in these concepts).

The Court acknowledged the interrelationship of all issues raised by the respective parties warranted granting leave to appeal on all grounds.

The game is now on, as we await the players to appear before the main umpire in a long-awaited centre court match which will hopefully bring certainty in a significant area of taxation law. Ironically, with the legislature sitting on the side-line, if the match goes against the Commissioner, one cannot rule out an appeal to the lines personnel to override the main umpire.

In order to refresh your memory of the case <click here>

This edition of ‘The Assessment’ was prepared by Andrew Orange. If you have any comments or queries please feel free to contact Andrew at andrewo@webbmartinconsulting.com.au.