The DIS and New PS raise several practical points. We highlight some of these below. For clarity, in the DIS and New PS the Commissioner refers to net income calculated under s 95 of the ITAA 1936 as “[tax] net income” and we have adopted this phrase.

The most significant ongoing practical point is made with minimal discussion. The Commissioner concludes that the character of allocated income does not flow through the trust - subject to the effect of statutory provisions outside Division 6 of ITAA 1936. An amount of tax net income that is included in a beneficiary’s assessable income under s 97 comprises an “un-dissected or un-allocated proportionate share of the entirety of the [tax] net income” returned by the trust.

Many trustees would seek to stream franked dividends or capital gains to selected beneficiaries while directing other income to different beneficiaries. The Commissioner intends to consult with the tax profession on the manner in which statutory flow-through provisions, such as Subdivision 115-C ITAA 1997 (capital gains) and Subdivision 207-B ITAA 1997 (franking credits), interact with Division 6. 

The second practical point is that trust clauses which re-characterise receipts as income or income equalisation clauses will not necessarily be effective in deeming notional tax income to exist for trust distribution purposes. For example, the Commissioner intends to consult on whether a capital gain arising through application of the market value rules or a franking credit can be deemed to give rise to an identical amount of distributable income under the trust deed. The issue is whether there must be an actual accretion to the trust in order for distributable income to exist.

The third practical point is whether income equalisation clauses can displace inconsistent accounting methodology required by the trust deed. For example, if the trustee is obliged under the trust instrument to account for investments at fair value, can an income equalisation clause override this by requiring gains to be recognised on a realisation basis?  Such situations could give rise to variations between trust net income and tax net income every year. The Commissioner intends to consult on this third issue as well.

The fourth practical point is one that lies at the heart of the Bamford decision. As trust law governs the determination of “the income of a trust estate” (to the extent that general trust law is not overridden by trust terms), practitioners will need knowledge of relevant trust law principles. General trust law (in so far as it is not displaced by the trust provisions) will impact on the characterisation of receipts as income and on apportionment of outgoings and losses between income and capital. This apportionment is governed by presumptions that are highly rule based.

The Commissioner intends to consult in relation to “what constitutes a receipt or outgoing of a trust” for purposes of determining trust distributable income for a period. The consultation will extend to consideration of the relevance of accounting principles (eg application of cash v accrual basis) “in identifying and measuring apportionable receipts and outgoings of the trust”.

A fifth practical point is more pervasive and, for some practitioners, may require a cultural change that recognises that “one size does not fit all” when it comes to trusts (or even categories of trusts). Careful attention will have to be given to the specific terms of a trust. For example, trust clauses enabling the trustee “to re-characterise a receipt or outgoing cannot contradict other requirements of the trust instrument” (refer to the Commissioner’s DIS in relation to Forrest v FCT [2010] FCAFC 6).

The Commissioner has directed ATO staff that “[n]o case should be resolved without detailed consideration of the trust deed (including any amendments that have been made to it) and all relevant documents including (but not limited to) relevant trustee resolutions and financial statements”. In anticipation of intensive ATO scrutiny, practitioners will similarly need to be vigilant.

What does this mean for 2010 returns and beyond (and prior)?

If the foregoing discussion has been sufficient to engender mild panic as you read this and recall that the end of the tax year is not far off, the Commissioner has offered some degree of consolation.

He proposes a non-active approach to retrospective application of the decision - if “you don’t …, he won’t …”. In relation to the 2009-10 tax year, the New PS directs ATO staff not to “select cases for active compliance solely to” correct errors in tax returns or trust administration which the Bamford decision has brought to light. This leniency does not extend to circumstances of deliberate exploitation of Division 6 of the ITAA 1936. The New PS gives several examples where the exception applies.

While cases may not be selected “solely” on the basis of such errors, disputes on other grounds may lead to the review of the basis upon which trust distributions have been made. If there are disputes on other grounds ATO officers are directed to apply “the law as explained in Bamford“.

Practitioners will need to consider any practical implications of triggering disputes which might draw undesired ATO investigation. The New PS cites a dispute about the quantum of a trust’s net income as an example of a dispute that would lead to applying the post-Bamford legal position.

Practitioners may also find some solace from the fact that the following rulings will be withdrawn only for the 2010-11 and later income years:

• TR 95/29 (Primary production averaging)
• IT 331 (Adjustments to [tax] net income)
• PS LA 2005/1 (GA) (Taxation of capital gains of a trust).

The DIS recognises that “trustees and beneficiaries may have relied on … [them] already in respect of the 2009-10 income year” and so should remain available for that and prior years. However, a taxpayer may choose to rely on the Bamford decision for the year ended 30 June 2010 or a prior year.

TR 92/13 (Trust dividends and franking) is conspicuously absent from the above list. The ruling will also be withdrawn, as it relates to former legislation. The Commissioner views the current imputation provisions (Subdivision 207-B of ITAA 1997) as more than a mere re-enactment of the former Division 7 of Part IIIAA and intends to consult on a replacement ruling.

However, he recognises “that for 2009-10 and earlier income years taxpayers may have relied on TR 92/13 as a guide to the application of Subdivision 207-B”. The DIS states that “Returns reasonably prepared on that basis will not be disturbed”. It might be prudent to be able to establish such reliance has occurred. Playing devil’s advocate (and, probably, not in the spirit of the assurance), does the DIS recognition of the disparity between Subdivision 207-B and Division 7 impact on the “reasonableness”?

In the absence of tax avoidance schemes, ATO staff are directed to “accept that trustees and beneficiaries who have prepared returns for 2009-10 or earlier income years on the basis of the Commissioner’s views of the operation of Division 6 (as argued in Bamford), or on the basis of an alternative view about the operation of Division 6 that is reasonably open having regard to other relevant authorities, have taken ‘reasonable care to comply with the taxation law’ and that their position is ‘reasonably arguable’ for the purposes of Division 284 of … [Sch 1 to TAA 1953]“.

Flowing from this, the Commissioner recognises:

• in these circumstances there is “no liability for administrative penalty in respect of a relevant ‘shortfall amount’…”, and
• the factors outlined above must be taken into account in determining whether to remit any shortfall interest charge or GIC imposed under the ITAA 1936 and/or the TAA.

Private Rulings, objection decisions or arguments in appeal will be based on the Commissioner’s view of “income of the trust estate” and “that share”. These courses of action will clearly then result in the Commissioner’s position being applied by him for FY10 and earlier years, so care will need to be taken in relation to these situations.

And the consultation continues…

At the outset, we noted that the Commissioner does not know (yet) what to think in relation to some matters. Some proposed consultations have been outlined above.

Other issues of uncertainty which the Commissioner has identified and in relation to which the ATO intends to consult include:

• whether a trustee must use the same accounting methodology to identify and measure the trusts distributable income and also to prepare periodic financial accounts for the information of the beneficiaries;
• “how a trust’s distributable income is to be determined where the trust instrument employs different notions of income for different purposes”;
• “the principles to be applied in identifying the section 97 income of the trust estate if a particular trust does not distinguish between income and capital for the purposes of ascertaining beneficiary entitlements to trust property”;
• “how paragraphs 97(1)(a), (b) and (c) are to be reconciled”; and
• “the manner in which Division 6 interacts with other provisions which rely on a beneficiary’s present entitlement to the income of a trust (for example, Division 11A of the ITAA 936)”.

The Commissioner is also considering the ability to re-characterise income as capital. He notes that Bamford was only concerned with the converse circumstance of re-characterising a capital gain as income.

All too hard?

The foregoing is not intended as a complete statement of the practical points emerging from the DIS and the New PS.

Although the Commissioner’s published position predating Bamford will remain in place to a degree for the 2009-10 year, careful consideration will need to be given to various matters in relation to that year, including drafting distribution resolutions. Furthermore, practitioners will need to review the terms of a trust, the manner in which trust structures are used in connection with a client’s tax affairs, and the distribution goals in relation to the 2010-11 tax year, in order to ensure timely implementation for efficacy in the new tax year.

If the implications of Bamford are beginning to sound “too hard”, you might like to consider speaking with one of our consulting team or arranging a visit from one of our consultants for a “one-on-one” session on the decision and its implications for your practice.

This edition of ‘The Assessment’ was prepared by Andrew Orange. If you would like assistance in relation to the BAMFORD - What the Commissioner Thinks, please feel free contact Andrew by phone on 03 8662 3200 or by email at 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.

Click through to download summary of the Rudd Government federal budget, prepared by TaxBanter - Australia’s newest provider of effective tax training. <Click here> to download a PDF Summary. ]]> http://www.webbmartinconsulting.com.au/feature/federal-budget-2010-summary/feed/ http://www.webbmartinconsulting.com.au/the-assessment/2010-federal-budget-summary/ http://www.webbmartinconsulting.com.au/the-assessment/2010-federal-budget-summary/#comments Tue, 11 May 2010 21:39:22 +0000 Webb Martin Consulting http://www.webbmartinconsulting.com.au/?p=855 <Click here> to download PDF version.

1.0       Introduction

The Kevin Rudd led Federal Labour Government handed down its third Budget on Tuesday 11 May 2009.  The Government has committed to a range of measures in the area of taxation.  Some of these measures will be introduced immediately into parliament.  Others will be introduced in due course.

The Budget underlying deficit for 2010-11 is $40.8b.  The Government expects the nation to return to a surplus in 3 years (2013) some 3 years sooner than expected in last year’s budget.

2.0       General Budget Announcements

• Taxing the Super profits of the mining sector with 40% Resource Super Profits Tax
• Use RSPT to fund cuts to company tax rate, boost retirement savings and help small business
• Invest in Infrastructure and Build skills for sustainable growth
• Invest in renewable energy
• Savings for the future
• Better Health and Hospitals
• Ease the cost of living, simplifying personal tax time

3.0       Budget Tax announcements

Personal Tax Rates - NO change to last year’s legislated changes

Increase in the low income tax offset

2010 year - maximum offset $1,350, cuts out where taxable income is $63,750

2011 year - maximum offset $1,500, cuts out where taxable income is $67,500

The low income tax offset will still phase out at a rate of four cents for each dollar over $30,000.

Medicare Levy Thresholds

The Medicare low income thresholds will also rise from $17,794 to $18,488 for singles and from $30,025 to $31,196 for couples.  The additional amount for each dependent child or student will also rise from $2,757 to $2,865.

For pensioners below pension age the Medicare low income threshold also rises from $25,299 to $27,697.  This should ensure that Age pensioners who have no tax liability should also have no Medicare levy.

Tax Discount on Savings

To provide an incentive to save, the Government has announced that a 50% discount on the tax applicable to interest earned up to $1,000 will apply from 1 July 2011.

The measure is designed to promote deposits as a tax effective savings vehicle and encourage Australians to diversify their investments.

Simpler Tax Time

From 1 July 2012, individual taxpayers will be able to claim a standard $500 deduction in lieu of work related expense and tax preparation costs.  From 1 July 2013, the standard deduction will be increased to $1,000.

Taxpayers will still be able to claim their actual work related expenses and costs of managing their tax affairs, but will be subject to scrutiny.

The pre filling of tax returns is to be improved.

First Home Owners

First Home Saver accounts provide a simple tax effective way for Australians to save for their first home through a combination of government contributions and low taxes.

FHS account holders must keep the their savings in the account for 4 years  before they are able to use those savings to buy a home.

The Government will increase the flexibility of this program by allowing savings in a FHS account to be paid into an approved mortgage after the end of a minimum qualifying period.

The changes will apply to homes purchased after the enabling legislation receives Royal Assent.

Consultation will occur on the proposed changes.

Superannuation

The SGC rate will be increased to 12%.  The increase will be phased in gradually from 1 July 2013 with a .25% increase rising by .25, then .5 until 2020 when it reaches 12%.

SGC will also be extended to those workers aged up to 75 (up from 70).

The co-contribution will also be adjusted permanently.  A 100% co contribution for 2011 and 2012 will be made permanent.  The rate of co contribution will be no longer rise to 125% for 2013 and 2014.  The income thresholds will also be frozen for these two years ($31,920 and $61,920).

Low income earners do not benefit as greatly from concessional contributions as others as a result of the 15% contributions tax.  The Government will provide a maximum $500 contribution for those with income below $37,000.  This will apply for the income year 2013 with contributions made in 2014.

The concessional cap will be increased to $50,000 for those aged 50 and over from 1 July 2012 where the balance of their superannuation interests is below $500,000.

CGT For Earnout Arrangements

The Government will clarify the law in relation to earnout arrangements by ensuring that the payments under eligible arrangements relate to the underlying asset and the rights do not represent a separate CGT asset.

Small Business Measures

The company tax rate will be reduced to 28% with effect from 1 July 2012.  This is in advance of the reductions of the company tax rate for other companies.

An immediate write off for depreciable assets acquired from 1 July 2012 with a cost of $5000 or less.

The long life pool will be scrapped and small businesses will have access to a single depreciation pool (30% rate).

The small business measures are dependant upon the passage of the RSPT (see below).

Business Measures

The Company tax rate will be reduced from 30%.

From 1 July 2013      29%

From 1 July 2014      28%

The Government has announced a resource rent tax of 40% on the Super Profits of the mining industry.

The RSPT will be calculated by a specific formula under legislation to be introduced.  The profit will recognize the capital already invested by taxpayers in their mining projects.

A new Resource Exploration Refundable Tax offset will also be introduced to encourage activity in this industry.

From 7.30pm on 11 May 2010, three amendments will apply to certain CGT events.

A rollover will be available where an unincorporated body becomes a company, rollover relief will also be extended to certain restructures involving shares or interests where foreign residents exist, and demerger relief will be extended to certain structures where a sole company or complying superannuation fund is involve.

The Consolidation rules will be amended to clarify the ability of the Commissioner to recover PAYG under the joint and several liability rules.  Entities will also be able to obtain a clear exit under the PAYG liability rules where that entity has paid their obligation under a valid tax sharing agreement.

Film Tax Offset

The Government will relax the requirement that 70% of a films expenditure be undertaken in Australia, and will also reduce the required spend for eligibility for Post, digital and visual effects production from $5m to $500,000.

Goods and Services Tax (GST)

Summary

Having undertaken the reviews foreshadowed in last years’ Budget, this years’ Budget announces the following key changes:

• Accepting all the Board of Taxation’s recommendations regarding GST and cross border transactions;
• Slightly amending the GST and margin scheme rules;
• Amending the GST and financial supplies rules intending to reduce compliance for small businesses;
• Broadening the GST-free treatment for exported recreational boats;
• Altering the basis of exempting Australian taxes, fees and changes;
• Minor revision of previously announced GST administrative changes; and
• Increased funding to promote voluntary GST compliance.

GST and cross border transactions

• Implement from 1 July 2012 all the Board of Taxation recommendations regarding GST and cross border transactions:

- limit the ‘connected with Australia’ provisions;

- expand the compulsory reverse charge mechanism;

- extend the GST-free export rules;

- remove the need for some non-residents from registering;

GST and Margin Scheme

• Amend the margin scheme provisions to ‘clarify the law and simplify compliance and reduce the potential for disputes between taxpayers and the ATO’ by:

- restructuring the provision to give prominence to the main principles by inserting ‘objects clauses for the key provisions so that the intention is clear’; and

- implement a minor technical amendment, effective from 1 July 2012, to remove an anomaly to allow an approved valuation when calculating the margin on subdivided land.

• It appears one way to ‘reduce the potential for disputes between taxpayers and the ATO’ is by way of the ATO having ‘made significant changes to its approach’ to margin scheme valuations with the intent to reduce uncertainty for taxpayers.

The Government has not proceeded with any of the other potential margin scheme reforms discussed during the consultation and review process as the ‘costs and risks to revenue … outweigh the potential benefits’.

GST and financial supplies

• Amend the rules with effect from 1 July 2012 to ‘clarify the operation of the legislation and reduce compliance and administration costs, particularly for many small businesses’. The proposed amendments are:

- increasing the Financial Acquisitions Threshold (FAT) from $50,000 to $150,000;

- simplify the treatment of hire purchase agreements making the whole supply as taxable;

- allow cash basis taxpayers to claim input tax credits up front on hire purchase agreements (the same  basis as for non-cash basis taxpayers);

- bank deposits expressly excluded from the ‘borrowing’ exclusion of ‘creditable purpose’;

- slightly broadening the range of acquisitions that qualify for RITCs (i.e. 75% credits);

- limiting the access to RITCs via bundling arrangements

Note: changing the FAT threshold does not necessarily change the compliance requirements of applying the test, and it would appear there is no change to the additional 10% test.

GST-free export of boats

• Amend the rules with effect from 1 July 2011 to allow boats used for recreational purposes to be sold GST-free if the boat is exported by the purchaser within 12 months, provided that the boats are only used for recreational purposes while in Australia;
• The changes ‘allow Australian boat builders to overcome disadvantages they face relative to foreign competitors who can more easily sell boats for export tax-free’, and is aimed at making Australian-made boats ‘more attractive to overseas purchases’.

Exempt Taxes, Fees and Charges

• With effect from 1 July 2011 amend the basis for determining the GST exemption for Australian taxes, fees and charges by moving from the current determination-based approach to a principles-based approach.

Minor GST changes

• Minor revisions to GST administrative changes announced in the 2009-10 Budget, and for these to be effective from 1 July 2011:

- adopt the income tax self-assessment regime for indirect taxes and refresh the period of review;

- reform the change of use adjustments;

- allow adjustments for pre-registration acquisitions;

- clarify treatment of tax law partnerships;

- simplify the GST grouping rules and allow grouping for non-operating holding companies; and

- introduce a reverse charge for supplies of going concerns and farmland.

GST Compliance

• The Government will spend $337.5m over four years to promote voluntary GST compliance - specific issues to be addressed include fraudulent GST refunds, systematic under-reporting of GST liabilities, non-lodgement of GST returns and non-payment of GST debts.
• Expected to raise an extra $2.7b over four years ‘due to increased taxpayer compliance’!

Financial Markets

Boost Business Credit - Banking competition

• ASIC to allow listed entities to issue bonds to retail investors under strict conditions

• Good disclosure history
• “Vanilla” bonds
• At least $50 million issue

Interest withholding tax (IWT) on Financial Institutions will be reduced gradually on certain financial arrangements between subsidiaries and parents and between banks and their branches:

Subsidiary Lending

• IWT Rate 7.5% (2014)
• IWT Rate 5% (2015)
• IWT Rate - maybe 0%

Branch lending

• IWT Rate 2.5% (2014)
• IWT Rate 0% (2015)

Capital Protected Borrowings

The benchmark rate of interest on capital protected borrowings will be increased slightly to the Reserve Bank Variable housing rate PLUS 100 basis points.

Standard Business Reporting

The Government will provide funding of $89.9m over 4 years for SBR.

• Funding will be provided to ASIC, APRA, ATO and Treasury to maintain and operate SBR. Funding will also be provided to the states and territories to maintain and operate SBR.
• The process of registration of a business name will also be streamlined with a single registration across all of the States. This will remove the need for 8 separate registrations.

Investment Measures

$661m will be provided for Skills for Sustainable growth Program.  The 4 year program will provide

• 39,000 training places in sectors facing high demand through critical skills investment fund
• 22,500 apprenticeship commencements
• Guaranteed training place for all <25 yr olds
• Numeracy, literacy and language courses for 140,000

Infrastructure investment

The Government is planning a major investment in infrastructure projects including:

• $1billion in Rail
• Australian Rail Track Corporation will invest in a number of rail projects including Albury to Melbourne to Geelong.
• $5.6billion in Infrastructure Fund over 10 years
• Allocated to resource rich states
• Ports & roads $700m in 2013
• Aviation investments for border protections and security issues

Renewable energy measures

$652 Renewable Energy Future Fund

Wind, solar, biomass low emission technologies

Encourage and support private sector investment

Better Health and Hospitals

$2.2b includes:

• $417m for better after hours access to GP’s
• $355m increase in GP Super Clinics
• $523m to train and support nurses
• $467m for electronic health records

Financial Services Centre

Specific Regime for MIT’s - An exposure draft of the proposed changes was released for discussion and consultation on Friday 7^th May 2010.

• The government is looking to establish Australia as a Centre for International Finance & Regulation. The Board of Taxation will be asked to undertake a consultation on a proposed Investor Manager Regime and the rules that should apply to Collective Investment Vehicles

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.