Australian Regulatory Compliance Review

GST and representatives of incapacitated entities

Treasury has released exposure draft legislation to restore the position before the Federal Court decision in Deputy Commissioner of Taxation v PM Developments Pty Ltd [2008] that the representative of an incapacitated entity (such as a liquidator of a company in liquidation) is liable for GST on transactions within the scope of its appointment has been released. The proposed amendments will also ensure that the GST outcome for the representative will be the same as it would have been for the incapacitated entity.

Interested parties are invited to comment by 7 August.

Reasons for tax bonus decision (Pape v Commissioner of Taxation)

The High Court has published its reasons for its decision in April in Pape v Commissioner of Taxation [2009] HCA 23 that the tax bonus was constitutional.

It is a long decision (614 paragraphs) split 6-1 in favour in 4 separate sets of reasons.

The court acknowledged the need for the government to respond to the global financial crisis but did not go so far as to authorise any government to appropriate money and spend it for any purpose determined by parliament.

Final decision on taxation of employee share schemes

The Assistant Treasurer, Senator Nick Sherry, has released a Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from 1 July 2009.

Under the arrangements outlined on Budget night in May, all discounts on shares and rights provided under an employee share scheme would be assessed in the income year in which the shares and rights are acquired.

Under the final framework for employee share schemes, the taxation of discounts on shares and rights acquired under an employee share scheme will remain the starting principle of the regime, with concessional treatment available for particular schemes.

The upfront tax exemption will be means tested and tax deferral will only be accessible where there is a real risk that the shares or rights may be forfeited, such as due to performance hurdles or employment conditions. The pre-Budget use of cessation of employment as a taxing point will be retained and the maximum 10 year deferral period will be reduced to seven years.

Modifications to the original announcement are:

• increasing the income tax threshold for eligibility for the upfront tax concessions to $180,000, to align it with the top marginal tax rate threshold;
• providing further clarity on the meaning of "real risk of forfeiture" via the use of explanatory materials and Tax Office materials, including through the use of a range of example cameos to assist industry;
• • Employees receiving benefits under these schemes will not be able to pay tax upfront and the scheme's governing rules must clearly distinguish these schemes from those eligible for the upfront tax exemption.
• moving the deferred taxing point from a point at which the taxpayer will no longer have a real risk of losing the share or right to a point at which:
• • in the case of shares, there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share; and
  • in the case of rights to shares (options), there is both no longer a real risk of the taxpayer losing the right and no restriction (present at acquisition) preventing the taxpayer from either disposing or exercising of the right, however, if after exercising the right, the underlying share is subject to forfeiture and restrictions preventing the taxpayer from disposing of the underlying share, it is the point at which there is both no longer a real risk of the taxpayer losing the share and no restriction (present at acquisition) preventing the taxpayer from disposing of the share.
• allowing the deferral of tax in relation to up to $5,000 worth of shares under particular salary sacrifice based employee share schemes, where there is no real risk of forfeiture.
• removing the reporting requirement for employers to report the market value of employee share scheme benefits in the year of grant, if this is not the year in which the employee is taxed; and
• establishing a three part forward plan of consultation with industry by:
• • asking the Board of Taxation to examine two remaining issues (a) how best to determine the market value of employee share scheme benefits; and, (b) whether shares and rights under an employee share scheme that are provided by start-up, research and development and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture;
  • commit to an Exposure Draft process of the Bill to ensure the policy is accurately reflected in the application of the law, including consultation on a range of technical issues raised in submissions that will be contained in the Exposure Draft Bill; and
  • supplementing this process by asking the Board of Taxation to consult with stakeholders  to examine technical matters associated with the implementation of these reforms, and to report to Government in time to allow the Board's views to be taken into account in the draft legislation.

A full reporting regime will also be introduced to significantly boost the integrity of the taxation of share schemes.

The combination of these final reforms and the measures out in the 5 June, 2009 consultation paper are set out in the attached Policy Statement.

As previously announced, the existing law will apply to all shares and rights acquired before 1 July 2009. The Government will introduce the legislation during the Spring Sittings of Parliament.

Private Ancillary Funds: new tax guidelines for private philanthropy

The Assistant Treasurer, Senator Nick Sherry, has introduced into Parliament the Tax Laws Amendment (Measures No 4) Bill 2009, which establishes a new legal framework for prescribed private funds from 1 October 2009.

Prescribed private funds, which are now to be known as Private Ancillary Funds (PAFs), are a type of fund designed to encourage private philanthropy by providing businesses, families or individuals with greater flexibility to start and run their own trust funds for philanthropic purposes.

The Assistant Treasurer has also released for consultation the detailed draft Guidelines on how the new PAF framework will apply.

The Bill contains three important changes to the earlier Exposure draft Bill, namely:

• allowing multiple corporate trustees of PAFs;
• reducing potential compliance costs by amending the requirement that transitional PAFs must have a single corporate trustee; and
• widening the scope of the defence available to PAF trustees and directors from being jointly and severally liable to administrative penalties.

The Bill also moves the full administration of PAFs under the authority of the Commissioner of Taxation, gives the Treasurer the power to make legislative guidelines about the establishment and maintenance of PAFs, and gives the Commissioner of Taxation the power to impose administrative penalties on trustees that fail to comply with the guidelines, and power to remove or suspend trustees of non-complying funds.

The draft Guidelines released today contain the following key reforms:

• replaces the existing complex rules based on accumulation targets with a simpler minimum annual distribution rate for funds, proposed to be set at 5 per cent, being a rate the Government considers to strike the right balance between ensuring resources flow to the charitable sector now, whilst also allowing PAFs to grow for the benefit of the sector in the future;
• a requirement that funds develop and maintain an investment strategy, which requires consideration of investment objectives and risk;
• the introduction of valuation rules that seek to minimise the compliance costs associated with making regular valuations; and
• a requirement, in lieu of setting a minimum fund size, that trusts distribute at least $11,000 per year unless the expenses of the fund are met from outside the fund, to ensure philanthropists have the freedom to establish smaller trusts whilst protecting funds from being eroded by expenses.

1 July tax changes

The Assistant Treasurer has reminded us of the following tax changes effective 1 July 2009:

• The 30 per cent marginal tax threshold will rise from $34,001 to $35,001 and the 40 per cent marginal tax rate will be reduced to 38 per cent.

• small business will have the option to be able to reduce PAYG instalments for the 2009-10 income year. It will apply to all taxpayers who pay quarterly PAYG instalments based on their previous year's tax, adjusted by GDP growth.

  The Small Business and General Business Tax Break bonus tax deduction continues at 50% for small business until 31 December. For all other businesses, the rate drops from 30% to 10% from 1 July to 31 December 2009. Businesses – large and small – that want to claim the Tax Break as part of their 2008-09 tax return need to both invest in an eligible asset and have it installed ready for use prior to 30 June 2009.

• From 1 July 2009, all couples and families are to be treated the same way for tax purposes, regardless of gender.

  Same-sex couples will be treated the same way for tax purposes, including the ability to access the same tax concessions available to married and opposite-sex de facto couples. The amount of tax people are liable to pay may depend on whether they are (or were) in a relationship, or whether they have dependent children or relatives.

Tax forward work program

The Government's forward work program sets out the consultation it plans for announced tax measures and indicates the tax legislation it plans to introduce in the 2009 Winter Parliamentary sittings.

The forward work program includes:

• improving the Integrity of Prescribed Private Funds;
• increasing the R&D Expenditure cap for the existing R&D tax offset;
• introducing a new secrecy regime to standardise the tax secrecy laws in a single piece of legislation; and
• providing funding for an optional clearinghouse service to make superannuation compliance easier for small business.

GST state duty reform delayed

A key part of the introduction of GST was the agreement by the state governments to remove state-based duties by 2010.

The new Intergovernmental Agreement on Federal Financial Relations contained an agreement by the states to abolish, before 1 July 2013, the following taxes which have not yet been abolished:

(a) Wholesale Sales Tax
Sales tax levied on the value of the last wholesale sale of goods sold or otherwise dealt with as imposed by the Commonwealth’s Sales Tax (Imposition) Acts.
(b) Bed Taxes
Accommodation taxes levied on the cost of temporary residential accommodation.
(c) Financial Institutions Duty
Financial Institutions Duty levied on the value of receipts (credits) at financial institutions and on the average daily liabilities and/or investments of short term money market dealers.
(d) Stamp Duty on Marketable Securities
Stamp duty levied on turnover (i.e. sale price times quantity traded) on the transfer of marketable securities quoted on the Australian Stock Exchange or another recognised stock exchange.
(e) Stamp Duty on Non-quotable Marketable Securities
Stamp duty levied on transfers of marketable securities in private companies and trusts, and in public companies and trusts where the securities are not quoted on the Australian Stock Exchange or another recognised stock exchange.
(f) Debits Tax
Debits tax levied on the value of withdrawals (debits) from accounts with financial institutions with cheque drawing facilities. Debits duty levied on transactions, including credit card transactions. This does not include stamp duty on electronic debits.
(g) Stamp Duty on Non-real Non-residential Conveyances
Stamp duty levied on the value of non-real non-residential conveyances.
(h) Stamp Duty on Leases
Stamp duty levied on the rental payable under tenancy agreements.
(i) Stamp Duty on Mortgages, Bonds, Debentures and Other Loan Securities
Stamp duty levied on the value of a secured loan property.
(j) Stamp Duty on Credit Arrangements, Instalment Purchase Arrangements and Rental Arrangements
Stamp duty levied on the value of the loan under credit arrangements. Stamp duty levied on credit business in respect of loans made, discount transactions and credit arrangements. Stamp duty levied on the price of goods purchased under instalment purchase arrangements. Stamp duty levied on the rent paid in respect of the hire of goods, including consumer and producer goods.
(k) Stamp Duty on Cheques, Bills of Exchange and Promissory Notes
Stamp duty levied on cheques, bills of exchange, promissory notes, or other types of payment orders, promises to pay or acknowledgment of debts, including duty on electronic debits.

Queensland has acted on the change by announcing that duty on the transfer of core business assets will now not be abolished until 1 July 2013.

Board of Taxation Post-Implementation Reviews

The Assistant Treasurer has announced that the Board of Taxation will undertake post-implementation reviews of certain aspects of the consolidation regime and the provisions relating to the alienation of personal services income.

The Board will conduct the alienation of personal services income review in line with the terms of reference and report by 31 October 2009. Submissions close on 27 July.

No timetable has been set for the consolidation regime review.

Small business tax relief

In a recent speech Michael D'Ascenzo, Commissioner of Taxation announced new measures to help small businesses that are having difficulty paying their tax debt:

• The ATO is providing a 12 month general interest charge (GIC)-free payment arrangement for all businesses with an annual turnover of less than $2 million who have an activity statement debt. For these businesses, payment arrangements (activity statement and income tax) negotiated from 1 June 2009 until 30 June 2010 will have GIC remitted for the period the payment arrangement is maintained (up to a maximum of 12 months).

• The ATO is providing an interest-free deferral of the payment due date on activity statement liabilities: a deferral of up to two months can be granted for quarterly and annual payers and up to one month for monthly payers

• The Government has proposed to reduce the GDP uplift factor from 9% to 2%. This reduction will provide cash flow benefits to around 1.5 million eligible small businesses, individuals, trusts and small superannuation funds, by ensuring that their PAYG instalment amounts for the 2009-10 income year more closely reflect their actual income tax liability for that income year.

• Businesses can vary their instalments downwards in line with their likely end of year tax performance.

Tightening the Non-Commercial Loan Rules in Division 7A of the Income Tax Assessment Act 1936

The Government has released a Treasury discussion paper on its 2009-10 Budget decision to tighten the non-commercial loan rules in Division 7A of the Income Tax Assessment Act 1936.

Division 7A provides tax integrity rules designed to prevent private companies from making tax‑free distributions of profits to shareholders (or their associates). In particular, advances, loans and other payments or credits to the shareholders or associates are, unless they come within specified exclusions, treated as assessable dividends to the extent that the company has realised or unrealised profits.

The Government's announced changes extend the Division 7A rules so that 'payment' includes the use of company assets by a shareholder (or their associate) for free or at less than their market values.

The changes include amendments to prevent corporate limited partnerships being used to circumvent the non-commercial loan rules.

Comments on the discussion paper can be made until 3 July 2009.