Thin capitalisation: eroding asset values and increasing debt ... - PwC

Issue 106: December 2008 

Electronic Bulletin of Australian Tax Developments 

Inside this issue 

Thin capitalisation: eroding asset values 

and increasing debt levels 1 

Review of tax arrangements applying to 

managed investment trusts 3 

Scheme penalty provisions and 

voluntary disclosure 8 

New Cartel legislation 9 

Corporate tax developments 11 

International developments 12 

Goods and Services Tax 

(GST) developments 15 

State taxes 16 

Personal and expatriate taxation 18 

Other news 21 

Legislation update 22 

Thin capitalisation: eroding asset 

values and increasing debt levels 

Many taxpayers with a tax year that 

ends on 31 December, may need to 

urgently review their position under 

the thin capitalisation (TC) rules of the 

taxation law because of the effect that 

the current economic environment has 

had on the balance sheet. Unless action 

is undertaken before the end of the year, 

many taxpayers may lose the benefit 

of claiming deductions for the costs 

(known as ‘debt deductions’) associated 

with debt finance used to carry on 

the business. 

Generally, under the TC rules, 

‘multinational’ taxpayers are unable 

to deduct all of the taxpayer’s ‘debt 

deductions’ where level of ‘debt’ as 

determined under the TC rules exceeds 

what is defined as the ‘maximum 

allowable debt’. In this respect, where 

the taxpayer has excess debt for TC 

purposes, some proportion of the 

‘debt deductions’ will be denied tax 

deductibility. This will be the case 

regardless of the tax treatment of these 

amounts in the hands of the recipient. 

In cases where, for example, loans 

are made to a taxpayer by associated 

entities, the cost of losing the benefit of 

a tax deduction whilst the associate is 

still subject to tax on the interest income 

derived, is a cost that many taxpayers 

are unable to recover in pricing their 

goods and services. In a business 

context taxpayers should endeavour 

to reduce or eliminate this cost through 

legitimate planning. 

Except in the case of authorised deposit 

taking institutions (ADIs), the ‘maximum 

allowable debt’ (ie the maximum level 

of prescribed debt at which ‘debt 

deductions’ will not be forfeited) is 

determined by reference to the assets 

and liabilities of the taxpayer, unless the 

taxpayer uses what is referred to as the 

‘arm’s length debt test’. Whilst the ‘arm’s 

length debt test’ can be used by all 

taxpayers, it will depend on the particular 

circumstances whether a higher debt 

level can be obtained under that method, 

when compared with the use of asset 

and liability balances under what is 

referred to as the ‘safe harbour’ method 

of determining ‘maximum allowable 

debt’. 

Since the ‘arm’s length debt test’ 

takes into account specified facts and 

circumstances existing in the tax year 

under consideration (such as the state 

of the Australian economy during the 

year) and requires a determination of 

the amount of debt that a hypothetical 

independent lending institution would 

reasonably be expected to have 

provided on the terms and conditions 

applying to the taxpayer’s actual debt, 

it may well be, that taxpayers who have 

historically relied on the ‘arm’s length 

debt test’ will have difficulty in the current 

economic environment of being able 

to demonstrate that the arm’s length 

debt amount calculated in the previous 

year remains appropriate for the current 

year. If that is the case, those taxpayers 

may effectively be forced to use the 

‘safe harbour debt method’ (or for some 

taxpayers the ‘worldwide gearing test’). 

Under the ‘safe harbour’ method, the 

starting point is to ascertain the values 

of the taxpayer’s assets and liabilities at 

the relevant TC measurement dates. The 

actual measurement dates to be used 

will depend on the method of ‘averaging’ 

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TaxTalk – Electronic Bulletin of Australian Tax Developments 

chosen by the taxpayer, but regardless 

of the ‘averaging’ method chosen, the 

year end balances must be included 

in calculating the average. Taxpayers 

should also be conscious of the ‘part 

year’ rules inherent under the TC regime 

which can result in the requirement to 

determine the TC position for distinct 

periods of the year during which the 

taxpayer is differently ‘classified’ under 

the provisions. The issue here is that 

if in the present tax year, there is a 

requirement to apply the provisions to 

more than one period in the year, some 

of the planning opportunities generally 

available to taxpayers will only be able 

to be applied to the period which is 

still ‘open’. 

Leaving aside the problems associated 

with the ‘part year’ rules, the likely 

problem that many taxpayers will face 

in calculating their ‘safe harbour’ debt 

amount for the current year is that in 

the current economic environment, the 

value of assets may have eroded to a 

point where existing asset values will 

be insufficient for the ‘safe harbour’ 

debt amount to support the level of 

the taxpayer’s debt which gives rise to 

‘debt deductions’. In other words, the 

current economic environment may 

have the effect of eroding asset values 

to a point where ‘debt deductions’ will 

be disallowed either wholly or in part. 

The effect of this outcome may well 

be a further reduction in net worth of 

the taxpayer through the income tax 

cost required to be recorded in the 

financial statements. 

A further problem that may be faced by 

taxpayers this year relates to the recent 

fall in value of the Australian currency 

(relative to foreign currencies), since this 

may have a detrimental impact on the 

taxpayer’s balance sheet, particularly 

where borrowings are denominated 

in foreign currency and there is an 

unrealised foreign exchange loss 

required to be recorded. In this respect, 

even if the debt is hedged, the value 

of the debt to be measured against 

the ‘safe harbour’ debt amount (or the 

‘arm’s length’ debt amount if the arm’s 

length debt test is chosen) will generally 

be the value of the debt measured in 

Australian currency, with no reduction 

being made for the value of the ‘hedge 

asset’. The ‘hedge asset’ would simply 

be included in the value of assets taken 

into account in determining the ‘safe 

harbour’ debt amount. Whilst with a fully 

hedged liability no adverse impact on 

the taxpayer’s balance sheet would arise 

from translating amounts to Australian 

currency, the fact that under the safe 

harbour method, only 75 per cent of 

the value of ‘included’ assets are taken 

into account, means that the value of 

the hedge asset taken into account will 

only be 75 per cent of the additional 

debt value arising because of the foreign 

currency restatement. 

On the asset side of the balance sheet, 

whilst the fall in currency value may 

increase the carrying value of foreign 

assets, since equity investments held 

in controlled foreign entities are excluded 

from assets used by the taxpayer in the 

calculation of ‘safe harbour’ debt, any 

increase in the value of these assets 

because of movements in the value of 

the Australian currency will provide no 

benefit to the taxpayer in calculating 

‘safe harbour’ debt. 

Not surprising, with the present volatility 

of financial markets, many taxpayers 

are undertaking in-depth reviews 

of their current TC position and are 

considering strategies to reduce adverse 

consequences through the denial 

of tax deductions. Strategies being 

considered include: 

• equity injections and debt reductions 

• repatriation of monies from 

overseas jurisdictions 

• applying the arm’s length test 

• maximising concessions available 

such as the associate entity debt 

and controlled foreign entity debt 

concessions 

• reviewing selection of 

averaging method 

• revaluation of assets 

Implementing some of these strategies 

will present other tax issues that need to 

be taken into account, and any strategy 

adopted must be based on a proper 

analysis of all inherent and associated 

taxation implications for the taxpayer and 

other affected entities. 

Taxpayers should also be aware of 

the Commissioner’s preliminary views 

as to how the ‘safe harbour debt test’ 

interacts with the transfer pricing 

provisions of Australia’s tax law. 

We featured this issue in our February 

2008 and July 2008 editions of TaxTalk. 

In summary we noted in those articles 

that the Commissioner in Draft Taxation 

Determination TD 2007/D20 was of the 

view, that the transfer pricing provisions 

could be used to adjust the pricing 

of ‘intra-group’ financial transactions 

even if the taxpayer has a debt capital 

structure that is within the ‘safe harbour’ 

debt amount determined under the TC 

rules. Taxpayers with ‘intra-group’ debt 

thus have an additional matter to take 

into consideration in reviewing their TC 

position for the current and future years. 

Another matter to take into account 

is that from 1 January 2009 many 

taxpayers will be required to prepare 

their ‘safe harbour’ statement of 

assets and liabilities on the basis of 

the Australian equivalent International 

Financial Reporting Standards (AIFRS). 

Presently, those taxpayers may choose 

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to apply the former generally accepted 

accounting standards under transitional 

rules which were introduced some time 

ago. While it is difficult to generalise, 

there will no doubt be many taxpayers 

whose balance sheets are adversely 

impacted by the application of AIFRS to 

the TC calculations. Remedial action may 

need to be taken before 31 December 

2008 to ensure that when the next tax 

year begins, the level of debt giving rise 

to ‘debt deductions’ is not excessive 

relative to the taxpayer’s ‘safe harbour’ 

debt position. 

In considering this issue, taxpayers 

should be aware of proposed changes 

to the TC rules which would: 

• prohibit the recognition for TC 

purposes of deferred tax liabilities and 

assets, and prohibit the recognition 

of the asset or liability recorded in 

the balance sheet in respect of a 

defined benefit fund (ie overfunded or 

underfunded obligations respectively) 

operated by the taxpayer, and 

• subject to complying with certain 

valuation requirements, permit entities 

(other than those treated as ADIs) to 

recognise for TC purposes the value of 

internally generated intangible assets 

and to revalue intangible assets where 

recognition and revaluation is currently 

prohibited under the accounting 

standards due to the absence of 

an ‘active market’. 

With respect to prohibiting the 

recognition of deferred tax balances, in 

the current environment where taxpayers 

may be incurring losses, this change 

to the law may have a material adverse 

impact on calculation of a taxpayer’s 

‘safe harbour debt amount’. In case of 

prohibiting the recognition of defined 

benefit fund asset and liabilities, whilst 

this may be welcomed given the current 

values of listed securities, the fact that 

the changes will not apply for the year 

ending 31 December 2008 may pose a 

significant problem for taxpayers who 

are required to recognise defined benefit 

fund liabilities in their financial statements 

prepared under AIFS, and who choose 

not to use the transitional rules to 

prepare their ‘safe harbour’ statement 

of assets and liabilities. 

With the changing economic environment 

and the changes to the TC rules outlined 

above, constant review of the taxpayer’s 

position under these rules to avoid 

unexpected surprises has become a 

business norm. As TC is listed by the 

Commissioner as an audit focus area, 

demonstrating that the TC position 

has been correctly determined should 

take high priority on any taxpayer’s risk 

management matrix. 

Further discussion on the thin 

capitalisation rules was included in our 

year-end tax planning special edition of 

TaxTalk in June 2008. 

Please contact your 

PricewaterhouseCoopers adviser if 

you have any need for assistance. 

For further information, please contact your 

usual PricewaterhouseCoopers adviser, or: 

Peter Collins 

(03) 8603 6247 

peter.collins@au.pwc.com 

Mike Davidson 

(02) 8266 8803 

m.davidson@au.pwc.com 

Jim McMillan 

(08) 8218 7308 

jim.mcmillan@au.pwc.com 

Warren Dick 

(08) 923 83589 

warren.dick@au.pwc.com 

Review of tax 

arrangements 

applying to 

managed 

investment trusts 

On 29 October 2008, the Chairman of 

the Board of Taxation announced the 

release of a discussion paper on the 

Board’s review of the tax arrangements 

applying to managed investment trusts 

(MITs). The discussion paper is intended 

to facilitate ‘stakeholder’ consultation. 

The closing date for submissions is 

19 December 2008. 

The following provides a high-level 

summary of the key issues the Board has 

identified in its review, as well as certain 

questions on which the Board is seeking 

‘stakeholder’ submissions. 

Options for determining 

tax liabilities of MITs and 

beneficiaries 

Under the terms of reference applying 

to the review, the Board is required to 

explore alternatives for the taxation of 

trust income that are broadly consistent 

with five key policy principles: 



1. the tax treatment of beneficiaries 

should largely replicate the tax 

treatment applying if the beneficiary 

had derived the trust income directly 

2. ‘flow though’ tax treatment 

should only apply to trusts 

undertaking activity that is primarily 

passive investment 

3. beneficiaries should be assessable 

on their share of the net income of 

the trust whether it is paid or applied 

for their benefit 

4. the trustee should be assessable on 

trust income that is not assessable to 

beneficiaries in a particular year, and 

5. trust losses should generally be 

trapped in the trust subject to 

special rules for utilisation. 

Having regard to these terms of 

reference, the discussion paper 

outlines the following three options 

for determining tax liabilities of MITs 

and beneficiaries (as alternatives for 

the current reliance on the concept of 

present entitlement for allocating liability 

between the trust and its beneficial 

owners) and requests ‘stakeholder’ 

submissions with respect to these 

options and any other options that 

might be appropriate: 

• Option 1 – the trustee is assessed 

on the net income after allowing a 

deduction for certain distributions 

made to beneficiaries (the ‘trustee 

assessment and deduction model’). 

Under this option, the liability of 

beneficiaries depends on the extent of 

distributions made and, where the MIT 

has accrued income which is included 

in assessable income, the MIT may 

need to borrow to make distributions 

to beneficiaries to avoid tax being 

assessed on undistributed income. 

• Option 2 – the trustee is exempt from 

tax and instead, tax on the trust’s 

net income is always assessable 

to beneficiaries irrespective of 

distributions made to them (the 

‘trustee exemption model’). The 

discussion paper notes that this 

provides a high degree of certainty 

about where the tax liability will fall, 

since there is no requirement for 

any distributions to be made for 

the beneficiaries to be assessed. 

• Option 3 – tax on the trust’s net 

income is always assessable to 

beneficiaries, provided a substantial 

minimum level of annual distributions 

(for example 90 per cent) is attained. 

The discussion paper notes that this 

option reduces the extent to which 

beneficiaries are liable to tax on 

amounts not received, but there may 

be some additional compliance costs 

for trustees, who must ensure that 

the minimum levels of distributions 

are attained to ensure that the trustee 

is not taxed. If the minimum level of 

distributions is not made, the Board 

suggests that the trust could fall out 

of the MIT regime entirely with the 

income being subject to tax under the 

existing trust provisions (Division 6 of 

the Income Tax Assessment act 1936). 

Alternatively, the Commissioner could 

be given discretion to permit the trust 

to continue to be taxed as an MIT, 

or the trustee could be assessed on 

the undistributed amount possibly at 

penal rates. 

The further option raised by the Board is 

to retain the existing Division 6 structure 

and simply redefine key terms such 

as ‘present entitlement’, ‘income of 

the trust’ and ‘share’ of that income. 

This approach would no doubt remove 

existing uncertainty with respect to 

matters such as the treatment of capital 

gains, and the debate as to whether the 

‘proportionate approach’ or the ‘quantum 

approach’ for allocation of net income 

is used. 

Defining the 

term ‘distribution’ 

The Board notes that under Option 1 

(and potentially Option 3), it would be 

essential for the term ‘distribution’ to be 

defined, and in that context, the Board 

is seeking stakeholder comment on a 

definition that would provide clarity and 

ensure appropriate tax outcomes. 

Tax rate for undistributed/ 

unallocated income 

The Board raises the issue as to what 

tax rate should apply to undistributed 

income under Option 1 and is seeking 

stakeholder input. After noting that the 

existing tax rate of 46.5 per cent was 

originally designed to remove the cost 

to the revenue of trusts accumulating 

income, the Board states in the context 

of MITs, that the tax rate to apply should 

reflect an appropriate balance between 

equity and integrity. 

When is tax 

liability determined? 

The Board notes that under current law, 

a beneficiary’s tax liability arises in the 

same year that the income is derived 

by the trust, even though an amount 

of income may not be distributed to 

the beneficiary until the following year. 

This position would apply under Option 

2, however under Option 1, the paper 

outlines the following two approaches 

that could be adopted: 

• The trustee could be given say three 

months after the end of the income 

year to make distributions for that 

year. The paper notes that a period 

of three months aligns with the period 

allowed for withholding by MITs from 

distributions to foreign residents. 



• Taxable distributions could be 

assessable in the income year 

that they are actually received by 

beneficiaries (with the trustee claiming 

a deduction in the prior year in 

certain cases). The discussion paper 

acknowledges that this approach 

will lead to a deferral of tax revenue, 

and states that such cost to revenue 

would need to be balanced against 

the simplicity of resident beneficiaries 

being taxed on a distribution 

receipts basis. 

The Board notes that a further approach 

suggested by some stakeholders would 

be to change the tax year for all MITs 

to 31 March to allow more time for the 

preparation of distribution statements 

before 30 June. 

Treatment of ‘unders’ and 

‘overs’ 

The Board in its paper considers options 

for addressing the under-reporting and 

over-reporting of net income by MITs. 

These options are: 

• a ’carry forward’ approach, allowing 

‘unders’ or ‘overs’ to carry forward into 

the following income year, or 

• a ‘credit/deduction’ approach, 

whereby MITs would pay tax and be 

subject to the general interest charge 

on an ‘under’ and attach a tax credit to 

the after-tax distribution. MITs would 

claim a deduction for an ‘over’ in 

the following income year. 

The Board is seeking input from 

stakeholders on the appropriate 

treatment of ‘unders’ and ‘overs’. 

This includes views as to whether, 

under either approach, there should 

be a de minimus rule of up to (say) 2 

per cent of the net income, and if so, 

what the consequences should be for 

breaching this rule. 

International considerations 

The Board outlines the current 

international tax treatment of MITs and 

highlights the tax benefits afforded in 

other countries to certain collective 

investment vehicles (CIVs) that are 

treated as companies for tax purposes, 

even though they are not generally 

subject to tax. The Board notes the 

advantages available to these corporate 

CIVs (with ‘flow through’ tax treatment) 

when compared to an MIT, including 

for example the availability of tax treaty 

benefits to a CIV in its own right. This 

is in contrast to an MIT, where treaty 

benefits generally cannot be claimed by 

the MIT but by each beneficiary, based 

on the resident status of the beneficiary. 

In light of the above observations made 

in the paper, the Board is seeking input 

from stakeholders as to: 

• the issues they are currently 

experiencing under Australian 

domestic law and tax treaties 

with respect to the operation 

of international rules for MITs 

• suggestions for dealing with 

these issues, and 

• whether there would be advantages 

in having a deemed corporate ‘flowthrough’ 

CIV regime in Australia for 

international reasons. 

Dealing with distributions that 

are greater than or less than 

net income 

The Board notes that distributions of a 

MIT will not equal the trust’s net income 

for a number of reasons, including 

for what are referred to in the MIT 

industry as ‘timing’ and ‘permanent’ 

differences. The Board further notes 

that the existing mechanism creates 

tax distortions and, in some cases, can 

result in the same amount being taxed 

twice. Under this mechanism, amounts 

in excess of net income either reduce the 

recipient beneficiary’s capital gains tax 

(CGT) cost base, or in some cases are 

assessed as ordinary income. 

In view of the existing problems, the 

Board raises a number of options for 

change. In the case of ‘tax deferred 

distributions’, an option would be to 

assess the beneficiary (after adjustment 

for the extent that the beneficiary would 

not be taxable in full on the gain), rather 

than adjusting the CGT cost base of 

the beneficiary’s interest. Adjustments 

would then need to be made at the trust 

level to ensure the distribution was not 

included in subsequently-calculated 

gains of the MIT. Where distributions 

are less than the net income, there 

would be a corresponding uplift in cost 

base of the units held by beneficiaries 

to avoid double tax. 

Character retention and 

flow‐through 

The Board identifies the following issues 

that arise under the current approach of 

allowing the character of amounts in the 

hands of the trustee to flow through to 

the beneficiaries of the trust: 

• uncertainty about how the general 

deductions of the trust should 

be allocated when calculating 

the separate components of the 

trust’s net income 

• uncertainty in determining amounts 

that are ‘attributable to’ or ‘taken into 

account in working out amounts’, 

included in the beneficiaries’ 

assessable income under specific 

mechanisms existing in the income 

tax law, and 



• complexity and compliance costs for 

beneficiaries, MITs and the Australian 

Tax Office (ATO) in relation to reporting 

and record keeping. 

The options raised by the Board for 

increasing certainty and minimising 

compliance costs associated with 

character flow-through are to: 

• create specific legislation to ensure 

the flow-through of character 

• treat all MIT distributions in a similar 

manner to company dividends and 

enact special rules which would 

preserve character flow-through in 

specific instances, or 

• allow different character retention 

arrangements for distributions 

to foreign residents which could 

be dependent on the size of their 

investment in the MIT. On this point, 

the Board refers to the suggestion 

of the Organisation for Economic 

Cooperation and Development (OECD) 

that different approaches be applied 

to ‘portfolio’ and ‘non-portfolio’ foreign 

beneficiaries in domestic ‘real estate 

investment trusts’ (REITs), such as a 

lower rate of final withholding tax for 

portfolio investors. 

Stakeholder comment is sought on a 

number of specific questions associated 

with this issue. 

Capital versus revenue 

account treatment of gains 

and losses 

The Board’s initial consultations have 

raised as an important issue, the capital 

versus revenue treatment of gains and 

losses made on the disposal of assets 

by MITs. The Assistant Treasurer has 

confirmed that the Board should consider 

this issue as part of its review. 

The importance of this issue to the MIT 

industry cannot be understated. If gains 

are on revenue account, there will be no 

CGT discount available to beneficiaries 

on distributions of gains made by the 

MIT, and for non-residents, distributions 

will be subject to MIT withholding tax 

(whereas if the gains were on capital 

account, the distributions may not be 

subject to CGT in some situations). 

Some stakeholders have suggested 

to the Board that the law should be 

amended to allow the CGT provisions 

of the tax law to be the primary code for 

calculating gains and losses in respect 

of investments by MITs in shares, units in 

unit trusts and real property. It is thought 

that an amendment of this nature would 

benefit the MIT industry by enhancing 

the competitiveness of Australian MITs, 

supporting the Government’s objective 

of making Australia the financial services 

hub of Asia, and reducing significant 

compliance costs for MITs. 

On the capital versus revenue issue, the 

Board is seeking stakeholder comment 

on a number of specific questions. 

Definition of fixed trust 

The paper explains that many of the 

concessions afforded to ‘widely held’ 

or ‘pooled’ investment vehicles (including 

MITs) are predicated on the investment 

vehicle being a ‘fixed trust’. Such 

concessions include the trust loss rules, 

simplified franking rules and CGT ‘scrip 

for scrip’ rollover relief. This definition 

requires the beneficiaries of the trust to 

have a fixed entitlement to income and 

capital of the trust. A ‘fixed entitlement’ 

in turn requires the beneficiary to have a 

‘vested and indefeasible interest’ which 

may not be able to be satisfied by some 

MITs because of the power of the trustee 

to issue and redeem units, and/or to 

vary the rights of the unit holders by 

amending the trust deed. 

The paper identifies the following 

potential options for clarifying the 

treatment of fixed trusts: 

• introducing a rule whereby certain 

MITs will be deemed to be ‘fixed 

trusts’, or 

• altering the definition of the term ‘fixed 

trust’ to ensure that the term does not 

rely on the concept of ‘vested and 

indefeasible’ interest. 

The Board is seeking comments on 

the advantages and disadvantages of 

these potential options, and any other 

options for clarifying the treatment of 

‘fixed trusts’. 

Eligible investment business 

The paper outlines the existing law 

(in Division 6C of the Income Tax 

Assessment Act 1936), under which 

an MIT is generally subject to tax as 

if it was a company where the trust’s 

activities extend beyond an ‘eligible 

investment business’ (EIB) or (under the 

‘control test’) the trust controls another 

entity whose activities extend beyond 

an EIB. The paper discusses what 

approaches can be taken to develop 

principles to distinguish between when 

an activity of a listed, publicly offered or 

widely held trust should be subject to 

taxation to the trustee at company rates 

(with the beneficiaries being treated as 

deemed shareholders), rather than to the 

beneficiaries on a taxation ‘flow-through’ 

basis. In particular, the paper focuses on 

the relevance of the ‘control test’ and the 

benefits of introducing a REIT regime to 

deal with EIB income. The paper raises 

a number of questions with respect to 

Division 6C (the ‘public trading trust’ 

rules), including whether non-compliance 

with the EIB rule should result in only 

the ‘tainted’ income being denied ‘flow- 



through’ tax treatment, and if so how this 

outcome could this be achieved. 

Other issues raised in the paper with 

respect to these existing public trading 

trust rules include: 

• whether an MIT should be able to 

establish itself as a controller of 

companies with active businesses 

and trading activities without the 

need to ‘staple’ the entities to obtain 

‘flow-through’ tax treatment 

• whether an MIT should be able to 

own or control any foreign entity 

carrying on a foreign trading activity 

or business without jeopardising ‘flowthrough’ 

tax treatment 

• an examination of the definition of 

‘eligible investment business’ and 

consideration of alternatives for 

refining the term, and 

• whether the holding of a 20 per cent 

interest in a non-widely held trust by 

a complying superannuation fund 

should cause the trust to be a public 

unit trust and taxed as a company if 

the trust’s activities (or the activities 

of any ‘controlled’ entity) are not 

restricted to carrying on an EIB. 

Interim changes to the 

existing public trading 

trust rules 

The paper refers to interim measures in 

Tax Laws Amendment (2008 Measures 

No 5) Bill 2008, the brief details of which 

are set out in this TaxTalk edition under 

Legislation Update. 

While specific comment is not sought 

on the Bill, the Board has identified 

and discusses issues relating to these 

measures, which include: 

• investing in real estate for the 

substantial purpose of making capital 

gains may not meet the current EIB 

rules as the primary purpose may not 

be considered the derivation of rent 

• certain retirement village arrangements 

that choose to operate on a deferred 

management fee may not meet 

the test of investing in land for the 

purpose of deriving rent 

• licence fees for rights to occupy, 

signage fees etc may be so substantial 

that the test of investing in land for 

rent is not met, and 

• the appropriateness of turnover and 

profit-based rents of a particular kind 

being treated as rent. 

Existing Division 6B 

The paper reviews the present 

relevance of Division 6B of the Income 

Tax Assessment Act 1936, which 

was originally enacted to protect the 

corporate tax base from arrangements 

whereby assets could be transferred 

by a company to a trust without capital 

gains on disposal and distributions of 

tax deferred income could be made 

free of any taxation implications. 

The paper highlights that Division 6B 

may no longer be necessary in light 

of changes to the income tax law 

following its implementation, such 

as the introduction of CGT, Division 

6C (applying to public trading trusts) 

and the dividend imputation system. 

Furthermore, the Board notes that it is 

accepted that the operation of Division 

6B discourages the commercial practice 

of transferring assets to a unit trust. 

As a result of these concerns, the Board 

is seeking stakeholder comment on 

whether Division 6B should be retained, 

and if Division 6B were retained in some 

form, what changes should be made 

to the provisions (including views as to 

whether they be integrated within any 

specific tax regime for MITs). 

Defining the scope of a 

managed investment trust 

The paper discusses the concept of 

‘widely held’ for the purposes of any 

new MIT regime and identifies that the 

current rules in Division 6B and Division 

6C, give rise to uncertainty about what 

is a ‘unit trust’ for the purposes of 

those provisions. 

In recognition of these issues, the Board 

is seeking stakeholder feedback on the 

potential scope of a new MIT regime 

and asks: 

• What is an appropriate approach to 

defining ‘widely held’ for the purpose 

of any MIT regime? 

• Should rights attaching to interests in 

an MIT be uniform? 

• Should an MIT be able to make an 

irrevocable election to be governed by 

the new MIT regime? 

• What compliance burden might arise 

if some trusts are within the new MIT 

regime and others are outside and 

there are cross holding funds? 

Investor directed portfolio 

services (IDPSs) and absolute 

entitlement 

The discussion paper highlights the 

typical features of an IDPS, which are 

summarised as follows: 

• investment assets are required to be 

held on trust for the investor such that 

someone other than the investor is the 

legal owner 



• investors are given a list of 

investment opportunities on which 

they have the discretion to make the 

investment decision 

• the operator is able to give effect to 

standing directions previously given 

by the investor, such as to rebalance 

the portfolio by buying and selling 

specified securities and assets, and 

• the assets in which an investor has 

an economic interest are held by a 

custodian who is not the operator. 

The Board identifies as an issue for 

consideration with respect to IDPSs and 

similar arrangements, whether tax law 

should recognise one or multiple trusts, 

or whether the law should ‘look through’ 

to the investor as a relevant taxpayer. In 

this respect the Board notes that some 

stakeholders take the view that IDPSs do 

not fall within Division 6, and that capital 

gains and losses from the investment are 

taken to be made by the investor directly. 

Consequently, the Board is seeking 

stakeholder comment with respect to the 

following questions: 

• In designing a new MIT tax regime, 

whether it would be appropriate 

to carve out certain classes of 

arrangement and, if so, what classes? 

• If IDPS arrangements were to fall 

within a MIT tax regime and in 

substance compromise many single 

transparent trusts, whether it would be 

appropriate to provide special rules for 

them and, if so, what should they be? 

• Whether there should be a provision 

for revenue assets that is equivalent to 

the CGT provision applying to treat an 

absolutely entitled beneficiary as the 

relevant taxpayer for CGT purposes in 

relation to a trust asset. 

Creating a new trust by 

amending the terms of a 

deed 

Another area of uncertainty highlighted 

by the paper relates to the application of 

tax law to MITs when amendments are 

made to constituent trust instruments, 

and whether this creates a new trust 

estate or an alteration to the nature of 

the beneficiaries’ interest in the trust. 

Ultimately, these determinations are not 

easily made and are a question of fact 

and degree, and consequently are a 

source of uncertainty. Accordingly the 

Board is seeking comment on: 

• any approaches, including potential 

legislative amendments for addressing 

these issues, and 

• whether the extent of the relief that 

could be provided would depend 

on how an MIT is defined for tax 

purposes, eg whether an MIT 

is defined to include trusts with 

multiple classes of beneficiaries 

or whether MITs are required to be 

registered as managed investment 

schemes for the purposes of the 

Corporations Act 2001 (Cth). 

Implications for other trusts 

The terms of reference for the review 

require the Board to examine the 

desirability of extending relevant aspects 

of the recommended changes for MITs 

to tax arrangements for other trusts. 

Consequently, the Board is seeking 

comments on whether any options 

for change should be extended to 

other trusts. 



Greg Lazarus, Partner 

(02) 8266 7334 

greg.lazarus@au.pwc.com 

Niall Healy, Partner 

(02) 8266 7882 

niall.healy@au.pwc.com 

Marco Feltrin, Partner 

(03) 8603 6796 

marco.feltrin@au.pwc.com 

Brian Lawrence, Partner 

(02) 8266 5221 

brian.lawrence@au.pwc.com 

Scheme penalty 

provisions 

and voluntary 

disclosure 

In the recent case of Lawrence v 

Commissioner of Taxation (2008) FCA 

1497 (currently under appeal), the 

Federal Court at first instance held that 

certain arrangements entered into by 

the taxpayer were subject to the antiavoidance 

provisions under Part IVA of 

the Income Tax Assessment Act 1936 

(ITAA 1936) relating to dividend stripping. 

Of particular interest are the Court’s 

views about the administrative ‘scheme 

penalty provisions’ in Schedule 1 to the 

Taxation Administration Act 1953 (TAA). 

Liability to an administrative penalty 

can arise where a taxpayer obtains a 

‘scheme benefit’ from a scheme and 

it is reasonable to conclude that the 

taxpayer entered the scheme for the 

sole or dominant purpose of obtaining 

a tax benefit. The Court followed the 

2007 Federal Court decision in Federal 

Commissioner of Taxation v Starr (2007) 

164 FCR 436, which held that the 

determination of a taxpayer’s purpose 

in relation to the penalty provisions was 

to be made upon a subjective rather 



than objective basis. This contrasts 

with the analysis of a taxpayer’s sole or 

dominant purpose under Part IVA, which 

is performed on an objective basis. 

In Lawrence, the taxpayer’s evidence did 

not support his position. However, if there 

was appropriate evidence of a taxpayer’s 

subjective ‘non-scheme’ purposes in 

another case, then a good argument 

could be made that the ‘scheme penalty 

provisions’ should not apply. 

In relation to remission of penalties for 

voluntary disclosure made before the 

Commissioner gives notice of a ‘tax 

audit’, the Court held that a notice issued 

by the Commissioner to the taxpayer 

under section 264 of the ITAA 1936, 

which required the taxpayer to attend 

an interview and produce documents, 

was not sufficient to amount to notice 

of a ‘tax audit’. 

While the Court noted that the taxpayer 

may have suspected a tax audit was to 

be conducted after receiving the notice 

under section 264, it did not accept that 

the notice itself, nor the covering letter, 

was sufficiently clear in stating that an 

examination of the taxpayer’s financial 

affairs was to be conducted. From 

this it appears that the Commissioner 

needs to use very clear words to notify 

a taxpayer of a ‘tax audit’. 

The result of the Court’s finding was 

that the taxpayer was treated as having 

made a voluntary disclosure before the 

Commissioner had notified him of a 

‘tax audit’, resulting in an 80 per cent 

reduction in the base penalty amount. 

Following this decision, the Australian 

Tax Office (ATO) released Miscellaneous 

Taxation Ruling MT 2008/3 in relation to 

voluntary disclosure. The ATO considers 

it will have informed a taxpayer that a 

‘tax audit’ is to be conducted if it uses 

phrases such as “under examination” 

or “under review”. It also considers that 

verbal notification of a ‘tax audit’ will be 

sufficient notification. Whether the ATO’s 

view sits comfortably with the test set 

out in Lawrence remains to be seen, but 

it is an area for closer consideration by 

taxpayers who have had administrative 

penalties imposed on them. 



Michael Bersten, Partner 

(02) 8266 6858 

michael.bersten@au.pwc.com 

Chris Sievers, Partner 

(03) 8603 4208 

chris.sievers@au.pwc.com 

New Cartel legislation 

On 27 October 2008 the Assistant 

Treasurer and Minister for Competition 

Policy and Consumer Affairs released 

the final version of the Trade Practices 

Amendment (Cartel Conduct and Other 

Measures) Bill 2008 which will introduce 

criminal penalties for cartel behaviour, 

bringing Australia in line with the United 

States and the United Kingdom. The 

proposed changes to amend the 

Trade Practices Act 1974 are expected 

to be introduced into Parliament in the 

current session of Federal Parliament. 

The criminal penalties will be in addition 

to the existing civil penalties. The civil 

prohibitions have also been amended 

to parallel the new criminal offences. 

Current civil regime 

Under the existing laws, corporations 

who engage in cartel behaviour face 

fines of up to $10 million or three times 

the value of the illegal benefit gained 

from the cartel, or where that cannot be 

ascertained, 10 per cent of the corporate 

group’s annual turnover in the preceding 

twelve months, whichever is greater. 

An individual who is found to 

have engaged in cartel behaviour 

currently faces a maximum fine of 

$500,000 per offence. 

New criminal penalties 

Under the proposed changes, the 

maximum penalty for an individual found 

guilty of cartel conduct is a 10 year jail 

term or a fine of $220,000. The penalty 

for a corporation will be the same as the 

fines that currently apply to corporations. 

Elements of the new 

criminal offences 

The Bill makes it an offence for a 

corporation to make or give effect to a 

contract, arrangement or understanding 

between competitors that contains a 

provision to fix prices, restrict outputs, 

divide or share markets, or rig bids. 

The Government has decided that 

the offences should not include the 

words ‘with the intention of dishonestly 

obtaining a benefit’, which were included 

in the Exposure Draft Bill released 

in January 2008. Submissions were 

made to Government which indicated 

that the dishonesty requirement would 

have made it more difficult to bring 

successful criminal prosecutions for 

cartel conduct. There were concerns 

that such a subjective test would confuse 

juries and make prosecutions more 

difficult. Of all the countries which have 



criminalised cartel conduct (including 

the United States, United Kingdom, 

Canada, France, Germany, Ireland and 

Japan), only the United Kingdom has 

retained a dishonesty test. There has only 

been one successful prosecution in the 

United Kingdom. 

Instead of the ‘dishonesty’ test, the Bill 

applies fault elements under the 

Commonwealth Criminal Code (intention, 

and knowledge or belief) to the offences. 

According to the Government, this will 

ensure that the burden of proof is high 

enough to catch only serious offenders 

but also that the fault element is not 

used as an escape clause. 

Parallel civil prohibitions 

The Government will introduce a parallel 

regime of civil prohibitions on serious 

cartel conduct for corporations and 

individuals. These civil prohibitions will 

contain the same elements as the new 

criminal offences and will replace the 

existing civil prohibitions in the Trade 

Practices Act 1974. The difference 

will be that the criminal offences 

require proof of the elements of the 

offence ‘beyond reasonable doubt’, 

and that certain ‘fault’ elements will 

be automatically applied under the 

Commonwealth Criminal Code. 

To minimise double jeopardy concerns, 

the Government will also enable civil 

proceedings to be postponed until 

criminal proceedings are completed. 

If the defendant is convicted, the civil 

proceedings will be terminated. 

Cartel provisions 

The final Bill has changed the tests 

that apply to determining whether a 

provision of a contract, arrangement 

or understanding qualifies as a 

cartel provision and is prohibited. 

The amendments bring the tests in 

line with the tests that apply under 

the existing civil prohibitions in the 

Trade Practices Act 1974, upon which 

the new cartel prohibitions have been 

modelled. 

For a breach involving price fixing, the 

test provides that the provision must 

have had the purpose, effect or likely 

effect of directly or indirectly fixing 

prices. For a breach comprising other 

forms of serious cartel conduct (output 

restrictions, market sharing and bid 

rigging), the test provides that the 

provision must have had the purpose of 

directly or indirectly restricting outputs, 

sharing markets or rigging bids. 

Civil or criminal? 

Under the new legislation, the Australian 

Competition and Consumer Commission 

(ACCC), in conjunction with the director 

of public prosecutions (DPP), will be 

required to decide at an early stage 

whether to pursue a criminal or civil case. 

A criminal charge will provide the ACCC 

with greater powers, including the power 

to arrange for the Australian Federal 

Police (AFP) to intercept telephone calls 

between suspected cartel participants, 

if the ACCC can obtain a warrant 

from the Federal Court. However, a 

criminal charge means that the ACCC 

will have to prove their case to a jury 

‘beyond reasonable doubt’, a higher 

burden of proof than the civil ‘balance 

of probabilities’ standard. 

Joint venture exemptions 

and partnerships 

If a cartel provision is for the purposes of 

a joint venture and the joint venture is for 

the production and/or supply of goods 

or services, then it is not caught by the 

proposed new cartel laws. Partnerships 

and any other unincorporated businesses 

which do not fit within the joint venture 

exemptions, may be caught by the 

proposed civil and criminal prohibitions. 

Conclusion 

As well as having the harshest anti-cartel 

laws in the world alongside the United 

States, the removal of ‘dishonesty’ 

as the mental element for criminal 

cartel conduct reflects how gravely the 

Australian Government regards this kind 

of conduct. The possibility of criminal 

sanctions for company executives will be 

more of a deterrent for businesses that 

may otherwise rationalise corporate fines 

for cartel conduct as the ‘cost’ of doing 

such business. 



Michael Daniel, Partner 

(02) 826 66618 

michael.daniel@au.pwc.com 



Corporate tax developments 

Withholding tax: the debt and 

equity rules and interaction 

with tax treaties 

In Deutsche Asia Pacific Finance Inc 

v Commissioner of Taxation (No.2) 

[2008] FCA 1570, the applicant 

(taxpayer) sought a declaration from the 

Federal Court that it was not subject 

to withholding tax on distributions 

it received as a limited partner in a 

limited partnership (LP) formed in 

New South Wales. For income tax 

purposes, the LP was deemed to be a 

company under the limited partnership 

provisions of the tax law and, in respect 

of the partnership interest held by the 

taxpayer in the LP, it satisfied the ‘debt 

test’ in the income tax law (and was thus 

classified as a ‘debt interest’) because 

of its ‘redeemable’ characteristics. 

Under Australian domestic tax law, 

while the taxpayer was deemed to be a 

shareholder in the LP, the fact that the 

interest was classified as a ‘debt interest’ 

meant that for withholding purposes 

the distribution to the taxpayer was 

to be treated as interest and not as a 

dividend paid on a share. 

The issue under consideration before 

the Court was whether, because on the 

agreed facts the taxpayer was a ‘United 

States corporation’, the distribution 

was not subject to withholding tax as 

a result of the double tax treaty (DTT) 

between Australia and the United 

States (US). In this respect the taxpayer 

submitted that the distribution, which 

as mentioned above was deemed to 

be interest under domestic law, was 

exempt from Australian withholding tax 

under Article 11(3)(b) of the DTT on the 

basis that it was interest “derived by a 

financial institution which is unrelated 

to and dealing independently with the 

payer” of the interest. It was agreed that 

the taxpayer was a ‘financial institution’ 

and that it was unrelated to and dealing 

independently with the payer of the 

distribution. However, under the DTT, 

Article 11(3)(b) was subject to Article 

11(9) which provided that ‘interest’ 

could be subjected to tax at a rate 

not exceeding 15 per cent where the 

‘interest’ was “determined with reference 

to profits of the issuer”. Thus if Article 

11(9) applied, the exemption under 

Article 11(3)(b) was not available. 

In seeking the Court’s declaration that 

there should be no withholding tax, the 

taxpayer submitted that Article 11(9) 

was included in the DTT to combat 

avoidance of US tax by disguising profit 

distributions as interest and thus should 

not apply to the distribution in question. 

In support, the taxpayer submitted that 

since for Australian withholding tax 

purposes, the debt and equity rules in 

Australian tax law specifically deemed 

dividends on shares classified as ‘debt 

interests’ to be interest, and interest on 

loans classified as ‘equity interests’ to 

be dividends, this domestic policy intent 

should not therefore be disturbed by 

Article 11(9) of the DTT. 

The Court rejected these submissions 

and further held that the interest received 

by the taxpayer was “determined with 

reference to the profits of the issuer”. 

While the taxpayer submitted that a 

partnership does not ‘issue’ a partnership 

interest, the Court was satisfied that 

since under Australian tax law, the LP 

was deemed to be a company and the 

partners deemed to be shareholders, it 

was not a ‘quantum leap’ to conclude 

that the LP was the ‘issuer’ of the 

partnership interest. As a result, the 

Court refused to make the declaration 

sought by the taxpayer, meaning that 

the taxpayer was not relieved of the 

withholding tax cost imposed. 

The case highlights not only the 

importance of properly classifying 

financial instruments under the debt and 

equity rules of the tax law, but also the 

importance of properly considering the 

interaction of any applicable double tax 

treaty with Australian domestic tax law. 



Peter Collins, Partner 

(03) 8603 6247 

peter.collins@au.pwc.com 

Tony Clemens, Partner 

(02) 8266 2953 

tony.e.clemens@au.pwc.com 

Graham Sorensen, Partner 

(07) 3257 8548 

graham.sorensen@au.pwc.com 

Frank Cooper, Partner 

(08) 9238 3332 

frank.cooper@au.pwc.com 



International developments 

Papua New Guinea Budget 

The Papua New Guinea (PNG) Minister 

for Finance and Treasury handed down 

the PNG 2009 National Budget on 

18 November 2008, with a theme to 

“promote sustained economic growth 

and to further empower and transform 

the rural economy”. The Budget 

acknowledges that PNG is not immune 

from global economic conditions, and the 

Government seeks through its Budget 

to insulate the economy from global 

uncertainties and threats. 

Key components of the 2009 

Budget include: 

• It is expected that this Budget will 

deliver a small budget deficit in 2009 

of K10.3m (while the 2008 Budget 

originally forecasted a surplus equal to 

1 per cent of Gross Domestic Product, 

the revised estimate also indicates a 

small deficit of K9.5m in 2008). 

• It is expected that Government 

revenues and expenditure will both 

decrease in 2009. 

• Despite external factors, economic 

growth is forecast to be 6.2 per cent 

in 2009 (revised 2008 estimate is 

7.2 per cent), while inflation is forecast 

to decrease in 2009. 

• There appear to be no new taxes 

or increases in existing taxes, and 

only minor changes to tax laws 

(however, there were new taxes 

introduced and changes to tax laws 

as part of the PNG Liquefied Natural 

Gas project amendments passed in 

September 2008). 



David Caradus, Partner 

+675 321 1500 

david.caradus@pg.pwc.com 

Tax treaty with Japan enters 

into force 

On 10 November 2008 the Australian 

Government formalised Australia’s 

adoption of the new double tax treaty 

(new Convention) with Japan, the details 

of which were reported in our March 

2008 edition of TaxTalk. Under the 

terms of the notification signed by the 

Assistant Treasurer, the new Convention 

enters into force on 3 December 2008. 

From an Australian tax perspective, this 

commencement date means that the new 

Convention will apply from: 

• 1 January 2009 with respect to 

Australian withholding tax, and 

• the start of the year of income 

commencing on or after 1 July 2009 

with respect to income tax. 

From a Japanese tax perspective, the 

new Convention will apply as follows: 

• concerning taxes on incomes withheld 

at source, for amounts taxable on or 

after 1 January 2009 

• concerning taxes on incomes not 

withheld at source, for incomes in any 

taxable year that starts on or after 1 

January 2009, and 

• concerning other taxes, for taxes in 

any taxable year that starts on or after 

1 January 2009. 



Adrian Green, Partner 

(02) 8266 7890 

adrian.green@au.pwc.com 

Australia and the UK to 

commence tax treaty 

negotiations 

On 28 October 2008, the Assistant 


Policy and Consumer Affairs issued a 

media release advising that Australia had 

commenced negotiations on a revised 

tax treaty with the United Kingdom 

(UK). The Assistant Treasurer said that 

“modernising the existing tax treaty, 

which was signed in 2003, will ensure 

that optimal tax conditions operate for 

those businesses and individuals with 

dealings in both countries”. 

Tax information exchange 

agreement with the 

British Virgin Islands 




media release advising that Australia 

had signed a Tax Information Exchange 

Agreement (TIEA) with the British Virgin 

Islands (BVI). In his media release, the 

Assistant Treasurer stated that the TIEA: 

• provides for full exchange of 

information on request in both criminal 

and civil tax matters 

• builds upon legislation in both 

jurisdictions which already provides 



for mutual legal assistance in criminal 

matters, and 

• reflects both Governments’ 

shared commitment to implement 

Organisation for Economic 

Cooperation and Development 

(OECD) principles of transparency and 

effective exchange of information, to 

eliminate harmful tax practices. 

One of the terms of the TIEA is that 

Australia will remove any governmental 

references to the BVI as a ‘tax haven’ 

and will list the BVI as an ‘information 

exchange country’ in the Taxation 

Administration Regulations 1976. The 

effect of this, as noted in the media 

release, is that residents of the BVI will 

obtain access to reduced withholding 

tax rates on distributions of certain 

income they may receive from Australian 

managed investment trusts. 

The Assistant Treasurer also advised 

that in addition to the TIEA, Australia 

and the BVI had signed an agreement 

for the allocation of taxing rights with 

respect to certain income of individuals, 

which will provide benefits to Australian 

and BVI residents. He also advised that 

Australia and the BVI had agreed to enter 

into discussions, when appropriate, to 

foster further co-operation in areas of 

mutual interest. 

United States relaxes rules 

on taxing loans from a CFC 

As a response to liquidity problems, the 

United States (US) Internal Revenue 

Service (IRS) has expanded the 

exception that allows a controlled foreign 

corporation (CFC) to lend money to their 

US parent corporation without the loan 

being subject to full US federal income 

tax. However, the concession is subject 

to a number of limitations, namely: 

• it does not apply to debt obligations 

outstanding for sixty (60) days or more 

• in the aggregate, such obligations may 

not be outstanding for one hundred 

and eighty (180) days or more during 

the tax year, and 

• the concession is effective only 

for the first two tax years of a 

foreign corporation ending after 

3 October 2008 and beginning 

before 1 January 2010. 



David Snowden, Executive Director 

(02) 8266 7927 

david.snowden@au.pwc.com 

Ireland maintains low 

corporate tax rate 

The Irish Budget was announced 

on 14 October 2008 with strong 

expectations of significant cost restraints 

and tax increases given the current 

economic climate. While the Budget 

introduced some measures that will 

increase personal taxes, it has been 

widely acknowledged as pro-business 

because it: 

• retained the existing corporate tax rate 

of 12.5 per cent 

• increased the research and 

development tax credit from 

20 to 25 per cent, and 

• reduced the top rate of stamp duty 

on non-residential property from 

9 to 6 per cent. 

Given the current economic environment, 

it was inevitable that some tax rate 

increases would be announced. 

In this regard: 

• capital gains tax (on asset disposals) 

has increased from 20 to 22 per cent 

from 14 October 2008 

• the standard rate of Value Added Tax 

has increased from 21 to 21.5 per cent 

from 1 December 2008, and 

• deposit interest retention tax (DIRT) 

has increased from 20 to 23 per cent 

on regular deposits and to 26 per cent 

on certain other savings products. 

From a personal tax perspective, there 

will be a new income tax levy that will 

apply at a rate of 1 per cent to gross 

income up to approximately €100,000 

per annum. A rate of 2 per cent will apply 

to income in excess of that amount. 

This brings the effective highest marginal 

rate on income to 48.5 per cent. 

Other measures introduced include: 

• an exemption from corporation tax 

and capital gains tax for new startup 

companies which commence 

trading in 2009, to the extent that 

their tax liability for the year does 

not exceed €40,000 

• an acceleration of the timing of 

corporation tax payments for 

companies with a corporation tax 

liability of more than €200,000 in 

their previous accounting period 

• an extension of the asset classes 

which qualify for accelerated 

tax depreciation for energy 

efficient equipment. 



Neil Fuller, Partner 

(02) 8266 2025 

neil.fuller@au.pwc.com 



Australia joins global effort to 

combat tax havens 




media release stating that the Australian 

Government endorses the strong 

action taken by seventeen countries at 

the Finance Minister meeting in Paris 

on Transparency and Exchange of 

Information convened by France and 

Germany. At that meeting, the attendees 

supported the principle of converging 

responses to counteract tax fraud 

and evasion by adopting measures 

appropriate to each country and 

coordination of some of their actions. 

In addition to agreeing on a number of 

other matters, the participating countries: 

• expressed their willingness to use 

the latest version of the Article 26 

of the Organisation for Economic 

Cooperation and Development 

(OECD) Model Tax Convention 

when negotiating new double taxation 

agreements, and to consider in due 

course terminating some of their 

existing treaties in cases where 

amendments could not be made 

accordingly. Article 26 creates an 

obligation to exchange information 

that is relevant to the correct 

application of a tax convention as well 

as for purposes of the administration 

and enforcement of domestic tax laws. 

• agreed to ask the OECD to establish 

a methodology to provide a clear 

distinction between the countries 

and territories which have substantially 

implemented the OECD standard on 

exchange of information and those 

which have not, and to publish its 

conclusions in 2009 

• agreed to ask the OECD to require 

from states which want to join 

the OECD to implement prior to 

membership the OECD principles 

on transparency and exchange of 

information, and 

• agreed to call on aid agencies to 

give extra weight to the principles 

of tax transparency and information 

exchange when designing their 

aid programs. 



Michael Bersten, Partner 

(02) 8266 6858 

michael.bersten@au.pwc.com 

Chris Sievers, Partner 

(03) 8603 4208 

chris.sievers@au.pwc.com 

Profits from leasing ships 

and aircraft 

Taxation Ruling TR 2008/8, issued 

on 22 October 2008, sets out the 

Commissioner’s view about: 

• what profits derived from the leasing 

of ships and aircraft fall within the 

ships and aircraft articles of each of 

Australia’s tax treaties 

• in what circumstances Australia is 

allocated a right to tax those leasing 

profits under the ships and aircraft 

article, and 

• the method of assessment of 

such profits. 

Australia’s position in respect of the 

ships and aircraft article in its treaties 

is generally to preserve source taxing 

rights over profits from internal ship and 

aircraft operations that include both 

transport and non-transport activities. 

Australia also generally treats as internal 

traffic the operations of ships or aircraft 

confined solely to places in Australia, 

even if they form part of an overall 

international voyage. 

TR 2008/8 was previously issued in 

draft as TR 2008/D3 and is substantially 

the same as the draft. However, the 

examples in the final Ruling have been 

updated to further clarity that: 

• Where Australia is allocated source 

country taxing rights over certain 

ship and aircraft leasing profits 

under the relevant tax treaty article, 

those leasing profits are deemed to 

have a source in Australia for the 

purposes of Australia’s domestic 

tax law provisions. 

• There are some circumstances as 

outlined in the Ruling that require 

the adoption of a reasonable basis 

of apportionment. According to 

the Ruling, an acceptable basis of 

apportionment is one based on time, 

similar to the time apportionment 

basis contained in Taxation Ruling TR 

2006/1 covering ship charterparties. 

The Ruling applies both before and after 

its date of issue. 



Tony Carroll, Partner 

(02) 8266 2965 

tony.carroll@au.pwc.com 

Adrian Green, Partner 

(02) 8266 7890 

adrian.green@au.pwc.com 

Graham Sorensen, Partner 

(07) 3257 8548 

graham.sorensen@au.pwc.com 



Goods and Services Tax (GST) 

developments 

the cancellation fee may fall into one of 

the following categories, each of which 

involves a supply: 

• cancellation fees as consideration for 

the intended supply 

The Commissioner’s position 

on cancellation fees 

Draft GST Ruling GSTR 2008/D4, 

issued on 29 October 2008, sets out 

the Commissioner’s preliminary view 

on the GST consequences resulting 

from cancellation fees paid when an 

arrangement under which a particular 

supply was intended to be made 

(intended supply) does not proceed 

or does not proceed in the manner 

originally contemplated. Because 

cancellation fees are generally not 

charged when the supply is cancelled 

by the supplier (except in relation to 

a ticketed arrangement for the supply 

of performances, events or similar 

arrangements), the draft Ruling focuses 

on arrangements that are cancelled 

by or on behalf of a customer. 

In particular, GSTR 2008/D4 

principally examines whether there is 

a supply for which a cancellation fee is 

consideration, and also discusses the 

interaction between security deposits 

and cancellation fees, as well as the 

circumstances in which a cancellation 

fee is not consideration for a ‘supply’. 

In considering the GST consequences 

where there is a cancellation fee paid for 

failure to proceed with an arrangement, 

GSTR 2008/D4 notes that the failure 

to proceed with an arrangement under 

which an intended supply was to be 

made may involve: 

– 

– 

– 

the customer notifying the supplier 

that they are cancelling before 

the time of the intended supply 

(a ‘cancellation’) 

the customer failing to take 

advantage of the arrangement by 

not showing up at the time of the 

intended supply (a ‘no show’), or 

the customer showing up late 

(a ‘late show’). 

GSTR 2008/D4 notes that in some 

cases, the effect of a ‘late show’ will be 

exactly the same as a ‘no show’ and thus 

when used in GSTR 2008/D4, the term 

‘no show’ should be taken to include a 

‘late show’ that has the same outcome 

as a ‘no show’. 

In GSTR 2008/D4, the Commissioner 

considers whether the cancellation fee is 

consideration for a supply and states that 

• cancellation fees as consideration for a 

facilitation supply which occurs where 

the supplier performs certain tasks in 

preparing to make the intended supply 

• cancellation fees as consideration 

for different goods, services or other 

things related to the intended supply, 

such as where the supplier provides 

the customer with work in progress 

if the intended supply is cancelled 


for the entry into obligations to do 

certain things under the terms of an 

arrangement, such as to not take 

other appointments at a particular 

time allocated to the customer 

• cancellation fees as consideration for 

a cancellation supply 


for a release supply, such supply 

being the creation or surrender of 

contractual rights, or 

• cancellation fees as damages, 

penalties or compensation; in this 

case, while an amount paid in relation 

to a cancelled arrangement might be 

described as ‘damages’, a ‘penalty’ 

or ‘compensation’, the Commissioner 

considers that this does not mean 

that the amount is not thereby 

consideration for a supply. 

The Commissioner expresses the view 

that in a very limited number of cases, 

the facts of a case may establish 

that a customer made an ex gratia 

payment (for example, a payment 

with the expectation of maintaining a 

good relationship with the supplier in 

circumstances where the supplier is not 

obliged to do, or has not done, anything 

in connection with the payment). In 

this rare situation, according to the 

Commissioner, the amount will not 

constitute consideration for a supply 



because there is no connection between 

the ex gratia payment and any supply. 

GSTR 2008/D4 also considers the 

treatment of security deposits and states 

that although the decision of the High 

Court in the Reliance Carpet case (see 

June 2008 edition of TaxTalk) was made 

in the context of a formal contract for the 

sale of land, the Commissioner considers 

the position to be no different where a 

security deposit is forfeited under the 

terms of a cancellation clause in other 

arrangements. 

Once finalised, the Ruling will explain 

the Commissioner’s view of the law as it 

applies both before and after its date of 

issue. Comments on the draft Ruling can 

be made until 10 December 2008. 

Notification requirements 

for claiming GST refunds 

Draft Miscellaneous Tax Ruling 

MT2008/D4, issued on 29 October 2008, 

sets out the Commissioner’s preliminary 

view on the notification requirements 

for an entity under section 105-55 of 

Schedule 1 to the Taxation Administration 

Act 1953 as amended from 1 July 2008. 

Under that provision, there is a four-year 

time limit for entitlements to refunds, 

other payments or credits in relation to 

GST, luxury car tax, wine tax and fuel tax 

in respect of a tax period or importation. 

The four-year entitlement period 

commences after the end of the tax 

period or importation, however the four 

year time limit does not apply, if within 

that period: 

• an entity notifies the Commissioner 

that they are entitled to the refund, 

other payment or credit 

• the Commissioner notifies an entity 

that it is entitled to the refund, other 

payment or credit, or 

• in the case of a credit, the credit is 

taken into account in working out an 

amount that the Commissioner may 

recover from an entity only because 

of fraud or evasion where the ability 

of the Commissioner to recover 

the amount is not subject to any 

time limitation. 

In stating that there is no prescribed form 

to be used by the taxpayer to notify the 

Commissioner of the refund entitlement, 

MT2008/D4 outlines the manner in 

which the notification is to be made. In 

particular, the Commissioner notes in 

MT2008/D4 that the notification must 

be in writing. The Commissioner further 

notes that while the notification does not 

need to specify an exact amount, the 

entitlement must be clearly identified. 

In this respect, correspondence that is 

speculative in nature will not meet the 

notification requirements. According to 

the Commissioner, a valid notification 

must be directed at one or more 

particular entitlements, rather than being 

directed at reserving an entity’s rights in 

relation to possible future claim(s). 

Once finalised, the Ruling will explain 

the Commissioner’s view of the law 

as it applies both before and after its 

date of issue. The final Ruling will be a 

‘public indirect tax ruling’. Comments 

on the Draft Ruling can be made until 

12 December 2008. 



Andrew Porvaznik, Partner 

(02) 8266 5772 

andrew.porvaznik@au.pwc.com 

Adrian Abbott, Partner 

(02) 8266 5140 

adrian.abbott@au.pwc.com 

Ken Fehily, Partner 

(03) 8603 6216 

ken.fehily@au.pwc.com 

Kristina Kipper, Director 

(08) 9238 5202 

kristina.kipper@au.pwc.com 

State taxes 

New South Wales: new home 

buyers grant to boost the 

housing sector 

On 8 November 2008, the Premier 

of New South Wales (NSW) issued a 

media release stating that the NSW 

Government will boost the grant for 

families building their first home or 

buying a newly-constructed home. 

The announcement proposes to increase 

the existing incentive provided by 

the NSW Government for new home 

owners from $7,000 to $10,000 in 

some circumstances. This new $3,000 

incentive, known as the New Home 

Buyers Supplement, is in addition to 

the $14,000 First Home Owners Boost 

announced by the Commonwealth 

Government during October 2008 for 

persons who satisfy the Commonwealth’s 

eligibility requirements for the purchase 

or building of a newly constructed home 

(see November 2008 edition of TaxTalk). 

The New Home Buyers Supplement is to 

be available for contracts made between 

11 November 2008 and 10 November 

2009 (inclusive) for purchase or building 

of a newly-constructed home. The 

remaining eligibility criteria will be the 

same as that applying to the $7,000 First 

Home Owners Grant. A new home is a 



home which has never been occupied 

as a place of residence by the builder, 

a tenant or other occupant. Where the 

home is being purchased, it must be 

the first sale of that home. A new home 

includes units and apartments. 

It is important to note that not all persons 

entitled to the First Home Owners Grant 

will qualify for the New Home Buyers 

Supplement. This is because the First 

Home Owners Grant is not limited to 

the purchasing or building of a newly 

constructed home. It is available for the 

first purchase by an individual of a home. 

The further difference between the two 

schemes is that unlike the New Home 

Buyers Supplement, which will only be 

in place for contracts entered into during 

the qualifying period, the First Home 

Owners Grant presently has no end date. 

In announcing the New Home Buyers 

Supplement, the Premier also announced 

proposed reforms to the First Home 

Owners Grant scheme which, subject to 

Commonwealth Government approval, 

will apply from 1 July 2009. Under the 

proposal, the First Home Owners Grant 

will be capped, and will only be available 

for properties valued up to $750,000. 

New South Wales: 

Mini Budget 

The NSW Treasurer handed 

down the State’s Mini Budget on 

11 November 2008 to address a 

substantial decline in the State’s 

revenue base. Key revenue measures 

announced include: 

• Land tax changes – from the 2009 land 

tax year, a marginal rate of 2 per cent 

will apply to land tax payers with 

total taxable land holdings above 

$2.25 million. The higher rate will only 

apply to the land holding in excess of 

$2.25 million. The land holding below 

this amount will remain subject to the 

1.6 per cent rate. Principal place of 

residence and rural properties remain 

exempt from land tax. This threshold 

will also be indexed in line with the 

existing land tax threshold. 

• Land holder duty – change from a 

‘land rich’ model to a ‘landholder’ 

model, so that the purchase of a 

significant parcel of shares or units 

in an entity that owns land above 

a threshold value is subject to 

transfer duty as if there was a direct 

purchase of land. Western Australia, 

the Northern Territory, the Australian 

Capital Territory and Queensland 

(for trusts only) have already moved 

to replace the ‘land rich’ approach 

with the ‘landholder’ model. The 

new provisions will commence 

from 1 July 2009. 

• Nominal duties – increased 

nominal duties (charged on a range 

of documents) will apply from 

1 January 2009 – the changes are 

from $2 to $10; $10 to $50; and 

$200 to $500 (for trust deeds). 

• Deferred abolition of stamp duties 

– currently, duty on unquoted 

marketable securities is scheduled 

to be abolished from 1 January 

2009, mortgage duty on business 

loans is scheduled to be abolished 

on 1 July 2009 and transfer duty 

on non-land business assets is 

scheduled to be abolished on 

1 January 2011. The abolition of these 

three stamp duties will be deferred 

until 1 July 2012. 



• Parking space levy – from 1 July 

2009, the parking space levy will 

increase from $950 to $2,000 a 

year per off-street, non-residential 

parking space in the Sydney, North 

Sydney and Milsons Point business 

districts; and from $470 to $710 

a year in the business areas of St 

Leonards, Chatswood, Parramatta 

and Bondi Junction. 

• Mineral royalties – increased 

mineral royalty rates will apply 

from 1 January 2009. 



Mono Ray, Partner 

(02) 8266 9171 

mono.ray@au.pwc.com 

Angela Melick, Partner 

(02) 8266 7234 

angela.melick@au.pwc.com 

Western Australia: 

land tax reductions 

On 21 October 2008, the West Australian 

Treasurer announced an immediate cut 

in rates applying to land tax and the 

Metropolitan Region Improvement Tax 

(MRIT). The Treasurer said that the “cuts 

would apply to assessable properties 

across the board and would average 

around seven per cent”. The Treasurer 

further added that assessments based 

on calculations in the May 2008 Budget 

had been due to go out on 24 September 

2008, the new Government’s first 

working day in office, but had been held 

back pending legislation to enable the 

immediate adjustment. 

Under the changes, land tax on 

land valued at $500,000 will drop 

by $20 to $180. For land valued at 

$1million, the reduction will be $70, 

from $700 to $630. If the property is 

located in the metropolitan region, the 

MRIT savings will be a further $20 in 

the case of the land valued at $500,000 

and a further $70 in the case of the land 

valued at $1million. 

The proposed new tax scales are 

as follows. 

Unimproved value of the land 

Exceeding $ Not exceeding $ Rate of land tax 

0 300,000 Nil 

300,000 1,000,000 0.09 cent for each $1 in excess of 

$300,000 

1,000,000 2,200,000 $630 + 0.47 cent for each $1 in excess of 

$1,000,000 

2,200,000 5,500,000 $6,270 + 1.22 cents for each $1 in excess 

of $2,200,000 

5,500,000 11,000,000 $46,530 + 1.46 cents for each $1 in 

excess of $5,500,000 

11,000,000 $126,830 + 2.16 cents for each $1 in 

excess of $11,000,000 

Unimproved value of the land 

Exceeding $ Not exceeding $ Rate of Metropolitan Region Improvement 

Tax 

0 300,000 Nil 

300,000 0.14 cent for each $1 in excess of 

$300,000 

Personal and 

expatriate 

taxation 

High Court rules on 

employee’s deduction 

for legal 

In our October 2008 edition of TaxTalk, 

we reported that the Commissioner was 

unsuccessful in disallowing a deduction 

claim made by an employee for the costs 

of legal fees incurred in challenging his 

employer for breach of contract (see 

Romanin v Commissioner of Taxation 

[2008] FCA 1532. We also reported that 

the High Court was considering a case 

involving similar issues and that the 



decision of the High Court would need 

to be carefully considered by employees 

seeking to claim deductions for legal fees 

relating to disputes with their employer. 

The High Court has now handed down its 

decision in that case (see Commissioner 

of Taxation v Day [2008] HCA 53. 

By majority (Justice Kirby dissenting), 

the Court has upheld the decision of 

the Full Federal Court and has held that 

a deduction was allowable for legal costs 

incurred by an employee in defending 

charges of improper conduct. 

In the case (which was featured in 

more detail in our February 2008 

edition of TaxTalk), the individual had 

incurred legal fees in defending charges 

brought against him by his employer 

for failure to observe standards of 

conduct as required under the Public 

Service Act 1922 (Cth). The individual 

was a senior compliance officer with 

the Australian Customs Service. The 

Commissioner had disallowed the 

claim for deduction in respect of the 

legal fees incurred by the employee on 

the grounds that the legal expenses 

were incurred in defending charges of 

conduct extraneous to the performance 

of the respondent’s income-producing 

activities, and therefore it could not be 

said that the expenses were incurred 

in the course of gaining or producing 

assessable income. 

In rejecting the Commissioner’s 

submissions and finding in favour of 

the taxpayer, the majority expressed 

the view that “[w]hat was productive 

of his income by way of salary is to be 

found in all the incidents of his office in 

the Service to which the Act referred, 

including his obligation to observe 

standards of conduct, breach of which 

might entail disciplinary charges. The 

respondent’s outgoings, by way of legal 

expenses, followed upon the bringing 

of the charges with respect to his 

conduct, or misconduct, as an officer. 

He was exposed to those charges and 

consequential expenses, by reason of his 

office. The charges cannot be considered 

as remote from his office, in the way that 

private conduct giving rise to criminal or 

other sanctions may be”. 

According to the majority, it was 

necessary for the taxpayer “to obtain 

legal advice and representation in order 

to answer the charges and to preserve 

his position.....Whether the charges were 

well-founded, a fact which had not been 

established by the time the Full Court 

determined this matter, is not relevant 

to the question of deductibility”. 

While the decision is welcome news 

for taxpayers, the following part of the 

majority’s judgement will need to be 

taken into consideration by all employees 

seeking to claim a deduction for legal 

costs incurred in disputes with their 

employer – “[t]he incurring of expenditure 

by an employee to defend a charge 

because it may result in his or her 

dismissal may not itself be sufficient in 

every case to establish the necessary 

connection to the employment or service 

which is productive of income. Much 

will depend upon what is entailed in 

the employment and the duties which 

it imposes upon an employee”. Earlier, 

as mentioned above, the majority of the 

Court had said that “the charges cannot 

be considered as remote from his office, 

in the way that private conduct giving 

rise to criminal or other sanctions may 

be”. Based on this comment by the High 

Court, legal expenditure incurred by 

an individual to prevent the individual’s 

employment being terminated because of 

conduct not directly associated with the 

workplace will likely be non-deductible. 



Neil Napper, Partner 

(02) 8266 6647 

neil.napper@au.pwc.com 

Paul Brassil, Partner 

(02) 8266 2964 

paul.brassil@au.pwc.com 

Glen Frost, Partner 

(02) 8266 2266 

glen.frost@au.pwc.com 

Paul O’Brien, Partner 

(03) 8603 4182 

paul.obrien@au.pwc.com 

The Commissioner’s view on 

issues relevant to SMSFs 

Draft Self Managed Superannuation 

Funds Ruling SMSFR 2008/D5, issued 

on 5 November 2008, sets out the 

Commissioner’s preliminary views on the 

meaning of ‘asset’, ‘loan’, ‘investment 

in’, ‘lease’ and ‘lease arrangement’ 

being the core concepts in the definition 

of ‘in-house asset’ of a self managed 

superannuation fund (SMSF) as 

defined in the Superannuation Industry 

(Supervision) Act 1993 (SISA). 

By way of background, the ‘in-house 

asset’ rules in the SISA ensure the 

investment practices of superannuation 

funds are consistent with the 

Government’s retirement incomes policy, 

being that superannuation savings 

should be invested prudently for the 

purpose of providing retirement income. 

The ‘in-house asset’ rule prevents the 

investment in or holding of ‘in-house 

assets’ which have market value 

exceeding 5 per cent of the value of fund 

assets. If the ‘in-house’ limit is breached, 

then the fund trustees must reduce the 

level of ‘in-house assets’ within twelve 

months. Furthermore, an ‘in-house asset’ 

cannot be acquired by a SMSF if the 

acquisition will cause the 5 per cent limit 

to be exceeded. 

‘In-house asset’ is defined in the SISA as 

“an asset of the fund that is a loan to, or 



an investment in, a related party of the 

fund, an investment in a related trust of 

the fund, or an asset of the fund subject 

to a lease or lease arrangement between 

a trustee of the fund and a related party 

of the fund …” The Draft Ruling states 

that this part of the definition contains 

terms defined in the SISA which require 

further consideration, being: 

• 

• 

• 

• 

• 

asset 

loan 

investment in 

lease, and 

lease arrangement. 

The Commissioner’s views as to what 

each of these terms is defined to 

mean are set out in the Draft Ruling, 

together with a number of examples. 

In relation to the meaning of ‘loan’, the 

Draft Ruling states that the definition in 

the SISA is substantially wider than the 

traditional meaning of a ‘loan’ which 

involves a payment and repayment 

of an amount of money, and extends 

the scope of arrangements covered 

to include arrangements that are in 

substance financing arrangements 

deferring the payment of an amount. 

Such arrangements would include 

(but are not limited to): 

• 

• 

• 

the loan of money 

sale of goods or land on credit 

instalment payment arrangements, and 

• arrangements for the deferral of 

payment of debts or entitlements. 

SMSF trustees will need to consider the 

activities of the relevant fund in the light 

of the Commissioner’s views and take 

appropriate action to ensure that the 

‘in‐house asset’ rule is not breached. 

According to the Commissioner, the 

formality and the legal enforceability of 

the arrangement does not affect whether 

it is a ‘loan’ under the definition in the 

SISA. The Commissioner believes that 

‘loan’ also encompasses arrangements 

where there is no objective purpose 

of gaining interest, income, profit or 

gain, such as an interest-free loan. 

The Commissioner however accepts that 

not every situation where a payment is 

deferred necessarily amounts to a ‘loan’ 

under the definition, such as the payment 

for goods on normal commercial terms. 

Comments can be made on the Draft 

Ruling up until 19 December 2008. 

Once finalised, the Ruling will apply 

both before and after its date of issue. 

Superannuation guarantee 

Draft Superannuation Guarantee Ruling 

SGR 2008/D2, issued on 5 November 

2008, sets out the Commissioner’s 

preliminary views on: 

• what constitutes ‘ordinary time 

earnings’ (OTE) for the purpose of 

calculating the minimum level of 

superannuation support required 

for individual employees, and 

• the meaning of ‘salary or 

wages’, which is relevant to 

employers in calculating the 

superannuation guarantee shortfall 

of individual employees where 

an employer has not provided 

the required minimum level of 

superannuation support. 

It is proposed that when the final Ruling 

is issued, it will replace Superannuation 

Guarantee Rulings SGR 94/4 and 

SGR 94/5. An important observation 

with respect to SGR 2008/D2 is that the 

Commissioner’s preliminary view is that 

payments specifically excluded from OTE 

are not necessarily excluded from ‘salary 

or wages’. On this point, SGR 2008/D2 

cites a lump sum payment in lieu of 

unused annual leave, and unused long 

service leave made to the employee on 

termination of employment as examples 

of payments falling into this category. 

That not having a proper understanding 

of these definitions can result in 

adverse implications for an employer 

was highlighted in the Administrative 

Appeals Tribunal decision (Prushka 

Fast Debt Recovery Pty Ltd v Federal 

Commissioner of Taxation [2008] 

AATA 762), which we reported in 

our October 2008 edition of TaxTalk. 

Once finalised, the Ruling will apply 

both before and after its date of issue. 



Mike Forsdick, Partner 

(02) 8266 5767 

mike.forsdick@au.pwc.com 



Other news 

End of the trust cloning 

CGT concession 



Inspector-General of 

Taxation report into the 

ATO’s management of 

major complex issues 



Policy and Consumer Affairs released the 

Inspector-General of Taxation’s report 

Improvements to tax administration 

arising from the Inspector-General’s 

case study reviews of the Tax Office’s 

management of major, complex issues. 

The report is the fourth and final report 

on major complex issues. 

As noted by the Assistant Treasurer, 

the report summarises systemic 

issues arising from three earlier case 

studies conducted by the Inspector- 

General in 2007 relating to service 

entity arrangements, living away 

from home allowances, and research 

and development syndicates. 

Included in the report are agreements 

reached between the Inspector General 

and the Australian Tax Office (ATO) on 

changes to be made by the ATO to its 

work practices, including: 

• agreement on the timeframe in which 

the ATO will reach a view on priority 

technical issues 

• agreement on the process to be 

used in managing the achievement 

of agreed milestones on complex 

technical issues 

• introduction of initiatives to ensure that 

compliance actions are fair and based 

on a contemporary appraisal of the 

factors that have led to the issue 

• a commitment to clarifying the law 

through litigation of contentious areas 

and to generally provide test case 

funding to achieve this objective 

• agreement to consolidate the ATO’s 

information on significant technical 

issues into one site on the ATO’s 

website within two years 

• agreement that once the ATO 

concludes that its view on a matter has 

changed, the existing public advice 

or guidance should be withdrawn 

immediately and the ATO should 

clearly indicate whether replacement 

advice or guidance is required. 



Policy and Consumer Affairs announced 

that the capital gains tax (CGT) ‘trust 

cloning’ exception to CGT events E1 and 

E2 will be removed with effect for CGT 

events happening after 31 October 2008. 

CGT event E1 happens when a trust is 

created, and CGT event E2 happens 

when an asset is transferred to an 

existing trust. In the case of both events, 

an exception applies where the asset is 

transferred from another trust “and the 

beneficiaries and terms of both trusts are 

the same”. This has often been referred 

to as the ‘trust cloning exception’. 

The other exception to CGT events E1 

and E2 will be retained – that is, where 

the taxpayer is the sole beneficiary 

of the relevant trust that is not a unit 

trust and the taxpayer is absolutely 

entitled to the asset as against the 

trustee. A mere change of trustee of a 

single trust will continue not to trigger 

a taxable CGT event. 

The Assistant Treasurer has indicated 

that legislation will be introduced as soon 

as practicable and that initial consultation 

will be undertaken on the design of 

these amendments. 

Paul Brassil, Partner 

(02) 8266 2964 

paul.brassil@au.pwc.com 

Tony Carroll, Partner 

(02) 8266 2965 

tony.carroll@au.pwc.com 

Paul O’Brien, Partner 

(03) 8603 4182 

paul.obrien@au.pwc.com 

Demutualisation of friendly 

societies: CGT relief to 

be provided 




that the Government will provide capital 

gains tax (CGT) relief for policyholders 

of friendly societies who receive shares 

when their friendly society demutualises. 

The Assistant Treasurer also indicated 

that the Government would undertake 

consultation on the design of the 

amendments. In this respect, a Treasury 

discussion paper has been released for 

public comment with the closing date 

for submissions being 5 December 2008. 



Legislation update 

Tax consultation enhanced 

through launch of Tax Issues 

Entry System 

On 20 November 2008, the Assistant 



the launch of the Tax Issues Entry 

System (TIES) which, as explained 

by the Assistant Treasurer “is a single 

entry point for tax professionals and 

the community to raise minor policy 

and administrative issues relating 

to the care and maintenance of the 

tax and superannuation systems.” 

With the launch of TIES, the 

Government is delivering on one of the 

recommendations from the Tax Design 

Review Panel’s report Better Tax Design 

and Implementation. The Panel was 

chaired by Neil Wilson, chief operating 

officer of PricewaterhouseCoopers. 

Action to enhance 

market integrity 

On 19 November 2008, the Minister for 

Superannuation and Corporate Law 

announced that the Government has 

commissioned the Corporations and 

Markets Advisory Committee (CAMAC) 

to review a range of market practices 

with a view to further enhancing the 

integrity and transparency of the 

Australian market. The Minister said 

that these include the use of margin 

lending by company directors, ‘blackout’ 

trading by company directors, the 

spreading of false rumours, and the 

potential disclosure of market sensitive 

information at analyst briefings. 

In order to assist the completion of the 

project, the Government has approved 

a grant of $100,000 to fund the CAMAC 

investigation. CAMAC is to report 

its findings to Government on these 

matters by 30 June 2009. 

A new regime to regulate 

the provision of tax 

agent services 

On 13 November 2008, the Assistant 


Policy and Consumer Affairs introduced 

the Tax Agent Services Bill 2008 into 

Parliament. The Bill proposes to reform 

the registration and regulation of entities 

providing tax agent services for a fee. 

In introducing the Bill, the Assistant 

Treasurer said that “the introduction 

of this Bill indicates the Government’s 

commitment to strengthening the tax 

industry and the integrity of the tax 

system by improving the registration and 

regulation of tax agent service providers, 

thereby giving greater protection and 

certainty to taxpayers. Reform in this 

area is long overdue. An updated 

regulatory regime that is appropriate for 

the modern tax environment has been on 

the drawing board for almost 15 years.” 

The Assistant Treasurer also announced 

the Government’s intention that a 

formal post-implementation review 

of certain aspects of the regulatory 

framework be conducted three years 

after implementation to ensure the new 

framework operates effectively. 

In introducing the Bill, the Assistant 

Treasurer outlined the key elements 

of the proposed tax agent services 

regulatory framework, including: 

• A single national Tax Practitioners’ 

Board will replace the existing statebased 

Tax Agents’ Boards, with its 

key functions being to register and 

regulate tax agents and Business 

Activity Statement (BAS) agents. 

The Board will also have certain 

powers to ensure that unregistered 

entities are not holding themselves 

out as registered. 

• The Board will be able to investigate 

matters and impose sanctions 

where appropriate. 

• Entities that provide ‘tax agent 

services’ or ‘BAS services’ for a 

fee or other reward, who advertise 

the provision of such services, or 

who hold themselves out as being 

registered, will be required to register 

with the Board. In default, the Board 

may instigate civil penalty proceedings 

against the entity in the Federal Court. 

• The registration requirements for tax 

agents will consist of a ‘fit and proper 

person’ test as well as minimum 

educational qualifications and relevant 

work experience requirements. 



• BAS agents will not be required 

to demonstrate the same degree 

of formal education and relevant 

experience as ‘tax agents’. This 

reflects the narrower scope of 

services that they may provide. 

• In the case of partnerships and 

companies seeking registration, 

compliance with the requirements 

will be demonstrated by sufficient 

organisational qualifications 

and experience. 

• Entities that specialise in a particular 

area of the taxation laws or that only 

provide a type of tax agent service 

(for example, tax compliance work or 

advice rather than both) will be eligible 

to register, with scope to operate in 

their specialty. 

• Because BAS agents are not currently 

regulated, a significant transitional 

period for their registration is proposed 

to allow sufficient time for applicants 

to meet the requirements. 

• Tax agents and BAS agents will 

be governed by a legislated Code 

of Professional Conduct. There 

will be a broad range of sanctions 

that the Board may impose for 

non‐compliance with the Code. 

• New civil penalty provisions (including 

substantial monetary penalties) 

will apply where the conduct being 

sanctioned is not serious enough 

to warrant a criminal conviction or 

imprisonment. Situations where 

these will apply include where a 

registered agent makes a false or 

misleading statement, employs or 

uses the services of an entity whose 

registration has been terminated due 

to misconduct, or signs a declaration 

in relation to a document prepared 

by an entity that is not qualified to 

prepare that document and was not 

appropriately supervised. 

• The Board may also apply to the 

Federal Court of Australia for an 

injunction to prevent or compel 

certain conduct. 

The Assistant Treasurer noted that a 

major direct benefit for taxpayers will be 

the introduction of two ‘safe harbours’ 

for taxpayers who engage a tax agent 

or BAS agent. The safe harbours will 

exempt taxpayers from liability for an 

‘administrative penalty’ imposed by 

the Commissioner where: 

• having made a false and misleading 

statement to the Commissioner (which 

would result in an administrative 

penalty applying), the taxpayer can 

demonstrate that they had taken 

reasonable care by engaging a 

tax agent or BAS agent and gave 

all relevant taxation information 

to the agent 

• having failed to lodge a document on 

time and in the approved form (which 

failure would result in an administrative 

penalty), the taxpayer can show 

that they had engaged a tax agent 

or BAS agent and had provided all 

necessary information to the agent to 

enable them to provide the document 

to the Commissioner on time and 

in the approved form, but the agent 

carelessly failed to do so. 

The safe harbours will not apply where 

either the taxpayer or the agent has 

intentionally disregarded a taxation law 

or been reckless as to the operation 

of a taxation law. 

Other revenue legislation 

Tax Laws Amendment (2008 Measures 

No 5) Bill 2008, introduced into the 

House of Representatives on 25 

September 2008, was referred to 

the Senate Economics Committee 

for review. In its final report, that 

Committee recommended that the 

Senate pass the Bill. The Bill proposes 

to make amendments to give effect to a 

number of taxation measures, namely: 

• amendments to the goods and 

services tax (GST) law to maintain 

the integrity of the GST tax base by 

ensuring that the interaction between 

the ‘margin scheme’ provisions and 

the ‘going concern’, ‘farmland’ and 

‘associate’ provisions does not allow 

property sales to be structured in a 

way that results in GST not applying 

to the value added to real property 

on or after 1 July 2000 by an entity 



registered or required to be registered 

for GST. 

This proposed measure is to have 

effect from the date of Royal Assent. 

• amendments (as foreshadowed in 

our August 2008 edition of TaxTalk) 

to the thin capitalisation (TC) rules 

of the income tax law in relation to 

the use of accounting standards for 

identifying and valuing an entity’s 

assets, liabilities and equity capital. 

It aims to adjust for certain impacts 

of the adoption of the Australian 

equivalent International Financial 

Reporting Standards (AIFRS) on the 

TC position of complying entities. 

The amendments will generally: 

– 

– 

prohibit the recognition of deferred 

tax liabilities and assets and 

defined benefit liability or assets 

for TC purposes where they are 

recognised under the accounting 

standards, and 

subject to complying with certain 

valuation requirements, permit 

entities (other than those treated 

as authorised deposit-taking 

institutions) to recognise internally- 

generated intangible assets and 

revalue intangible assets where this 

is currently prohibited due to the 

absence of an ‘active market’. 

The proposed amendments are to 

apply to the first and subsequent 

income years after Royal Assent. 

• amendments to the fringe benefits 

tax law to ensure that the ‘otherwise 

deductible rule’ applies appropriately 

to benefits provided in relation to 

investments that the employee holds 

jointly with a third party 

The proposed commencement date of 

this measure depends on the nature of 

the benefit provided. 

• amendments to the ‘eligible 

investment business’ rules 

for managed funds to: 

– 

clarify the scope and meaning of 

investing in land for the purpose 

of deriving rent to ensure that 

fixtures on land are included, 

and introduce a 25 per cent 

safe harbour allowance for nonrental, 

non-trading income from 

– 

– 

investments in land, which will 

operate in conjunction with the 

existing rental purposes tests on an 

overall land portfolio basis 

provide an additional safe harbour 

test by allowing up to 2 per cent 

of gross revenue of the trustee to 

be income from other than eligible 

investment businesses (except from 

carrying on a trading activity on a 

commercial basis) so as to reduce 

the scope for inadvertent minor 

breaches that would otherwise 

trigger company taxation for a 

trust, and 

expand the range of financial 

instruments that a managed fund 

may invest in or trade to include 

additional financial instruments 

that arise under financial 

arrangements other than certain 

excluded arrangements. 

The proposed amendments are to 

apply to the first and subsequent 

income years after Royal Assent. 

Further information 

If you have any queries about issues 

raised in this edition or would like to be 

placed on the mailing list for TaxTalk, 

please contact one of the following: 

Adelaide 

Scott Bryant, Partner 

Phone: +61 8 8218 7450 

Fax: +61 8 8218 7812 

scott.a.bryant@au.pwc.com 

Brisbane 

Tom Seymour, Partner 

Phone: + 61 7 3257 8623 

Fax: + 61 7 3031 9312 

tom.seymour@au.pwc.com 

Melbourne 

David Wills, Partner 

Phone: +61 3 8603 3183 

Fax: +61 3 8613 2880 

david.a.wills@au.pwc.com 

Perth 

Frank Cooper, Partner 

Phone: +61 8 9238 3332 

Fax: +61 8 9488 8771 

frank.cooper@au.pwc.com 

Sydney 

Lyndon James, Partner 

Phone: +61 2 8266 3278 

Fax: +61 2 8286 3278 

lyndon.james@au.pwc.com 

© 2008 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the individual member firms of the worldwide PricewaterhouseCoopers 

organisation. All rights reserved. The information in this publication is provided for general guidance on matters of interest only. It should not be 

used as a substitute for consultation with professional accounting, tax, legal or other advisers. 

This document is not intended or written by PricewaterhouseCoopers to be used, and cannot be used, for the purpose of avoiding tax 

penalties that may be imposed on the tax payer. Before making any decision or taking any action, you should consult with your regular 

PricewaterhouseCoopers’ professional. No warranty is given to the correctness of the information contained in this publication and no liability 

is accepted by the firm for any statement or opinion, or for any error or omission. TaxTalk is a registered trademark. Print Post Approved 

PP255003/01192. 

Editor 

Elly Parker 

PricewaterhouseCoopers Tax 

Phone: +61 3 8603 2673 

elly.parker@au.pwc.com 

Technical Editor 

Geoff Dunn, Director 

Tax Technical Knowledge Centre 

PricewaterhouseCoopers Tax 

Phone: +61 2 8266 5220 

geoff.dunn@au.pwc.com 

Media enquiries 

Lisa Jervis 

Phone: +61 2 8266 5743 

Mobile: 0419 432 239 

lisa.jervis@au.pwc.com

Thin capitalisation: eroding asset values and increasing debt ... - PwC

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