Thin capitalisation: eroding asset values and increasing debt ... - PwC
Thin capitalisation: eroding asset values and increasing debt ... - PwC
Thin capitalisation: eroding asset values and increasing debt ... - PwC
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Issue 106: December 2008<br />
Electronic Bulletin of Australian Tax Developments<br />
Inside this issue<br />
<strong>Thin</strong> <strong>capitalisation</strong>: <strong>eroding</strong> <strong>asset</strong> <strong>values</strong><br />
<strong>and</strong> <strong>increasing</strong> <strong>debt</strong> levels 1<br />
Review of tax arrangements applying to<br />
managed investment trusts 3<br />
Scheme penalty provisions <strong>and</strong><br />
voluntary disclosure 8<br />
New Cartel legislation 9<br />
Corporate tax developments 11<br />
International developments 12<br />
Goods <strong>and</strong> Services Tax<br />
(GST) developments 15<br />
State taxes 16<br />
Personal <strong>and</strong> expatriate taxation 18<br />
Other news 21<br />
Legislation update 22<br />
<strong>Thin</strong> <strong>capitalisation</strong>: <strong>eroding</strong> <strong>asset</strong><br />
<strong>values</strong> <strong>and</strong> <strong>increasing</strong> <strong>debt</strong> levels<br />
Many taxpayers with a tax year that<br />
ends on 31 December, may need to<br />
urgently review their position under<br />
the thin <strong>capitalisation</strong> (TC) rules of the<br />
taxation law because of the effect that<br />
the current economic environment has<br />
had on the balance sheet. Unless action<br />
is undertaken before the end of the year,<br />
many taxpayers may lose the benefit<br />
of claiming deductions for the costs<br />
(known as ‘<strong>debt</strong> deductions’) associated<br />
with <strong>debt</strong> finance used to carry on<br />
the business.<br />
Generally, under the TC rules,<br />
‘multinational’ taxpayers are unable<br />
to deduct all of the taxpayer’s ‘<strong>debt</strong><br />
deductions’ where level of ‘<strong>debt</strong>’ as<br />
determined under the TC rules exceeds<br />
what is defined as the ‘maximum<br />
allowable <strong>debt</strong>’. In this respect, where<br />
the taxpayer has excess <strong>debt</strong> for TC<br />
purposes, some proportion of the<br />
‘<strong>debt</strong> deductions’ will be denied tax<br />
deductibility. This will be the case<br />
regardless of the tax treatment of these<br />
amounts in the h<strong>and</strong>s of the recipient.<br />
In cases where, for example, loans<br />
are made to a taxpayer by associated<br />
entities, the cost of losing the benefit of<br />
a tax deduction whilst the associate is<br />
still subject to tax on the interest income<br />
derived, is a cost that many taxpayers<br />
are unable to recover in pricing their<br />
goods <strong>and</strong> services. In a business<br />
context taxpayers should endeavour<br />
to reduce or eliminate this cost through<br />
legitimate planning.<br />
Except in the case of authorised deposit<br />
taking institutions (ADIs), the ‘maximum<br />
allowable <strong>debt</strong>’ (ie the maximum level<br />
of prescribed <strong>debt</strong> at which ‘<strong>debt</strong><br />
deductions’ will not be forfeited) is<br />
determined by reference to the <strong>asset</strong>s<br />
<strong>and</strong> liabilities of the taxpayer, unless the<br />
taxpayer uses what is referred to as the<br />
‘arm’s length <strong>debt</strong> test’. Whilst the ‘arm’s<br />
length <strong>debt</strong> test’ can be used by all<br />
taxpayers, it will depend on the particular<br />
circumstances whether a higher <strong>debt</strong><br />
level can be obtained under that method,<br />
when compared with the use of <strong>asset</strong><br />
<strong>and</strong> liability balances under what is<br />
referred to as the ‘safe harbour’ method<br />
of determining ‘maximum allowable<br />
<strong>debt</strong>’.<br />
Since the ‘arm’s length <strong>debt</strong> test’<br />
takes into account specified facts <strong>and</strong><br />
circumstances existing in the tax year<br />
under consideration (such as the state<br />
of the Australian economy during the<br />
year) <strong>and</strong> requires a determination of<br />
the amount of <strong>debt</strong> that a hypothetical<br />
independent lending institution would<br />
reasonably be expected to have<br />
provided on the terms <strong>and</strong> conditions<br />
applying to the taxpayer’s actual <strong>debt</strong>,<br />
it may well be, that taxpayers who have<br />
historically relied on the ‘arm’s length<br />
<strong>debt</strong> test’ will have difficulty in the current<br />
economic environment of being able<br />
to demonstrate that the arm’s length<br />
<strong>debt</strong> amount calculated in the previous<br />
year remains appropriate for the current<br />
year. If that is the case, those taxpayers<br />
may effectively be forced to use the<br />
‘safe harbour <strong>debt</strong> method’ (or for some<br />
taxpayers the ‘worldwide gearing test’).<br />
Under the ‘safe harbour’ method, the<br />
starting point is to ascertain the <strong>values</strong><br />
of the taxpayer’s <strong>asset</strong>s <strong>and</strong> liabilities at<br />
the relevant TC measurement dates. The<br />
actual measurement dates to be used<br />
will depend on the method of ‘averaging’<br />
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chosen by the taxpayer, but regardless<br />
of the ‘averaging’ method chosen, the<br />
year end balances must be included<br />
in calculating the average. Taxpayers<br />
should also be conscious of the ‘part<br />
year’ rules inherent under the TC regime<br />
which can result in the requirement to<br />
determine the TC position for distinct<br />
periods of the year during which the<br />
taxpayer is differently ‘classified’ under<br />
the provisions. The issue here is that<br />
if in the present tax year, there is a<br />
requirement to apply the provisions to<br />
more than one period in the year, some<br />
of the planning opportunities generally<br />
available to taxpayers will only be able<br />
to be applied to the period which is<br />
still ‘open’.<br />
Leaving aside the problems associated<br />
with the ‘part year’ rules, the likely<br />
problem that many taxpayers will face<br />
in calculating their ‘safe harbour’ <strong>debt</strong><br />
amount for the current year is that in<br />
the current economic environment, the<br />
value of <strong>asset</strong>s may have eroded to a<br />
point where existing <strong>asset</strong> <strong>values</strong> will<br />
be insufficient for the ‘safe harbour’<br />
<strong>debt</strong> amount to support the level of<br />
the taxpayer’s <strong>debt</strong> which gives rise to<br />
‘<strong>debt</strong> deductions’. In other words, the<br />
current economic environment may<br />
have the effect of <strong>eroding</strong> <strong>asset</strong> <strong>values</strong><br />
to a point where ‘<strong>debt</strong> deductions’ will<br />
be disallowed either wholly or in part.<br />
The effect of this outcome may well<br />
be a further reduction in net worth of<br />
the taxpayer through the income tax<br />
cost required to be recorded in the<br />
financial statements.<br />
A further problem that may be faced by<br />
taxpayers this year relates to the recent<br />
fall in value of the Australian currency<br />
(relative to foreign currencies), since this<br />
may have a detrimental impact on the<br />
taxpayer’s balance sheet, particularly<br />
where borrowings are denominated<br />
in foreign currency <strong>and</strong> there is an<br />
unrealised foreign exchange loss<br />
required to be recorded. In this respect,<br />
even if the <strong>debt</strong> is hedged, the value<br />
of the <strong>debt</strong> to be measured against<br />
the ‘safe harbour’ <strong>debt</strong> amount (or the<br />
‘arm’s length’ <strong>debt</strong> amount if the arm’s<br />
length <strong>debt</strong> test is chosen) will generally<br />
be the value of the <strong>debt</strong> measured in<br />
Australian currency, with no reduction<br />
being made for the value of the ‘hedge<br />
<strong>asset</strong>’. The ‘hedge <strong>asset</strong>’ would simply<br />
be included in the value of <strong>asset</strong>s taken<br />
into account in determining the ‘safe<br />
harbour’ <strong>debt</strong> amount. Whilst with a fully<br />
hedged liability no adverse impact on<br />
the taxpayer’s balance sheet would arise<br />
from translating amounts to Australian<br />
currency, the fact that under the safe<br />
harbour method, only 75 per cent of<br />
the value of ‘included’ <strong>asset</strong>s are taken<br />
into account, means that the value of<br />
the hedge <strong>asset</strong> taken into account will<br />
only be 75 per cent of the additional<br />
<strong>debt</strong> value arising because of the foreign<br />
currency restatement.<br />
On the <strong>asset</strong> side of the balance sheet,<br />
whilst the fall in currency value may<br />
increase the carrying value of foreign<br />
<strong>asset</strong>s, since equity investments held<br />
in controlled foreign entities are excluded<br />
from <strong>asset</strong>s used by the taxpayer in the<br />
calculation of ‘safe harbour’ <strong>debt</strong>, any<br />
increase in the value of these <strong>asset</strong>s<br />
because of movements in the value of<br />
the Australian currency will provide no<br />
benefit to the taxpayer in calculating<br />
‘safe harbour’ <strong>debt</strong>.<br />
Not surprising, with the present volatility<br />
of financial markets, many taxpayers<br />
are undertaking in-depth reviews<br />
of their current TC position <strong>and</strong> are<br />
considering strategies to reduce adverse<br />
consequences through the denial<br />
of tax deductions. Strategies being<br />
considered include:<br />
• equity injections <strong>and</strong> <strong>debt</strong> reductions<br />
• repatriation of monies from<br />
overseas jurisdictions<br />
• applying the arm’s length test<br />
• maximising concessions available<br />
such as the associate entity <strong>debt</strong><br />
<strong>and</strong> controlled foreign entity <strong>debt</strong><br />
concessions<br />
• reviewing selection of<br />
averaging method<br />
• revaluation of <strong>asset</strong>s<br />
Implementing some of these strategies<br />
will present other tax issues that need to<br />
be taken into account, <strong>and</strong> any strategy<br />
adopted must be based on a proper<br />
analysis of all inherent <strong>and</strong> associated<br />
taxation implications for the taxpayer <strong>and</strong><br />
other affected entities.<br />
Taxpayers should also be aware of<br />
the Commissioner’s preliminary views<br />
as to how the ‘safe harbour <strong>debt</strong> test’<br />
interacts with the transfer pricing<br />
provisions of Australia’s tax law.<br />
We featured this issue in our February<br />
2008 <strong>and</strong> July 2008 editions of TaxTalk.<br />
In summary we noted in those articles<br />
that the Commissioner in Draft Taxation<br />
Determination TD 2007/D20 was of the<br />
view, that the transfer pricing provisions<br />
could be used to adjust the pricing<br />
of ‘intra-group’ financial transactions<br />
even if the taxpayer has a <strong>debt</strong> capital<br />
structure that is within the ‘safe harbour’<br />
<strong>debt</strong> amount determined under the TC<br />
rules. Taxpayers with ‘intra-group’ <strong>debt</strong><br />
thus have an additional matter to take<br />
into consideration in reviewing their TC<br />
position for the current <strong>and</strong> future years.<br />
Another matter to take into account<br />
is that from 1 January 2009 many<br />
taxpayers will be required to prepare<br />
their ‘safe harbour’ statement of<br />
<strong>asset</strong>s <strong>and</strong> liabilities on the basis of<br />
the Australian equivalent International<br />
Financial Reporting St<strong>and</strong>ards (AIFRS).<br />
Presently, those taxpayers may choose<br />
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to apply the former generally accepted<br />
accounting st<strong>and</strong>ards under transitional<br />
rules which were introduced some time<br />
ago. While it is difficult to generalise,<br />
there will no doubt be many taxpayers<br />
whose balance sheets are adversely<br />
impacted by the application of AIFRS to<br />
the TC calculations. Remedial action may<br />
need to be taken before 31 December<br />
2008 to ensure that when the next tax<br />
year begins, the level of <strong>debt</strong> giving rise<br />
to ‘<strong>debt</strong> deductions’ is not excessive<br />
relative to the taxpayer’s ‘safe harbour’<br />
<strong>debt</strong> position.<br />
In considering this issue, taxpayers<br />
should be aware of proposed changes<br />
to the TC rules which would:<br />
• prohibit the recognition for TC<br />
purposes of deferred tax liabilities <strong>and</strong><br />
<strong>asset</strong>s, <strong>and</strong> prohibit the recognition<br />
of the <strong>asset</strong> or liability recorded in<br />
the balance sheet in respect of a<br />
defined benefit fund (ie overfunded or<br />
underfunded obligations respectively)<br />
operated by the taxpayer, <strong>and</strong><br />
• subject to complying with certain<br />
valuation requirements, permit entities<br />
(other than those treated as ADIs) to<br />
recognise for TC purposes the value of<br />
internally generated intangible <strong>asset</strong>s<br />
<strong>and</strong> to revalue intangible <strong>asset</strong>s where<br />
recognition <strong>and</strong> revaluation is currently<br />
prohibited under the accounting<br />
st<strong>and</strong>ards due to the absence of<br />
an ‘active market’.<br />
With respect to prohibiting the<br />
recognition of deferred tax balances, in<br />
the current environment where taxpayers<br />
may be incurring losses, this change<br />
to the law may have a material adverse<br />
impact on calculation of a taxpayer’s<br />
‘safe harbour <strong>debt</strong> amount’. In case of<br />
prohibiting the recognition of defined<br />
benefit fund <strong>asset</strong> <strong>and</strong> liabilities, whilst<br />
this may be welcomed given the current<br />
<strong>values</strong> of listed securities, the fact that<br />
the changes will not apply for the year<br />
ending 31 December 2008 may pose a<br />
significant problem for taxpayers who<br />
are required to recognise defined benefit<br />
fund liabilities in their financial statements<br />
prepared under AIFS, <strong>and</strong> who choose<br />
not to use the transitional rules to<br />
prepare their ‘safe harbour’ statement<br />
of <strong>asset</strong>s <strong>and</strong> liabilities.<br />
With the changing economic environment<br />
<strong>and</strong> the changes to the TC rules outlined<br />
above, constant review of the taxpayer’s<br />
position under these rules to avoid<br />
unexpected surprises has become a<br />
business norm. As TC is listed by the<br />
Commissioner as an audit focus area,<br />
demonstrating that the TC position<br />
has been correctly determined should<br />
take high priority on any taxpayer’s risk<br />
management matrix.<br />
Further discussion on the thin<br />
<strong>capitalisation</strong> rules was included in our<br />
year-end tax planning special edition of<br />
TaxTalk in June 2008.<br />
Please contact your<br />
PricewaterhouseCoopers adviser if<br />
you have any need for assistance.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Peter Collins<br />
(03) 8603 6247<br />
peter.collins@au.pwc.com<br />
Mike Davidson<br />
(02) 8266 8803<br />
m.davidson@au.pwc.com<br />
Jim McMillan<br />
(08) 8218 7308<br />
jim.mcmillan@au.pwc.com<br />
Warren Dick<br />
(08) 923 83589<br />
warren.dick@au.pwc.com<br />
Review of tax<br />
arrangements<br />
applying to<br />
managed<br />
investment trusts<br />
On 29 October 2008, the Chairman of<br />
the Board of Taxation announced the<br />
release of a discussion paper on the<br />
Board’s review of the tax arrangements<br />
applying to managed investment trusts<br />
(MITs). The discussion paper is intended<br />
to facilitate ‘stakeholder’ consultation.<br />
The closing date for submissions is<br />
19 December 2008.<br />
The following provides a high-level<br />
summary of the key issues the Board has<br />
identified in its review, as well as certain<br />
questions on which the Board is seeking<br />
‘stakeholder’ submissions.<br />
Options for determining<br />
tax liabilities of MITs <strong>and</strong><br />
beneficiaries<br />
Under the terms of reference applying<br />
to the review, the Board is required to<br />
explore alternatives for the taxation of<br />
trust income that are broadly consistent<br />
with five key policy principles:<br />
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1. the tax treatment of beneficiaries<br />
should largely replicate the tax<br />
treatment applying if the beneficiary<br />
had derived the trust income directly<br />
2. ‘flow though’ tax treatment<br />
should only apply to trusts<br />
undertaking activity that is primarily<br />
passive investment<br />
3. beneficiaries should be assessable<br />
on their share of the net income of<br />
the trust whether it is paid or applied<br />
for their benefit<br />
4. the trustee should be assessable on<br />
trust income that is not assessable to<br />
beneficiaries in a particular year, <strong>and</strong><br />
5. trust losses should generally be<br />
trapped in the trust subject to<br />
special rules for utilisation.<br />
Having regard to these terms of<br />
reference, the discussion paper<br />
outlines the following three options<br />
for determining tax liabilities of MITs<br />
<strong>and</strong> beneficiaries (as alternatives for<br />
the current reliance on the concept of<br />
present entitlement for allocating liability<br />
between the trust <strong>and</strong> its beneficial<br />
owners) <strong>and</strong> requests ‘stakeholder’<br />
submissions with respect to these<br />
options <strong>and</strong> any other options that<br />
might be appropriate:<br />
• Option 1 – the trustee is assessed<br />
on the net income after allowing a<br />
deduction for certain distributions<br />
made to beneficiaries (the ‘trustee<br />
assessment <strong>and</strong> deduction model’).<br />
Under this option, the liability of<br />
beneficiaries depends on the extent of<br />
distributions made <strong>and</strong>, where the MIT<br />
has accrued income which is included<br />
in assessable income, the MIT may<br />
need to borrow to make distributions<br />
to beneficiaries to avoid tax being<br />
assessed on undistributed income.<br />
• Option 2 – the trustee is exempt from<br />
tax <strong>and</strong> instead, tax on the trust’s<br />
net income is always assessable<br />
to beneficiaries irrespective of<br />
distributions made to them (the<br />
‘trustee exemption model’). The<br />
discussion paper notes that this<br />
provides a high degree of certainty<br />
about where the tax liability will fall,<br />
since there is no requirement for<br />
any distributions to be made for<br />
the beneficiaries to be assessed.<br />
• Option 3 – tax on the trust’s net<br />
income is always assessable to<br />
beneficiaries, provided a substantial<br />
minimum level of annual distributions<br />
(for example 90 per cent) is attained.<br />
The discussion paper notes that this<br />
option reduces the extent to which<br />
beneficiaries are liable to tax on<br />
amounts not received, but there may<br />
be some additional compliance costs<br />
for trustees, who must ensure that<br />
the minimum levels of distributions<br />
are attained to ensure that the trustee<br />
is not taxed. If the minimum level of<br />
distributions is not made, the Board<br />
suggests that the trust could fall out<br />
of the MIT regime entirely with the<br />
income being subject to tax under the<br />
existing trust provisions (Division 6 of<br />
the Income Tax Assessment act 1936).<br />
Alternatively, the Commissioner could<br />
be given discretion to permit the trust<br />
to continue to be taxed as an MIT,<br />
or the trustee could be assessed on<br />
the undistributed amount possibly at<br />
penal rates.<br />
The further option raised by the Board is<br />
to retain the existing Division 6 structure<br />
<strong>and</strong> simply redefine key terms such<br />
as ‘present entitlement’, ‘income of<br />
the trust’ <strong>and</strong> ‘share’ of that income.<br />
This approach would no doubt remove<br />
existing uncertainty with respect to<br />
matters such as the treatment of capital<br />
gains, <strong>and</strong> the debate as to whether the<br />
‘proportionate approach’ or the ‘quantum<br />
approach’ for allocation of net income<br />
is used.<br />
Defining the<br />
term ‘distribution’<br />
The Board notes that under Option 1<br />
(<strong>and</strong> potentially Option 3), it would be<br />
essential for the term ‘distribution’ to be<br />
defined, <strong>and</strong> in that context, the Board<br />
is seeking stakeholder comment on a<br />
definition that would provide clarity <strong>and</strong><br />
ensure appropriate tax outcomes.<br />
Tax rate for undistributed/<br />
unallocated income<br />
The Board raises the issue as to what<br />
tax rate should apply to undistributed<br />
income under Option 1 <strong>and</strong> is seeking<br />
stakeholder input. After noting that the<br />
existing tax rate of 46.5 per cent was<br />
originally designed to remove the cost<br />
to the revenue of trusts accumulating<br />
income, the Board states in the context<br />
of MITs, that the tax rate to apply should<br />
reflect an appropriate balance between<br />
equity <strong>and</strong> integrity.<br />
When is tax<br />
liability determined?<br />
The Board notes that under current law,<br />
a beneficiary’s tax liability arises in the<br />
same year that the income is derived<br />
by the trust, even though an amount<br />
of income may not be distributed to<br />
the beneficiary until the following year.<br />
This position would apply under Option<br />
2, however under Option 1, the paper<br />
outlines the following two approaches<br />
that could be adopted:<br />
• The trustee could be given say three<br />
months after the end of the income<br />
year to make distributions for that<br />
year. The paper notes that a period<br />
of three months aligns with the period<br />
allowed for withholding by MITs from<br />
distributions to foreign residents.<br />
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• Taxable distributions could be<br />
assessable in the income year<br />
that they are actually received by<br />
beneficiaries (with the trustee claiming<br />
a deduction in the prior year in<br />
certain cases). The discussion paper<br />
acknowledges that this approach<br />
will lead to a deferral of tax revenue,<br />
<strong>and</strong> states that such cost to revenue<br />
would need to be balanced against<br />
the simplicity of resident beneficiaries<br />
being taxed on a distribution<br />
receipts basis.<br />
The Board notes that a further approach<br />
suggested by some stakeholders would<br />
be to change the tax year for all MITs<br />
to 31 March to allow more time for the<br />
preparation of distribution statements<br />
before 30 June.<br />
Treatment of ‘unders’ <strong>and</strong><br />
‘overs’<br />
The Board in its paper considers options<br />
for addressing the under-reporting <strong>and</strong><br />
over-reporting of net income by MITs.<br />
These options are:<br />
• a ’carry forward’ approach, allowing<br />
‘unders’ or ‘overs’ to carry forward into<br />
the following income year, or<br />
• a ‘credit/deduction’ approach,<br />
whereby MITs would pay tax <strong>and</strong> be<br />
subject to the general interest charge<br />
on an ‘under’ <strong>and</strong> attach a tax credit to<br />
the after-tax distribution. MITs would<br />
claim a deduction for an ‘over’ in<br />
the following income year.<br />
The Board is seeking input from<br />
stakeholders on the appropriate<br />
treatment of ‘unders’ <strong>and</strong> ‘overs’.<br />
This includes views as to whether,<br />
under either approach, there should<br />
be a de minimus rule of up to (say) 2<br />
per cent of the net income, <strong>and</strong> if so,<br />
what the consequences should be for<br />
breaching this rule.<br />
International considerations<br />
The Board outlines the current<br />
international tax treatment of MITs <strong>and</strong><br />
highlights the tax benefits afforded in<br />
other countries to certain collective<br />
investment vehicles (CIVs) that are<br />
treated as companies for tax purposes,<br />
even though they are not generally<br />
subject to tax. The Board notes the<br />
advantages available to these corporate<br />
CIVs (with ‘flow through’ tax treatment)<br />
when compared to an MIT, including<br />
for example the availability of tax treaty<br />
benefits to a CIV in its own right. This<br />
is in contrast to an MIT, where treaty<br />
benefits generally cannot be claimed by<br />
the MIT but by each beneficiary, based<br />
on the resident status of the beneficiary.<br />
In light of the above observations made<br />
in the paper, the Board is seeking input<br />
from stakeholders as to:<br />
• the issues they are currently<br />
experiencing under Australian<br />
domestic law <strong>and</strong> tax treaties<br />
with respect to the operation<br />
of international rules for MITs<br />
• suggestions for dealing with<br />
these issues, <strong>and</strong><br />
• whether there would be advantages<br />
in having a deemed corporate ‘flowthrough’<br />
CIV regime in Australia for<br />
international reasons.<br />
Dealing with distributions that<br />
are greater than or less than<br />
net income<br />
The Board notes that distributions of a<br />
MIT will not equal the trust’s net income<br />
for a number of reasons, including<br />
for what are referred to in the MIT<br />
industry as ‘timing’ <strong>and</strong> ‘permanent’<br />
differences. The Board further notes<br />
that the existing mechanism creates<br />
tax distortions <strong>and</strong>, in some cases, can<br />
result in the same amount being taxed<br />
twice. Under this mechanism, amounts<br />
in excess of net income either reduce the<br />
recipient beneficiary’s capital gains tax<br />
(CGT) cost base, or in some cases are<br />
assessed as ordinary income.<br />
In view of the existing problems, the<br />
Board raises a number of options for<br />
change. In the case of ‘tax deferred<br />
distributions’, an option would be to<br />
assess the beneficiary (after adjustment<br />
for the extent that the beneficiary would<br />
not be taxable in full on the gain), rather<br />
than adjusting the CGT cost base of<br />
the beneficiary’s interest. Adjustments<br />
would then need to be made at the trust<br />
level to ensure the distribution was not<br />
included in subsequently-calculated<br />
gains of the MIT. Where distributions<br />
are less than the net income, there<br />
would be a corresponding uplift in cost<br />
base of the units held by beneficiaries<br />
to avoid double tax.<br />
Character retention <strong>and</strong><br />
flow‐through<br />
The Board identifies the following issues<br />
that arise under the current approach of<br />
allowing the character of amounts in the<br />
h<strong>and</strong>s of the trustee to flow through to<br />
the beneficiaries of the trust:<br />
• uncertainty about how the general<br />
deductions of the trust should<br />
be allocated when calculating<br />
the separate components of the<br />
trust’s net income<br />
• uncertainty in determining amounts<br />
that are ‘attributable to’ or ‘taken into<br />
account in working out amounts’,<br />
included in the beneficiaries’<br />
assessable income under specific<br />
mechanisms existing in the income<br />
tax law, <strong>and</strong><br />
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• complexity <strong>and</strong> compliance costs for<br />
beneficiaries, MITs <strong>and</strong> the Australian<br />
Tax Office (ATO) in relation to reporting<br />
<strong>and</strong> record keeping.<br />
The options raised by the Board for<br />
<strong>increasing</strong> certainty <strong>and</strong> minimising<br />
compliance costs associated with<br />
character flow-through are to:<br />
• create specific legislation to ensure<br />
the flow-through of character<br />
• treat all MIT distributions in a similar<br />
manner to company dividends <strong>and</strong><br />
enact special rules which would<br />
preserve character flow-through in<br />
specific instances, or<br />
• allow different character retention<br />
arrangements for distributions<br />
to foreign residents which could<br />
be dependent on the size of their<br />
investment in the MIT. On this point,<br />
the Board refers to the suggestion<br />
of the Organisation for Economic<br />
Cooperation <strong>and</strong> Development (OECD)<br />
that different approaches be applied<br />
to ‘portfolio’ <strong>and</strong> ‘non-portfolio’ foreign<br />
beneficiaries in domestic ‘real estate<br />
investment trusts’ (REITs), such as a<br />
lower rate of final withholding tax for<br />
portfolio investors.<br />
Stakeholder comment is sought on a<br />
number of specific questions associated<br />
with this issue.<br />
Capital versus revenue<br />
account treatment of gains<br />
<strong>and</strong> losses<br />
The Board’s initial consultations have<br />
raised as an important issue, the capital<br />
versus revenue treatment of gains <strong>and</strong><br />
losses made on the disposal of <strong>asset</strong>s<br />
by MITs. The Assistant Treasurer has<br />
confirmed that the Board should consider<br />
this issue as part of its review.<br />
The importance of this issue to the MIT<br />
industry cannot be understated. If gains<br />
are on revenue account, there will be no<br />
CGT discount available to beneficiaries<br />
on distributions of gains made by the<br />
MIT, <strong>and</strong> for non-residents, distributions<br />
will be subject to MIT withholding tax<br />
(whereas if the gains were on capital<br />
account, the distributions may not be<br />
subject to CGT in some situations).<br />
Some stakeholders have suggested<br />
to the Board that the law should be<br />
amended to allow the CGT provisions<br />
of the tax law to be the primary code for<br />
calculating gains <strong>and</strong> losses in respect<br />
of investments by MITs in shares, units in<br />
unit trusts <strong>and</strong> real property. It is thought<br />
that an amendment of this nature would<br />
benefit the MIT industry by enhancing<br />
the competitiveness of Australian MITs,<br />
supporting the Government’s objective<br />
of making Australia the financial services<br />
hub of Asia, <strong>and</strong> reducing significant<br />
compliance costs for MITs.<br />
On the capital versus revenue issue, the<br />
Board is seeking stakeholder comment<br />
on a number of specific questions.<br />
Definition of fixed trust<br />
The paper explains that many of the<br />
concessions afforded to ‘widely held’<br />
or ‘pooled’ investment vehicles (including<br />
MITs) are predicated on the investment<br />
vehicle being a ‘fixed trust’. Such<br />
concessions include the trust loss rules,<br />
simplified franking rules <strong>and</strong> CGT ‘scrip<br />
for scrip’ rollover relief. This definition<br />
requires the beneficiaries of the trust to<br />
have a fixed entitlement to income <strong>and</strong><br />
capital of the trust. A ‘fixed entitlement’<br />
in turn requires the beneficiary to have a<br />
‘vested <strong>and</strong> indefeasible interest’ which<br />
may not be able to be satisfied by some<br />
MITs because of the power of the trustee<br />
to issue <strong>and</strong> redeem units, <strong>and</strong>/or to<br />
vary the rights of the unit holders by<br />
amending the trust deed.<br />
The paper identifies the following<br />
potential options for clarifying the<br />
treatment of fixed trusts:<br />
• introducing a rule whereby certain<br />
MITs will be deemed to be ‘fixed<br />
trusts’, or<br />
• altering the definition of the term ‘fixed<br />
trust’ to ensure that the term does not<br />
rely on the concept of ‘vested <strong>and</strong><br />
indefeasible’ interest.<br />
The Board is seeking comments on<br />
the advantages <strong>and</strong> disadvantages of<br />
these potential options, <strong>and</strong> any other<br />
options for clarifying the treatment of<br />
‘fixed trusts’.<br />
Eligible investment business<br />
The paper outlines the existing law<br />
(in Division 6C of the Income Tax<br />
Assessment Act 1936), under which<br />
an MIT is generally subject to tax as<br />
if it was a company where the trust’s<br />
activities extend beyond an ‘eligible<br />
investment business’ (EIB) or (under the<br />
‘control test’) the trust controls another<br />
entity whose activities extend beyond<br />
an EIB. The paper discusses what<br />
approaches can be taken to develop<br />
principles to distinguish between when<br />
an activity of a listed, publicly offered or<br />
widely held trust should be subject to<br />
taxation to the trustee at company rates<br />
(with the beneficiaries being treated as<br />
deemed shareholders), rather than to the<br />
beneficiaries on a taxation ‘flow-through’<br />
basis. In particular, the paper focuses on<br />
the relevance of the ‘control test’ <strong>and</strong> the<br />
benefits of introducing a REIT regime to<br />
deal with EIB income. The paper raises<br />
a number of questions with respect to<br />
Division 6C (the ‘public trading trust’<br />
rules), including whether non-compliance<br />
with the EIB rule should result in only<br />
the ‘tainted’ income being denied ‘flow-<br />
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through’ tax treatment, <strong>and</strong> if so how this<br />
outcome could this be achieved.<br />
Other issues raised in the paper with<br />
respect to these existing public trading<br />
trust rules include:<br />
• whether an MIT should be able to<br />
establish itself as a controller of<br />
companies with active businesses<br />
<strong>and</strong> trading activities without the<br />
need to ‘staple’ the entities to obtain<br />
‘flow-through’ tax treatment<br />
• whether an MIT should be able to<br />
own or control any foreign entity<br />
carrying on a foreign trading activity<br />
or business without jeopardising ‘flowthrough’<br />
tax treatment<br />
• an examination of the definition of<br />
‘eligible investment business’ <strong>and</strong><br />
consideration of alternatives for<br />
refining the term, <strong>and</strong><br />
• whether the holding of a 20 per cent<br />
interest in a non-widely held trust by<br />
a complying superannuation fund<br />
should cause the trust to be a public<br />
unit trust <strong>and</strong> taxed as a company if<br />
the trust’s activities (or the activities<br />
of any ‘controlled’ entity) are not<br />
restricted to carrying on an EIB.<br />
Interim changes to the<br />
existing public trading<br />
trust rules<br />
The paper refers to interim measures in<br />
Tax Laws Amendment (2008 Measures<br />
No 5) Bill 2008, the brief details of which<br />
are set out in this TaxTalk edition under<br />
Legislation Update.<br />
While specific comment is not sought<br />
on the Bill, the Board has identified<br />
<strong>and</strong> discusses issues relating to these<br />
measures, which include:<br />
• investing in real estate for the<br />
substantial purpose of making capital<br />
gains may not meet the current EIB<br />
rules as the primary purpose may not<br />
be considered the derivation of rent<br />
• certain retirement village arrangements<br />
that choose to operate on a deferred<br />
management fee may not meet<br />
the test of investing in l<strong>and</strong> for the<br />
purpose of deriving rent<br />
• licence fees for rights to occupy,<br />
signage fees etc may be so substantial<br />
that the test of investing in l<strong>and</strong> for<br />
rent is not met, <strong>and</strong><br />
• the appropriateness of turnover <strong>and</strong><br />
profit-based rents of a particular kind<br />
being treated as rent.<br />
Existing Division 6B<br />
The paper reviews the present<br />
relevance of Division 6B of the Income<br />
Tax Assessment Act 1936, which<br />
was originally enacted to protect the<br />
corporate tax base from arrangements<br />
whereby <strong>asset</strong>s could be transferred<br />
by a company to a trust without capital<br />
gains on disposal <strong>and</strong> distributions of<br />
tax deferred income could be made<br />
free of any taxation implications.<br />
The paper highlights that Division 6B<br />
may no longer be necessary in light<br />
of changes to the income tax law<br />
following its implementation, such<br />
as the introduction of CGT, Division<br />
6C (applying to public trading trusts)<br />
<strong>and</strong> the dividend imputation system.<br />
Furthermore, the Board notes that it is<br />
accepted that the operation of Division<br />
6B discourages the commercial practice<br />
of transferring <strong>asset</strong>s to a unit trust.<br />
As a result of these concerns, the Board<br />
is seeking stakeholder comment on<br />
whether Division 6B should be retained,<br />
<strong>and</strong> if Division 6B were retained in some<br />
form, what changes should be made<br />
to the provisions (including views as to<br />
whether they be integrated within any<br />
specific tax regime for MITs).<br />
Defining the scope of a<br />
managed investment trust<br />
The paper discusses the concept of<br />
‘widely held’ for the purposes of any<br />
new MIT regime <strong>and</strong> identifies that the<br />
current rules in Division 6B <strong>and</strong> Division<br />
6C, give rise to uncertainty about what<br />
is a ‘unit trust’ for the purposes of<br />
those provisions.<br />
In recognition of these issues, the Board<br />
is seeking stakeholder feedback on the<br />
potential scope of a new MIT regime<br />
<strong>and</strong> asks:<br />
• What is an appropriate approach to<br />
defining ‘widely held’ for the purpose<br />
of any MIT regime?<br />
• Should rights attaching to interests in<br />
an MIT be uniform?<br />
• Should an MIT be able to make an<br />
irrevocable election to be governed by<br />
the new MIT regime?<br />
• What compliance burden might arise<br />
if some trusts are within the new MIT<br />
regime <strong>and</strong> others are outside <strong>and</strong><br />
there are cross holding funds?<br />
Investor directed portfolio<br />
services (IDPSs) <strong>and</strong> absolute<br />
entitlement<br />
The discussion paper highlights the<br />
typical features of an IDPS, which are<br />
summarised as follows:<br />
• investment <strong>asset</strong>s are required to be<br />
held on trust for the investor such that<br />
someone other than the investor is the<br />
legal owner<br />
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• investors are given a list of<br />
investment opportunities on which<br />
they have the discretion to make the<br />
investment decision<br />
• the operator is able to give effect to<br />
st<strong>and</strong>ing directions previously given<br />
by the investor, such as to rebalance<br />
the portfolio by buying <strong>and</strong> selling<br />
specified securities <strong>and</strong> <strong>asset</strong>s, <strong>and</strong><br />
• the <strong>asset</strong>s in which an investor has<br />
an economic interest are held by a<br />
custodian who is not the operator.<br />
The Board identifies as an issue for<br />
consideration with respect to IDPSs <strong>and</strong><br />
similar arrangements, whether tax law<br />
should recognise one or multiple trusts,<br />
or whether the law should ‘look through’<br />
to the investor as a relevant taxpayer. In<br />
this respect the Board notes that some<br />
stakeholders take the view that IDPSs do<br />
not fall within Division 6, <strong>and</strong> that capital<br />
gains <strong>and</strong> losses from the investment are<br />
taken to be made by the investor directly.<br />
Consequently, the Board is seeking<br />
stakeholder comment with respect to the<br />
following questions:<br />
• In designing a new MIT tax regime,<br />
whether it would be appropriate<br />
to carve out certain classes of<br />
arrangement <strong>and</strong>, if so, what classes?<br />
• If IDPS arrangements were to fall<br />
within a MIT tax regime <strong>and</strong> in<br />
substance compromise many single<br />
transparent trusts, whether it would be<br />
appropriate to provide special rules for<br />
them <strong>and</strong>, if so, what should they be?<br />
• Whether there should be a provision<br />
for revenue <strong>asset</strong>s that is equivalent to<br />
the CGT provision applying to treat an<br />
absolutely entitled beneficiary as the<br />
relevant taxpayer for CGT purposes in<br />
relation to a trust <strong>asset</strong>.<br />
Creating a new trust by<br />
amending the terms of a<br />
deed<br />
Another area of uncertainty highlighted<br />
by the paper relates to the application of<br />
tax law to MITs when amendments are<br />
made to constituent trust instruments,<br />
<strong>and</strong> whether this creates a new trust<br />
estate or an alteration to the nature of<br />
the beneficiaries’ interest in the trust.<br />
Ultimately, these determinations are not<br />
easily made <strong>and</strong> are a question of fact<br />
<strong>and</strong> degree, <strong>and</strong> consequently are a<br />
source of uncertainty. Accordingly the<br />
Board is seeking comment on:<br />
• any approaches, including potential<br />
legislative amendments for addressing<br />
these issues, <strong>and</strong><br />
• whether the extent of the relief that<br />
could be provided would depend<br />
on how an MIT is defined for tax<br />
purposes, eg whether an MIT<br />
is defined to include trusts with<br />
multiple classes of beneficiaries<br />
or whether MITs are required to be<br />
registered as managed investment<br />
schemes for the purposes of the<br />
Corporations Act 2001 (Cth).<br />
Implications for other trusts<br />
The terms of reference for the review<br />
require the Board to examine the<br />
desirability of extending relevant aspects<br />
of the recommended changes for MITs<br />
to tax arrangements for other trusts.<br />
Consequently, the Board is seeking<br />
comments on whether any options<br />
for change should be extended to<br />
other trusts.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Greg Lazarus, Partner<br />
(02) 8266 7334<br />
greg.lazarus@au.pwc.com<br />
Niall Healy, Partner<br />
(02) 8266 7882<br />
niall.healy@au.pwc.com<br />
Marco Feltrin, Partner<br />
(03) 8603 6796<br />
marco.feltrin@au.pwc.com<br />
Brian Lawrence, Partner<br />
(02) 8266 5221<br />
brian.lawrence@au.pwc.com<br />
Scheme penalty<br />
provisions<br />
<strong>and</strong> voluntary<br />
disclosure<br />
In the recent case of Lawrence v<br />
Commissioner of Taxation (2008) FCA<br />
1497 (currently under appeal), the<br />
Federal Court at first instance held that<br />
certain arrangements entered into by<br />
the taxpayer were subject to the antiavoidance<br />
provisions under Part IVA of<br />
the Income Tax Assessment Act 1936<br />
(ITAA 1936) relating to dividend stripping.<br />
Of particular interest are the Court’s<br />
views about the administrative ‘scheme<br />
penalty provisions’ in Schedule 1 to the<br />
Taxation Administration Act 1953 (TAA).<br />
Liability to an administrative penalty<br />
can arise where a taxpayer obtains a<br />
‘scheme benefit’ from a scheme <strong>and</strong><br />
it is reasonable to conclude that the<br />
taxpayer entered the scheme for the<br />
sole or dominant purpose of obtaining<br />
a tax benefit. The Court followed the<br />
2007 Federal Court decision in Federal<br />
Commissioner of Taxation v Starr (2007)<br />
164 FCR 436, which held that the<br />
determination of a taxpayer’s purpose<br />
in relation to the penalty provisions was<br />
to be made upon a subjective rather<br />
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than objective basis. This contrasts<br />
with the analysis of a taxpayer’s sole or<br />
dominant purpose under Part IVA, which<br />
is performed on an objective basis.<br />
In Lawrence, the taxpayer’s evidence did<br />
not support his position. However, if there<br />
was appropriate evidence of a taxpayer’s<br />
subjective ‘non-scheme’ purposes in<br />
another case, then a good argument<br />
could be made that the ‘scheme penalty<br />
provisions’ should not apply.<br />
In relation to remission of penalties for<br />
voluntary disclosure made before the<br />
Commissioner gives notice of a ‘tax<br />
audit’, the Court held that a notice issued<br />
by the Commissioner to the taxpayer<br />
under section 264 of the ITAA 1936,<br />
which required the taxpayer to attend<br />
an interview <strong>and</strong> produce documents,<br />
was not sufficient to amount to notice<br />
of a ‘tax audit’.<br />
While the Court noted that the taxpayer<br />
may have suspected a tax audit was to<br />
be conducted after receiving the notice<br />
under section 264, it did not accept that<br />
the notice itself, nor the covering letter,<br />
was sufficiently clear in stating that an<br />
examination of the taxpayer’s financial<br />
affairs was to be conducted. From<br />
this it appears that the Commissioner<br />
needs to use very clear words to notify<br />
a taxpayer of a ‘tax audit’.<br />
The result of the Court’s finding was<br />
that the taxpayer was treated as having<br />
made a voluntary disclosure before the<br />
Commissioner had notified him of a<br />
‘tax audit’, resulting in an 80 per cent<br />
reduction in the base penalty amount.<br />
Following this decision, the Australian<br />
Tax Office (ATO) released Miscellaneous<br />
Taxation Ruling MT 2008/3 in relation to<br />
voluntary disclosure. The ATO considers<br />
it will have informed a taxpayer that a<br />
‘tax audit’ is to be conducted if it uses<br />
phrases such as “under examination”<br />
or “under review”. It also considers that<br />
verbal notification of a ‘tax audit’ will be<br />
sufficient notification. Whether the ATO’s<br />
view sits comfortably with the test set<br />
out in Lawrence remains to be seen, but<br />
it is an area for closer consideration by<br />
taxpayers who have had administrative<br />
penalties imposed on them.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Michael Bersten, Partner<br />
(02) 8266 6858<br />
michael.bersten@au.pwc.com<br />
Chris Sievers, Partner<br />
(03) 8603 4208<br />
chris.sievers@au.pwc.com<br />
New Cartel legislation<br />
On 27 October 2008 the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs released<br />
the final version of the Trade Practices<br />
Amendment (Cartel Conduct <strong>and</strong> Other<br />
Measures) Bill 2008 which will introduce<br />
criminal penalties for cartel behaviour,<br />
bringing Australia in line with the United<br />
States <strong>and</strong> the United Kingdom. The<br />
proposed changes to amend the<br />
Trade Practices Act 1974 are expected<br />
to be introduced into Parliament in the<br />
current session of Federal Parliament.<br />
The criminal penalties will be in addition<br />
to the existing civil penalties. The civil<br />
prohibitions have also been amended<br />
to parallel the new criminal offences.<br />
Current civil regime<br />
Under the existing laws, corporations<br />
who engage in cartel behaviour face<br />
fines of up to $10 million or three times<br />
the value of the illegal benefit gained<br />
from the cartel, or where that cannot be<br />
ascertained, 10 per cent of the corporate<br />
group’s annual turnover in the preceding<br />
twelve months, whichever is greater.<br />
An individual who is found to<br />
have engaged in cartel behaviour<br />
currently faces a maximum fine of<br />
$500,000 per offence.<br />
New criminal penalties<br />
Under the proposed changes, the<br />
maximum penalty for an individual found<br />
guilty of cartel conduct is a 10 year jail<br />
term or a fine of $220,000. The penalty<br />
for a corporation will be the same as the<br />
fines that currently apply to corporations.<br />
Elements of the new<br />
criminal offences<br />
The Bill makes it an offence for a<br />
corporation to make or give effect to a<br />
contract, arrangement or underst<strong>and</strong>ing<br />
between competitors that contains a<br />
provision to fix prices, restrict outputs,<br />
divide or share markets, or rig bids.<br />
The Government has decided that<br />
the offences should not include the<br />
words ‘with the intention of dishonestly<br />
obtaining a benefit’, which were included<br />
in the Exposure Draft Bill released<br />
in January 2008. Submissions were<br />
made to Government which indicated<br />
that the dishonesty requirement would<br />
have made it more difficult to bring<br />
successful criminal prosecutions for<br />
cartel conduct. There were concerns<br />
that such a subjective test would confuse<br />
juries <strong>and</strong> make prosecutions more<br />
difficult. Of all the countries which have<br />
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criminalised cartel conduct (including<br />
the United States, United Kingdom,<br />
Canada, France, Germany, Irel<strong>and</strong> <strong>and</strong><br />
Japan), only the United Kingdom has<br />
retained a dishonesty test. There has only<br />
been one successful prosecution in the<br />
United Kingdom.<br />
Instead of the ‘dishonesty’ test, the Bill<br />
applies fault elements under the<br />
Commonwealth Criminal Code (intention,<br />
<strong>and</strong> knowledge or belief) to the offences.<br />
According to the Government, this will<br />
ensure that the burden of proof is high<br />
enough to catch only serious offenders<br />
but also that the fault element is not<br />
used as an escape clause.<br />
Parallel civil prohibitions<br />
The Government will introduce a parallel<br />
regime of civil prohibitions on serious<br />
cartel conduct for corporations <strong>and</strong><br />
individuals. These civil prohibitions will<br />
contain the same elements as the new<br />
criminal offences <strong>and</strong> will replace the<br />
existing civil prohibitions in the Trade<br />
Practices Act 1974. The difference<br />
will be that the criminal offences<br />
require proof of the elements of the<br />
offence ‘beyond reasonable doubt’,<br />
<strong>and</strong> that certain ‘fault’ elements will<br />
be automatically applied under the<br />
Commonwealth Criminal Code.<br />
To minimise double jeopardy concerns,<br />
the Government will also enable civil<br />
proceedings to be postponed until<br />
criminal proceedings are completed.<br />
If the defendant is convicted, the civil<br />
proceedings will be terminated.<br />
Cartel provisions<br />
The final Bill has changed the tests<br />
that apply to determining whether a<br />
provision of a contract, arrangement<br />
or underst<strong>and</strong>ing qualifies as a<br />
cartel provision <strong>and</strong> is prohibited.<br />
The amendments bring the tests in<br />
line with the tests that apply under<br />
the existing civil prohibitions in the<br />
Trade Practices Act 1974, upon which<br />
the new cartel prohibitions have been<br />
modelled.<br />
For a breach involving price fixing, the<br />
test provides that the provision must<br />
have had the purpose, effect or likely<br />
effect of directly or indirectly fixing<br />
prices. For a breach comprising other<br />
forms of serious cartel conduct (output<br />
restrictions, market sharing <strong>and</strong> bid<br />
rigging), the test provides that the<br />
provision must have had the purpose of<br />
directly or indirectly restricting outputs,<br />
sharing markets or rigging bids.<br />
Civil or criminal?<br />
Under the new legislation, the Australian<br />
Competition <strong>and</strong> Consumer Commission<br />
(ACCC), in conjunction with the director<br />
of public prosecutions (DPP), will be<br />
required to decide at an early stage<br />
whether to pursue a criminal or civil case.<br />
A criminal charge will provide the ACCC<br />
with greater powers, including the power<br />
to arrange for the Australian Federal<br />
Police (AFP) to intercept telephone calls<br />
between suspected cartel participants,<br />
if the ACCC can obtain a warrant<br />
from the Federal Court. However, a<br />
criminal charge means that the ACCC<br />
will have to prove their case to a jury<br />
‘beyond reasonable doubt’, a higher<br />
burden of proof than the civil ‘balance<br />
of probabilities’ st<strong>and</strong>ard.<br />
Joint venture exemptions<br />
<strong>and</strong> partnerships<br />
If a cartel provision is for the purposes of<br />
a joint venture <strong>and</strong> the joint venture is for<br />
the production <strong>and</strong>/or supply of goods<br />
or services, then it is not caught by the<br />
proposed new cartel laws. Partnerships<br />
<strong>and</strong> any other unincorporated businesses<br />
which do not fit within the joint venture<br />
exemptions, may be caught by the<br />
proposed civil <strong>and</strong> criminal prohibitions.<br />
Conclusion<br />
As well as having the harshest anti-cartel<br />
laws in the world alongside the United<br />
States, the removal of ‘dishonesty’<br />
as the mental element for criminal<br />
cartel conduct reflects how gravely the<br />
Australian Government regards this kind<br />
of conduct. The possibility of criminal<br />
sanctions for company executives will be<br />
more of a deterrent for businesses that<br />
may otherwise rationalise corporate fines<br />
for cartel conduct as the ‘cost’ of doing<br />
such business.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Michael Daniel, Partner<br />
(02) 826 66618<br />
michael.daniel@au.pwc.com<br />
PricewaterhouseCoopers : 10
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
Corporate tax developments<br />
Withholding tax: the <strong>debt</strong> <strong>and</strong><br />
equity rules <strong>and</strong> interaction<br />
with tax treaties<br />
In Deutsche Asia Pacific Finance Inc<br />
v Commissioner of Taxation (No.2)<br />
[2008] FCA 1570, the applicant<br />
(taxpayer) sought a declaration from the<br />
Federal Court that it was not subject<br />
to withholding tax on distributions<br />
it received as a limited partner in a<br />
limited partnership (LP) formed in<br />
New South Wales. For income tax<br />
purposes, the LP was deemed to be a<br />
company under the limited partnership<br />
provisions of the tax law <strong>and</strong>, in respect<br />
of the partnership interest held by the<br />
taxpayer in the LP, it satisfied the ‘<strong>debt</strong><br />
test’ in the income tax law (<strong>and</strong> was thus<br />
classified as a ‘<strong>debt</strong> interest’) because<br />
of its ‘redeemable’ characteristics.<br />
Under Australian domestic tax law,<br />
while the taxpayer was deemed to be a<br />
shareholder in the LP, the fact that the<br />
interest was classified as a ‘<strong>debt</strong> interest’<br />
meant that for withholding purposes<br />
the distribution to the taxpayer was<br />
to be treated as interest <strong>and</strong> not as a<br />
dividend paid on a share.<br />
The issue under consideration before<br />
the Court was whether, because on the<br />
agreed facts the taxpayer was a ‘United<br />
States corporation’, the distribution<br />
was not subject to withholding tax as<br />
a result of the double tax treaty (DTT)<br />
between Australia <strong>and</strong> the United<br />
States (US). In this respect the taxpayer<br />
submitted that the distribution, which<br />
as mentioned above was deemed to<br />
be interest under domestic law, was<br />
exempt from Australian withholding tax<br />
under Article 11(3)(b) of the DTT on the<br />
basis that it was interest “derived by a<br />
financial institution which is unrelated<br />
to <strong>and</strong> dealing independently with the<br />
payer” of the interest. It was agreed that<br />
the taxpayer was a ‘financial institution’<br />
<strong>and</strong> that it was unrelated to <strong>and</strong> dealing<br />
independently with the payer of the<br />
distribution. However, under the DTT,<br />
Article 11(3)(b) was subject to Article<br />
11(9) which provided that ‘interest’<br />
could be subjected to tax at a rate<br />
not exceeding 15 per cent where the<br />
‘interest’ was “determined with reference<br />
to profits of the issuer”. Thus if Article<br />
11(9) applied, the exemption under<br />
Article 11(3)(b) was not available.<br />
In seeking the Court’s declaration that<br />
there should be no withholding tax, the<br />
taxpayer submitted that Article 11(9)<br />
was included in the DTT to combat<br />
avoidance of US tax by disguising profit<br />
distributions as interest <strong>and</strong> thus should<br />
not apply to the distribution in question.<br />
In support, the taxpayer submitted that<br />
since for Australian withholding tax<br />
purposes, the <strong>debt</strong> <strong>and</strong> equity rules in<br />
Australian tax law specifically deemed<br />
dividends on shares classified as ‘<strong>debt</strong><br />
interests’ to be interest, <strong>and</strong> interest on<br />
loans classified as ‘equity interests’ to<br />
be dividends, this domestic policy intent<br />
should not therefore be disturbed by<br />
Article 11(9) of the DTT.<br />
The Court rejected these submissions<br />
<strong>and</strong> further held that the interest received<br />
by the taxpayer was “determined with<br />
reference to the profits of the issuer”.<br />
While the taxpayer submitted that a<br />
partnership does not ‘issue’ a partnership<br />
interest, the Court was satisfied that<br />
since under Australian tax law, the LP<br />
was deemed to be a company <strong>and</strong> the<br />
partners deemed to be shareholders, it<br />
was not a ‘quantum leap’ to conclude<br />
that the LP was the ‘issuer’ of the<br />
partnership interest. As a result, the<br />
Court refused to make the declaration<br />
sought by the taxpayer, meaning that<br />
the taxpayer was not relieved of the<br />
withholding tax cost imposed.<br />
The case highlights not only the<br />
importance of properly classifying<br />
financial instruments under the <strong>debt</strong> <strong>and</strong><br />
equity rules of the tax law, but also the<br />
importance of properly considering the<br />
interaction of any applicable double tax<br />
treaty with Australian domestic tax law.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Peter Collins, Partner<br />
(03) 8603 6247<br />
peter.collins@au.pwc.com<br />
Tony Clemens, Partner<br />
(02) 8266 2953<br />
tony.e.clemens@au.pwc.com<br />
Graham Sorensen, Partner<br />
(07) 3257 8548<br />
graham.sorensen@au.pwc.com<br />
Frank Cooper, Partner<br />
(08) 9238 3332<br />
frank.cooper@au.pwc.com<br />
PricewaterhouseCoopers : 11
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
International developments<br />
Papua New Guinea Budget<br />
The Papua New Guinea (PNG) Minister<br />
for Finance <strong>and</strong> Treasury h<strong>and</strong>ed down<br />
the PNG 2009 National Budget on<br />
18 November 2008, with a theme to<br />
“promote sustained economic growth<br />
<strong>and</strong> to further empower <strong>and</strong> transform<br />
the rural economy”. The Budget<br />
acknowledges that PNG is not immune<br />
from global economic conditions, <strong>and</strong> the<br />
Government seeks through its Budget<br />
to insulate the economy from global<br />
uncertainties <strong>and</strong> threats.<br />
Key components of the 2009<br />
Budget include:<br />
• It is expected that this Budget will<br />
deliver a small budget deficit in 2009<br />
of K10.3m (while the 2008 Budget<br />
originally forecasted a surplus equal to<br />
1 per cent of Gross Domestic Product,<br />
the revised estimate also indicates a<br />
small deficit of K9.5m in 2008).<br />
• It is expected that Government<br />
revenues <strong>and</strong> expenditure will both<br />
decrease in 2009.<br />
• Despite external factors, economic<br />
growth is forecast to be 6.2 per cent<br />
in 2009 (revised 2008 estimate is<br />
7.2 per cent), while inflation is forecast<br />
to decrease in 2009.<br />
• There appear to be no new taxes<br />
or increases in existing taxes, <strong>and</strong><br />
only minor changes to tax laws<br />
(however, there were new taxes<br />
introduced <strong>and</strong> changes to tax laws<br />
as part of the PNG Liquefied Natural<br />
Gas project amendments passed in<br />
September 2008).<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
David Caradus, Partner<br />
+675 321 1500<br />
david.caradus@pg.pwc.com<br />
Tax treaty with Japan enters<br />
into force<br />
On 10 November 2008 the Australian<br />
Government formalised Australia’s<br />
adoption of the new double tax treaty<br />
(new Convention) with Japan, the details<br />
of which were reported in our March<br />
2008 edition of TaxTalk. Under the<br />
terms of the notification signed by the<br />
Assistant Treasurer, the new Convention<br />
enters into force on 3 December 2008.<br />
From an Australian tax perspective, this<br />
commencement date means that the new<br />
Convention will apply from:<br />
• 1 January 2009 with respect to<br />
Australian withholding tax, <strong>and</strong><br />
• the start of the year of income<br />
commencing on or after 1 July 2009<br />
with respect to income tax.<br />
From a Japanese tax perspective, the<br />
new Convention will apply as follows:<br />
• concerning taxes on incomes withheld<br />
at source, for amounts taxable on or<br />
after 1 January 2009<br />
• concerning taxes on incomes not<br />
withheld at source, for incomes in any<br />
taxable year that starts on or after 1<br />
January 2009, <strong>and</strong><br />
• concerning other taxes, for taxes in<br />
any taxable year that starts on or after<br />
1 January 2009.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Adrian Green, Partner<br />
(02) 8266 7890<br />
adrian.green@au.pwc.com<br />
Australia <strong>and</strong> the UK to<br />
commence tax treaty<br />
negotiations<br />
On 28 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs issued a<br />
media release advising that Australia had<br />
commenced negotiations on a revised<br />
tax treaty with the United Kingdom<br />
(UK). The Assistant Treasurer said that<br />
“modernising the existing tax treaty,<br />
which was signed in 2003, will ensure<br />
that optimal tax conditions operate for<br />
those businesses <strong>and</strong> individuals with<br />
dealings in both countries”.<br />
Tax information exchange<br />
agreement with the<br />
British Virgin Isl<strong>and</strong>s<br />
On 28 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs issued a<br />
media release advising that Australia<br />
had signed a Tax Information Exchange<br />
Agreement (TIEA) with the British Virgin<br />
Isl<strong>and</strong>s (BVI). In his media release, the<br />
Assistant Treasurer stated that the TIEA:<br />
• provides for full exchange of<br />
information on request in both criminal<br />
<strong>and</strong> civil tax matters<br />
• builds upon legislation in both<br />
jurisdictions which already provides<br />
PricewaterhouseCoopers : 12
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
for mutual legal assistance in criminal<br />
matters, <strong>and</strong><br />
• reflects both Governments’<br />
shared commitment to implement<br />
Organisation for Economic<br />
Cooperation <strong>and</strong> Development<br />
(OECD) principles of transparency <strong>and</strong><br />
effective exchange of information, to<br />
eliminate harmful tax practices.<br />
One of the terms of the TIEA is that<br />
Australia will remove any governmental<br />
references to the BVI as a ‘tax haven’<br />
<strong>and</strong> will list the BVI as an ‘information<br />
exchange country’ in the Taxation<br />
Administration Regulations 1976. The<br />
effect of this, as noted in the media<br />
release, is that residents of the BVI will<br />
obtain access to reduced withholding<br />
tax rates on distributions of certain<br />
income they may receive from Australian<br />
managed investment trusts.<br />
The Assistant Treasurer also advised<br />
that in addition to the TIEA, Australia<br />
<strong>and</strong> the BVI had signed an agreement<br />
for the allocation of taxing rights with<br />
respect to certain income of individuals,<br />
which will provide benefits to Australian<br />
<strong>and</strong> BVI residents. He also advised that<br />
Australia <strong>and</strong> the BVI had agreed to enter<br />
into discussions, when appropriate, to<br />
foster further co-operation in areas of<br />
mutual interest.<br />
United States relaxes rules<br />
on taxing loans from a CFC<br />
As a response to liquidity problems, the<br />
United States (US) Internal Revenue<br />
Service (IRS) has exp<strong>and</strong>ed the<br />
exception that allows a controlled foreign<br />
corporation (CFC) to lend money to their<br />
US parent corporation without the loan<br />
being subject to full US federal income<br />
tax. However, the concession is subject<br />
to a number of limitations, namely:<br />
• it does not apply to <strong>debt</strong> obligations<br />
outst<strong>and</strong>ing for sixty (60) days or more<br />
• in the aggregate, such obligations may<br />
not be outst<strong>and</strong>ing for one hundred<br />
<strong>and</strong> eighty (180) days or more during<br />
the tax year, <strong>and</strong><br />
• the concession is effective only<br />
for the first two tax years of a<br />
foreign corporation ending after<br />
3 October 2008 <strong>and</strong> beginning<br />
before 1 January 2010.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
David Snowden, Executive Director<br />
(02) 8266 7927<br />
david.snowden@au.pwc.com<br />
Irel<strong>and</strong> maintains low<br />
corporate tax rate<br />
The Irish Budget was announced<br />
on 14 October 2008 with strong<br />
expectations of significant cost restraints<br />
<strong>and</strong> tax increases given the current<br />
economic climate. While the Budget<br />
introduced some measures that will<br />
increase personal taxes, it has been<br />
widely acknowledged as pro-business<br />
because it:<br />
• retained the existing corporate tax rate<br />
of 12.5 per cent<br />
• increased the research <strong>and</strong><br />
development tax credit from<br />
20 to 25 per cent, <strong>and</strong><br />
• reduced the top rate of stamp duty<br />
on non-residential property from<br />
9 to 6 per cent.<br />
Given the current economic environment,<br />
it was inevitable that some tax rate<br />
increases would be announced.<br />
In this regard:<br />
• capital gains tax (on <strong>asset</strong> disposals)<br />
has increased from 20 to 22 per cent<br />
from 14 October 2008<br />
• the st<strong>and</strong>ard rate of Value Added Tax<br />
has increased from 21 to 21.5 per cent<br />
from 1 December 2008, <strong>and</strong><br />
• deposit interest retention tax (DIRT)<br />
has increased from 20 to 23 per cent<br />
on regular deposits <strong>and</strong> to 26 per cent<br />
on certain other savings products.<br />
From a personal tax perspective, there<br />
will be a new income tax levy that will<br />
apply at a rate of 1 per cent to gross<br />
income up to approximately €100,000<br />
per annum. A rate of 2 per cent will apply<br />
to income in excess of that amount.<br />
This brings the effective highest marginal<br />
rate on income to 48.5 per cent.<br />
Other measures introduced include:<br />
• an exemption from corporation tax<br />
<strong>and</strong> capital gains tax for new startup<br />
companies which commence<br />
trading in 2009, to the extent that<br />
their tax liability for the year does<br />
not exceed €40,000<br />
• an acceleration of the timing of<br />
corporation tax payments for<br />
companies with a corporation tax<br />
liability of more than €200,000 in<br />
their previous accounting period<br />
• an extension of the <strong>asset</strong> classes<br />
which qualify for accelerated<br />
tax depreciation for energy<br />
efficient equipment.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Neil Fuller, Partner<br />
(02) 8266 2025<br />
neil.fuller@au.pwc.com<br />
PricewaterhouseCoopers : 13
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
Australia joins global effort to<br />
combat tax havens<br />
On 21 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs issued a<br />
media release stating that the Australian<br />
Government endorses the strong<br />
action taken by seventeen countries at<br />
the Finance Minister meeting in Paris<br />
on Transparency <strong>and</strong> Exchange of<br />
Information convened by France <strong>and</strong><br />
Germany. At that meeting, the attendees<br />
supported the principle of converging<br />
responses to counteract tax fraud<br />
<strong>and</strong> evasion by adopting measures<br />
appropriate to each country <strong>and</strong><br />
coordination of some of their actions.<br />
In addition to agreeing on a number of<br />
other matters, the participating countries:<br />
• expressed their willingness to use<br />
the latest version of the Article 26<br />
of the Organisation for Economic<br />
Cooperation <strong>and</strong> Development<br />
(OECD) Model Tax Convention<br />
when negotiating new double taxation<br />
agreements, <strong>and</strong> to consider in due<br />
course terminating some of their<br />
existing treaties in cases where<br />
amendments could not be made<br />
accordingly. Article 26 creates an<br />
obligation to exchange information<br />
that is relevant to the correct<br />
application of a tax convention as well<br />
as for purposes of the administration<br />
<strong>and</strong> enforcement of domestic tax laws.<br />
• agreed to ask the OECD to establish<br />
a methodology to provide a clear<br />
distinction between the countries<br />
<strong>and</strong> territories which have substantially<br />
implemented the OECD st<strong>and</strong>ard on<br />
exchange of information <strong>and</strong> those<br />
which have not, <strong>and</strong> to publish its<br />
conclusions in 2009<br />
• agreed to ask the OECD to require<br />
from states which want to join<br />
the OECD to implement prior to<br />
membership the OECD principles<br />
on transparency <strong>and</strong> exchange of<br />
information, <strong>and</strong><br />
• agreed to call on aid agencies to<br />
give extra weight to the principles<br />
of tax transparency <strong>and</strong> information<br />
exchange when designing their<br />
aid programs.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Michael Bersten, Partner<br />
(02) 8266 6858<br />
michael.bersten@au.pwc.com<br />
Chris Sievers, Partner<br />
(03) 8603 4208<br />
chris.sievers@au.pwc.com<br />
Profits from leasing ships<br />
<strong>and</strong> aircraft<br />
Taxation Ruling TR 2008/8, issued<br />
on 22 October 2008, sets out the<br />
Commissioner’s view about:<br />
• what profits derived from the leasing<br />
of ships <strong>and</strong> aircraft fall within the<br />
ships <strong>and</strong> aircraft articles of each of<br />
Australia’s tax treaties<br />
• in what circumstances Australia is<br />
allocated a right to tax those leasing<br />
profits under the ships <strong>and</strong> aircraft<br />
article, <strong>and</strong><br />
• the method of assessment of<br />
such profits.<br />
Australia’s position in respect of the<br />
ships <strong>and</strong> aircraft article in its treaties<br />
is generally to preserve source taxing<br />
rights over profits from internal ship <strong>and</strong><br />
aircraft operations that include both<br />
transport <strong>and</strong> non-transport activities.<br />
Australia also generally treats as internal<br />
traffic the operations of ships or aircraft<br />
confined solely to places in Australia,<br />
even if they form part of an overall<br />
international voyage.<br />
TR 2008/8 was previously issued in<br />
draft as TR 2008/D3 <strong>and</strong> is substantially<br />
the same as the draft. However, the<br />
examples in the final Ruling have been<br />
updated to further clarity that:<br />
• Where Australia is allocated source<br />
country taxing rights over certain<br />
ship <strong>and</strong> aircraft leasing profits<br />
under the relevant tax treaty article,<br />
those leasing profits are deemed to<br />
have a source in Australia for the<br />
purposes of Australia’s domestic<br />
tax law provisions.<br />
• There are some circumstances as<br />
outlined in the Ruling that require<br />
the adoption of a reasonable basis<br />
of apportionment. According to<br />
the Ruling, an acceptable basis of<br />
apportionment is one based on time,<br />
similar to the time apportionment<br />
basis contained in Taxation Ruling TR<br />
2006/1 covering ship charterparties.<br />
The Ruling applies both before <strong>and</strong> after<br />
its date of issue.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Tony Carroll, Partner<br />
(02) 8266 2965<br />
tony.carroll@au.pwc.com<br />
Adrian Green, Partner<br />
(02) 8266 7890<br />
adrian.green@au.pwc.com<br />
Graham Sorensen, Partner<br />
(07) 3257 8548<br />
graham.sorensen@au.pwc.com<br />
PricewaterhouseCoopers : 14
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
Goods <strong>and</strong> Services Tax (GST)<br />
developments<br />
the cancellation fee may fall into one of<br />
the following categories, each of which<br />
involves a supply:<br />
• cancellation fees as consideration for<br />
the intended supply<br />
The Commissioner’s position<br />
on cancellation fees<br />
Draft GST Ruling GSTR 2008/D4,<br />
issued on 29 October 2008, sets out<br />
the Commissioner’s preliminary view<br />
on the GST consequences resulting<br />
from cancellation fees paid when an<br />
arrangement under which a particular<br />
supply was intended to be made<br />
(intended supply) does not proceed<br />
or does not proceed in the manner<br />
originally contemplated. Because<br />
cancellation fees are generally not<br />
charged when the supply is cancelled<br />
by the supplier (except in relation to<br />
a ticketed arrangement for the supply<br />
of performances, events or similar<br />
arrangements), the draft Ruling focuses<br />
on arrangements that are cancelled<br />
by or on behalf of a customer.<br />
In particular, GSTR 2008/D4<br />
principally examines whether there is<br />
a supply for which a cancellation fee is<br />
consideration, <strong>and</strong> also discusses the<br />
interaction between security deposits<br />
<strong>and</strong> cancellation fees, as well as the<br />
circumstances in which a cancellation<br />
fee is not consideration for a ‘supply’.<br />
In considering the GST consequences<br />
where there is a cancellation fee paid for<br />
failure to proceed with an arrangement,<br />
GSTR 2008/D4 notes that the failure<br />
to proceed with an arrangement under<br />
which an intended supply was to be<br />
made may involve:<br />
–<br />
–<br />
–<br />
the customer notifying the supplier<br />
that they are cancelling before<br />
the time of the intended supply<br />
(a ‘cancellation’)<br />
the customer failing to take<br />
advantage of the arrangement by<br />
not showing up at the time of the<br />
intended supply (a ‘no show’), or<br />
the customer showing up late<br />
(a ‘late show’).<br />
GSTR 2008/D4 notes that in some<br />
cases, the effect of a ‘late show’ will be<br />
exactly the same as a ‘no show’ <strong>and</strong> thus<br />
when used in GSTR 2008/D4, the term<br />
‘no show’ should be taken to include a<br />
‘late show’ that has the same outcome<br />
as a ‘no show’.<br />
In GSTR 2008/D4, the Commissioner<br />
considers whether the cancellation fee is<br />
consideration for a supply <strong>and</strong> states that<br />
• cancellation fees as consideration for a<br />
facilitation supply which occurs where<br />
the supplier performs certain tasks in<br />
preparing to make the intended supply<br />
• cancellation fees as consideration<br />
for different goods, services or other<br />
things related to the intended supply,<br />
such as where the supplier provides<br />
the customer with work in progress<br />
if the intended supply is cancelled<br />
• cancellation fees as consideration<br />
for the entry into obligations to do<br />
certain things under the terms of an<br />
arrangement, such as to not take<br />
other appointments at a particular<br />
time allocated to the customer<br />
• cancellation fees as consideration for<br />
a cancellation supply<br />
• cancellation fees as consideration<br />
for a release supply, such supply<br />
being the creation or surrender of<br />
contractual rights, or<br />
• cancellation fees as damages,<br />
penalties or compensation; in this<br />
case, while an amount paid in relation<br />
to a cancelled arrangement might be<br />
described as ‘damages’, a ‘penalty’<br />
or ‘compensation’, the Commissioner<br />
considers that this does not mean<br />
that the amount is not thereby<br />
consideration for a supply.<br />
The Commissioner expresses the view<br />
that in a very limited number of cases,<br />
the facts of a case may establish<br />
that a customer made an ex gratia<br />
payment (for example, a payment<br />
with the expectation of maintaining a<br />
good relationship with the supplier in<br />
circumstances where the supplier is not<br />
obliged to do, or has not done, anything<br />
in connection with the payment). In<br />
this rare situation, according to the<br />
Commissioner, the amount will not<br />
constitute consideration for a supply<br />
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because there is no connection between<br />
the ex gratia payment <strong>and</strong> any supply.<br />
GSTR 2008/D4 also considers the<br />
treatment of security deposits <strong>and</strong> states<br />
that although the decision of the High<br />
Court in the Reliance Carpet case (see<br />
June 2008 edition of TaxTalk) was made<br />
in the context of a formal contract for the<br />
sale of l<strong>and</strong>, the Commissioner considers<br />
the position to be no different where a<br />
security deposit is forfeited under the<br />
terms of a cancellation clause in other<br />
arrangements.<br />
Once finalised, the Ruling will explain<br />
the Commissioner’s view of the law as it<br />
applies both before <strong>and</strong> after its date of<br />
issue. Comments on the draft Ruling can<br />
be made until 10 December 2008.<br />
Notification requirements<br />
for claiming GST refunds<br />
Draft Miscellaneous Tax Ruling<br />
MT2008/D4, issued on 29 October 2008,<br />
sets out the Commissioner’s preliminary<br />
view on the notification requirements<br />
for an entity under section 105-55 of<br />
Schedule 1 to the Taxation Administration<br />
Act 1953 as amended from 1 July 2008.<br />
Under that provision, there is a four-year<br />
time limit for entitlements to refunds,<br />
other payments or credits in relation to<br />
GST, luxury car tax, wine tax <strong>and</strong> fuel tax<br />
in respect of a tax period or importation.<br />
The four-year entitlement period<br />
commences after the end of the tax<br />
period or importation, however the four<br />
year time limit does not apply, if within<br />
that period:<br />
• an entity notifies the Commissioner<br />
that they are entitled to the refund,<br />
other payment or credit<br />
• the Commissioner notifies an entity<br />
that it is entitled to the refund, other<br />
payment or credit, or<br />
• in the case of a credit, the credit is<br />
taken into account in working out an<br />
amount that the Commissioner may<br />
recover from an entity only because<br />
of fraud or evasion where the ability<br />
of the Commissioner to recover<br />
the amount is not subject to any<br />
time limitation.<br />
In stating that there is no prescribed form<br />
to be used by the taxpayer to notify the<br />
Commissioner of the refund entitlement,<br />
MT2008/D4 outlines the manner in<br />
which the notification is to be made. In<br />
particular, the Commissioner notes in<br />
MT2008/D4 that the notification must<br />
be in writing. The Commissioner further<br />
notes that while the notification does not<br />
need to specify an exact amount, the<br />
entitlement must be clearly identified.<br />
In this respect, correspondence that is<br />
speculative in nature will not meet the<br />
notification requirements. According to<br />
the Commissioner, a valid notification<br />
must be directed at one or more<br />
particular entitlements, rather than being<br />
directed at reserving an entity’s rights in<br />
relation to possible future claim(s).<br />
Once finalised, the Ruling will explain<br />
the Commissioner’s view of the law<br />
as it applies both before <strong>and</strong> after its<br />
date of issue. The final Ruling will be a<br />
‘public indirect tax ruling’. Comments<br />
on the Draft Ruling can be made until<br />
12 December 2008.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Andrew Porvaznik, Partner<br />
(02) 8266 5772<br />
<strong>and</strong>rew.porvaznik@au.pwc.com<br />
Adrian Abbott, Partner<br />
(02) 8266 5140<br />
adrian.abbott@au.pwc.com<br />
Ken Fehily, Partner<br />
(03) 8603 6216<br />
ken.fehily@au.pwc.com<br />
Kristina Kipper, Director<br />
(08) 9238 5202<br />
kristina.kipper@au.pwc.com<br />
State taxes<br />
New South Wales: new home<br />
buyers grant to boost the<br />
housing sector<br />
On 8 November 2008, the Premier<br />
of New South Wales (NSW) issued a<br />
media release stating that the NSW<br />
Government will boost the grant for<br />
families building their first home or<br />
buying a newly-constructed home.<br />
The announcement proposes to increase<br />
the existing incentive provided by<br />
the NSW Government for new home<br />
owners from $7,000 to $10,000 in<br />
some circumstances. This new $3,000<br />
incentive, known as the New Home<br />
Buyers Supplement, is in addition to<br />
the $14,000 First Home Owners Boost<br />
announced by the Commonwealth<br />
Government during October 2008 for<br />
persons who satisfy the Commonwealth’s<br />
eligibility requirements for the purchase<br />
or building of a newly constructed home<br />
(see November 2008 edition of TaxTalk).<br />
The New Home Buyers Supplement is to<br />
be available for contracts made between<br />
11 November 2008 <strong>and</strong> 10 November<br />
2009 (inclusive) for purchase or building<br />
of a newly-constructed home. The<br />
remaining eligibility criteria will be the<br />
same as that applying to the $7,000 First<br />
Home Owners Grant. A new home is a<br />
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home which has never been occupied<br />
as a place of residence by the builder,<br />
a tenant or other occupant. Where the<br />
home is being purchased, it must be<br />
the first sale of that home. A new home<br />
includes units <strong>and</strong> apartments.<br />
It is important to note that not all persons<br />
entitled to the First Home Owners Grant<br />
will qualify for the New Home Buyers<br />
Supplement. This is because the First<br />
Home Owners Grant is not limited to<br />
the purchasing or building of a newly<br />
constructed home. It is available for the<br />
first purchase by an individual of a home.<br />
The further difference between the two<br />
schemes is that unlike the New Home<br />
Buyers Supplement, which will only be<br />
in place for contracts entered into during<br />
the qualifying period, the First Home<br />
Owners Grant presently has no end date.<br />
In announcing the New Home Buyers<br />
Supplement, the Premier also announced<br />
proposed reforms to the First Home<br />
Owners Grant scheme which, subject to<br />
Commonwealth Government approval,<br />
will apply from 1 July 2009. Under the<br />
proposal, the First Home Owners Grant<br />
will be capped, <strong>and</strong> will only be available<br />
for properties valued up to $750,000.<br />
New South Wales:<br />
Mini Budget<br />
The NSW Treasurer h<strong>and</strong>ed<br />
down the State’s Mini Budget on<br />
11 November 2008 to address a<br />
substantial decline in the State’s<br />
revenue base. Key revenue measures<br />
announced include:<br />
• L<strong>and</strong> tax changes – from the 2009 l<strong>and</strong><br />
tax year, a marginal rate of 2 per cent<br />
will apply to l<strong>and</strong> tax payers with<br />
total taxable l<strong>and</strong> holdings above<br />
$2.25 million. The higher rate will only<br />
apply to the l<strong>and</strong> holding in excess of<br />
$2.25 million. The l<strong>and</strong> holding below<br />
this amount will remain subject to the<br />
1.6 per cent rate. Principal place of<br />
residence <strong>and</strong> rural properties remain<br />
exempt from l<strong>and</strong> tax. This threshold<br />
will also be indexed in line with the<br />
existing l<strong>and</strong> tax threshold.<br />
• L<strong>and</strong> holder duty – change from a<br />
‘l<strong>and</strong> rich’ model to a ‘l<strong>and</strong>holder’<br />
model, so that the purchase of a<br />
significant parcel of shares or units<br />
in an entity that owns l<strong>and</strong> above<br />
a threshold value is subject to<br />
transfer duty as if there was a direct<br />
purchase of l<strong>and</strong>. Western Australia,<br />
the Northern Territory, the Australian<br />
Capital Territory <strong>and</strong> Queensl<strong>and</strong><br />
(for trusts only) have already moved<br />
to replace the ‘l<strong>and</strong> rich’ approach<br />
with the ‘l<strong>and</strong>holder’ model. The<br />
new provisions will commence<br />
from 1 July 2009.<br />
• Nominal duties – increased<br />
nominal duties (charged on a range<br />
of documents) will apply from<br />
1 January 2009 – the changes are<br />
from $2 to $10; $10 to $50; <strong>and</strong><br />
$200 to $500 (for trust deeds).<br />
• Deferred abolition of stamp duties<br />
– currently, duty on unquoted<br />
marketable securities is scheduled<br />
to be abolished from 1 January<br />
2009, mortgage duty on business<br />
loans is scheduled to be abolished<br />
on 1 July 2009 <strong>and</strong> transfer duty<br />
on non-l<strong>and</strong> business <strong>asset</strong>s is<br />
scheduled to be abolished on<br />
1 January 2011. The abolition of these<br />
three stamp duties will be deferred<br />
until 1 July 2012.<br />
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• Parking space levy – from 1 July<br />
2009, the parking space levy will<br />
increase from $950 to $2,000 a<br />
year per off-street, non-residential<br />
parking space in the Sydney, North<br />
Sydney <strong>and</strong> Milsons Point business<br />
districts; <strong>and</strong> from $470 to $710<br />
a year in the business areas of St<br />
Leonards, Chatswood, Parramatta<br />
<strong>and</strong> Bondi Junction.<br />
• Mineral royalties – increased<br />
mineral royalty rates will apply<br />
from 1 January 2009.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Mono Ray, Partner<br />
(02) 8266 9171<br />
mono.ray@au.pwc.com<br />
Angela Melick, Partner<br />
(02) 8266 7234<br />
angela.melick@au.pwc.com<br />
Western Australia:<br />
l<strong>and</strong> tax reductions<br />
On 21 October 2008, the West Australian<br />
Treasurer announced an immediate cut<br />
in rates applying to l<strong>and</strong> tax <strong>and</strong> the<br />
Metropolitan Region Improvement Tax<br />
(MRIT). The Treasurer said that the “cuts<br />
would apply to assessable properties<br />
across the board <strong>and</strong> would average<br />
around seven per cent”. The Treasurer<br />
further added that assessments based<br />
on calculations in the May 2008 Budget<br />
had been due to go out on 24 September<br />
2008, the new Government’s first<br />
working day in office, but had been held<br />
back pending legislation to enable the<br />
immediate adjustment.<br />
Under the changes, l<strong>and</strong> tax on<br />
l<strong>and</strong> valued at $500,000 will drop<br />
by $20 to $180. For l<strong>and</strong> valued at<br />
$1million, the reduction will be $70,<br />
from $700 to $630. If the property is<br />
located in the metropolitan region, the<br />
MRIT savings will be a further $20 in<br />
the case of the l<strong>and</strong> valued at $500,000<br />
<strong>and</strong> a further $70 in the case of the l<strong>and</strong><br />
valued at $1million.<br />
The proposed new tax scales are<br />
as follows.<br />
Unimproved value of the l<strong>and</strong><br />
Exceeding $ Not exceeding $ Rate of l<strong>and</strong> tax<br />
0 300,000 Nil<br />
300,000 1,000,000 0.09 cent for each $1 in excess of<br />
$300,000<br />
1,000,000 2,200,000 $630 + 0.47 cent for each $1 in excess of<br />
$1,000,000<br />
2,200,000 5,500,000 $6,270 + 1.22 cents for each $1 in excess<br />
of $2,200,000<br />
5,500,000 11,000,000 $46,530 + 1.46 cents for each $1 in<br />
excess of $5,500,000<br />
11,000,000 $126,830 + 2.16 cents for each $1 in<br />
excess of $11,000,000<br />
Unimproved value of the l<strong>and</strong><br />
Exceeding $ Not exceeding $ Rate of Metropolitan Region Improvement<br />
Tax<br />
0 300,000 Nil<br />
300,000 0.14 cent for each $1 in excess of<br />
$300,000<br />
Personal <strong>and</strong><br />
expatriate<br />
taxation<br />
High Court rules on<br />
employee’s deduction<br />
for legal<br />
In our October 2008 edition of TaxTalk,<br />
we reported that the Commissioner was<br />
unsuccessful in disallowing a deduction<br />
claim made by an employee for the costs<br />
of legal fees incurred in challenging his<br />
employer for breach of contract (see<br />
Romanin v Commissioner of Taxation<br />
[2008] FCA 1532. We also reported that<br />
the High Court was considering a case<br />
involving similar issues <strong>and</strong> that the<br />
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decision of the High Court would need<br />
to be carefully considered by employees<br />
seeking to claim deductions for legal fees<br />
relating to disputes with their employer.<br />
The High Court has now h<strong>and</strong>ed down its<br />
decision in that case (see Commissioner<br />
of Taxation v Day [2008] HCA 53.<br />
By majority (Justice Kirby dissenting),<br />
the Court has upheld the decision of<br />
the Full Federal Court <strong>and</strong> has held that<br />
a deduction was allowable for legal costs<br />
incurred by an employee in defending<br />
charges of improper conduct.<br />
In the case (which was featured in<br />
more detail in our February 2008<br />
edition of TaxTalk), the individual had<br />
incurred legal fees in defending charges<br />
brought against him by his employer<br />
for failure to observe st<strong>and</strong>ards of<br />
conduct as required under the Public<br />
Service Act 1922 (Cth). The individual<br />
was a senior compliance officer with<br />
the Australian Customs Service. The<br />
Commissioner had disallowed the<br />
claim for deduction in respect of the<br />
legal fees incurred by the employee on<br />
the grounds that the legal expenses<br />
were incurred in defending charges of<br />
conduct extraneous to the performance<br />
of the respondent’s income-producing<br />
activities, <strong>and</strong> therefore it could not be<br />
said that the expenses were incurred<br />
in the course of gaining or producing<br />
assessable income.<br />
In rejecting the Commissioner’s<br />
submissions <strong>and</strong> finding in favour of<br />
the taxpayer, the majority expressed<br />
the view that “[w]hat was productive<br />
of his income by way of salary is to be<br />
found in all the incidents of his office in<br />
the Service to which the Act referred,<br />
including his obligation to observe<br />
st<strong>and</strong>ards of conduct, breach of which<br />
might entail disciplinary charges. The<br />
respondent’s outgoings, by way of legal<br />
expenses, followed upon the bringing<br />
of the charges with respect to his<br />
conduct, or misconduct, as an officer.<br />
He was exposed to those charges <strong>and</strong><br />
consequential expenses, by reason of his<br />
office. The charges cannot be considered<br />
as remote from his office, in the way that<br />
private conduct giving rise to criminal or<br />
other sanctions may be”.<br />
According to the majority, it was<br />
necessary for the taxpayer “to obtain<br />
legal advice <strong>and</strong> representation in order<br />
to answer the charges <strong>and</strong> to preserve<br />
his position.....Whether the charges were<br />
well-founded, a fact which had not been<br />
established by the time the Full Court<br />
determined this matter, is not relevant<br />
to the question of deductibility”.<br />
While the decision is welcome news<br />
for taxpayers, the following part of the<br />
majority’s judgement will need to be<br />
taken into consideration by all employees<br />
seeking to claim a deduction for legal<br />
costs incurred in disputes with their<br />
employer – “[t]he incurring of expenditure<br />
by an employee to defend a charge<br />
because it may result in his or her<br />
dismissal may not itself be sufficient in<br />
every case to establish the necessary<br />
connection to the employment or service<br />
which is productive of income. Much<br />
will depend upon what is entailed in<br />
the employment <strong>and</strong> the duties which<br />
it imposes upon an employee”. Earlier,<br />
as mentioned above, the majority of the<br />
Court had said that “the charges cannot<br />
be considered as remote from his office,<br />
in the way that private conduct giving<br />
rise to criminal or other sanctions may<br />
be”. Based on this comment by the High<br />
Court, legal expenditure incurred by<br />
an individual to prevent the individual’s<br />
employment being terminated because of<br />
conduct not directly associated with the<br />
workplace will likely be non-deductible.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Neil Napper, Partner<br />
(02) 8266 6647<br />
neil.napper@au.pwc.com<br />
Paul Brassil, Partner<br />
(02) 8266 2964<br />
paul.brassil@au.pwc.com<br />
Glen Frost, Partner<br />
(02) 8266 2266<br />
glen.frost@au.pwc.com<br />
Paul O’Brien, Partner<br />
(03) 8603 4182<br />
paul.obrien@au.pwc.com<br />
The Commissioner’s view on<br />
issues relevant to SMSFs<br />
Draft Self Managed Superannuation<br />
Funds Ruling SMSFR 2008/D5, issued<br />
on 5 November 2008, sets out the<br />
Commissioner’s preliminary views on the<br />
meaning of ‘<strong>asset</strong>’, ‘loan’, ‘investment<br />
in’, ‘lease’ <strong>and</strong> ‘lease arrangement’<br />
being the core concepts in the definition<br />
of ‘in-house <strong>asset</strong>’ of a self managed<br />
superannuation fund (SMSF) as<br />
defined in the Superannuation Industry<br />
(Supervision) Act 1993 (SISA).<br />
By way of background, the ‘in-house<br />
<strong>asset</strong>’ rules in the SISA ensure the<br />
investment practices of superannuation<br />
funds are consistent with the<br />
Government’s retirement incomes policy,<br />
being that superannuation savings<br />
should be invested prudently for the<br />
purpose of providing retirement income.<br />
The ‘in-house <strong>asset</strong>’ rule prevents the<br />
investment in or holding of ‘in-house<br />
<strong>asset</strong>s’ which have market value<br />
exceeding 5 per cent of the value of fund<br />
<strong>asset</strong>s. If the ‘in-house’ limit is breached,<br />
then the fund trustees must reduce the<br />
level of ‘in-house <strong>asset</strong>s’ within twelve<br />
months. Furthermore, an ‘in-house <strong>asset</strong>’<br />
cannot be acquired by a SMSF if the<br />
acquisition will cause the 5 per cent limit<br />
to be exceeded.<br />
‘In-house <strong>asset</strong>’ is defined in the SISA as<br />
“an <strong>asset</strong> of the fund that is a loan to, or<br />
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an investment in, a related party of the<br />
fund, an investment in a related trust of<br />
the fund, or an <strong>asset</strong> of the fund subject<br />
to a lease or lease arrangement between<br />
a trustee of the fund <strong>and</strong> a related party<br />
of the fund …” The Draft Ruling states<br />
that this part of the definition contains<br />
terms defined in the SISA which require<br />
further consideration, being:<br />
•<br />
•<br />
•<br />
•<br />
•<br />
<strong>asset</strong><br />
loan<br />
investment in<br />
lease, <strong>and</strong><br />
lease arrangement.<br />
The Commissioner’s views as to what<br />
each of these terms is defined to<br />
mean are set out in the Draft Ruling,<br />
together with a number of examples.<br />
In relation to the meaning of ‘loan’, the<br />
Draft Ruling states that the definition in<br />
the SISA is substantially wider than the<br />
traditional meaning of a ‘loan’ which<br />
involves a payment <strong>and</strong> repayment<br />
of an amount of money, <strong>and</strong> extends<br />
the scope of arrangements covered<br />
to include arrangements that are in<br />
substance financing arrangements<br />
deferring the payment of an amount.<br />
Such arrangements would include<br />
(but are not limited to):<br />
•<br />
•<br />
•<br />
the loan of money<br />
sale of goods or l<strong>and</strong> on credit<br />
instalment payment arrangements, <strong>and</strong><br />
• arrangements for the deferral of<br />
payment of <strong>debt</strong>s or entitlements.<br />
SMSF trustees will need to consider the<br />
activities of the relevant fund in the light<br />
of the Commissioner’s views <strong>and</strong> take<br />
appropriate action to ensure that the<br />
‘in‐house <strong>asset</strong>’ rule is not breached.<br />
According to the Commissioner, the<br />
formality <strong>and</strong> the legal enforceability of<br />
the arrangement does not affect whether<br />
it is a ‘loan’ under the definition in the<br />
SISA. The Commissioner believes that<br />
‘loan’ also encompasses arrangements<br />
where there is no objective purpose<br />
of gaining interest, income, profit or<br />
gain, such as an interest-free loan.<br />
The Commissioner however accepts that<br />
not every situation where a payment is<br />
deferred necessarily amounts to a ‘loan’<br />
under the definition, such as the payment<br />
for goods on normal commercial terms.<br />
Comments can be made on the Draft<br />
Ruling up until 19 December 2008.<br />
Once finalised, the Ruling will apply<br />
both before <strong>and</strong> after its date of issue.<br />
Superannuation guarantee<br />
Draft Superannuation Guarantee Ruling<br />
SGR 2008/D2, issued on 5 November<br />
2008, sets out the Commissioner’s<br />
preliminary views on:<br />
• what constitutes ‘ordinary time<br />
earnings’ (OTE) for the purpose of<br />
calculating the minimum level of<br />
superannuation support required<br />
for individual employees, <strong>and</strong><br />
• the meaning of ‘salary or<br />
wages’, which is relevant to<br />
employers in calculating the<br />
superannuation guarantee shortfall<br />
of individual employees where<br />
an employer has not provided<br />
the required minimum level of<br />
superannuation support.<br />
It is proposed that when the final Ruling<br />
is issued, it will replace Superannuation<br />
Guarantee Rulings SGR 94/4 <strong>and</strong><br />
SGR 94/5. An important observation<br />
with respect to SGR 2008/D2 is that the<br />
Commissioner’s preliminary view is that<br />
payments specifically excluded from OTE<br />
are not necessarily excluded from ‘salary<br />
or wages’. On this point, SGR 2008/D2<br />
cites a lump sum payment in lieu of<br />
unused annual leave, <strong>and</strong> unused long<br />
service leave made to the employee on<br />
termination of employment as examples<br />
of payments falling into this category.<br />
That not having a proper underst<strong>and</strong>ing<br />
of these definitions can result in<br />
adverse implications for an employer<br />
was highlighted in the Administrative<br />
Appeals Tribunal decision (Prushka<br />
Fast Debt Recovery Pty Ltd v Federal<br />
Commissioner of Taxation [2008]<br />
AATA 762), which we reported in<br />
our October 2008 edition of TaxTalk.<br />
Once finalised, the Ruling will apply<br />
both before <strong>and</strong> after its date of issue.<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Mike Forsdick, Partner<br />
(02) 8266 5767<br />
mike.forsdick@au.pwc.com<br />
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Other news<br />
End of the trust cloning<br />
CGT concession<br />
For further information, please contact your<br />
usual PricewaterhouseCoopers adviser, or:<br />
Inspector-General of<br />
Taxation report into the<br />
ATO’s management of<br />
major complex issues<br />
On 29 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs released the<br />
Inspector-General of Taxation’s report<br />
Improvements to tax administration<br />
arising from the Inspector-General’s<br />
case study reviews of the Tax Office’s<br />
management of major, complex issues.<br />
The report is the fourth <strong>and</strong> final report<br />
on major complex issues.<br />
As noted by the Assistant Treasurer,<br />
the report summarises systemic<br />
issues arising from three earlier case<br />
studies conducted by the Inspector-<br />
General in 2007 relating to service<br />
entity arrangements, living away<br />
from home allowances, <strong>and</strong> research<br />
<strong>and</strong> development syndicates.<br />
Included in the report are agreements<br />
reached between the Inspector General<br />
<strong>and</strong> the Australian Tax Office (ATO) on<br />
changes to be made by the ATO to its<br />
work practices, including:<br />
• agreement on the timeframe in which<br />
the ATO will reach a view on priority<br />
technical issues<br />
• agreement on the process to be<br />
used in managing the achievement<br />
of agreed milestones on complex<br />
technical issues<br />
• introduction of initiatives to ensure that<br />
compliance actions are fair <strong>and</strong> based<br />
on a contemporary appraisal of the<br />
factors that have led to the issue<br />
• a commitment to clarifying the law<br />
through litigation of contentious areas<br />
<strong>and</strong> to generally provide test case<br />
funding to achieve this objective<br />
• agreement to consolidate the ATO’s<br />
information on significant technical<br />
issues into one site on the ATO’s<br />
website within two years<br />
• agreement that once the ATO<br />
concludes that its view on a matter has<br />
changed, the existing public advice<br />
or guidance should be withdrawn<br />
immediately <strong>and</strong> the ATO should<br />
clearly indicate whether replacement<br />
advice or guidance is required.<br />
On 31 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs announced<br />
that the capital gains tax (CGT) ‘trust<br />
cloning’ exception to CGT events E1 <strong>and</strong><br />
E2 will be removed with effect for CGT<br />
events happening after 31 October 2008.<br />
CGT event E1 happens when a trust is<br />
created, <strong>and</strong> CGT event E2 happens<br />
when an <strong>asset</strong> is transferred to an<br />
existing trust. In the case of both events,<br />
an exception applies where the <strong>asset</strong> is<br />
transferred from another trust “<strong>and</strong> the<br />
beneficiaries <strong>and</strong> terms of both trusts are<br />
the same”. This has often been referred<br />
to as the ‘trust cloning exception’.<br />
The other exception to CGT events E1<br />
<strong>and</strong> E2 will be retained – that is, where<br />
the taxpayer is the sole beneficiary<br />
of the relevant trust that is not a unit<br />
trust <strong>and</strong> the taxpayer is absolutely<br />
entitled to the <strong>asset</strong> as against the<br />
trustee. A mere change of trustee of a<br />
single trust will continue not to trigger<br />
a taxable CGT event.<br />
The Assistant Treasurer has indicated<br />
that legislation will be introduced as soon<br />
as practicable <strong>and</strong> that initial consultation<br />
will be undertaken on the design of<br />
these amendments.<br />
Paul Brassil, Partner<br />
(02) 8266 2964<br />
paul.brassil@au.pwc.com<br />
Tony Carroll, Partner<br />
(02) 8266 2965<br />
tony.carroll@au.pwc.com<br />
Paul O’Brien, Partner<br />
(03) 8603 4182<br />
paul.obrien@au.pwc.com<br />
Demutualisation of friendly<br />
societies: CGT relief to<br />
be provided<br />
On 24 October 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs announced<br />
that the Government will provide capital<br />
gains tax (CGT) relief for policyholders<br />
of friendly societies who receive shares<br />
when their friendly society demutualises.<br />
The Assistant Treasurer also indicated<br />
that the Government would undertake<br />
consultation on the design of the<br />
amendments. In this respect, a Treasury<br />
discussion paper has been released for<br />
public comment with the closing date<br />
for submissions being 5 December 2008.<br />
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TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
Legislation update<br />
Tax consultation enhanced<br />
through launch of Tax Issues<br />
Entry System<br />
On 20 November 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs announced<br />
the launch of the Tax Issues Entry<br />
System (TIES) which, as explained<br />
by the Assistant Treasurer “is a single<br />
entry point for tax professionals <strong>and</strong><br />
the community to raise minor policy<br />
<strong>and</strong> administrative issues relating<br />
to the care <strong>and</strong> maintenance of the<br />
tax <strong>and</strong> superannuation systems.”<br />
With the launch of TIES, the<br />
Government is delivering on one of the<br />
recommendations from the Tax Design<br />
Review Panel’s report Better Tax Design<br />
<strong>and</strong> Implementation. The Panel was<br />
chaired by Neil Wilson, chief operating<br />
officer of PricewaterhouseCoopers.<br />
Action to enhance<br />
market integrity<br />
On 19 November 2008, the Minister for<br />
Superannuation <strong>and</strong> Corporate Law<br />
announced that the Government has<br />
commissioned the Corporations <strong>and</strong><br />
Markets Advisory Committee (CAMAC)<br />
to review a range of market practices<br />
with a view to further enhancing the<br />
integrity <strong>and</strong> transparency of the<br />
Australian market. The Minister said<br />
that these include the use of margin<br />
lending by company directors, ‘blackout’<br />
trading by company directors, the<br />
spreading of false rumours, <strong>and</strong> the<br />
potential disclosure of market sensitive<br />
information at analyst briefings.<br />
In order to assist the completion of the<br />
project, the Government has approved<br />
a grant of $100,000 to fund the CAMAC<br />
investigation. CAMAC is to report<br />
its findings to Government on these<br />
matters by 30 June 2009.<br />
A new regime to regulate<br />
the provision of tax<br />
agent services<br />
On 13 November 2008, the Assistant<br />
Treasurer <strong>and</strong> Minister for Competition<br />
Policy <strong>and</strong> Consumer Affairs introduced<br />
the Tax Agent Services Bill 2008 into<br />
Parliament. The Bill proposes to reform<br />
the registration <strong>and</strong> regulation of entities<br />
providing tax agent services for a fee.<br />
In introducing the Bill, the Assistant<br />
Treasurer said that “the introduction<br />
of this Bill indicates the Government’s<br />
commitment to strengthening the tax<br />
industry <strong>and</strong> the integrity of the tax<br />
system by improving the registration <strong>and</strong><br />
regulation of tax agent service providers,<br />
thereby giving greater protection <strong>and</strong><br />
certainty to taxpayers. Reform in this<br />
area is long overdue. An updated<br />
regulatory regime that is appropriate for<br />
the modern tax environment has been on<br />
the drawing board for almost 15 years.”<br />
The Assistant Treasurer also announced<br />
the Government’s intention that a<br />
formal post-implementation review<br />
of certain aspects of the regulatory<br />
framework be conducted three years<br />
after implementation to ensure the new<br />
framework operates effectively.<br />
In introducing the Bill, the Assistant<br />
Treasurer outlined the key elements<br />
of the proposed tax agent services<br />
regulatory framework, including:<br />
• A single national Tax Practitioners’<br />
Board will replace the existing statebased<br />
Tax Agents’ Boards, with its<br />
key functions being to register <strong>and</strong><br />
regulate tax agents <strong>and</strong> Business<br />
Activity Statement (BAS) agents.<br />
The Board will also have certain<br />
powers to ensure that unregistered<br />
entities are not holding themselves<br />
out as registered.<br />
• The Board will be able to investigate<br />
matters <strong>and</strong> impose sanctions<br />
where appropriate.<br />
• Entities that provide ‘tax agent<br />
services’ or ‘BAS services’ for a<br />
fee or other reward, who advertise<br />
the provision of such services, or<br />
who hold themselves out as being<br />
registered, will be required to register<br />
with the Board. In default, the Board<br />
may instigate civil penalty proceedings<br />
against the entity in the Federal Court.<br />
• The registration requirements for tax<br />
agents will consist of a ‘fit <strong>and</strong> proper<br />
person’ test as well as minimum<br />
educational qualifications <strong>and</strong> relevant<br />
work experience requirements.<br />
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TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
• BAS agents will not be required<br />
to demonstrate the same degree<br />
of formal education <strong>and</strong> relevant<br />
experience as ‘tax agents’. This<br />
reflects the narrower scope of<br />
services that they may provide.<br />
• In the case of partnerships <strong>and</strong><br />
companies seeking registration,<br />
compliance with the requirements<br />
will be demonstrated by sufficient<br />
organisational qualifications<br />
<strong>and</strong> experience.<br />
• Entities that specialise in a particular<br />
area of the taxation laws or that only<br />
provide a type of tax agent service<br />
(for example, tax compliance work or<br />
advice rather than both) will be eligible<br />
to register, with scope to operate in<br />
their specialty.<br />
• Because BAS agents are not currently<br />
regulated, a significant transitional<br />
period for their registration is proposed<br />
to allow sufficient time for applicants<br />
to meet the requirements.<br />
• Tax agents <strong>and</strong> BAS agents will<br />
be governed by a legislated Code<br />
of Professional Conduct. There<br />
will be a broad range of sanctions<br />
that the Board may impose for<br />
non‐compliance with the Code.<br />
• New civil penalty provisions (including<br />
substantial monetary penalties)<br />
will apply where the conduct being<br />
sanctioned is not serious enough<br />
to warrant a criminal conviction or<br />
imprisonment. Situations where<br />
these will apply include where a<br />
registered agent makes a false or<br />
misleading statement, employs or<br />
uses the services of an entity whose<br />
registration has been terminated due<br />
to misconduct, or signs a declaration<br />
in relation to a document prepared<br />
by an entity that is not qualified to<br />
prepare that document <strong>and</strong> was not<br />
appropriately supervised.<br />
• The Board may also apply to the<br />
Federal Court of Australia for an<br />
injunction to prevent or compel<br />
certain conduct.<br />
The Assistant Treasurer noted that a<br />
major direct benefit for taxpayers will be<br />
the introduction of two ‘safe harbours’<br />
for taxpayers who engage a tax agent<br />
or BAS agent. The safe harbours will<br />
exempt taxpayers from liability for an<br />
‘administrative penalty’ imposed by<br />
the Commissioner where:<br />
• having made a false <strong>and</strong> misleading<br />
statement to the Commissioner (which<br />
would result in an administrative<br />
penalty applying), the taxpayer can<br />
demonstrate that they had taken<br />
reasonable care by engaging a<br />
tax agent or BAS agent <strong>and</strong> gave<br />
all relevant taxation information<br />
to the agent<br />
• having failed to lodge a document on<br />
time <strong>and</strong> in the approved form (which<br />
failure would result in an administrative<br />
penalty), the taxpayer can show<br />
that they had engaged a tax agent<br />
or BAS agent <strong>and</strong> had provided all<br />
necessary information to the agent to<br />
enable them to provide the document<br />
to the Commissioner on time <strong>and</strong><br />
in the approved form, but the agent<br />
carelessly failed to do so.<br />
The safe harbours will not apply where<br />
either the taxpayer or the agent has<br />
intentionally disregarded a taxation law<br />
or been reckless as to the operation<br />
of a taxation law.<br />
Other revenue legislation<br />
Tax Laws Amendment (2008 Measures<br />
No 5) Bill 2008, introduced into the<br />
House of Representatives on 25<br />
September 2008, was referred to<br />
the Senate Economics Committee<br />
for review. In its final report, that<br />
Committee recommended that the<br />
Senate pass the Bill. The Bill proposes<br />
to make amendments to give effect to a<br />
number of taxation measures, namely:<br />
• amendments to the goods <strong>and</strong><br />
services tax (GST) law to maintain<br />
the integrity of the GST tax base by<br />
ensuring that the interaction between<br />
the ‘margin scheme’ provisions <strong>and</strong><br />
the ‘going concern’, ‘farml<strong>and</strong>’ <strong>and</strong><br />
‘associate’ provisions does not allow<br />
property sales to be structured in a<br />
way that results in GST not applying<br />
to the value added to real property<br />
on or after 1 July 2000 by an entity<br />
PricewaterhouseCoopers : 23
TaxTalk – Electronic Bulletin of Australian Tax Developments<br />
registered or required to be registered<br />
for GST.<br />
This proposed measure is to have<br />
effect from the date of Royal Assent.<br />
• amendments (as foreshadowed in<br />
our August 2008 edition of TaxTalk)<br />
to the thin <strong>capitalisation</strong> (TC) rules<br />
of the income tax law in relation to<br />
the use of accounting st<strong>and</strong>ards for<br />
identifying <strong>and</strong> valuing an entity’s<br />
<strong>asset</strong>s, liabilities <strong>and</strong> equity capital.<br />
It aims to adjust for certain impacts<br />
of the adoption of the Australian<br />
equivalent International Financial<br />
Reporting St<strong>and</strong>ards (AIFRS) on the<br />
TC position of complying entities.<br />
The amendments will generally:<br />
–<br />
–<br />
prohibit the recognition of deferred<br />
tax liabilities <strong>and</strong> <strong>asset</strong>s <strong>and</strong><br />
defined benefit liability or <strong>asset</strong>s<br />
for TC purposes where they are<br />
recognised under the accounting<br />
st<strong>and</strong>ards, <strong>and</strong><br />
subject to complying with certain<br />
valuation requirements, permit<br />
entities (other than those treated<br />
as authorised deposit-taking<br />
institutions) to recognise internally-<br />
generated intangible <strong>asset</strong>s <strong>and</strong><br />
revalue intangible <strong>asset</strong>s where this<br />
is currently prohibited due to the<br />
absence of an ‘active market’.<br />
The proposed amendments are to<br />
apply to the first <strong>and</strong> subsequent<br />
income years after Royal Assent.<br />
• amendments to the fringe benefits<br />
tax law to ensure that the ‘otherwise<br />
deductible rule’ applies appropriately<br />
to benefits provided in relation to<br />
investments that the employee holds<br />
jointly with a third party<br />
The proposed commencement date of<br />
this measure depends on the nature of<br />
the benefit provided.<br />
• amendments to the ‘eligible<br />
investment business’ rules<br />
for managed funds to:<br />
–<br />
clarify the scope <strong>and</strong> meaning of<br />
investing in l<strong>and</strong> for the purpose<br />
of deriving rent to ensure that<br />
fixtures on l<strong>and</strong> are included,<br />
<strong>and</strong> introduce a 25 per cent<br />
safe harbour allowance for nonrental,<br />
non-trading income from<br />
–<br />
–<br />
investments in l<strong>and</strong>, which will<br />
operate in conjunction with the<br />
existing rental purposes tests on an<br />
overall l<strong>and</strong> portfolio basis<br />
provide an additional safe harbour<br />
test by allowing up to 2 per cent<br />
of gross revenue of the trustee to<br />
be income from other than eligible<br />
investment businesses (except from<br />
carrying on a trading activity on a<br />
commercial basis) so as to reduce<br />
the scope for inadvertent minor<br />
breaches that would otherwise<br />
trigger company taxation for a<br />
trust, <strong>and</strong><br />
exp<strong>and</strong> the range of financial<br />
instruments that a managed fund<br />
may invest in or trade to include<br />
additional financial instruments<br />
that arise under financial<br />
arrangements other than certain<br />
excluded arrangements.<br />
The proposed amendments are to<br />
apply to the first <strong>and</strong> subsequent<br />
income years after Royal Assent.<br />
Further information<br />
If you have any queries about issues<br />
raised in this edition or would like to be<br />
placed on the mailing list for TaxTalk,<br />
please contact one of the following:<br />
Adelaide<br />
Scott Bryant, Partner<br />
Phone: +61 8 8218 7450<br />
Fax: +61 8 8218 7812<br />
scott.a.bryant@au.pwc.com<br />
Brisbane<br />
Tom Seymour, Partner<br />
Phone: + 61 7 3257 8623<br />
Fax: + 61 7 3031 9312<br />
tom.seymour@au.pwc.com<br />
Melbourne<br />
David Wills, Partner<br />
Phone: +61 3 8603 3183<br />
Fax: +61 3 8613 2880<br />
david.a.wills@au.pwc.com<br />
Perth<br />
Frank Cooper, Partner<br />
Phone: +61 8 9238 3332<br />
Fax: +61 8 9488 8771<br />
frank.cooper@au.pwc.com<br />
Sydney<br />
Lyndon James, Partner<br />
Phone: +61 2 8266 3278<br />
Fax: +61 2 8286 3278<br />
lyndon.james@au.pwc.com<br />
© 2008 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the individual member firms of the worldwide PricewaterhouseCoopers<br />
organisation. All rights reserved. The information in this publication is provided for general guidance on matters of interest only. It should not be<br />
used as a substitute for consultation with professional accounting, tax, legal or other advisers.<br />
This document is not intended or written by PricewaterhouseCoopers to be used, <strong>and</strong> cannot be used, for the purpose of avoiding tax<br />
penalties that may be imposed on the tax payer. Before making any decision or taking any action, you should consult with your regular<br />
PricewaterhouseCoopers’ professional. No warranty is given to the correctness of the information contained in this publication <strong>and</strong> no liability<br />
is accepted by the firm for any statement or opinion, or for any error or omission. TaxTalk is a registered trademark. Print Post Approved<br />
PP255003/01192.<br />
Editor<br />
Elly Parker<br />
PricewaterhouseCoopers Tax<br />
Phone: +61 3 8603 2673<br />
elly.parker@au.pwc.com<br />
Technical Editor<br />
Geoff Dunn, Director<br />
Tax Technical Knowledge Centre<br />
PricewaterhouseCoopers Tax<br />
Phone: +61 2 8266 5220<br />
geoff.dunn@au.pwc.com<br />
Media enquiries<br />
Lisa Jervis<br />
Phone: +61 2 8266 5743<br />
Mobile: 0419 432 239<br />
lisa.jervis@au.pwc.com<br />
PricewaterhouseCoopers : 24