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

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TaxTalk – Electronic Bulletin of Australian Tax Developments • Parking space levy – from 1 July 2009, the parking space levy will increase from $950 to $2,000 a year per off-street, non-residential parking space in the Sydney, North Sydney and Milsons Point business districts; and from $470 to $710 a year in the business areas of St Leonards, Chatswood, Parramatta and Bondi Junction. • Mineral royalties – increased mineral royalty rates will apply from 1 January 2009. For further information, please contact your usual PricewaterhouseCoopers adviser, or: Mono Ray, Partner (02) 8266 9171 mono.ray@au.pwc.com Angela Melick, Partner (02) 8266 7234 angela.melick@au.pwc.com Western Australia: land tax reductions On 21 October 2008, the West Australian Treasurer announced an immediate cut in rates applying to land tax and the Metropolitan Region Improvement Tax (MRIT). The Treasurer said that the “cuts would apply to assessable properties across the board and would average around seven per cent”. The Treasurer further added that assessments based on calculations in the May 2008 Budget had been due to go out on 24 September 2008, the new Government’s first working day in office, but had been held back pending legislation to enable the immediate adjustment. Under the changes, land tax on land valued at $500,000 will drop by $20 to $180. For land valued at $1million, the reduction will be $70, from $700 to $630. If the property is located in the metropolitan region, the MRIT savings will be a further $20 in the case of the land valued at $500,000 and a further $70 in the case of the land valued at $1million. The proposed new tax scales are as follows. Unimproved value of the land Exceeding $ Not exceeding $ Rate of land tax 0 300,000 Nil 300,000 1,000,000 0.09 cent for each $1 in excess of $300,000 1,000,000 2,200,000 $630 + 0.47 cent for each $1 in excess of $1,000,000 2,200,000 5,500,000 $6,270 + 1.22 cents for each $1 in excess of $2,200,000 5,500,000 11,000,000 $46,530 + 1.46 cents for each $1 in excess of $5,500,000 11,000,000 $126,830 + 2.16 cents for each $1 in excess of $11,000,000 Unimproved value of the land Exceeding $ Not exceeding $ Rate of Metropolitan Region Improvement Tax 0 300,000 Nil 300,000 0.14 cent for each $1 in excess of $300,000 Personal and expatriate taxation High Court rules on employee’s deduction for legal In our October 2008 edition of TaxTalk, we reported that the Commissioner was unsuccessful in disallowing a deduction claim made by an employee for the costs of legal fees incurred in challenging his employer for breach of contract (see Romanin v Commissioner of Taxation [2008] FCA 1532. We also reported that the High Court was considering a case involving similar issues and that the PricewaterhouseCoopers : 18
TaxTalk – Electronic Bulletin of Australian Tax Developments decision of the High Court would need to be carefully considered by employees seeking to claim deductions for legal fees relating to disputes with their employer. The High Court has now handed down its decision in that case (see Commissioner of Taxation v Day [2008] HCA 53. By majority (Justice Kirby dissenting), the Court has upheld the decision of the Full Federal Court and has held that a deduction was allowable for legal costs incurred by an employee in defending charges of improper conduct. In the case (which was featured in more detail in our February 2008 edition of TaxTalk), the individual had incurred legal fees in defending charges brought against him by his employer for failure to observe standards of conduct as required under the Public Service Act 1922 (Cth). The individual was a senior compliance officer with the Australian Customs Service. The Commissioner had disallowed the claim for deduction in respect of the legal fees incurred by the employee on the grounds that the legal expenses were incurred in defending charges of conduct extraneous to the performance of the respondent’s income-producing activities, and therefore it could not be said that the expenses were incurred in the course of gaining or producing assessable income. In rejecting the Commissioner’s submissions and finding in favour of the taxpayer, the majority expressed the view that “[w]hat was productive of his income by way of salary is to be found in all the incidents of his office in the Service to which the Act referred, including his obligation to observe standards of conduct, breach of which might entail disciplinary charges. The respondent’s outgoings, by way of legal expenses, followed upon the bringing of the charges with respect to his conduct, or misconduct, as an officer. He was exposed to those charges and consequential expenses, by reason of his office. The charges cannot be considered as remote from his office, in the way that private conduct giving rise to criminal or other sanctions may be”. According to the majority, it was necessary for the taxpayer “to obtain legal advice and representation in order to answer the charges and to preserve his position.....Whether the charges were well-founded, a fact which had not been established by the time the Full Court determined this matter, is not relevant to the question of deductibility”. While the decision is welcome news for taxpayers, the following part of the majority’s judgement will need to be taken into consideration by all employees seeking to claim a deduction for legal costs incurred in disputes with their employer – “[t]he incurring of expenditure by an employee to defend a charge because it may result in his or her dismissal may not itself be sufficient in every case to establish the necessary connection to the employment or service which is productive of income. Much will depend upon what is entailed in the employment and the duties which it imposes upon an employee”. Earlier, as mentioned above, the majority of the Court had said that “the charges cannot be considered as remote from his office, in the way that private conduct giving rise to criminal or other sanctions may be”. Based on this comment by the High Court, legal expenditure incurred by an individual to prevent the individual’s employment being terminated because of conduct not directly associated with the workplace will likely be non-deductible. For further information, please contact your usual PricewaterhouseCoopers adviser, or: Neil Napper, Partner (02) 8266 6647 neil.napper@au.pwc.com Paul Brassil, Partner (02) 8266 2964 paul.brassil@au.pwc.com Glen Frost, Partner (02) 8266 2266 glen.frost@au.pwc.com Paul O’Brien, Partner (03) 8603 4182 paul.obrien@au.pwc.com The Commissioner’s view on issues relevant to SMSFs Draft Self Managed Superannuation Funds Ruling SMSFR 2008/D5, issued on 5 November 2008, sets out the Commissioner’s preliminary views on the meaning of ‘asset’, ‘loan’, ‘investment in’, ‘lease’ and ‘lease arrangement’ being the core concepts in the definition of ‘in-house asset’ of a self managed superannuation fund (SMSF) as defined in the Superannuation Industry (Supervision) Act 1993 (SISA). By way of background, the ‘in-house asset’ rules in the SISA ensure the investment practices of superannuation funds are consistent with the Government’s retirement incomes policy, being that superannuation savings should be invested prudently for the purpose of providing retirement income. The ‘in-house asset’ rule prevents the investment in or holding of ‘in-house assets’ which have market value exceeding 5 per cent of the value of fund assets. If the ‘in-house’ limit is breached, then the fund trustees must reduce the level of ‘in-house assets’ within twelve months. Furthermore, an ‘in-house asset’ cannot be acquired by a SMSF if the acquisition will cause the 5 per cent limit to be exceeded. ‘In-house asset’ is defined in the SISA as “an asset of the fund that is a loan to, or PricewaterhouseCoopers : 19
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