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

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TaxTalk – Electronic Bulletin of Australian Tax Developments an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund …” The Draft Ruling states that this part of the definition contains terms defined in the SISA which require further consideration, being: • • • • • asset loan investment in lease, and lease arrangement. The Commissioner’s views as to what each of these terms is defined to mean are set out in the Draft Ruling, together with a number of examples. In relation to the meaning of ‘loan’, the Draft Ruling states that the definition in the SISA is substantially wider than the traditional meaning of a ‘loan’ which involves a payment and repayment of an amount of money, and extends the scope of arrangements covered to include arrangements that are in substance financing arrangements deferring the payment of an amount. Such arrangements would include (but are not limited to): • • • the loan of money sale of goods or land on credit instalment payment arrangements, and • arrangements for the deferral of payment of debts or entitlements. SMSF trustees will need to consider the activities of the relevant fund in the light of the Commissioner’s views and take appropriate action to ensure that the ‘in‐house asset’ rule is not breached. According to the Commissioner, the formality and the legal enforceability of the arrangement does not affect whether it is a ‘loan’ under the definition in the SISA. The Commissioner believes that ‘loan’ also encompasses arrangements where there is no objective purpose of gaining interest, income, profit or gain, such as an interest-free loan. The Commissioner however accepts that not every situation where a payment is deferred necessarily amounts to a ‘loan’ under the definition, such as the payment for goods on normal commercial terms. Comments can be made on the Draft Ruling up until 19 December 2008. Once finalised, the Ruling will apply both before and after its date of issue. Superannuation guarantee Draft Superannuation Guarantee Ruling SGR 2008/D2, issued on 5 November 2008, sets out the Commissioner’s preliminary views on: • what constitutes ‘ordinary time earnings’ (OTE) for the purpose of calculating the minimum level of superannuation support required for individual employees, and • the meaning of ‘salary or wages’, which is relevant to employers in calculating the superannuation guarantee shortfall of individual employees where an employer has not provided the required minimum level of superannuation support. It is proposed that when the final Ruling is issued, it will replace Superannuation Guarantee Rulings SGR 94/4 and SGR 94/5. An important observation with respect to SGR 2008/D2 is that the Commissioner’s preliminary view is that payments specifically excluded from OTE are not necessarily excluded from ‘salary or wages’. On this point, SGR 2008/D2 cites a lump sum payment in lieu of unused annual leave, and unused long service leave made to the employee on termination of employment as examples of payments falling into this category. That not having a proper understanding of these definitions can result in adverse implications for an employer was highlighted in the Administrative Appeals Tribunal decision (Prushka Fast Debt Recovery Pty Ltd v Federal Commissioner of Taxation [2008] AATA 762), which we reported in our October 2008 edition of TaxTalk. Once finalised, the Ruling will apply both before and after its date of issue. For further information, please contact your usual PricewaterhouseCoopers adviser, or: Mike Forsdick, Partner (02) 8266 5767 mike.forsdick@au.pwc.com PricewaterhouseCoopers : 20
TaxTalk – Electronic Bulletin of Australian Tax Developments Other news End of the trust cloning CGT concession For further information, please contact your usual PricewaterhouseCoopers adviser, or: Inspector-General of Taxation report into the ATO’s management of major complex issues On 29 October 2008, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs released the Inspector-General of Taxation’s report Improvements to tax administration arising from the Inspector-General’s case study reviews of the Tax Office’s management of major, complex issues. The report is the fourth and final report on major complex issues. As noted by the Assistant Treasurer, the report summarises systemic issues arising from three earlier case studies conducted by the Inspector- General in 2007 relating to service entity arrangements, living away from home allowances, and research and development syndicates. Included in the report are agreements reached between the Inspector General and the Australian Tax Office (ATO) on changes to be made by the ATO to its work practices, including: • agreement on the timeframe in which the ATO will reach a view on priority technical issues • agreement on the process to be used in managing the achievement of agreed milestones on complex technical issues • introduction of initiatives to ensure that compliance actions are fair and based on a contemporary appraisal of the factors that have led to the issue • a commitment to clarifying the law through litigation of contentious areas and to generally provide test case funding to achieve this objective • agreement to consolidate the ATO’s information on significant technical issues into one site on the ATO’s website within two years • agreement that once the ATO concludes that its view on a matter has changed, the existing public advice or guidance should be withdrawn immediately and the ATO should clearly indicate whether replacement advice or guidance is required. On 31 October 2008, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced that the capital gains tax (CGT) ‘trust cloning’ exception to CGT events E1 and E2 will be removed with effect for CGT events happening after 31 October 2008. CGT event E1 happens when a trust is created, and CGT event E2 happens when an asset is transferred to an existing trust. In the case of both events, an exception applies where the asset is transferred from another trust “and the beneficiaries and terms of both trusts are the same”. This has often been referred to as the ‘trust cloning exception’. The other exception to CGT events E1 and E2 will be retained – that is, where the taxpayer is the sole beneficiary of the relevant trust that is not a unit trust and the taxpayer is absolutely entitled to the asset as against the trustee. A mere change of trustee of a single trust will continue not to trigger a taxable CGT event. The Assistant Treasurer has indicated that legislation will be introduced as soon as practicable and that initial consultation will be undertaken on the design of these amendments. Paul Brassil, Partner (02) 8266 2964 paul.brassil@au.pwc.com Tony Carroll, Partner (02) 8266 2965 tony.carroll@au.pwc.com Paul O’Brien, Partner (03) 8603 4182 paul.obrien@au.pwc.com Demutualisation of friendly societies: CGT relief to be provided On 24 October 2008, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced that the Government will provide capital gains tax (CGT) relief for policyholders of friendly societies who receive shares when their friendly society demutualises. The Assistant Treasurer also indicated that the Government would undertake consultation on the design of the amendments. In this respect, a Treasury discussion paper has been released for public comment with the closing date for submissions being 5 December 2008. PricewaterhouseCoopers : 21
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Thin capitalisation: eroding asset values and increasing debt ... - PwC

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