Issue

Description

Reference material

PSLA 2010/4 – Division 7A: trust entitlements

•   14/10/2010

•   Practice Statement issued by Commissioner of Taxation.

•   Purpose: to provide practical guidance on administrative aspects of taxation ruling TR 2010/3 (issued 2/6/10) - TR 2010/3 sets out the Commissioner’s view on when a private company with an unpaid present entitlement makes a loan to the trust estate which generated the entitlement, for the purposes of Division 7A of the Income Tax Assessment Act 1936.

•   PSLA 2010/4 provides guidance for businesses to work towards achieving a compliant structure and identifies those arrangements where an unpaid present entitlement will not be treated as a loan.

•   A loan treated as a dividend will be assessable income unless an exception applies or the loan is fully repaid in the year it was made.

http://www.ato.gov.au/corporate/content.asp?doc=/content/00258985.htm

TR 2010/7 – Income tax: the interaction of Division 820 of the Income Tax Assessment Act 1997 to the transfer pricing provisions

•   28/10/10

•   Ruling issued by the Commissioner of Taxation.

•   Ruling explains how the thin capitalisation provisions of Div 820 of the ITAA 1997 interact with the transfer pricing provisions.

•   The focus of the ruling is the interaction between the thin capitalisation and transfer pricing provisions.

•   TR 92/11 and TR 97/20 set out the Commissioner's views on the appropriate methods to work out arm's length consideration in relation to debt financing that is provided on a non-arm's length basis.

•   Division 820 sets an upper limit on the amount of debt in respect of which an entity can claim tax deductions. Where an entity's level of debt exceeds the maximum allowable debt Div 820 will deny a proportion of the otherwise deductible amounts.

•   Div 820 can reduce deductible amounts after the application of the transfer pricing provisions.

•   Ruling is retrospective and there is some public concern it will increase uncertainty and will be unfavourable for taxpayers.

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20107/NAT/ATO/00001

'Tax ruling will mire multinationals'

•   28/10/2010

•   Article comments on TR 2010/7 suggesting that the ruling will create uncertainty for multinationals that invest in Australia, may stifle investment and is likely to trigger litigation.

•   Under the ruling the ATO may adjust or disallow interest deductions for intra-group loans if it considers that the interest rate is uncommercial.

•   Ruling has retrospective application.

•   Clayton Utz has suggested that the ruling is inconsistent with the policy behind thin capitalisation rules that were introduced to encourage investment.

AFR 28/10/10 Katie Walsh, p. 3.

Draft taxation determination TD2010/D6

•   17/12/2010

•   Draft tax determination issued.

•   Income tax: consolidation: capital gains: does paragraph 40-880(5(f) of the ITAA 1997 prevent the deduction, under section 40-880 of that Act, of incidental costs described in subsection 110-35(2) of that Act that the head company of a consolidated group or MEC group incurs, in disposing of shares in a subsidiary member to a non-group entity, after the member leaves the group?

•   Yes, paragraph 40-880(5(f) of the ITAA 1997 does prevent the deduction. This may result in an increased liability for affected taxpayers.

http://law.ato.gov.au/pdf/pbr/td2010-d006.pdf

'M&A costs ruling puts tax deductions in doubt'

•   23/11/2010

•   Article comments on TD2010/D6

•   The ATO has released a draft ruling that denies corporate groups tax deductions for costs incurred before or after a merger or acquisition.

•   The determination sets out examples of when a group can deduct certain expenses in relation to subsidiaries.

•   Ernst & Young partner has said that the determination illustrates how complicated the interaction of tax consolidation and capital gains tax is particularly with the overlay of black-hole deductions.

•   RSM Bird has commented that the interpretation put forward in the determination is the correct one and mistakes are more likely to have been made by SMEs who typically don't have the skills in-house or resources to obtain external advice.

AFR 23/11/2010 Katie Walsh p. 12.

TD 2010/D4 – draft taxation determination: Income tax: consolidation: capital gains: does paragraph 40-880(5)(f) of the Income Tax Assessment Act 1997 prevent the deduction, under section 40-880 of that Act, of incidental costs described in subsection 110-35(2) of that Act that the head company of a consolidated group or MEC group incurs, in acquiring shares in an entity that becomes a subsidiary member of the group, before the entity joins the group

•   17/11/2010

•   Draft taxation determination released for public comment.

•   Draft determination concerns deductions that can be claimed by head companies of consolidated groups.

•   Determination sets out that these companies are unable to claim deductions for incidental costs described in subsection 110-35(2) of the ITAA 1997 incurred in acquiring shares in an entity that becomes a subsidiary member of the group, before the entity joins the group.

•   Although the costs cannot be claimed as an expense/deduction they may be taken into account at a later time when calculating a capital gains tax liability.

http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~2010%2FD4~basic~exact&target=FA&style=java&sdocid=DXT/TD2010D4/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=5&tot=5&pn=RDB:::RDB

TD 2010/7D – draft taxation determination: Income tax: is 'Australian source(s)' in subsection 6-5(3) of the ITAA 1997 dependent solely on where purchase and sale contracts are executed in respect of the sale of shares in an Australian corporate group acquired in a levered buyout by a private equity fund?

•   1/12/2010

•   Draft taxation determination released for public comment.

•   Draft determination outlines that, for the purposes of subsection 6-5(3) of the ITAA 1997 (determining what is ordinary income), 'source' is determined having regard to all the facts and circumstances of the particular case.

•   As a result, the source of the profit from the disposal of shares acquired in a private equity backed leveraged buyout is crucial in determining

if an Australian tax liability will arise.

•   Determining the source of income is a matter of fact that is to be determined with regard to the facts and circumstances of the case.

•   The draft determination provides guidance around determining source.

•   Draft determination will have different impacts for different taxpayers.

http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2010D7/NAT/ATO/00001

TD 2010/D8 Income tax: does the business profits article (Article 7) of Australia's tax treaties apply to Australian sourced business profits of a foreign limited liability partnership (LLP) where the partners in the LLP are residents of a country with which Australia has entered into a tax treaty and the LLP is treated as fiscally transparent in the country of residence of the partners?

•   1/12/2010

•   Draft taxation determination released for public comment.

•   Draft determination outlines that to the extent the business profits are liable to tax in the hands of the partners in their country of residence and the partners meet any other applicable tax treaty requirements the business profits article of Australia's tax treaties will apply.

•   The tax treaty will only be applied where the Commissioner is satisfied that the partners are persons who are residents of that country for the purposes of the tax treaty.

•   Whether or not business profits are taxable in Australia will be determined depending on the circumstances of the taxpayer.

http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2010D8/NAT/ATO/00001

TD2010/20: Income tax: treaty shopping: can Part IVA of the ITAA 1936 apply to arrangements designed to alter the intended effect of Australia's International Tax Agreements network?

•   1/12/2010

•   Tax determination issued.

•   Determination applies to years of income commencing both before and after the date of issue of the determination (1 December 2010) however it will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute before the date of issue.

•   Yes, Part IVA will apply however, it will depend upon whether a taxpayer has obtained, or would but for section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) obtain, a tax benefit in connection with the scheme and, having regard to the factors in paragraph 177D(b), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

•   Part IVA sets out the general anti-avoidance provisions. As a result, where an arrangement is put in place to attract the operation of a tax treaty in the context of a broader structuring arrangement it may be a Part IVA scheme in which case any tax benefit will be cancelled.

http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD201020/NAT/ATO/00001

TD 2010/21: Income tax: can the profit on the sale of shares in a company group acquired in a leveraged buyout be included in the assessable income of the vendor under subsection 6-5(3) of the Income Tax Assessment Act 1997?

·        1/12/2010 tax determination issued.

•   Tax determination sets out that the profit from the disposal of shares in a company group acquired in a leveraged buyout may be included in the assessable income of the vendor under section 6-5(3) of the ITAA 1997 where the profit is ordinary income.

•   This may also be the case when the vendor is a non-resident private equity entity and the profit arises from an Australian source.

•   Whether a profit is ordinary income or a gain of a capital nature will depend on all the circumstances of the particular case.

·        Where a private equity entity that has acquired shares in an Australian company is a resident of a country with which Australia has a tax treaty, the business profits article will determine which country has the taxing rights in respect of any profit that is of an income nature.

•   A profit made by a private equity entity resident in a non-treaty country from the disposal of shares in an Australian company acquired for the purpose of profit-making by sale in a commercial transaction will constitute ordinary income for the purposes of subsection 6-5(3).

•   If the profit is not ordinary income, a capital gain or capital loss from the disposal of most CGT assets is disregarded for Australian income tax purposes if made by a non-resident of Australia. Gains and losses on CGT assets that are not taxable Australian property are disregarded.

•   The facts of each case can vary and each case has to be determined on its own merits.

http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~2010%2F21~basic~exact&target=FA&style=java&sdocid=TXD/TD201021/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=7&tot=8&pn=RDB:::RDB

•   7/12/2010

•   The Tax Laws Amendment (2010 Measures No 4) Bill 2010 received Royal Assent.

•   Schedule 5 to this Bill amends the ITAA1936 to increase the threshold above which a taxpayer may claim the medical expenses tax offset and commence annually indexing the threshold to the consumer price index.

•   The threshold above which the 20% net medical expenses tax offset can be claimed will be increased from $1,500 to $2,000.

•   The number of taxpayers eligible to access the offset will be reduced.

http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00270776.htm

TR 2010/D7: Income tax: business related capital expenditure – section 40-880 of the ITAA 1997 core issues

•   8/12/2010

•   Draft taxation ruling released for public comment.

•   The draft ruling considers the type of expenditure to which section 40-880 of the ITAA 1997 (business related costs) and in respect of which a deduction can be claimed.

•   Ruling relates to application/operation of 'black hole expenditure' provisions. Ruling will help taxpayers determine their tax liability.

•   When final ruling is issued the arrangements are proposed to apply from 8 December 2010 – date of issue of draft ruling.

http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2010D7/NAT/ATO/00001

TR 2010/D8: Income tax: retail premiums paid to shareholders where share entitlements are not taken up or are not available

•   8/12/2010

•   Draft taxation ruling released for public comment.

•   When final ruling is issued it is proposed to apply both before and after its date of issue.

•   The draft ruling is about the taxation of retail premiums paid to shareholders in companies in respect of amounts subscribed for shares.

•   Ruling sets out that:

o   A Retail Premium paid to a Non Participating Shareholder is assessable income as a dividend under section 44 of the ITAA 1936.

o   A Retail Premium paid to a non-resident will be non-assessable non-exempt income under section 128D of the ITAA 1936 where it is subject to withholding tax under section 128B.

o   A Retail Premium paid to a Non Participating Shareholder is an unfrankable distribution sourced, directly or indirectly, from a company's share capital account pursuant to paragraph 202-45(e) of the ITAA 1997.

o   A Retail Premium paid to a non-resident Non Participating Shareholder will be a dividend subject to withholding tax under subsection 128B(1) of the ITAA 1936, unless excluded under another provision of the ITAA 1936, ITAA 1997, or of the International Tax Agreements Act 1953 which gives the force of law to certain international tax agreements. Withholding tax does not apply to franked dividends.

o   As a Retail Premium paid to a non-resident is an unfrankable distribution pursuant to paragraph 202-45(e) of the ITAA 1997 withholding tax will apply under subsections 128B(1) and 128B(4) of the ITAA 1936.

•   Tax consequences will be determined on a case by case basis dependant on the recipient's shareholder status.

http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2010D8/NAT/ATO/00001

TD 2010/D9 – draft taxation determination: income tax: Division 7A - unpaid present entitlements - factors the Commissioner will take into account in determining the amount of any deemed entitlement arising under section 109XI of the Income Tax Assessment Act 1936

•   15/12/2010

•   Draft taxation determination released for public consultation.

•   Where section 109XI of the ITAA 1936 operates to treat a private company as being or becoming presently entitled to an amount from the income of the target trust for the purposes of paragraphs 109XA(1)(c), 109XA(2)(b) and 109XA(3)(b), in determining the amount of this entitlement under subsection 109XI(4), the Commissioner will take into account relevant factors occurring before the earlier of the due date for lodgment and the date of lodgment of the trust's return of income for the year of income in which the actual transaction referred to in section 109XA takes place.

•   In each and every year in which there is a section 109XA transaction and the conditions in subsection 109XI(1) are satisfied, the Commissioner will be required under subsection 109XI(4) to determine the amount (if any) that the private company is taken to be or to become entitled to from the net income of the target trust.

•   The Commissioner will make this determination taking into account the relevant factors existing immediately before the target trust's lodgment date for the year in which the section 109XA transaction occurred.

•   Determination outlines the factors that the Commissioner will take into consideration when determining if a company is entitled to income from the target trust.

•   The making of a determination may result in an increased tax liability.

http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2010D9/NAT/ATO/00001

TD 2010/D10 – draft taxation determination –  income tax: Division 7A - payments and loans through interposed entities - factors the Commissioner will take into account in determining the amount of any deemed payment or notional loan arising under section 109T of the Income Tax Assessment Act 1936

•   15/12/2010

•   Draft taxation determination released.

•   Draft determination outlines that where section 109T of the ITAA 1936 operates to treat a private company as having made a payment or loan to a shareholder, in determining the amount of that deemed payment or notional loan under section 109V or 109W, the Commissioner will take into account relevant factors occurring before the earlier of the due date for lodgment and the date of lodgment of the private company's return for the income year in which the company is taken to have made the deemed payment or notional loan.

•   The relevant factors that the Commissioner will take into account immediately before the lodgment date for the private company's return for the year in which it is taken to have made a deemed payment or notional loan include:

http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2010D10/NAT/ATO/00001

TR 2010/D9 – draft taxation ruling: income tax: deductibility under subsection 295-465(1) of the ITAA 1997 of premiums paid by a complying superannuation fund for an insurance policy providing Total and Permanent Disability cover in respect of its members

•   15/12/2010

•   Draft taxation ruling released.

•   This draft Ruling is concerned with issues relating to the deductibility under subsection 295-465(1) of the ITAA 1997 of premiums paid by a complying superannuation fund for insurance policies which provide total and permanent disability (TPD) cover in respect of the fund's members.

•   This draft Ruling deals with: The Commissioner's view on how subsection 295-465(1) together with paragraph 295-460(b) applies to such premiums; and the relationship between the deductibility of the premiums and the rules for the provision of benefits by a complying superannuation fund to its members as set out in the Superannuation Industry (Supervision) Act 1993 and the Supervision Industry (Supervision) Regulations 1994.

•   For an insurance premium on a TPD insurance policy paid by a complying superannuation fund to be deductible, there must be a connection between the payment and a current or contingent liability of the fund to provide a disability superannuation benefit. The payment must be wholly or partly related to the provision of disability superannuation benefits.

•   The extent to which a premium is in respect of a fund's liability to pay a disability superannuation payment will be determined by the nature and scope of the insured events.

•   If a deduction is disallowed a fund's liability will be more than it would be if the premium were deductible.

http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2010D9/NAT/ATO/00001

Decision impact statement - Watson v Deputy Commissioner of Taxation

•   22/12/2010

•   Outlines the ATO's response to this case which concerned whether or not insurance proceeds paid to the taxpayer under an income protection policy were assessable income 'from' his business activity for the purposes of section 35-10 of the ITAA 1997.

•   The Full Federal Court unanimously agreed with the primary judge that the payments made under the insurance policy were not assessable income 'from' the taxpayer's business activity, for the purposes of the non-commercial loss rules in Division 35 of the ITAA 1997.

•   The Court considered that the policy income was received because the taxpayer was not able to carry on the business activity to the same extent as before he became ill.

•   The Court held that income will be 'from' a particular business activity where it has its starting point/source/origin in that activity.

http://www.ato.gov.au/distributor.asp?doc=/content/Content/00265868.htm

Decision Impact Statement - Tagget v Commissioner of Taxation

•   22/12/2010

•   Concerns whether or not the taxpayer should be assessed on the value of land transferred to him at the time of transfer, or the value of the land at an earlier time when the taxpayer acquired a conditional right to have the land transferred to him.

•   The court found that as the taxpayer accounted on a cash receipts basis the parcel of land was income when derived – ie in the year ended 30 June 2006.

•   The case was decided on its facts – it is unlikely to have broader consequences for other taxpayers.

http://www.ato.gov.au/distributor.asp?doc=/content/Content/00265873.htm

Decision Impact Statement – JMB Beverages Pty Ltd v Commissioner of Taxation

•   22/12/2010

•   The Full Court decision confirms that processes such as fermentation may change the nature of the juice of a fruit or vegetable such that it no longer bears that character. It is necessary to determine whether the beverage consists either wholly or at of at least 90% by volume of juices of fruit (as the case may be) by referring to the constituents of the beverage actually existing at the time the beverage is supplied.

•   The requirement in item 11 for carbonated beverages to 'consist wholly of juices of fruit or vegetables' requires that, apart from carbon dioxide used for carbonation, the beverage consist 100% of the juices of fruit or vegetables. The requirement does not allow any additives that are not juices of fruit or vegetables, even if the addition is only of a de minimis amount.

•   The Commissioner considers this to be settled law following the decision of the primary judge and of the Supreme Court of New South Wales in P & N Beverages Australia Pty Ltd v Commissioner of Taxation [2007] NSWSC 338.

•   In accordance with the decision of the primary judge, non-alcoholic beverages referred to in the table in clause 1 of Schedule 2 to the GST Act are confined to those beverages which do not acquire their alcohol content through human intervention (i.e. by using yeast to cause or accelerate fermentation) - GST applies to non-alcoholic beverages produced through human intervention.

•   This DIS clarifies the law.

http://law.ato.gov.au/atolaw/view.htm?docid=LIT/ICD/NSD1071of2009/00001

Decision Impact Statement - Dreamtech International Pty Ltd v Commissioner of Taxation

•   22/12/2010

•   Favourable DIS published.

•   This case concerned whether or not a stretched Hummer vehicle was a 'limousine' and, therefore, came within the definition of 'car' in section 27-1 of the New Tax System (Luxury Car Tax) Act 1999 (LCT Act).

•   The Tribunal gave the word 'limousine' it's ordinary meaning and took into account all relevant considerations. They found that the ordinary meaning of the term 'limousine' is reasonably wide.

•   Consideration was given to the claims made by Dreamtech that the vehicle was similar to a bus and was a heavy vehicle.

•   The decision confirms the ATO's view of the attributes that are to be taken into account when determining whether or not a vehicle is a limousine.

•   Whether or not a vehicle will fall within the definition of a limousine is a question of fact.

http://www.ato.gov.au/distributor.asp?doc=/content/Content/00265841.htm

Changes to GST treatment of residential premises

•   27/1/2011

•   The Assistant Treasurer has announced that the Government will amend the GST law to ensure that it achieves the intended policy outcome for the GST treatment of residential premises. A discussion paper on the design of the proposed amendments has been released for public comment.

•   The intent of the GST law is to capture GST on the value added to real property by developers, with newly constructed residential premises being subject to GST and other residential premises being input taxed. To ensure neutrality between owner-occupiers and investors, the supply of residential accommodation and long-term commercial accommodation by landlords are generally input taxed supplies.

•   The changes will clarify how residential property is treated under the GST, following a Full Federal Court decision last year that found that GST was not payable on some supplies of new residential premises to owner-occupiers and investors.

•   The amendments will ensure that new residential premises constructed under development lease arrangements since 3 October 2007 are treated as taxable supplies, rather than input taxed supplies, where the premises are sold by developers to home buyers or investors. This amendment will contain a transitional provision to ensure that taxpayers who have entered into arrangements on a basis consistent with the Court's findings, prior to this announcement over newly constructed residential premises, are not disadvantaged.

http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/020.htm&pageID=003&min=brs&Year=&DocType

http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1920

Government announces one-off flood levy

•   27/01/2011

•   The Prime Minister today announced the Gillard Labor Government’s response to the immense national challenge of rebuilding flood-affected regions across Australia.

•   Preliminary estimates, following consultation with the Queensland Government, indicate that the Government will need to invest $5.6 billion in rebuilding flood-affected regions, with the vast majority going on rebuilding essential infrastructure.

•   Two-thirds of that funding will be delivered through spending cuts.

•   The other third will be provided by a modest one-year progressive levy that won’t be paid by people directly affected by the floods or by low-income earners.

•   The levy will apply to taxpayers with a taxable income over $50,000 at a rate of 0.5 per cent. Taxpayers earning over $100,000 will pay an additional 1 per cent levy on any income that exceeds $100,000.

•   The levy is expected to raise $1.8 billion and will be paid by approximately 40 per cent of taxpayers.

http://www.pm.gov.au/press-office/rebuilding-after-floods

http://www.smh.com.au/environment/weather/gillard-confirms-oneoff-flood-levy-20110127-1a65c.html

Tax breaks in too-hard basket

•   8/2/2011

•   Federal government is considering regulatory changes in response to collapses in the managed investment industry

•   Treasury advice suggests that curtailing generous tax breaks would be counterproductive.

•   Treasury said changing the special tax rules for managed investment schemes would be complex and risk unintended consequences and that change would risk structural damage to the tax system.

•   A parliamentary inquiry in 2009 recommended changes but didn't call for an end to the tax breaks.

•   The Greens have said that MIS distort land and water prices and damage communities across regional Australia and that they are committed to removing MIS tax rorts for forestry.

AFR 8/2/2011, John Kehoe, p. 7.

Huge tax bill for breached cap [super contributions cap]

•   8/2/2011

•   Article discusses more aggressive approach being taken by the ATO to excessive contributions and self managed funds.

•   A taxpayer has become liable for an ECT liability after rolling over funds from her SMSF to a public fund.

•   Lawyers consider that the ATO has a conflict of interest in being both regulator of these funds and policeman suggesting that a regulator's primary focus should be making sure peoples' money is safe.

•   Accountants have called for changes to penalties for exceeding the contributions caps.

AFR 8/2/2011, Jason Clout, p. 12.

Taxation Ruling 2011/1

•   9/2/2011

•   Taxation Ruling 2011/1 released.

•   TR2011/1 Income tax: application of the transfer pricing provisions to business restructuring by multinational enterprises

•   The ruling set outs the Commissioner's views on the application of Australia's transfer pricing provisions in Division 13 of Part III (Division 13) of the ITAA 1936 and the Associated Enterprises Article of Australia's tax treaties (treaty Article 9) of the International Agreements Act 1953 to business restructuring arrangements to help determine the arm's length value of consideration where the consideration for a supply or acquisition of property by a taxpayer under an international agreement in respect of a business restructuring is not an arm's length amount.

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20111/NAT/ATO/00001

Labor mulls $5bn levy for disability

•   16/2/2011

•   Productivity Commission expected to recommend the government introduce a $5 billion levy to fund a universal disability insurance scheme.

•   The proposed scheme may take the form of a Medicare style levy. Other funding approaches are believed to be a pay as you go method or a superannuation style model.

AFR 16/2/2011 Fleur Anderson and Lisa Murray, p. 1.