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Complimentary Edition (i)

April 2005www.taxmatrix.com.au

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Monthly Tax Update NotesApril 2005

TABLE OF CONTENTS

As a guide to readers the following rating system has been applied at the front of the title of anarticle (the context being the section within which the article appears):*** indicates the item is in the “must read category” (legislation will not receive *** rating unless

it has received Royal Assent.)** indicates the item is in the “should read category”.* indicates the item is in the ”read if you have plenty of time” category.

1. INCOME TAX ................................................................................... 1

1.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIES ........................ 1(a) Assessable & Deductible Items------------------------------------------------------------------------------- 1(b) Policy & Administration------------------------------------------------------------------------------------------ 1

(1) Financial literacy for Australians (Brough)................................................................... 1

1.2 COURTS & TRIBUNALS ........................................................................... 1(a) Courts --------------------------------------------------------------------------------------------------------------- 1

(1) ** Same business test appeal unsuccessful (TelePacific Pty Limited v C of T)........... 1(2) ** Were the penalty notices valid? Did the Commissioner post the notices? (Ross

Forsyth v Deputy C of T) ............................................................................................. 4(3) * Taxpayer sues the Commissioner for defamation (Croker v C of T) ......................... 7

(b) Tribunals ------------------------------------------------------------------------------------------------------------ 8(1) *** No relief on double paid superannuation (Williams and C of T ) ............................ 8

1.3 ATO RELEASES........................................................................................ 9(a) Rulings & Draft Rulings ----------------------------------------------------------------------------------------- 9

(1) *** A person holding an ABN can still be an employee TR 2005/D3 ........................ 10(2) *** When will interest be deductible for a trust? Interest deductibility attacked in

relation to trust distributions? (TR 2003/9 replaced by new draft ruling) (TR2005/D4) ................................................................................................................... 11

(3) ** Project Pool Expenses (TR 2005/4) ...................................................................... 12(4) * Interest expense incurred by trustees (TR 2003/9W - Withdrawal)......................... 13(5) * PAYG Withholding TR 2000/14W - Withdrawal ...................................................... 14(6) * Y2K expenditure ruling withdrawn (TR 1998/13W - Withdrawal) ............................ 14(7) * Exemption of income ruling for bona fide prospectors withdrawn (TR 92/19W -

Withdrawal) ............................................................................................................... 14(8) * Take or pay contracts (TR 96/5A-2 - Addendum) ................................................... 14

(b) Determinations & Draft Determinations ------------------------------------------------------------------- 15(1) * ISP's and PE (TD 2005/2)...................................................................................... 15

(c) Class Rulings ---------------------------------------------------------------------------------------------------- 16(1) ** Class Rulings ....................................................................................................... 16

(d) Product Rulings & Addenda --------------------------------------------------------------------------------- 16(1) ** Product Rulings .................................................................................................... 16

(e) Interpretative Decisions --------------------------------------------------------------------------------------- 17(1) Assessability ............................................................................................................. 17

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(2) Commercial Debt Forgiveness .................................................................................. 17(3) CGT .......................................................................................................................... 17(4) Deductions ................................................................................................................ 17(5) Franking .................................................................................................................... 17(6) International .............................................................................................................. 17(7) Research & Development ......................................................................................... 17(8) UCA .......................................................................................................................... 17(9) Other ......................................................................................................................... 18(10) Withdrawals - CGT.................................................................................................... 18

(f) Practice Statements ------------------------------------------------------------------------------------------- 18(1) ** What authorisation is required to make an FOI request on behalf of another

person PS LA 2005/3 ................................................................................................ 18(2) * How will fees and charges be imposed in relation to FOI requests? PS LA 2005/419(3) * When will information be provided to a third party? PS LA 2005/5 ......................... 20(4) * When will the names of ATO personnel be released? PS LA 2005/6 ..................... 20

(g) Fact Sheets ------------------------------------------------------------------------------------------------------ 21(h) Other Publications & Updates ------------------------------------------------------------------------------- 21

(1) *** ATO compliance issues in 2005 Phillips Structures, Cash Economy and RentalProperties (ATO Speech) .......................................................................................... 21

(2) * Review of topical tax issues affecting corporate Australia (ATO Speech)............... 24(3) ** Water entitlement transactions or on income or capital account? CGT and trading

of water entitlements (ATO speech).......................................................................... 29

2. GST ................................................................................................ 35

2.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIES ...................... 35

2.2 COURTS & TRIBUNALS ......................................................................... 35(a) Courts ------------------------------------------------------------------------------------------------------------- 35(b) Tribunals ---------------------------------------------------------------------------------------------------------- 35

2.3 ATO RELEASES...................................................................................... 35(a) Taxation Rulings & Draft Rulings --------------------------------------------------------------------------- 35

(1) ** Fuel cards and GST - who really supplies the fuel: are the tax invoices correct?(GSTR 2005/1).......................................................................................................... 35

(b) Determinations & Draft Determinations ------------------------------------------------------------------- 37(c) Interpretative Decisions --------------------------------------------------------------------------------------- 37

(1) GST........................................................................................................................... 37(d) Practice Statements ------------------------------------------------------------------------------------------- 37(e) Fact Sheets ------------------------------------------------------------------------------------------------------ 38(f) Other Publications & Updates ------------------------------------------------------------------------------- 38

(1) * Hobart man jailed for GST fraud involving false BAS (ATO Media) ....................... 38(2) * Queensland man jailed for GST fraud involving false BAS (ATO Media) .............. 38

3. FRINGE BENEFIT TAX .................................................................. 39


3.2 COURTS & TRIBUNALS ......................................................................... 39(a) Courts ------------------------------------------------------------------------------------------------------------- 39(b) Tribunals ---------------------------------------------------------------------------------------------------------- 39

3.3 ATO RELEASES...................................................................................... 39(a) Taxation Rulings & Draft Rulings --------------------------------------------------------------------------- 39(b) Determinations & Draft Determinations ------------------------------------------------------------------- 39(c) Interpretative Decisions --------------------------------------------------------------------------------------- 39


Table of Contents(iii)



(d) Practice Statements ------------------------------------------------------------------------------------------- 39(e) Fact Sheets ------------------------------------------------------------------------------------------------------ 39(f) Other Publications & Updates ------------------------------------------------------------------------------- 39

(1) FBT ........................................................................................................................... 39

4. STATE TAXES ............................................................................... 41


4.2 COURTS & TRIBUNALS ......................................................................... 41(a) Courts ------------------------------------------------------------------------------------------------------------- 41

(1) *** Was the face value of the loan part of the consideration and dutiable? (ChiefCommissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd) ........... 41

(2) What was the value of the goodwill of the Ramada Grand Hotel at Glenelg? (HSHHotels (Australia) Ltd v C of ST)................................................................................ 47

(b) Tribunals ---------------------------------------------------------------------------------------------------------- 52

4.3 STATE REVENUE OFFICE RELEASES ................................................. 52(a) Taxation Rulings & Draft Rulings --------------------------------------------------------------------------- 52(b) Practice Directions --------------------------------------------------------------------------------------------- 52(c) Other Publications & Updates ------------------------------------------------------------------------------- 53

(1) ** Stamp duty concessions for relationship breakdowns........................................... 53

5. SUPERANNUATION, ETP’S & PENSIONS ................................... 55



(1) * Incorrect health information at time of employment leads to loss ofsuperannuation benefit (Phillips v Commissioner for Superannuation) ..................... 55

(b) Tribunals ---------------------------------------------------------------------------------------------------------- 57

5.3 APRA, ASIC & ATO RELEASES ............................................................. 57(a) Taxation Rulings & Draft Rulings --------------------------------------------------------------------------- 57

(1) ** Does your client have an employee? (SGR 2005/1) ............................................. 57(b) Determinations & Draft Determinations ------------------------------------------------------------------- 60(c) Interpretative Decisions --------------------------------------------------------------------------------------- 60

(1) Superannuation Guarantee....................................................................................... 60(d) Practice Statements ------------------------------------------------------------------------------------------- 60(e) Fact Sheets ------------------------------------------------------------------------------------------------------ 60(f) Other Publications & Updates ------------------------------------------------------------------------------- 61

6. OTHER IMPOSTS, OFFSETS & REBATES .................................. 63

6.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIES ...................... 63(1) * ASIC provides relief on timing of auditor's independence declarations (ASIC

Media) ....................................................................................................................... 63(2) * ASIC urges small capitalisation companies to get fundraising disclosure right first

time (ASIC Media)..................................................................................................... 63(3) * APRA releases IFRS discussion paper (APRA Media)........................................... 64


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(1) * An examination of the use of diesel fuel on board vessels (Allseas MarineContractors SA and C of T) ....................................................................................... 65

(b) Tribunals ---------------------------------------------------------------------------------------------------------- 66

6.3 APRA, ASIC & ATO RELEASES ............................................................. 67(a) Taxation Rulings & Draft Rulings --------------------------------------------------------------------------- 67(b) Determinations & Draft Determinations ------------------------------------------------------------------- 67(c) Interpretative Decisions --------------------------------------------------------------------------------------- 67

(1) Withdrawals - WET ................................................................................................... 67(d) Practice Statements ------------------------------------------------------------------------------------------- 67(e) Fact Sheets ------------------------------------------------------------------------------------------------------ 67(f) Other Publications & Updates ------------------------------------------------------------------------------- 67

(1) ** SMSF update by ATO (ATO Speech).................................................................... 67(2) Jail for diesel fuel rebate fraud (ATO Media)............................................................. 69

7. LEGISLATION ................................................................................ 71

7.1 LEGISLATION & REGULATIONS ........................................................... 71(a) Acts Receiving Royal Assent in the last month --------------------------------------------------------- 71

(1) * A New Tax Systems (Goods and Services Tax Imposition (Recipients) - General)Act No. 3 of 2005 ...................................................................................................... 71

(2) * A New Tax Systems (Goods and Services Tax Imposition (Recipients) - Excise)Act No. 2 of 2005 ...................................................................................................... 71

(3) * A New Tax System (Goods and Services Tax Imposition (Recipients) - Customs)Act No. 1 of 2005 ...................................................................................................... 71

(4) ** Tax Laws Amendment (Long-term Non-reviewable contracts) Act No. 10 of 200572(5) Retirement Savings Account Providers Supervisory Levy Imposition Amendment

Act No. 17 of 2005 .................................................................................................... 72(6) Life Insurance Supervisory Levy Imposition Amendment Act No. 16 of 2005 ........... 72

(b) Bills Awaiting Royal Assent ---------------------------------------------------------------------------------- 73(1) * Customs Amendment Bill 2004.............................................................................. 73(2) * Bankruptcy and Family Law Legislation Amendment Bill 2005.............................. 73(3) * New International Tax Arrangements (Managed Funds and Other Measures) Bill

2004 .......................................................................................................................... 73(4) ** Tax Laws Amendment (2004 Measures No. 6) Bill 2004...................................... 74

(c) Bills Laid Aside -------------------------------------------------------------------------------------------------- 74(d) Bills Before Parliament ---------------------------------------------------------------------------------------- 74

(1) * Superannuation Legislation Amendment Bill 2004 ................................................ 74(2) ** Tax Laws Amendment (2004 Measures No. 7) Bill 2004...................................... 75(3) Appropriation (Parliamentary Department) Bill (No. 2) 2004-2005 ............................ 76(4) Appropriation Bill (No. 3) 2004-2005 ......................................................................... 76(5) Appropriation Bill (No. 4) 2004-2005 ......................................................................... 76(6) Tax Laws Amendment (2005 Measures No. 1) Bill 2005 .......................................... 76

(e) Regulations Promulgated------------------------------------------------------------------------------------- 76

7.2 STATE PARLIAMENTS ........................................................................... 77(a) Victoria ------------------------------------------------------------------------------------------------------------ 77(b) New South Wales ---------------------------------------------------------------------------------------------- 77

(1) * Superannuation Legislation Amendment Bill 2004 ................................................ 77(c) Queensland ------------------------------------------------------------------------------------------------------ 77(d) Western Australia----------------------------------------------------------------------------------------------- 77(e) Australian Capital Territory----------------------------------------------------------------------------------- 78

(1) * Mineral Resources and Other Legislation Amendment Bill 2004 ........................... 78(2) Appropriation Bill 2004-2005 (No. 2) 2005 ................................................................ 78

(f) South Australia -------------------------------------------------------------------------------------------------- 78(1) * Parliamentary Superannuation (Scheme for New Members) Amendment Bill

2004 .......................................................................................................................... 78


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(2) * Superannuation Funds Management Corporation of South Australia(Miscellaneous) Amendment Bill 2004 ...................................................................... 78

(g) Tasmania --------------------------------------------------------------------------------------------------------- 79(h) Northern Territory----------------------------------------------------------------------------------------------- 79

(1) * Taxation (Administration) Amendment (Objections and Appeals) Act No. 5 of2005 .......................................................................................................................... 79

Tax MatrixTax Training & Updating for ProfessionalsDirector: Chris WallisMelbourne OfficeLevel 18, 15 Collins Street, Melbourne, Victoria 3000 Telephone: (03) 9654 9777 Fax: (03) 9654 9577E-mail: [email protected] OfficeBuilding B, Leeder Business Park661 Newcastle Street, Leederville WA 6007Telephone: (08) 9328 8526 Fax: (08) 9227 6568E-mail: [email protected]

Hall & WilcoxLawyersTax and Superannuation Partners:Keith James, Garry Sebo; Dennis Nettlefold, Chris Ketsakidis andAndrew O’BryanSpecial Counsel: Michael ParkerLevel 19, Bourke Place, 600 Bourke Street, Melbourne, Victoria 3000 DX 320Telephone: (03) 9603 3555 Fax: (03) 9670 9632 www.hallandwilcox.com.au

Complimentary Edition (1)



1. INCOME TAX

1.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIES

(a) Assessable & Deductible ItemsNil

(b) Policy & Administration

(1) Financial literacy for Australians (Brough)

Source (613575) The Hon Mal Brough, MP Minister for Revenue and the Assistant Treasurer No. 013 Thursday24th February, 2005

http://assistant.treasurer.gov.au/mtb/content/pressreleases/2005/013.asp?pf=1

The Government has developed Money for Life, Financial Literacy in the Workplace, a training programme aimed atimproving employee financial literacy skills.

A report produced by the Commonwealth Bank, Improving financial literacy in Australia: benefits for the individualand the nation indicates that improving financial literacy among the 10 per cent of Australia’s least financially literateindividuals would contribute $6 billion per year to GDP and create 16,000 new jobs over 10 years.

1.2 COURTS & TRIBUNALS

(a) Courts

(1) ** Same business test appeal unsuccessful (TelePacific Pty Limited v C of T)

Source (616941) TelePacific Pty Limited v Commissioner of Taxation [2005] FCA 158 (4 March 2005)

http://www.austlii.edu.au/au/cases/cth/federal_ct/2005/158.html

What was the issue?

Did the continuity of ownership test provide access to prior year losses?

Was the same business test satisfied so as to provide access prior year losses?

Was the AAT wrong in including that the continuity of ownership test and the same business test were both failed?

What were the facts?

A company related to the taxpayer Tech Pacific (Australia) Pty Limited:

♦ made a loss in the 1990 year of income;

♦ transferred the loss to the taxpayer.

The Taxpayer:

made losses in each of the 1991 and 1992 years of income;

sought to recoup those losses in the 1992, 1993 and 1994 years of income;

sought to recoup the transferred loss in the 1995 year of income.

The Taxpayer:

was incorporated on 5 September 1988 as a wholly owned subsidiary of Imagineering Technology Ltd ("Imagineering').

in Mach 1989, it changed its name to Imagineering Telecommunications Pty Ltd.

http://assistant.treasurer.gov.au/mtb/content/pressreleases/2005/013.asp?pf=1


Income Tax(2)Courts & Tribunals


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in November 1989, First Pacific Company Ltd (‘First Pacific’), a Hong Kong corporation, acquired through itsAustralian subsidiary, Cranhaven Pty Ltd (‘Cranhaven’), 27.7 per cent of the issued share capital of Imagineering.

In early 1991:

~ operated from premises in Sydney, which it shared with Imagineering.

~ had a staff of approximately 26 people;

~ had a business that was primarily as a wholesale distributor of telecommunications products, includingmobile phones, most of which it imported as finished products or in the form of components;

~ sold mobile phones to dealers throughout Australia and did not sell directly to consumers or ‘end-users’;

~ provided a warranty service and gave advice and provided other support services to retailers.

On 26 February 1991, Cranhaven entered into an ‘Election Agreement’ with three companies associated with a MrJodee Rich who between them, held 21.5 percent of the issued capital of Imagineering.

On 28 February 1991, First Pacific, through Cranhaven who at that time held 45% of the capital in Imagineering, madea takeover offer for all the shares in Imagineering that it did not already hold.

On 24 May 1991, Cranhaven declared its Part A offer unconditional.

On 30 May 1991, Cranhaven extended the period for acceptances of the offer until 11 June 1991.

On 31 May 1991, Cranhaven informed the shareholders of Imagineering that it had acquired 87 per cent of the shares inthe company.

On 3 May 1991, several weeks before Cranhaven’s offer was declared unconditional, four companies within the PhillipRoss Communications Group, as sellers, and Tricom Pty Ltd (‘Tricom’), as purchaser, entered into Heads ofAgreement.

The Heads of Agreement recited that the sellers were engaged in the conduct of two separate businesses:

one was a dealership in mobile phones;

the other consisted of the provision of paging and networking services.

On 27 August 1991, the sellers under the Heads of Agreement, and the Taxpayer executed what a ‘lengthy andcomprehensive agreement’ (the ‘Sale Contract’) which was expressed to take effect from 30 April 1991.

The Taxpayer, acknowledged that it would be able to succeed in the remitted proceedings unless, in addition tosatisfying the same business test (s 80E(1)(b)), it also satisfied the new business and the new transaction tests (s80E(1)(c)).

It was common ground the Taxpayer could not claim deductions in the Relevant Years for the prior losses incurred byit, or the transferred los, unless it satisfied the continuity of business test laid down in s 80E of the ITAA.

What was the legislative background?

Section 80E(1), as in force at all material times, provided as follows:

Subject to subsection (2), where –

(a the whole or a part of a loss incurred by a taxpayer, being a company, in a year before theyear of income would not, but for this section, by reason of a change that has taken place inthe beneficial ownership of shares in the company or in any other company, be taken intoaccount for the purposes of section 79E, 79F, 80, 80AAA or 80AA;

(b) the first-mentioned company carried on at all times during the year of income the samebusiness as it carried on immediately before the change referred to in paragraph (a) tookplace; and

(c) the first-mentioned company did not, at any time during the year of income, derive incomefrom a business of a kind that it did not carry on, or from a transaction of a kind that it hadnot entered into in the course of its business operations, before the change took place,

sections 80A and 80DA do not prevent the whole of the loss being so taken into account.’

Income TaxComplimentary Edition

Courts & Tribunals(3)



What was the decision?

Part I of the Reasons

[37] In Part I of the AAT’s reasons, it considered changes that had taken place in the Taxpayer’s business duringthe period 1992 to 1995. The AAT made it clear that it was addressing this question on the assumption(contrary to its earlier findings) that the Phillip Ross Business had been acquired before the disqualifyingchange. That is, the AAT proceeded on the assumption that the Taxpayer, as it claimed, had acquired thePhillip Ross Business on 3 May 1991.

[38] The AAT commenced this section of its reasoning by extracting the whole of Appendix C of theCommissioner’s written submissions to the AAT. This extract was preceded by the observation (at [88]) thatthe contentions in Appendix C ‘appear to me to be accurate’.

[41] The AAT said (at [89]) that the contractual arrangements with Telstra referred to in Appendix C ‘were ofparticular importance’. The arrangements with Telstra had provided an important source of revenue which, asthe Commissioner had contended, may have exceeded the Taxpayer’s profit on the sale of mobile phones.Moreover, the Telstra Agreement was important because it allowed the Taxpayer to act as agent for the sale ofTelstra stock, thereby relieving the Taxpayer, to that extent, of the cost of carrying its own stock.

[43 The amended notice of appeal identified five grounds, as follows:

‘(i) The Tribunal erred in concluding that the change in the beneficial ownership of therelevant shares in [Imagineering] took place on 24 May 1991 rather than on 21 June1991...

(ii) If it be relevant, the Tribunal erred in concluding that the [Taxpayer] was not carrying onthe erstwhile businesses of the Phillip Ross companies before 27 August 1991 because untilthat date "it did not own it"... The Tribunal’s error equates a business to a proprietary rightcapable of ownership when it is nothing more than a factual characterization of a course ofactivity or conduct.

(iii) The Tribunal erred in construing "the same business" test in [s] 80E, by reference todecided cases, as requiring more than compliance with characterization of the[Taxpayer’s] business as being "a distributor of telecommunications equipment and theprovision of telecommunication services", having regard to the legislative purposeunderlying the insertion of [s] 80E of the [ITAA].

(iv) The Tribunal erred in conflating the "new transaction test" in the second limb of [s]80E(1)(c) in applying the "same business test" in [s] 80E(1)(b).

(v) The Tribunal erred in failing to include in its reasons for decision sufficient or properfindings on material questions of fact and a reference to the evidence or other material onwhich those findings were based contrary to the requirements of [s] 43(2B) of theAdministrative Appeals Tribunal Act 1975 [(Cth)].’

[44] The Taxpayer did not press the first ground of appeal. ...

[45] The fourth and fifth grounds of appeal were directed principally to Part I of the AAT’s reasons although thefourth ground may also have applied to the findings in Part E of the AAT’s reasons. It will be recalled that theAAT there found that the changes to the Taxpayer’s business that had occurred over the period 1992 to 1995had transformed the nature of its business from that conducted immediately before the disqualifying change.The AAT therefore concluded that the Taxpayer was unable to satisfy the same business requirement laiddown in s 80E(2)(b) of the ITAA.

[46] Mr Edmonds ultimately did not dispute that if the Taxpayer’s attack on the AAT’s findings in Part I failed, theTaxpayer could not succeed in its appeal to this Court. This followed from the fact that the AAT’s findings inPart I constituted an independent basis for its conclusion that the Taxpayer did not satisfy the same businesstest of s 80E(1)(b) of the ITAA.

[62] The Taxpayer’s written submissions did not specifically address the fourth ground of appeal, namely that theAAT had erroneously conflated the new transaction test (s 80E(1)(c)) with the same business test (s 80E(1)(b)).However, Mr Edmonds advanced this argument in the course of oral submissions.



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[64] Mr Edmonds made no criticism of (the AAT) analysis. In essence, his argument rested on the fact that in PartD of the reasons, the AAT discussed at some length the different views expressed by Sheppard J and CampbellJ as to the construction of s 80E(1)(c) of the ITAA: see Hammond Investments, at 355, 359, per Sheppard J; cfFielder Downs (WA) Pty Ltd v Federal Commissioner of Taxation [1980] Qd R 283, at 292-293, per WBCampbell J.

[65] It is, perhaps, a trifle odd that the AAT, under the heading of ‘The Law as to the Same Business Test’discussed the construction of s 80E(1)(c) of the ITAA. The AAT appears to have done so because the Taxpayerhad referred to the two cases in its submissions and the AAT felt it appropriate to analyse the cases eventhough it ultimately did not need to apply the same transaction test to the circumstances of the present case.

[66] Be that as it may, there is nothing in the AAT’s reasons to suggest that it failed to appreciate that HammondInvestments and Fielder Downs were concerned with the new transaction test, rather than the same businesstest. ...

[67] It may have been clearer if the AAT had discussed Hammond Investments and Fielder Downs in a separatesection of its reasons and expressly stated that it did not need to express a final view as to the construction of s80E(1)(c) of the ITAA. ...

[68] As I have noted, the Taxpayer accepted that the AAT’s findings recorded in Part I of its reasons, if immunefrom challenge, provide an independent basis for affirming the Commissioner’s disallowance of theTaxpayer’s objections. Since the Taxpayer’s attacks on the AAT’s findings recorded in Part I of its reasonshave not succeeded, the appeal to this Court must be dismissed. ...

Editor:

The Tribunal decision which holds that the same business test was failed, was not set aside.

(2) ** Were the penalty notices valid? Did the Commissioner post the notices? (Ross Forsyth vDeputy C of T)

Source (599236) Ross Forsyth v Deputy Commissioner of Taxation [2004] NSWCA 474 Spigelman CJ Giles JAGzell J

http://www.austlii.edu.au/au/cases/nsw/NSWCA/2004/474.html

What was the issue?

Were the 222AOE director's penalty notices valid?


The Commissioner issued three director's penalty notices and obtained judgment against the director.

On each of them, the director appealed against the judgement alleging that the underlying penalty notices were invalid.


Directors of a company are required to ensure that:

♦ the company meets its obligation to remit deductions by the due date; or

♦ concludes an agreement as to payment; or

♦ the company enters administration; or

♦ is wound up.

If a director fails to comply with that imposed statutory duty the consequence, under s222AOC is that a liability isimposed on the director to “pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of thecompany’s liability”.

What was the decision - validity of first notice?

[37] The (Director) submits that DPN1 is invalid on the basis that it materially understated the amounts unpaid bythe company at that time by reason of the omission of any reference to any liability other than that forAugust/September 1998.

http://www.austlii.edu.au/au/cases/nsw/NSWCA/2004/474.html





[39] The (Director) submits that he was induced to support the company pursuing an agreement under s222ALAwhereas, if he had known of the full liability, he would have supported one of the other options, eitheradministration or winding up.

[40] Plainly, the choice between the four options for which the Act provides may be determined by the financialposition of the company including, perhaps most relevantly, the liabilities for which a director may becomepersonally liable. This does not, however, determine the question of whether the notice ought contain suchadditional information of this character as is known to the Commissioner in order to be valid. Whether that isso depends on the words of the section understood in their context and, particularly, the purpose of theparticular legislative scheme of which it forms part.

[41] Part VI Div 9 of the Act was considered by the High Court in Deputy Commissioner of Taxation v Woodhams(2000) HCA 10; (2000) 199 CLR 370. The Court determined that a notice under s222AOE was not invalid onthe basis that it failed to set out the date on which the unremitted deductions referred to in the notice had beendue. The joint judgment said:

“[33] It is the legislative purpose to be served by the giving of a s222AOE notice thatdetermines the nature and extent of the information necessary to satisfy the requirement toset out details of the unpaid amount of the company’s liability under a remittance provisionin respect of deductions. At this stage of the argument, the concern is with absence ofinformation, rather than erroneous or misleading information. Absence of information willinvolve a failure to provide necessary details if, without such information, the notice willnot fulfil the purpose for which it is required to be given.

[46] This case is to be determined in accordance with the statement of legislative purpose identified in the jointjudgment of the High Court in Woodhams .... In my opinion, applying the formulation of the High Court in par[33], the “absence” of the information as to other unpaid instalments does not “involve a failure to providenecessary details” of a character without which “the notice will not fulfil the purpose for which it is required tobe given”. As the High Court went on to note in par [35], a director “will ordinarily have access to informationconcerning the company’s liabilities”. Furthermore, as the High Court said at [37]: “The section does notrequire that the notice state details of the facts relevant to the director’s liability”. Similarly, in my opinion, thesection does not require that the notice state details of facts and matters relevant to the second purpose to beserved by the notice (as identified at [36]) namely, “to inform the recipient of the alternative courses available... which will result in remission of the penalty”.

[47] The notice, as the High Court pointed out at par [35] is a “notice before action”. The notice does not create theliability to pay the penalty. That liability is created by s222AOC. It is significant that the notice unders222AOE does not create the penalty but simply removes a prohibition on taking proceedings for its recovery.No section requires the Commissioner to remove that prohibition in relation to all outstanding penalties at thesame time.

[48] Section 222AOE(a) requires that the notice “sets out details of the unpaid amount of the liability referred to ins222AOC”. ...That section provides that where an employer pays salary or wages: “The employer shall, at thetime of paying the salary or wages, make a deduction from the salary or wages ...”.

[49] The statutory duty to pay arises anew each month with respect to the total of the deductions made in theprevious month....

[50] Recognition of the fact that each monthly period is discrete is found in the terms of s222AOC itself whichprovides:

“222AOC If s222AOB is not complied with on or before the due date, each personwho was a director of the company at any time during the period beginningon the first deduction day and ending on the due date is liable to pay tp theCommissioner, by way of penalty, an amount equal to the unpaid amount ofthe company’s liability under a remittance provision in respect ofdeductions:

(a) that the company has made for the purposes of Division 1AAA ...and

(b) its due date is the same as the due date.”



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[52] The reference to “one or more deductions” culminating in a single due date in s222AOA identifies eachmonthly amount as discrete. ...,Accordingly, s222AOC, in its terms, imposes liability separately with respect toeach month.

[53] I note that, by s222AOC(b), the due date of the director’s liability is the same as the due date of the company’sliability. In my opinion, the reference to “details of the unpaid amount of the liability” in s222AOE(a) appliesto each month’s liability of the company which remains unpaid.

[54] Accordingly, the failure of the notice to inform the (Director) of unpaid instalments for months other than fortwo months for which the Commissioner proposed to proceed, in the absence of compliance with the notice,did not affect the validity of the notice.

What was the decision - the validity of the second and third notices?

[55] The second and third notices were both dated 15 June 1999. DPN2 related to the period August to November1997 and January to March 1998 in the amount of $244,051.89. DPN3 related to the period October toNovember 1998 and February, March and May 1999 in the amount of $101,022.68.

[56] It was first submitted that these two notices were “tainted” by the invalidity of DPN1.

[57] The other basis upon which it was said that DPN2 and 3 were invalid was that there was insufficient evidenceof postage.

[58] Section 222AOF relevantly provides:

“222AOF(1) If it appears from ASC documents that a person is or has been within the lastseven days, a director of the company, the Commissioner may give the person a notice undersection 222AOE by leaving it at, or sending it by post to, an address that appears from suchdocuments to be, or to have been within the last seven days, the person’s place of residenceor business.”

[59] As can be seen from s222AOF the Commissioner is not obliged to prove receipt but, relevantly, “sending bypost”.

[62] An officer of the Australian Taxation Office gave evidence that all tax officers were required to follow a setprocedure with respect to the issue of Director’s Penalty Notices, including obtaining extracts from the recordsof the Australian Securities and Investments Commission to determine the addresses of directors and thenplacing the DPN in an envelope addressed to that address and affixing a stamp, whereupon the envelope ispersonally placed by that tax officer in a public mailbox. She gave evidence that the officers in the debtcollection area, including the particular officer who was concerned with the group tax file in relation toPremium, “followed the prescribed procedure”. She annexed an extract of the narrative of the Australian TaxOffice, plainly prepared by the relevant officer, which stated:

“DPNs have been issued to the directors Ross Forsyth ...

Ross Forsyth – August 97, September 97, October 97, November 97, January 98, February98, March 98 amount $244,051.89.

October 98, November 98, February 99, March 99, May 99 amount $101,022.68.

Mailed to: 69 Darley Road Randwick NSW 2031 ...

These addresses were obtained from ASC extract dated 15/6/99 and notices were mailedpersonally today at 1:40pm at the Market Street PO Box.”

[63] This is clear evidence of postage satisfying the requirements of s222AOF.

Editor:

As interest rates rise and cash flow tightens we are likely to come across more Director's Penalty Notices.

It is imperative that clients be educated to bring a director's penalty notice they receive to their adviser's attentionimmediately on receipt of the notice.

It is equally imperative that advisers deal with the notice without delay. Fourteen days can pass very quickly.

It is important to remember that the most appropriate response by a director in a potentially insolvent company:





♦ might not be to inject personal funds;

♦ might be to wind up the company.

(3) * Taxpayer sues the Commissioner for defamation (Croker v C of T)

Source (614468) Croker v Commissioner of Taxation [2005] FCA 127 (24 February 2005) - Hely J


What was the issue?

Could a bankruptcy notice be set aside where the Commissioner overstated the amount due in the notice?


The taxpayer instituted proceedings against the Commissioner seeking damages for defamation.

On 28 October 2003 Levine J summarily dismissed the proceedings and ordered the taxpayer to pay theCommissioner’s costs.

On 23 July 2004 a costs assessor assessed and certified the costs at $12,972.30.

The assessor's certificate was on the filing of the certificate in the office or registry of the Court having jurisdiction toorder the payment of that amount of money, and with no further action, taken to be a judgment of that Court for theamount of the unpaid costs, and the rate of interest payable in respect of that amount of costs is the rate of interest in theCourt in which the certificate is filed.

On 1 September 2004 the certificate was filed in the Local Court in Sydney with a back sheet attached to that certificatereading :

‘Balance of debt: $12,972.30

Costs of registration: $ 63.00

...

Total: $13,035.30’

On 29 October 2004 the Commissioner issued a bankruptcy notice against the taxpayer claiming that he owed theCommissioner a debt of $13,221.72 comprising:

‘Amount of judgments or orders - $13,035.30

... interest accrued since the date of judgments or orders - $ 186.42

Total debt owing - $13,221.72’

On 9 November 2004 the bankruptcy notice was served on the taxpayer.

On 29 November 2004 the taxpayer filed an application to set aside the bankruptcy notice and sought an award of $1million or other amount in ‘compensatory, exemplary and notional damages’.

On 21 December 2004 the Commissioner filed a notice of motion seeking orders that the taxpayer's application bestruck out.


Bankruptcy Act 1966 - Section 41

(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice asthe amount due to the creditor exceeds the amount in fact due, unless the debtor, within thetime allowed for payment, gives notice to the creditor that he or she disputes the validity ofthe notice on the ground of the misstatement.


[9] In [the taxpayer's] contention the bankruptcy notice is invalid as it overstates the quantum of his debt to theCommissioner in the sum of $63 and in a further sum being the proportion of the interest claimed which isreferable to the inclusion of the $63 in the amount of the judgment or order.




April 2005

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[10] [The taxpayer's] contention that the amount of the debt as claimed in the bankruptcy notice is overstated shouldbe accepted. That is because ... the certificate is taken to be a judgment of [the Local] Court for the amount ofthe unpaid costs, ie a judgment for $12,972.30. The solicitor for the Commissioner, was unable to point to anylegislative or regulatory provision which would authorise entry of judgment in the sum of $13,035.30....

[15] [The Commissioner] conceded that [the taxpayer] had given notice to the Commissioner in accordance with theprovisions of s 41(5) of the Bankruptcy Act 1966 (Cth), but submitted that the bankruptcy notice should not beset aside because it was not likely to mislead...

[16] [The Commissioner] relied upon the decision of the Full Court in Seovic Civil Engineering Pty Ltd vGroeneveld (1999) 87 FCR 120 (‘Seovic’) as establishing that an overstatement of the amount due by thedebtor will only lead to the avoidance of the bankruptcy notice if the overstatement could reasonably misleadthe debtor. ....[A] reading of the judgment does not support that proposition....

[18] Seovic indicates that the object of a notice under s 41(5) is to provide the creditor the opportunity ofconsidering, for example, whether the bankruptcy notice should be withdrawn, and a fresh notice correcting themisstatement issued, thereby avoiding unnecessary and wasteful litigation. The Commissioner chose not toadopt that course here, and no reason has been shown why leave to amend the bankruptcy notice should begiven after that litigation. ...It is open to the Commissioner to issue a fresh notice, and it has not been shownthat justice to the Commissioner requires that the existing notice be amended by the correction of the amountclaimed.

[19] ...[The taxpayer's] affidavit provides very little guidance as to the basis of the [damages] claim, althoughreference is made to a claim against the Commissioner for compensation for detriment caused by defectiveadministration. ...The claim for defective administration was made pursuant to an administrative scheme...Such a claim does not give rise to a cause of action known to the law.

[20] ...Insofar as the application includes the damages claim it should be dismissed...

(b) Tribunals

(1) *** No relief on double paid superannuation (Williams and C of T )

Source (618642) Williams and Commissioner of Taxation [2005] AATA 113 (8 February 2005)

http://www.austlii.edu.au/au/cases/cth/aat/2005/113.html

What was the issue?

Were SGC assessments in relation to late paid superannuation correct?

Is the imposition of GIC under section 49 an assessment for the purposes of section 42 such that it can be objectedagainst?

What legal consequences attach to the fact that Williams paid the outstanding superannuation entitlements after theirdue dates for payment, as the Commissioner has the power to levy and recover superannuation guarantee charge againstthat very contingency.


William (Bill) Williams and his wife, Donna Marie Williams (the "Williams"), operate a business trading asSpringwood Gourmet Meats.

They employed a number of employees in the financial years ended 30 June 2001 and 30 June 2002 ("the relevantyears"). The Williams paid superannuation contributions on behalf of those employees after the due dates.

The Commissioner subsequently raised default assessments of superannuation guarantee charge ("SGC") for therelevant years.

The Williams did not attend the hearing and advised the Registry by phone to proceed with the hearing in his absence,which the Tribunal did. Neither party called any evidence.


[52] ... As it appeared to the Tribunal, one of the underlying policies to the SGAA is to compel employers to makepayments of superannuation on behalf of employees (whether the basis of such an obligation such as anemployment contract, any relevant industrial award or instrument or some other basis recognised by the law of






obligations or some other branch of public law). Unfortunately for the [Williams], this proposition is decisiveof the resolution of this appeal in favour of the [Commissioner].

[53] A subsidiary issue is what legal consequences attach to the fact that the [Williams] has paid the outstandingsuperannuation entitlements after their due dates for payment, particularly in the light of the power of the[Commissioner] to levy and recover superannuation guarantee charges against that very contingency.

[54] This issue troubled the Tribunal greatly. The [Williams] has attempted to perform his legal obligations inrelation to the payment of superannuation on behalf of his employees, although he has done so late, and thenby way of payment to the superannuation trustee. In view of the timing differential, the [Commissioner] wasempowered to, and did, impose a superannuation guarantee charge in respect of the late payment ofsuperannuation.

[55] The Tribunal had close regard to the terms of the SGAA. There is nothing in the SGAA that relieves the[Williams] from the duty to pay the amount of a superannuation guarantee charge once the [Commissioner] hasraised the charge.

[56] In both effect and broad terms, the [Williams] has paid superannuation contributions twice. The[Commissioner] is not obliged to refund any superannuation guarantee charge that it has properly raisedagainst the [Williams]. Whether the [Commissioner] chooses to do so on an ex gratia basis is a matter entirelyfor the [Commissioner]. This will not give rise to a reviewable decision by this Tribunal.

[57] The other option open to the [Williams] is to make inquiries of the superannuation trustee to determine whetherany proper refund of twice-paid contributions can be made to the [Williams] (if indeed this is the case in pointof fact). This will depend upon, among other things, the construction and operation of the trust deedconstituting the superannuation fund, as well as the operation of any relevant policy that is consistent with thetrust deed itself.

Tribunal’s Conclusion

[58] The correct (but not necessarily preferable) decision in this case is that the [Commissioner] was lawfullyempowered to raise and recover superannuation guarantee charges against the [Williams] for the fiscal yearsended 30 June 2001 and 30 June 2002 in respect of a shortfall in the payment of superannuation by the[Williams] on behalf of his employees for those years. ...

[59] There is an unfortunate legislative lacuna raised by the facts of this case where the [Williams] paidsuperannuation contributions to the trustee late, yet still has incurred a superannuation guarantee chargeliability. The [Commissioner] might reconsider the working of the SGAA in this respect and consider whethersome legislative or administrative variation of the superannuation guarantee charge liability regime isnecessitated where a liable employer makes late superannuation contributions direct to the trustee.

Editor:

This decision is another in the long line of recent decisions which highlight the Commissioner's audit activity inrelation to SGC.

Advisers have plenty of work to do to educate clients about compliance in this area.

1.3 ATO RELEASES

(a) Rulings & Draft Rulingshttp://law.ato.gov.au/atolaw/browse.htm?toc=03:RUL:Taxation

http://law.ato.gov.au/atolaw/browse.htm?toc=03:RUL:Taxation

Income Tax(10)ATO Releases


April 2005

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(1) *** A person holding an ABN can still be an employee TR 2005/D3

Source (614176) TR 2005/D3 The draft ruling proposes to replace previous taxation ruling TR 2000/14.

http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2005D3/NAT/ATO/00001

What issue does the draft ruling consider?

When is an individual paid as an employee for Pay As You Go purposes?

What was the background to the draft ruling?

The draft ruling is essentially the same as TR 2000/14 reflects updates to include recent case law.

What is the relevant legislative provision?

Section 12-35 of Schedule 1 of the Taxation Administration Act (“TAA”) - Payment to Employee

An entity must withhold an amount from salary, wages, commission, bonuses or allowances it paysto an individual as an employee (whether of that or another entity).

Section 8 of the Australian Business Number Act 1999 (ABNA) provides in part that an entity is entitled to an ABN ifthey carry on an enterprise in Australia.

What was the ruling?

The Commissioner’s view is that:

♦ The term 'employee' is not defined in the TAA and the word 'employee' has its ordinary meaning.

♦ Whether a person is an employee of another is a question of fact to be determined by examining the terms andcircumstances of the contract between them having regard to the key indicators expressed in the relevant case law.

♦ The totality of the relationship between the parties must be considered to determine whether, on balance, theworker is an employee or independent contractor including:

~ The degree of control which the payer can exercise over the worker;

~ Whether the worker operate on their own account or in the business of the payer;

~ Whether the substance of a contract is to achieve a specified result;

~ Whether the work can be delegated or subcontracted;

~ Whether the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work;and

~ Who provides the tools and equipment and pays business expenses.

♦ A person who holds an Australian business number (ABN) may still be an employee if that person is engaged as anemployee in another position.

♦ The operation of the personal services income measures is not determinative of whether an individual is anemployee.

♦ Payment does not necessarily have to be between employer and employee for the payment to be covered.

Editor:

Employers need to take particular care with contractors both in relation to PAYG withholding obligation and SGCobligations. It is possible for a contractor to be an employee under one regime but not the other.

http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2005D3/NAT/ATO/00001


ATO Releases(11)



(2) *** When will interest be deductible for a trust? Interest deductibility attacked in relation totrust distributions? (TR 2003/9 replaced by new draft ruling) (TR 2005/D4)

Source (616947) This draft Ruling replaces TR 2003/9 which was previously released as TD 2003/D4

http://law.ato.gov.au/atolaw/print.htm?docid=DTR/TR2005D4/NAT/ATO/00001

What issue does the draft ruling consider?

Deductibility of interest expenses incurred by trustees on funds borrowed in connection with the payment ofdistributions to beneficiaries.

The Ruling explains the principles to be applied in determining whether a trustee of a trust estate is entitled to adeduction when calculating the net income of the trust estate under section 95 in respect of interest expenses incurredon funds borrowed in connection with the payment of distributions to beneficiaries.

What was the background to the draft ruling?

This Ruling, when finalised, will replace Taxation Ruling TR 2003/9 which is withdrawn on and from 2 March 2005.

The term 'returnable amount' is used in the Draft Ruling to refer to money or property forming part of the trust estatethat:

♦ is employed by the trustee in gaining or producing the assessable income of the trust estate, or in carrying onbusiness for that purpose; and that

♦ a beneficiary of the trust estate is entitled to require to be returned to that beneficiary; and that is or representsmoney or property that was either:

~ previously transferred by the beneficiary (or another person on the beneficiary's behalf) to the trustee of thetrust estate; or

~ previously retained by the trustee out of funds to which the beneficiary was presently entitled.

Ruling

The Commissioner’s view in the replacement draft ruling is that:

♦ interest expenses incurred by a trustee of a trust estate in respect of borrowed funds used by the trustee to dischargean obligation to pay a monetary distribution to a beneficiary will not, of itself, result in the interest expense beingdeductible regardless of whether the borrowing of funds by the trustee allows income producing assets to remainpart of the trust estate;

♦ interest expenses incurred by a trustee will be deductible if they are sufficiently connected with the assessableincome earning activity, or business, carried on by the trustee as trustee of a particular trust estate;

♦ the onus rests upon the trustee to show that a sufficient connection exists;

♦ interest expenses will be sufficiently connected if the purpose of the borrowing, when the relevant facts viewedobjectively, is to refinance a 'returnable amount';

♦ internally generated goodwill or unrealised revaluations of assets are not, in the relevant sense, amounts provided tothe trustee by, or on behalf of, a beneficiary of the trust estate and do not constitute ‘returnable amounts’;

♦ if a beneficiary becomes entitled to an amount that had not previously been provided to the trustee by, or on behalfof, the beneficiary, and the borrowing and distribution by the trustee is contemporaneous (or nearly so) with thatentitlement coming into existence, it will be difficult to show that a sufficient connection exists;

♦ the interest expenses will not be sufficiently connected if the objective purpose of the borrowing is merely todischarge an obligation to make a #

♦ there may be practical difficulties in establishing that a returnable amount was used to produce assessable income,particularly where funds are mixed and a portion of the funds is used to gain exempt income, is used for privatefamily purposes, or is otherwise used in a non-income producing way;

♦ a rigid tracing is not necessary where all the funds have been used as part of the recurrent operations of the businessof the trust estate.

Examples are provided of 3 situations that the Commissioner considers will result in the borrowed moneys financing a‘returnable amount’:

http://law.ato.gov.au/atolaw/print.htm?docid=DTR/TR2005D4/NAT/ATO/00001



April 2005

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♦ an individual subscribed money for units in a unit trust and has a right of redemption in relation to the units, and themoney is used by the trustee to purchase income producing assets;

♦ a beneficiary has an unpaid present entitlement to some or all of the capital of a trust estate, or some or all of thenet income of the trust estate, and the amount to which the beneficiary is entitled has been retained by the trusteeand used in the gaining or producing of assessable income of the trust; and

♦ a beneficiary lends an amount to the trustee who uses the money for income producing purposes (for example, bydepositing it at interest in a bank).

Editor:

From the point of my view of managing client groups' interest deductibility issues across Division 7A the debt - equityregime and the requirements of this draft ruling practitioners should give thought to requiring clients to hold a singleMaster Facilities Agreement rather than numerous Division 7A agreements (as outlined by Chris Wallis in his papers atthe 2004 TIA Victorian - Tasmanian Joint State Convention) and other individual loan agreements. If you want toknow more about the use of a Master Facilities Agreement and/or to obtain such an agreement, please call GraemeWarren at Hall & Wilcox on 9603 3571 or Michael Parker on 9603 3555.

(3) ** Project Pool Expenses (TR 2005/4)

Source (617513)

http://law.ato.gov.au/atolaw/print.htm?docid=TXR/TR20054/NAT/ATO/00001

What issue does the ruling consider?

The Ruling considers the operation of the UCA provisions which allow deductions for project amounts that areallocated to a project pool.

What was the background to the ruling?

The project pool provisions in Subdivision 40-I (sections 40-825 to 40-875 and section 40-885):

♦ were introduced in response to black hole expenditure issues identified by the Ralph Report;

♦ apply to expenditure incurred from 1 July 2001.

If the capital expenditure incurred is a project amount, subsection 40-830(1) allows the taxpayer to allocate the projectamount to a project pool.

Subsection 40-830(2) allows the deduction of an amount for project amounts that have been allocated to a project pool.

The first category of project amounts is covered by subsection 40-840(1) and covers certain amounts that are miningcapital expenditure or transport capital expenditure: see sections 40-860, 40-865, 40-870 and 40-875.

The ruling deals with the second category of project amounts detailed in subsection 40-840(2), which is more generalthan the first category and is not restricted to particular industries.

There are four restrictions placed on project amounts in the second category.

First, the expenditure must be one of the seven specific types of expenditure set out in paragraph 40-840(2)(d) being:

♦ an amount paid to create or upgrade community infrastructure for a community associated with the project;

♦ an amount incurred for site preparation costs for depreciating assets (except, for horticultural plants, in drainingswamp or low-lying land or in clearing land);

♦ an amount incurred for feasibility studies for the project;

♦ an amount incurred for environmental assessments for the project;

♦ an amount incurred to obtain information associated with the project;

♦ an amount incurred in seeking to obtain a right to intellectual property; and

♦ an amount incurred for ornamental trees and shrubs.

Second, the amount must not form part of the cost of a depreciating asset held by the taxpayer: paragraph 40-840(2)(a).

http://law.ato.gov.au/atolaw/print.htm?docid=TXR/TR20054/NAT/ATO/00001


ATO Releases(13)



Third, the amount must not be deductible to the taxpayer under a provision outside Subdivision 40-I: paragraph 40-840(2)(b).

Fourth, the amount must be directly connected with a project the taxpayer carries on or proposes to carry on for ataxable purpose: paragraph 40-840(2)(c).


The Commissioner's orders in relation to several of the concepts relevant to the project pool provisions are as follows:

♦ 'project' is not defined and takes its ordinary meaning shaped by the context in which it is found;

♦ a project must be a plan, scheme or undertaking of some substance in order that shown that the capital expendituresaid to be a project amount is directly connected with the project;

♦ a project must be something more substantial than an idea or speculation;

♦ the term 'carry on':

~ takes its ordinary meaning shaped by the context in which it is found; and

~ requires some form of continuing activity.

♦ the holding of a passive investment would not have sufficient activity to constitute the carrying on of a project.

♦ the definition of 'taxable purpose' in subsection 40-25(7) covers various purposes, including the purpose ofproducing assessable income. A project is carried on or proposed to be carried on for the 'purpose of producingassessable income' if it is carried (on or proposed to be carried on):

~ for the purpose of gaining or producing assessable income; or

~ in carrying on a business for the purpose of gaining or producing assessable income.

♦ to constitute a project under Subdivision 40-I the activity the taxpayer carries on for a taxable purpose must, on areasonable and objective determination, have a finite project life (whether or not that project life has yet beenquantified by estimation);

♦ if the project is not identified to the point where it can be objectively and reasonably determined that it has a finiteproject life, there is no project for the purposes of the legislation;

♦ the project life of the taxpayer's project is estimated from when the taxpayer starts to operate that project;

♦ a taxpayer must estimate the project life of their project each year;

♦ a taxpayer can commence to claim deductions for project amounts in a project pool for the income year in whichthe project starts to operate: section 40-855;

♦ all capital expenditures in terms of subparagraphs 40-840(2)(d)(i) to (vii) that qualify as project amounts can beallocated to a project pool and amounts can be deducted for them over the project life estimated by the taxpayer.

(4) * Interest expense incurred by trustees (TR 2003/9W - Withdrawal)

Source (616979)

http://law.ato.gov.au/atolaw/print.htm?docid=TXR/TR20039W/NAT/ATO/00001

What issue does the withdrawal consider?

The deductibility of interest expenses incurred by trustees on borrowed funds used to pay distributions to beneficiaries.

What was the reason for the withdrawal?

The Commissioner has released a revised ruling in draft form following industry consultation.




April 2005

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(5) * PAYG Withholding TR 2000/14W - Withdrawal

Source (614180) TR 2000/14W - Withdrawal

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200014W/NAT/ATO/00001


When Pay As You Go withholding applies to payments to individuals .

What was the background to the withdrawal?

TR 2000/14 dealt with when payments to an individual will require PAYG withholding.


The Commissioner’s view previously expressed in TR 2005/D3 has been updated to reflect developments in case law indraft TR 2005/D3.

(6) * Y2K expenditure ruling withdrawn (TR 1998/13W - Withdrawal)

Source (617514)



The deductibility of year 2000 (millennium bug or Y2K) expenses.


As expenditure incurred in making computer systems and computer operated equipment year 2000 compliant, coversinsurance premiums, direct legal expenses and expenses associated with using temporary replacement equipment wouldneed to have been incurred prior to 1 January 2000, TR 98/13 is no longer required and is accordingly withdrawn.

(7) * Exemption of income ruling for bona fide prospectors withdrawn (TR 92/19W - Withdrawal)

Source (616981)



Exemption of income derived by bona fide prospectors.


The exemption of income provided by paragraph 23(pa) of the 1936 Act only applied to income derived before the1997-98 income year.

Section 330-60 of the 1997 Act provided an equivalent exemption for ordinary income derived in the 1997-98 incomeyear or later income years, but was repealed with effect from 1 July 2001 and effectively replaced with the uniformcapital allowance regime contained in Division 40 of the ITAA 1997.

As the exemption from income tax of income provided by paragraph 23(pa) of the 1936 Act and section 330-60 of the1997 Act is no longer available, TR 92/19 is withdrawn.

(8) * Take or pay contracts (TR 96/5A-2 - Addendum)

Source (616983)

http://law.ato.gov.au/atolaw/print.htm?docid=TXR/TR965A2/NAT/ATO/00001

What issue does the addendum consider?

Take or pay contracts.

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200014W/NAT/ATO/00001



http://law.ato.gov.au/atolaw/print.htm?docid=TXR/TR965A2/NAT/ATO/00001


ATO Releases(15)



What was the reason for the addendum?

This Addendum amends Taxation Ruling TR 96/5 to reflect the effective replacement of Division 330 with Division 40.The defined term 'eligible mining or quarrying operations' in section 330-30 has been effectively replaced by thedefined term 'mining operations' in subsection 40-730(7).

(b) Determinations & Draft Determinations http://law.ato.gov.au/atolaw/browse.htm?toc=04:DAB:Determinations:Taxation

(1) * ISP's and PE (TD 2005/2)

Source (617509)

http://law.ato.gov.au/atolaw/print.htm?docid=TXD/TD20052/NAT/ATO/00001

What issue does the determination consider?

Does a resident of a country with which Australia has a Tax Treaty, have a permanent establishment ("PE") solely fromthe sale of trading stock through an internet website hosted by an Australian resident internet service provider?

What was the background to the determination?

The term 'permanent establishment' is defined in the Permanent Establishment Article5 in Australia's Tax Treaties,generally contained in Article 5.6 The term is defined in Article 5(1)7 to mean a:

fixed place of business through which the business of an enterprise is wholly or partly carried on.

What was the reason for the determination?

The Commissioner's view is that:

♦ If the sole presence of an enterprise in Australia is a website hosted by an Australian ISP, the enterprise does nothave a permanent establishment in Australia, subject to various assumptions including.

~ that the taxpayer, as a resident of the country with which Australia has a tax treaty, is entitled to the benefits ofthe relevant treaty;2

~ that the ISP is carrying on a business as an ISP, is dealing at arm's length with the taxpayer and does notprovide other services to the taxpayer in addition to the hosting3 arrangement which may give rise to a PE ofthe taxpayer; and

~ that any income from the sale is covered by the business profits article of the tax treaty and not some otherarticle.

♦ A website is considered to be a combination of computer software and electronic data.

♦ The distinction between the website and the server on which the website is stored is important when, the enterprisethat operates the server is different from the enterprise that carries on business through the website.

♦ The server on which a website is stored is a piece of equipment with a physical location and may constitute a 'fixedplace of business' of an enterprise which has that server at its disposal.

♦ The fact that an enterprise has a certain amount of space on the server of an ISP allocated for it to use to storesoftware and data does not result in the server being at the disposal of the enterprise.

♦ An agreement with an ISP would not typically specify which server the website will be hosted on and the ISP maychange the server used at their discretion.

♦ Under Article 5(6)16 an enterprise will not be deemed to have a permanent establishment in Australia merelybecause that enterprise carries on business in Australia through a broker, general commission agent or any otheragent of independent status, where the agent is acting in the ordinary course of their business.17

♦ In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, becausethe ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly concludecontracts on behalf of the non-resident enterprise.

http://law.ato.gov.au/atolaw/browse.htm?toc=04:DAB:Determinations:Taxation

http://law.ato.gov.au/atolaw/print.htm?docid=TXD/TD20052/NAT/ATO/00001



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(c) Class Rulings http://law.ato.gov.au/atolaw/browse.htm?toc=03:RUL:Class

Source: (613515)

(1) ** Class Rulings

CR2005/7

Income tax: Telstra Corporation LimitedOff-Market Share Buy-back 2004:Telstra Employee Share SchemeParticipants 16 February 2005

CR2005/8

Income tax: return of capital - Strike OilNL 23 February 2005

CR2005/9

Income tax: research and development:membership funding for the AustralianCoal Association Research Program 9March 2005

CR2005/10

Income tax: scrip for scrip roll-over:proposed takeover of National Foods Ltdby Fonterra Co-operative Group Ltd 9March 2005

CR2003/83A-Addendum

Income tax: exempt foreign employmentincome: Papua New Guinea HealthServices Support Program (PNG HSSP)employees based in Papua New Guineaand administered by the AustralianAgency for International Development(AusAID) 9 March 2005

(d) Product Rulings & Addendahttp://law.ato.gov.au/atolaw/browse.htm?toc=04:RUL:Product:2001

Source: ATO Assist (611169)

(1) ** Product Rulings

PR2005/12

Income tax: WA Blue Gum Project 200516 February 2005

PR2005/13

Income tax: FEA Plantations Project2005 - 2005 Growers 16 February 2005

PR2005/14

Income tax: FEA Plantations Project2005 - 2006 Growers 16 February 2005

PR2005/15

Income tax: 2005 Timbercorp AlmondProject - Early Growers (to 15 June2005) 16 February 2005

PR2005/16

Income tax: 2005 Timbercorp AlmondProject - Post 30 June Growers (to 15June 2006) 16 February 2005

PR2005/17

Income tax: Environinvest Beef CattleProject 2005 - 2005 Graziers (to 15 June2005) 16 February 2005

PR2005/18

Income tax: Environinvest Beef CattleProject 2005 - 2006 Graziers (from 1 July2005) 16 February 2005

PR2005/19

Income tax: Sylvatech Tropical Timbers2005 - 2005 Growers 16 February 2005

PR2005/20

Income tax: Sylvatech Tropical Timbers2005 - 2006 Growers 16 February 2005

PR2005/21

Income tax: Rewards Group SandalwoodProject 5 - 2005 Growers 23 February2005

PR2005/22

Income tax: Rewards Group SandalwoodProject 5 - 2006 Growers 23 February2005

PR2005/23

Income Tax: BioForest WholesaleProject No 2 - 2005 Growers 2 March2005

PR2005/24

Income Tax: BioForest WholesaleProject No 2 -2006 Growers (to 31January 2006) 2 March 2005

PR2005/25

Income tax: Great Southern Vineyards2005 (Project 2) 2 March 2005

PR2005/26

Income tax: Coonalpyn Olives ProjectNo. 22 March 2005

PR2003/43W

Withdrawal Income tax: Slag Film Fund23 February 2005

PR2004/102A

Addendum Income tax: Barkworth OliveEstates - Riverina 23 February 2005

PR2004/99A

Addendum Income tax: Great SouthernVineyards 2005 Project 2 March 2005

PR2004/114A

Addendum Income tax: Great SouthernPlantations 2005 Project - (Pre 30 JuneGrowers) 2 March 2005

PR2004/115A

Addendum Income tax: Great SouthernPlantations 2005 Project - (Post 30 JuneGrowers) 2 March 2005

http://law.ato.gov.au/atolaw/browse.htm?toc=03:RUL:Class

http://law.ato.gov.au/atolaw/browse.htm?toc=04:RUL:Product:2001


ATO Releases(17)



PR2004/116A

Addendum Income tax: Great SouthernPlantations 2006 Project - (Pre 30 JuneGrowers) 2 March 2005

PR2004/117A

Addendum Income tax: Great SouthernPlantations 2006 Project - (Post 30 JuneGrowers) 2 March 2005

(e) Interpretative DecisionsSource: Legal Database (603667)

http://law.ato.gov.au/atolaw/index.htm

(1) Assessability

ID2005/28

Assessability of professional incomereceived by an Australian resident as aconsultant to an international organisationin Japan 21 January 2005

ID2005/29

Assessability of salary and wages receivedby an Australian resident individualworking in Monaco 21 January 2005

ID2005/34

Assessability of employment incomereceived by an Australian Defence Force(ADF) member serving in Israel withOperation PALADIN as part of the UnitedNations Truce Supervision Organisation(UNTSO) 28 January 2005

ID2005/35

Assessability of employment incomereceived by an Australian Defence Force(ADF) member serving in Syria withOperation PALADIN as part of the UnitedNations Truce Supervision Organisation(UNTSO) 28 January 2005

ID2005/36

Assessability of employment incomereceived by an Australian Defence Force(ADF) member serving in Lebanon withOperation PALADIN as part of the UnitedNations Truce Supervision Organisation(UNTSO) 28 January 2005

ID2005/37

Assessability of bonus payment receivedby Australian resident from employmentperformed in the United Kingdom andAustralia 28 January 2005

(2) Commercial Debt Forgiveness

ID2005/30

Commercial Debt Forgiveness: losstransfer agreements 28 January 2005

(3) CGT

ID2005/39

Capital Gains Tax: cost base - Finnish gifttax 11 February 2005

ID2005/40

Capital Gains Tax: cost base - UKinheritance tax 11 February 2005

ID2005/43

Capital Gains Tax: small businessconcessions - connected entities - 'control'of an unadministered deceased estate 11February 2005

ID2005/44

Capital Gains Tax: small businessconcessions - active asset test - cessationof relevant business 11 February 2005

(4) Deductions

ID2005/26

Deductions: self education - course feespaid from FEE-HELP loan funds 21January 2005

ID2005/27

Deductions: self education - paymentsmade to reduce FEE-HELP debt 21January 2005

(5) Franking

ID2005/31

Streaming of franking credits: distributionto only one class of shareholder 28January 2005

ID2005/38

NZ franking companies and thebenchmark rule 11 February 2005

(6) International

ID2005/22

The meaning of financial intermediationservices in the context of the ForeignInvestment Funds measures? 21 January2005

ID2005/24

Permanent Establishment of a non-resident entity with employees inAustralia 21 January 2005

(7) Research & Development

ID2005/23

Research and Development Tax Offset:legal ownership of interests in a companyby an exempt entity 21 January 2005

(8) UCA

ID2005/21

Capital allowances: depreciating assets -capital works - deductions for decline invalue 21 January 2005




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ID2005/32

Capital Allowances: change in ownershipof mining property - roll-over relief 28January 2005

(9) Other

ID2005/20

Deferred interest under a Loan Note 21January 2005

ID2005/42

Employee share scheme: deductibility ofinterest and borrowing expenses incurredby a non-resident taxpayer on a loan usedto exercise share options 11 February2005

(10) Withdrawals - CGT

ID2003/1048(Withdrawn)

Capital gains tax: cost base - UKinheritance tax 11 February 2005

(f) Practice Statements

(1) ** What authorisation is required to make an FOI request on behalf of another person PS LA2005/3

Source (618643)

http://law.ato.gov.au/atolaw/print.htm?docid=PSR/PS20053/NAT/ATO/00001

What issue does the Practice Statement consider?

What authority is need for the Commissioner to accept an FOI request made on behalf of a client.

What was the reason for the Practice Statement?

The Commissioner's statement is to the effect that:

♦ Where someone purports to be applying on behalf of someone else, or acting as that other entity's agent or withtheir consent, authorisation will be required.

♦ FOI applications by non-individuals, must be accompanied by a signed request from the public officer in the caseof a company, the trustee of a trust estate, or any one of the partners in a partnership is authorised to make FOIrequests in respect of the affairs of the partnership.

♦ FOI applications by an entity purporting to be an agent (eg a solicitor, tax agent or other accepted agencyarrangement) for an individual or non-individual, must be accompanied by a signed authority from the principal(applicant).

♦ FOI requests in respect of deceased persons who have a valid will may only be made by an executor as the legalpersonal representative of the deceased.

♦ Directors of a company would not ordinarily be authorised to make an FOI request on behalf of the company.

♦ The current trustee of a trust, including but not limited to trading trusts, unit trusts and superannuation trusts, is theperson authorised to make an FOI request on behalf of the trust.

♦ The holder of a registered deed that evidences the granting of a power of attorney over the affairs of an individualor an entity will be able to make FOI requests in respect of that entity, subject to the scope of the deed.

♦ Whilst the deed may not specifically cover FOI requests, if the FOI request refers to documents that cover subjectmatter that is covered by the deed, then the holder of the power of attorney would be authorised.



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(2) * How will fees and charges be imposed in relation to FOI requests? PS LA 2005/4

Source (618645)



How will fees and charges be imposed in relation to FOI requests?

What is the Practice Statement?

The Commissioner will adopt the following practices:

♦ The level of fees and charges is:

~ designed to ensure that users of the Freedom of Information Act 1982 (FOI Act) make a contribution towardsthe cost of providing access to the documents;

~ is not a partial or full cost recovery regime for agencies.

♦ In accordance with the Regulations, fees and charges will apply for requests for documents under the FOI Act,unless they are waived or reduced.

♦ There are two application fees:

~ a $30.00 fee for an application under subsection 15(1) of the FOI Act for access to documents (see subsection15(2) and regulation 5(a) of the Regulations), and

~ a $40.00 fee for an application under subsection 54(1) of the FOI Act for an internal review (regulation 5(b)).

♦ There is no application fee for a request under section 48 of the FOI Act to amend or annotate records of personalinformation.

♦ Charges for search and retrieval of documents and for decision-making are to be applied before documents areprovided.

♦ No charge is actually imposed until the applicant has agreed to accept the charge (usually by the payment of adeposit) or the amount of the charge has been waived or reduced.

♦ If an FOI request is for access by inspection, rather than a copy of the documents:

~ the inspection fee is also capped.

~ the first two hours are without charge, after 2 hours a charge of $6.25 per half hour or part thereof applies.

♦ Information about an individual's business or commercial activities is personal information so there is a cap on asole trader's request for information about an audit of his business. (Note that personal information does not applyto an entity which is not an individual.)

♦ Section 94 of the FOI Act provides that all Commonwealth agencies will levy the same rate of fees and charges forall applicants and document types.

♦ For supervision during an inspection of documents to prevent harm to Tax Office records supervision will alwaysbe provided, the only costs which may be charged are those set out in the Regulations.

♦ In estimating the time for search and retrieval of documents officers are entitled to rely on:

~ the estimated average time spent by them in locating similar files in response to other FOI requests.

~ average times for decision making or for inspection of documents by applicants may be relied on in makingestimates of inspection time.

♦ The term 'time spent in searching for or retrieving' a document includes time spent:

~ searching a file index to establish the location of a document (whether that is done manually or by computer)

~ physically locating and extracting the document from the place where it is held

~ reading a file to locate a document relevant to a request, and

~ consulting with other officers to determine if documents exist - for example on personal computers.




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Editor:

It is difficult to see how the ATO can justify charging time for officers to consult with other officers to determine ifdocuments exist on personal computers.

Why aren't all ATO documents part of the ATO database?

It is an extremely dangerous practice to allow ATO documents to exist outside the ATO database.

(3) * When will information be provided to a third party? PS LA 2005/5

Source (618647)



When will information be provided to a third party?

What was the background to the Practice Statement?

Section 38 of the FOI Act allows the Commissioner to claim exemption from disclosure to the extent to whichdisclosure is prohibited by the tax secrecy provisions listed in Schedule 3 to the Act. However, where the documentsought contains personal information about the Freedom of Information (FOI) applicant, either solely or jointly, theexemption under section 38 will not apply.


The Commissioner's Practice will be as follows:

♦ Release of information by the Tax Office under the FOI Act to a person other than the person to whom theinformation relates or from whom the information was obtained must be balanced against the Tax Office'sobligations under the Privacy Act 1988 and the secrecy provisions of the taxation laws under which we operate.

♦ Material the ATO holds is often sourced from other government agencies, commercial organisations and privateindividuals, usually for a specific purpose and often by means of the Commissioner's statutory informationgathering powers.

♦ Where the section 38 exemption cannot be claimed, third party material may be exempt under another exemptionprovision, most commonly section 41 (personal information) or section 43 (business affairs) of the FOI Act. Ifinformation sought is about a third party such as a State government, a commercial organisation or an individual,before we disclose information about them we must consult with these third parties in accordance with theprovisions of the FOI Act (a procedure called reverse FOI ).

(4) * When will the names of ATO personnel be released? PS LA 2005/6

Source (618648)



When will the names of ATO personnel be released?


The Commissioner's practice will be as follows:

♦ The names of Tax officers will generally be released if they appear in documents to be provided by the Tax Officeunder Freedom of Information (FOI) , subject to their relevance to the request and to some limited exemptionsunder the Freedom of Information Act 1982 (FOI Act).

♦ Exemption from release will be considered where release would endanger the physical safety of officers and/oraffect operations of the agency.

♦ While this will not mean names of all officers in a particular work area will always be exempt, exemption willordinarily be claimed for names of officers dealing with matters such as undercover or covert activities, organisedcrime and fraud.




ATO Releases(21)



♦ Release or exemption of material under FOI may be made only by an authorised FOI decision-maker (that is, amember of the FOI stream under ATO General Counsel - part of the Office of the Chief Tax Counsel businessline), not the case officer dealing with a particular file.

(g) Fact SheetsNil

(h) Other Publications & Updates

(1) *** ATO compliance issues in 2005 Phillips Structures, Cash Economy and Rental Properties(ATO Speech)

Source (617523) Speech by Second Commissioner Jennie Granger to the Tribeca Fifth Annual Tax PlanningStrategies Conference, Four Seasons Hotel, Sydney, 28 February 2005. (Unedited extracts only)

http://www.ato.gov.au/print.asp?doc=/content/55484.htm

Introduction

We are just past the midpoint of delivering our third Compliance Program so this is a good opportunity to update you onthe Tax Office’s Compliance Program.

Compliance Program

It is an accountability mechanism that we hope promotes community confidence by providing the means by which thecommunity can see that it is balanced, appropriately differentiated and cost effective.

It has another important purpose; it is itself a compliance strategy.

Background

To illustrate, about 13,000 people, over half of Tax Office staff, work in a compliance program related area involving abudget of more than $1.251 billion. To provide some insight into the scale of our activities in 2003-2004:

♦ Over 4,000 staff worked in our help-focused activities;

About 5,000 staff worked in verification and enforcement activities; and

3,000 staff in debt and lodgement work:

This Year’s Compliance program to date

Large Business segment

In a general sense the tax risks we see in the Large Business market are around complex planning arrangements thatexploit the grey areas of tax law. Because of the scale of the revenue at risk, it is a segment where our scrutiny isrelatively intense. For example this year we expect to make about $3 billion tax adjustments from audits.

My colleague, Deputy Commissioner Jim Killaly, presented a speech recently on some of the issues of concern we arefocussing on and what is attracting our attention. You may have seen some media in relation to in-house financing.

We are also reviewing some very short term entries and exits to consolidated groups.

This segment includes businesses between $2M and $M100 turnover so there is some significant diversity. What wehave become concerned about is that we are beginning to see many of the tax planning features characteristic of thelarge business market.

So we are upgrading our capability for dealing with compliance issues.

Profit Shifting

Our primary focus has been on foreign multinationals but now we are also strengthening our focus on Australianheadquartered multinationals. A particular aspect we are focussing on is intellectual property provided to offshoreaffiliates.

We are now also seeing some complex cross border structuring in the SME segment even down to the lower end of themarket. To give you some insight one SME with a turnover of under $M10 initially attracted our attention because of




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the low price set by a related non-resident company for products sold to the Australian company which was making avery low net profit before interest. However we have since discovered a much more complex structure involving non-resident and Australian resident companies and an Australian family trust and some complex flows of funds. Also ofinterest is that AUSTRAC records have disclosed a significant amount of money coming into Australia that did notreflect the disclosed goods pricing and profit outcome in Australia. So, what started as a transfer pricing review hasbecome a much larger examination of the global business, its functions and cashflows.

Tax Havens

This year we are undertaking reviews targeting transactions with tax havens that cannot be explained as ordinarybusiness or private arrangements. As at 12 January 2005, we have received voluntary disclosures from 24 individualtaxpayers which have led to income adjustments of approximately $12.3 million and raised liabilities of more than $5million with interest and penalties totalling about $700,000. We have also detected and demanded lodgment of 550returns. To date, 207 lodgments have been made disclosing taxable income of $4.8 million.

We can also exchange information on tax haven cases with other jurisdictions with which we have a Double Taxagreement.

Service Entities

We are continuing to look at service entity arrangements; commonly referred to as Phillips type arrangements. Therecan of course be a range of legitimate commercial and other reason for setting up these arrangements. Our concernstems from recent compliance activities which have identified service arrangements that were not consistent with thePhillips decision. Our key concerns with these arrangements are that:

♦ the service fees or charges were disproportionate or excessive in relation to the benefit conferred by the servicearrangements;

♦ the service entities are highly integrated with the professional practices and there was little or no clear evidence ofsubstantive and discrete business activities being conducted in the service entities; and

♦ the relevant documentation is either non-existent or did not reflect the substance of what actually occurred betweenthe parties.

We are planning to issue a draft ruling for comment shortly and it will be accompanied by a draft booklet. It will givepractical assistance and examples to help taxpayers in setting up and managing these arrangements.

Micro-Business segment

Our verification activities are much more highly leveraged. For example, in our data matching program this year, weplan to match over 1 million business records obtained from third parties to identify high risk cases for further action.Besides the usual banking data we also match data from sources such as Workcover insurance data, government grants,motor vehicle dealers, art and antique auction houses and barter exchanges.

Record keeping

We are continuing a strong focus on record keeping practices.

We are also continuing our practice of conducting record keeping reviews. Where the record keeping practices do notmeet the minimum standard, the officer will offer advice and educational assistance on how they can be improved. Inthe second phase of the strategy, a small business with identified record keeping problems will be revisited severalweeks after the initial review to ascertain whether their record keeping practices have improved.

Cash Economy

Our activities are focussed on detecting and addressing the two major risks in this area, i.e., those not in the tax system(both registration and lodgment) and those who omit income (whether in cash or other forms).

We are continuing our program of focussing on high-risk cash economy industries such as hospitality; motor vehicledealers and horseracing. In addition to our direct audit results, we are also looking at trends in performance at theindustry level.

We are seeing positive trends across a range of indicators in some of the industries where we have active cash economyprojects. For example, in the most recent years, income tax payable in the building and construction industry has grownat about twice the rate of GDP and GST payable has grown at 1.5 x GDP. We are reviewing these to understand to whatextent this is above market performance and therefore may be an improvement in compliance.

We are also conducting a pilot this year reviewing businesses that obtain finance through low documentation loans.


ATO Releases(23)



Individuals segment

Our audit program is targeted and supported by a high level of automated risk detection. For example, this year we willmatch more than 330 million records from financial and investment institutions, employers and other governmentagencies to identify risks for further action. We expect to follow up on 350,000 investment income cases and to makeadjustments in about 90% of these. The average adjustment in these cases so far this year has been an increase in taxpayable of $540.

Some areas that we are focusing on this year and what will attract our attention are:

Work related expenses

So far for the 2003-04 year, claims are up by 9% in dollar value over the previous period. Although some of this isattributable to an increase of claimants of about 4%, the average claim per individual taxpayer has also increased from$1,449 to $1,525.

Occupations that we are paying attention to are real estate, entertainment, airline, road transport, financial advisers andtravel agents. We are also strengthening our focus on the small, but significant, percentage of tax agents where there is ahigh risk of over-claiming by their clients and where poor tax return preparation quality controls have been identified.

So far this year:

♦ Pre lodgement Advisory letters we have sent to taxpayers identified as likely to be high risk, have resulted in adecrease of up to 15% in claims with a net revenue impact of over $3m.

♦ Special schedules sent to some taxpayers making unusually large claims asking them to further explain their claimshave led to a reduction in claims of about 20% with a net revenue impact of $12m.

♦ Tax Agent performance reviews including checking working papers have identified that the main concerns lie withverifying claims for travel and car expenses.

Rental properties

Over recent years we have seen an increase in the number of taxpayers who declare rental income and claim rentaldeductions. Early tax data indicates there are around 185,000 new taxpayers to the rental market. In such a growingmarket there is often a need to educate and advise to ensure that there is a clear understanding of the tax law andadministrative requirements.

Rental deductions generally exceed rental income levels; however for the second successive year, the year-to-dategrowth in net rental losses is in the order of 65%. In 2002-03 over 1.3 million taxpayers declared rental income of $13.7billion and claimed rental deductions of $14.9 billion. So far for the year 2003-04, the trend has continued, with onemillion taxpayers already returning rental income of $9.5 billion and claiming $11.8 billion in rental deductions.

It is obvious that the sustained property boom played a significant part in this trend. However, we are concerned thatsome individuals are overstating rental deductions, for example:

♦ claiming deductions for properties not genuinely available for rent;

♦ claiming deductions for initial repairs or renovation costs rather than being attributed to the capital cost of theproperty; and

♦ incorrectly apportioning deductions related to private borrowings or travel.

We have sent out 37,000 pre-lodgement advisory letters to taxpayers.

We will be visiting a number of agents to review cases where we have seen a pattern of significant reduction in theclaims of their clients where advisory letters were sent and conversely other clients have significantly increased claims.Both will be reviewed.

Capital Gains Tax (CGT)

Our analysis is showing that net capital gains have increased by 45% compared to last year and that the number oftaxpayers returning a net capital gain has increased in the order of about 18%.

Superannuation

Because of the rapidly developing law in this area, our approach has largely been about providing help and assistance.While we will continue to help and educate, we are now rebalancing this approach, increasing our auditing presence.



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Choice of Superannuation Fund

One of our key areas of focus this year is the implementation of Superannuation Choice on 1 July. We will be assistingin the delivery of a range of significant community awareness and industry education campaigns for employers,superannuation funds, intermediaries and the community, reflecting a whole of government basis. We will also bepublishing a booklet for employers providing practical guidance about their obligations and what will attract ourattention.

Choice is, of course, complementary to Superannuation Guarantee (SG) and we will be taking this opportunity to alsogauge the level of compliance with SG, especially in the Small and Micro business segments. Checks of compliancewith SG and Choice obligations will be included in many of our future field interactions with employers.

While our initial focus will be on ensuring that employers are aware of their Choice obligations and are takingappropriate action to meet them, we will switch focus in the latter part of the year to ensure that employers have mettheir obligation to offer Choice and have acted upon employee elections.

Self Managed Superannuation Funds (SMSF)

And finally an area I’d particularly like to highlight is self managed superannuation funds. They account for more than21% of the total superannuation investment and their numbers are growing dramatically.

Our concern with SMSFs is largely around the level of understanding that Trustees have of their responsibilities underthe law. Superannuation laws are sophisticated and trustees of SMSFs carry the full responsibility for ensuring that theirfund complies with these laws.

This year we have completed over 1,600 audits and are aiming to complete 2,300 by the end of June. This includesfollowing up on auditor contravention reports we are now receiving following the introduction in July 2004 of therequirement for auditor’s to report contraventions to us. So far around 1,000 auditor contravention reports have beenreceived and around 12% of these have been assessed as representing high risk cases.

Another issue that is of significant concern is the promotion of schemes that employ SMSFs to gain illegal early accessto superannuation. The promoters of such schemes tend to target those funds with relatively small amounts of preservedsuperannuation.

Editor:

There are particularly interesting comments about Phillips Structures. As we have suspected for many months, theissue is not Phillips Structures per se but rather the poorly executed adaptations of Phillips Structures. It is difficultto understand how so many professionals could have got it so wrong - unless of course they haven't read thedecision. The decision is clear cut and easy to ready and readily available at www.austlii.edu.au.

(2) * Review of topical tax issues affecting corporate Australia (ATO Speech)

Source (610239) Speech by Jim Killaly, Deputy Commissioner, Large Business and International (Case Leadership)given at the Australian Taxation Summit, 7-9 February 2005 (Unedited extracts only)


My focus will be on groups with a turnover greater than $100 million and high wealth individuals.

I might start by explaining the new roles of Deputy Commissioners (Case Leadership) for the large business andmedium business audit programs.

We are also seeking the timely progression of all cases but in particular some of the older cases on hand....

More recently the Commissioner decided that he would appoint Kevin Fitzpatrick to a similar role as DeputyCommissioner Large and Medium Business (Case Leadership). ...

My focus at the case level will be on the Energy and Resources, Financial Services Industry Segments and some of thecases in the National Client Group Segment. ...

As part of this exercise we will be exploring what improvements might be made more generally to the management andconduct of major cases, on the basis of what we discover in these new roles. ...

Part of the thinking behind the allocation of a bigger percentage of senior executive time to case work is the desire toget breakthroughs in the business and tax technical analysis applied to risk assessment and audit work. In particular we



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want to evaluate the extent to which systematic approaches like those outlined in the Taxpayers’ Charter and theCooperative Compliance Model are being used at the case level. ...

We will also be examining whether the cases are flowing in as streamlined a fashion as possible for taxpayers and theTax Office, while making sure at the same time that the audits are done properly.

Gradually, you will be seeing more frequent involvement by senior executives and other technical specialists who willbe working more with audit case teams to assist in the risk assessment work and as appropriate will be engaging withtaxpayers on the conduct of audit cases and the substantive issues. ...

In recent years we have also been implementing approaches based on analysis at the level of the corporate group, interms of how they are running their businesses and managing their tax affairs. It is timely to consider how effective wehave been in that regard. ...

Top down approaches to risk assessments and audits that begin at the corporate group level to first identify the bigissues and then test them through targeted enquiries should speed up our information gathering. This assumes that thebusiness affairs have been reasonably well documented, that those records are accessible by the ATO within areasonable time and we get a reasonable level of cooperation. ...

The more we follow these approaches the better we will be able to talk confidently with taxpayers about the businessimpacts and benefits as we see them - and compare and contrast them with the tax impacts. ...

Curiously, in some major audits taxpayers question why we are looking at the overall business and key functions likeinvestment decisionmaking, capital and asset management and treasury operations, even though all these functions arefinancially very important and can have major tax implications. ...

In long-running audits the Tax Office sometimes has to resort to formal notices to taxpayers to supply information. ...Judgments about using a formal process are always difficult. The end result, though, is that a lot more key information,several arch lever folders full in some cases, is supplied as a result of the Tax Office using its formal powers. ...

I have also noticed that when documents are produced in response to such formal notices, the large businesses involvedinvariably make claims that they do not have to disclose a lot of other documents, claiming legal professional privilege.In some cases the taxpayers claim privilege without providing any description of the types of documents involved. ...

Two aspects of legal professional privilege concern us. First, that it is not used to conceal factual information from us. Itis obvious that access to information is central to the effective performance of our compliance assuranceresponsibilities. Some large businesses play this aspect really hard.

I can’t help noticing the paucity of company records maintained by some companies in relation to the structuring ofsome major transactions. There are few if any documents dealing with the tax implications of transactions that are madeavailable to us. We are finding that we have to resort to formal recorded interviews as a means to fill in the gaps ininformation.

This is not our preferred approach. ...

... It is sometimes difficult to get straightforward answers from some of the people we interview. This of course hasknock-on effects in making us more cautious about accepting the first answer put to us.

All of this can add enormously to cycle times, depending on how the parties conduct themselves. ...

We will also be asking taxpayers to disclose the type of documents they are seeking to keep confidential and in suchcases will follow procedures that give us confidence that their claims for confidentiality or privilege are warranted.

We are concerned that at least in one instance we have seen a legal advisor giving active advice to prospective clients,advocating their involvement in tax avoidance. This arrangement was designed to re-characterise capital raising tocreate interest expense deductions that would not otherwise be available. We don’t believe that the design andpromotion of tax avoidance arrangements is a matter that should be protected by legal professional privilege and it canbe expected that the Tax Office will litigate such matters if necessary. ...

As a starting point we have analysed the current large business audit program and have identified all the cases meetingany of the following criteria:

1. Cases where the primary tax, penalty and general interest charge in relation to the risks being considered arelikely to exceed $40 million in total. A threshold of $40 million tax effect will also be used to select loss cases.

2. ... We will be examining the causes for any delays – whether they be due to internal or external causes - and wewill be assisting our audit teams to address them, including through the marshalling of further resources,assistance or specialist capabilities as needed.



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3. The years being audited include the 2001 financial year and/or prior years. It is essential that we push to makeour audit program more current so we can manage issues as they are occurring in real time. ... Where the 2001or a prior year is the latest year that is under audit, we will be actively considering the review of the later yearsso that the case is brought up to date as quickly as practicable without sacrificing quality. This may involveparallel enquiry processes, ... These aspects take on a special importance in the context of decisions arising outof the Review of Self Assessment, which reinforces our need to be more current. ...

Kevin Fitzpatrick (Deputy Commissioner) has been reviewing the High Wealth Individuals Taskforce (CaseLeadershiop) audit program and has identified cases which he will review based on similar criteria. ...

Kevin and I will also be taking an interest in disputed cases where there are significant revenue implications orprecedential aspects, to ensure that the audit program is being effectively managed from risk assessment processes, toaudit, through to dispute resolution and collection. ...

I want to turn now to the area of corporate financing and to explain some of our thinking in the context of riskassessment and audit work we are currently undertaking.

We have seen some large businesses claim massive deductions for bad debts in their in-house finance companies.Across the large business sector these claims amount to some billions of dollars.

The larger claims are not appearing in the banking and finance sector but in the in-house finance companies used byother corporates. Nor are they confined to one industry sector, but do tend to arise in corporate groups that haveundertaken major investments. The funding giving rise to the bad debts has flowed through the finance company tothese major investments - which have either failed or have significantly reduced in value thereby giving rise to thewrite-downs.

The Tax Office is not generally concerned about deductions that may arise in respect of interest paid by the in-housefinance company to external lenders in respect of bank loans, commercial paper or bond issues. ...

The real issue is whether, properly viewed, the amount of the principal making up part of the bad debt claim by the in-house finance company is deductible. In terms of the Income Tax Assessment Act 1997, the question is whether the lossof principal is deductible under the bad debt provisions in Section 25-35 or under the general deduction provisions inSection 8-1.

Our initial approach is to understand the group’s need for funding, how it goes to the markets to raise that funding, andthe role of the in-house finance company and the parent in supporting that access to debt funding. ...

We examine the stocks and flows of money within the group and develop a clear understanding of the various roles andresponsibilities within the corporate finance and treasury areas, and the business units conducting the operations of thegroup. ... For example, we establish:

♦ how cash and financial risks are managed;

♦ how distributions flow from the bottom to the top of the structure;

♦ whether there is any streaming of interest expense and any access arrangements in relation to dividends; and

♦ how the important financing decisions are made.

In doing all this we are not trying to “second guess” the business decisions taken. Nor are we relying on hindsight. Weare trying to understand those decisions and operations, based on the assumptions and forecasts that the business itselfhad made, as they really were when the events under examination were occurring. ...

In the cases I have seen the moneys raised by the finance company are made available by way of loans to the entity thatis establishing a new business for the group.

I have seen instances where the moneys provided by the in-house finance company were used to construct newmanufacturing processes. In addition to the bad debt claims by the in-house finance company, the operating entitieshave claimed some hundreds of millions of dollars of depreciation and R&D expenses in addition to many hundreds ofmillions of dollars of interest expense. These claims are also under examination because the operating companies neverreally paid for the plant and equipment because the loan principal was never repaid. Nor did they pay the interest on theloans in the sense of making cash payments. The interest was accrued and finally written off as uncollectible by thefinance company.

There is still a process that we have to complete, and the various provisions have to be applied according to their terms,but there is a preliminary question that has caused us to carefully examine these cases:


ATO Releases(27)



Do the circumstances amount to a taxpayer incurring a capital loss on a new investment that went bad, or doesthe tax law allow the taxpayer to get a revenue loss? It is a particular concern because the use of in-housefinancing gives rise to multiple deductions being claimed in respect of the one lot of investment.

Central to our considerations in relation to deductions in respect of amounts of principal is the question posed in Section25-35 of whether the bad debts have been incurred in the ordinary course of a business of lending money. I think thatpeople generally understand that the statutory test entails establishing whether such a business is being carried on andwhether the bad debts arose in the ordinary course of such a business.

Fundamental to this test is that the in-house finance company seeking the deduction for the principal written off has tobe conducting activities that can objectively be seen to meet the description of carrying on the business of lendingmoney. ...

The intention of the company making the claim will need to be considered. However such an intention of itself will beinsufficient if the nature of the activities conducted having regard to all the relevant facts and circumstances do notamount to the carrying on of such a business. The claim will also fail if the nature of the transactions being audited issuch that they fall outside the ordinary course of such a business....

The courts have described the business of lending money as the turning over of money with a view to making a margin,due regard being had to the possibility of bad debts and the provisioning needed to cover them. They have madereference to the creditworthiness of the borrower as something that a lender would be expected to consider and make aprecondition to lending. The clear implication is that a person carrying on a business of lending money would not beexpected to lend to someone who was not creditworthy. ...

Against the backdrop of the cases that have attracted our attention in the audit context, in addition to the matters set outabove there are some key features that can be distilled that will be relevant in considering claims for bad debts:

1. The role played by the in-house finance company within the corporate group;

2. Whether there were any controls, parameters or expectations in relation to the in-house finance company’sperformance, the reasons for those parameters and expectations, and whether they were consistent with thecompany being able to conduct a genuine business of lending money (albeit to a captive customer base);

3. Any controls, parameters or expectations on the related parties seeking the in-house loans and the reasons forthem;

4. The range of activities conducted by the lending company, the risks to which it was exposed, particularly inrelation to its margins from lending, and the steps taken to analyse and manage those risks;

5. The nature of the in-house finance company’s loan portfolio, its lending demographic, the management of theportfolio and the oversight of the carrying values of loan assets, including the extent of any provisioning forbad and doubtful debts;

6. The circumstances giving rise to the loans under examination, the basis on which the lending decision wasmade, moneys progressively advanced, and whether an independent party would have provided loans of thoseamounts (or at all) in those circumstances and under those conditions;

7. The nature of the advantage sought by the lender, the rewards it was seeking, the basis on which they were setand their relationship to the risks assumed;

8. The proposed use of the funds by the borrower, the nature of its business, and the advantage sought to beobtained from the use of the funds by the borrower;

9. Whether regard was had to the creditworthiness of the borrower, its cash flows to service interest and principaland any assumptions on which any forecasts and projections were based;

10. The nature of the risks being assumed by the lender and the borrower, the steps taken to manage those risks;

11. Whether the nature of the risk assumed by the lender is consistent with a lender’s risk or the business riskassumed by an investor;

12. The terms and conditions of the loan, the security and default arrangements, and the recourse open to thelender;

13. How the terms of the loan were evidenced and enforced and whether the relative priority of the lender wasmaintained or postponed in relation to other creditors in the same class; and

14. The way in which the loans giving rise to the bad debts were managed compared to the loan portfoliogenerally.



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The use of debt as a means of funding within a corporate group produces a range of tax related advantages. If themoneys are borrowed on the open market by the in-house finance company, on-lending them within the group allowsthe external debt to be serviced out of pre-tax earnings rather than post tax profit distributions if equity investments aremade.

The automatic use of debt as a means of funding new projects and capital investments begs the whole question ofcapital adequacy in relation to the entities borrowing the funds, a matter that an independent lender would surelyconsider. ...

We are hearing suggestions that the commercial debt forgiveness provisions in Division 245 of the Income TaxAssessment Act 1936 do not work to prevent the double dip. I think that people will understand that this is somethingwe will want to satisfy ourselves about and not accept on the basis of assertion. ...

At the level of the operating entities that have borrowed the funding from the in-house finance company and are usingthe moneys to meet capital expenditures, operating expenditures and general working capital needs, we are seeingcapital allowance deductions arise. These cover depreciation and research and development. So by channelling thefunding through the in-house finance company it is argued that the group as a whole is entitled to three lots ofdeductions – in the form of the bad debt, the capital allowances and the internally generated interest charge - in respectof one amount of capital expenditure.

... Given the clear policy intent not to underwrite business investment and project management through the tax systemin this manner, the Tax Office will need to properly test any assertions that the legislative provisions do not do their job.

I want to return for a moment to the bad debt claims. The issue is not whether the transactions are, in fact and in law,loans. I suspect that the groups under audit intended that loan financing would be used since it is one of the pre-conditions to the tax attributes and the ensuing financial and cash flow advantages to which I previously referred.

On its terms Section 25-35, and the previous versions in earlier legislation, all envisage the situation where a loan mightbe made but the circumstances are outside the ordinary course of a business of lending money. It does not provide adeduction in such cases. So it is not enough to say that loans were in fact made – or that they were habitually made. Nordo I believe that it is conclusive to show that loans were repaid with interest in the past.

In some cases we see the directors of the borrower company seeking additional financial support or assurance – or atleast a letter of comfort.

We have seen deliberate steps to try to ensure that the lender company cannot rely on any assurance or letter of comfortgiven to the related party borrower. We hear the argument that letters of comfort are not intended to be legally binding,notwithstanding their express undertakings and the fact that they may have induced the directors to sign off on accountswhere the company has negative net assets and no current cash flow, and induced them to continue to trade and incurnew liabilities. This view sits uncomfortably with the decision of Einstein J in Gate Gourmet Australia Pty Ltd (InLiquidation) ACN 089 347 562 v Gate Gourmet Holding AG, Company Number Ch-0203003945-1 and Ors [2004]NSWSC 149.

We also need to assure ourselves in relation to the write-off processes used by the group. A loan would not be bad if itwere directly or indirectly assured. Nor would it be bad if it were extinguished or compromised since the loanobligation would cease to exist.

For the Tax Office to be satisfied that an in-house finance company was carrying on the business of lending money wewould need to see the operations being conducted on a commercial basis.

I suspect these issues will be with us for some time pending definitive resolution. I can see consolidation removingsome difficulties because the single entity principle will mean that the head company will be the new taxpayer, one thatcannot lend to itself or borrow from itself. However, I have some concerns about the formation cases and we will beexamining them closely in relation to bad debt and loss claims said to arise on formation.

We are already seeing major increases in the stock of capital losses being carried forward by companies, which haveincreased by over $10 billion for the 2003 financial year. This is counter-intuitive given the introduction of the lossintegrity measures, the extent of merger and acquisition activity in recent times and the generally strong state of theeconomy. This is emerging in spite of the major focus on losses in our audit program over the last seven years. ...


ATO Releases(29)



(3) ** Water entitlement transactions or on income or capital account? CGT and trading of waterentitlements (ATO speech)

Source (610242) Speech by Deborah Boyd, Director, Losses & CGT Centre of Expertise at the 3rd A-Z of AustralianWater Trading Conference, November 2004 (unedited extracts only)


Introduction

Generally, water trading activities involve dealing with capital gains tax (CGT) assets or creating rights over CGTassets. As such capital gains and capital losses will be made from these transactions.

While other taxing regimes under the Australian taxation system also impact on transactions involving water trading,the focus of my presentation today is how the CGT rules apply to these transactions. Where appropriate, I’ll also dealwith how the general income tax provisions interact with the CGT provisions.

How the general tax regime interact with the CGT regime

...Water entitlements, including access licences, water allocations, extraction components, and supplementary licences,are CGT assets....

A capital gain or a capital loss is made when a CGT event happens to a water entitlement. A CGT event may alsohappen when a right is created over the water entitlement.

The transaction which produces the capital gain or loss may also produce a profit or a loss under the general income taxprovisions. Whether the proceeds from the transaction are ordinary income of the owner can only be determined byhaving regard to the facts and circumstances of the owner and of the transaction.

... Where the owner deals with their water entitlements on a temporary or seasonal basis, it is more likely that thereceipts from the transaction will be ordinary income.

If the profit from the transaction is ordinary income, anti-overlap rules (section 118-20 of the ITAA 1997) reduce thecapital gain made on the transaction to the extent that the profit has been assessed as ordinary income.

For example, if the owner of a water entitlement was assessed on a $2,000 profit made from granting a right over theirwater allocation and the owner also made a $2,200 capital gain from the CGT event that happened because of thistransaction, the owner would have a $2,000 assessable profit and a $200 capital gain.

CGT events when water entitlements are traded

Broadly, trading in water entitlements is likely to involve either a permanent trade or a temporary/seasonal trade.

♦ Permanent trade

Where an owner permanently disposes of a water entitlement, CGT event A1 happens.

♦ Temporary/seasonal trade

It is likely that either of two CGT events will happen if the owner transfers a water entitlement on a temporary orseasonal basis:

~ CGT event D1 (section 104-35 of the ITAA 1997), or

~ CGT event F1 (section 104-110 of the ITAA 1997).

CGT event D1 happens if the owner creates contractual rights or other legal or equitable rights in another party touse the water entitlements.

CGT event F1 happens where the owner grants, renews or extends a lease over a water entitlement.

If the temporary transfer exhibits the characteristics of a lease, the lease payments do not form part of the capitalproceeds for CGT event F1.

CGT concessions available to reduce a capital gain made on a CGT event on a water entitlement

Two classes of CGT concessions may reduce a capital gain made by the owner from a CGT event happening to theirwater entitlement:

~ general CGT concessions, and

~ small business CGT concessions.




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♦ General CGT concessions

The CGT discount is not available for either CGT event D1 or F1 that happens on a seasonal/temporary trade as theowner did not own the right or lease for at least 12 months at the time of the CGT event. It does not matter that thewater entitlement was owned for at least 12 months as the capital gain relates to the newly created right or lease.

♦ Small business CGT concessions

There is no requirement for the water entitlement to be owned for a minimum period in order for the small businessconcessions to be available.

A water entitlement is an active asset of the owner if it is:

~ used or held ready for use by the owner, the owner’s CGT affiliate or an entity connected with the owner, inthe course of the carrying on of a business (for example, an extraction component available to a rice grower inan irrigation area), or

~ an intangible asset, that is inherently connected with a business carried on by the owner (for example, a waterlicence relating to the owner’s cotton growing business) or that is used or held ready for use, in a businesscarried on by the owner’s CGT affiliate or entity connected with the owner (for example, a water licencerelating to the cotton growing business of the owner’s spouse).

If the owner creates a right in another entity over a water entitlement (CGT event D1), the capital gain made fromthis event is taken to have been made from an active asset, providing the water entitlement satisfies the active assettest.

CGT consequences if/when...

♦ A water entitlement is separated from the land

If the separation of a water entitlement is a result of a change in the relevant State legislation, the owner of the landwill have two CGT assets, being the land and the water entitlement. No CGT event happens on this splitting of aCGT asset into two or more assets.

If the relevant state legislation already recognises that the water entitlement is a separate asset from the land, andthe owner deals with their water entitlement, but not the land, the CGT consequences relate only to the transactioninvolving the water entitlement.

♦ Two or more water entitlements are amalgamated

If the relevant state legislation provides for the amalgamation of two or more water entitlements, the CGTprovisions recognise the merging of the separate assets into a single asset. No CGT event happens on the mergingof CGT assets.

♦ An owner of a water entitlement purchases the same type of water entitlement from another entity

The water entitlements continue to be treated as two separate assets, with all of the attributes of each entitlementcontinuing (for example, date of acquisition and cost base).

♦ Changes are made to the ownership details of a water entitlement before the enactment of state legislation and theissue of a replacement water entitlement to the new registered owner

There are CGT consequences if there is a change in the ownership of a CGT asset.

Whether the change of ownership details of a water entitlement issued by the state represents a change ofownership of the asset will depend on the facts of each case.

Example

A water licence was registered in the name of Mr Smith and ownership details of the licence were amended to show thenames of Mr & Mrs Smith. Both Mr and Mrs Smith would need to be able to demonstrate that they were always theowners of the licence in order to avoid any CGT consequences.

In the Mr and Mrs Smith example, Mr Smith will dispose of an interest in the licence to his spouse if he and his spousewere not always the owners of the licence.

♦ A water entitlement is replaced with a new water entitlement

The relevant state legislation may provide that the original water entitlement asset expires, is cancelled or comes toan end in some other way.


ATO Releases(31)



CGT event C2 (section 104-25 of the ITAA 1997) happens on the ending of the original water entitlement and theissue of a new water entitlement under the legislation is the acquisition of a new CGT asset by the owner.

The owner of the original water entitlement will make a capital gain or loss when CGT event C2 happens to thisasset. The owner may be able to take advantage of the statutory licence rollover that is provided in Subdivision124-C of the ITAA 1997.

While the rollover is described as a ‘statutory licence’ rollover, it is also available for other statutory waterentitlements such as water allocations, share or extraction components, etc. The definition of a statutory licenceincludes an authority, licence, permit or quota granted by an Australian government agency.

Rollover is available whether the replacement of the water entitlement with a new asset happens automaticallyunder state legislation, or the owner must apply for their new entitlement.

Whether there are substantial similarities between the old and new water entitlement will depend on the facts ofeach case.

Rollover is not available if a licence or right relating to water usage between two private entities expires and isextended or replaced with a new licence or right on substantially the same terms. This transaction does not involvea statutory water entitlement.

♦ A change to state legislation allows a water entitlement to be traded

There are no CGT consequences if the only effect of the change is to allow a water entitlement to be traded.

♦ An additional water entitlement is issued because the person owns an existing water entitlement

The additional water entitlement, being a separate CGT asset, is acquired by the owner at the time it is created andissued.

The cost base of the additional entitlement is the amount the owner paid to acquire it and the incidental costsincurred in acquiring it.

♦ A transaction involving a water entitlement that relates to land owned solely for personal or private purposes

In most cases there will be no CGT consequences if a CGT event happens to a water entitlement owned by a personin respect of land that is used solely for personal or private purposes.

An exemption from CGT is provided for a capital gain made on personal use asset that was acquired by the ownerfor $10,000 or less (section 118-10 of the ITAA 1997).

Whether or not the water entitlement is a personal use asset will depend on the facts of each case.

If the transaction involves the owner creating rights over their water entitlement in another entity, the owner willneed to establish that these newly created rights are also personal use assets to avoid any CGT consequences.

♦ All or part of an owner’s water entitlement is compulsorily acquired by the government

CGT event A1 (section 104-10 of the ITAA 1997) happens on the compulsory acquisition of a CGT asset.

If the owner receives money they can choose rollover if they incur expenditure within a prescribed period inacquiring a replacement entitlement(s) that is used:

~ in their business, if the water entitlement was a business asset, or

~ for a similar purpose as the original water entitlement.

♦ A person who acquires a water entitlement as a beneficiary of a deceased estate

When a person dies there is a change of ownership of the deceased’s CGT assets. A capital gain or loss would bemade as a CGT event happens on this change of ownership. If the deceased’s CGT asset is a pre-CGT asset thereare no CGT consequences for the deceased. Special rules in Division 128 of the ITAA 1997 disregard any capitalgain or loss made on a post-CGT asset when a person dies, if the CGT asset passes:

~ to the deceased’s legal personal representative or to a beneficiary, or

~ from their legal personal representative to a beneficiary.

If a person acquires a water entitlement as a beneficiary, the cost base of the asset is either:

~ if the water entitlement was acquired by the deceased pre-CGT, the market value of the entitlement on the daythe person died, or



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~ if the water entitlement was acquired by the deceased post-CGT, the cost base of the asset on the day theperson died.

In determining whether the 12 month ownership test required under the CGT discount rules is satisfied, the periodcommences from when the deceased acquired the entitlement (if post-CGT asset) or from date of death of thedeceased (if pre-CGT asset). The small business concessions may also apply.

♦ A water entitlement is suspended or cancelled

There are no immediate CGT consequences for an owner if their water entitlement, such as a water licence, issuspended.

CGT event C2 (section 104-25 of the ITAA 1997) happens on the cancellation of the licence. As no capitalproceeds are likely to be received for the cancellation of the licence, the owner may make a capital loss.

Is statutory licence rollover available if...

♦ The owner of the water entitlement does not apply for their new entitlement within the time required under the statelegislation

If the new entitlement is issued by the state as a replacement entitlement, it is likely that the rollover in Subdivision124-C of the ITAA 1997 will be available. The provisions in Subdivision 124-C do not require that the new licenceor right be issued within a certain period.

♦ A new water entitlement is issued to an entity connected with the owner of the original water entitlement ratherthan to the owner

It is a requirement for statutory licence rollover that the owner of the water entitlement be the same entity whoacquires the new entitlement.

Further questions...

♦ What is the cost base of a water entitlement if no part of the original land purchase price was allocated to the waterentitlement?

If the land was acquired pre-CGT, the CGT assets, being the land and the water entitlements, are also pre-CGTassets. In this situation there is no need to apportion the cost base as any capital gain or loss on the disposal of theseassets is disregarded.

♦ How are water entitlements treated for the purposes of the marriage breakdown CGT rollover?

Each of the separate CGT assets within a bundle of water entitlements may be assets to which the marriagebreakdown rollover can apply.

♦ Is compensation paid by government authorities to owners of water allocations due to reductions or cancellations ofwater allocation under amendments to water management plans regarded as ordinary income, or subject to the CGTregime?

The tax consequences will depend on the facts of each case, and on whether the original entitlement comes to anend.

Reductions in water allocations

If the water allocation is being used in relation to a business conducted on the land, the compensation is more likely tobe ordinary income as the compensation would be replacing income lost as a result of reduced production from the landdue to the reduction in available water.

If the water allocation is not being used in relation to the owner’s business, the compensation is more likely to be dealtwith under the CGT regime. The owner of the allocation may acquire a right to compensation under the relevantlegislation and disposes of this right (CGT event C2, section 104-25 of the ITAA 1997) when the compensation isreceived.

Cancellation of water allocations

Regardless of whether the cancelled water allocation was being used in relation to a business conducted on the land orfor personal or private purposes, the compensation is more likely to be dealt with under the CGT regime.

♦ Are incentives paid to primary producers to limit the taking of water from natural water sources regarded asordinary income or subject to CGT?


ATO Releases(33)



The tax consequences would depend on the facts of each case.

If the natural water source is being used in relation to a business conducted on the land, the incentive is more likelyto be treated as ordinary income. The incentive could be seen as replacing income lost because of the reducedproduction resulting from the more limited use of the water resources on the land.

If the natural water source is not being used in relation to the owner’s business, the incentive is more likely to bedealt with under the CGT regime.

♦ What income tax deductions are available for temporary transfers as opposed to permanent transfers (lease ratherthan capital purchase)?

Where the receipts from the transaction are regarded as ordinary income of the owner, expenses incurred by theowner connected to the transaction will generally be allowable deductions to the owner. Such costs could includepayments to the relevant state government, such as stamp duty, fees and charges.

Where a person leases water entitlements on a temporary or seasonal basis, the payments made under theagreement would normally be characterised as a form of rent and are deductible to the lessee, providing that there isa sufficient connection between the use of the entitlements and the production of the person's income.

However, where the arrangement is a sale and leaseback agreement, there are implications for general income taxdeductions.


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2. GST

2.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIESNil


(a) CourtsNil

(b) TribunalsNil

2.3 ATO RELEASES

(a) Taxation Rulings & Draft Rulingshttp://law.ato.gov.au/atolaw/browse.htm?toc=03:RUL:Taxation

(1) ** Fuel cards and GST - who really supplies the fuel: are the tax invoices correct? (GSTR2005/1)

Source (613792) GSTR 2005/1 previously released in draft form as GSTR 2004/D1

http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20051/NAT/ATO/00001


What are the GST implications of purchasing fuel using a Fuel Card ("FC")?

The Ruling deals only with situations in which an entity that provides the FC:

♦ first makes a creditable acquisition of the fuel; and

♦ subsequently makes a taxable supply of the fuel.


There are a number of different types of FC.

♦ those which are issued by the oil companies for use in purchasing fuel from their sites only. The use of these cardsactivates the contracts particular to that oil company;

♦ those which are issued by independent card providers and which are multi-branded FCs are accepted at a number ofsites;

♦ that those which are issued by independent card providers and which are multi-branded FCs and can be used as oilcompany FCs.

♦ those which are issued by fuel retailers and distributors as either their own brand of FC or a FC that is co-brandedwith one of the oil companies or independent card providers.

FC arrangements can involve up to four parties:

♦ the FC provider:

♦ the fuel merchant - the entity that physically provides the fuel to the FC customer;


http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20051/NAT/ATO/00001

GST(36)ATO Releases


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♦ the FC customer - the person in whose name the FC account is maintained and who receives the fuel or the credit;

♦ the FC holder - likely to be an employee of the FC Customer.

Under some FC arrangements, the fuel is owned by the fuel merchant prior to the commencement of the relevant FCtransaction in which the FC is used to acquire the fuel.

Under other arrangements the fuel may be owned at that time by the oil company and not the fuel merchant.

Most FC arrangements are designed contractually to provide that, at the commencement of the transaction in which aFC is used to purchase fuel, there is a supply of fuel from the fuel merchant to the FC provider and then a further supplyof the fuel by the FC provider to the FC holder.

Under a different type of FC arrangement the FC provider makes a supply of an interest in a credit arrangement only, tothe FC customer2, with the supply of the fuel being made directly by the fuel merchant to the FC customer.


♦ if the terms of the contracts and what happens commercially between the parties to the FC arrangement areeffective in creating a supply of the fuel via the FC provider in addition to a supply of credit:

~ the FC provider makes a creditable acquisition of the fuel from the fuel merchant and is entitled to claim inputtax credits for that acquisition;

~ the FC provider makes a taxable supply of the fuel to the FC customer; and

~ must account for the GST on that supply; and

~ is entitled to input tax credits for any other creditable acquisitions it makes that relate to its taxable supply ofthe fuel.

♦ If the FC arrangement does not involve a supply of fuel by the FC provider, the provision of the credit arrangementmay form part of a mixed or composite supply, or it may be a separate supply, depending on the particulararrangement.

♦ FC arrangements all involve a provision of fuel on credit to the FC customer.

♦ If fuel is paid for with a FC provided by an oil company, the contractual arrangements between the parties will beeffective in creating a supply of fuel from the fuel merchant to the oil company and from the oil company to the FCcustomer in circumstances where the express terms of the contracts provide that:

~ the fuel merchant sells the fuel to the oil company; or

~ property in the fuel passes from the fuel merchant to the oil company and then to the FC customer;

~ immediately before delivery into the FC holder's fuel tank.

♦ accepts that a FC arrangement will also be effective in creating a supply of fuel to the oil company and then fromthe oil company to the FC customer if the express terms of the contractual arrangements between the partiesprovide that:

♦ the FC customers are deemed to purchase oil company brand fuel from the oil company;

♦ the fuel merchant supplies the oil company brand fuel to the FC customer as agent for the oil company;

♦ the fuel merchant is deemed to have sold the fuel to the oil company at the commencement of the transaction inwhich the fuel is delivered to the FC customer; or that

♦ title in the fuel passes from the fuel merchant to the oil company and then from the oil company to the FC customerand the fuel merchant sells the fuel as the oil company's agent.

♦ accepts that if the fuel is owned by the oil company at that time, the fuel is acquired, the arrangement will beeffective in creating a supply of fuel from the oil company to the independent FC provider and then from theindependent FC provider to the FC customer in the following circumstances:

~ there is a written agreement, or there are written terms and conditions that form part of an agreement, betweenthe independent FC provider and its FC customer;

~ there is a written agreement between the fuel merchant and the oil company;

~ there is a written agreement between the independent FC provider and the oil company; and

GSTComplimentary Edition

ATO Releases(37)



~ the contract between the independent FC provider and the oil company provides that where the FC holder usesthe FC to acquire fuel from an oil company outlet, the fuel is taken to be supplied by the relevant oil companyto the independent FC provider and then by the independent FC provider to the FC customer.

In the United Kingdom case The Harpur Group Ltd. [1995] BVC 841 (the Harpur case), where the British VATTribunal considered an arrangement designed contractually to provide that, where a FC was used to buy fuel, thefuel was supplied from the fuel merchant to the FC provider (with an individual card holder acting as the FCprovider's agent) and then by the FC provider to the FC customer.

The issue before the Tribunal was whether :

♦ the FC provider bought fuel from the fuel merchant which it then sold to its FC customers; or

♦ the FC provider operated a credit card service.

The view expressed in the Harpur case was that property in the fuel passes once and for all to the FC holder from thefuel merchant as soon as the fuel is delivered into the FC holder's tank, even though there may be express provisionsin the agreements between the parties to the contrary. Property in the fuel, having already passed to the FC holdercannot be further passed on because, once the fuel is commingled in the FC holder's tank, it loses any separateidentity it may have had. The practical outcome of the Harpur decision meant the UK VAT provisions could notreadily be administered. Subsequently, the authorities issued a directive to enable FC arrangements to becomepractically effective.

Applying the decision in the Harpur case to FC arrangements in Australia would result in the conclusion that forGST purposes, there is no supply of fuel via the FC provider. Instead, there would merely be a provision of credit bythe FC provider, with the supply of the fuel going directly from the fuel merchant to the FC holder.

The Commissioner has concluded that in the absence of evidence to the contrary, where a FC is used to purchasefuel, the underlying contractual arrangements between the parties determine which entity makes the taxable supplyof the fuel to the FC customer.

This administrative interpretation overcomes the difficulties passed by the view expressed in the United Kingdomcase The Harpur Group Ltd. [1995] BVC 841 (the Harpur case), where the British VAT Tribunal found thatownership in the fuel passed at the pump and that title to the fuel passed directly from the fuel merchant to the cardholder.


Nil

(c) Interpretative DecisionsSource (606638)


(1) GST

ID2005/25

GST and the dairy adjustment levy onflavoured milk supplied by a wholesaler21 January 2005

ID2005/41

GST and supply of care services to aperson who lives in supportedaccommodation 11 February 2005

(d) Practice StatementsNil



GST(38)ATO Releases


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(e) Fact SheetsNil

(f) Other Publications & Updates

(1) * Hobart man jailed for GST fraud involving false BAS (ATO Media)

Source (613578) Australian Taxation Office Media Release - Nat 2005/09 1 March 2005

http://www.ato.gov.au/print.asp?doc=/content/mr2005009.htm

David Tegg, 35, of Rokeby, was jailed for 14 months by the Hobart Supreme Court on Friday for GST fraud of $53,203and attempted fraud of a further $79,889.

Mr Tegg prepared seven business activity statements using false income and purchase figures on behalf of his companyPerformance Computer Hardware. He then claimed GST credits that he was not entitled to.

Mr Tegg will serve eight months before being released on a good behaviour bond.

(2) * Queensland man jailed for GST fraud involving false BAS (ATO Media)



John Watson, 38 of Durack was today jailed for 4 years by the Brisbane District Court for BAS fraud totalling$266,489.

Between February 2001 and September 2003 Mr Watson prepared and lodged thirty-two business activity statementsusing false income and purchase figures. He then claimed GST credits that he was not entitled to.

Mr Watson will serve will serve 12 months before being released on a good behaviour bond.






3. FRINGE BENEFIT TAX



(a) CourtsNil

(b) TribunalsNil

3.3 ATO RELEASES


Nil


Nil

(c) Interpretative DecisionsNil


(e) Fact SheetsNil

(f) Other Publications & UpdatesSource ATO Website (603699)

(1) FBT

27 Jan2005

NTLG Sub-committee Minutes 2004-11-18

Minutes for 18 November 2004

14 Feb2005

Fringe benefits tax (FBT) – A guide foremployers.

A comprehensive guidebook foremployers on fringe benefits tax (FBT).






4. STATE TAXES



(a) Courts

(1) *** Was the face value of the loan part of the consideration and dutiable? (ChiefCommissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd)

Source (609064) Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3 (8February 2005) Gleeson CJ. Gummow, Kirby, Hayne and Callinan JJ

http://www.austlii.edu.au/au/cases/cth/high_ct/2005/3.html

What was the issue?

What was the dutiable value of the shares acquired by Dick Smith Electronics?

Did the consideration for the share include the face value of a loan?

Why this decision matters?

The use of a selection of the techniques, the subject of this case might enable an entity to remain within the $5 m smallbusiness cap when without employing those techniques that entity would fall outside the $5 m cap.


Various parties entered into a share acquisition agreement:

The parties to the agreement were:

♦ InterTAN, Inc, a company incorporated in Delaware, USA (called "the First Vendor"), InterTAN Canada Ltd;

♦ a company incorporated in Alberta and continued into British Columbia, Canada (called "the Second Vendor"); and

♦ Dick Smith Electronics, a company incorporated in New South Wales (called "the Purchaser").

The agreement related shares in the capital of InterTAN Australia Ltd, a company incorporated in New South Wales(called "the Company").

The Company carried on, in Australia and New Zealand, the business of a radio, television, and consumer electronicsretailer. All of the shares in the Company were held as follows:

The First Vendor owned 12,200,000 ordinary shares in the Company and the Second Vendor owned 10,735,562redeemable preference shares.

In brief, it was agreed on 10 April 2001 that:

♦ on the Completion Date, the Vendors would sell and the Purchaser would purchase the shares in the Company;

♦ that prior to the Completion Date the Vendors would procure that the Company declare a dividend on the ordinaryshares equal to all the Company's retained earnings up to completion to a maximum of $27 m;

♦ that the Purchaser would "fund the Company" to enable it to discharge the debts created by the declaration of thedividend; and

♦ that the purchase price for the shares would be $114,139,649 minus the amount of the dividend, apportionedbetween the Vendors as mentioned above.

The term Purchase Price:

http://www.austlii.edu.au/au/cases/cth/high_ct/2005/3.html

State Taxes(42)Courts & Tribunals


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♦ was defined to mean "$114,139,649.00 minus the Dividend Amount."

♦ was apportioned:

~ as to $10,735,562 to the Second Vendor; and

~ as to the balance to the First Vendor.


Section 8(1) provides that Ch 2 charges duty on dutiable transactions identified as including:

"(a) a transfer of dutiable property, and

(b) the following transactions:

(i) an agreement for the sale or transfer of dutiable property".

Section 11 defines dutiable property as including "shares ... in a NSW company".

Section 9(1) provides that the duty charged on a dutiable transaction referred to in s 8(1)(b) is to be charged as if eachsuch dutiable transaction were a transfer of dutiable property. By virtue of s 9(2)(c) the transfer is taken to haveoccurred at the time when the agreement was entered into, that is, 10 April 2001. Duty is charged on the dutiable valueof the shares at the rate set out in Pt 3 of the Act (s 19).

Section 21 of the Act, so far as presently relevant, provides:

"(1) The dutiable value of dutiable property that is subject to a dutiable transaction is the greaterof:

(a) the consideration (if any) for the dutiable transaction (being the amount of amonetary consideration or the value of a non-monetary consideration), and

(b) the unencumbered value of the dutiable property."

What were the contentions?

The Commissioner sought to uphold the assessment, on the basis, and only on the basis, that:

♦ the relevant provision was s 21(1)(a); and

♦ the amount of monetary consideration for the dutiable transaction was $114,139,649.

What was the decision - Glesson CJ & Callinan J

[14] The Vendors caused the Company to declare a dividend, prior to completion, of $25,584,097. The declarationof dividend created a debt in that amount owed by the Company to the holders of the ordinary shares[3]. Thatliability existed at completion, and the value of the net assets of the Company, and therefore the value of itsshares, on completion was diminished by that amount, as the agreement envisaged. (Dick Smith Electronics)paid to the Vendors, by way of purchase price, the agreed price of the shares at completion, which was$114,139,649 minus the dividend, that is $88,555,552. There is no reason to doubt that this reflected the valueof the shares at completion. The Company paid to the First Vendor the debt it owed it as a result of the priordeclaration of the dividend: $25,584,097. (Dick Smith Electronics) lent that amount to the Company. TheCompany incurred a liability to (Dick Smith Electronics) of $25,584,097, and (Dick Smith Electronics)obtained an asset in the form of a debt owing by the Company to (Dick Smith Electronics) of $25,584,097.There is no justification for ignoring any of these facts, which were all provided for, or the natural consequenceof what was provided for, in the agreement.

[23] The question that arose in (Archibald Howie v Commissioner of Stamp Duties (NSW)) concerned a reductionof capital by a company, which distributed to its shareholders, in specie, shares it held in other companies. Theshares were distributed at the value at which they stood in the company's books, which was less than theiractual value. ...The taxpayer argued, and the Court accepted, that duty was payable at the rate applicable to aconveyance made upon a consideration in money or money's worth of not less than the unencumbered value ofthe property conveyed.

[25] In Archibald Howie[11], Dixon J explained the decision as follows:

"The reduction involving the payment off of part of the paid up share capital must thereforebe considered an effectuation of a provision of the contract of membership. The allotment ofthe share and the payment up of the liability thereon conferred upon the holder for the time

State TaxesComplimentary Edition




being of the share a right to have the assets of the company used and applied in the variousways in which the articles expressly or impliedly require or authorize and this is one of them.It is an effectuation or realization of the rights obtained by the acquisition of the share in thesame way as is the distribution of a dividend. The consideration given is the payment up ofthe share capital in satisfaction of the liability for the amount of the share incurred onallotment." (emphasis added)

[26] Those observations apply to one aspect of the present case. The consideration for the dividend distributed bythe Company to the First Vendor (the owner of the ordinary shares) was the amount subscribed for the sharecapital. The First Vendor provided full consideration for that dividend in exactly the same way as theshareholders in Archibald Howie provided full consideration for the distribution in specie. It was the originalsubscription for capital, and the rights thereby acquired, that "moved" the payment of the dividend. This cannotbe overlooked in an analysis of the whole transaction.

[27] In Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd[12], Mason J[13] and Aickin J[14]referred to Archibald Howie and to the distinction between the adequacy of consideration for the purpose ofcontract law and the adequacy of consideration for the purpose of revenue law. Again, however, in the ordinarycase of a conveyance on sale following an arm's-length transaction, that distinction is unlikely to be material....

[29] In that case, the dealings were not at arm's length, but the Court held that the agreed price was theconsideration upon which the transfers would be made. In the present case, also, we are dealing with a transferon sale. That is the nature of the dutiable transaction.

The consideration for the dutiable transaction

[30] The declaration and payment of the dividend by the Company to the Vendors was not the dutiable transaction.It was a transaction that was envisaged, and permitted, by the agreement between the Vendors and (Dick SmithElectronics), but it was a transaction between the Vendors and the Company. The declaration of dividend, priorto completion, involved an exercise by the Vendors of their rights as shareholders of the Company. It created aliability in the Company which was discharged by the payment of the dividend at completion....

[31] The loan by (Dick Smith Electronics) to the Company, to provide it with the ready money to pay the debt tothe Vendors incurred by the declaration of dividend, was not the dutiable transaction. The consideration for theloan was the Company's promise to repay the loan together with any interest that was payable.

[32] The purchase price of the shares in the Company clearly was not $114,139,649. Both in form and in substance,the purchase price of the shares was $114,139,649 minus the amount of the dividend. How could it have beenotherwise? ...Inevitably, the net assets of the Company would be reduced by the amount of the dividend,because the declaration of the dividend created a liability in that amount in the form of a debt owing by theCompany to the Vendors. Hence, the purchase price was agreed to be $114,139,649 minus the amount of thedividend. It was the First Vendor, the owner of the ordinary shares, whose share of the purchase price wasreduced by the amount of the dividend.

[33] The consideration for which the Vendors agreed to transfer, and transferred, their shares was not $114,139,649.They received two amounts of money. They received $88,555,552 from (Dick Smith Electronics), which wasthe purchase price payable under the agreement. The First Vendor received $25,584,097 from the Company,which was the dividend to which it was entitled on its ordinary shares. The Vendors received the first amountin their capacity as Vendors. The First Vendor received the second amount in its capacity as creditor of theCompany.

[34] ...To treat the capital gains tax cost base of the shares as $114,139,649 would appear anomalous. No doubt itwould suit the First Vendor in some respects, as the income tax involved in a sale of the shares would be likelyto be considerably more than the amount of stamp duty involved in this case. ...The First Vendor received, onincome account, a dividend of $25,584,097. The Vendors received, on capital account, a total amount of$88,555,552.

[35] ...The right of the Vendors to declare the dividend was not conferred on them by the agreement. It wasconferred on them by the Articles of Association of the Company....

[36] The fallacy in the argument for (the Commissioner) is the assumption that, because the Vendors were toreceive the purchase price, and one of them was to receive the dividend, the whole amount of $114,139,649 isto be regarded as the consideration for the transfer of the shares. ...There is nothing particularly complicatedabout the arrangement. Both legally and commercially its elements are quite straightforward. It was an arm's-length transaction intended to have legal effect according to its form. There is no reason to disregard that form.



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[37] (the Commissioner) argued that it would be wrong to overlook the funding obligations undertaken by (DickSmith Electronics) in cl 7.7 of the agreement, and given effect by the loan from (Dick Smith Electronics) to theCompany of $25,584,097. So much may be accepted. What follows from that? It does not make the loan partof the dutiable transaction. Nor does it make the payment of $25,584,097 by (Dick Smith Electronics) to theCompany part of the consideration for the transfer of the shares. It was a payment by way of loan, inconsideration for the borrower's promise to repay....

[38] The distinction between monetary consideration and non-monetary consideration, it was accepted on bothsides, corresponds with the distinction, in earlier legislation, between money and money's worth. Clause 7.7did not oblige (Dick Smith Electronics) to pay, and (Dick Smith Electronics) did not pay pursuant to cl 7.7, anymoney to the Vendors.

[39] Whatever else cl 7.7 required, it did not oblige (Dick Smith Electronics) to make a gift to the Company. If(Dick Smith Electronics) had been willing and able to arrange for a third party to make a loan to the Company,perhaps supported by security from (Dick Smith Electronics), the clause would not have obliged (Dick SmithElectronics) to make any payment to the Company. What cl 7.7 gave the Vendors was not a right to receiveany money from (Dick Smith Electronics), or even a right to have (Dick Smith Electronics) pay money to theCompany, but an assurance that the Company would have available to it, on completion, liquid funds sufficientto discharge the debt created by the declaration of the dividend and that, if and to the extent necessary, thosefunds would be made available to the Company, whether by the provision of loan or equity capital orotherwise, by (Dick Smith Electronics). That was what was agreed on 10 April 2001.

[40] There has never been any attempt to assess the value to the Vendors of the obligation undertaken by (DickSmith Electronics) in cl 7.7. (Dick Smith Electronics) accepts that consideration for a transfer on sale caninclude the conferring by a purchaser of a benefit on a third party at the vendor's request. Even so, (Dick SmithElectronics) submits, if the conferring of a benefit takes the form of a payment of an amount of money, thatamount itself will only satisfy the description of part of the consideration for the transfer if the amount is paidas the price, or part of the price, "of the subject conveyed"

[41] We are prepared to accept that the obligation accepted by (Dick Smith Electronics) under cl 7.7 is part of theconsideration for the dutiable transaction. We cannot accept that it is monetary consideration for the transfer onsale. It is non-monetary consideration for the transfer on sale, and its value to the Vendors would depend uponthe complex of commercial factors bearing upon the worth of the benefit of the assurance they sought andobtained in the sale agreement. Having regard to the evident financial strength of the Company, and to thevariety of possible ways in which the assurance might have been provided, the value might not be substantial.That may explain why has not attempted to put a case on this basis.

Conclusion

[43] Gzell J and the majority in the Court of Appeal were correct to conclude that was wrong in assessing duty onthe basis that the consideration for the dutiable transaction was $114,139,649. However, in concluding that theconsideration was $88,555,552 they appear to have overlooked (because it was not argued) the value of thenon-monetary consideration in the form of the value of the obligation undertaken by (Dick Smith Electronics)in cl 7.7 of the agreement.

What was the decision - Gummow Kirby and Hayne JJ

[54] It would be a misstatement of the operation of the Agreement, and of the transaction for which it provided, torefer simply to cl 5 and the statement therein that the Purchaser will purchase the Shares for the Purchase Price,for the conclusion that it was the receipt by the Vendors of that payment alone which supplied the monetaryconsideration actuating or moving the transfer of the Shares by the Vendors to the Purchaser. It is necessary tolook further into the provisions of the Agreement.

[56[ Clause 7.6 obliged the Purchaser to pay the Purchase Price to or at the direction of the First Vendor; thatportion of the Purchase Price to which the Second Vendor was entitled was to be held on its behalf by the FirstVendor. Clauses 7.7 and 7.8 deal with what were identified as "Discharge of Intra-Group Liabilities" and"Simultaneous completion" respectively. Their texts were as follows:

"7.7 On Completion, immediately after payment of the Purchase Price, the Purchaser shallfund the Company so that the Company is able to discharge the debts created by thedeclaration of the dividend referred to in clause 4.4. Immediately following such funding, theparties shall procure that the Company pay that dividend, less any amount which theCompany is required to withhold on account of the dividend not being fully franked."





[57] Clause 7.7 placed upon the Purchaser an obligation on completion and immediately after payment of thePurchase Price to "fund" the Company to enable it to discharge the duties created by the declaration of thedividend referred to in cl 4.4. One effect of cl 7.8 was that the Vendors were obliged to complete the sale of theShares only if the Purchaser had performed or was ready, willing and able to perform the funding obligationimposed by cl 7.7.

The issue and disposition in the Supreme Court

[60] The litigation has turned upon the significance of the difference between these two sums of $88,555,552 and$114,139,649 for the determination of what moved the transfers by the Vendors for the purposes of the Act.

[61] The primary judge and the majority in the Court of Appeal accepted the Purchaser's submission that therelevant consideration was the smaller rather than the greater sum....

However, attention (of the majority as expressed by Sheller JA) is directed ...to with what the Purchaser (astransferee) parted, and to whom it was transferred, rather than to what the Vendors (as transferors) received.

[64] The duty charged upon a dutiable transaction being an agreement for the sale or transfer of shares was dutycharged "as if each such dutiable transaction were a transfer of dutiable property" (s 9(1)). The consequencewas that the relevant dutiable transaction in this case was the Agreement; the Purchaser was to be taken as thetransferee of the Shares by a transfer occurring on 10 April 2001, the date of entry into the Agreement (s9(2))[27]. The duty charged by Ch 2 was payable by the Purchaser as the transferee (s 13).

Section 19 stated:

"Duty is charged on the dutiable value of the dutiable property subject to the dutiable transaction atthe relevant rate set out in [Ch 2 Pt 3]." (emphasis added)

The term "dutiable value" was relevantly defined in s 21(1):

"The dutiable value of dutiable property that is subject to a dutiable transaction is the greater of:

(a) the consideration (if any) for the dutiable transaction (being the amount of a monetaryconsideration or the value of a non-monetary consideration), and

(b) the unencumbered value of the dutiable property."

Arguments of the parties

[68] In the letter of 10 July 2001, the solicitors for the Purchaser wrote to the Commissioner:

"Under clause 9.1 of the [Agreement] the purchase price in respect of [the Shares] is subjectto adjustment dependent on the net assets of [the Company] as at 30 April 2001. Theaccounts which will form the basis of this adjustment have not yet been finalised andtherefore, in order to avoid late stamping penalties, we would be grateful if you couldinterim stamp the [Agreement] ad valorem for $531,330.60 and also stamp each of the sharetransfer forms as having been produced.

When the completion accounts for this transaction have been finalised we will produceevidence of the final consideration in order to finalise the stamping of this documentation."

[69] However, in response, the Commissioner took the position that "the intended result of the whole transaction isof the Vendors receiving $114,139,649" and duty was assessed accordingly. No question of interim stampingwas pursued. Rather, the Purchaser contended that the monetary consideration for the transaction was reduced,for assessment purposes, by the actual sum of the Dividend Amount, while the Commissioner insisted that therequirement in cl 7.7 that the Purchaser fund the Company to discharge the debt created by the declaration ofthe dividend formed part of the monetary consideration for the transfer of the Shares.

[72] ...The criterion in the Act of consideration "for" the transaction, being the Agreement for the sale and transferof the Shares to the Purchaser, upon whom s 13 imposes the liability to pay the duty, looks to what wasreceived by the Vendors so as to move the transfers to the Purchaser as stipulated in the Agreement.

Consideration "for" the transfer in this case

[73] It may be accurate for general purposes to say, as the primary judge emphasised, that "[i]n effect, the [V]endorssold their shares ex dividend"[35]. But to say that is to invite speculation as to the commercial and otherrevenue considerations which may have influenced the form in which the transaction was cast. This is not toanswer the question posed by s 21(1) of the Act. What was to be received by the Vendors, and was received by



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them, was $114,139,649. The Vendors had bargained for an obligation on the part of the Purchaser to bringabout that result.

[74] The Purchaser discharged an obligation it owed the Vendors under the Agreement to "fund" the Company andso to provide for the payment by the Company of the dividend declared on the ordinary shares. The tripartiteelement in the transaction does not by itself provide an answer to what otherwise is the operation of theAct[36]. The contrary was not seriously urged in the oral submissions for the Purchaser.

[75] The consideration which moved the transfer by the Vendors to the Purchaser of the Shares which they ownedin the Company was the performance by the Purchaser of the several promises recorded in the Agreement inconsequence of which the Vendors received the sum of $114,139,649. It was only in return for that total sum(paid by the various steps and in the various forms required by the Agreement) that the Vendors were willingto transfer to the Purchaser the bundle of rights which their shareholding in the Company represented.

[76] Noticing the several steps which the Agreement required to be undertaken in order to achieve that result mustnot be permitted to obscure that the amount of monetary consideration for the transaction of the sale andtransfer of the Shares was the sum identified. That part of the amount was to come as a dividend from theCompany, the Vendors' shares in which were being sold, rather than immediately from the Purchaser, does notdeny that proposition.

[77] That which passed to the Vendors "for" the transfers of the Shares was "consideration" which was "monetary"rather than "non-monetary" within the meaning of s 21(1) of the Act. The transaction was to be assessed toduty on the footing that it was performed on its terms and, completion having taken place before theAgreement was furnished by the Purchaser to the Commissioner, both sides addressed their arguments byreference to the implementation of the transaction. The Commissioner correctly took the stance that theintended result of the transaction, seen as a whole, was the receipt by the Vendors of $114,139,649.

The error of the Supreme Court

[78] ...Approached correctly, the case may be summed up as follows. The promises which the parties made andrecorded in the Agreement can be sufficiently described as being:

1. the Vendors' promise to transfer the Shares to the Purchaser;

2. the Vendors' promise to procure the Company to declare as large a dividend as it could (up to amaximum of $27 million);

3. the Purchaser's promise to pay the Vendors $114,139,649 minus the Dividend Amount; and

4. the Purchaser's promise to "fund" the Company's payment of the dividend.

[79] The consideration for each of those promises is to be found in the promises made by the opposite party[37].However, what for the purposes of s 21(1) of the Act moved the transfers by the Vendors was performance ofall of the various stipulations in the Agreement, not merely the promises which the Purchaser made. To put thesame point in other words: why identify the consideration "for" the transfers as only what the Purchaser givesup? The Vendors transferred the Shares in return for receiving some $114 million, of which part was receivedfrom the Company because the parties had agreed that this should be so.

[80] To identify, as the submissions for the Purchaser would have it, promise 4 as one which leads to the creation ofan asset which the Purchaser will hold (the debt owed by the Company to the Purchaser) is apt to mislead.Promise 2, although made by the Vendors, is a promise whose performance works to the advantage of bothsides. The Vendors receive money. The Purchaser, because of promises 2 and 4, satisfies the Vendors' desirefor money by a means which gives the Purchaser the asset of a debt as distinct from the indirect interest itwould have obtained as shareholder in what but for the dividend would have been larger and more valuableassets of the Company.

Orders

[81] The appeal should be allowed with costs.





(2) What was the value of the goodwill of the Ramada Grand Hotel at Glenelg? (HSH Hotels(Australia) Ltd v C of ST)

Source (611180) HSH Hotels (Australia) Ltd v Commissioner Of State Taxation [2005] SASC 39 (11 February 2005)

http://www.austlii.edu.au/au/cases/sa/SASC/2005/39.html

What was the issue?

Was goodwill transferred at the time of the sale of the hotel?


The purchaser HSH, acquired the freehold and business of the Ramada Grand Hotel at Glenelg by:

♦ acquiring all units held by Roxburg Investments Pty Limited in the Ramada Grand Unit Trust;

♦ all shares in Grand Hotel (SA) Pty Ltd which acted as the corporate trustee of the trust.

A consideration of $44,615,100 was agreed between HSH and the vendor and this amount was finalised at $45,783,306because as part of the agreement HSH undertook various liabilities of the vendor.

Roxburgh Investments Pty Limited owed $76 m to Southstate Corporate Holdings Pty Limited which:

♦ was the sole shareholder in the corporate trustee Grand Hotel (SA) Pty Ltd; and.

♦ held a charge over the units in the Unit Trust to secure its lending to Roxburgh Investments Pty Limited.

The amount owing by Roxburgh Investments Pty Ltd to Southstate Corporate Holdings Pty Ltd far exceeded the netvalue of the units.

A structure was devised for the sale, namely, the transfer of the units in the unit trust for a nominal value of $1 with anassignment of the mortgages in the sum of $44,615,100.

Commissioner assessed the duty under s100(2) of the Act because the purchaser did not provide the requisiteinformation under section 94.

Sections 94 and 100 were enacted to prevent duty being avoided where a purchaser acquired real estate through thevehicle of a company or unit trust which had substantial liabilities.

Under the instruments creating the charges:

♦ Southstate Corporate Holdings Pty Ltd:

~ had the power to sell Roxburgh Investments Pty Ltd’s units in the case of loan default; and

~ held a registered mortgage over the legal title to the Trust’s real property.

Grand Hotels (SA) Pty Ltd defaulted in its repayment obligations to Southstate Corporate Holdings Pty Ltd, ("theVendor").

On 20 December 1994, the Vendor:

♦ as owner of the shares in the Trustee, agreed with HSH to sell to HSH its shares in the Trustee.

♦ relying on its security interest over the units, agreed to sell to HSH Roxburgh Investments Pty Ltd’s units and toassign the mortgage the Vendor held to HSH.

On 31 January, 1995, in pursuance of the sale and purchase agreement, the following property was conveyed by theVendor to HSH:-

♦ all the shares in the Trustee for a nominal consideration of $1.00; and

♦ all the issued units in the Trust for a nominal consideration of $1.00.

The shares and units were sold free of any charge of any type.

The Vendor also simultaneously assigned its mortgage to HSH for a consideration of $44,615,100.00 adjusted downfrom $47,300,000.00 to reflect the sale of the apartments.

By virtue of these transactions, by the Vendor transferred to HSH:

♦ the beneficial ownership of the trust assets, free of any debt to the Vendor, for a total consideration of$44,615,101.00; and

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♦ control of the Trustee.

HSH requested the Commissioner’s opinion on the transfer of the units in the unit trust for the nominal consideration of$1.00.

The Commissioner proceeded to investigate the possible application of Part 4 of the Stamp Duties Act.

The Hotel business had been managed by a company under the name of a well known and widely regarded hotelier, MrStarr.

Part 4 of Stamp Duties Act, 1923

Part 4 of the Act contains the provisions which are relevant to the assessment in this case. The effect of Part 4 at thetime of the transactions was, relevantly, to require a person to prepare and lodge with the Commissioner a statementwhen certain threshold conditions were satisfied.


94(1) If –

(a) a person –

(i) acquires a majority interest in a private company or scheme; or

(ii) acquires an interest which, together with any other interest acquiredduring the preceding period of two years, results in the person having amajority interest in a private company or scheme; or

(iii) acquires an interest which, together with any other interest acquiredduring the preceding period of two years, and the interest of a relatedperson acquired during the preceding period of two years, is a majorityinterest in a private company or scheme; or

(iv) having a majority interest (including an interest which, together with theinterest of a related person, is a majority interest) acquires a furtherinterest in a private company or scheme; and

(b) the private company or scheme is, at the time of the acquisition, entitled to realproperty –

(i) the unencumbered value of which comprises not less than 80 per cent ofthe unencumbered value of all property to which it is entitled, whether inSouth Australia or elsewhere (other than property referred to in subsection(5)); and

(ii) the unencumbered value of which, insofar as the real property is situatedin South Australia, is not less than $1,000,000,

the person must lodge with the Commissioner a statement in respect of theacquisition."

7 The relevant part of s100 at the time of the transaction stated:

"100(1) A statement required to be lodged under section 94 or 96 will, for the purposes of this Act, betaken to be an instrument executed by the person required to lodge the statement on –

(a) in the case of a statement under section 94 – the date of the relevant acquisition;

(b) in the case of a statement under section 96 – the date of the acquisition of the landuse entitlement.

(2) If a person who is required to lodge a statement under section 94 or 96 fails or refuses tolodge the statement within the time allowed by this Part ––

(a) the Commissioner may make an assessment, on the basis of such information as isavailable to the Commissioner and such estimates as the Commissioner considersreasonable, of the duty that would have been chargeable if the statement had beenlodged (and the duty will be recoverable from the person who is required to lodgethe statement)..."





What were the contentions?

HSH maintains, that it was not obliged by virtue of any of the transactions to comply with section 94(1) of Part 4 of theStamp Duties Act 1923.

The Commissioner maintains that s94(1) applied to the conveyance of the units in the unit trust and in default of astatement from HSH, the Commissioner was entitled under s100(2) to proceed to assess the conveyance to duty as hemaintained was required by s95.

HSH and the Commissioner agree that:

♦ threshold conditions (a) and (b) referred to in paragraph 20 above are satisfied in this case and that their dispute onthis appeal relates solely to the question of the satisfaction of condition (c).

♦ if the Trustee was entitled to real property the unencumbered value of which equalled 80% or more of all propertyto which the Trust was entitled (taking account of the exclusions required by s94(5)), HSH was required to lodgeand file a statement under section 94(1) by virtue of the aforesaid transactions.

In that event, HSH and the Commissioner further agree that the Commissioner was correct in proceeding to assess theconveyance to duty, although HSH in that event disputes the value to be attributed to the real property.

Conversely, the Commissioner accepts that if condition (c) is not satisfied (i.e., the Trustee was not entitled to realproperty the unencumbered value of which equalled 80% or more of all property to which the Trust was entitled (takinginto account the exclusions required by Part 4)), HSH was not required to lodge and file a statement under Part 4 theCommissioner further accepts in that event that he was incorrect when he proceeded to assess the transactions to advalorem duty under section 100(2) in default of a statement lodged by HSH.


Commissioner’s Calculation

(i) Determination of Value of Real Property

[82] 32. (The number 32 refers to a paragraph in the agreed Statement of Facts). The Commissioner, basing himselfon the consideration paid for the assignment of the mortgages of $44,615,100.00, extrapolated a value for theTrust’s real property as follows:-

Consideration for assignment of mortgages $44,615,100.00He then added:ADD Consideration for unit transfer $ 1.00ADD liabilities of the Unit Trust to be retained $1,243,890.00He then subtracted:-LESS Current Assets held by Trustee $1,134,542.00LESS Hotel Furniture, Fittings and Equipment $4,804,313.00LESS China and Glassware $ 61,164.00LESS Motor Vehicles $ 91,529.00IMPLIED VALUE OF TRUST’S REALPROPERTY: $39,767,443.00

(iii) Determination of Relevant Percentage

[86] 36. The Commissioner deducted from this total, in accordance with s94(5), the cash and money held at thebank which formed part of the current assets. The cash and money amounted to $75,685 according to the saidbalance sheet. The total assets of the trust for Part 4 purposes were relevantly found to have a value of$45,783,306.00. The Commissioner calculated that $39,767,433.00 is 86.86% of $45,783,306.00. HSH agreeswith the Commissioner’s arithmetic, but otherwise takes issue with the assessment.

(iv) Calculation of Duty Payable

[87] 37. The Commissioner, having found that the 80% threshold stipulated by Part 4 had been exceeded, applieds100(2) and calculated duty according to the rate for conveyances operating as voluntary dispositions intervivos applicable as at the date of transfer.

[88] 39. The Commissioner ... formally assessed duty in the sum of $1,783,366.50.

[89] 40. HSH appealed to the Treasurer by a notice of objection dated 21 May 1996.



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[90] 41. The Treasurer on 26 May 2003 purported to reassess the stamp duty and to increase the duty payable. TheTreasurer found that the value of the real property to which the Trustee was entitled was $40,450,000.00,basing himself on a valuation obtained from FPD Savills. He found that this amount was approximately 88%of the total consideration paid by HSH for the units in the trust and the assignment of the mortgage. Hetherefore found that the 80% threshold had been exceeded. He recalculated duty as $1,814,080.00...

[97] Ultimately, the question for the court involves the value of the real estate component passing in the transaction,and as a stepping stone towards that conclusion, did any, and if so how much, goodwill pass in the transaction?

[101] The findings I make are as follows:

...

2 The hotel occupies one of the prime real estate sites in Adelaide regardless of whatuse was made of the site. In other words, many businesses would be successful onthat site simply because of the location.

...

11 Prior to the acquisition by HSH, the hotel was operated by entities associated withMr Bill Sparr pursuant to a management agreement. Mr Sparr was an experiencedand successful restauranteur and developer. His organisation was not part of thepurchaser’s plans and the management agreement was terminated.

12 The hotel industry generally was coming out of a particularly low phase at the timeof purchase, but there were positive signs for improvement and the hotel hadalready shown improvement in its trading figures in the months leading up tosettlement.

[102] As can be seen from the above findings, I have found the location generally, and the site of the hotel inparticular, to be very important factors in resolving the question of the value of the real estate.

[104] There is further support for the importance of this site from the document offering the property for sale. JLWTransact were appointed as the agents offering the Ramada for sale. Under the heading "Location" in theexecutive summary, the agents said (again, my underlining):

"Glenelg is Adelaide’s most historic and well known beachside suburb and one of the city’smajor leisure, retail and accommodation precincts and principal tourist attractions.

Situated in a prime beachfront position, the Ramada Grand enjoys magnificent beach andocean views and is located within the commercial and retail centre of Glenelg. The propertyis very well located only six kilometres from Adelaide International Airport and 11kilometres from Adelaide Central District (CBD) via Anzac Highway or Adelaide’s onlytramline.

[107] The way in which the Commissioner approached his assessment is set out in paragraphs 77-88 hereof in theagreed statement of facts. The Commissioner started with the consideration for the assignment of themortgages, added the consideration for the unit transfer and the liabilities of the unit trust to be retained, andthen subtracted the current assets, the hotel furniture fittings and equipment, china and glassware, and motorvehicles to arrive at a value of the real property of $39,767,443. The figures which he used for the assets otherthan the real estate and for the liabilities were taken from the balance sheet.

[109] The Commissioner did not allow anything for goodwill associated with the business. There was no goodwill inthe balance sheet, but of course the relevant accounting standards did not allow for internally generatedgoodwill to be included in the accounts of a company.

[111] The Commissioner has submitted there is no reason to be involved with an assessment of goodwill in this casebecause the business acquired by HSH was not the same business that was conducted previously by thevendors.

[112] This argument relied on the termination of the management agreement entered into with the managementcompany run by Mr Sparr....

[115] ...I believe, however, that the overall result of both the assessment and Mr Aschberger’s valuation is consistentwith the reasoning of the High Court in Murry’s case, and in particular at [51] where Gaudron, McHugh,Gummow and Hayne JJ say:





"Where the goodwill of a business largely derives from using an identifiable asset or assets,the goodwill of the business, as such, when correctly identified, may be of small value. That isbecause the earning power of the business will be largely commensurate with the earningpower of the asset or assets. If the goodwill of a business largely depends on a trade mark,for example, and the trade mark is fully valued, the real value of goodwill can only reflect avalue that is similar to the difference between the business as a going concern and the truevalue of the net assets of the business including the trade mark. A purchaser of the businesswill not pay twice for the same source of earning power. The purchaser will not pay a sumthat represents the earning power of the trade mark and also a sum that represents theearning power of the business. Nevertheless, the earning power of the trade mark is unlikelyto equal the earning power of the business."

[117] In my view, the site here can be compared with the trademark example, and both when valued may representclose to the whole value of a business. I refer also to the comments of their Honours in paragraph 33 asfollows:

...

[124] The fact that a large business was up and running and included considerable infrastructure, that there wereprobably advance bookings and that the hotel business was, in general terms, successful, would tend to indicateon the face of it that there was some goodwill involved.

[125] The fact that the management company arrangement involving Mr Sparr was discontinued, is an importantfactor in assessing the importance of goodwill overall, but in my view, it would be impossible to say, that evenwith an entirely new management company, there was no aspect of the business which was conducted insubstantially the same manner as it was beforehand. There is no evidence at all as to the manner in which thebusiness was carried out after the transfer. In my view, however, it is likely that some goodwill attached to theconduct of the business and in the efficient use of the assets of the business, and was therefore transferred withthe business in addition to the real property, and I find accordingly.

[126] Having accepted that some goodwill was associated with the business, but because of my finding regarding thesite, it follows that I consider that most of the goodwill associated with the business derives from the site.

[131] In my view, for the reasons already stated, this case is one where the goodwill of the business derives almostwholly from the location. It is not a case where the other factors mentioned by their Honours (Murry's case)have any significant influence. No evidence was led in relation to those other factors.

[132] This is a case where although the business, namely, the running of a four or five star hotel, is taken over by thepurchaser, there is no evidence to suggest that the means of operating the business, attracting custom,maintaining the same staff, and running the bars and restaurants continued to operate in the same way. I willassume, however, in the absence of any such evidence, that it is unlikely that any radical changes would havebeen made to the operation of the hotel in the short term.

[155] ...As can be seen from my analysis of the expert evidence, I believe that the statements of principle areconsistent with the way in which Mr Aschberger has valued the land and not valued the business or itsgoodwill. His approach in relation to the valuation of the land and its income earning capacity seems to me tobe consistent with the propositions I have set out from the cases. Mr Aschberger’s approach is that by far thegreatest proportion of the value of the business is related to the land. I deal with this aspect later in thesereasons.

[160] Both experts, although using different methodologies in attempting to fix a value for the real estate, wereattempting to ascertain a figure at which the hotel could be rented out to an operator. This rental had to allow areasonable profit for the operator. The rental so determined was then capitalised to reach a value for thebusiness.

[161] No evidence before me shows that there is any specialised field for the valuation of four or five star hotels. MrAschberger had valuation experience in the industry generally and was a qualified valuer. Mr Smith had novaluation qualifications....

[172] As I have indicated, valuation is not a science. It was suggested by Mr Aschberger that it could not be precisewithin a range of ten percent either way. This appears to me to be a reasonable margin for error in such aninexact art.

[173] By way of example, Mr Smith initially calculated a value for the business by use of his methodology of $36.9million. As will be seen, he calculated about $11 million of that figure as assets which he said were unrelated



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to the hotel’s real estate value, namely, what he called business value (including goodwill) of nearly $6million, and plant and equipment of about $5.3 million.

[178] I accept on the whole of the evidence that there must be such an allowance of the order of ten percent in suchan imprecise area.

[179] Mr Aschberger reached his valuation of $40,450,000 for the real estate by calculating a notional market rentalfor the property and then capitalising that. Mr Aschberger was able to use the actual trading figures to 31January 1995 and project figures for the full year ending 30 June 1995. He was also able to use the actualincome divided into the various departments of the hotel from the actual figures to the end of January 1995. Hethen applied industry percentages to those income figures for the various departments to arrive at a net annualrental which would have been appropriate to anyone renting any particular section of the business. This gavehim a total figure of $4.25 million. He then capitalised that figure at the rate of 10.5 percent to reach avaluation of $40,450,000 for the real estate.

[181] Mr Smith reached his initial valuation of $36.9 million by capitalising the operating profit before interest,depreciation and tax of $4.06 million at his suggested capitalisation rate of 11%....

[183] It therefore comes back to analysing the experts’ methodology to determine if the actual approach to thecalculation of rental was reasonable. In simple terms, Mr Smith used total income and applied a percentage tothat whereas Mr Aschberger divided up the income streams of the hotel and applied industry standards, withsome modifications....

[189] Finally, Mr Smith was able to conclude that 50 percent of goodwill relating to the rooms was unrelated to anysite goodwill. He expressed the view that "...hotel and site related issues are not necessarily of primeimportance." He said in his report:

"[It] is reasonable to conclude that locational considerations generally do not singularly, or evenlargely account for the source of most accommodation hotels’ source of goodwill."

[190] He therefore finally came up with a value for goodwill which was unrelated to the site itself in the sum of$5.97 million. His overall calculation was that at 30 June 1994, the hotel had a value of approximately $36.9million, and that included within that $36.9 million were two assets unrelated to the real estate value of thehotel, namely, a business value (including goodwill) of $5.97 million, and in addition, a value for businessplant and equipment of $5.3 million.

[191] In my view, Mr Smith was out of step in his failure to acknowledge the true importance of the site.

[218] I have formed the view, from reading all the criticisms made of each of the experts in final addresses, that MrAschberger’s approach is more appropriate for the operation of this hotel, and because he is a valuer withexperience in the valuation of the real estate component, and Mr Smith is not.

(b) TribunalsNil

4.3 STATE REVENUE OFFICE RELEASES


Nil

(b) Practice Directionshttp://law.ato.gov.au/atolaw/browse.htm?toc=03:Practice%20Statements:2001

Nil


http://law.ato.gov.au/atolaw/browse.htm?toc=03:Practice%20Statements:2001


State Revenue Office Releases(53)



(c) Other Publications & Updates

(1) ** Stamp duty concessions for relationship breakdowns

Source (613589) Revenue SA - Circular 253

http://www.revenuesa.sa.gov.au/circulars/c253.html

What issue does the circular consider?

The availability of stamp duty exemptions on property transfers after a relationship breakdown.

What was the background to the circular?

The Stamp Duties (Miscellaneous) Amendment Act 2004 (“the Amending Act”) was assented to on 4 November 2004and was proclaimed into operation on 24 February 2005.

The Amending Act makes a number of amendments to the Stamp Duties Act 1923 (“the Act”) relating to:

♦ the motor vehicle provisions; and

♦ the exemptions provided to spouses or former spouses (including de facto partners) when property is transferred asa result of a relationship breakdown.

The Family Law Amendment Act 2000 (Cth), which operates from 27 December 2001, amended the Family Law Act1975 (Cth) (“the FLA”) by inserting a new Part VIIIA. The provisions allow married persons to enter into agreementsas to the division of property in the event of a marriage breakdown. Agreements can be entered into either before,during or after marriage.

The Family Law Legislation Amendment (Superannuation) Act 2001 which operates from 28 December 2002, amendedthe FLA by inserting a new Part VIIIB, which provides for the splitting of superannuation benefits on a marriagebreakdown.

The Amending Act aligns the existing exemptions contained in the Act with the new Parts VIIIA and VIIIB of the FLAand extends the exemption provisions to include cohabitation agreements made pursuant to the De Facto RelationshipsAct 1996.

What was the circular?

Extension of Section 71CA Exemptions

The amendments to section 71CA contained in the Amending Act, extend the exemptions which are currently available.

An exemption will now apply to the three types of instruments referred to below.

Family Law agreements

A Family Law agreement is exempt from stamp duty. A Family Law agreement can be a maintenance agreement, afinancial agreement or a splitting agreement.

Instruments to give effect to or consequential on a Family Law agreement or a Family Law order

A deed or other instrument (including an application to transfer registration of a motor vehicle) to give effect to orconsequential on a Family Law agreement or a Family Law order is exempt from stamp duty if the following criteriaare met:

♦ the Commissioner is satisfied that the marriage to which the agreement or order relates has been dissolved orannulled, or the Commissioner is satisfied that the marriage to which the agreement or order relates has brokendown irretrievably;

♦ the instrument provides for the transfer of property between the parties to the marriage or former marriage and noother person other than a trustee of a superannuation fund takes or is entitled to take an interest in property inpursuance of the instrument;

♦ in the case of an application to transfer registration of a motor vehicle, the instrument must be consequential on adisposition of property between the parties to the marriage or former marriage.

Instruments executed by the trustee of a superannuation fund

Instruments executed by the trustee of a superannuation fund to give effect to, or consequential on:

http://www.revenuesa.sa.gov.au/circulars/c253.html

State Taxes(54)State Revenue Office Releases


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♦ a Family Law agreement;

♦ a Family Law order; or

♦ the provisions of any Act or law (including an Act or subordinate legislation of the Commonwealth) relating to thetransfer of property or any entitlements on account of a Family Law agreement or Family Law order

are also exempt.

New Section 71CBA

The new section 71CBA relates to property transfers between de facto partners, which are regulated by the De FactoRelationships Act 1996. This Act provides the machinery for de facto partners to agree on how to split up property onthe breakdown of their relationship.

An exemption will now apply to the three types of instruments:

♦ Certificated cohabitation agreements

♦ Instruments to give effect to or consequential on a certificated cohabitation agreement or a property adjustmentorder

♦ Instruments executed by the trustee of a superannuation fund




5. SUPERANNUATION, ETP’S & PENSIONS



(a) Courts

(1) * Incorrect health information at time of employment leads to loss of superannuation benefit(Phillips v Commissioner for Superannuation)

Source (611183) Phillips v Commissioner for Superannuation [2005] FCAFC 2 (11 February 2005)

http://www.austlii.edu.au/au/cases/cth/FCAFC/2005/2.html

What was the issue?

Was Mrs Phillips entitled to lead further evidence as to her disability so as to receive a pension?


In 1983, Ms Phillips:

♦ commenced employment with the Commonwealth Public Service (‘CPS’), retired in 1988 retired on invaliditygrounds.

♦ had undertaken a medical examination and completed a questionnaire entitled ‘Statement of Personal MedicalHistory’ in which she indicated that the only disability from which:

~ she suffered was hay fever or allergic rhinitis;

~ answered ‘NO’ to the following questions:

‘Are you now suffering or have you ever suffered from any of the following disabilities –

1. (a) Nervous fatigue or neurasthenia

(b) Mental or nervous conditions

(c) Anxiety state

(d) Depression or difficulty in sleeping

(e) Epilepsy or fits

(f) Persistent headaches

...

12. (b) Have you had any complaints, illness or injury not mentioned above?’

A Benefit Classification Certificate (‘BCC’) issued on 4 January 1984, specifying only allergic rhinitis (nasalinflammations) as a condition by reason of which Ms Phillips might not continue to be an eligible employee of the CPSuntil she attained maximum retirement age.

In the event of death or medical retirement, if the conditions specified on the BCC are related to the reason for the deathor retirement, the superannuation entitlement of an employee may be reduced or limited.

Ms Phillips was retired from the CPS with effect from 1 March 1988, with a ‘retirement condition’ of ‘PersonalityDisorder (obsessive compulsive)’ (‘OCD’) and consequent ‘retirement incapacity’ of ‘inability to perform her duties, or

http://www.austlii.edu.au/au/cases/cth/FCAFC/2005/2.html

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other duties appropriate to her classification, because of physical or mental incapacity viz obsessive compulsivedisorder’.

As Ms Phillips had not completed twenty years of service before retirement, a delegate of the Commissioner reviewedher medical history and the BCC that had been issued in 1984.

On 13 March 1990, the delegate determined that, at the time of her 1983 medical examination, the Commissioner hadfailed to give required information or had given false or misleading information in that she did not disclose a previouspsychiatric illness.

A substitute BCC was then issued, which noted the condition ‘schizo affective disorder’ as well as allergic rhinitis andwas deemed to have been in force from 4 January 1984.

The delegate also determined that Ms Phillips' retirement condition, namely her OCD, was caused, or substantiallycontributed to, by the schizo affective disorder specified in the substitute BCC.

However, on 8 January 2003, the Tribunal varied the decision by determining that Ms Phillips had failed to giveinformation that she was required to give in connection with the medical questionnaire completed in 1983 and that, hadshe given that information, a BCC would have issued specifying the conditions of personality disorder (‘PD’) and majordepressive disorder (‘MDD’) (rather than schizo affective disorder) in addition to allergic rhinitis.

Accordingly, the Tribunal issued a further substitute BCC containing this information and found that the conditionsspecified either caused, or substantially contributed to, Ms Phillips' retirement condition (OCD) or were connected tothe condition(s) that caused, or substantially contributed to, Ms Phillips' retirement condition.

The result was to reduce the superannuation payable to Ms Phillips.


[21] By her Notice of Appeal filed 20 February 2004, [Ms Phillips] relied on the following grounds:

‘1. That there has been a denial of natural justice in not entertaining [Ms Phillips']application to admit new evidence (in relation to the [Freedom of Information]material from the [Australian] Federal Police in particular).

2. That there has been a denial of natural justice in not allowing further time for [MsPhillips'] to present her full submission to the ...Court.’

[22] [Ms Phillips] has provided written submissions in support of these two grounds and sought to set aside thejudgment at first instance and to have the matter remitted to a differently constituted Tribunal for re-hearing.

[24] ... the important evidence that [Ms Phillips] wished to tender concerns the degree of connection between MsPhillips' prior medical history, as found by the Tribunal, and her retirement condition of OCD. In particular,Ms Phillips sought to tender a letter from Dr John Varghese, psychiatrist, dated 3 September 2003, whichstated relevantly as follows:

‘It is my opinion that an Anxiety Disorder, a Mood Disorder, or an underlying PersonalityDisorder marginally increases the risk for one developing Obsessive Compulsive Disorder.

Obsessive Compulsive Disorder, however, in the main is regarded as a specific neuro-psychiatric condition with a specific neuro-chemical cause. To develop this, one needs tohave a specific biological pre-disposition and subsequent events may unmask this andprecipitate out the illness.

Stress by itself does not result in Obsessive Compulsive Disorder unless one has abiological vulnerability.’

[25] [Ms Phillips] sought to rely on this new evidence to contend that the connection between her prior medicalhistory and her retirement condition is ‘marginal’ only and therefore did not satisfy the test outlined in Benhamof whether there was a ‘real and substantial connection’.

[26] Such evidence is contrary to the opinions of two doctors who gave evidence before the Tribunal and to thefinding of the Tribunal. Dr Frank Varghese stated in cross-examination that a ‘person with obsessivecompulsive personality disorder is more likely to develop OCD.’ ...

[31] The further evidence sought to be tendered by [Ms Phillips] relates to a factual issue and even if admittedwould not demonstrate any error of law.

Superannuation, ETP’s & PensionsComplimentary Edition




[32] As indicated above, given that the primary Judge was concerned with whether any error of law attended theconclusion of the Tribunal, her Honour was correct to reject the reception into evidence of material that wasnot before the Tribunal. ...

[34] We simply note that Mr Hanks QC, for the respondent, in response to an enquiry by the Court as to whetherthere was an opportunity to reconsider the entire matter in the light of the medical information now sought tobe relied on by [Ms Phillips], indicated that ‘if a reconsideration’ in the circumstance of new and betterinformation coming to light, ‘was a possibility, the [Commissioner for Superannuation] would look at it’."

[35] In relation to [Ms Phillips'] second ground, [Ms Phillips] claims that she was denied natural justice because shewas not allowed further time to present her full submission to the Court. This ground concerns [Ms Phillips']filing (without leave) of supplementary written submissions after the primary Judge had reserved her decision.It appears that the primary Judge did not consider those supplementary submissions.

[37] The respondent relies on remarks by McHugh J in Eastman v Director of Public Prosecutions (ACT) (2003)214 CLR 318 at 330:

‘...a party has no legal right to continue to put submissions to the court after the hearing. Inso far as the rules of natural justice require that a party be given an opportunity to put hisor her case, that opportunity is given at the hearing.’

[38] In our view, it is clear that [Ms Phillips] was given a full opportunity to put her case and we see no error in thelack of any reference to her intended further submissions.

[42] These principles are applicable here. We agree with the primary Judge that the Tribunal’s findings were opento it on the evidence before it and no error of law has been established.

(b) TribunalsNil

5.3 APRA, ASIC & ATO RELEASES


(1) ** Does your client have an employee? (SGR 2005/1)

Source (613803) SGR 2005/1 previously released as draft form as SGR 2004/D1

http://law.ato.gov.au/atolaw/view.htm?docid=SGR/SGR20051/NAT/ATO/00001


Who is an employee?


This ruling was previously released as Draft Superannuation Guarantee Ruling SGR2004/D1, which replaced SGR93/1on 25 August 2004.

What is the relevant legislative provision?

Section 12 of the Superannuation Guarantee (Administration) Act 1992.

Interpretation: employee, employer

(1) Subject to this section, in this Act, employee and employer have their ordinary meaning. However, forthe purposes of this Act, subsections (2) to (11):

(a) expand the meaning of those terms; and

(b) make particular provision to avoid doubt as to the status of certain persons.


http://law.ato.gov.au/atolaw/view.htm?docid=SGR/SGR20051/NAT/ATO/00001

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(2) A person who is entitled to payment for the performance of duties as a member of the executive body(whether described as the board of directors or otherwise) of a body corporate is, in relation to thoseduties, an employee of the body corporate.

(3) If a person works under a contract that is wholly or principally for the labour of the person, theperson is an employee of the other party to the contract.

(4) A member of the Parliament of the Commonwealth is an employee of the Commonwealth.

(5) A member of the Parliament of a State is an employee of the State.

(6) A member of the Legislative Assembly for the Australian Capital Territory is an employee of theAustralian Capital Territory.

(7) A member of the Legislative Assembly of the Northern Territory is an employee of the NorthernTerritory.

(8) The following are employees for the purposes of this Act:

(a) a person who is paid to perform or present, or to participate in the performance orpresentation of, any music, play, dance, entertainment, sport, display or promotional activityor any similar activity involving the exercise of intellectual, artistic, musical, physical orother personal skills is an employee of the person liable to make the payment;

(b) a person who is paid to provide services in connection with an activity referred to inparagraph (a) is an employee of the person liable to make the payment;

(c) a person who is paid to perform services in, or in connection with, the making of any film,tape or disc or of any television or radio broadcast is an employee of the person liable tomake the payment.

(9) A person who:

(a) holds, or performs the duties of, an appointment, office or position under the Constitution orunder a law of the Commonwealth, of a State or of a Territory; or

(b) is otherwise in the service of the Commonwealth, of a State or of a Territory (includingservice as a member of the Defence Force or as a member of a police force);

is an employee of the Commonwealth, the State or the Territory, as the case requires. However, thisrule does not apply to a person in the capacity of the holder of an office as a member of a localgovernment council.

(9A) Subject to subsection (10), a person who holds office as a member of a local government council isnot an employee of the council.

(10) A person who is a member of an eligible local governing body within the meaning of section 221A ofthe Income Tax Assessment Act 1936 is an employee of the eligible local governing body.

(11) A person who is paid to do work wholly or principally of a domestic or private nature for not morethan 30 hours per week is not regarded as an employee in relation to that work.



♦ If an individual is not an employee as defined in the SGAA or is an employee but is otherwise exempted from theapplication of the SGAA by a specific provision, an employer will not have a potential liability for the SGC.

♦ Whether a person is an employee of another is a question of fact to be determined having regard to the keyindicators expressed in judicial decisions which have considered the issue of whether a person is a common lawemployee.

♦ The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon theexistence of a common law employment relationship. While the definition includes persons who at common lawwould be regarded as employees, it also extends to:

~ a person who is entitled to payment for the performance of duties as a member of the executive body of a bodycorporate (subsection 12(2));

Superannuation, ETP’s & PensionsComplimentary Edition

APRA, ASIC & ATO Releases(59)



~ a person who works under a contract that is wholly or principally for the labour of the person (subsection12(3)) (see paragraph 11);

~ members of the Commonwealth and State Parliament, members of the ACT Legislative Assembly andmembers of the NT Legislative Assembly (subsections 12(4) to (7));

~ a person who is paid to perform or present, or to participate in the performance or presentation of, any music,play, dance, entertainment, sport, display or promotional activity or any similar activity involving the exerciseof intellectual, artistic, musical, physical or other personal skills (paragraph 12(8)(a));

~ a person who is paid to provide services in connection with any activity referred to in paragraph 12(8)(a);

~ a person who is paid to perform services in, or in connection with, the making of any film, tape or disc or ofany television or radio broadcast (paragraph 12(8)(c));

~ a person who holds, or performs the duties of, an appointment, office or position under the Constitution orunder the law of the Commonwealth, State or Territory (paragraph 12(9)(a));

~ a person who is otherwise in the service of the Commonwealth, of a State or of a Territory, including serviceas a member of the Defence Force or as a member of the police force (paragraph 12(9)(b)); and

~ a person who is a member of an eligible local governing body (subsection 12(10)).

♦ For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of theparties indicate that:

~ the individual is remunerated (either wholly or principally) for their personal labour and skills;

~ the individual must perform the contractual work personally (there is no right of delegation); and

~ the individual is not paid to achieve a result,

the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will bean employee under that subsection.

♦ If an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and other party for the purposes of the SGAA, either at common lawor under the extended definition of employee.

♦ If a partnership has contracted to provide services, then the person who actually does the work (even if a partner) isnot the employee of the other party to the contract.

♦ A partner in a partnership is not an employee of the partnership.

♦ A person who holds an ABN may still be an employee for the purposes of the SGAA.

♦ The status of a person as an employee for SGAA purposes is not determined by reference to whether the person is afull-time, part time or casual worker.

♦ The application or otherwise of the PSI measures is not determinative of whether an individual is an employeewithin the meaning of section 12 of the SGAA.

♦ An arrangement between parties that is structured in a way that does not give rise to a payment for servicesrendered but rather a payment for something entirely different, such as a lease or a bailment does not give rise to anemployer/employee relationship for the purposes of the SGAA.

♦ In determining whether an individual is an employee, the terms and conditions of the contract, whether express orimplied, in light of the circumstances surrounding the making of the contract, will always be of considerableimportance to the proper characterisation of the relationship between the parties.

♦ Contractual arrangements often contain a clause that purports to characterise the relationship between the parties asthat of principal and independent contractor and not that of employer and employee. Such a clause cannot receiveeffect according to its terms if it contradicts the effect of the agreement as a whole. That is, the parties cannot deemthe relationship between themselves to be something that is not.

♦ The key indicators of whether an individual is an employee or independent contractor include:

~ Control;

~ Whether the worker operates on his or her own account or in the business of the payer;

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~ "Results" contracts;

~ Whether the work can be delegated or subcontracted;

~ Risk; and

~ Provision of tools and equipment and payment of business expenses.

♦ Under subsection 12(2) of the SGAA, a person who is entitled to payment for the performance of duties as amember of the executive body (whether described as the board of directors or otherwise) of a body corporate39 is,in relation to those duties, an employee of the body corporate.

♦ Section 84-10 of the 1997 Act ensures that the application of the alienation measures to an individual does notmake the individual an employee for the purposes of the SGAA. Whether or not an individual is subject to the PSImeasures is distinct from and separate to the determination of whether that individual is an employee within themeaning of section 12 of the SGAA.

Editor:

The most contentious of the provisions is section 12(3) which deals with work performed by a person under acontract that is wholly or principally for the labour of the person.

It is unfortunate that the ruling doesn’t address the circumstances in which the Commissioner will seek to recover acharge in respect of an incorporated employee such as he did in relation to PAYG in the recent Trylow case. Whatemployers want to know is whether they have SGC obligations:

♦ Where a contractor interposes an incorporated entity;

♦ Where they put off an employee and put the same person on as an incorporated contractor?

Any queries relating to this ruling or any other superannuation issues can be directed to John Sudano of Hall &Wilcox, Lawyers on 9603 3531.


Nil

(c) Interpretative DecisionsSource: (603672)


(1) Superannuation Guarantee

ID2005/33

Superannuation Guarantee: long serviceleave payments from a workerentitlement fund 28 January 2005


(e) Fact SheetsNil

(f) Other Publications & UpdatesNil






6. OTHER IMPOSTS, OFFSETS & REBATES

6.1 POLITICIANS, BOARDS & STATUTORY AUTHORITIES

(1) * ASIC provides relief on timing of auditor's independence declarations (ASIC Media)

Source (613568) IR 05-07 Media and information releases - Tuesday 15 February 2005

http://www.asic.gov.au/asic/ASIC_PUB.NSF/print/IR+05-07+ASIC+provides+relief+on+timing+of+auditor's+independence+declarations?opendocument

Class Order [CO 05/83] Timing of Auditor's Independence Declarations was released on 15 February to assist auditorsin meeting the timing obligations associated with financial reports.

Specifically, [CO 05/0083] provides relief where:

♦ the declaration is given to the directors before the directors resolve to make the relevant directors' report and noearlier than 7 days before the directors' report is signed; and

♦ the relevant auditor's report is made within 7 days after the directors' report is signed and includes a statement orstatements to the effect that either the declaration would be in the same terms if it was given to the directors at thetime the auditor's report is made, or circumstances have changed since the declaration was given to the directorsand setting out how the declaration would differ if it was given to the directors at the time the auditor's report ismade.

(2) * ASIC urges small capitalisation companies to get fundraising disclosure right first time(ASIC Media)

Source (613569) ASIC Media and information releases Wednesday 23 February 2005

http://www.asic.gov.au/asic/ASIC_PUB.NSF/print/05-34+ASIC+urges+small+capitalisation+companies+to+get+fundraising+disclosure+right+first+time?openDocument

ASIC announced a campaign on 23 February aimed at improving the disclosure in fundraising documents issued bysmall capitalisation companies (Small Caps Campaign).

The six areas that ASIC will focus on are:

♦ use of funds and consequences of not raising the full amount sought;

♦ use of terms from the Australasian Code for Reporting Mineral Resources and Ore Reserves (JORC) and ValminCodes by resource sector companies;

♦ prospective financial information;

♦ related party underwritten fundraisings;

♦ material contracts; and

♦ directors' track record.

An attachment to the media release detailed the common types of problems.

Attachment to IR 05-34: Common disclosure failures by small capitalisation companies

Use of funds and consequences of the company not raising the full amount sought

Issuers commonly fail to address how the company will use the funds raised and the consequences for the company ifthe full amount sought is not raised where there is no underwriter.

ASIC sets out what is expected of companies in this respect in ASIC Information Release 03-06 Fundraising documentshave common failures.

http://www.asic.gov.au/asic/ASIC_PUB.NSF/print/IR+05-

http://www.asic.gov.au/asic/ASIC_PUB.NSF/print/05-

Other Imposts, Offsets & Rebates(62)Politicians, Boards & Statutory Authorities


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Compliance with the JORC and Valmin Codes by resource sector companies

The JORC Code sets out minimum standards, recommendations and guidelines for public reporting of explorationresults, mineral resources and ore reserves.

The Code and Guidelines for Technical Assessment and/or Valuation of Mineral and Petroleum Assets and Mineral andPetroleum Securities for Independent Expert Reports (Valmin Code) sets standards for commissioning and preparingexpert reports for public documents.

Material non-compliance with the JORC and Valmin Codes may make the disclosure document misleading.

Prospective financial information

Issuers commonly fail to adequately disclose the assumptions underpinning prospective financial information. Theassumptions must provide reasonable grounds for the inclusion of the financial information.

ASIC requires all issuers, advisers and independent experts to comply with ASIC Policy Statement 170 ProspectiveFinancial Information, when including prospective financial information.

Related party underwritten fundraisings

ASIC will scrutinise rights issues and other fundraisings which are underwritten by major shareholders and relatedparties to ensure that the intent of Chapter 6 of the Corporations Act 2001 is not avoided (see further ASIC PolicyStatement 159, paragraphs 159.152 to 159.187 and Panel Guidance Note No. 1).

Material contracts

Issuers commonly provide insufficient information in relation to the terms and conditions of material contracts withassociated and third parties.

Directors' track record

ASIC expects disclosure documents to contain sufficient information about directors' professional backgrounds andexperience (track record), and to ensure that such information is not misleading, or omits material information.

As part of its risk rating process, ASIC carries out directors' background checks on matters such as bankruptcies,associations with entities in external administration and ASIC disciplinary or other proceedings. Any material non-compliance with track record disclosures may cause ASIC to take action, as noted earlier.

(3) * APRA releases IFRS discussion paper (APRA Media)

Source (613572) APRA Media Release - No. 05_11 - Thursday, 24 February 2005

http://www.apra.gov.au/internetapps/Print_Media_Page.cfm?title=APRA%20releases%20IFRS%20discussion%20paper&pageID=8335

APRA released the first of two discussion papers on 24 February setting out its proposed prudential response to theadoption of IFRS by APRA regulated institutions.

The paper deals with the prudential implications of a number of specific IFRS related changes to Australian accountingstandards.

These include:

♦ fair value measurement;

♦ non-accrual loans and deferred acquisition costs;

♦ treatment of hedges;

♦ available for sale financial assets;

♦ property;

♦ excess of market value over net assets (EMVONA);

♦ loan loss provisioning; and

♦ employer sponsored defined benefit superannuation

♦ plans

http://www.apra.gov.au/internetapps/Print_Media_Page.cfm?title=APRA%20releases%20IFRS%20discussion%20p

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Politicians, Boards & Statutory Authorities(63)



APRA’s intention is that the proposals in this discussion paper will take effect from 1 January 2006.

A second discussion paper will deal with the treatment of eligible Tier 1 capital instruments and securitisation.


(a) Courts

(1) * An examination of the use of diesel fuel on board vessels (Allseas Marine Contractors SAand C of T)

Source (601787) Allseas Marine Contractors SA and Commissioner of Taxation [2005] AATA 7 (6 January 2005) –P.J. Lindsay, Senior Member


What was the issue?

Was the taxpayer entitled to a diesel fuel rebate?

Was the diesel fuel used on marine transport if it was used on a:

♦ pipelaying vessel;

♦ and on two support vessels including:

~ a survey ship;

~ and a re-supply vessel.


The taxpayer's pipelaying vessel, the MV Lorelay, was supplied by pipe carriers (CEC Pride and Arktis Ace) whichtransported pipes from the beach to the Lorelay. Tugboats (the Woona and Tarpan) were used for mooring the pipecarriers alongside the Lorelay. A survey boat (the Searanger) was used to survey the pipeline.

On 23 September 2002 the taxpayer:

♦ claimed a diesel fuel rebate in respect of its purchase of 1,828,174 litres of diesel fuel under a number of differentcategories of eligible activity including marine transport .

In providing a detailed description of the eligible activity, the taxpayer stated that:

"Allseas Marine contractors have brought a specialised gas pipe laying vessel into Australia to lay gas pipe inthe Bass Strait. The diesel fuel will be consumed in operating the vessel in its day-to-day activities." (T4-22)

The Commissioner took the view:

♦ the fundamental purpose of moving the pipelaying vessel while engaged in pipe laying activities, is to lay pipe, notto transport passengers and goods.

♦ The pipelaying vessel was considered not to transport anything but itself.

♦ movement of the vessel constituted transport of the vessel rather than transport by the vessel and therefore thediesel fuel was not used in marine transport.

♦ movement of the pipelaying vessel to a position where pipelaying can take place was seen as incidental to thepipelaying operation but not incidental to transport of goods or passengers by the vessel.


[31] I make the following findings:

♦ the pipe loaded onto the Lorelay at Bell Bay and while at sea, was conveyed or transported in the Lorelayto another place, being the Bass Strait seabed, and such conveyance is an activity covered by the ordinarymeaning of ‘marine transport’ (Port of Brisbane case at [15]). The vessel’s four main engines, propellerand thrusters are electrically driven through diesel power and the use of the diesel fuel was in marine


Other Imposts, Offsets & Rebates(64)Courts & Tribunals


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transport as these articles of plant provided the vessel’s propulsion (item 2.2 to exhibit WVB3 to Mr VanBenten’s statement).

♦ diesel fuel used to power the Lorelay’s onboard cranes and other equipment such as the elevator andconveyor used to load, move and store the pipe in the cargo hold during passage was a use of diesel fuel inmarine transport. Similarly, diesel fuel used to power the Lorelay’s internal gantry cranes, elevator and thelongitudinal conveyor to move pipe from the hold to the main firing line, was use in marine transport. Thepipe was being moved in the course of being transported to its destination point, unlike goods shiftedaround inside a warehouse or factory.

♦ subject to what is said below, the power used in the processes that occurred at each of the stations on themain firing line, including the lining up of pipe with the pipe already assembled on the firing line, is a useof diesel fuel in marine transport. I will comment further on this stage of the transportation of the pipe as itis more problematic than the other uses of diesel on the Lorelay. However, the diesel used to power thewinches, tensioners and roller supports as it moves along the stinger and in lowering the pipe to the seabedis also a use in marine transport. The pipe is in the course of being conveyed to its destination.

♦ ... I accept the taxpayer’s submission that the Lorelay’s conveyance of pipe did not cease and was notcomplete until the pipe was on the seabed. In contrast with the use of fuel by dredges for retrieving spoilfrom the river bed, on the evidence before me the immediate purpose of the firing line processes is tomake the pipe ready for its placement on the sea bed and they take place during the conveyance of thepipe. (cf Port of Brisbane case at [23]). Apart from the welding and application of the anticorrosivecoating, the processes along the firing line are effected to enable the pipe to be transported securely to itsparticular place on the sea bed. But I do not include the diesel fuel used in operating the Phoenixautomated welding system. The welding process, as opposed to say the fuel used to power the conveyorbelt system, was not "ancillary to" (Port of Brisbane case at [23]) or "an integral part of" (DynoWesfarmers at 5 & 6) the activity of conveying the pipe.

[32] As for the Searanger, I note the (Commissioner's) concession that the use of diesel fuel in propelling the vesselwhile carrying fuel for re-supply of the Lorelay (and return) and transporting the remote controlled vehicle tothe point of survey (and return) is a use of diesel fuel in marine transport.

[33] It was not disputed and I find that the Searanger did not transport pipe. The taxpayer submitted that while theSearanger conducted survey work to ensure the pipe was laid flat on the sea bed, it necessarily carried crew andequipment for that purpose and such conveyance was in marine transport. ...Taking the surveying activity toinclude, as Mr Van Benten represented, the Searanger’s use of the remote operated vehicle to assess the pipelay route in advance and the pipe’s supports, and observation to ensure the pipe’s curvature was correct, thisactivity does not involve transporting people or things. Of course, crew and equipment were on board thevessel while the surveying was performed. But the vessel was not then carrying them as part of an activity ofmarine transport or ancillary to marine transport. The immediate purpose in carrying them was to perform thesurvey work, which I find is not marine transport.

[34] The decision under review should be varied by determining that diesel fuel rebate is payable to the taxpayerpursuant to s.164(1)(ac) of the Customs Act and s.78A(1)(ac) of the Excise Act in respect of the diesel fuelpurchased by the taxpayer for use:

(a) by the Lorelay in all its activities in laying pipe across the Bass Strait, such use was in marinetransport in the course of the taxpayer’s carrying on an enterprise, except use (i) in powering thePhoenix welding equipment and (ii) in applying the anti-corrosive coating;

(b) by the Searanger in propelling the vessel while carrying fuel to the Lorelay (and back) and whilecarrying the remote controlled vessel to the point of survey (and back), such use was in marinetransport in the course of the taxpayer’s carrying on an enterprise, but the rebate is not otherwisepayable.

(b) TribunalsNil

SuperannuationComplimentary Edition (65)



6.3 APRA, ASIC & ATO RELEASES


Nil


Nil

(c) Interpretative DecisionsSource (603674)

(1) Withdrawals - WET

ID2004/790(Withdrawn)

Wine equalisation tax: whether abeverage made by addition of grape spiritor neutral spirit to fruit juice is 'wine' 28January 2005


(e) Fact SheetsNil

(f) Other Publications & Updates

(1) ** SMSF update by ATO (ATO Speech)

Source (617530) Address by Mark Jackson, Deputy Commissioner, Superannuation to Self ManagedSuperannuation Fund Professionals' Association of Australia (SPAA) Inaugural National SPAA Conference,Sydney, 8 March 2005.


You will know that following the transfer of the responsibility for the regulation of self managed superannuation fundsto the Tax Office, a major help and support program was started. So far, this financial year alone, we have issued over90,000 trustee guides, sent letters to over 15,000 new trustees, and provided over 500 seminars.

And, we currently answer approximately 100,000 telephone calls on the subject of self managed funds each year.

While there is still a way to go to achieve full compliance, the results are encouraging.

This forward momentum has more recently been supported by the introduction of mandatory auditor reporting.

Recently we started a process to correct what seemed to be inaccurate information about trustees. But we don’t alwaysget it right and contact from members of this association alerted us to problems with the approach we were taking.

As a result, the mail-out was halted and we subsequently commenced a consultation process with associations. We willshortly be in a position to restart contacting tax agents to correct trustee details using a more streamlined approach.




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In the 2004/05 year, we have so far completed almost 1,600 audits and are aiming to complete 2,300 by the end of June.This is an increase of around 50% over the 2003/04 financial year.

Recent audit activity has reaffirmed earlier non-compliance indications in respect of a number of issues. These includecontravention of the in-house asset rule, lending money to members of the fund; and acquiring prohibited assets frommembers of the fund.

Some examples of this contravention which have recently come to notice are trustees purchasing residential propertyfrom members or purchasing unlisted shares from members.

We remind trustees that funds can generally not acquire assets from members – unless the assets are business realproperty or listed shares.

What continues to be a concern, particularly as it seems to be so easy to remedy, is the inadequate record-keeping bysome trustees. A common example is the lack of documentation in relation to leasing arrangements.

On several occasions, when looking at non-arms length dealings, we have found that even though the arrangement maybe at market rates, there is no documentation to evidence the legitimacy of the transaction. Many trustees also continueto ignore the requirement to keep minutes to document their decisions.

Another area of particular concern is the failure of trustees to hold assets in the name of the fund as opposed to the nameof a member or a member’s business.

The failure to hold assets in the fund’s name has proven to be an ongoing compliance issue. And it can have seriousconsequences not only from action by the regulator.

I understand that certain states and territories do not allow assets to be held in the name of a super fund. Where this isthe case, an appropriate declaration of trust should be in place.

The question of reporting by auditors in the auditor contravention report of assets not in the fund’s name has been raisedwith me. I can confirm that such reporting is required.

However, I am able to announce today that where such reports are received this financial year, no audit action will betaken by the Tax Office. This is to allow trustees time to correct the situation. We will be on the look-out in the 2005-06year for any such cases and they will have a high priority for action. An advice on this matter will issue shortly.

We are also reviewing trustee eligibility through the introduction of registration checks, which aim to prevent ineligibleindividuals, such as insolvents and those convicted of offences of dishonesty, from registering as trustees.

Over the last year, we have been developing the ‘Risk Assessment Profiling’ analysis tool. This is a computer systemwhich assesses a number of factors relating to fund performance. These factors are drawn from tax returns, regulatoryreturns and now from auditor contravention reports. The profiles produced by the system allow us to target our auditactivity much more accurately.

We will also be spending more time ensuring that trustees are capable of and, in fact, are meeting their obligations. Aspart of this process, trustees who have problems with the Tax Office over their personal taxation affairs will now comeunder closer scrutiny to ensure they are meeting their obligations in running a super fund.

Early access schemes remain one of our greatest concerns. A scheme arrangement could leave the affected memberwith a severely reduced superannuation balance. Taxation and legal liabilities could further reduce the remaining assets.

We have been working successfully with ASIC in targeting promoters of SMSFs who gain unlawful early access tosuperannuation benefits. This is helping us to more quickly close down such operations and apply penalties tooffenders.

Last year, we referred 16 cases for action and there are a further 11 cases in progress.

There has been some public comment on the materiality of reporting required. The current guidelines were developedwith the help of professional bodies but do not quite seem to have ‘hit the mark’.

So, as part of our continued efforts to minimise disruption to professional association members and trustees, we havereviewed the reporting obligations of approved auditors.

Our view is that auditors should use their professional judgement in consideration of the auditing standards to determinewhether they should report a breach. In an effort to make this view clearer, we will be reviewing all of our publicationsand messages on this subject and reissuing updated versions where necessary.

We remind approved auditors that reporting relevant breaches is mandatory.

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I mentioned earlier the rapidly approaching date for implementation of ‘Choice’. We are currently working with theTreasury, ASIC and the Financial Literacy Foundation to produce an integrated public education campaign.

We are all putting a lot of effort into ensuring that employers, employees and industry are aware of their obligations andentitlements under the measure.

A self managed fund should only be recommended to those who have the appropriate combination of asset level, timeand expertise to establish and manage such a fund.

Under the Choice measure, many of your clients are likely to have key obligations to adhere to. Crucially, foremployers, these include determining which employees are eligible to choose their superannuation fund; identifying anacceptable default fund to receive contributions; and providing employees with a Choice Form allowing them to requesta change of fund.

(2) Jail for diesel fuel rebate fraud (ATO Media)



Anthony Pienaar, 59, has been jailed for 3 years by the Grafton District Court for diesel fuel rebate fraud totalling$126,558.

In 2002, Mr Pienaar submitted two diesel fuel rebate claims for 331,000 litres of diesel for residential usage. Due to theunusually large claims the ATO conducted an audit to substantiate them. It revealed Mr Pienaar had not purchased anyfuel.

Mr Pienaar will serve 15 months before being released on a good behaviour bond. He is also required to payreparations of $126,558.





7. LEGISLATION

7.1 LEGISLATION & REGULATIONSSource: (593519) Australian Parliament House Website

http://www.aph.gov.au/

Jane Baquie of Hall & Wilcox Lawyers prepared these legislation notes. Telephone: 9603 3552

We have included the URL’s for each of the Bills and Explanatory Memorandum summarised in these update notes.

In the specially prepared electronic edition of these notes available from our website www.taxmatrix.com.au the URL toeach of the Bills and the EMs is activated as links to the underlying websites to provide greater assistance in yourresearch.

(a) Acts Receiving Royal Assent in the last month

(1) * A New Tax Systems (Goods and Services Tax Imposition (Recipients) - General) Act No. 3of 2005

Introduced to the House of Representatives on 8 December 2004. Passed in the House of Representatives on8 December 2004. Introduced into the Senate on 9 December 2004. Passed in the Senate on 8 February 2005.Received Royal Assent on 18 February 2005.

Bill: http://scaleplus.law.gov.au/html/bills/0/2004/0/2004121005.htm?sfgdata=4

Explanatory Memorandum: See below Item 4

Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/ADD5677BDF55F0B0CA256FB000052E0D?OpenDocument

(2) * A New Tax Systems (Goods and Services Tax Imposition (Recipients) - Excise) Act No. 2 of2005

Introduced to the House of Representatives on 8 December 2004. Passed in the House of Representatives on 8December 2004. Introduced into the Senate on 9 December 2004. Passed in the Senate on 8 February 2005.Received Royal Assent on 18 February 2005.



Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6E1CFCC12E4965ECCA256FB0000397D1?OpenDocument

(3) * A New Tax System (Goods and Services Tax Imposition (Recipients) - Customs) Act No. 1of 2005

Introduced to the House of Representatives on 8 December 2004. Passed in the House of Representatives on8 December 2004. Introduced into the Senate on 9 December 2004. Passed in the Senate on 8 February 2005.Received 18 February 2005.



Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6E1CFCC12E4965ECCA256FB0000397D1?OpenDocument

http://www.aph.gov.au/

http://scaleplus.law.gov.au/html/bills/0/2004/0/2004121005.htm?sfgdata=4

http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/ADD5677BDF55F0B0CA256FB000052


http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6E1CFCC12E4965ECCA256FB0000397


http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6E1CFCC12E4965ECCA256FB0000397

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(4) ** Tax Laws Amendment (Long-term Non-reviewable contracts) Act No. 10 of 2005

Introduced to the House of Representatives on 8 December 2004. Passed in the House of Representatives on 8December 2004. Introduced into the Senate on 9 December 2004. Passed in the Senate on 8 February 2005.Received Royal Assent on 22 February 2005.



Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/2069EE7461299B4BCA256FB3001297A0?OpenDocument

These four Acts amend the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act).

These amendments provide suppliers with certain pre-existing contracts, that will not have had a review opportunity by1 July 2005, a mechanism to negotiate with the recipient of their supplies to take into account the impact of the NewTax System changes.

The main points of the Acts are:

♦ Suppliers may incur once-off costs in negotiating an appropriate price change with the recipient but the compliancecosts will only be incurred if the supplier seeks to take into account the impact of the New Tax System changes onthe supplies and the recipient does not voluntarily elect to pay the GST.

♦ Recipients will need to report and pay the GST if they do not accept an offer of an appropriate price change madeby the supplier but there should be no significant compliance costs for registered recipients.

♦ Unregistered recipients will be subject to the same reporting and payment obligations as registered recipients buthowever, these obligations can be avoided by accepting an offer of an appropriate price change which will placethe contract under the general GST rules.

♦ There should be no disproportionate impact on small business.

(5) Retirement Savings Account Providers Supervisory Levy Imposition Amendment Act No. 17of 2005

Introduced to the House of Representatives on 9 December 2004. Passed in the House of Representatives on8 February 2005. Introduced in the Senate on 9 February 2005. Passed in the Senate on 9 February 2005. ReceivedRoyal Assent on 22 February 2005.


Explanatory Memorandum: http://scaleplus.law.gov.au/html/ems/0/2004/0/2004121304.htm?sfgdata=4

Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/5F28394FE57C2038CA256FB300220602?OpenDocument

This Act amends the Retirement Savings Account Providers Supervisory Levy Imposition Act 1998 as part of a packageof seven Bills which were to introduce a number of changes to the arrangements for the determination of levies paid byregulated financial entities. The changes were to give effect to the Government's response to the Review of FinancialSector Levies.

(6) Life Insurance Supervisory Levy Imposition Amendment Act No. 16 of 2005

Introduced to the House of Representatives on 9 December 2004. Passed in the House of Representatives on 8February 2005. Introduced in the Senate on 9 February 2005. Passed in Senate on 9 February 2005. ReceivedRoyal Assent on 18 February 2005.

Bill: http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1882&TABLE=BILLS

Explanatory Memorandum: http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1934&TABLE=EMS

Act:http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6D7F1FB5BE7557E3CA256FB30021C45D?OpenDocument


http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/2069EE7461299B4BCA256FB3001297A


http://scaleplus.law.gov.au/html/ems/0/2004/0/2004121304.htm?sfgdata=4

http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/5F28394FE57C2038CA256FB30022060

http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1882&TABLE=BILLS

http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1934&TABLE=EMS

http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/6D7F1FB5BE7557E3CA256FB30021C4

LegislationComplimentary Edition

Australian Parliament(71)



This Act amends the Life Insurance Supervisory Levy Imposition Act 1998 as part of a package of seven Bills whichwere to introduce a number of changes to the arrangements for the determination of levies paid by regulated financialentities.

The changes were to give effect to the Government's response to the Review of Financial Sector Levies.

(b) Bills Awaiting Royal Assent

(1) * Customs Amendment Bill 2004

Introduced to the Senate on 8 December 2004. Passed in the Senate on 8 December 2004.



This Bill proposes to prescribe commercial quantities for all those drugs in Schedule VI of the Customs Act 1901 forwhich a commercial quantity is not currently prescribed. This will ensure that judges have appropriate sentencingdiscretion in relation to drug importation offences involving large quantities of drugs.

(2) * Bankruptcy and Family Law Legislation Amendment Bill 2005

Introduced in House of Representatives on 10 February 2005. Passed in House of Representatives on 17 February2005. Introduced in the Senate on 17 November 2004. Passed in the Senate on 9 February 2005. Passed in theSenate on 8 December 2004.

Bill:http://www.comlaw.gov.au/comlaw/legislation/bills1.nsf/bills/bytitle/75E88EF13431EBAACA256F7200261408?OpenDocument -

Explanatory Memorandum:http://www.comlaw.gov.au/comlaw/legislation/bills1.nsf/bills/bytitle/75E88EF13431EBAACA256F7200261408?OpenDocument&VIEWCAT=attachment&COUNT=25&START=1

This Bill proposes to make a number of significant changes to the Bankruptcy Act 1966 (the Act) and the Family LawAct 1975 (the Family Law Act). These changes will implement a number of key recommendations made in the JointTaskforce Report on the Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax.

The objects of this are to:

♦ address the longstanding issues concerning the interaction between family law and bankruptcy;

♦ prevent the misuse of financial agreements as a means of avoiding payment to creditors; and

♦ provide a more effective means of collecting income contributions from bankrupts who do not receive their incomeas a salary or wage.

(3) * New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004

Introduced to the House of Representatives on 18 November 2004. Passed in the House of Representatives on 16February 2005. Introduced in the Senate on 7 march 2005. Passed in the Senate on 9 March 2005.



This Bill proposes to:

♦ more closely align the tax treatment of foreign residents that indirectly invest in assets via Australian fixed trustswith the treatment of foreign residents that invest directly in the assets which will remove tax impediments toforeign residents investing in Australian fixed trusts as they will no longer be subject to Australian tax in respect oftheir foreign source income;

♦ remove tax impediments that discourage foreign residents from investing in Australian trusts, including managedfunds, which will improve the international competitiveness of Australia’s managed funds industry, and enhance



http://www.comlaw.gov.au/comlaw/legislation/bills1.nsf/bills/bytitle/75E88EF13431EBAACA256F7200261408?Open

http://www.comlaw.gov.au/comlaw/legislation/bills1.nsf/bills/bytitle/75E88EF13431EBAACA256F7200261408?Open





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the ability of Australian funds to attract foreign investment. This in turn should encourage the development ofAustralia as a global financial services centre; and

♦ provide an exception to CGT Event E4 for distributions of foreign source income to foreign resident beneficiariesof Australian funds which will remove an onerous administrative impediment to investment in Australian trusts andis expected to make Australia’s managed funds industry more internationally attractive, enhancing the ability ofAustralian funds to compete internationally.

(4) ** Tax Laws Amendment (2004 Measures No. 6) Bill 2004

Introduced to the House of Representatives on 18 November 2004. Passed in the House of Representatives on 10February 2004. Introduced in the Senate on 7 March 2005. Passed in the Senate on 7 March 2005.



The amendments proposed by this Bill will allow irrigation water providers and rural land irrigation water providers toclaim accelerated decline in value deductions for eligible capital expenditure.

The Bill also proposes to:

♦ amend the debt - equity provisions to ensure at-call loans made before 1 July 2005 do not become an equity interestuntil that date.

♦ broaden the fringe benefits tax exemption for the purchase of a new dwelling as a result of relocation; and

♦ amend the provisions for accessing the fringe benefits tax exemption for incidental purchase costs associated withthe acquisition of a dwelling as a result of relocation.

Editor:

The promised small business carve out from the debt equity provision is not in this Bill.

(c) Bills Laid AsideNil

(d) Bills Before Parliament

(1) * Superannuation Legislation Amendment Bill 2004

Introduced to the House of Representatives on 17 November 2004. Passed in the House of Representatives on1 December 2004. Introduced to the Senate on 2 December 2004.




♦ amend the Superannuation Act 1976 and the Rules for the administration of the Public Sector SuperannuationScheme (PSS) to recognise that superannuation salary for the purposes of the Commonwealth SuperannuationScheme (CSS) and the PSS can be provided for in determinations that set remuneration for Secretaries ofDepartments and certain Australian Government office holders who are members of the CSS of the PSS; and

♦ confirm the validity of any such determinations of superannuation salary for the purposes of the CSS and the PSSthat have been made in the past under various Acts of Parliament. However, this validation of past determinationswill not reduce benefits already paid or continuing to be paid from the CSS or the PSS to or in respect of anyperson who was covered by those determinations.






Australian Parliament(73)



(2) ** Tax Laws Amendment (2004 Measures No. 7) Bill 2004

Introduced to the House of Representatives on 8 December 2004.


Explanatory Memorandum: http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1916&TABLE=EMS


♦ amend the Income Tax Assessment Act 1997:

− together with the Taxation Administration Act 1953 to introduce a 25 per cent entrepreneurs’ tax offset on theincome tax liability attributable to business income for small businesses in the simplified tax system (STS) thathave an annual turnover of $75,000 or less;

− to ensure that the roll-over relief available for partnerships under the uniform capital allowances regime inDivision 328 is also available in relation to depreciating assets allocated to simplified tax systems (STS) pools;

− together with the Income Tax (Transitional Provisions) Act 1997 to remove the requirement that taxpayers inthe simplified tax system (STS) must use the STS accounting method (generally referred to as a cash basis ofaccounting);

− to provide greater flexibility, reduce compliance costs and ongoing uncertainty surround family trust electionsand interposed entity elections;

♦ amend the Fringe Benefits Tax Assessment Act 1986 to increase the fringe benefits tax (FBT) exemption thresholdsfor long service award benefits;

♦ introduce an amendment to the Petroleum Resource Rent Tax Assessment Act 1987 to allow petroleum explorationcompanies conducting exploration work in a designated frontier area to obtain an uplift on expenditure incurred.These amendments will:

− enable the Minister responsible for the Petroleum (Submerged Lands) Act 1967 to allocate up to 20 per cent ofthe annual offshore petroleum acreage release areas as designated frontier areas; and

− apply a 150 per cent uplift to certain exploration expenditure conducted in the first term of an explorationpermit in a designated frontier area;

♦ amend the Income Tax Assessment Act 1936 to:

− allow taxpayers who have deferred the tax income tax liability on a discount received on shares or rightsacquired under an employee share schemes (ESS), to roll-over a taxing point that would otherwise occurbecause of a corporate restructure;

− correct a minor technical defect in Subdivision EA of Division 7A to ensure a loan from a trustee to ashareholder of a corporate beneficiary will not be treated as a deemed dividend if the loan is repaid before theearlier of the due date for lodgment or the date of lodgement of the trust’s income tax return for the year inwhich the loan is made;

− allow revocation of unused provisional certificates issued under Division 10BA in respect of certain filmprojects;

− enable those projects to then apply for the tax offset for large scale films contained in Division 376 of theIncome Tax Assessment Act 1997 (ITAA 1997); and

− amend Division 7A to allow a loan from a private company to be repaid or put on a commercial footing beforethe earlier of the due date for lodgement and the date of lodgement of the private company’s income tax returnfor the income year in which the loan is made in order to avoid being treated as a deemed dividend;

♦ make minor corrections and amendments to the taxation laws as part of the Government’s ongoing commitment toimprove the quality of the taxation laws to fix errors such as duplications of definitions, missing asterisks fromdefined terms, incorrect numbering and referencing and outdated guide material; and

♦ provide greater flexibility, clarify certain aspects of the consolidation regime and ensure that the regime interactsappropriately with other aspects of the income tax law;


http://parlinfoweb.aph.gov.au/piweb/view_document.aspx?ID=1916&TABLE=EMS



April 2005

(03) 9654 9777



(3) Appropriation (Parliamentary Department) Bill (No. 2) 2004-2005

Introduced to the House of Representatives on 10 February 2005. Passed in the House of Representatives on 9March 2005. Introduced in the Senate on 10 march 2005.

Bill: http://parlinfoweb.aph.gov.au/piweb/Repository/Legis/Bills/Linked/10020507.pdf

Explanatory Memorandum: Not available

(4) Appropriation Bill (No. 3) 2004-2005

Introduced to the House of Representatives on 10 February 2005. Passed in the House of Representatives on 9March 2005. Introduced in the Senate on 10 March 2005.



(5) Appropriation Bill (No. 4) 2004-2005

Introduced to the House of Representatives on 10 February 2005.



(6) Tax Laws Amendment (2005 Measures No. 1) Bill 2005

Introduced to the House of Representatives on 10 February 2005. Passed in the House of Representatives on 16February 2005. Introduced in the Senate on 7 March 2005.


Explanatory Memorandum: http://parlinfoweb.aph.gov.au/PIWeb/view_document.aspx?id=1945&table=EMS


♦ amend the Fringe Benefit Tax Assessment Act 1986 to provide a fringe benefits tax (FBT) exemption to cover theengagement of a relocation consultant to assist in the relocation of an employee;

♦ amend the Income Tax Assessment Act 1997 to introduce statutory `caps' that will be the effective life used tocalculate the decline in value of those assets if:

− the taxpayer chooses to adopt the effective life determined by the Commissioner for a particular asset; and

− the cap (if any) that applies to that asset is shorter than the effective life determined by the Commissioner.

♦ amend the Income Tax Assessment Act 1997 to introduce a tax offset for workers aged 55 years and over.Eligibility for the offset will be based on age and net income from working, with a maximum annual tax offset of$500.

♦ amend the A New Tax System (Goods and Services Tax) Act 1999 to ensure that the goods and services tax appliesto transactions involving non-residents who supply options or rights to things which are connected with Australia;

(e) Regulations PromulgatedNil

http://parlinfoweb.aph.gov.au/piweb/Repository/Legis/Bills/Linked/10020507.pdf




http://parlinfoweb.aph.gov.au/PIWeb/view_document.aspx?id=1945&table=EMS

LegislationComplimentary Edition (75)



7.2 STATE PARLIAMENTSSource: Various State Parliament Websites (593520)

Due Date 11/03/2005 VIC NSW TAS QLD SA WA ACT NT

Category 7.2 Legn 10/12 10/12 10/12 10/12 10/12 10/12 10/12 10/12

Updating completed *11/03/2005 Regs 10/12 10/12 10/12 10/12 10/12 10/12 10/12 10/12

* unless otherwise indicated

www.dms.dpc.vic.gov.au www.parliament.wa.gov.au

www.parliament.nsw.gov.au www.parliament.sa.gov.au

www.parliament.qld.gov.au www.legassembly.act.gov.au

www.parliament.tas.gov.au www.nt.gov.au

These legislation notes were prepared by Jane Baquie of Hall & Wilcox, Lawyers and were current as at 11 March 2005except where later dates are specified. Telephone: 9603 3552.

(a) Victoriawww.dms.dpc.vic.gov.au

Nil

(b) New South Waleswww.parliament.nsw.gov.au

Nil

(1) * Superannuation Legislation Amendment Bill 2004

Bill: http://www.parliament.nsw.gov.au/prod/parlment/nswbills.nsf/0/85e892409123ccabca256f47002e4e2d/$FILE/b04-093-07-p02.pdf

Explanatory Memorandum:http://research.lawlex.com.au/default.asp?itid=0&ntid=0&nid=&cid=80926&jurid=&alpha=&alphaid=&ihl=&nhl=&fp=&rdt=&vaftype=&requirelogin=&tab=ind&pact=coredoc&top=exp&nav=col&docview=true&RelDocID=80665

Introduced to Legislative Assembly on 10 November 2004. Passed in Legislative Council on 7 December 2004.Introduced in the Legislative Council on 7 December 2004.

The Bill proposes to amend various public sector superannuation Acts with respect to police hurt on duty benefits, deathbenefits, deferral and payment of benefits as a result of Government initiatives, adjustment of employer reserves,payment of Commonwealth co-contributions into public sector superannuation schemes, dispute procedures, and forother purposes.

(c) Queenslandwww.parliament.qld.gov.au

Please Note: Queensland only has one House of Parliament.

Nil

(d) Western Australiawww.parliament.wa.gov.au

Nil

http://www.parliament.nsw.gov.au/prod/parlment/nswbills.nsf/0/85e892409123ccabca256f47002e4e2d/$FILE/b04-093-07-p02.pdf

http://research.lawlex.com.au/default.asp?itid=0&ntid=0&nid=&cid=80926&jurid=&alpha=&alphaid=&ihl=&nhl=&fp=&rdt=&vaftype=&requirelogin=&tab=ind&pact=coredoc&top=exp

Legislation(76)State Parliaments


April 2005

(03) 9654 9777



(e) Australian Capital Territorywww.legassembly.act.gov.au

Please Note: Australian Capital Territory only has one house of Parliament

(1) * Mineral Resources and Other Legislation Amendment Bill 2004

Bill: http://www.legislation.qld.gov.au/Bills/51PDF/2004/MROLAB04.pdf

Explanatory Memorandum: http://www.legislation.qld.gov.au/Bills/51PDF/2004/MROLAB04Exp.pdf

Introduced to Legislative Assembly on 23 November 2004. Passed in the legislative assembly on 9 March 2005.

This Bill, amongst other things, proposes to provide for the merger of the Queensland Coal and Oil Shole MiningIndustry Superannuation Fund with the COALSUPER Retirement Income Fund in New South Wales to formAUSCOAL Superannuation Fund through:

♦ altering the definition of the term, superannuation fund;

♦ inserting a transitional provision to allow the merger to commence on 1 January 2005; and

♦ updating the title of a federal award referred to in sections 3(3)(b) and (4)(b) of the Coal and Oil Shole MineWorkers' Superannuation Act 1989.

(2) Appropriation Bill 2004-2005 (No. 2) 2005

Bill: http://www.legislation.act.gov.au/b/db_16018/current/pdf/db_16018.pdf

Explanatory Memorandum: http://www.legislation.act.gov.au/b/db_16018/current/pdf/db_16018.pdf

Introduced to the Legislative Assembly on 17 February 2005.

This Bill proposes to appropriate moneys for the financial year 2004-2005.

(f) South Australiawww.parliament.sa.gov.au

(1) * Parliamentary Superannuation (Scheme for New Members) Amendment Bill 2004

Bill: http://www.parliament.sa.gov.au/Catalog/HABills/504/50-04-033.htm?sfgdata=4

Explanatory Memorandum: not available

Introduced to the Legislative Assembly on 25 October 2004. Passed in the Legislative Assembly on 28 February2005. Introduced to the Legislative Council on 1 March 2005

This Bill proposes to amend the Parliamentary Superannuation Act 1974 by closing the existing superannuation schemewhich provides indexed pensions to members who leave Parliament, and introducing a new scheme for memberselected at or after the next election which shall be an accumulation scheme similar to the schemes generally available tothe wider community.

Some further amendments are proposed that will allow members to be able to pay a surcharge debt out of their lumpsum superannuation benefits, together with some minor technical amendments.

(2) * Superannuation Funds Management Corporation of South Australia (Miscellaneous)Amendment Bill 2004

Bill: http://www.parliament.sa.gov.au/Catalog/LCBills/504/50-04-026.htm?sfgdata=4

Explanatory Memorandum: http://www.parliament.sa.gov.au/Internet/DesktopModules/Display.aspx?CALLER=1...

Introduced to the Legislative Council on 10 November 2004.

This Bill proposes to amend the Superannuation Funds Management Corporation of South Australia Act 1995 to:

http://www.legislation.qld.gov.au/Bills/51PDF/2004/MROLAB04.pdf

http://www.legislation.qld.gov.au/Bills/51PDF/2004/MROLAB04Exp.pdf

http://www.legislation.act.gov.au/b/db_16018/current/pdf/db_16018.pdf

http://www.legislation.act.gov.au/b/db_16018/current/pdf/db_16018.pdf

http://www.parliament.sa.gov.au/Catalog/HABills/504/50-04-033.htm?sfgdata=4

http://www.parliament.sa.gov.au/Catalog/LCBills/504/50-04-026.htm?sfgdata=4

http://www.parliament.sa.gov.au/Internet/DesktopModules/Display.aspx?CALLER=1


State Parliaments(77)



♦ improve governance arrangements for the Superannuation Funds Management Corporation of South Australia,known as “Funds SA”;

♦ extend Funds SA’s functions regarding the management and investment of funds on behalf of Government andrelated bodies;

♦ extend the Governor’s power to remove Government nominated directors; and

♦ provide the Treasurer with the power of direction and control in relation to the functions of Funds SA withlimitations.

(g) Tasmaniawww.parliament.tas.gov.au

Nil

(h) Northern Territorywww.nt.gov.au

Please Note: The Northern Territory only has one House of Parliament

(1) * Taxation (Administration) Amendment (Objections and Appeals) Act No. 5 of 2005

Bill: http://notes.nt.gov.au/dcm/legislat/Acts.nsf/8951faff2d9faeaa692565610018f15c/4045973a4c0cc57d69256f610080c1fa?OpenDocument&ExpandSection=2 - _Section2

Introduced to the Legislative Assembly on 1 December 2004. Passed in Legislative Assembly on 9 February 2005.Received Royal Assent on 4 March 2005.

This Bill proposes to provide for the establishment of an independent appeals process from the decisions of theTaxation Commissioner. The forum to provide an alternative and inexpensive option to appeal objection decisions ofthe Commissioner of Taxes or Mineral Royalty Secretary will be named the Taxation and Royalty Appeals Tribunal.

Applicants will be able to submit to the Tribunal objections to the following decisions:

♦ stamp duty;

♦ payroll tax; and

♦ mineral royalties.

The Tribunal will be constituted by the Chief Magistrate, together with another Magistrate who will be chaired by theChief Magistrate.

The Bill then sets out the proper practices and procedures that applicants and Tribunal members must comply with.

http://notes.nt.gov.au/dcm/legislat/Acts.nsf/8951faff2d9faeaa692565610018f15c/4045973a4c0cc57d69256f610080c1fa?OpenDocument&ExpandSection=2

(78)Appeals


April 2005

(03) 9654 9777



Appeals as at: 11 March 2005

Source: Federal Court Website (617553)

http://www.fedcourt.gov.au/ctlists/ctlists_appeals.html

These appeal notes were prepared by Jane Baquie of Hall & Wilcox, Lawyers. Telephone: 9603 3552

(1) ACP Publishing Pty Limited v C of T [2004]FCA 874

Topic: Goods and Services Tax (GST)Filed: Q146/04; 27/07/2004Status: Judgment ReservedNext Listing date: N/A

(2) Avon Products Pty Limited v Federal C of T[2004] FCA 475Topic: Sales TaxFiled: N764/04, 14/05/2004Status: New Party DetailsNext Listing date: 11/01/05

(3) * Commonwealth Bank OfficersSuperannuation Corporation Pty Limited v C ofT [2003] FCA 794Topic: SuperannuationFiled: N939/03; 07/08/2003Status: JudgmentNext Listing date: 31/07/03

(4) Idlecroft v C of T [2004] FCA 1087(Ansonguard Pty Limited v C of T; Avirob Pty Limitedv C of T; Maurice Hannon Nominees Pty Limited v Cof T; Reibelt Investments Pty Limited v C of T)Topic: Income TaxFiled: Q179/04, Q180/04, Q181/04, Q182/04, Q183/04,Q184/04, Q185/04, Q186/04; 13/09/2004Status: Judgment ReservedNext Listing date: N/A

(5) Lopez v Deputy C of T [2004] FCA 756Topic: Income TaxFiled: W154/04; 06/07/2004Status: Order MadeNext Listing date: 10/11/04

(6) Macquarie Finance Limited v C of T [2004] FCA1170Topic: Taxation AdministrationFiled: NSD 1439/2004; 05/10/2004Status: Judgment ReservedNext Listing date: N/A

(7) Marijancevic v Deputy C of T [2004] FCA 1084Topic: TaxationFiled: VID1087/2004; 07/09/2004Status: Notice of AppealNext Listing date: 04/11/04

(8) McDermott Industries (Aust) Pty Limited v C ofT [2004] FCA 1044Topic: Income TaxFiled: W209/04; 02/09/2004Status: Judgement ReservedNext Listing date: N/A

(9) McNeil v C of T [2004] FCA 420Topic: Income TaxFiled: N671/04; 05/05/2004Status: Judgement ReservedNext Listing date: N/A

(10) * Phillips v Commissioner for Superannuation[2004] FCA 28Topic: SuperannuationFiled: Q39/04; 20/02/2004Status: JudgmentNext Listing date: 11/02/05

(11) Ramsden v Federal C of T [2004] FCA 681Topic: Taxation AdministrationFiled: Q97/04; Q98/04; Q99/04; 17/06/2004Status: Judgment ReservedNext Listing date: N/A

(12) Smith v Club Plus Superannuation Pty Limited[2004] FCA 1519Topic: SuperannuationFiled: NSD1879/04; 07/07/2004Status: Settling Index and Appeal PapersNext Listing date: 02/03/05

http://www.fedcourt.gov.au/ctlists/ctlists_appeals.html




DISCLAIMER

The material in these Tax Update Notes is published on the basis that the opinions expressed are not tobe regarded as the official opinions of any of Hall & Wilcox Lawyers, H&W Training Pty Limited orTax Matrix Pty Limited. These Tax Update Notes should not used or treated as professional advice andreaders should rely on their own inquiries in making any decisions concerning their own interests.

© 2005 H&W etc - a division of Tax Matrix Pty Limited. These Tax Update Notes are not tobe reproduced in whole or part without the written permission of Tax Matrix Pty LimitedABN 33 101 349 900.

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