Ken Mansell

Senior Tax Trainer

Chartered Accountants Australia & New Zealand

S17 Latest key tax developments

Tax Bill (2015 Measures No 6) now law

TSLA (2015 Measures No 6) Act 2015

• Look-through earnout rights – CGT treatment from 24 April 2015

• Foreign resident CGT withholding regime from 1 July 2016.

Tax Bill (2015 Measures No 6) now law

TSLA (2015 Measures No 6) Act 2015

• Look-through earnout rights – CGT treatment from 24 April 2015

• Foreign resident CGT withholding regime from 1 July 2016.

Business

Sale

Yr

0

Yr2Yr1$100

k

$200kYr3

Earnout

Payment

12 month

discount

Div 152

concessions

Earnout Right

Div 152

concessions

Tax Bill (2015 Measures No 6) now law

TSLA (2015 Measures No 6) Act 2015

• Look-through earnout rights – CGT treatment from 24 April 2015

• Foreign resident CGT withholding regime from 1 July 2016.

Your client

Property

$2.0m+

Owns

Selling

Negotiations

Vendor

NR

Agent

ATORemit

Small business restructure roll-over now law

TLA (Small Business Restructure Roll-over) Act 2016

• Optional roll-over relief for:

– Active assets; transferred between

– Small business entities; as part of a

– Genuine restructure of an ongoing business

• Start date: 1 July 2016.

Mum & Dad

100%

CGT assets

Dep’n assets

Trading stock

Revenue assets

Mum & Dad

100%

New EntityOld entity

$2m T/O

$6m NAVGenuine restructure

3 years

GST and digital products

T&SLA (2016 Measures No 1) Act 2016

Contains amendments on:

• GST treatment of digital products and other services

• GST treatment of cross-border transactions between businesses

• Farm management deposits (FMDs).

Innovation tax incentives

TLA (Tax Incentives for Innovation) Act 2016

Tax incentives for investors in:

• Early stage innovation companies; and

• Venture capital investment.

Optus share buy-back

Cable & Wireless Australia & Pacific Holding (in liq) v FCT [2016] FCA 78

• Non-resident taxpayer got $3.9bn from Optus for share buy-back

• Amount debited to ‘Buy-back Reserve’ account

• Taxpayer claimed it was a form of ‘Share Capital’ account

• Taxpayer sought refund of $452m withheld

• Federal Court held amount correctly withheld - $3.9bn was paid out of profits.

No share trading business

Re Devi v FCT [2016] AATA 67

• Childcare worker turned over $600,000 in share transactions

• $20,000 loss incurred

• AAT found taxpayer was an investor, not a share trader

• No deduction for losses allowed

• Transactions not regular, systematic or sophisticated

Cents per km car deductions

TLA (2016 Measures No 1) Regulation 2016

• Repeals cents per km rates based on engine capacity

• From 2015-16, a single rate ($0.66 per business km) applies

• FCT has power to set rates from 2016-17.

Interest expense had no nexus with income

Re Jarvis v FCT [2016] AATA 99

• Couple sought interest deductions on home loan facility

• AAT held interest not deductible

• No nexus with taxpayer’s income

• Business carried on by other entities

Bank

Jarvis

BusinessTrading

entity

Homeloan

$ re-draw@ interest $ on-lent

i-free

$ usedin business

Easier access to company losses

Exposure draft legislation

• Same business test will continue to exists for companies

• Supplemental test to allow access losses if satisfy a ‘similar business test’

• Allow companies to seek opportunities to innovate

$2.0m turnover test and Division 152

Re PFGG v FCT [2015] AATA 972

• $5.4m capital gain from sale of mining tenements

• AAT found taxpayer not entitled to CGT small business concessions

• Small business entity test failed

• Annual turnover of connected entity over $2.0m

• Reimbursement of fuel expenses was ordinary income ($55k = 2.5%)

• Taxpayer has appealed to the Federal Court

$6.0m NAV test and Division 152

Breakwell v FCT [2015] FCA 1471

• Taxpayer made capital gain in 2008 via sale of business by trust

• Taxpayer owed over $2m to a related trust, including $1.1m pre Div 7A debt

• Argued these were not assets of trust, not included in $6.0m NAV test

• Federal Court dismissed taxpayer’s appeal

• Held that loans included in NAV test of trust – not statute-barred.

Debt owed

(Statute Barred)

ETUT FDT

Mr

Breakwell

Connected

entities

Business

100%

Purchaser Sold

CGT

distributed

CGT distributed

Net Assets > $NAV

$6.0m NAV test and Division 152

Re Miley v FCT [2016] AATA 73

• 3 equal shareholders sold 100% of shares to arm’s length buyer

• Taxpayer’s share of proceeds: $5.9m

• Issue whether taxpayer satisfied $6.0m NAV test

• AAT held MV of shares was reduced by 16% to reflect minority shareholding

Billy

Ray

1/3rd

Liam Miley

1/3rd 1/3rd

ABC Co Pty Ltd 3rd party

buyer

All selling shares to 3rd party

90% SBP test and Division 152

FCT v Devuba Pty Ltd [2015] FCAFC 168

• Company claimed Div 152 concessions re sale of shares in another company

• FCT argued concessions not available due to dividend access share

• AAT held concessions available - 90% SBP test passed by company

• Full Court dismissed FCT’s appeal

• Court held dividend couldn’t be declared to dividend access shareholder

Requirement Passed?

CGT event Yes

CGT gain Yes

$2m T/O or $6m NAV test Yes

Active assets Yes

CGT concession stakeholder N/A

90% SBP ???

Trading Co

Pty Ltd

Devuba

Pty Ltd100%

Listed Co LtdListed Co buys Devuba’s shares in Trading Co.Devuba wants Div 152 concessions

Dad – 85 A Class sharesMum – 15 Z Class DAS shares

Allocable cost of pre-CGT assets

Financial Synergy Holdings Pty Ltd v FCT [2016] FCAFC 31

• Taxpayer won appeal against decision re allocable cost of pre-CGT assets

• Full Federal Court held MV of cost base for ACA determined at joining time

• This was at date of acquisition by consolidated group

FDT

Pre-

CGT

Div 122 rollover

07/1985

Trading Co

FSH Pty

LtdDiv 126 rollover }

$1.56m

07/198

5

10/1985

$30.0m

Consolidated

group

ACA calcs

07/2007

SBRR and ‘genuine restructures’

LCG 2016/D2 and LCG 2016/D3

• LCG 2016/D2 explains consequences of choosing roll-over

– Div 7A 1936 not turned off

• LCG 2016/D3 explains

– ‘Genuine restructure of an ongoing business’

– ATO will check contrived & unduly tax-driven restructures

SBRR and ‘genuine restructures’

LCG 2016/D2 and LCG 2016/D3

LCG 2016/D2 explains consequences of choosing roll-over

– Div 7A 1936 not turned off.

LCG 2016/D3 explains

– ‘Genuine restructure of an ongoing business’

– ATO will check contrived & unduly tax driven restructures

Example

Family Co Pty Ltd transfers a factory to Family Trust for $260,000. The whole amount is via

a Division 7A loan for $260,000. This is a valid Div 7A loan. Failure by Family Trust to

make Div 7A loan repayments will trigger deemed dividends.

SBRR and ‘genuine restructures’LCG 2016/D2 and LCG 2016/D3

LCG 2016/D2 explains consequences of choosing roll-over

– Div 7A 1936 not turned off.

LCG 2016/D3 explains

– ‘Genuine restructure of an ongoing business’

– ATO will check contrived & unduly tax-driven restructures

Example

Dad owns Fish&Chips Pty Ltd. Under SBR roll-over, transfers “Chip” business to Chips Pty Ltd. Now,

Dad owns 2 companies. 12 months later, transfers shares in Chips Pty Ltd to son.

Not “genuine restructure of an ongoing business.” It was a form of succession planning.

Fish&Chips Pty Ltd retrospectively fails SBR rollover.

Fish&Chips Pty Ltd now pays tax on asset transfer.

R&D tax incentive

New ATO checklist

ATO has released a new checklist for R&D tax incentive claimants to:

• Self-assess eligibility

• Source advice on record-keeping requirements

• Correct mistakes and challenge decisions

Testing drug's safety was core R&D activity

Re JLSP v Innovation Australia [2016] AATA 23

• Taxpayer an Australian-based company in global drug research group

• Ran clinical trial of client's drug in Australia

• AAT found taxpayer conducted core R&D activity:

– Experimental

– Substantial purpose of trial to generate new knowledge

• AAT disagreed with Innovation Australia that purpose must be dominant

FBT rates, thresholds for 2017

Annual refresh

• TD 2016/1: Indexation factors for valuing non-remote housing

• TD 2016/2: FBT record-keeping exemption threshold - $8,286

• TD 2016/3: Cents-per-km rates for vehicles other than cars

• TD 2016/4: Weekly amounts for food and drink expenses of employees receiving LAFHA

• TD 2016/5: Benchmark interest rate - 5.65% pa

• TD 2016/7: Car parking threshold is $8.48.

GST adjustments for windfall gains

GSTD 2016/D1

• Increasing adjustment for supply can give rise to excess GST

• Division 142 of GST Act prevents refund of excess GST if excess passed on to

customer & supplier not reimbursed.

Consumer

Supplier

ATO

Refund GST

(‘Reimbursed’)

Sale

(GST ‘passed on’)

GST previously remitted,

now can be refunded

Sale

GST remitted

Dispute over contract for sale of land

SAMM Property Holdings Ltd v Shaye Properties Ltd [2016] NSWSC 362

• Was contract GST inclusive or GST exclusive?

• NSW Supreme Court ordered a contract for sale of property be rectified to

reflect common intention of parties that purchase price was exclusive of GST

GST treatment of digital currency

Discussion paper

• GST treatment of digital currency (e.g. bitcoin)

• Potential approaches available to

– Identify digital currencies in GST law; and

– Change GST treatment to remove “double GST ”

Accommodation in commercial premises

Castan Investments Unit Trust and FCT [2016] AATA 298

• AAT has affirmed an objection decision of FCT re GST on supply of

accommodation

• AAT said only issue it was required to determine was whether supply of

accommodation was correctly described

• It held taxpayer failed to discharge the onus of proof

Pharmacies claiming large GST refunds

ATO information

• ATO gives help to pharmacies to avoid delays in processing large GST refunds

due to recent changes to the PBS

• It says to reduce the likelihood of undue delays in processing, pharmacies’

contact and financial institution details should be up to date

ATO replacing ELS lodgment service

Standard Business Reporting system

• From July 2016, ELS will be replaced with SBR-enabled practitioner lodgment

service for all tax-related returns and tax-related statements

• ELS to be kept as safety net until 31 March 2017

Trustee had power to apply trust capital

Fischer v Nemeske Pty Ltd [2016] HCA 11

• High Court dismissed an appeal in a matter involving trustee powers

• Held trustee validly exercised a power to apply trust capital or income by

creating a debt reflecting value of shares held

Dr Cr

XYZ Shares 3,904,300

Asset revaluation reserve 3,904,300

Asset revaluation reserve 3,904,300

Mr & Mrs Beneficiary 3,904,300

Definitions of employee and contractor

House of Representatives Committee report

House of Reps Committee on Education & Employment recommended that:

• ATO & Fair Work Ombudsman to align definitions of employee and contractor

across government agencies

• Productivity Commission investigates impact on small business of lowering GST

threshold on importation of physical goods

• Government reassesses policy case for taxing GRPs of persons over 65.

Data matching

ATO scoping future audit activity

ATO has announced data matching programs on:

• Electoral rolls

• Contractor payments 2016-19

• Merchants – specialised payments systems 2014-17

• Credit and debit cards 2014-15

Transfer pricing

Simplified transfer pricing record-keeping

• ATO has updated FAQs about simplifying transfer pricing record-keeping

• Some of the questions featured include:

– What happens when simplified transfer pricing record-keeping option is

applied?

– Branch, trust, partnership application of simplification options

Transfer pricing

PSLA 2016/1

• It provides guidance to ATO staff when they are proposing transfer pricing

adjustments involving imported purchases with potential customs implications

• It applies from 14 April 2016.

Public benevolent institution

ACNC draft interpretation statement

• ACNC has released a draft interpretation statement on PBIs

• It sets out views on what “public”, “benevolent” and “institution” mean for ACNC

purposes.

ATO warns about iTunes scams

Latest telephone scam

• ATO is reminding public to be alert to scammers impersonating the ATO

demanding iTunes gift cards as a form of tax debt payment

• Over the past month 8,692 phone scam reports were received

• ATO said it also recently received reports of not only iTunes cards but also pre-

paid Visa gift cards

• It says ATO will never request payment of a tax debt via pre-paid or gift cards

Property developers and trusts

ATO audit focus

• ATO is continuing to focus on trusts developing and selling properties as part of

their normal business

• It said some trusts are incorrectly claiming the 50% CGT discount when

developed properties are sold

• ATO said it has escalated 75% of cases reviewed for audit and have received

voluntary disclosures

Property transfers and pre-filling

Automatic reporting

• From 1 July 2016, all state revenue collection agencies will report transfers of

freehold or leasehold interests to ATO

• ATO uses information to expand its CGT data matching

• ATO will also be make this information available through pre-filling

Non-profit foundations and evasion

TA 2016/5

• Purported tax-exempt non-profit “foundations” used to evade tax

• ATO reviewing arrangements where taxpayers stream income through a

foundation that is treated as not being subject to tax

PSI diverted to SMSF

TA 2016/6

• Diverting PSI to a SMSF

• FCT considers that such arrangements may be ineffective at alienating PSI

• It also notes amount received by the SMSF may be non-arm’s length income.

Entity

Client

Client makes paymentto entity

related to individual

Earnings distributedto SMSF

Individual providespersonal services

SMSF has ownership interest in entity

IndividualSMSF

Decision impact statement

Orica Limited v FCT [2015] FCA 1399

• ATO won pre-2013 Part IVA case

• Federal Court held dominant purpose of intra-group refinancing arrangement

with US subsidiary was to obtain deductions

• Claim that Head Co could have used group losses dismissed

• ATO says case shows Part IVA can apply to artificial arrangements that shift

taxable profits from Australian tax base

Decision impact statement

Norman Superannuation Fund and FCT [2015] AATA 914

• Related trusts sold, re-acquired publicly listed shares on same day

• Under scheme, trustees received 2 dividends & double imputation benefits to

negate tax liability

• S.177EA of Part IVA held to applied to deny additional imputation benefits

• ATO says new dividend washing rules in S.207-157 now remove need to make

S.177EA determination