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Year-end tax planning toolkit

For the year ending 30 June 2017

The contents of this document are for general information only and do not consider your personal circumstances or situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.

The contents of this document does not constitute financial product advice and should not be used in making a decision with respect to a financial product. Taxation is only one of the matters that must be considered when making a decision on a financial product. You should consider seeking financial advice from the holder of an Australian Financial Services License before making a decision on a financial product.

If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage arising from reliance upon any information contained in this document.

© Pitcher Partners Advisors Proprietary Limited, June 2017. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Table of contents

4

Year-end tax planning toolkit – 2016/17

Glossary ACA Allocable cost amount

AMIT Attribution managed investment trust

ATO Australian Taxation Office

BAS Business activity statement

CFC Controlled foreign company

CFI Conduit foreign income

CGT Capital gains tax

CIV Collective investment vehicle

CRS Common Reporting Standard

DTA Double tax agreement

ESIC Early stage investment company

ESS Employee share scheme

ESVCLP Early stage venture capital limited partnership

ETP Eligible termination payment

FAT Financial acquisitions threshold

FATCA Foreign Account Compliance Act

FBT Fringe benefits tax

FITO Foreign income tax offset

FTDT Family trust distributions tax

FTE Family trust election

GST Goods and services tax

HELP Higher Education Loan Program

IDS International Dealings Schedule

IEE Interposed entity election

IGA Inter-governmental agreement

IMR Investment manager regime

LAFH Living away from home

LISC Low income superannuation contribution

MIT Managed investment trust

MLR Minimum loan repayments


5

Glossary (continued) MLS Medicare levy surcharge

NANE Non-assessable non-exempt

OTE Ordinary time earnings

PAF Private ancillary fund

PAYG Pay-as-you-go

PE Permanent establishment

Pitcher Partners Pitcher Partners Advisors Proprietary Limited

PSB Personal services business

PSI Personal services income

RSA Retirement savings account

R&D Research and development

RITC Reduced input tax credit

RTP Reportable tax position

SBE Small business entity

SG Superannuation guarantee

TFN Tax file number

TOFA Taxation of Financial Arrangements

TSL Trade Support Loan

UPE Unpaid present entitlement

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1. Introduction

Welcome to the Pitcher Partners

30 June 2017 year-end tax planning toolkit.

Year-end tax planning

As the financial year draws to a close, it is time to start thinking about whether your year-end tax planning is in order.

Tax planning not only requires consideration of income and deductions for the year, but also requires you to consider

whether your compliance requirements have been met. This includes whether appropriate elections are made within

the time requirements, the preparation and maintenance of appropriate documentation (such as trust minutes) and

forward planning of your tax affairs. Our tax toolkit is here to assist you in this process.

Interactive PDF

This document has been created as an interactive PDF. This means you can check boxes, record notes and submit this

back to Pitcher Partners for discussion.

What this document does

This document provides an outline of tax issues that can be considered before year-end. This document has been

updated for new developments and, where relevant, the 2017/18 Budget announcements. This toolkit is specifically

tailored for taxpayers in the middle market and includes checklists covering both corporate taxpayers and private

groups.

What this document doesn’t do

This toolkit is not intended to be a comprehensive and complete document covering all taxation issues that require

consideration. Every taxpayer’s circumstances are unique. This document is only intended to provide you with a broad

overview of a range of issues for consideration before the end of the financial year.

Take care about tax planning

Tax planning may often result in a taxpayer paying less income tax in a given income year. It is noted that the

definition of a tax benefit under the tax anti-avoidance provisions is broad enough to cover a deferral of income tax.

Therefore, the tax anti-avoidance provisions must always be considered as part of your year-end tax planning. We

have highlighted a number of anti-avoidance or integrity provisions for your consideration in Section 13 of this toolkit.

How will you find what you are looking for?

To assist you in quickly locating the area of tax that is relevant to you, this document has been divided into sections.

The sections either relate to a specific type of taxpayer (for example, a company or trust) or to a specific tax topic (for

example, capital gains tax). Further, Section 2 of this toolkit provides a summary of all of the questions contained in

Sections 3 to 13 of this toolkit. The following diagram is a simplified outline of how this toolkit is arranged.

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We trust you will find this document useful when considering your 30 June 2017 tax planning. Please talk to your Pitcher Partners representative if you would like more information or clarification of some of the issues raised in this document.

Disclaimer

The contents of this document are for general information only and do not consider your personal circumstances or

situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or

explanations have been summarised and simplified. This document is not intended to be used, and should not be used,

as professional advice.

The contents of this document do not constitute financial product advice and should not be used in making a decision

with respect to a financial product. Taxation is only one of the matters that must be considered when making a

decision on a financial product. You should consider seeking financial advice from the holder of an Australian Financial

Services License before making a decision on a financial product.

If you have any questions, or are interested in considering any item contained in this document, please consult with

your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners

disclaims all liability for any loss or damage arising from reliance upon any information contained in this document.

© Pitcher Partners Advisors Proprietary Limited, June 2017. All rights reserved. Pitcher Partners is an association of

independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Income

[Section 3]

Deductions

[Section 4] CORE SECTIONS

SUMMARISED YEAR-END TAX PLANNING CHECKLIST

[Section 2]

Trusts

[Section 6]

Companies

[Section 7]

Partnerships

[Section 8]

Individuals

[Section 5]

ENTITY SPECIFIC QUESTIONS

Capital gains tax

[Section 9]

International tax

[Section 11]

Super, GST & state taxes

[Section 12]

Finance issues

[Section 10]

SPECIALIST TOPIC QUESTIONS

Integrity provisions

[Section 13]


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2. Summary checklist

Enter your details

If you are completing this document as a checklist and wish to submit this back to your Pitcher Partners representative,

please complete your details in the following boxes.

Enter entity name .

Enter contact details .

Background

The following simplified checklist contains a high level summary of the planning items that are covered in more detail

in this toolkit. We have provided a reference link to the detailed discussion of each of these tax planning items.

We recommend that you work your way through this summarised checklist at first instance. Where items appear

relevant, those items should be “tagged” using the check boxes. The detailed item can then be reviewed in more detail

to determine whether the planning opportunity is relevant to your circumstances.

Income

This section deals specifically with the treatment of income that you may have received or derived during

the income year and whether such income should be attributed to the 2016/17 income year or included as

income in the 2017/18 income year and (or) subsequent years.

. General rules on income — Ensure that you have included all income derived during the 2016/17 income

year in your assessable income for that year. — Section 3A

. Business income — If you derive business sales income, you may be able to legitimately bring forward or

defer sales invoicing (in appropriate circumstances). — Section 3B

. Tax on business income — If you are a small business entity (“SBE”), your income could be subject to tax at

a lower tax rate (27.5% for a company or an 8% discount for an unincorporated business capped at $1,000)

in the year ending 30 June 2017. Businesses should consider the timing of income, franking credit impacts

and whether there are advantages in moving to a corporate structure. — Section 3C

. Accrued and unearned income — If there is accrued or unearned income in your accounts, you may be

able to defer recognition of that income for tax purposes. — Section 3D

. Trade incentives (purchase of stock) — Identify whether your business receives conditional discounts or

trade incentive discounts from your suppliers. If so, you may be able to defer recognition of this income for

taxation purposes. — Section 3E

. Trade incentives (sale of stock) — Identify whether your business provides unconditional discounts or

trade incentive discounts to your customers. If so, you may be able to reduce the income recorded for

taxation purposes by the discount component. — Section 3F

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. Customer disputed amounts — It may be possible to defer the recognition of disputed income amounts

until after the dispute has been settled. — Section 3G

. Construction contracts — Where you enter into construction contracts (that do not represent trading

stock), you may be able to utilise one of the income recognition methods allowed by the Australian

Taxation Office (“ATO”) for tax purposes. — Section 3H

. Proceeds of insurance and indemnities — If you have received insurance proceeds, you should examine

whether the proceeds should be included in assessable income and when these proceeds should be

brought to account. — Section 3I

. Grants, bounties and subsidies — If you have received grants, bounties or subsidies, you should examine

whether these should be included in assessable income and when these amounts should be brought to

account. — Section 3J

. Disaster relief — Concessionary tax treatment may apply to money that has been received in connection

with a natural disaster. In addition, the ATO have concessions for reconstructing records or making

reasonable estimates. — Section 3K

. Interest income — Examine the timing of interest income as interest is typically assessable on a receipts

basis (especially in respect of interest received around year-end). — Section 3L

. Dividend income — Dividends accrued may not be assessable at year-end if they are declared but not paid.

Ensure you also take franking credits into account in your tax planning. — Section 3M

. Retail premiums — Retail premiums received as a non-participating rights issue shareholder may be

treated as an unfranked dividend or a capital gain. — Section 3N

. Trust distributions — Year-end tax planning should take into account expected tax distributions from trusts

(rather than expected accounting or cash distribution amounts). — Section 3O

. Rental or leasing income — Consider whether rental income received is passive in nature (and therefore on

a cash basis) or is derived in carrying on a business (and therefore possibly on an accruals basis). This can

have an effect on the timing of income brought to account. — Section 3P

. Foreign taxes paid on your behalf — If you received income that has been subject to foreign tax, ensure

applicable foreign income tax offsets are claimed and foreign income is grossed-up for planning purposes.

— Section 3Q

. Income that is not otherwise assessable — Consider whether income received this year should be treated

as non-assessable. — Section 3R

. Personal services income — If you provide services through a trust or company, there is a risk that the

income could be attributed to you directly as PSI. You should consider these rules before year-end. —

Section 3S


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. Extraordinary items — If you are in receipt of extraordinary (or significant) amounts during the year, these

items should be examined closely. — Section 3T

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 3U

Deductions

This section deals specifically with the expenses that you may have incurred during the income year and

whether such expenses can give rise to a deduction for the 2016/17 income year or should be deferred

to the 2017/18 income year and/or subsequent years.

. General rules of deductibility — Consider all material expense items to determine whether there is any

risk that certain amounts may not be deductible. — Section 4A

. Capital expenditure — If you have identified non-deductible capital expenditure, you should consider

whether a deduction over time is available under the blackhole provisions or, alternatively, whether the

costs should be included in the cost base of an asset. An immediate deduction may be available for a

range of expenses incurred by a start-up business. — Section 4B

. Bad debt deductions — If you have doubtful debts, you can possibly bring forward a deduction if these

amounts can be written off as bad debts for tax purposes before 30 June 2017. — Section 4C

. Trading stock valuation — You can choose to value trading stock at year-end at cost, market selling

value, replacement value or obsolete stock value. This can have the effect of bringing forward

deductions or shifting amounts to the following year. — Section 4D

. Depreciating assets (all entities) — There are a number of options that allow you to accelerate

deductions for depreciation in respect of depreciating assets you hold. — Section 4E

. Depreciating assets (small business entities) — If you are a SBE (generally defined as a business with

aggregated turnover of less than $10 million), further tax incentives can apply to provide a higher

deduction for depreciation. — Section 4F

. Project pools — If you have identified non-deductible capital expenditure, you should consider whether

a deduction for capital expenditure is available over the life of the project as a project pool cost. —

Section 4G

. Rental properties (depreciating assets) — Consider the impact of the proposed new measures that will

limit plant and equipment depreciation claims from 9 May 2017. — Section 4H

. Rental properties (travel expenses) — Investors should consider whether deductions for travel expenses

are likely to be impacted by the new provisions starting from 1 July 2017. — Section 4I

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. Capitalised internal labour costs — Where you internally construct assets, you may be required to

capitalise labour costs for tax purposes. This may defer deductions claimed (i.e. over the effective life of

the asset). — Section 4J

. Commercial websites — If you have incurred costs with respect to a commercial website that you use in

your business, you may be able to claim deductions, or otherwise, claim depreciation. — Section 4K

. Employee bonuses — Consider whether your accrued employee bonuses for 30 June 2017 are

deductible in the current year, and review options to ensure a deduction can be claimed for the current

year. — Section 4L

. Earning exempt-type income — If you derive exempt-type income, a number of your expenses may be

non-deductible. This should be reviewed to determine the correct position. — Section 4M

. Foreign exchange gains and losses — Consider whether the foreign exchange provisions will give rise to

significant adjustments at year-end. Consider if there are any opportunities to reduce compliance under

the provisions by making certain elections before year-end. — Section 4N

. Gifts and donations — Review your deductions (or proposed deductions) for gifts and donations and

their impact on your tax losses. — Section 4O

. Interest deductions — If you have significant interest (or debt) costs during the year, you should

consider whether you are precluded from deducting these amounts. — Sections 4P and 10B

. Prepayments — Some prepayments may be fully deductible upfront if they are made by individuals and

small businesses or represent excluded expenditure. — Section 4Q

. Service and management fees to associated entities — If management fees and service fees are

charged between your group entities, you should ensure agreements and other relevant paperwork is in

effect before year-end and that the fees are commercially justifiable. — Section 4R

. Capital support payments — The ATO takes the view that capital support payments made by a parent to

its subsidiary will be on capital account and non-deductible. Accordingly, consider whether it is better to

structure the arrangement as an appropriate arm’s length service fee. — Section 4S

. Superannuation expenses — You may be able to claim a deduction for superannuation contributions by

paying the amounts to the fund (i.e. received by the super fund) before year-end. — Sections 4T and

12A

. Trade incentives (purchase of stock) — if you provide discounts and trade incentives on your sales,

these items are generally deductible at a different time for tax as compared to accounting. — Sections

4U


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. Tax loss incentive for designated infrastructure projects — If you are involved in large scale

infrastructure projects, there are provisions that can allow certain entities to recoup early stage losses

for approved projects. — Section 4V

. Related party deductions — Where tax planning arrangements involve related party transactions,

consider carefully the application of the anti-avoidance provisions as these may deny deductions to one

of the related parties. — Section 4W

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 4X

Individuals

This section considers specific year-end taxation issues associated with individuals.

. ATO compliance activity — The ATO are scrutinising claims made by individuals for work-related

expenses, rental property expenses and interest deductions on the private portion of loans. — Section

5A

.

Tax rates for the year ending 30 June 2017 — The tax rates for the year ending 30 June 2017 have

changed from those for the year ended 30 June 2016. For an individual resident taxpayer, $137,422 of

taxable income (which equates to a fully franked dividend of $96,195) provides an average tax rate of

30% for the year ending 30 June 2017 (including Medicare levy). — Section 5B

. Medicare levy — As part of tax planning, you should understand your Medicare levy payable and

consider any opportunities to reduce this levy. — Section 5B

. Temporary budget repair levy — Individuals with taxable income greater than $180,000 could consider

the impact of paying dividends before and after 30 June 2017, and could also consider salary sacrifice

arrangements for the period between 1 April 2017 and 30 June 2017 where the fringe benefits tax

(“FBT”) rate is equal to 47%. — Section 5B

. Distributions from corporate tax entities — Consider whether dividends should be paid from corporate

tax entities with turnover of between $10 million and $25 million before 30 June 2017 (due to the

potential loss of 2.5% of franking credits in the following year). — Section 5B

. Private health insurance rebate — The private health insurance rebate is adjusted for on the lodgement

of your income tax return. This can either increase or decrease the total amount payable. — Section 5C

. Rebates and offsets — There are a large number of rebates and offsets that may be available to reduce

tax payable. — Section 5D

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. Work expenses and substantiation — Ensure that you have kept appropriate records to substantiate

your deductions for work expenses. — Section 5E

. Work-related car expenses — Ensure that you record odometer readings for the year ending 30 June

2017 and consider maintaining a logbook (to maximise options for car expense deductions). — Section

5G

. Work-related travel expenses — Examine whether travel expenses (local, interstate, overseas) are

deductible and ensure the substantiation requirements are satisfied. — Section 5H

. Work-related clothing, laundry and cleaning expenses — Consider whether you can claim a deduction

for the cost of buying or cleaning: occupation specific or protective clothes; or unique, distinctive

uniforms. — Section 5I

. Other work-related expenses — Consider the deductibility of other work-related expenses including

home office expenses, occupancy expenses, work-related development and support, tools and

equipment and overtime meal allowance expenses. — Section 5J

. Work-related specific deductions for industries — If you work in a specific industry, you should consider

the ATO’s guide for that industry on work-related expenses. — Section 5K

. Self-education expenses — Review whether education expenses are deductible and consider the non-

deductible threshold of $250 which may apply. — Section 5L

. Work-related expenses you cannot claim — Review whether there are specific rules that will deny a

deduction for your work-related expenses. — Section 5M

. Tax offsets for investments in early stage venture capital limited partnerships and early stage

investment companies — Investing in an early stage venture capital limited partnership (“ESVCLP”) or

an early stage investment company (“ESIC”) may provide you with a non-refundable carry-forward tax

offset to reduce your tax payable for the year ending 30 June 2017. — Section 5N

. Prepaying expenses — Consider whether you can prepay certain expenses before 30 June 2017 and

bring forward tax deductions to the current income year. — Section 5O

. Salary sacrifice arrangements — Ensure that you have appropriately considered the requirements for an

effective salary sacrifice arrangement (for example, into superannuation). — Section 5P

. Employee share schemes — If you have received shares and/or options/rights as an employee, you need

to consider the employee share scheme (“ESS”) provisions and whether an amount will be assessable to

you. — Section 5Q

. Foreign employment income — If you have received foreign employment income, you should consider

the income tax and FBT consequences. — Section 5R


15


. Non-commercial losses — If you carry on business as a sole trader, losses arising from the business

activity may not be deductible under the non-commercial loss provisions. — Section 5S

. Personal services income — Where you have provided services, you need to consider the possible

application of the PSI rules and how this may affect your income and deductions. — Section 5T

. Living away from home — You should carefully review amounts received in respect of a living away from

home (“LAFH”) allowance. — Section 5U

. Changes to repayment of HELP, TSL and SFSS debts — If you are living or intending to live overseas, and

have a HELP or TSL debt, you need to provide your new contact details and report your worldwide

income to the ATO. — Section 5V

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 5W

Trusts

This section considers specific year-end taxation issues associated with trusts.

.

ATO compliance activity — The ATO will continue significant trust compliance activities for the income

year ending 30 June 2017. Care needs to be taken to ensure that you are compliant with the trust

provisions. — Section 6A

. Trustee tax rate — To avoid a trustee assessment at a rate of 49%, ensure that you make beneficiaries

presently entitled to all of the income of the trust before 30 June 2017 (or an earlier time if required by

the trust deed). — Section 6B

. Review of trust deeds — You should review your trust deed before year-end to ensure that the deed is

appropriate for distributions in respect of the income year ending 30 June 2017 and future years. —

Section 6C

. Trustee resolutions — Distribution resolutions or plans should be completed before year-end (or earlier

if required by the trust deed). — Section 6D

. Meaning of income of the trust estate — Review the trust deed to determine how income is defined to

ensure the distribution resolutions are effective in distributing all trust income (and to avoid a trustee

assessment). You will also be required to disclose income per your deed in your tax return for the year

ending 30 June 2017. — Section 6E

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.

Distribution of timing differences (general) — The ATO has been focusing compliance activity on

taxpayers taking advantage of timing differences between a trust’s net income for tax purposes and its

income for trust purposes by using a corporate beneficiary to avoid top-up tax in the hands of

individuals. Care needs to be taken if you expect taxable income to exceed accounting profit. — Section

6F

. Distribution of timing differences (unit trusts) — As beneficiaries of unit trusts can be taxable on a

distribution of timing differences, consider whether it may be possible to align tax and accounting by

defining trust income as “taxable income” for the current income year. — Section 6G

. Trust to company distributions — Ensure that you have considered Division 7A when distributing

income (directly or indirectly) to a corporate beneficiary. — Sections 6H and 7K

. Trust streaming — If you wish to stream capital gains or franked dividends for the current year, you

should ensure you comply with the trust tax streaming provisions. — Section 6I

. Capital gains versus revenue gains — The ATO may seek to treat capital gains on revenue account. You

should ensure your position is correct and defendable. — Section 6J

. Trust losses and bad debts — Trust losses and bad debt deductions may be denied if a family trust

election (“FTE”) is not made, or if the trust loss provisions are not otherwise satisfied. — Section 6K

. Franking credits — If you receive dividends through a trust, franking credits may not flow through the

trust unless the trust is a fixed trust or the trust makes a FTE. — Section 6L

. Distributions from foreign trusts — Capital gains derived by foreign trusts may be assessable to

Australian resident beneficiaries as trust income that has not been previously subject to tax, resulting in

the denial of the 50% CGT general discount and prohibiting the beneficiary from offsetting capital losses

against the gain. — Section 6M

. Injection of income into a trust — If there is more than one trust in your group, trust-to-trust

distributions to take advantage of losses in a trust may not be effective if a FTE is not made. — Section

6N

. Injection of income into a company – If the trust is distributing taxable income to a loss company, care

needs to be taken where the taxable distribution exceeds the amount of cash to be distributed to the

company. — Section 6O

. Interest expenses to fund distributions — Interest deductions may be denied where finance is used to

fund distributions (of income or capital) to beneficiaries. — Section 6P

. Family trust elections — Critically review your FTE requirements for the year to ensure that deductions

for bad debts and losses and the ability to flow-through franking credits is protected. Make sure all new

trusts have made an election to be within the family group. — Section 6Q


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. Tax file number withholding — The trustee must obtain tax file numbers (“TFN”) from beneficiaries

before 30 June 2017, which have not previously been reported, to avoid penalties. This needs to be

reported to the ATO by 31 July 2017. — Section 6R

. Superannuation deductions for directors of corporate trustees — Consider whether payments for

superannuation contributions made for directors of a trustee company will be deductible. — Section 6S

. Trust distributions to a superannuation fund — Non-arm’s length income derived by a superannuation

fund (which may include discretionary trust distributions or private company dividends) can be taxed at a

rate of 47% in a superannuation fund. — Section 6T

. Trust distributions to exempt entities — Consider the anti-avoidance rules that apply to trust

distributions made to exempt entities. — Section 6U

. Trust stripping provisions (reimbursement agreements) — The ATO has indicated it may apply the trust

stripping provisions more broadly to family trust arrangements. Care needs to be taken where income is

distributed to a beneficiary, where it is unlikely that the beneficiary will ever call on the funds (or be paid

those funds). — Section 6V

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 6W

Companies

This section considers specific year-end taxation issues associated with companies.

. ATO compliance activity — The ATO is continuing to scrutinise the taxation affairs of companies and has

indicated areas it will target for the 2017 and 2018 income years. You should consider whether any of

your arrangements are those that have been identified by the ATO, and, if required, you should consider

appropriate action. — Section 7A

.

Tax rates — SBE corporate tax entities are subject to tax at a rate of 27.5% for the year ending 30 June

2017. All other corporate tax entities are subject to corporate tax at a rate of 30%. If you are not

currently operating your business through a corporate structure, you should consider whether this is

appropriate. — Section 7B

. Payment of dividends — If you are seeking to pay a franked dividend where you have retained losses (or

a current year loss), you may not be able to frank the dividend unless you ensure appropriate actions are

taken before the signing of your accounts for the current year. — Section 7C

. Franking dividends (maximum franking credits) — If you are paying a franked dividend before 30 June,

you should determine the maximum franking credit that can be attached to the dividend having regard

to your corporate tax rate for imputation purposes. Your franking percentage may be 27.5% for 30 June

2017 (based on your prior year turnover). — Section 7D

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. Franked dividends (distribution statements) — If you have made a frankable distribution you must

provide the recipient with a distribution statement. If the franking credit on a distribution is incorrect,

you must apply to the Commissioner to amend the distribution statement (unless you are within the

scope of the ATO’s draft guidance). — Section 7E

. Franked dividends (benchmark percentage) — Ensure that you are franking dividends to the

appropriate benchmark percentage, or are aware of your disclosure requirements when deviating from

the benchmark percentage. — Section7F

. Franked dividends (franking deficits) — If you are considering paying a franked dividend before 30 June,

you should consider reviewing your franking position so that you do not inadvertently create a franking

deficit tax position. — Section 7G

. Franked distributions funded by raising capital — Companies that are seeking to pay franked

distributions to shareholders should ensure that these are not funded by capital raising activities. —

Section 7H

. Franking credit trading arrangements — You should review any arrangements that purport to provide a

return that is calculated with reference to franking credits. Such arrangements may fall foul of the

franking credit benefit provisions. — Section 7I

. Debt that can be treated like equity — All loans made to companies should be reviewed to ensure that

they are on terms that allow them to be treated as debt for tax purposes and are not inadvertently

treated as equity (and thus interest will be non-deductible). This will typically require a 10 year

repayment period or an appropriate interest rate. — Section 7J

. Division 7A (generally) — You should review Division 7A before year-end to ensure that you do not

trigger a deemed unfranked dividend to a shareholder or associate for any loans, payments or debt

forgiveness transactions provided by the company. — Sections 7K

. Division 7A (direct transactions by companies) — You should identify new and existing loans made to

shareholders and associates and determine the required minimum loan repayments (“MLR”) before 30

June. — Sections 7L

. Division 7A (trust distribution to companies) — You should identify all new and existing UPEs and

determine whether these are placed on complying investment agreements or should be converted to

Division 7A loans. — Sections 7M

. Division 7A (benefits indirectly provided by companies) — All loans, payments, guarantees and other

arrangements that have been made by the private company to other entities within the group (including

other private companies) need to be reviewed to determine if there is a risk of the interposed entity

rules applying through that other entity. — Sections 7N

. Capitalising unit trusts – Care needs to be taken (from a Division 7A perspective) if you are considering

capitalising a unit trust or a distribution reinvestment plan where the unit holder is a company. The ATO

are seeking to apply Division 7A to these arrangements. — Section 7O


19


. Division 7A (future simplification) — Consider whether the proposed Division 7A simplification

measures could provide better financing options for the group in the future. — Sections 7P

.

Deductions for losses and bad debts — If you are utilising prior year tax losses, or have tax losses in the

current year, you should consider whether the company has satisfied the continuity of ownership test

and the same business test. If you have made a loss in the 2016 or 2017 income years, you should also

consider whether the proposed similar business test may provide a better opportunity to utilise losses in

the future. — Section 7Q

. Share capital transactions — If your share capital account has moved for the current year, you should

examine those movements very carefully. They may result in an unfranked dividend or untainting tax

liabilities. You may be able to correct these if identified before year-end. — Section 7R

. Tax consolidation (choice to consolidate) — If you are making a choice to consolidate, you need to

record your choice in writing and lodge a separate notification form with the ATO. You will also need to

consider whether tax funding and tax sharing agreements are put in place before (or close to) year-end.

— Section 7S

. Tax consolidation (change in members) — If members have joined or left during the income year, you

are required to notify the ATO within 28 days. You are also required to update your tax funding and tax

sharing agreements. — Section 7T

. Tax consolidation (updating tax costs) — If entities have joined a tax consolidated group during the

year, you should ensure that you have recalculated the tax cost base of assets and liabilities, as this could

materially impact your 30 June 2017 tax calculation. — Section 7U

. Tax consolidation (disposal of subsidiary entities) — If entities have left a tax consolidated group, the

cost base of the shares needs to be recalculated based on the underlying tax cost of assets and liabilities

of the leaving entity. This can have a material impact on any capital gain or loss derived on sale of the

leaving entity. — Section 7V

. Tax consolidation (deductible liabilities) — Determine whether the budget announcement on

deductible liabilities requires an amendment to previously tax returns lodged. — Section 7W

. Research and development (generally) — Consider the effect of the research and development (“R&D”)

tax incentive provisions on your R&D deductions for the year ending 30 June 2017. — Section 7X

. Research and development (taxpayer alerts) – Consider reviewing your R&D Tax Incentive registrations

and claims, especially if you have claims in the following ATO target areas: construction activities,

agricultural activities and software development. — Section 7Y

. Research and development (expenditure in excess of $100 million) — Where the taxpayer’s R&D

expenditure is $100 million or more, the taxpayer is not eligible for the 38.5% non-refundable R&D Tax

Incentive, however, the excess can be claimed as a tax offset at the company tax rate of 30%. — Section

7Z

20



. Research and development (feedstock adjustments) — Consider whether the taxpayer received a R&D

tax incentive offset for feedstock expenditure incurred on R&D activities. If so, it may be necessary to

include an adjustment in the assessable income of the taxpayer. — Section 7AA

.

Reportable tax positions — Consider whether you need to prepare the reportable tax position (“RTP”)

schedule in the tax return. To avoid disclosures, you may need to ensure that you have appropriate

opinions on material tax issues. Consider implementing an appropriate tax risk management procedure.

You should plan for the application of these measures, broadly, from 1 July 2017 if your turnover is $250

million or more. — Section 7BB

. Pay-as-you-go instalments — Determine whether the pay-as-you-go (“PAYG”) instalment for the fourth

quarter for the year ending 30 June 2017 can be varied. — Section 7CC

. Director penalty regime — Ensure that you are up to date with super and PAYG payments and consider

implementing control procedures dealing with the director penalty regime. — Section 7DD

. Tax transparency — The ATO is required to publicly report tax information for certain corporate tax

entities. If you are close to the $200 million turnover threshold, you should consider what these

disclosures will mean for your business. — Section 7EE

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 7FF

Partnerships

This section considers specific year-end taxation issues associated with partnerships.

.

Professional practices with trusts as partners — The ATO is reviewing professional practices that have

trusts as partners. There may be ways in which to mitigate this risk by following ATO administrative

guidelines. — Section 8A

. No-goodwill professional practices — No-goodwill professional practices should consider whether the

ATO’s revised views apply (especially as equity participants usually “retire” on 30 June and new equity

participants are often appointed from 1 July). — Section 8B

. Varying distribution amounts to partners — For common law partnerships, consider the ability to vary

distribution entitlements before 30 June 2017. — Section 8C

. Equity contributions by a company — You should review partnership accounts to ensure that amounts

of partnership equity and undrawn profits owing to a company are not inadvertently recorded as loans

from a private company to a partnership at year-end. You should be careful to ensure that Division 7A

does not apply to the arrangement. — Section 8D


21

This section considers specific year-end taxation issues associated with partnerships.

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 8E

Capital gains tax

This section considers a number of year-end considerations for capital gains that may have been derived

during the income year.

. General — Ensure that you have considered all contracts and capital receipts for the year to determine

whether a capital gain or loss has been made. — Section 9A

. Sale of property on revenue account or capital account — Ensure that you consider the ATO’s guidelines

for determining whether a gain is on revenue account or capital account. — Section 9B

. Small business CGT concessions — Where you conduct a business (either directly or indirectly), consider

your ability to reduce any capital gain under the small business CGT concessions. — Section 9C

. CGT discount — Consider whether assets disposed of were held for over 12 months and thus qualify for

the CGT discount. If the amounts are material, you should consider whether the ATO will treat the

amounts as being on revenue account (and not eligible for the 50% discount). — Section 9D

. CGT and international tax — Special rules apply to inbound investments made by non-residents and

temporary residents and outbound residents made by residents. — Section 9E

. Earnout arrangements — Consider whether the sale of any CGT assets for the income year requires

consideration of the earnout arrangement provisions. — Section 9F

. CGT exemptions — Consider whether the CGT exemptions may apply to exempt your capital gain or loss.

— Section 9G

. CGT rollovers — Consider whether the CGT rollovers may apply to reduce your capital gain or loss. —

Section 9H

. Main residence exemption — Ensure you have applied the main residence exemption correctly for any

sale of residential property and adjacent land (note change for foreign residents and temporary

residents from 9 May 2017). — Section 9I

. Wash sales — Consider the ATO’s view on wash sale arrangements where assets are disposed of for a

loss or gain and (subsequently) substantially the same assets are re-acquired. — Section 9J

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 9K

22


Finance issues

This section considers a number of year-end considerations for financial transactions and financial type

entities for the income year.

.

Loan rationalisation and debt forgiveness — You may wish to consider rationalising inter-entity loans at

year-end, to simplify loan arrangements and Division 7A compliance. However, consider the tax

consequences that may occur on a loan rationalisation or debt forgiveness during the year. — Section 10A

. Interest deductibility — If you have significant interest or debt deduction costs during the year, you should

consider whether you may be precluded from deducting such amounts. — Section 10B

. Capital protected borrowings — Interest deductions may be denied in respect of funding capital protected

shares, units or stapled securities. — Section 10C

. Taxation of financial arrangements (general) — On an annual basis, you need to consider whether the

taxation of financial arrangements (“TOFA”) provisions will start to apply to your entity or group of entities.

— Section 10D

. Taxation of financial arrangements (elections) — TOFA can provide taxpayers with a number of elections

that allow tax to be aligned with accounting for financial instruments. If such elections are of interest, they

need to be made before year-end. — Section 10E

. Taxation of financial arrangements (consolidated groups) — If your group is subject to TOFA and an entity

has joined your tax consolidated group, make sure that you have applied the special TOFA rule to liabilities

of the joining entity (which treats such amounts as assessable). — Section 10F

. Taxation of financial arrangements (compliance issues) — If your group is subject to TOFA, the ATO is

conducting ongoing compliance activity. Accordingly, you should ensure you are comfortable with your

TOFA positions. — Section 10G

. Common reporting standard — If you are an Australian resident for tax purposes, ensure that you are

disclosing income from foreign financial accounts in your Australian income tax return. If you run a family

office or a managed investment scheme, you may need to disclose information to the ATO based on

accounts held before and after 1 July 2017. — Section 10H

. FATCA compliance for investment entities — If you have US investments, have beneficiaries or controllers

that are US citizens, or if you simply have an entity that invests in Australian funds, the Foreign Account

Compliance Act (“FATCA”) provisions could apply. You should carefully consider your FATCA obligations.

— Section 10I

. Financing structures — If you are considering creating a new investment structure, or considering investing

in such a structure, consider whether the Attribution Managed Investment Trust (“AMIT”) rules, ESVCLP

rules, ESIC rules, crowdfunding rules, funds passport rules or the collective investment vehicle (“CIV”) rules

could be relevant. — Section 10J

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 10K


23

International tax

This section considers a number of year-end considerations where you have international transactions,

or inbound or outbound investments.

. General —When dealing with international tax issues, it is always necessary to consider seeking foreign

tax advice. — Section 11A

. ATO compliance activity — The ATO is targeting international transactions and has received substantial

funding for its Tax Avoidance Taskforce, targeting both High Wealth Individuals and multinationals. You

should carefully consider whether your arrangements with international parties are likely to be

scrutinised by the ATO. — Section 11B

. Non-resident individual tax rates — We have outlined the tax rates for individuals for the year ending 30

June 2017. — Section 11C

. Tax residency and source (general) — You should carefully consider whether the relevant entity is a tax

resident for the current year and whether certain foreign sourced income should be included or

excluded from taxable income. — Section 11D

. Tax residency and source (foreign incorporated companies) — You should carefully consider whether

foreign incorporated companies within your group will be considered Australian residents for taxation

purposes. — Section 11E

. Temporary resident concessions — If you are a foreign citizen and an Australian tax resident, consider

whether you can apply the temporary resident concessions and reduce your taxable income. — Section

11F

.

Working holiday makers — If you are a working holiday maker, the first $37,000 of income will be taxed

at 15%, with the remainder taxed at ordinary rates. You are required to lodge an income tax return each

year you work in Australia. Alternatively, if you employ or are planning to employ working holiday

makers, you need to register as an employer of working holiday makers before making payments to

them. In addition, you will need to withhold tax at working holiday maker rates. — Section 11G

. Changing residence — A change in residence may have significant tax implications and may also require

elections to be made. You should consider your residency status for the income year. — Section 11H

. Controlled foreign company regime — You should consider whether the controlled foreign company

(“CFC”) provisions will result in an accrual of underlying income in respect of your foreign investment,

even if your individual interest is a minority interest. — Section 11I

. Distributions from foreign trusts to Australian resident beneficiaries — Capital gains derived by foreign

trusts may be assessable to Australian resident beneficiaries as trust income that has not been previously

subject to tax. — Section 11J

. Transfer pricing (general) — If you have international dealings, you should ensure that you have

appropriately considered Australia’s transfer pricing provisions. — Section 11K

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. Transfer pricing (contemporaneous documentation) — Ensure that you have adequate and appropriate

transfer pricing documentation in place and that the transfer pricing approach taken is fully and

accurately reflected in the IDS for the year ending 30 June 2017. — Section 11L

. Transfer pricing (simplified record keeping) — Consider whether you are eligible to apply one or more of

the simplified transfer pricing record keeping options. If so, ensure you record your self-assessment of

your eligibility for the option. — Section 11M

. Transfer pricing (offshore hubs) — If you are a multinational group with operating models (or hubs)

involving procurement, marketing, sales and distribution functions, you should determine your risk

rating with respect to your offshore hubs. — Section 11N

. Transfer pricing (financing arrangements) — If you are a multinational group with financial

arrangements, you should determine your risk rating with respect to financing arrangements. — Section

11O

. International dealings schedule — Completion of the international dealings schedule (“IDS”) for the tax

return for the year ending 30 June 2017 should be consistent with your transfer pricing documentation

for the current year. — Section 11P

. Significant global entities — Consider whether you are a significant global entity that is subject to a

number of new measures. — Section 11Q

. General purpose financial statements (“GPFS”) — If you are a significant global entity and you do not

lodge GPFS with ASIC, you may be required to lodge GPFS with the ATO in respect of income years

commencing on or after 1 July 2016. — Section 11R

. Multinational anti-avoidance law — If you are a significant global entity, consider whether your

arrangements after 1 January 2016 are within the scope of the multinational anti-avoidance law

(“MAAL”). — Section 11S

. Diverted profits tax — If you are a significant global entity, consider whether your arrangements after 1

July 2017 are within scope of the diverted profits tax (“DPT”). — Section 11T

. Country-by-country reporting — If you are a significant global entity, consider whether you will be

required to provide statements to the ATO (or another revenue authority) in respect of income years

commencing on or after 1 January 2016. — Section 11U

. Conduit foreign income — If an Australian company is a conduit between foreign entities, the conduit

foreign income (“CFI”) provisions may allow unfranked dividends to be paid to non-residents tax free

provided certain conditions are met in the relevant income years. — Section 11V

. Foreign income tax offset — Consider your foreign income tax offset (“FITO”) position for the year

ending 30 June 2017 to determine whether there are any excess FITOs that may be wasted. Strategies

may be able to be put in place to mitigate any FITO wastage. — Section 11W


25



. Exempt-type distributions and gains from non-residents — Consider whether distributions from non-

resident entities (including capital reductions) can or have been made to an Australian entity in a tax –

free manner. — Section 11X

.

Sales of assets by non-residents or temporary residents — Non-residents and temporary residents can

dispose of certain Australian assets (for example, certain assets that are not land nor land rich entities)

without tax consequences. However, non-residents and temporary residents are no longer eligible for

the 50% CGT discount (subject to transitional rules) and may not be able to claim the main residence

exemption from 9 May 2017. — Section 11Y

. Deductions in earning foreign income — Where there is a foreign branch or foreign subsidiary in the

group that produces exempt or non-assessable non-exempt (“NANE”) income to the group, closely

consider whether any deductions incurred for the year will be denied. — Section 11Z

. Deemed dividends from non-resident CFCs — Related party transactions may result in deemed

unfranked dividends where benefits are provided by a CFC to a shareholder or associate of the

shareholder (similar to Division 7A). — Section 11AA

. Thin capitalisation —The thin capitalisation provisions may deny interest deductions if you have (or

control) foreign operations or are foreign controlled. Consider examining your tax gearing ratios before

30 June 2017. — Section 11BB

. Deductions where withholding tax payable is not paid — Ensure that you have complied with the

withholding tax provisions so that deductions for payments to non-residents (for example, interest and

royalties) are not denied for the income year. — Section 11CC

. Non-resident beneficiaries — If you stream classes of income to non-residents (for example, interest),

you should consider the ATO’s views on streaming and the risk that the current provisions may not

support streaming of such income. — Section 11DD

. Non-resident trusts and other offshore assets — If you have an interest in a foreign trust for the year

ending 30 June 2017, you may need to disclose income in your tax return under certain accruals

provisions. — Section 11EE

. Foreign owners of underutilised residential property – If you are a foreign resident and are considering investing in residential property, you may be liable to a charge from 9 May 2017 where the property is

not available for rent. — Section 11FF

. Investment manager regime — If you are a non-resident investor that invests in certain assets such as

equities or foreign assets, you should consider the application of the Investment Manager Regime

(“IMR”) regime, which could help to ensure that certain gains are not taxable in Australia. — Section

11GG

. Managed investment trust fund payments — The withholding tax rate on fund payments to non-

residents during the 2017 income year is equal to 15% for exchange of information (“EOI”) countries and

30% for non-EOI countries. A special rate of 10% applies to certain energy efficient buildings. — Section

11HH

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. Foreign exchange — Consider whether the (tax) foreign exchange provisions will give rise to significant

adjustments at year-end. Consider if there are any opportunities to reduce compliance under the

provisions by making certain elections before year-end. — Section 11II

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 11JJ

Superannuation, GST and state taxes

This section considers a number of year-end considerations for superannuation, GST and state taxes.

. ATO compliance activity – If you have a self-managed superannuation fund, carefully consider the ATO’s

focus areas. — Section 12A

.

Employer deductions for contributions — To claim a deduction for superannuation contributions, the

contribution must be made (i.e. received by the superannuation fund) on or before 30 June 2017. —

Section 12B

. Superannuation guarantee — Ensure that you have complied with the superannuation guarantee (“SG”)

requirements, especially for bonuses paid and payments made to contractors, consultants or members of

the board who are not paid via the payroll. — Section 12C

. Concessional contributions cap — Make sure you have complied with the annual concessional contribution

cap and consider whether additional concessional contributions could be made before the reduction in the

concessional contributions cap on 1 July 2017. — Section 12D

. Non-concessional contributions cap — Make sure you have complied with the non-concessional

contribution cap for the 2016/17 income year and consider whether additional non-concessional

contributions could be made prior to the reduction of the non-concessional contributions cap on 1 July

2017. — Section 12E

. Personal superannuation contributions — Consider whether the individual is eligible to make a deductible

concessional contribution before 30 June 2017 and ensure notice requirements are met within time. If you

are not eligible, consider the impact of delaying personal superannuation contributions until after 1 July

2017. — Section 12F

. Low income superannuation contribution — If you are a low income earner, consider the impact of making

a contribution to your superannuation fund before 30 June 2017. — Section 12G

. Low income spouse superannuation contribution — If you have a spouse with a low income, consider the

impact of whether contributions made to their superannuation account will be eligible for the tax offset. If

your spouse has income between $13,800 and $40,000, consider the implications of delaying contributions

until after 1 July 2017. — Section 12H


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. Cap on superannuation transfers into retirement products — If you are currently running pensions, or are

about to commence pensions, consider the implications of the introduction of the $1.6 million transfer

balance cap on your superannuation account balances, and whether you will need to transfer excess

amounts in an accumulation account. — Section 12I

. Excess contributions — When reviewing your superannuation strategy for year-end, carefully consider

whether payments are within your contributions cap. — Section 12J

. Additional contributions tax for higher income earners — Individuals with income exceeding $300,000 pay

an additional 15% contributions tax (i.e. 30%) on contributions for the year ending 30 June 2017. You

should take this into consideration when making superannuation contributions prior to year-end. —

Section 12K

. Taxation of employment termination payments — If you have received an ETP during the income year

ending 30 June 2017, you should review the taxation treatment of such payments. — Section 12L

. First home super saver scheme — If you are a first home buyer, or contemplating purchasing a first home

in the future, consider the implications of delaying voluntary contributions to superannuation until after 1

July 2017, as these may be withdrawn for a first home deposit in the future. — Section 12M

. Contributing the proceeds of downsizing to superannuation — If you are aged 65 or over, consider the

implications of delaying the potential sale of your main residence until after 1 July 2018 so that you may

have the option to contribute some of the proceeds to your superannuation fund. — Section 12N

. GST adjustments for bad debts written off — If you write off a bad debt during the year, a debt has been

overdue for at least 12 months or you recover a bad debt previously written off during the year, you may

need to make a GST adjustment in the relevant BAS. — Section 12O

. Accounting for GST on a cash or accruals basis — If your turnover is less than $10 million, you should

consider whether you should account for GST on a cash basis (which may give you a cash flow advantage).

In addition, if you currently account for GST on a cash basis you should consider whether you still satisfy the

eligibility requirements for cash basis accounting. — Section 12P

. Annual apportionment of GST input tax credits — If you currently claim full GST credits on your activity

statements for items purchased partly for private purposes, ensure that you adjust your activity statements

at the end of the income year. — Section 12Q

. Financial acquisitions threshold — If you make financial supplies, you should consider whether you have

exceeded the FAT in order to determine whether you can claim full input tax credits in relation to your

acquisitions. — Section 12R

. GST adjustments for change in use — If you have changed the extent to which an acquisition or

importation is used for a creditable purpose, you should consider whether a change in use adjustment is

required in the BAS for the period ended 30 June. — Section 12S

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. Low value imported goods — If you are not currently registered for GST and supply Australian consumers

with low-value physical goods (or you are an electronic distribution platform), you may need to register

before 1 July 2017 and consider the implications of these new rules. — Section 12T

. Digital products and services — If you are not currently registered for GST and supply Australian

consumers with digital products or services (or you are an electronic distribution platform), you may need

to register before 1 July 2017 and consider the implications of these new rules. — Section 12U

. Digital currency — If you deal in or with digital currency, you should consider the impact of the proposed

changes from 1 July 2017. — Section 12V

. Specific requirements for the precious metals industry — If you buy gold, silver and platinum (that has

been supplied as a taxable supply for GST purposes), from 1 April 2017, you are required to apply a reverse

charge. — Section 12W

. Reporting requirements for certain industries — Consider reporting requirements to the Commissioner for

payments made to contractors for the supply of building and construction services. — Section 12X

. Stamp duty surcharge for foreign purchasers of property — Consider whether you can modify the trust

deed to exclude beneficiaries from receiving 50% or more of the income of the trust estate. — Section 12Y

. Off-the-plan stamp duty concession – All buyers who will be affected by the changes to the OTP duty

concession and who are currently in the market to buy an OTP property should consider whether there is

an opportunity to sign the contract of sale prior to 1 July 2017. By doing so they could save themselves a

substantial amount of stamp duty. — Section 12Z

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 12AA

Tax administration and integrity

This section considers a number of integrity measures that should be considered with your year-end

planning.

. ATO compliance activity — You should consider whether any of the issues identified in the recent

taxpayer alerts apply to your tax affairs or to any tax planning opportunities that you are considering. —

Section 13A

. Transparency of taxation debts — If you have outstanding ATO debt, you should consider making

payment or entering into a payment arrangement with the ATO to ensure that your tax debt information

is not disclosed to credit reporting agencies. — Section 13B

. Part IVA — You should consider Part IVA in relation to any material tax planning strategy that may be

implemented for the year ending 30 June 2017. — Section 13C


29

This section considers a number of integrity measures that should be considered with your year-end

planning.

. Promoted schemes — Be careful of schemes that are promoted to taxpayers to reduce their taxable

income for the income year. Consider the ATO guidance on what to look out for. — Section 13D

. Phoenix activity — Be wary of schemes that promote deliberately liquidating companies to avoid paying

debts, including taxes, creditors and employee entitlements. — Section 13E

. Black economy — You should ensure that you appropriately report your tax and superannuation

obligations to the ATO and other relevant authorities as there are serious consequences for avoiding tax.

— Section 13F

. Tax avoidance taskforce — You should ensure that you are appropriately report your tax obligations to

the ATO and other relevant authorities as there are serious consequences for avoiding tax. — Section

13G

. Related party deductions — Where tax planning arrangements involve related party transactions,

consider carefully the application of the anti-avoidance provisions that may deny deductions incurred by

one of the related parties. — Section 13H

. Wash sales — Consider the ATO’s view on wash sale arrangements where assets are disposed of for a

loss or gain and substantially the same assets are re-acquired. — Section 13I

. Franking credit trading arrangements — You should review any arrangements that purport to provide a

return that is calculated with reference to franking credits as such arrangements may fall foul of anti-

avoidance provisions. — Section 13J

. Trusts taskforce — The ATO will continue to dedicate compliance resources to people that have been

involved in tax avoidance or evasion using trusts. — Section 13K

. Trust distributions to exempt entities — Consider the impact of the anti-avoidance rules on distributions

from trusts to exempt entities. — Section 13L

. Trust stripping provisions (reimbursement agreements) — Care needs to be taken where income is

distributed to a beneficiary, where it is unlikely that the beneficiary will ever call on the funds (or be paid

those funds). — Section 13M

. Significant global entities — In considering your 30 June 2017 position, you should consider the

application of the integrity rules that apply to significant global entities. — Section 13N

. Self-managed superannuation funds — In considering your 30 June 2017 position, you should consider

the ATO’s integrity concerns in relation to self-managed superannuation funds. — Section 13O

. Notes relating to items in this section — Review notes taken in relation to the section. — Section 13P

30


3. Income

General rules on income

A taxpayer is required to include all income derived in an income year in their assessable income. Business activity

income is typically brought to account on an accruals basis, while passive income and personal services income are

typically brought to account on a cash basis. Some types of passive income have their own special timing rules and

taxpayers in the business of deriving passive income (for example, a finance entity) would need to bring such income to

account on an accruals basis.

Year-end planning considerations

. Ensure that you have included all income derived for the 2016/17 income year in your assessable income.

Business income

Generally, the accruals method is appropriate in accounting for income from the sale of goods, commodities or from

business activities. Where income is derived from a professional practice, it is not always clear whether the income is

from personal services or from a business activity1. This issue should be reviewed on an annual basis.

A taxpayer will typically derive business income when an invoice has been raised or where the taxpayer is legally

entitled to the amount. All year-end trade debtor amounts are generally included in the assessable income of a

taxpayer deriving business income. Taxpayers should also carefully review accrued income amounts to determine

whether the amounts are assessable income at year-end (see Section 3D).


.

Determine whether you have brought income to account in the correct year. Some income is brought to

account on a cash basis (for example, interest), while other income is brought to account on an accruals

basis (for example, business income).

. Consider whether income in respect of invoices issued in June 2017 and July 2017 included in assessable

income in the appropriate year.

Tax on business income

It is noted that for the 2016/17 income year, businesses that are operated through a corporate structure with turnover

of less than $10 million (including the turnover of certain related entities) will be subject to tax at a rate of 27.5%.

To the extent that an individual taxpayer derives income from an unincorporated business, a discount of 8% will apply

on the income tax payable on the business income (capped at $1,000 per individual), provided the turnover of the

business is less than $5 million (including the turnover of certain related entities).

Businesses that are subject to these changes (referred to as “SBEs”), should consider the impact this will have on

income that straddles the 30 June 2017 year-end.

1 Taxation Ruling TR 98/1.

http://law.ato.gov.au/atolaw/print.htm?DocID=TXR%2FTR981%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=19980114000001-99991231235959


31


. Consider whether you are eligible for the 27.5% reduced rate of tax available to businesses with

aggregated turnover of less than $10 million that are operated through a corporate structure.

. Consider whether you are eligible for the 8% discount (capped at $1,000) on income tax payable that is

available to individual taxpayers with business income from an unincorporated business.

. Consider the proposed changes to tax rates for SBEs and its impact on income that straddles the 30 June

2017 year-end.

Accrued and unearned income

Taxpayers carrying on a business may often record income as either accrued or unearned. You should carefully

consider the tax treatment of those types of income, as the tax treatment will not always follow the accounting

treatment.

Accrued income

It may be possible to defer the recognition of accrued income to the following income year. Whether income has been

derived for tax purposes may depend on the legal entitlement to the amounts at the time. For example, work in

progress amounts will not generally give rise to assessable income until there is a recoverable debt.

If, under a contract or arrangement, a recoverable debt exists without the need to bill the client, then the amount will

generally be derived once the entitlement to recover arises2. Further, the accounting basis for accruing income can

sometimes be held to be acceptable for tax purposes. As a final note, construction contract income may be derived on

a basis other than a billings basis (see Section 3H).

Unearned income

Generally, if a contract or arrangement requires that the fee be paid in advance, the income is derived in the income

year in which the work (or the part of the work) to which the fee relates is completed (even if invoiced prior to that

time). If the client simply pays early, the fee income is generally only derived when a recoverable debt arises or would

have arisen if the client had not paid early3. The accounting and commercial treatment of the income may also be

relevant in determining the tax treatment. Accordingly, if you are seeking to defer such income for tax purposes, it is

prudent to consider whether the income can also be recorded as “unearned” under the accounting standards.

Not all unearned income qualifies for deferral. There have been many court cases where this principle has been

distinguished. If the amount of unearned income is material, you should carefully consider the appropriate tax

treatment.


. Identify whether an amount of accrued income or unearned income has been recorded in the accounts

in a prior year, or is expected to be recorded in the accounts at 30 June 2017.

2 Taxation Ruling TR 93/11, para 6. 3 Taxation Ruling TR 93/11, para 8 and Arthur Murray (N.S.W.) Pty. Ltd. v Federal Commissioner of Taxation [1965] HCA 58.

See also Taxation Ruling TR 2014/1, para 5.



https://jade.io/article/65872?at.hl=(1965)+114+CLR+314


32


. Determine whether such amounts have been derived for tax purposes and whether a tax adjustment

should be made for the 30 June 2017 balance.

Trade incentives (purchase of stock)

The acquisition of trading stock may give rise to a trade incentive (for example, volume rebate, trade discount,

promotional rebate). The amount may either represent assessable income to the purchaser or reduce the cost of

trading stock4, depending on the nature of the trade incentive.

For unconditional trade incentives (for example, a 10% unconditional rebate for all stock purchased) relating directly to

the purchase of trading stock, the amount is treated as a reduction in the cost of trading stock.

However, other incentives generally do not reduce the purchase price, but are treated as income at the time when the

incentive is provided (for example, conditional incentives, promotional incentives, and volume rebate or trade

discounts). In these cases, the purchase of trading stock is to be recorded at the full (i.e. undiscounted) price (see

Section 4U). Accordingly, these incentives can be deferred until they are derived by the taxpayer and, therefore, do

not need to be included in the taxpayer’s assessable income at year-end.


. Identify whether your business receives conditional discounts or trade incentive discounts from your

suppliers. If so, you may be able to defer recognition of this income for taxation purposes.

Trade incentives (sale of stock)

Where you sell trading stock and offer trade incentives, the treatment of the discount component predominantly

follows the treatment in Section 3E.

That is, for unconditional trade incentives relating directly to the sale of trading stock, the amount is treated as a

reduction in the sales proceeds. This treatment is allowed for tax purposes if the trade incentive is virtually certain,

effectively allowing an upfront deduction for the discount provided.

An incentive that is not directly related to the sale of trading stock or is not virtually certain, such as conditional

incentives and promotional incentives, will be treated as deductible when the incentive is actually provided.

Accordingly, the sales income must be recorded as the gross (undiscounted) price for tax purposes.


.

Identify whether your business provides unconditional discounts or trade incentive discounts to your

customers. If so, you may be able to reduce the income recorded for taxation purposes by the discount

component.

Customer disputed amounts

When accounting for income on an accruals basis, income that is subject to a dispute with the customer may be

deferred until the dispute is settled5. This treatment should be consistently applied in the accounts of the taxpayer.

4 Taxation Ruling TR 2009/5. 5 BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation [2002] FCAFC 433.


https://jade.io/article/100352


33


.

If you have an unsettled dispute in relation to an amount of income from a customer that relates to a

sale in the 2016/17 income year, you may be able to defer recognition of the amount until settlement of

the dispute in a subsequent year.

Construction contracts

The ATO allows taxpayers to account for construction contract income using one of a number of methods where the

construction activities are carried on by a taxpayer other than the land-owning taxpayer (i.e. the taxpayer does not

hold trading stock or a revenue asset).

The various methods available include the basic approach (i.e. the billings method) or the estimated profits basis (i.e.

the accounting method)6. While the method chosen must be applied consistently, each method can result in income

being recognised in very different periods. Under the billings method, deductions may be claimed upfront while

income would only be assessable once a recoverable debt is created (for example, on issue of an invoice). On the other

hand, the estimated profits basis may recognise income over the life of the project as work progresses (even where no

amount has been billed).

In this regard, the ATO expects not only consistency of treatment for all years during which a particular contract runs,

but consistency of treatment for all similar contracts entered into by you and by all entities that are part of your

group7.


.

Where you have entered into a long term construction contract during the year that does not relate to

your trading stock or a revenue asset you own, you should consider the various methods (i.e. basic

approach and the estimated profits basis) and the effect each method has on your taxable income for

2017 (subject to the consistency requirement).

. If a construction contract does relate to the construction of trading stock or a revenue asset you own,

consider the possibility of separating the construction activity into a separate entity from the asset-

holding entity going forward.

Proceeds of insurance and indemnities

The treatment of insurance proceeds will depend on the reason for the receipt. Broadly, where they related to a loss

of income or the loss of a revenue asset, the amounts will be ordinary income. Specific statutory provisions can treat

these receipts as income where they relate to trading stock or where they relate to the loss of an amount of income8.

If those provisions do not apply and the insurance proceeds relate to the loss or destruction of a CGT asset or a

depreciating asset, the amount may be taken to constitute proceeds on the disposal of those assets9. Finally, the

receipt of insurance proceeds may be treated as an “assessable recoupment”10.

6 Taxation Ruling No. IT 2450. 7 Ibid. 8 Income Tax Assessment Act 1997 (Cth) s15-30. 9 Income Tax Assessment Act 1997 (Cth) s118-300 and ATO Interpretative Decision ID 2011/82. 10 Income Tax Assessment Act 1997 (Cth) s20-20 and s20-30.

http://law.ato.gov.au/atolaw/print.htm?DocID=ITR%2FIT2450%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=19871001000001-99991231235959

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The provisions outlined above have their own timing rules for when insurance proceeds are to be brought to account11.

Where the loss event, claim and insurance receipt straddle year-end, you should consider the applicable provision

closely to determine when the amount must be brought to account for tax purposes.


.

Where the loss event, claim and insurance receipt straddle the year-end, you should consider the

application of the relevant provision to determine whether the amount must be returned in this year or

in a later income year.

. Where an asset has been lost or destroyed, you may be able to claim a loss in respect of the asset.

Alternatively, you may be able to claim rollover relief if the proceeds are used to acquire a replacement

asset.

Grants, bounties and subsidies

The treatment of government grants or subsidies is complex and will depend on the nature of the grant 12. An amount

will be treated as ordinary income where the amount is for: (1) an expected reduction in income; (2) to assist with

operating costs; (3) to compensate for a loss of profits; or (4) to evaluate the entity’s current operations.

A bounty or subsidy in relation to your business that is not ordinary income but is of a capital nature, will constitute

statutory income when received13. Amounts received in relation to commencing a business activity or acquiring new

assets may be assessable in certain circumstances.

When the amount should be recognised as income will depend on its nature. Generally, these amounts are included in

assessable income on a receipts basis. Where the grant is conditional, it is possible to defer recognising the amount as

income until the conditions are satisfied. If an amount is repaid, the recipient may also be able to treat the original

receipt as NANE income14.

You should also ensure you have considered the operation of the provisions relating to insurance (Section 3I) and

disaster relief (Section 3K).


. Where government grants have been received, determine whether such amounts will be assessable

income or whether an exemption may apply.

. Examine whether it is possible to defer the recognition of income received under a grant, for example,

where the receipt of the grant can be deferred or where there are conditions imposed on amounts

already received.

Disaster relief

Some grants that are provided to individuals, small businesses and primary producers in relation to natural disasters

are not taxable. Further, events may be declared a disaster to ensure that affected communities can receive tax

deductible donations.

11 For example, section 15-30 requires the amount to be received. 12 Taxation Ruling TR 2006/3. 13 Income Tax Assessment Act 1997 (Cth) s15-10. 14 Income Tax Assessment Act 1997 (Cth) s59-30.





35

There are also special rules that may apply to the receipt of disaster relief money (received from charities to which

local, State or Federal Government or their agencies have made payments). In some cases, such amounts may not

constitute income to the taxpayer15. Further, rollover relief may apply for certain CGT assets replaced after a natural

disaster16.

Finally, the ATO has released guidelines indicating that they will assist taxpayers affected by disasters to reconstruct

records or allow reasonable estimates to be made17.

You should also ensure that you have considered the operation of the provisions relating to insurance (Section 3I) and

grants, bounties and subsidies (Section 3J).


. Consider whether concessionary tax treatment applies to money that has been received in connection

with a natural disaster.

. Consider whether you can obtain the ATO’s assistance with reconstructing records or making reasonable

estimates for your income or deductions.

Interest income

Interest income is usually included in assessable income on a cash basis. The timing of derivation will typically be when

the interest income is received or applied for the benefit of the taxpayer.

However, interest derived as part of the taxpayer’s ordinary activities (for example, where the taxpayer is a financial

institution or the interest is charged on trade debts) will generally be included in assessable income on an accruals

basis. Further, deferred interest can automatically be accrued under the TOFA provisions, which can apply where

accrued interest is not received for 12 months (for example, on a discounted bond — see Section 10D).

You should consider reviewing interest income to determine whether amounts “accrued” can be deferred to the

following income year or years.


. Review interest income and determine whether any “accrued” interest can be deferred until the following

income year or years.

Dividend income

Dividends are included in assessable income when they are paid (which includes the crediting of the dividend by the

company). This is irrespective of whether the share investment activities of the taxpayer constitute a business or not.

If any part of the dividend is franked, the franking credit amount will also constitute assessable income. You should

closely consider the timing of dividends that you receive around year-end.

We note that the meaning of dividend is broad and that the taxation provisions can also deem you to have derived a

dividend in many other cases (for example, from a share buy-back or in respect of a loan from a private company under

Division 7A — see Section 7K).

15 For example, Taxation Determination TD 2006/22. 16 Income Tax Assessment Act 1997 (Cth) s124-95(6). 17 Practice Statement Law Administration PS LA 2011/25.

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.

Consider the timing of dividends received around year-end. This should include a review of dividends

under dividend reinvestment plans or private company dividends. Depending on the payment date of

the dividend, the amount may either be income of the 2017 or 2018 income year.

. Consider whether you have participated in a share buy-back plan and whether any amount of the buy-

back is considered a dividend for taxation purposes.

Retail premiums

Retail premiums are amounts paid to shareholders that do not take up rights to subscribe for shares offered by a

company (non-participating shareholders). The amount of the premium is the difference between the clearing price

(i.e. the price at which these unexercised rights are offered to institutional investors) and the offer price (i.e. the price

at which existing shareholder can take up these rights). A retail premium paid to a non-participating shareholder in

connection with a non-renounceable rights offer may constitute a dividend or ordinary income. However, where the

payment is treated as a dividend, it will be an unfrankable dividend18.

In contrast, in a recently released draft ruling, the ATO indicated that an amount paid to a non-participating

shareholder in connection with a renounceable rights offer may be regarded as the proceeds from a CGT event being

the disposal of the right to be issued shares19.


.

Consider whether you received a retail premium during the 2016/17 income year in relation to shares

that you have held. Note that the ATO do not allow franking credits to be utilised in respect of such

amounts.

Trust distributions

A beneficiary is assessable on their share of the taxable (net) income of a trust. Where you have received a trust

distribution for the year ending 30 June 2017 (or are entitled to receive a trust distribution by year-end) you should

estimate the amount of the assessable distribution in your year-end tax planning. Where this amount is uncertain, you

should consider contacting the trustee for an appropriate estimate.


.

As part of your tax planning, estimate the amount of assessable trust distributions that you will receive

(or you will be entitled to receive) at year-end. This may not be the same as the cash distribution or cash

entitlement from the trust.

Rental or leasing income

Income from renting or leasing a property will generally be included in assessable income when the income is actually

received (i.e. on a cash basis). However, such income may be recognised on an accruals basis if the taxpayer is

18 Taxation Ruling TR 2012/1. 19 Draft Taxation Ruling TR 2017/D3.


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37

considered to be in the business of renting or leasing. You should therefore consider whether “accrued” rental income

needs to be included in your assessable income for the year ending 30 June 2017.


. Consider whether rental or lease income “accrued” at 30 June 2017 can be deferred for taxation

purposes.

Foreign taxes paid on your behalf

Where foreign taxes have been withheld from an amount of income you have earned, you are required to gross-up

your income for tax purposes. You may then be able to claim a FITO in respect of the amount of foreign tax paid20.

Refer to Section 11W for considerations relating to FITOs.


. In considering your estimated 30 June 2017 taxable position, you should consider any foreign income

that you may derive (grossed up for foreign tax).

Income that is not otherwise assessable

A number of provisions treat receipts as not being assessable income. Examples include non-portfolio foreign

distributions received by companies, mutual receipts received from members, foreign income other than employment

income derived by temporary residents, certain windfall amounts, subsequent unfranked dividends to offset a Division

7A deemed dividend, certain income derived by foreign residents subject to withholding tax (see Section 11X) and

amounts remitted as GST.


. Consider whether any income you have derived during the income year should be excluded as either

exempt or not assessable.

Personal services income

PSI is income that is mainly a reward for an individual’s personal efforts or skills. For example, this may include income

from professional services21.

If you are an individual, these rules can apply if you conduct your affairs in your own name or through an entity. If the

PSI rules operate, the PSI regime may attribute income to you (even though it is earned in another entity) and

deductions may be limited to those you could otherwise claim as if you were an employee. The PSI rules do not apply if

you are conducting a personal services business (“PSB”). The results, unrelated clients and business premises tests are

used to determine whether a taxpayer is conducting a PSB.

Even if the PSI rules do not apply, the ATO has indicated that it could still seek to apply Part IVA where income from

personal services is derived through a trust or company and is not “distributed” to the individual during the year of

income.

20 This amount is ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (Cth). 21 Taxation Ruling TR 2001/7.


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.

Where you have provided personal services you need to consider the possible application of the PSI rules

before 30 June (regardless of whether you conduct the operations in your own name or in another

entity). These provisions could have a material impact on your assessable income and allowable

deductions claimed.

. If you operate a professional services business through a trust or company, you need to consider the

extent to which income should be distributed to you for 30 June 2017.

. You should consider whether you conducted a PSB for the year ending 30 June 2017.

. You should consider whether it is worthwhile obtaining a private ruling from the ATO on the application

of the PSI rules or Part IVA to your arrangements.

Extraordinary items

You should consider whether any extraordinary or abnormal amounts received during the income year are assessable

and, if so, when they are assessable (for example, the sale of a business/asset or the settlement of a legal dispute). If

they are material, due to the nature of such amounts, they will typically come within ATO scrutiny. You should

consider whether the amounts represent ordinary income, statutory income, capital gains or exempt amounts. You

should also consider other parts of this checklist that are relevant to such income.


. Where you have received extraordinary and abnormal receipts during the income year, you should

ensure that such amounts have been appropriately treated for tax purposes.

Notes relating to items in this section

Place any notes or additional information here for further reference in your discussion with your Pitcher Partners

representative.


39

4. Deductions

General rules of deductibility

A taxpayer may deduct a loss or outgoing to the extent that it is incurred in gaining or producing assessable income or

is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income22. The

deduction will only be available to the taxpayer that actually incurred the loss or outgoing.

Generally, a loss of outgoing will be incurred in the 2016/17 income year if an amount is actually paid or the taxpayer

becomes definitively committed to pay an amount in that year. This is subject to the application of other provisions

(for example, the prepayment rules). Where the general deduction rule is not satisfied, a deduction may be available

under a specific provision. No deduction is available for expenses that are of a capital or private nature, or are incurred

in deriving exempt income.

A taxpayer must keep all relevant documentation to substantiate that the expense has been incurred23.


. Review all your expenses and payments during the year to determine whether you may be able to claim

a deduction.

. Determine whether the expenses and payments can be claimed in the current year (for example,

whether you have made a payment, incurred an obligation, or prepaid amounts).

. Keep documentation so that you can substantiate that you have in fact incurred expenses before year-

end.

Capital expenditure

Expenses should be reviewed annually to determine if they are capital in nature and non-deductible. This may include

a review of legal expenses, repairs and maintenance expenditure, restructuring costs, equity raising costs and the cost

of acquiring or developing capital assets.

Where capital expenditure is non-deductible, you should consider whether the expenditure can be included in the cost

base of a CGT or depreciating asset or deducted under the business blackhole expenditure provisions24.

Small business taxpayers (or certain entities not yet carrying on a business) may be able to immediately deduct certain

capital expenses. These expenses can include advisory expenses or service costs associated with a proposed structure

or proposed operations, or payments to an Australian government agency of fees, taxes or charges relating to

establishing the business or its operating structure. The small business entity threshold has been increased from

turnover of $2 million to $10 million (including turnover of certain related entities) for the 2016/17 income year as part

of the Federal Government’s Ten Year Enterprise Tax Plan, which will allow more businesses to immediately deduct

certain capital expenses.

22 Income Tax Assessment Act 1997 (Cth) s8-1. 23 See for example Sobel Investments Pty Ltd and Commissioner of Taxation [2012] AATA 180 and The Applicant and the

Commissioner of Taxation [2012] AATA 174. 24 Income Tax Assessment Act 1997 (Cth) s40-880 and Taxation Ruling TR 2011/6.


https://jade.io/article/262732?at.hl=%255B2012%255D+AATA+180+

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. Review expenditure (for example, repairs and maintenance, legal costs or restructuring expenditure)

incurred during the year to determine whether capital amounts are included.

. Where costs are capital (and otherwise non-deductible) consider whether the amount can be included in

the cost base of an asset or, alternatively, deducted under the blackhole expenditure provisions either

immediately (if the taxpayer is a small business) or over five years in other cases.

Bad debt deductions

A taxpayer can only claim a deduction for a bad debt if the debt: (1) is written off before year-end; and (2) has

previously been included in the taxpayer’s assessable income. A taxpayer must keep written records to prove that such

debts have been written off before year-end. However, it is not necessary that journal entries are physically posted

before year-end. Care needs to be taken to ensure that the original debt is being written off (for example, issues may

arise if you have capitalised the debt or interest into another loan). Taxpayers that carry on finance activities may wish

to consider opting into the TOFA provisions which can also provide an appropriate treatment for bad debts in respect

of “financial arrangements”.


. Before year-end, review the debtors’ ledger and write off any bad debts to ensure that the amounts can

be deducted for the 2016/17 income year. You should keep written records approving the write-off.

. Be careful in capitalising doubtful debts (including interest) into other loan accounts, as this may give rise

to a new debt and may jeopardise a bad debt deduction.

. If there are doubts on claiming the bad debt, consider whether the TOFA provisions may provide a more

appropriate outcome.

Trading stock valuation

For taxation purposes, trading stock can be valued at year-end using cost, market selling value or replacement value.

Changing the method of valuing stock at year-end for tax purposes can either bring forward or defer part of your

taxable income. The provisions allow a choice to be made for each individual item of trading stock. A lower value can

be used where stock is obsolete25, giving rise to tax deductions for the taxpayer.

SBEs can choose not to conduct a stocktake (and thus not bring to account changes in the value of trading stock) if

there is a difference of $5,000 or less between the value of stock at the start of the income year and a reasonable

estimate of the value of stock at the end of the year. Notably the SBE threshold has been increased from turnover $2

million to $10 million (which includes turnover of certain related entities) for the 2016/17 income year.


. Consider valuing trading stock at either market selling value or replacement value, or identifying

obsolete stock at year-end.




41

. Where the entity holds investments as trading stock (including foreign investments), consider whether

the market selling value method can be used on an investment-by-investment basis to bring forward

unrealised losses on such investments.

. If you are a SBE (i.e. aggregated turnover of less than $10 million), consider utilising the simplified

trading stock rules.

Depreciating assets (all entities)

A taxpayer can claim a deduction for the decline in value of an asset it holds if that asset is a depreciating asset that is

used or installed ready for use for a taxable purpose over the effective life of the asset26. For assets acquired during

the 2016/17 income year, the ATO’s effective lives are set out in Taxation Ruling TR 2016/1 (applicable from 1 July

2016)27.

From 1 July 2016, taxpayers may choose to self-assess the effective life of certain intangible depreciating assets (for

example, standard patents, registered designs, copyrights) rather than use the specified statutory effective lives. The

choice must be made for the income year in which the taxpayer begins to hold the asset28.

In reviewing your year-end deductions, there are a number of concessions that may bring forward deductions. A

number of these are identified in the following checklist questions. In addition, if you are a SBE, you should consider

whether you are eligible to access the SBE depreciation concessions (refer to Section 4F).


. Ensure that you review your depreciation schedules and consider scraping obsolete items by 30 June

2017 (in order to claim the remaining written down value).

. Consider self-assessing the effective life of depreciating assets (including certain intangible assets

acquired on or after 1 July 2016), but note that this must be disclosed in your income tax return.

. A 200% multiple of the straight line depreciation rate is available for assets acquired after 9 May 2006 by

electing to use the diminishing value rate.

. An outright deduction can be claimed for depreciating assets costing less than $300 where they are not

used in a business.

. Depreciating assets costing less than $1,000 can be allocated to a low value pool. The depreciation rates

applicable to the pool are 18.75% in the first year and 37.5% in following years. The choice to use a pool

is irrevocable.

. The cost of developing in-house computer software (for example, website expenditure) may be allocated

to a software development pool and deducted over 5 years (starting with a rate of 30% in the

subsequent year).

26 The amount of the deduction is reduced if the asset is held for a non-business purpose. 27 Taxation Ruling TR 2016/1. 28 Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017 was introduced in the House of Representatives on 30

March 2017. At the time of writing, the Bill had not been passed into law.

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. SBEs may be eligible for additional concessions (see below).

Depreciating assets (small business entities)

SBEs are eligible to claim an immediate tax deduction for depreciating assets costing less than $20,000 which are

acquired and installed ready for use between 7.30pm [Australian Eastern Standard Time] on 12 May 2015 and

30 June 201829. Depreciating assets that cost more than $20,000 can be depreciated at a rate of 15% initially and 30%

on a diminishing value basis in following years using the pooling method. A small range of depreciating assets are not

eligible for the immediate tax deduction where specific depreciation rules already apply to these assets (for example,

horticultural plants and in-house software).

For the 2016-17 income year, a SBE is generally defined as a business with turnover of less than $10 million. The

turnover test includes the turnover of connected entities and affiliated entities. You should consider whether it may be

beneficial to make an election to be an SBE in order to access these concessions for the 2016/17 income year.


. Consider the application of the simplified depreciation concessions where you are a SBE or meet the

eligibility criteria to be treated as a SBE (up to $10 million for the 2016/17 income year).

. Certain depreciating assets costing less than $20,000 can be written off immediately if they are installed

ready for use between 7.30pm [Australian Eastern Standard Time] on 12 May 2015 and 30 June 201830.

. For other depreciating assets, you may be able to depreciate these assets at a rate of 15% initially and

30% on a diminishing value basis in following years using the pooling method.

. Where the balance in the pool (before the current year deduction) is less than $20,000, the SBE may be

able to immediately deduct the amount.

Project pools

Where expenditure is of a capital nature and is not incurred to acquire a depreciating asset, the capital cost may be

deductible on a straight line basis under the project pool provisions31.

Costs that may be deducted under this provision include community infrastructure costs, certain site preparation costs

for depreciating assets, project feasibility costs, environmental assessment costs, costs pertaining to obtaining

information for projects, costs incurred in seeking to obtain intellectual property rights, costs incurred in relation to

ornamental trees or shrubs, mining expenditure32, and transport capital expenditure (including costs associated with

transport facilities, earthworks, bridges and tunnels that are necessary for that facility).

29 Legislation to extend the qualifying period to 30 June 2018 has been introduced into Parliament but had not been passed at

the time of writing. 30 Subject to the enacting of 2017/18 Federal Budget measures. 31 Income Tax Assessment Act 1997 (Cth) s40-830. 32 ATO Interpretative Decision ATO ID 2012/17.

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43


. Consider whether you have incurred capital expenditure that will be considered a “project pool” amount.

Such costs may be deductible under the project pool provisions over the life of the project.

Rental properties (depreciating assets)

The Government announced in the 2017/18 Federal Budget that deductions for depreciation of plant and equipment in

residential real estate properties would be limited for properties acquired after 9 May 2017 (i.e. will be limited for

second hand plant and equipment).

These changes apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming

part of residential investment properties acquired prior to 9 May 2017 (including contracts already entered into at

7.30pm AEST on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer

owns the asset or the asset reaches the end of its effective life. The precise scope of the measure will depend on its

legislation once enacted.


. Investors will no longer be able to claim depreciation for depreciating assets acquired as part of a

purchase of residential real estate from another party (other than off-the-plan purchases).

Rental properties (travel expenses)

The Government announced in the 2017/18 Federal Budget that it will disallow deductions for travel expenses related

to inspecting, maintaining or collecting rent for a residential rental property from 1 July 2017. The measure is not

designed to prevent investors from engaging third parties such as real estate agents for property management

services. These expenses are proposed to remain deductible. The precise scope of the measure will depend on its

legislation once enacted.


. Deductions incurred for travel expenses will be deductible if incurred before 30 June 2017. Such

deductions will be denied from 1 July 2017.

Capitalised internal labour costs

The ATO holds the view that direct labour costs incurred by a taxpayer constructing an asset should be capitalised in a

manner consistent with AASB 116 Property, plant and equipment33.


. If you construct depreciating assets and would be required to capitalise such costs under AASB 116, you

should consider whether such costs need to be capitalised for tax purposes.

33 ATO Interpretative Decision ATO ID 2011/43.


44


Commercial websites

The ATO has finalised guidance concerning the deductibility of expenditure on a commercial website34. A commercial

website is considered an intangible asset that a taxpayer uses for the purposes of conducting its business. The ATO

highlights that periodic outgoings relating to minor modifications to website functionality can potentially be deductible

under the general deduction provisions.

Conversely, enhancements and significant upgrades may be considered to be capital in nature. Expenditure on

acquiring or developing a new or existing website (or a payment to secure and use a domain name) may also be capital.

It is noted that expenditure which is not immediately deductible may be deductible under the capital allowance

regime.


. If you are considering deducting expenditure associated with a commercial website, please consider

whether your position is consistent with the ATO’s views.

Employee bonuses

An employer can only claim a deduction for employee bonuses if the amount thereof was incurred before year-end. A

bonus will be incurred if the company has definitively committed itself to the payment (for example, by passing a

properly authorised resolution35) or by incurring a quantifiable legal liability to pay a bonus36.

If a taxpayer does not determine and authorise a bonus to be paid until after the end of the income year, the amount

may not be considered incurred and deductible in the 2016/17 income year. A properly executed bonus plan may

bring forward deductions to the 2016/17 income year. You should also consider the related party deduction provisions

where the bonus is not paid until the subsequent year (see Section 13H).


. If you pay employee bonuses, you should review the relevant plan and approval process to determine

whether you qualify for a deduction in the year ending 30 June 2017 for accrued bonuses.

Earning exempt-type income

Expenditure incurred to earn exempt or NANE income is generally not deductible, except where the amount incurred is

interest in relation to certain foreign NANE dividend income37 or where the expense relates to distributions from

previously attributed income38.

Where the expenditure is an indirect expense (for example, it is an overhead cost), you should consider whether a

portion of such expenditure should be treated as non-deductible39.

34 Taxation Ruling TR 2016/3. 35 Taxation Ruling No. IT 2534. 36 Merrill Lynch International (Australia) Limited v Commissioner of Taxation [2001] FCA 1127. 37 Income Tax Assessment Act 1997 (Cth) s25-90 and Commissioner of Taxation v Noza Holdings Pty Ltd [2012] FCAFC 43. 38 Income Tax Assessment Act 1936 (Cth) s23AI(2). 39 Kidston Goldmines Ltd v Commissioner of Taxation [1991] FCA 351.

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.

Where exempt or NANE income is earned by an entity, ensure that you have reviewed the deductibility

of all expenses as expenses, to the extent they are incurred in deriving that income, will generally not be

deductible.

. If you incur general overhead costs, you may be required to apportion those between your activities that

produce assessable income and those that produce NANE income.

Foreign exchange gains and losses

Foreign exchange gains and losses are recognised for tax purposes when foreign currency denominated rights or

obligations are realised, called forex realisation events (unless TOFA applies to the arrangement – see Section 10D).

Generally, in calculating the foreign exchange gains and losses, spot exchange rates are required to be used. Due to

the prescriptive nature of these rules, this may not align with rates used for accounting purposes.

Elections may be available to assist in reducing compliance issues. For example, regulations have been introduced to

allow taxpayers to make a choice to use conversion rates that are more in line with those used for accounting purposes

(for example, average rates). Other elections include: (1) a functional currency election (which allows taxable income

to be calculated in the foreign currency); (2) a forex retranslation election (which allows the accounting method to be

used); and (3) a limited balance election (which allows foreign currency gains and losses to be ignored on qualifying

bank accounts that do not have a balance in excess of $A250,000 at any time during the year).

These elections require conditions to be satisfied and need to be made by the relevant taxpayer within certain

timeframes.


. Ensure that your 30 June tax calculations include adjustments for unrealised foreign exchange gains and

losses.

. Consider whether elections should be made to simplify the calculation of realised foreign exchange gains

and losses for the year.

. As TOFA applies in precedence to other provisions, you should consider the TOFA implications for foreign

currency transactions (see Section 10D).

Gifts and donations

A taxpayer is entitled to a tax deduction if a gift or donation of money or property is made (where it is valued at $2 or

more) to a deductible gift recipient, provided appropriate documentary evidence has been retained.

However, a gift or donation cannot increase a tax loss for the income year. A taxpayer may be able to elect to amortise

the gift or donation over a period of up to five years (such a donation can only be made in respect of a gift of property

valued at over $5,00040). Such an election must be made before you lodge your income tax return for the income year

in which the gift or donation was made.

40 Subdivision 30-DB of the Income Tax Assessment Act 1997 (Cth). Note that the property must be valued by the ATO.


46


Consider whether you wish to establish your own charitable structure such as a Private Ancillary Fund (“PAF”) to which

tax deductible donations can be made.


. Retain all receipts in relation to gifts and donations in order to claim your deductions. Ensure that such

gifts and donations have been made to deductible gift recipients.

. Where a deduction for a gift or donation creates a tax loss, consider whether it is possible to spread the

deduction over a period of up to five years.

. Consider whether you wish to establish your own charitable structure such as a PAF to which tax

deductible donations can be made.

Interest deductions

Refer to Section 10B under Finance Issues for consideration of the deductibility of interest costs.

Prepayments

A taxpayer who prepays expenditure is generally not entitled to an upfront deduction (unless the amount is regarded

as “excluded expenditure”). Instead, prepaid expenditure is apportioned over the shorter of 10 years or the period

during which the services are to be provided (“the eligible service period”).

Excluded expenditure includes: (1) expenditure that is less than $1,000 (GST exclusive); (2) amounts that are required

to be paid pursuant to a law or court order; and (3) payments that are for salary or wages under a contract of service41.

Special rules apply to individuals (see Section 5N) and SBEs that may permit an upfront deduction where the eligible

service period is no more than 12 months. The SBE threshold is turnover of $10 million (which includes turnover of

certain related parties) for the 2016/17 income year.

However, where the amount is incurred under an agreement42, such expenditure will be required to be apportioned.

Limited exceptions apply to this provision, including exemptions for investments in certain negatively geared listed or

widely held stocks and excluded expenditure (for example, expenditure of less than $1,000 or that is required to be

incurred by a Federal, state or territory law).


. Prepayments of expenditure will generally be amortised over the shorter of the eligible service period or

10 years — unless the amounts are excluded expenditure.

. If you are an individual or SBE, an immediate deduction may be claimed for prepaid expenses where the

payment covers a period of 12 months or less that ends in the next income year.

41 Income Tax Assessment Act 1936 (Cth) s82KZL. 42 Income Tax Assessment Act 1936 (Cth) s82KZME.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82kzl.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82kzme.html


47

Service and management fees to associated entities

Service and management fees paid to associated service entities may not always be deductible because43:

The fees may be considered excessive;

The service entity has not performed the services independently of the taxpayer;

The arrangements may make no commercial business sense;

The services may not have been actually delivered;

There is no documentation of a management or service agreement; or

The documents or arrangements are put in place after year-end.

The ATO has set out detailed guidelines in relation to the deductibility of service fees in professional practices44 (refer

to Section 8). You should closely consider the deductibility of service and management fees paid or incurred to related

entities prior to year-end. Further, where there is a timing difference between the assessability of the income and

deduction of the amount, integrity provisions may apply (see Section 13H).


.

Before year-end, you should review all inter-group service and management fees. You should ensure

that appropriate arrangements and documentation are in place and that they are commercially

justifiable.

Capital support payments

Where a parent entity makes payments to a subsidiary entity that has incurred a loss, these payments may be regarded

by the ATO as “capital support payments”. The ATO has issued a taxation determination45 indicating that these costs

may be on capital account and thus non-deductible to the parent entity. This can be compared to an appropriate

service fee (which would otherwise be deductible). Accordingly, care needs to be taken to the extent that payments

made by a parent entity to a subsidiary relate to providing support to the subsidiary entity for losses incurred, rather

than services provided by the subsidiary.


.

The ATO takes the view that capital support payments made by a parent to its subsidiary may be on

capital account and non-deductible. Accordingly, consider whether it is feasible to structure the

arrangement as the provision of services by the subsidiary to the parent for an appropriate arm’s length

service fee.

Superannuation expenses

Refer to Section 12A12 for the superannuation issues to be considered before year-end. Also refer to Section 6S for

year-end tax planning issues relating to superannuation payments from trusts.

43 Taxation Ruling TR 2006/2. 44 ATO website: Your service entity arrangements. 45 Taxation Determination TD 2014/14.


https://www.ato.gov.au/Business/Income-and-deductions-for-business/In-detail/Service-entities/Your-service-entity-arrangements/?page=1#About_this_guide


48


Trade incentives (purchase of stock)

Refer to Section 3E of this document. An incentive that is not directly related to acquiring trading stock does not

reduce the purchase price. In this case, the purchase of trading stock is to be recorded at the full (undiscounted) price.

This may give rise to a larger upfront deduction.


. Review incentives on the acquisition of trading stock and determine whether the purchase price of

trading stock should be reduced for incentives provided during the income year.

Tax loss incentive for designated infrastructure projects

The tax loss incentive for designated infrastructure projects aims to encourage private investment in nationally

significant infrastructure payments by providing eligible entities the benefits of: (1) uplifting the value of carry forward

losses by the 10 year Government bond rate; and (2) modifications to the continuity of ownership test and same

business test which limit deductions for carry forward losses and bad debt deductions.

As there is a global expenditure cap of $25 billion, projects need to be designated by the Chief Executive Officer of

Infrastructure Australia. Accordingly, taxpayers will need to be able to identify potential qualifying projects and apply

for this concession as soon as possible. It may be difficult for taxpayers in the middle market to obtain approval for this

incentive.


. If your entity is involved in large scale infrastructure projects, tax loss incentive legislation for designated

infrastructure projects may allow the entity to recoup early stage losses for approved projects.

Related party deductions

Where a tax planning opportunity gives rise to a differential in the timing of income and deductions between two

related parties, you need to consider the application of special integrity provisions. These provisions may deny

deductions for certain prepaid expenditure46 or may deny deductions where the income is not brought to account in

the same year as the deduction is claimed47.


. Where tax planning arrangements involve related party transactions, consider carefully the application

of the anti-avoidance provisions that may deny deductions incurred by one of the related parties.

46 Income Tax Assessment Act 1936 (Cth) s82KJ. 47 Income Tax Assessment Act 1936 (Cth) s82KK.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82kj.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82kk.html


49


Place any notes or additional information here for further reference with your discussion with your Pitcher Partners

representative.

50


5. Individuals

ATO compliance activity

The ATO’s “Building Confidence” publication indicates that the following activities continue to attract their attention:

Claims for work-related expenses that are unusually high relative to others across comparable industries and

occupations;

Excessive rental property expenses;

Non-commercial rental income received for holiday homes; and

Interest deductions claimed for the private proportion of loans.

Individual taxpayers should pay particular attention to these types of issues and ensure that they are compliant.


. The ATO will scrutinise high work-related expenses by all individuals. You should ensure your work-

related expenses can be validly claimed and that you have appropriate documentation.

. If you own a rental property, the ATO will be closely scrutinising your expenses and deductions for the

year ending 30 June 2017.

. If you are claiming interest deductions, ensure you are not claiming a deduction for any part of the loan

that is funding private expenditure or assets used for private purposes.

Tax rates for the year ending 30 June 2017

The following table outlines the tax rates that apply to resident individuals and non-resident individuals for the 30 June

2017 income year (excluding the Temporary Budget Repair [“TBR”] Levy and the Medicare Levy — see below).

Residents

Taxable Income Tax Payable

0 — $18,200 Nil

$18,201 — $37,000 19% of excess over $18,200

$37,001 — $87,000 $3,572 + 32.5% of excess over $37,000

$87,001 — $180,000 $19,822 + 37% of excess over $87,000

$180,001+ $54,232 + 45% of excess over $180,000


51

Non-residents


0 — $87,000 32.5%

$87,000 — $180,000 $28,275 + 37% of excess over $87,000

$180,001+ $62,685 + 45% of excess over $180,000

From 1 January 2017, a withholding rate of 15% applies to the first $37,000 of a working holiday maker’s income.

Minors (other income)

Other income Tax payable

0 — $416 Nil

$417 — $1,307 Nil + 66% of the excess over $416

$1,308+ 45% of the total amount of income that is not excepted income

Temporary budget repair (“TBR”) levy

A TBR levy of 2% applies for the year ending 30 June 2017. The levy applies to income in excess of: (1) $180,000 for

resident individuals and non-resident individuals; and (2) $416 for minors. The levy will not be applicable from 1 July

2017.

The Fringe Benefits Tax (“FBT”) rate is also 49% for the FBT year to 31 March 2017 to align with the highest marginal

tax rate. As this reduces to 47% on 1 April 2017, this can create a mismatch for the three month period between 1

April 2017 and 30 June 2017. Accordingly, individuals with taxable income greater than $180,000 could consider salary

sacrifice arrangements for the period between 1 April 2017 and 30 June 2017.

Medicare levy

A Medicare levy of 2% is generally payable by resident individuals with taxable income above $21,655 for the year-

ending 30 June 2017. The Federal Government announced in the 2017/18 Budget that the rate of Medicare levy

payable will increase from 2% to 2.5% from 1 July 2019.

Medicare levy surcharge

If a resident individual does not have appropriate private health insurance, a Medicare levy surcharge (“MLS”) of up to

1.5% may apply depending on the resident individual’s taxable income. Non-resident and certain temporary resident

individuals are not required to pay the Medicare levy or the MLS. The rates for the MLS for the year ending 30 June

2017 are:

Base tier Tier 1 Tier 2 Tier 3

Singles $90,000 or less $90,001—105,000 $105,001—140,000 $140,001 or more

Families $180,000 or less $180,001— 210,000 $210,001— 280,000 $280,001 or more

Surcharge rate 0.0% 1.0% 1.25% 1.5%

An exemption from paying the Medicare levy may be available if: (1) you are not entitled to Medicare benefits; or (2)

you meet certain medical requirements.

52


The Medicare levy can be reduced for a number of reasons including: (1) where your taxable income is below certain

thresholds; (2) you had a spouse (married or de facto); (3) you had a spouse that died during the year and you did not

have another spouse before the end of the year; (4) you are entitled to a child housekeeper or housekeeper tax offset;

or (5) were a sole parent at any time during the income year and you had sole care of one or more dependent children.

Norfolk Island residents are liable to pay the Medicare levy from 1 July 201648.

HELP, TSL and SFSS repayment thresholds and rates

If you have a HELP, TSL or SFSS loan, you must start making compulsory repayments when your repayment income

exceeds the minimum repayment threshold. Compulsory repayments are made through your 2017 income tax return.

You can also make voluntary repayments at any time. However, the voluntary repayment bonus is no longer available.

Repayment income Repayment rate

Below $54,869 Nil

$54,869 – $61,119 4.0%

$61,120 – $67,368 4.5%

$67,369 – $70,909 5.0%

$70,910 – $76,222 5.5%

$76,223 – $82,550 6.0%

$82,551 – $86,894 6.5%

$86,895 – $95,626 7.0%

$95,627 – $101,899 7.5%

$101,900 and above 8.0%

The Federal Government has announced changes to the minimum payment threshold and the repayment rate from 1

July 2018.

Comparison of income years and tax rates

There are two main changes to income tax rates that will have an important impact on the amount of tax paid by

individual taxpayers. The first is the removal of the 2% TBR levy from 1 July 2017 (as discussed above). The second is

the staged reduction of the corporate tax rate from 30% to 27.5% for entities with turnover less than $50 million

(discussed in further detail at sections 7B and 7D). It is noted that the franking percentage of a company may change

earlier (as it is based on prior year turnover).

The effect of the staged reduction of the corporate tax rate is that some of the taxation burden will be shifted from

corporate tax entities to individuals, resulting in greater tax being paid at the individual level at the time a dividend is

paid. By way of example, an individual with a marginal tax rate of 49% will pay top-up tax of 27.14% on a dividend

franked to 30% and top up tax of 29.66% on a dividend franked to 27.5% (net tax payable calculated as a percentage of

the cash dividend).

Accordingly, the change in the top marginal tax rate, together with changes to the franking percentage, are important

factors when determine the effect of dividends paid prior to 30 June 2017 and dividends paid after that date.

48 Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Act 2015 (Cth).

http://www.austlii.edu.au/au/legis/cth/num_act/taslaira2015608/


53


. The tax-free threshold for minors that earn taxable income (that is not excepted income) is $416.

. As a part of your ordinary tax planning, you should consider your position in relation to the Medicare

levy and whether you are entitled to any reductions or exemptions for the year.

. Individuals with taxable income greater than $180,000 could consider salary sacrifice arrangements for

the period between 1 April 2017 and 30 June 2017 are the FBT rate for this period is at the lower 47%.

. When paying dividends before or after 30 June 2017, you should take into account the change in the top

marginal rate (of 49% to 47%) as well as the potential change to the franking percentage (30% to 27.5%).

Private health insurance rebate

If you have private health insurance, the amount of the private health insurance rebate to which you are entitled (as a

reduction of your private health insurance premium) is reduced if your income is more than a certain amount. The

following table can be used to determine your premium reduction entitlement for 2016/17.

Status Income thresholds

Base tier Tier 1 Tier 2 Tier 3

Single $90,000 or less $90,001 — $105,000 $105,001 — 140,000 $140,001 or more

Family $180,000 or less $180,001 — 210,000 $210,001 — 280,000 $280,001 or more

Age Rebate for premiums paid from 1 July 2016 — 31 March 2017

Under 65 yrs 26.791% 17.861% 8.930% 0%

65–69 yrs 31.256% 22.326% 13.395% 0%

70 yrs or over 35.722% 26.791% 17.861% 0%

Age Rebate for premiums paid from 1 April 2017 — 30 June 2017

Under 65 yrs 25.934% 17.289% 8.644% 0%

65–69 yrs 30.256% 21.612% 12.966% 0%

70 yrs or over 34.579% 25.934% 17.289% 0%

The family income threshold is increased by $1,500 for each MLS dependent child after the first child.


. The private health insurance rebate is adjusted on the lodgement of your income tax return. This may

increase or decrease the total amount payable.

https://www.ato.gov.au/Individuals/Medicare-levy/In-detail/Medicare-levy-surcharge/Changes-to-private-health-insurance-rebate-and-Medicare-levy-surcharge/?anchor=Medicare_levy_surcharge_dependent_child_#Medicare_levy_surcharge_dependent_child_

54


Rebates and offsets

A number of rebates and tax offsets are available to reduce taxable income. You should consider whether any of the

following offsets may have application to you for the 2016/17 income year.

It is important to note that “adjusted taxable income” is often used to determine eligibility for the rebates and tax

offsets. Adjusted taxable income is the sum of the following amounts: (1) taxable income; (2) adjusted fringe benefits;

(3) total net investment losses; (4) reportable superannuation contributions; (5) deductible superannuation

contributions; (6) certain tax-free government pensions and benefits and (7) target foreign income.

The way fringe benefits are treated for the calculation of these offsets has changed from 1 July 2017. Broadly, the

meaning of “adjusted fringe benefits total’ was amended so that the gross rather than the adjusted net value of

reportable fringe benefits is used49. This will have the effect that the amount of fringe benefits included in the

calculation of “adjusted taxable income” for the 2017/18 income year will be higher than in previous years.


. Low income tax offset — the low income tax offset will remain at $445 for the 2016/17 income year.

. Income received in arrears — the rebate may be available if you receive income in a lump sum

containing an amount that accrued in an earlier income year.

. Spouse superannuation contribution rebate — a tax offset for contributions made to a complying

superannuation fund or retirement savings account (“RSA”) for the purpose of providing superannuation

benefits for your spouse who is a low income earner or is not working.

. Net medical expenses tax offset — taxpayers with an adjusted taxable income below certain thresholds

can claim an offset for disability aids, attendant care or aged care expenses for the year ending 30 June

2017.

. Recipients of social security benefits and allowances — the rebate may be available if you receive

certain Australian social security payments.

. UN forces and defence force rebate — this rebate is available to certain civilian personnel contributed

by Australia to an armed force of the United Nations overseas and for those that serve in a qualifying

overseas locality as a member of the Australian Defence Forces.

. Dependents rebate — available only to taxpayers who meet certain thresholds and maintain a

dependent spouse (born before 1 July 1952), have a child—housekeeper, or had a housekeeper.

. Franked dividend tax offset — a refundable tax offset where you receive a franked distribution.

. The Australian superannuation income stream tax offset — may be available if you receive an income

stream from your superannuation fund.

49 Budget Savings (Omnibus) Act 2016 (Cth).

https://www.legislation.gov.au/Details/C2016A00055


55


. Unused leave payments — a tax offset may be available to limit the tax payable on certain unused leave

payments to 30%.

. Zone rebates — you may be entitled to a rebate of tax where you reside in specified remote areas.

Work expenses and substantiation

Specific substantiation requirements must be met in order to deduct work expenses of more than $300. Expenses

covered by certain allowances are not included in the $300 threshold. The ATO accept a wide range of documents as

written records of your claim, including paper or electronic copies of documents (such as invoices, receipts or delivery

notes), statements from financial institutions (such as credit card statements), BPAY receipt numbers, PAYG payment

summaries and warranty documents.


. Ensure that you have kept appropriate records to substantiate your work expenses claim for the year

ending 30 June 2017.

Work expenses (using the ATO’s myDeductions App).

The ATO has a free phone App called myDeductions, which allows you to record your deductions and expenses, vehicle

trips, income (if you are a sole trader), and keep photos of your invoices and receipts. This is a handy tool to keep a

contemporaneous record of your tax expenses and to ensure that you legitimately maximise your deductions and

claims.


. Consider downloading the ATO’s phone App called myDeductions, which can help you maximise your

deductions claimed during the year.

Work-related car expenses

For the year ending 30 June 2017, there are only two methods for the calculating the tax deduction available for motor

vehicles: (1) the cents per km method (business use of up to 5,000 km at a rate of 66c per km); and (2) the logbook

method.

For the cents per km method, no substantiation of expenses is required. However, you need to show how you have

calculated the business km. Full substantiation is required of all expenses for the logbook method, including odometer

readings. Appropriate estimates can be used for fuel rather than receipts. This can be done by estimating the fuel

56


used for the year based on the engine type and litres used per 100km50. The average fuel price can be obtained from a

number of sources51.


. To leave your options open make sure that you have kept odometer readings for your car for the 2017

income year.

. Ensure that you also keep receipts for the running costs of your motor vehicle. Note that you can

estimate fuel costs based on your business travel.

. If using the logbook method, ensure that you have appropriately completed a valid logbook that can be

used for the 2017 income year.

Work-related travel expenses

Work-related travel expenses can include meals, accommodation and incidental expenses you incurred while away

overnight for work (for example, attending an interstate work conference). Generally, if your travel did not involve an

overnight stay, you cannot claim for meals. The ATO has published reasonable travel and overtime meal allowance

expense amounts that can be used for the 2017 income year52.

Other travel expenses you may be able to claim include work-related expenses for (but not limited to): air, bus, train,

tram and taxi fares; car-hire fees; and the costs you actually incur (such as fuel costs) when using a borrowed car.

You may be required to keep travel records if your travel involves being away from your ordinary residence for six or

more consecutive nights. Travel expenses should be reduced to exclude any private portion of your trip. Costs

incurred in travelling from your home to your workplace are generally not deductible other than in limited

circumstances (such as if you need to carry bulky tools or equipment that you used for work and can't leave it at your

workplace). However, you can claim travel between two separate places of employment.


. Review whether you have incurred any costs during the year for work-related travel expenses.

. Ensure that you have kept travel records where you are away for six or more consecutive nights.

Work-related clothing, laundry and cleaning expenses

You can claim a deduction for the cost of buying or cleaning occupation-specific clothing, protective clothing or unique,

distinctive uniforms. More specifically, you can claim deductions for (but not limited to):

Clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your income

earning activities or the environment in which you are required to carry them out;

A uniform, either compulsory or non-compulsory, that is unique and distinctive to the organisation you work for;

50 This information can be obtained from https://greenvehicleguide.gov.au/ for most vehicles. 51 See http://www.aip.com.au/pricing/pdf/AIP_Annual_Retail_Price_Data.xls for annual average prices. 52 Taxation Determination TD 2016/13.

https://greenvehicleguide.gov.au/

http://www.aip.com.au/pricing/pdf/AIP_Annual_Retail_Price_Data.xls

http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD201613%2FNAT%2FATO%2F00001%22


57

Clothing that is specific to your occupation, is not every day in nature and would allow the public to easily

recognise your occupation; and

Costs of washing, drying and ironing eligible work clothes, or having them dry cleaned.

However, you cannot claim the cost of purchasing or cleaning a plain uniform, ordinary clothes you wear for work that

may also protect you (for example, everyday shoes), and clothes you bought to wear for work that are not specific to

your occupation. The ATO publishes industry guidelines to help assist you with your claims for work-related clothing

deductions53.


. Examine whether you can claim deductions for work-related clothing, laundry and dry cleaning expenses

for the year ending 30 June 2017.

. Ensure you have reviewed your industry guidelines published by the ATO for work related clothing

deductions.

Other work-related expenses

There are a number of other common additional work-related expenses that individuals claim including the following

types of expenses.

Item Description

Home office expenses

Home office running expenses (heating, cooling, and lighting), depreciation of computers, phones and desks, work-related phone calls, internet usage, the costs of repairs to your home office furniture and fittings and cleaning expenses. The ATO allow you to claim actual amounts or an amount based on a rate of 45 cents per hour (plus the decline in value of depreciating assets)54.

Occupancy expenses

Occupancy expenses include rent or mortgage interest, council rates and house insurance premiums. These can only be claimed where your home office is considered to be a place of business.

Other work related expenses

This category of expenses includes union fees and subscriptions to associations, seminars, conferences and education workshops, books, memory sticks and insurance against the loss of your income.

Tools, equipment and stationary

This category of expenses may include depreciation on tools of your trade, protective items, computers and software. This category may also include items of stationery purchased to complete your ordinary work activities.

Overtime meal allowance expenditure

If you get paid an overtime meal allowance, you can claim a reasonable allowance amount. The reasonable allowance amounts are provided yearly in an ATO taxation determination55.

53 ATO website: Deductions for specific industries and occupations. 54 Practice Statement Law Administration PS LA 2001/6. 55 Taxation Determination TD 2016/13.

https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Deductions-for-specific-industries-and-occupations/

http://law.ato.gov.au/atolaw/view.htm?docid=PSR/PS20016/NAT/ATO/00001


58



.

You should consider whether you can claim work-related expenses such as home office expenses,

occupancy expenses, work-related registration, development and support amounts, tools, equipment

and stationery costs, as well as overtime meal allowance expenses.

Work-related specific deductions for industries

The ATO publish industry guidelines56 to help assist with claims for work-related deductions. You should review and

consider the specific industry guidelines for your profession.


. Examine the ATO’s industry guidelines for your occupation to ensure that you are maximising your claim

for deductions for the year ending 30 June 2017.

Self-education expenses

Self-education expenses are expenses that you incur when you undertake a course to obtain a formal qualification.

These expenses are deductible where the course has sufficient connection to your current employment and maintain

or improve the specific skills or knowledge you require in your current employment or result in, or likely to result in, an

increase in your income from your current employment.

It is important to note that there are limitations on the deductions for self-education expenses incurred in relation to

certain government supported higher education placements. In addition, deductions for self-education expenses may

need to be reduced by $250 in some circumstances57.


. Determine if you have self-education costs that relate to your current employment.

. You should quantify your self-education expenses and determine whether you need to reduce those

costs by $250.

Work-related expenses you cannot claim

There are a number of expenses associated with your work that you cannot claim. Typically, these include the

following types of expenses:

Travel between your home and your workplace;

Expenses for a uniform consisting of conventional clothing;

Self-education expenses where the course does not have sufficient connection to your current employment;

Entertainment (for example, buying a meal for a client or colleague);

56 ATO website: Deductions for specific industries and occupations. 57 Income Tax Assessment Act 1936 (Cth) s82A(1).

https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Deductions-for-specific-industries-and-occupations/

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s82a.html


59

Fines or penalties;

Child care expenses; and

Fees paid to social clubs.


. Review your work-related expenses to ensure that they do not include non-deductible expenses for the


Tax offsets for investments in ESVCLPs and ESICs

There are two incentives that can directly reduce your tax payable for 30 June 2017 by way of a carry forward non-

refundable tax offset.

The first is a tax offset equal to 10% for eligible contributions made by a limited partner to an ESVCLP. The second is a

tax offset equal to 20% for the value of an investment in an ESIC (subject to a maximum offset of $200,000). It is noted

that where a discretionary trust is used to invest into the ESVCLP or ESIC, the trust may be able to allocate the tax

offset to investors on a discretionary basis.

While these provisions are primarily aimed at sophisticated investors, certain non-founding non-sophisticated investors

are able to access the concessions but limited to investments of up to $50,000. Investors in an eligible ESIC or ESVCLP

may also be able to disregard certain capital gains realised on the disposal of shares or interests respectively (but also

have to disregard certain capital losses).


. You may be able to reduce your tax payable by investing in an ESIC or ESVCLP before 30 June 2017 and

obtaining access to a non-refundable carry forward tax offset of 20% or 10% respectively.

Prepaying expenses

Prepaying expenses can be an effective way of reducing taxable income for an income year. Prepaid expenses may be

deductible upfront if the eligible service period does not end later than 12 months after year-end.

However, amounts incurred under a “tax shelter agreement” will need to be apportioned where deductions exceed the

income attributable to the agreement. There are limited exceptions to this, including exemptions for investments in

certain investments, infrastructure borrowing related prepayments and excluded expenditure (see section 4Q).


. Consider whether a prepayment of the next 12 months of expenses, such as interest, before year-end

will help to effectively reduce your taxable income for the current year.

Salary sacrifice arrangements

A salary sacrifice arrangement occurs where an employee agrees to forego part of their future remuneration in return

for the employer or someone associated with the employer providing benefits of a similar value. Examples may include

superannuation contributions, the provision of motor vehicles and the payment of school fees, childcare costs or loan

repayments.

60


A valid salary sacrifice agreement must be entered into before the services have been performed and everything has

been done by the employee in earning the entitlement to the salary or wages. Where the salary sacrifice agreement is

invalid, this will mean that the original income will be that of the employee and the employer will have a PAYG

obligation, as well as other associated obligations (for example, superannuation guarantee charges).

While recent cases have cast doubt on the efficacy of salary sacrifice arrangements, it is noted that the ATO has not

withdrawn its long-standing public ruling allowing personal service providers (for example, employees) to enter into

salary sacrifice arrangements58.


. Where you are considering a salary sacrifice arrangement before year-end, ensure that the arrangement

is effective for tax purposes.

Employee share schemes

The discount on shares, stapled securities and right/options acquired under an ESS is generally subject to tax to the

individual. The timing of the taxation on the discount will depend on the type of the scheme (non-concessional

schemes are generally taxed upfront, while concessional schemes can be deferred in some cases). Special concessions

also apply for start-up companies. You should ensure that you have appropriately considered you ESS arrangements

and determined the amount that must be included in your taxable income for the year ending 30 June 2017.


. Consider whether employee options and/or shares qualify for deferral under the ESS provisions.

. Consider whether you qualify for the ESS start-up concessions for the year ending 30 June 2017.

Foreign employment income

The foreign income of Australian resident individuals is exempt if it relates to employment on foreign aid projects or

military service overseas. This means that fringe benefits provided in respect of non-exempt overseas employment can

now be subject to FBT in certain circumstances (alternatively, the value will be taxable to the individual).


. Consider whether you are taxable on income in respect of overseas employment.

. Employers should consider whether fringe benefits provided to employees working overseas give rise to

an FBT liability.


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Non-commercial losses

A non-commercial loss refers to a loss generated by an individual from conducting a business (other than a primary

production or professional arts business). These rules do not apply in respect of activities that are a hobby or relate to

generating passive income (i.e. as such losses are not deductible). Where non-commercial losses are generated, the

ability to claim such a loss depends on whether the individual earns less than $250,000 and whether one of a number

of “exception tests” are satisfied. If you do not satisfy those tests, or you earn more than $250,000, you need to apply

to the Commissioner for him to exercise his discretion to use the tax losses59.


. If you carry on a business in your own name, tax losses from the business may be quarantined under the

non-commercial loss provisions.

. If your adjusted taxable income is equal to or less than $250,000, you need to satisfy one of the tests to

claim the non-commercial loss.

. If you earn more than $250,000 or you do not satisfy the relevant tests to use the tax losses, you can

apply to the Commissioner to exercise his discretion to use the tax loss.

Personal services income

If the PSI rules apply (see Section 3S for details), the provisions can limit what is otherwise deducted by you or the

entity carrying on the activities.


. Where you have provided services (either personally or through an entity), please consider deductions

claimed and whether they will be limited by the PSI rules.

Living away from home allowance (LAFH)

Where an employee maintains a home in Australia for their own use and is required to live away from that home for

the purposes of their employment, the taxable value of any LAFH allowance may be reduced. The home must be

available to the employee for the duration of their time away (i.e. it cannot be rented out). The employee must also

have a sufficient interest in the home (i.e. they or their spouse must own or lease the property).

Importantly, the ability to reduce the taxable value of LAFH food and accommodation costs to nil is limited to a

maximum period of 12 months for an employee at any work location. Finally, all accommodation expenses must be

substantiated or they will be subject to FBT.

Other concessional living away from home benefits (for example, relocation transport and removal and storage of

household goods) may still be available where the employee does not meet the ‘maintaining a home’ criteria.

59 Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779.


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. If you are in receipt of a LAFH allowance, you should review your eligibility to claim the living away from

home concession.

Changes to repayment of HELP, TSL and SFSS debts

Changes to repayment thresholds

The Federal Government has announced reforms to higher education loans that are to take effect from 1 January

201860. Broadly, the minimum repayment threshold will be reduced to $42,000 from 1 July 2017 with a lower 1%

repayment rate, and a maximum threshold of $119,882 with a repayment rate of 10%.

In addition, from 1 July 2019 the indexation of HELP repayment thresholds will align with the Consumer Price Index (i.e.

CPI) rather than Average Weekly Earnings (i.e. AWE). The change in indexation method may mean that, in the future,

the CPI-indexed repayment thresholds will be lower than if the AWE-indexed repayment thresholds applied.

Overseas repayment of HELP and TSL debts

From 1 July 2017, if you are living overseas, have a HELP or TSL debt, and earn over the minimum repayment threshold,

you will incur the same repayment obligations as if you continued to live in Australia.

If you meet the above requirements, you will be required to lodge a statement of your worldwide income with the ATO

or provide a non-lodgement advice to the ATO by 31 October 2017 (or later if you are using a registered Australian tax

agent) regardless of the level of your worldwide income.

Alternatively, if you are intending on moving overseas for more than 183 days in a 12-month period, you are required

to notify the ATO of your new contact details through the myGov portal. This update must be made within seven days

of leaving Australia61. If you already live overseas, you need to update your contact details through the myGov portal

no later than 1 July 2017.

A failure to comply with these requirements will be treated as a breach of a taxation law and fines may be applied.


. If you are living overseas and have a HELP or TSL debt, you need to report your worldwide income to the

ATO or provide a non-lodgement advice by 31 October 2017 (or later if you are using a registered

Australian tax agent).

. If you are living or intending to live overseas, and have a HELP or TSL debt, you will need to advise the

ATO of your new contact details through the myGov portal.

60 Department of Education website: The Higher Education Reform Package. 61 ATO website: Study and training support loans: Overseas obligations.

https://docs.education.gov.au/system/files/doc/other/ed17-0138_-_he_-_glossy_budget_report_acc.pdf

https://www.ato.gov.au/individuals/study-and-training-support-loans/overseas-repayments/


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representative.

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6. Trusts


The ATO, through its Trust Taskforce, continues to monitor trust arrangements, particularly those involving wealthy

individuals. The ATO notes that the following arrangements will attract scrutiny62:

Unregistered trusts or their beneficiaries who have received substantial income, or have not lodged tax returns or

activity statements.

Offshore dealings involving secrecy jurisdictions.

Agreements with no apparent commercial basis that direct income entitlements to a low-tax beneficiary while

others enjoy benefits from the trust.

Artificial adjustments to trust income, so that tax outcomes do not reflect the economic substance (for example,

where parties receive substantial benefits from a trust while the tax liabilities corresponding to the benefit are

attributed elsewhere or where the full tax liability is passed to entities without any capacity or intention to pay).

Revenue activities are mischaracterised to achieve concessional capital gains tax treatment — for example, by

using special purpose trusts in an attempt to re-characterise mining or property development income as

discountable capital gains63.

Changes to trust deeds or other constituent documents to achieve a tax planning benefit, with such changes not

credibly explicable for other reasons.

Transactions with excessively complex features or sham characteristics, such as round robin circulation of income

among trusts.

New trust arrangements which have materialised and that involve taxpayers or promoters linked to previous non-

compliance — for example, people connected to liquidated entities that had unpaid tax debts.

Accordingly, if your activities are operated through a trust, you should carefully review the planning considerations

contained in this section and ensure that you strictly comply with the law and the requirements of your trust deed.


. As the ATO will continue its trust compliance activities for the year ending 30 June 2017, you should

carefully review all of the planning considerations contained in this section.

Trustee tax rate

Where no beneficiary is presently entitled to a share of the income of the trust estate, trustees will generally be liable

to pay tax on that proportionate share of the net (i.e. taxable) income of the trust at the rate of 49%64. Accordingly,

care needs to be taken to ensure that appropriate resolutions are created by the required time under the trust deed so

that the trustee is not taxed at the top marginal rate of tax.

62 ATO website: Trusts Taskforce. 63 Taxpayer Alert TA 2014/1. 64 The rate is scheduled to reduce from 49% to 47% for the 2017/18 income year and subsequent years.

https://www.ato.gov.au/General/Trusts/In-detail/Compliance/Trusts-Taskforce/?page=1#What_attracts_our_attention

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.

To avoid a trustee assessment at 49%, you should ensure that beneficiaries are made presently entitled

to all of the income of the trust estate by either 30 June 2017 or an earlier time (if required by the trust

deed).

Review of trust deeds

You should closely review the relevant trust deed, on an annual basis, to ensure that the terms of the deed are being

complied with. The deed of the trust should be reviewed to confirm the vesting date of the trust. Where a trust

distributes an amount of income or capital to another trust, such distributions may (at a later stage) be taken to be void

if the trust breaches the rule against perpetuities.

You should also closely consider the relevant trust deed to ensure that amounts are distributed to eligible beneficiaries

under the relevant deed. Distributions to ineligible beneficiaries will not be effective for tax and trust purposes and

may give rise to assessments to the default beneficiary or the trustee at 49%. This can be particularly important where

the trust is distributing to a new corporate or trust beneficiary (where the trust has not distributed to that beneficiary

previously). In many cases, a nomination or special approval by the guardian or appointor may be required.

Further, you should consider whether the deed defines income of the trust in an appropriate or flexible enough

manner (see Section 6E) and whether the deed allows streaming (see Section 6I). You may also wish to review

distribution clauses to ensure they are appropriate for the current year. There is still time to amend the trust deed (if

required) prior to 30 June. The ATO has acknowledged that a resettlement is unlikely to occur if an amendment to the

trust deed is made pursuant to a power under the deed65.


. Ensure that the deed is appropriate for the current year resolutions and distributions.

. Ensure that distributions for the current year are made to eligible beneficiaries of the trust.

. Ensure that you have considered the rule against perpetuities when making trust distributions for the

current year.

Trustee resolutions

Trustees must make income distribution resolutions by the end of an income year (i.e. 30 June) or earlier if required by

the trust deed, to ensure that the desired beneficiaries are presently entitled to trust income and avoid trustee

assessments at 49%.

In preparing resolutions, you are not required to have fully documented the trustee resolution by 30 June unless

otherwise required by the trust deed. However, the ATO will expect that you are able to evidence decisions made by

the trustee. This can be done by way of rough notes, or other documents prepared (such as budgets, spreadsheets,

mapping documents).

65 ATO Decision Impact Statement: Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark and

Taxation Determination TD 2012/21.

https://www.ato.gov.au/law/view/document?docid=LIT/ICD/QUD1of2010/00001


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Particular care should be exercised where the trust has an investment in an entity that can result in taxable income

without cash distributions (e.g. an investment in an AMIT, another trust, or an interest in a CFC).

Your Pitcher Partners representative can assist you in this process by helping you to implement a distribution plan and

distribution resolutions before year-end.


. Ensure that you have made distribution resolutions before year-end (or earlier if required by the trust

deed) and that these can be evidenced.

. Consider implementing a distribution plan where there are a number of trusts and other entities in the

group.

Meaning of income of the trust estate

The taxable income of a trust is allocated to beneficiaries based on their respective entitlements to the “income” of the

trust for trust purposes. The way in which a trust deed defines income, as well as the accounting treatment of the trust

income, can be critical in determining how taxable income is allocated to beneficiaries.

All trust deeds are unique. However, typically, trust deeds define trust income as being one of the following: (1)

income according to ordinary concepts; (2) the taxable income of the trust; or (3) a combination of the above. Many

trust deeds also contain discretions allowing the trustee to treat income or expenditure as either capital or income of

the trust. There is also uncertainty as to whether notional amounts (for example, franking credits, Division 7A

dividends66), can form part of the income of the trust estate.

It is critically important that you consider the meaning of income in your trust deed, in order to properly understand

the tax impact of resolutions by your trust.


. Ensure that you review your trust deed and understand the meaning of income under the relevant trust

deed before determining your distribution from the trust.

. Note that you will need to disclose the income of your trust estate for trust purposes in the tax return for

the year ending 30 June 2017.

. If you derive notional tax amounts (such as franking credits) you should consider how your deed defines

income and how it deals with such amounts.

. The accounting profit of the trust will not necessarily equate to the “income” of the trust. You need to

consider whether accounting amounts should be included or excluded from your calculation (for

example, revaluation or devaluation amounts) by having regard to your resolutions and trust deed.

. If you are distributing taxable income, this can result in a distributing more than accounting profit. This

may result in a deficiency of assets. You should consider whether this will have implications for users of

the accounts (e.g. banks, creditors, etc.).

66 Colonial First State Investments Ltd v FC of T [2011] FCA 16.



67


. Consider using percentages in your distribution resolutions to avoid a dispute with the ATO as to the

allocation of income of your trust estate to beneficiaries.

. Complexities can occur if your trust deed defines income as being equal to taxable income (as outlined in

TR 2012/D1). You should consider whether “notional amounts” such as franking credits will result in

complexities for your trust.

Distribution of timing differences

The ATO is focusing some of its compliance activity on timing differences in trusts. In particular, the ATO is examining

cases where the income of the trust estate is lower than the taxable income and excess amounts have been distributed

to a corporate beneficiary.67 The ATO have expressed concern that this strategy eliminates top-up tax and have

commenced reviews of taxpayers through the Trust Taskforce.


. Care needs to be taken where there are significant timing differences, especially where taxable income

exceeds accounting profit and the distribution is made to a corporate entity.

Distribution of timing differences (unit trusts)

If a unitholder receives a distribution of trust income for an income year and the distribution exceeds the trust's

(taxable) net income for that year, the cost base of the unit is required to be reduced by that difference. If the cost

base has been exhausted, a capital gain may arise as a result of such distribution (under CGT event E4 or CGT event

E10).

The ATO has released ATO ID 2012/6368 which confirms this result, even if the difference between the trust income and

the taxable (net) income is merely a result of a timing difference. For example, this adjustment can occur where an

outgoing is expensed for trust accounting purposes in year 1 and deductible for tax purposes in year 2.

One possible way to avoid this problem is to define income in the trust deed as being equal to “taxable income”. This

helps to ensure that the trust only distributes taxable amounts (and that there are no timing differences). However, in

considering this option, regard should be had to the items discussed at Section 6E above.


.

As beneficiaries of unit trusts can be taxable on a distribution of timing differences, consider whether it

may be possible to align tax and accounting by defining income as “taxable income” for the current

income year.

67 Taxpayer Alert TA 2013/1. 68 ATO Interpretative Decision ATO ID 2012/63.

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Trust to company distributions

The Division 7A implications of a trust making distributions to a corporate beneficiary and leaving those trust

distributions unpaid (i.e. as unpaid present entitlements) must not be ignored. See Section 7K for a more detailed

description of Division 7A.


. Ensure that you have considered Division 7A when making trust to company distributions for the current

year.

. Ensure you have complied with Division 7A in relation to prior year unpaid trust distributions to

corporate beneficiaries.

Trust streaming

Specific provisions allow capital gains and franked distributions to be streamed to beneficiaries of a trust estate. In

order for this to be effective, the trust deed must allow for streaming. Where a deed does not contain specific

streaming powers, you may need to consider amending the trust deed before year-end.

Beneficiaries must be made “specifically entitled” to either franked distributions or capital gains in order for those

amounts to be streamed to the beneficiaries. In creating the specific entitlement, there is a requirement that written

documentation be in place by 30 June for franked distributions and 31 August for capital gains. The legislation also

requires the full amount of the financial (economic) benefits to be allocated to beneficiaries (including any discounted

amounts). Notably, it is the ATO’s view that streaming of other forms of income (for example, interest, unfranked

dividends, rental income, royalties, and foreign income) is ineffective for tax purposes.


. Where your trust derives capital gains and/or franked distributions, determine whether such gains can

be streamed to particular beneficiaries of the trust under the relevant trust deed.

. If your deed does not explicitly allow for streaming, consider whether the trust deed should be amended

before year-end.

. Complete a written record on or before 30 June (or earlier if required by the deed) that evidences the

specific entitlement for franked distributions from the trust. Consider utilising the Pitcher Partners

standard documentation.

Capital gains versus revenue gains

Capital gains concessions (such as the 50% CGT discount) are often available when a trustee flows a capital gain

through to certain beneficiaries of the trust. Such concessions are not available where the gains are on revenue

account.

In this regard, the ATO has released a taxation determination indicating that, in its view, not all gains made by an

investment trust are on capital account69. The ATO outlines certain criteria that may support CGT treatment, for

example, where the trustee adopts a “buy and hold” style of investment, where annual turnover is less than 10% of the

69 Taxation Determination TD 2011/21.



69

portfolio and where there is a low level of sale transactions compared with the number of stocks in the portfolio.

Alternatively, the gain or loss may be treated on revenue account where there is a business or profitmaking type

transaction. Further, if the trust has a policy of measuring performance by reference to both realised income and

unrealised gains/losses, the ATO may treat the portfolio as being on revenue account. A number of additional factors

are taken into consideration in determining whether the gain is on revenue account or capital account.


. Where substantial (or a significant volume of) gains are derived by a trust, consider reviewing whether

the gains are on capital account or revenue account.

Trust losses and bad debts

Where a trust incurs a revenue loss or seeks to deduct a bad debt, the trust loss provisions must be satisfied. These

rules require testing the trust for changes in ownership and control which vary depending on whether the trust is fixed

or non-fixed. Given that, as a general rule, the trust loss provisions do not contain a same business test fall-back, they

should always be considered whenever a trust seeks to utilise a loss or deduct a bad debt — especially if income is

injected into the trust (see Section 6M).6N).

The application of the trust loss provisions is modified where a valid FTE is in place. The consequence of making a FTE

is that the trust can only distribute to members of the family group (as defined). Significant penalties are imposed if

this rule is breached (see Section 6Q).


.

If the trust has not made a FTE, consider whether such an election should be made if the trust is likely to

incur losses in the current income year or bad debt deductions from debts arising in the current income

year.

. If a FTE has not been made, and is unlikely to be made, consider the application of the trust loss

provisions.

Flowing franking credits through a trust

Where a trust holds shares that were acquired after 31 December 1997, franking credits can only be passed through to

a beneficiary of the trust if the beneficiary is a qualified person (unless one of the exceptions noted below applies).

This generally requires that both the trust and the beneficiary satisfy the 45-day holding period test (or 90 days for

certain preferred equities).

Exceptions to the 45-day holding period test include: (1) a small individual exclusion (i.e. if the beneficiary is an

individual and the total franking credit tax offsets claimed by that person do not exceed $5,000 for the income year);

(2) an exception for fixed trusts; (3) an exception for trusts that have made a FTE where the beneficiary is part of the

family group; and (4) deceased estates.

It is noted that it is practically difficult (if not impossible) to satisfy the fixed trust test without requesting the ATO to

exercise its discretion70.

70 Colonial First State Investments Ltd v FC of T [2011] FCA 16.


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. If the trust has not made a FTE, consider whether such an election is required if the trust has derived

franked distributions for the year.

. If the trust is not a fixed trust, consider whether either: (i) an application should be made to the ATO to

treat the relevant trust as a fixed trust for the purpose of these provisions; or (ii) amendments can or

should be made to the trust deed to try and ensure that the trust is a fixed trust for tax purposes.

Distributions from foreign trusts

The ATO has released two draft taxation determinations71 dealing with capital gains made by trustees of foreign trusts

in respect of assets that are not taxable Australian property.

Broadly, it is the ATO’s view that capital gains will be assessable to an Australian resident beneficiary as trust income

that has not been previously subject to tax. This view results in the denial of the 50% CGT general discount to the

beneficiary and prevents the beneficiary offsetting capital losses against the gain.

Further, deemed interest may be payable72 by the beneficiary in respect of the distribution where it is received from a

”controlled foreign trust”73.


.

Capital gains derived by foreign trusts may be assessable to Australian resident beneficiaries as trust

income that has not been previously subject to tax, resulting in the denial of the 50% CGT general

discount and preventing the beneficiary offsetting capital losses against the gain.

. Capital gains derived by controlled foreign trusts may be assessable to Australian resident beneficiaries

as trust income that has not been previously subject to tax, resulting in an interest penalty.

Injection of income into a trust

A trust may not be able to apply its losses or deductions to income that is injected into the trust by an outsider to the

trust. An injection may involve another trust distributing income to the relevant trust.

Where a trust has not made a FTE or an interposed entity election (“IEE”), all entities (other than the trustee and

persons with fixed entitlements in the trust) are considered outsiders to the trust. Where there are multiple trusts in

the group, it is very easy to breach the income injection test. For example, it has been held that not charging interest

on an UPE is sufficient to breach the rules to deny deductions to the trust74.

As the rules can generally be overcome by making an FTE or an IEE, you should consider whether an FTE or IEE should

be made by the relevant trusts. The consequence of making a FTE or IEE is that the trust can only distribute to

members of the family group (as defined). Significant penalties are imposed if you breach this rule (see Section 6Q).

71 Taxation Determination TD 2016/D4 and Taxation Determination TD 2016/D5. 72 Income Tax Assessment Act 1997 (Cth) s102AAM. 73 Income Tax Assessment Act 1936 (Cth) s342. 74 Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62.

http://law.ato.gov.au/atolaw/print.htm?DocID=DXT%2FTD2016D4%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=20161130000001-99991231235959

http://law.ato.gov.au/atolaw/print.htm?DocID=DXT%2FTD2016D5%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=20161130000001-99991231235959

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s102aam.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s342.html

https://jade.io/j/?a=outline&id=99713


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.

Where income is to be injected into a trust (for example, by another trust), you should consider whether

a FTE should be made. The consequences of not making an election are: (1) that the trust may not be

able to use its losses and deductions for the income year; and (2) the trustee may be taxed on the

injection of income.

Injection of income into a loss company

The injection of income into a loss company may be subject to special income injection rules, which can deny

deductions for the tax losses. The ATO are currently examining these arrangements where there are timing differences

(i.e. taxable income distributed to the loss company is greater than the cash distribution), even where the loss

company is owned by a member of the family group under an FTE.

. If the trust is distributing taxable income to a loss company, care needs to be taken where the taxable

distribution exceeds the amount of cash to be distributed to the company.

Interest expense to fund distributions to beneficiaries

Care needs to be taken where distributions, or unpaid entitlements, are funded by way of interest bearing loans taken

out by the trustee. The ATO holds the view that borrowings to fund contemporaneous distributions do not give rise to

deductible interest. A similar view is also held where borrowings are used to fund the repayment of beneficiary loans

or unpaid entitlements created from asset revaluation reserves of the trust75.

A different result may occur if the unpaid entitlement has been used to fund income generating assets of the business

and the trustee subsequently borrows an amount to return the funds to the beneficiary. In such a case, it may be

possible to obtain an interest deduction in respect of the refinancing.


. Carefully consider all loan funding that is used by the trust and consider whether interest deductibility is

compromised if you are looking to borrow in order to distribute amounts to beneficiaries.

Family trust elections

FTEs are made for various reasons. They can enable trusts to utilise carry forward losses and bad debt deductions (see

Section 6K); they can ensure that the income injection test is not breached (see Section 6M6N); they can ensure that

franking credits can flow through the relevant trust (see Section 6L); and they can ensure that losses are available in a

company that is owned by the trust (see Section 7Q).

The consequence of making a FTE is that the trustee becomes liable to family trust distributions tax (“FTDT”) at the rate

of 49% on distributions to beneficiaries76 that are not members of the family group. If a corporate trustee breaches

this rule, the directors of the trustee will be jointly and severally liable, together with the trustee, for the FTDT. There

is no time limit imposed on the ATO for the raising of FTDT assessments.

75 Taxation Ruling TR 2005/12. 76 ATO Interpretative Decision ATO ID 2012/12.



72


The definition of a distribution is very wide and includes non-arm’s length transactions (for example, interest-free

loans77, transfers of trust property, allowing use of trust property, forgiveness of commercial debts or unpaid

entitlements78).

An FTE is made at the time a trust return is lodged. As such, the ATO hold the view that a valid FTE cannot be made

unless the test individual is alive at the time of lodging the return79. This view can be problematic, especially if new

trusts have operated as part of an existing group during an income year. To help safeguard against this issue, it may be

prudent to maintain dormant trusts that have made FTEs in respect of a test individual in prior years. Where this

option is not available, the group may need to consider other options, including whether the test individual can be

changed or whether IEEs can be made.


.

Where the trust has made a FTE or interposed entity election, ensure that non-commercial transactions

are not made with anyone outside the FTE group (otherwise you may have a FTDT exposure at a rate of

49%).

. If an issue is identified, consider charging arm’s length consideration before year-end to reduce any

exposure for FTDT.

. Where the existing group has made a FTE, consider whether it is prudent to have a number of dormant

discretionary trusts that have made valid FTEs before year-end (as a safeguard if the test individual

passes away).

. If the test individual has passed away before the making of the FTE and lodgement of the tax return,

consider if other options are available (including the ability to make an IEE or the ability to change the

test individual).

Tax file number withholding and trustee reporting

Beneficiaries must quote their TFNs to trustees prior to receiving or becoming entitled to trust distributions. The

consequences of non-compliance can be a 98% tax rate, being withholding at 49% and a penalty at 49%. In addition,

the trustee must report the beneficiary’s TFN to the ATO within one month after the end of the quarter (if the trustee

has not previously reported the TFN), being 31 July 2017 for the current year. Accordingly, it is absolutely critical that:

trust resolutions are completed by 30 June 2017; new beneficiaries have advised the trustee of their TFN before that

time; and new beneficiary TFNs are reported to the ATO by end of July.

One way of possibly safeguarding against non-disclosure is to report the TFNs of all potential beneficiaries to the ATO

which have not already been reported in a previous income year by 31 July 2017.


. Before year-end, ensure that all beneficiaries have quoted their TFNs to the trustee. Failure to quote a

TFN to the trustee may result in a withholding tax obligation of 49% on the distribution.

77 Income Tax Assessment Act 1936 (Cth) Schedule 2F s272-60. 78 Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62. 79 ATO Interpretative Decision ATO ID 2014/3.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/sch2f.html


http://law.ato.gov.au/atolaw/view.htm?docid=%22AID%2FAID20143%2F00001%22


73

. Ensure that the trustee reports any new beneficiary TFNs to the ATO by 31 July 2017 (if they have not

already been reported in a previous income year).

. If a new beneficiary does not yet have a TFN, ensure that they make an application to the ATO for a TFN

as quickly as possible (i.e. before 30 June 2017).

. Consider lodging a TFN report for 31 July 2017 that includes the TFNs of all potential beneficiaries of the

trust not already been reported in a previous income year.

Superannuation deductions

Superannuation contributions for a director of a corporate trustee of a trust will only be deductible if the director is a

common law employee of the trust engaged in producing the assessable income of the trust80. This is broadly

consistent with the ATO’s view in TR 2010/181. This requirement is more likely to be satisfied for a trust which is an

operating entity.


. If you are paying superannuation contributions for directors of the trustee, you need to carefully

consider whether those payments will be deductible to the trust.

Distributing income to a superannuation fund

Care needs to be taken with any distributions that are made to a superannuation fund. Income derived by a SMSF as a

beneficiary of a discretionary trust is non-arm’s length income, as are dividends paid to an SMSF by a private company

(unless the dividend is consistent with an arm's length dealing). Non-arm’s length income is taxed at 47%.


. Non-arm’s length income derived by a superannuation fund (which may include discretionary trust

distributions or private company dividends) may be taxed at a rate of 47% in the superannuation fund.

Trust distributions to exempt entities

Specific anti-avoidance rules apply to prevent exempt beneficiaries being used to inappropriately reduce the amount of

tax payable on the taxable income of a trust:

An exempt entity that has not been notified of its present entitlement to income of trust estate within two months

after year-end will be treated as if it was not presently entitled to that amount. This will generally result in the

trustee being liable to pay tax on the relevant distribution82.

Where an exempt entity's share of the taxable income of a trust estate exceeds a prescribed benchmark

percentage, the excess will be (generally) taxable to the trustee. This rule is aimed at preventing an exempt entity

from receiving a disproportionate share of the trust's taxable income relative to the exempt entity's actual

80 Kelly v FCT (No 2) [2012] FCA 689. 81 Taxation Ruling TR 2010/1, paragraph 243. 82 Income Tax Assessment Act 1936 (Cth) s100AA.



http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s100aa.html

74


entitlement under the trust deed, for example, where an exempt entity receives 100% of the taxable income of a

trust yet only receives 1% of the actual economic benefits of the trust83.


. Consider the trust anti-avoidance rules that apply to distributions made to exempt entities.

Trust stripping provisions (reimbursement agreements)

The trust stripping provisions can tax the trustee at 49% where the trustee distributes income to one beneficiary (that

pays little or no tax) and the economic benefits of the distribution are provided to a different taxpayer.

Typically, the trust stripping provisions have only been applied in promoter scheme type cases, particularly situations

involving loss trusts and exempt entities. The ATO has indicated that (in its view) the provisions can apply more

broadly to family trust arrangements. Accordingly, care needs to be taken where amounts are distributed to a

beneficiary in circumstances where the beneficiary is unlikely to ever call on the funds (or be paid those funds).


.

The ATO has indicated it may apply the trust stripping provisions more broadly to family trust

arrangements. Care needs to be taken where income is distributed to a beneficiary, where it is

unlikely that the beneficiary will ever call on the funds (or be paid those funds).



representative.

83 Income Tax Assessment Act 1936 (Cth) s100AB.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s100ab.html


75

7. Companies


The ATO, through its “Building Confidence” website, has indicated that the issues listed below may attract their

attention84. Companies should pay particular attention to these items and, if required, rectify accordingly.

Small businesses

Businesses who intentionally seek an unfair advantage by hiding income (cash and electronic payments) or

deliberately avoiding their obligations by failing to register, keep records and/or lodge accurately.

Businesses that report outside of the small business benchmarks for their industry.

Employers not deducting and/or not sending the PAYG withholding from employee wages.

Employers not paying the superannuation guarantee.

Businesses registered for GST but not actively carrying on a business.

Businesses that fail to lodge activity statements.

Businesses that incorrectly or under report sales.

Privately owned and wealthy groups

Tax or economic performance not comparable to similar businesses.

Low transparency of tax affairs.

Large, one-off or unusual transactions, including transfer or shifting of wealth.

A history of aggressive tax planning.

Choosing not to comply or regularly taking controversial interpretations of the law.

Lifestyle not supported by after-tax income.

Treating private assets as business assets.

Poor governance and risk management systems.

Publicly listed businesses

Low transparency of tax affairs.

A record of aggressive tax planning.

Choosing not to comply or regularly taking controversial interpretations of the law.

Poor governance and risk-management systems.

84 ATO website: Building confidence.

https://www.ato.gov.au/business/small-business-benchmarks/

https://www.ato.gov.au/General/Building-confidence/

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.

The ATO is continuing to scrutinise the taxation affairs of companies and has indicated numerous areas it

will be targeting for the 2017 and 2018 income years. You should consider whether any of your

arrangements are those that have been identified by the ATO, and, if required, you should consider

appropriate action.

Tax rates

For the year ending 30 June 2017, two rates of Australian corporate tax can apply. Corporate tax entities that carry on

business and have an aggregated turnover (inclusive of certain related entities) of less than $10 million can be subject

to tax at a rate of 27.5%. All other corporate tax entities will be subject to corporate tax of 30%. A corporate tax entity

that does not carry on any business but merely receives distributions from one or more trusts would not qualify for the

reduced rate regardless of the level of its income.

As these tax rates will not apply to those businesses operating through a trust structure (using a corporate beneficiary

that does nothing more than receive distributions), businesses operating through a trust could consider whether the

current structure is the most appropriate going forward.


.

Corporate tax entities with aggregated turnover of less than $10 million will be subject to tax at a rate of

27.5% for the year ending 30 June 2017. All other corporate entities are subject to corporate tax at a

rate of 30% (including corporate beneficiaries).

. If you are operating a business through a trust structure (using a corporate beneficiary), you may

consider whether the current structure is the most appropriate going forward.

Payment of dividends

For taxation purposes, a dividend cannot be franked if it is sourced (directly or indirectly) from share capital. This has

created some significant uncertainty where an entity has current year profits but there are prior year losses (or

alternatively, prior year profits and current year losses).

The ATO has provided safe harbours in TR 2012/585. Essentially, the safest option is for a company to create a separate

profit reserve before signing off its financial statements. This can help to ensure that the profits are isolated from

losses. Other options include appropriately drafted minutes and notes to the signed accounts.


.

If your company is seeking to pay a franked dividend in circumstances where it has retained losses (or a

current year loss), you may not be able to frank the dividend unless you ensure appropriate actions are

taken before signing of your accounts for the current year.




77

Franked dividends – maximum franking credits

When paying dividends for the year ending 30 June 2017, you will need to determine the maximum franking credits

that can be attached to the dividend. The franking percentage for a particular income year is worked out having regard

to the entity’s aggregated turnover for the previous income year. This may lead to a corporate tax entity paying a

higher rate of tax on profits than the amount that can be attached to distributions to shareholders.

By way of example, a company with aggregated turnover of $5 million may have paid tax at a rate of 30% in respect of

the income year ended 30 June 2016, but may only be able to frank dividends paid in the income year ending 30 June

2017 at 27.5%.

For corporate tax entities with aggregated turnover of between $10 million and $25 million for the year ending 30 June

2017, consideration should be given to whether dividends are declared before 30 June 2017 to ensure that distributed

profits can be franked at the 30% tax rate.


. If you are paying a franked dividend before 30 June, you should determine the maximum franking credit

that can be attached to the dividend having regard to your corporate tax rate for imputation purposes.

. If your aggregated turnover is between $10 million and $25 million for the year ending 30 June 2017,

consider paying franked dividends before you are subject to the lower rate of tax in the 2017/18 income

year, to ensure that you can frank at the maximum rate (i.e. 30%).

Franked dividends – distribution statements

Corporate tax entities that make a frankable distribution are required to provide the recipient with a distribution

statement. The statement must be provided on or before the day of distribution for public companies and within four

months of the end of the income year for private companies.

In addition to other requirements, the distribution statement must specify the amount of the franking credit and the

franking percentage for the distribution. The franking credit on the distribution statement can only be amended on

application to the ATO.

The ATO have released draft guidance indicating that they will permit corporate tax entities that are subject to the

recent tax rate reduction to inform their shareholders in writing of the correct franking credit (rather than apply to the

ATO for permission to amend the distribution statements) provided certain conditions are met86.


. If you have made a frankable distribution you must provide the recipient with a distribution statement.

. If the franking credit on a distribution is incorrect, you must apply to the Commissioner to amend the

distribution statement (unless you are within the scope of the ATO’s draft guidance on the corporate tax

rate change).

86 Draft Practical Compliance Guideline PCG 2017/D7.

https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20177%2FNAT%2FATO%2F00001%22

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Franked dividends – benchmark percentage

The benchmark rate is a reference to the percentage to which a dividend paid by a corporate tax entity is declared to

be franked. The benchmark rate can only be set once a year for private companies but twice a year for public

companies. The benchmark percentage is set at the time of making the first distribution for the period. Once set, all

dividends paid during the same franking period must be franked to that franking percentage.

A corporate tax entity must notify the Commissioner in writing if its benchmark percentage is varied by more than 20%

from one franking period to the next franking period. For each intervening period in which no frankable distribution is

made, the maximum non-disclosable variation increases by 20%.


.

If you are paying dividends in the year ending 30 June 2017, you should ensure that you are franking the

dividend to the appropriate benchmark percentage, or are aware of your disclosure requirements when

deviating from the benchmark percentage.

Franked dividends – franking deficits

While a company can account for franking credits expected to arise by 30 June in determining the extent to which a

distribution is franked, care is needed to ensure that this does not create a franking deficit. Some key items that should

be considered before year-end include the following:

Generally the current year fourth quarter PAYG instalment cannot be included in the current year franking

account. However, you can include the prior year fourth quarter PAYG instalment.

Ensure that you have taken into account any refunds or final tax payments made during the year.

Make sure that you have removed penalties and interest amounts that may have been included in the relevant

assessments issued for the year.

Ensure that franked dividends and distributions received during the income year have been included in calculating

your franking account balance.

Any refund received within three months of year-end should be taken into account to determine if the year-end

balance is a deficit.

The consequence of a franking deficit is that a liability to franking deficit tax will arise. Generally, this amount can be

used as a tax offset for the following year (i.e. treated as a prepayment of tax). However, if the amount of franking

deficits exceeds 10% of the total of the franking credits for the year the entity may be penalised87 by a 30% reduction in

the tax offset.


. If you are paying a franked dividend before 30 June, you should consider reviewing your franking

position so that you do not inadvertently create a franking deficit tax position.

87 Income Tax Assessment Act 1997 (Cth) ss205-70(6) provides the Commissioner with a discretion.



79

Franked distributions funded by raising capital

A specific measure will be introduced for distributions made after 12pm on 19 December 2016 which will prevent

franking credits being attached to a distribution to shareholders funded by particular capital raising activities88.

The measure is intended to apply to distributions declared by a company outside, or in addition to, the company’s

normal dividend cycle, to the extent it is funded directly or indirectly by capital raising activities which result in the

issue of new equity interests.

In addition, the ATO have indicated that they are currently reviewing arrangements where a company with a significant

franking account balances raises new capital and at a similar time, a similar amount of franked distributions is paid to

shareholders.


. Companies that are seeking to pay franked distributions to shareholders should ensure that these are

not funded by capital raising activities.

Franking credit trading arrangements

A number of provisions can deny franking credits where an arrangement seeks to provide a franking credit benefit to a

taxpayer89. Accordingly, where a return to a shareholder is calculated with reference to franking credits, care needs to

be taken that the arrangement does not trigger the specific anti-avoidance provisions.


. You should review any arrangements that purport to provide a return that is calculated with reference to

franking credits. Such arrangements may trigger the certain anti-avoidance provisions.

Debt that can be treated like equity

Companies must apply the debt/equity tax rules when classifying debt and equity that they have issued. Generally,

returns paid by a company on a debt interest are deductible, while returns on equity interests are not deductible, but

may be frankable.

Loan funding provided to a company, but not placed on fixed repayment terms (so called “at-call loans”), can possibly

be treated as equity for tax purposes under the debt/equity tax provisions, unless the company’s GST turnover is less

than $20 million (and certain other conditions are satisfied).

Agreements can be put in place to ensure that loan arrangements are treated as debt for taxation purposes by either

having a repayment term of 10 years (or less) or by charging an interest rate that satisfies the legislative

requirements90.

Where an error is made in the classification of an arrangement as debt, the ATO has highlighted that it will amend prior

year returns to treat interest as (effectively) dividends and that the benchmark percentage will be applied to such

88 Mid-Year Economic and Fiscal Outlook 2016-17 (December 2016). 89 For example, Income Tax Assessment Act 1997 (Cth) sub-div 204-D, Income Tax Assessment Act 1936 (Cth) s177EA or Income

Tax Assessment Act 1997 (Cth) s207-157. 90 The legislation requires an adjusted benchmark interest rate to be calculated.

http://www.budget.gov.au/2016-17/content/myefo/download/2016-17-MYEFO-combined.pdf


http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s177ea.html


80


returns91. This can also give rise to franking deficit issues and penalties where dividends have been over or under

franked.

A number of related party loans placed on 10 year terms may be due for repayment during the year ending 30 June

2017. Accordingly, you should review and monitor the repayment date on all loans that have been placed on terms for

the purpose of the debt/equity provisions. If you are seeking to extend the repayment date, care needs to be taken

that this does not turn a debt interest into an equity interest.


. Review loans provided to companies in the group to ensure they have been placed on terms that will not

result in them being treated as equity for tax purposes.

. Review the status of existing loan arrangements that have been put in place since 1 July 2001 to

determine whether the 10-year loan repayment date is approaching. Care needs to be taken when

considering options for extending the date of the loan arrangement, as this may result in the

arrangement being treated as equity for tax purposes.

Division 7A (generally)

Division 7A is an integrity measure to prevent tax-free distributions from private companies to shareholders or their

associates. The provisions operate to deem an unfranked dividend in circumstances where a private company has

provided financial accommodation directly or indirectly to a shareholder or their associate. The extent of the deemed

dividend is limited to the private company’s distributable surplus. Where the application of Division 7A is a result of

mistake or omission, the ATO has a discretion to disregard the deemed dividend or deem it to be a frankable dividend.

While Pitcher Partners has been successful in obtaining the exercise of the discretion on a number of occasions, it is

only exercised in certain circumstances.

The Division 7A legislation is complex and we suggest that you speak to your Pitcher Partners representative to find out

more about how best to manage your Division 7A exposure prior to 30 June 2017. This toolkit considers four key areas

of Division 7A, including: (1) direct transactions by companies (Section 7L); (2) unpaid trust distributions to companies

(Section 7M); (3) other indirect benefits provided by companies (Section 7N); and (4) future proposed amendments

(Section 7P).


. You should review Division 7A before year-end to ensure that you do not inadvertently trigger a deemed

unfranked dividend to a shareholder or associate.

Division 7A (direct transactions by companies)

Where a private company pays an amount, makes a loan or forgives a debt owed by a shareholder or their associate

(and ex-associate in some cases) a Division 7A deemed dividend may arise. From 1 July 2009, the use of a company’s

assets (for example, a company yacht) for private purposes at less than their market value can also constitute a

payment. The amount of the deemed dividend is limited to the company’s distributable surplus.

Converting the arrangement to a Division 7A complying loan agreement can help to mitigate the Division 7A exposure

on such arrangements. A complying loan generally needs to be repaid over seven years, with interest charged at the

benchmark interest rate. The 2016/17 benchmark interest rate is equal to 5.40%92.

91 ATO Interpretative Decision ATO ID 2005/38.



81

Prior to year-end, you may be required to make minimum loan repayments (“MLRs”) for existing Division 7A loans. It

may be possible to satisfy this requirement by offsetting amounts owing by the company to you, or by way of payment

of a dividend prior to year-end.


.

Identify all Division 7A loans made by the company in prior years and determine the required MLRs

before 30 June. Consider the borrower’s ability to pay the MLR by 30 June and whether dividends need

to be declared before year-end.

. Identify any new loans that have been made to shareholders or associates. These loans may need to be

placed on complying terms.

. Identify any payments made to (or for) shareholders or associates/ex-associates (including cash

payments, relationship breakdown settlements, payments on their behalf, asset transfers or use of asset

arrangements). Ensure that an appropriate amount is charged before 30 June (either through the profit

and loss or through the appropriate loan accounts).

. Ensure that interest has been charged on compliant Division 7A loans using (at the very least) the

2016/17 benchmark interest rate of 5.40%.

. Consider rationalising UPEs and loans around the group to simplify the Division 7A analysis before 30

June 2017. Be mindful of the interposed entity provisions when rationalising loans.

. You must consider the anti-refinancing rule when MLRs or loan repayments are made. You must always

consider this rule when the loan is repaid by the borrower (e.g. whether the borrower has refinanced the

loan using an entity within the group).

Division 7A (trust distributions to companies)

Division 7A may apply to private groups that resolve to distribute income from a trust to a company but do not actually

pay those amounts to the company, creating an unpaid present entitlement (“UPE”) to the company.

It is ATO practice to treat UPEs made on or after 16 December 2009 directly or indirectly to a corporate beneficiary as a

loan from the company to the trust. This means that the UPE will be treated as a deemed dividend unless the UPE is

placed on complying loan terms (over 7 or 25 years, with principal and interest repayments), or alternatively, placed on

a sub trust for the sole benefit of a private company (discussed below).

UPE sub-trust (complying investment agreement)

If the post-16 December 2009 UPE is put on a complying investment agreement it will remain a UPE for the purposes of

Division 7A. A number of administrative options exist, including a 7 or a 10 year interest only loan (with a balloon

principal repayment at the end of the agreement) or an investment into an asset93.

It is noted that some of the UPEs that were on a complying investment agreement may be due for repayment by 30

June 2017. The ATO are currently consulting on whether they will allow such arrangements to be placed on 7 year loan

agreements.

92 Taxation Determination TD 2016/11. 93 Practice Statement PSLA 2010/4.

https://www.ato.gov.au/law/view/document?DocID=TXD/TD201611/NAT/ATO/00001&PiT=99991231235958

http://law.ato.gov.au/atolaw/print.htm?DocID=PSR%2FPS20104%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=20110701000001-99991231235959

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Where a UPE exists, this may result in the application of interposed entity rules under Division 7A. For example, loans

made by a trust (directly or indirectly) to shareholders or their associates (including loans to other trusts) may need to

be put on complying loan terms.


. Identify all pre- and post-16 December 2009 UPEs that are outstanding to a private company within the

group and ensure the pre-16 December 2009 UPEs are recorded separately in the financial statements.

. Consider whether new UPEs should be placed on complying investment agreements or treated as loans

before the lodgement date of the trust. This should occur for UPEs owing to companies and other types

of entities (for example, trust to trust distributions if there is a corporate beneficiary with a UPE in the

group). You should consider cash flow advantages that can occur.

. For prior year UPEs that have been converted to Division 7A compliant loans, ensure the trust has made

minimum yearly repayments before 30 June 2017.

. For prior year UPEs that have been placed under an investment option agreement ensure that you

record appropriate amounts of ‘interest’ income in the accounts for the current year and that interest

has been paid in cash.

. Identify and examine all related party transactions entered into by a trust where that trust has one or

more UPEs outstanding to a corporate beneficiary to ensure that the interposed entity provisions have

been complied with.

. If there are existing complying loan agreements in place between the trust and related entities, you will

need to consider MLRs that need to be made before 30 June.

. Consider whether turning the UPE with the corporate entity into a complying Division 7A loan provides a

more manageable outcome for the group.

Division 7A (benefits indirectly provided by companies)

Division 7A contains interposed entity provisions. These provisions may apply where a loan or payment is made from a

company to an entity (for example, another company) which provides a loan to a target entity or trust. They can also

apply where a company guarantees a loan for or on behalf of another entity. The interposed entity rules can trace

through an entity that is not related to the group. It is generally useful to identify all loans, UPEs, payments,

guarantees, forgiveness transactions and other types of transactions between entities within the group (including those

arrangements that pass-through an unrelated party) in order to assist in the application of the interposed entity rules.


.

Identify all loans, UPEs, payments, guarantees, forgiveness transactions and other types of transactions

that have been made by the private company to other entities within the group (including other private

companies) to determine if there is a risk of the interposed entity rules applying.

. Consider strategies to mitigate the interposed entity rules from applying, such as placing all loans from

companies on complying Division 7A terms (even when such companies do not have a distributable

surplus).


83

Division 7A (capitalising unit trusts)

The ATO is currently focusing on companies that capitalise unit trusts, where such amounts are used to provide debt or

equity to other entities within the group. The ATO are examining whether section 109C (i.e. a payment made to an

associate) or Part IVA (the anti-avoidance provisions) applies to the capitalisation. Care needs to be taken in relation to

any capitalisation of units in a trust, including distribution reinvestment plans.


. Care needs to be taken if you are considering capitalising a unit trust or a distribution reinvestment plan

where the unit holder is a company.

Division 7A (future simplification)

In the 2016/17 Budget, the Government announced changes to simplify Division 7A that were to come into effect from

1 July 2018. Whilst the details of the proposed changes will be subject to consultation, groups should commence

considering their Division 7A positions and whether it is possible to restructure their arrangements in the coming year.


. Consider whether the proposed Division 7A simplification measures could provide better financing

options to the group in the short term future.

. Consider whether it is opportune time to examine moving into a corporate structure to minimise Division

7A exposures in the future.

Deductions for losses and bad debts

It is critical that you consider the application of the carry forward loss provisions for companies that are seeking to

utilise prior year losses or deduct bad debts in respect of the year ending 30 June 2017. It is noted that this continues

to be a target area of the ATO from a tax compliance perspective.

Continuity of ownership test

A company can deduct carry forward losses and bad debts if the entity passes the continuity of ownership test — i.e. it

has maintained the same majority ownership from the start of the loss year to the end of the utilisation year with

regard to shares carrying more than 50% of entitlements to dividends, capital and voting rights. It must also

demonstrate that there has not been a change of control in the voting power of the company. Where the shares in the

loss company are owned by a trust additional rules are required to be satisfied as if the company were a trust (See

Section 6K). Please note that there are additional integrity rules with respect to unrealised losses at the time of change

in ownership and the duplication of losses on equity and debt interests throughout a chain of entities.

Same business test

Where the continuity of ownership test is not satisfied, the same business test must be applied. It is noted that the

ATO takes a very stringent view on what constitutes maintaining the same business.

84


Similar business test

Legislation is currently before Parliament replacing the same business rule with a similar business rule. The provisions

are to be effective for losses incurred in income years beginning on or after 1 July 201594. You should consider these

alternative rules if you have technically failed the same business test.


. If you are utilising prior year tax losses, or have tax losses in the current year, you should consider

whether the company has satisfied the continuity of ownership test and the same business test.

. If you have made a loss in the 2016 or 2017 income years, you should also consider whether the similar

business test may provide a better opportunity to utilise losses in the future.

Share capital transactions

A number of integrity provisions can operate when an amount moves in or out of the share capital account. For

example, if an amount is transferred to the share capital account (other than in connection with the raising of share

capital), this can “taint” the whole of the share capital account. Any subsequent payment from a tainted account will

be treated as an unfranked dividend unless untainting tax is paid. Alternatively, transfers of amounts from share

capital to other accounts (or distributions from share capital) can give rise to unfranked dividends.

Care, therefore, needs to be taken in recording such entries to the ‘equity’ section of the balance sheet under

accounting standards, as they can give rise to share capital tainting consequences. This is especially an issue for share

based payment transactions that are accounted for under AASB 2. Due to the significant consequences of falling within

these provisions, you should review all entries to the equity section prior to year-end (i.e. to ensure corrections can be

made to errors posted). Controls should be in place to monitor and limit entries to the share capital account at all

times.


. Review all accounting entries made to the equity section of the balance sheet for the year ending 30

June 2017 and the income tax consequence of these entries (for example, tainting, unfranked dividends).

. Consider whether it is possible to correct accounting entries that have been made in error.

. Consider implementing controls to prevent inadvertent entries to the share capital accounts in future

periods.

Tax consolidation (choice to consolidate)

For taxpayers who formed a consolidated group in the year ending 30 June 2017, it is important that they have made a

choice to consolidate95 in writing, and notified the ATO of this decision in the approved form. Both the notification

form and the choice to consolidate must be made by the time the tax return for the year ending 30 June 2017 is

lodged. These documents must state the effective date of formation of the consolidated group.

94 Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017. 95 GE Capital Finance Australasia Pty Ltd & Anor v FCT [2011] FCA 849.


https://jade.io/article/249650?at.hl=%255B2011%255D+FCA+849


85

Critically, if the choice to consolidate is not in writing, the tax consolidated group will not have formed. This separate

choice document does not need to be lodged with the ATO. You can contact your Pitcher Partners representative to

obtain a pro-forma choice template.

All new tax consolidated groups (and existing tax consolidated tax consolidated groups) should also consider entering

into a tax sharing agreement and tax funding agreement for the current year (to avoid adverse AASB 112 and UIG 1052

consequences, and to avoid being jointly and severally liable for all income tax debts).


. If your corporate group formed a consolidated group during the year ending 30 June 2017, you must

ensure that you have made a choice in writing.

. If your corporate group formed a consolidated group during the year ending 30 June 2017, you must

lodge a notification form with the ATO. This is separate to the choice to consolidate.

. You should consider entering into tax funding and tax sharing agreements for your new tax consolidated

group prior to lodging your first tax return.

Tax consolidation (change in members)

Where new members joined the tax consolidated group during the year, there is a requirement to add the member to

the existing tax sharing and tax funding agreements. Typically this is done by completing a deed, which is generally

included as a schedule to the agreements.

For members that leave a tax consolidated group during the year, there is a requirement for the member to make a

clear exit payment under existing tax sharing and tax funding arrangements.

The head company is also required to notify the ATO of the changes in membership within 28 days of an entity joining

or leaving the tax consolidated group.


.

If an entity has joined the tax consolidated group during the income year, ensure that you have updated

your tax sharing and tax funding agreements and notified the ATO within 28 days of the entity joining the

group.

. If an entity has left the tax consolidated group during the income year, ensure that you have made clear

exit payments and notified the ATO within 28 days of the entity leaving the group.

. Ensure that you have appropriately updated tax sharing and tax funding agreements for new entities and

that appropriate exit payments were made for leaving entities.

Tax consolidation (updating tax costs)

If you formed a tax consolidated group during the income year, or if entities joined the tax consolidated group, the tax

cost of assets and certain liabilities need to be reset. This can have a material impact on your tax calculation for the


86



. Ensure that you have calculated the new tax costs of all assets and certain liabilities for subsidiary

members that joined the tax consolidated group during the year ending 30 June 2017.

Tax consolidation (disposal of subsidiary entities)

If an entity has left the tax consolidated group (the leaving entity), for example by way of a sale of the shares, the cost

base of the shares in the leaving entity is generally recalculated based on the tax cost of the underlying assets and

liabilities held by the leaving entity. This is known as the exit allocable cost amount (“ACA”). It is noted that the re-

calculated cost base can sometimes have a material effect on the capital gain or loss that is realised on the disposal of

the subsidiary entity and may result in a negative amount (which itself is a capital gain). Furthermore, where a loss is

generated on the sale of the subsidiary, special rules can operate to automatic deny a capital loss being generated

(under the loss duplication provisions).


.

If an entity has left the tax consolidated group, the cost base of the shares needs to be recalculated

based on the underlying tax cost of assets and liabilities of the leaving entity. This can have a material

effect on any capital gain or loss on sale of the leaving entity.

. Where a loss is generated on the disposal of an entity by a tax consolidated group, the loss can be denied

under the loss duplication provisions.

Tax consolidation (deductible liabilities)

The Government announced in the 2016-17 Federal Budget that a new measure would be introduced for deductible

liabilities with application for the 2016/17 income year. Broadly, under the new measure where a head company

acquires a joining entity, the head company will not be entitled to include those liabilities in the consolidation entry tax

cost setting process. This will have the effect of reducing the ACA of a joining member and may result in assessable

income as an indirect consequence over time (for example, by way of lower revenue deductions such as trading stock

or depreciation claims, or by crystallising a CGT event on entry into the consolidation regime)96.


. Determine whether the budget announcement on deductible liabilities may require an amendment to

prior tax returns lodged.

Research and development (general)

Companies undertaking eligible R&D activities may qualify for the R&D tax incentive which provides either of the

following:

A 43.5% refundable tax offset (equivalent to a 145% tax deduction) to eligible entities with an aggregated turnover

of less than $20 million per year; or

96 Budget Paper No.2 – Ten year enterprise tax plan – better targeting the deductible liabilities measure – Page 36. At the time

of writing, these measures are yet to be enacted.

http://www.budget.gov.au/2016-17/content/bp2/download/bp2_consolidated.pdf


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A 38.5% non‐refundable tax offset (equivalent to a 128% tax deduction) to all other eligible entities. Unused

offsets may be able to be carried forward for use in future income years.

The company’s business records must be sufficient to verify the nature of the R&D activities, the amount of

expenditure incurred on those activities and the relationship between the expenditure and the R&D activities.

Furthermore, companies are still required to register annually with AusIndustry before being able to claim the tax

offset. Companies will need to register within 10 months after the end of their income year in which the R&D activity

was undertaken (i.e. by 30 April 2018 for 30 June 2017 year-ends). R&D activities undertaken overseas may also qualify

as eligible R&D activities if they meet certain additional requirements.

The ATO have prepared a checklist to assist taxpayers in claiming the R&D Tax Incentive, with particular regard to self-

assessing eligibility for the offset97.


. Consider whether the taxpayer is eligible for the R&D tax incentive for the year ending 30 June 2017 and,

if so, whether eligible R&D expenditure can be brought forward into the current year prior.

. If the taxpayer is eligible for the R&D tax incentive, ensure that the taxpayer lodges the registration of

R&D Activities with AusIndustry within 10 months of year-end.

. If overseas R&D activities have been conducted during the period 1 July 2016 to 30 June 2017, ensure

that the taxpayer lodges the advance findings and the overseas findings prior to 30 June 2017.

Research and development (taxpayer alerts)

The ATO and the Department of Industry, Innovation and Industry (“DIIS”) have released four Taxpayer Alerts

highlighting their concerns with taxpayer claims for the R&D Tax Incentive in respect of construction activities, ordinary

business activities, agricultural activities and software development.

The ATO have also issued a warning to promoters that have been incorrectly advising grape growers and wine

producers that the compulsory Wine Grapes Levy can be claimed under the R&D Tax Incentive in order to secure an

R&D incentive98.

The Taxpayer Alerts, together with the warning to promoters, signal that the ATO intends to commit significant

resources to the R&D Tax Incentive as part of their compliance program.

The period leading up to 30 June is an opportune time to ensure that your accounting, information and record keeping

systems are up to date to accommodate any claims you want to make under the R&D tax incentive for the year ending

30 June 2017. Accordingly, taxpayers should carefully review their registrations and claims to ensure that they are

correctly claiming the R&D Tax Incentive.


. Consider reviewing your R&D Tax Incentive registrations and claims, especially if you have claims in the

following ATO target areas: construction activities, agricultural activities and software development.

97 ATO website: Checklist for claiming the Research & Development Tax Incentive. 98 ATO website: Warning for promotors of tax schemes involving R&D in the wine industry.

https://www.ato.gov.au/Business/Research-and-development-tax-incentive/Checklist-for-claiming-the-R-D-Tax-Incentive/

https://www.ato.gov.au/Media-centre/Media-releases/Warning-for-promoters-of-tax-schemes-involving-R-D-in-the-wine-industry/

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Research and development (expenditure in excess of $100 million)

R&D expenditure in excess of $100 million is not eligible for the 38.5% non-refundable R&D Tax Incentive. However,

the excess may potentially be claimed as a tax offset at the company tax rate.


.

Where the taxpayer’s R&D expenditure is $100 million or more, the taxpayer is not eligible for the 38.5%

non-refundable R&D Tax Incentive, however, they can claim the excess as a tax offset at the company tax

rate of 30%.

Research and development (feedstock adjustments)

When a company obtains a R&D tax incentive offset for their feedstock expenditure incurred on R&D activities (and

where those activities produce income or the products are applied for the use of the company), a feedstock

adjustment may be required. Broadly, the feedstock adjustment applies to expenditure on goods or materials

(feedstock inputs) that are transformed or processed during R&D activities and produce one or more tangible products

(feedstock outputs), or energy that is input directly into that transformation or processing.

The feedstock adjustment essentially is a ‘clawback’ of the benefit a company previously received under the R&D tax

incentive by increasing the company’s assessable income. The feedstock adjustments are a complex set of rules and

the ATO has released a ruling which provides further guidance99.


.

Consider whether the taxpayer received a R&D tax incentive offset for feedstock expenditure incurred on

R&D activities. If so, it may be necessary to include an adjustment in the assessable income of the

taxpayer.

Reportable tax positions

Certain large business and multinational taxpayers (that are notified in writing by the ATO) will be subject to a

reporting requirement to disclose their most contestable and material tax positions to the ATO by completing and

lodging a RTP schedule with their 2017 income tax return.

A tax position will not need to be disclosed if the position is more likely to be correct than incorrect. However,

positions that are based on pending legislative amendments will need to be disclosed. Non-disclosure of information

to the ATO can result in an administrative penalty of up to $10,800100, even where the non-disclosure does not result in

a tax shortfall.

For taxpayers that are required to complete a RTP schedule, it will be important to ensure that you have an appropriate

tax risk management policy in place to monitor RTPs. In particular, this can also assist to identify those contentious

positions, where such positions will not need to be disclosed where the taxpayers can establish a position that is more

likely than not to be correct. Where positions are contentious, it will therefore be important to ensure that the

position is “more likely than not”, to ensure that the position does not need to be disclosed on the RTP schedule.

99 Taxation Ruling TR 2013/3. 100 Taxation Administration Act 1953 (Cth) Sch 1 s284-75. The administrative penalty will increase to $12,600 from 1 July 2017.


http://www.austlii.edu.au/au/legis/cth/consol_act/taa1953269/sch1.html


89

The ATO have extended RTP Category C for income years ending on or after 30 June 2017 to include a number of

specific issues that they find concerning101. These issues include arrangements involving the use of procurement or

marketing hubs and restructures by significant global entities.

There will be a significant change to the entities subject to these reporting requirements for income years ending on or

after 30 June 2018. Broadly, companies that are part of economic groups with turnover above $250 million may also

be required to complete a RTP schedule as part of their income tax return for years ending on or after 30 June 2018 (if

they are notified in writing by the ATO).


. If you are a large taxpayer, you may be required to complete a RTP schedule with your tax return.

. You should review all material tax positions to identify any that are about as likely as not to be correct as

incorrect. You should consider reviewing such positions to determine whether they can be made more

certain before lodging your tax return.

. You should consider appropriate tax risk mitigation processes to ensure minimisation of issues that are

required to be reported on the RTP schedule.

. If you are part of an economic group with turnover above $250 million, you may be required to complete

a RTP schedule for income years ending on or after 30 June 2018.

PAYG instalments

A PAYG instalment operates like a prepayment of a taxpayer’s tax liability for the current year. The amount of the

instalment is calculated either by the ATO or by the taxpayer, based on the income tax payable in the taxpayer’s most

recent income tax return. If the taxpayer is also subject to TOFA, the net TOFA gains should be included in the PAYG

instalment income amount. Prior to 30 June, it is possible to consider varying a final PAYG instalment, if you have

sufficient information to accurately calculate the estimated tax payable for the year.

Generally, a 15% buffer is provided for such estimates, whereby a taxpayer will be liable to the general interest charge

(i.e. GIC) if the varied instalment is less than 85% of the actual tax that would have been paid. Due to the penalties that

may be imposed for getting a variation incorrect, you should consider seeking advice prior to lodging the variation

amount.


. Consider whether there is an opportunity to vary the PAYG income tax instalment for the period ending

30 June 2017.

. Where you are subject to TOFA, ensure that your PAYG instalment income only includes your net TOFA

gains and not your gross income from TOFA arrangements. For example, interest expenses may reduce

your PAYG instalment income.

101 ATO website: Guide to Reportable Tax Positions 2017: What is a reportable tax position? Category C.

https://www.ato.gov.au/Forms/Guide-to-Reportable-Tax-Positions-2017/?anchor=CategoryC#CategoryC

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Director penalty regime

Directors of companies may be personally liable where a company fails to remit SG amounts and PAYG withholding. As

a consequence, directors should ensure that SG payments and PAYG withholding payments are all up to date.


. Review any outstanding PAYG and SG payments at year-end and ensure that these are paid within the

appropriate timeframe.

. Consider implementing stringent internal guidelines and requirements in relation to PAYG withholding

and SG charge payments.

Tax transparency

The ATO is required to publicly report the following information about certain corporate tax entities: (1) the entity's

name and ABN; (2) total income; (3) taxable income (or net income for a corporate unit trust, public trading trust or

corporate limited partnership); and (4) income tax payable.

These laws apply to Australian public and foreign-owned corporate tax entities with total income of $100 million or

more, entities that have an amount of Petroleum Resource Rent Tax payable and Australian-owned resident private

companies with total income of $200 million or more. An entity's total income is the accounting income reported by

the entity (i.e. based on its financial statements) which is disclosed in the company income tax return.

As the disclosure is based on accounting income, we note that taxpayers may be inadvertently reporting income

incorrectly in their tax returns and thus may be subject to these measures incorrectly. This may occur, for example,

where income that should be reported on a net basis is otherwise being reported on a gross basis. If you are

concerned about the public release of the above information, please contact Pitcher Partners to discuss your situation.


. The ATO is required to publicly report tax information for certain corporate tax entities. If you are close

to the $200 million threshold, you should consider what these disclosures will mean for your business.



representative.


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8. Partnerships

Professional practices with trusts as partners

The ATO has released guidelines, “Assessing the risk: allocation of profits within professional firms”, concerning income

splitting for professional practices for 2014/15 and later years102.

Relevantly the ATO allow any form of professional practice structure, providing it is legally effective, including a

partnership that comprises trustee partners.

The ATO provide three benchmark guidelines which, if followed, can mitigate the risk of an ATO review. Essentially

these three benchmark rules are aimed at ensuring that a sufficient amount of professional practice income is included

in the tax return of the individual practitioner who has (or whose associated entity has) an equity interest in the

practice (“the principal”).


. Where the professional practice discloses (in its tax return) partners in the partnership as being “trust”

entities, you should carefully consider the issues being examined by the ATO in relation to this issue.

. The ATO has recently indicated that you may be able to mitigate the risk of the ATO taking an issue with

the structure if an appropriate amount of income is included in the principal’s tax return (under one of

three acceptable methods). Pitcher Partners can assist you in reviewing this issue.

No-goodwill professional practices

The acquisition and disposal of interests in no-goodwill professional partnerships, trusts and incorporated practices is

addressed in ATO guidelines103. These guidelines have replaced a number of tax determinations.

Broadly, the ATO will not undertake compliance action or apply market value on the admission or exit of a practice

equity owner where:

CGT — In relation to the calculation of the cost base or reduced cost base of the practice interest, the market value

of the practice interest at the time of acquisition is treated as being equal to the amount the taxpayer pays

(including nil) in respect of the acquisition.

CGT — In relation to the calculation of the capital proceeds in respect of a CGT event happening to a practice

interest, the market value of the practice interest at the time of disposal is treated as being equal to the amount

the taxpayer receives (including nil) in respect of the disposal.

ESS — In relation to the calculation of a discount on the issue of shares in an incorporated practice, the market

value of the practice interest at the time of acquisition is treated as being equal to the amount the taxpayer pays

(including nil) in respect of the acquisition.

Off-market share buy-back (“OMB”) — In relation to the calculation of consideration in respect of an OMB of

shares in an incorporated practice, the market value of the practice interest at the time of disposal is treated as

being equal to the amount the taxpayer receives (including nil) in respect of the disposal.

102 ATO website: Assessing the risk: allocation of profits within professional firms. 103 ATO website: Administrative treatment: acquisitions and disposals of interests in ‘no goodwill’ professional partnerships,

trusts and incorporated practices.

https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/professional-firms/assessing-the-risk--allocation-of-profits-within-professional-firms/

https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/professional-firms/administrative-treatment--acquisitions-and-disposals-of-interests-in--no-goodwill--professional-partnerships,-trusts-and-incorporated-practices/

https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/professional-firms/administrative-treatment--acquisitions-and-disposals-of-interests-in--no-goodwill--professional-partnerships,-trusts-and-incorporated-practices/

92


The above concessions that the ATO will not apply market value substitution rules, only apply to the normal admission

and exit of equity owners. They do not apply, for example, where a partner assigns their partnership interest to a

related entity.


.

No-goodwill professional practices should consider whether the ATO’s revised views apply especially as

equity participants usually “retire” on 30 June and new equity participants are often appointed from 1

July.

Varying distribution amounts to partners

Where a partnership exists at common law (i.e. where partners are carrying on a business together), it may be possible

to vary the distribution of partnership profits between the partners on a yearly basis. The ATO accepts that an

agreement by the partners of a partnership to allow a partner to draw a 'partnership salary' is a contractual agreement

among the partners to vary the interests of the partners in the partnership (and thus the partnership’s taxable [net]

income) between the partners. However, for such an agreement to be effective for tax purposes for an income year,

the agreement must be entered into before the end of that income year104.

Care needs to be taken as the ATO may seek to adjust such amounts where they believe that the distributions made

are completely out of proportion to either a partner’s true interests in the partnership assets or their participation in

the partnership business105. Furthermore, a partnership agreement cannot exist or operate retrospectively106.

Accordingly, special consideration should be given to the partnership agreement when varying such rights.

This principle can also arguably be extended to profits relating to property but only if it is an asset of a partnership at

common law. In this case, the parties may be able to determine the proportion of the profit and loss from that

property to which each partner will be entitled107. Again, care needs to be taken to ensure that amendments do not

crystallise CGT events. Furthermore, the ATO does not accept variations in distributions where no partnership exists at

common law (for example, where mere joint owners of an investment property exist)108.


. Where a partnership exists at common law, consider whether partnership distribution variations can be

utilised before 30 June 2017 to vary distribution entitlements for various partners.

Equity contributions by a company

The ATO have stated in the past that bona fide capital contributions to a partnership by a company will not trigger

Division 7A. Furthermore, undrawn partnership profits of a company partner are not treated as a loan to the

partnership. Accordingly, care should be taken in reclassifying any such amounts as loans from the partner, where they

are (in fact) partnership capital or current account amounts. The consequence of a classification error could be a

deemed unfranked dividend by the company to the partnership, which would be shared between the partners.

It is noted that the previous statement by the ATO has been removed from publication and therefore care should be

taken if the amounts are material. Furthermore, given that the ATO are now reviewing unit trust capitalisations (see

104 Taxation Ruling TR 2005/7. 105 Taxation Ruling No. IT 2316 and Income Tax Assessment Act 1936 (Cth) s 94. 106 Waddington v O'Callaghan (1931) 16 TC 187. 107 FC of T v Nandan 96 ATC 4095. 108 Taxation Ruling TR 93/32 and FC of T v McDonald (1987) 18 ATR 957.






93

Section 7O), it is critical that partnership capitalisations by a company are appropriately considered in light of Division

7A.


. Review partnership accounts to ensure that amounts of partnership equity and undrawn profits owing to

a company are not inadvertently recorded as loans from a private company to a partnership at year-end.



representative.

94


9. Capital gains tax

General

Generally, CGT applies to the disposal of CGT assets acquired after 19 September 1985. However, CGT events apply in

broader circumstances, including where a right is created in another entity or where an amount is received in respect

of an event happening in relation to a CGT asset109. It is therefore prudent to consider all proceeds received during the

year, especially in respect of amounts received that have not otherwise been included in assessable income.

The CGT rules may require a gain or loss to be recognised in a year that is earlier than the settlement of the contract or

receipt of proceeds. For example, CGT events can happen at the time you enter into the contract. Accordingly, you

should review all contracts that straddle year-end to ensure that you have correctly taken into account the CGT

consequences.

Generally, a capital gain or loss is calculated by comparing the proceeds from the event with the cost base of the

relevant asset. Exclusions apply to exempt a capital gain derived in respect of certain events (for example, main

residence — refer to Sections 9G and 9I).

The ATO has indicated on its ‘Building Confidence’ webpage that it will be conducting ongoing compliance activity on

capital gains derived from the sale of shares and rental properties110.


. Review all proceeds received during the year, especially where those proceeds have not been included in

assessable income.

. A CGT event may happen on entering into a contract (for example, entering into a contract for the sale of

a CGT asset). Consider any contracts that straddle year-end that may give rise to a capital gain in the


. Consider whether there are any exceptions to the CGT provisions to exempt the capital gain or capital

loss (refer to Sections 9F and 9G).

. If you have material capital gains, the ATO may review those under its compliance activity. Consider

whether specific advice or an ATO private binding ruling should be obtained.

Sale of property on revenue account or capital account

The income tax treatment of a receipt from the sale of property will depend on whether it is characterised on revenue

account or capital account. Broadly, if a receipt is on capital account, the 50% general CGT discount (see section 9D)

and the ability to disregard gains from assets acquired prior to 20 September 1985 (see section 9G) may be available.

In contrast, if a receipt is on revenue account, the amount may be fully assessable.

The ATO are continuing to closely scrutinise whether receipts from property developments should be on revenue

account rather than capital account111. In particular, the ATO has been successful in arguing that the disposal of

109 Income Tax Assessment Act 1997 (Cth) s104-35 and s104-155. 110 ATO website: Building confidence. 111 Taxpayer Alert TA 2014/1.



https://www.ato.gov.au/general/building-confidence/how-we-assure-the-tax-and-super-systems/what-attracts-our-attention/#Privatelyownedandwealthygroups3

http://law.ato.gov.au/atolaw/view.htm?DocID=TPA/TA20141/NAT/ATO/00001&PiT=99http://law.ato.gov.au/atolaw/view.htm?DocID=TPA/TA20141/NAT/ATO/00001&PiT=99991231235958991231235958


95

commercial properties (in this case the sale of shopping centres and other like properties) was on revenue account,

even though they had been leased for a substantial period of time112.

In addition, the ATO have recently reiterated their view that intangible capital improvements (e.g. a development

agreement) made to a pre-CGT asset (such as land) may be treated as a separate asset for CGT purposes113. This means

that a disposal of the land may result in a gain with respect to the intangible capital improvement.


. Ensure that you consider the ATO’s guidelines for determining whether a gain is on revenue account or

capital account.

Small business CGT concessions

Where you have made a capital gain for the year, you should consider the ability to reduce that gain through the small

business CGT concessions.

A taxpayer can qualify for these concessions if the taxpayer satisfies the $6 million net assets test (on a connected

entity and affiliate inclusive basis) or the $2 million turnover test (on a connected entity and affiliate inclusive basis).

The asset that is the subject of the CGT event must be an active asset (i.e. an asset used in business) and can extend to

certain assets held by connected entities, affiliates and partners in a partnership where those entities do not carry on a

business. The small business concessions can also apply to the sale of shares in a company or units in a trust, provided

additional requirements are satisfied (for example, the CGT concession stakeholder test).

The four small business CGT concessions available are: (1) the 15-year exemption; (2) the 50% active asset reduction;

(3) the retirement exemption; and (4) the replacement asset rollover.

The small business concessions require choices and payments to be made by certain dates. Failure to make choices or

payments by these dates may have significant adverse consequences. The elections are generally due by the date of

lodgement of the return. Different due dates apply to payments depending on which exemption has been chosen and

the type of entity. For example, where a retirement payment is required to be made to a superannuation fund, an

individual must pay the amount at the time of making an election. Whereas a company or trust is required to pay the

amount within seven days of making the retirement exemption election.

Furthermore, where the retirement exemption is being sought and contributions are required to be made to a

superannuation fund, it is critical to ensure that the amounts qualify for the CGT concessions and lodge the required

CGT election form with the superannuation fund on or before the contribution is made. If these requirements are not

satisfied, the amount would be an “excessive” contribution and taxed at penalty rates.

Be aware that a deferred capital gain can be triggered in respect of assets previously acquired under the replacement

asset rollover, even if the asset is not sold. This occurs if the asset: (1) ceases to be an active asset; (2) becomes trading

stock; or (3) is used to produce exempt or non-assessable income. If the replacement asset is a share or unit, it is

necessary to apply a number of tests to determine if the asset is still active. If you have a client that has acquired

shares or units under the replacement asset rollover, please refer to tax consulting for assistance in confirming the

active asset status of those shares or units.

Finally, it is important to note that there has been a considerable amount of ATO audit activity and litigation recently

dealing with the $6 million net asset value test. Taxpayers relying on the $6 million net asset value test should ensure

that they have correctly valued their assets just before the CGT event happens (i.e. generally the date of signing the

sale contract) and that they have correctly identified all of the relevant associated entities. In some cases, the

alternative $2 million turnover test can help to overcome this issue.

112 August v Commissioner of Taxation [2013] FCAFC 85.. 113 Taxation Determination TD 2017/1.

https://jade.io/article/299538?at.hl=%255B2013%255D+fcafc+85


96


It was announced by the Government in the 2017/18 Federal Budget that the small business CGT concessions would be

amended from 1 July 2017 to ensure that the concessions can only be accessed in relation to assets used in a small

business or ownership interests in a small business.


.

If a capital gain arises on a business related asset (including shares or units) during the current income

tax year by a taxpayer (or its affiliates/connected entities), consider whether the small business CGT

concessions can be accessed.

. Where the taxpayer is seeking to utilise the retirement exemption and there is a risk that this concession

will not be available, consider obtaining a ruling to confirm that the contributions will not be treated as

“excessive” contributions.

. Where the taxpayer is seeking to utilise the retirement exemption, ensure that you lodge the required

CGT election form with the superannuation fund on or before the time the contribution is made.

. When relying on the $6 million net asset value test to access the small business concessions, ensure that

your valuation method is appropriate and you have identified all assets and associated entities that are

required to be valued. You may also wish to consider the ability to use the $2 million business turnover

test.

. Ensure that choices and payments are made by the relevant dates.

CGT discount

A capital gain can be reduced by 50% where it is in respect of a CGT asset held by an individual or trust for more than

12 months prior to the CGT event happening. The day of acquisition and the day of the CGT event do not count

towards the 12 month period114. Not all CGT events qualify for the 50% CGT discount.

A partial CGT discount may be available for non-resident individuals and temporary resident individuals in some

circumstances where a CGT event occurs on or after 8 May 2012.

The ATO may seek to classify capital gains as being on revenue account in certain cases (see Section 9B). Where this

occurs, the CGT discount will not be available. In addition, the ATO recently outlined their view that the CGT discount

will not be available to Australian resident beneficiaries in respect of capital gains on non-taxable Australian property

flowing through foreign trusts (see section 6M).

The Federal Government announced in the 2017/18 Federal Budget that the CGT discount will increase from 50% to

60% for resident individuals in respect of gains on investments in qualifying affordable housing from 1 January 2018.


.

For asset sales contemplated before year-end, consider whether the asset has been held for at least 12

months and consider the commercial implications (as compared to the taxation consequences) of

delaying a disposal of the asset.

114 Taxation Determination TD 2002/10.



97

. Where assets have been held for a short period, for example just over 12 months, consider whether

there is a risk that the gains are on revenue account (i.e. no discount is available).

. Non-resident individuals and temporary resident individuals may be eligible for a partial CGT discount in

some circumstances where a CGT event occurs on or after 8 May 2012.

. The CGT discount may be denied to Australian resident beneficiaries in respect of non-taxable Australian

property capital gains derived by foreign trusts.

. Capital gains derived on certain affordable housing may qualify for a CGT discount of 60% from 1 January

2018.

CGT and international tax

Special rules apply to inbound investments made by non-residents and temporary residents and outbound investments

by residents. In addition, CGT withholding tax may apply to sales of Australian property by non-residents from 1 July

2016. Refer to Sections 11X and 11Y for further details.


. Special rules apply to inbound investments made by non-residents and temporary residents and

outbound investments made by residents.

Earnout arrangements

Capital gains and losses arising in respect of look-through earnout rights after 24 April 2015 are disregarded for tax

purposes. For the purchaser of the business, any financial benefit provided (or received) under a look-through earnout

right increases (or decreases) part of the cost base or reduced cost base of the underlying asset. For the seller of the

business, any financial benefit received (or provided) under the look-through earnout right increases (or decreases) the

capital proceeds for the underlying asset.

These rules only apply to a narrow set of circumstances, so it is important to ensure that agreements are drafted

appropriately. For example, shares need to be an active asset. Further, complications may occur where an earnout is

in respect of the head company of a tax consolidated group (i.e. by way of the interaction with the single entity rule) or

where an entity joins a tax consolidated group under an arrangement which provides for an earnout.


. Consider whether the sale of any CGT assets for the income year requires consideration of the earnout

arrangement provisions.

. If you are considering entering into a sale agreement for a business or its assets under a qualifying

earnout arrangement, you will need to ensure that the sale agreement is drafted appropriately and that

all conditions of the provisions are satisfied.

98


CGT exemptions

A number of CGT exemptions can apply to reduce capital gains and losses derived during an income year. The

following provides a non-exhaustive list of exemptions that should be considered during your year-end tax planning:

Pre-CGT assets;

Certain collectable and personal use assets;

Shares in a pooled development fund;

Trading stock;

Certain payments for compensation and damages;

Transfer of stratum units to occupiers;

Certain testamentary gifts;

Marriage or relationship breakdown settlements;

Main residence exemption;

Cars, motor vehicles and valour decorations;

Assets used to produce exempt and NANE income;

Capital losses by a lessee where the asset is non-income producing;

Capital gains or losses on certain boats;

Depreciating assets used for producing income;

CGT events on death;

TOFA financial arrangements;

Forex hedging gains or losses on liabilities; and

Forex hedging gains or losses on pre-CGT assets.


. Where you have significant capital gains, consider if any exemptions will reduce your capital gains or

losses for the income year.

CGT rollovers

In addition, there are a number of CGT rollovers that may apply to reduce capital gains and losses derived during an

income year. These include:

Rollover for assets compulsorily acquired/lost/destroyed;

Scrip for scrip rollover relief;

Demerger relief;

Splitting of assets and merging of assets;

Rollover for the change of an unincorporated body to an incorporated company; and


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Small business restructure rollover.

The small business restructure rollover applies from 1 July 2016 and allows SBEs to restructure the way their business

and associated assets are owned, without crystallising an income or capital gain or loss. These provisions specifically

disregard the CGT, trading stock, depreciating assets and certain Division 7A consequences of the restructure. The

rollover does not extend to GST or stamp duty, which must be considered as part of any restructure. Relevantly, the

SBE turnover threshold will be increased from $2 million to $10 million for the 2016/17 income year, enabling more

businesses to access the small business restructure rollover.


. Where you have significant capital gains, consider if any rollovers will reduce your capital gains or losses

for the income year.

. Consider the indirect tax consequences of a restructure, including GST and stamp duty considerations.

. Always consider the commercial and legal implications of a restructure.

Main residence exemption

If a taxpayer sold their dwelling in the 2017 income tax year, the individual may qualify for the main residence

exemption to reduce the capital gain made from this sale.

Special rules apply in a range of circumstances, including: (1) where there was an absence during the ownership period;

(2) adjacent land (whether up to two hectares or more) is being sold with the main residence; (3) compulsory

acquisitions of the main residence and/or adjacent land have occurred; (4) where the residence was used for a period

to derive income; (5) when there are two properties that are both used as a main residence; and (6) when special

disability trusts can claim the main residence exemption.

Further, where dwellings have been acquired from a deceased estate, the ATO has a discretion to extend the two year

ownership period in which the trustee of the deceased estate or a beneficiary must dispose of the dwelling to qualify

for the main residence exemption.

The Government announced in the 2017/18 Federal Budget that foreign and temporary residents will no longer be

eligible for the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017. Existing properties held by foreign

residents and temporary residents will be grandfathered until 30 June 2019.


. Apply the main residence exemption if a CGT event happens to a dwelling that was used by an individual

taxpayer as a main residence and the relevant conditions are met.

. The Federal Government has announced that foreign and temporary residents will no longer be eligible

for the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017. Existing properties will be

grandfathered until 30 June 2019.

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Wash sales

The ATO may apply Part IVA to “wash sale” arrangements115 where CGT assets — for example shares — are sold for

the purpose of realising a capital gain or loss and substantially the same assets are reacquired shortly thereafter116.

This was confirmed in a recent AAT decision, where it was ruled that Part IVA could have application to such

transactions117.

The ATO states that this rule does not apply where (for example) a taxpayer disposes of shares in one company and

purchases shares in a competitor company that carries on a similar business, as shares in the two companies do not

constitute substantially the same assets.


. Consider the ATO’s view on wash sale arrangements where assets are disposed of for a loss or gain and

(subsequently) substantially the same assets are re-acquired.



representative.

115 Cumins v Commissioner of Taxation [2007] FCAFC 21, Taxation Ruling TR 2008/1 and Taxpayer Alert TA 2008/7. 116 Taxation Determination TD 2014/10. 117 Re David Lynton as trustee for the David Lynton Superannuation Fund [2017] AATA 694.



http://law.ato.gov.au/atolaw/print.htm?DocID=TPA%2FTA20087%2FNAT%2FATO%2F00001&PiT=99991231235958&Life=20080418000001-99991231235959

http://law.ato.gov.au/atolaw/view.htm?DocID=TXD/TD201410/NAT/ATO/00001

https://jade.io/article/531027?at.hl=%255B2017%255D+AATA+694


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10. Finance issues

Loan rationalisation and debt forgiveness

It is common to rationalise loans between group entities and/or for debt restructuring to occur. This can make the

group’s Division 7A position easier to manage by reducing the number of loans around the group.

However, loan rationalisation and debt restructuring can give rise to significant taxation issues that need to be carefully

considered — especially if one of the entities involved has a deficiency in net assets. Some of these issues are listed

below:

Limited recourse debt provisions — where limited recourse debt (defined to include certain non-arm’s length

intra-group debt) is terminated, the termination can have significant tax consequences if the debt was used to

fund capital allowance deductions. Termination includes repayment, refinancing and debt forgiveness.

Division 7A — an assignment of a loan owed by a company may give rise to a deemed dividend under Division 7A if

the assignee will not exercise the assigned right.

Debt forgiveness provisions — an assignment of debts may trigger the debt forgiveness provisions and result in a

reduction in the carrying value of tax and capital losses or the tax cost of assets.

Debt/equity swaps — a debt/equity swap may give rise to the application of numerous tax provisions, including

the possible application of the Division 7A, the debt forgiveness provisions and the share tainting provisions.


. Consider rationalising all group loans prior to year-end to simplify the loan structure and the

management of Division 7A loans around the group.

. Consider whether a loan rationalisation could result in a debt forgiveness. Consider whether there are

any other tax issues that may arise from a loan rationalisation.

Interest deductibility

Interest expenses can form a major part of a taxpayer’s deductions for an income year. Where this is the case, the

taxpayer should carefully consider the deductibility of the interest and any tax planning opportunities that may be

available for prepaying interest (see Section 4Q). Questions concerning the deductibility of interest can occur in the

following circumstances:

The costs are incurred before the financed property or project has started to earn income;

The deductions exceed any income likely to be derived from the financed property or project;

Interest is incurred after the income producing asset has been disposed of or the business has ceased;

An entity obtains financing to repay partnership capital or UPEs;

Interest is incurred on perpetual debt or convertible interests;

Interest is incurred on an instrument that is not debt under the debt/equity rules (see Section 7J);

The loan is used to finance an asset that is provided to a related party at less than market rates;

Interest is paid to a non-resident and withholding tax has not been remitted; and

You do not satisfy the thin capitalisation provisions (see Section 11BB).

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Further, the prepayment of interest expenses close to year-end is often considered as an option to reduce the 30 June

taxable income position. However, you should closely consider whether the amounts prepaid can be deducted

immediately or only deductible over time (see Sections 4Q and 5N).

It is important to note that the ATO has indicated that it will paying close attention to interest deductions claimed for

the private proportion of loans118.


. Consider whether interest deductions can be claimed for the year.

. If you are considering a prepayment of interest, ensure that the prepayment will be deductible as

intended (see Sections 4N and 5M).

. Ensure that interest deductions are not claimed for the private proportion of loans.

Capital protected borrowings

Where a product (being a direct or indirect interest in a share, unit or stapled security) provides capital protection to

the taxpayer in respect of a borrowing (for example, an embedded put option that ensures the investment value is

protected or where debt is secured only against the value of the investment), this may result in a component of the

interest expense being reclassified as part of the cost base of a deemed put option.

Where the investor holds the underlying asset on capital account, the capital protection amount may not be

deductible. You should carefully consider whether you hold any such products (or are looking at investing into any

products before year-end), as these provisions may apply to deny deductions for the year ending 30 June 2017. This

should be considered where a deductible prepayment of interest is being considered close to year-end.


. Consider whether any of your investments in shares, units or stapled securities are capital protected

products and whether any of your interest deductions for the year are at risk of being treated as capital.

Taxation of financial arrangements (“TOFA”) (general)

The TOFA provisions apply to “financial” arrangements (for example, loans, derivatives, foreign currency). The

provisions apply a comprehensive set of rules to bring to account gains and losses on such arrangements.

TOFA applies to taxpayers that that have an aggregated turnover of $100 million or more, gross assets greater than

$300 million or financial assets greater than $100 million and certain other categories of taxpayers (based on the prior

year). The rules also apply where a taxpayer is party to an arrangement that is a qualifying security (for example, has

deferred interest and has a term of more than 12 months)119. A taxpayer not otherwise subject to the TOFA provisions

may elect for them to apply.

TOFA applies an accruals regime so that gains (for example, interest income) and losses (for example, interest expense)

are accrued where they are sufficiently certain. Accordingly, TOFA can change the basis for assessing returns to

118 ATO website: Building confidence. 119 Income Tax Assessment Act 1997 (Cth) s230-455.

https://www.ato.gov.au/general/building-confidence/how-we-assure-the-tax-and-super-systems/what-attracts-our-attention/#Privatelyownedandwealthygroups3



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taxpayers. In addition, TOFA can allow a taxpayer to make an election to use one or more of four elective methods for

recognising gains and losses (See Section 10E below.)

Being taxed under the TOFA rules may offer advantages as compared to the ordinary provisions. For example,

dividends paid on preference shares that are debt interests under the debt/equity rules may be deductible on an

accruals basis under TOFA, while they are only deductible on a cash basis outside of TOFA.

However, TOFA also requires interest income to be accrued. Accordingly, this will mean that unearned interest income

would need to be brought to account at year-end.


.

Consider whether TOFA applies mandatorily to your entity for the year ending 30 June 2017 and the

implications it may have on financial type arrangements (for example, loans, bank accounts, swaps,

debts, deferred settlements).

. Consider whether it may be preferable to elect into the TOFA regime due to the treatment of

arrangements under TOFA as compared to provisions outside of TOFA (for example, preference share

deductions).

Taxation of financial arrangements (elections)

The TOFA provisions allow taxpayers to make a number of elections that align their taxation outcomes with their

accounting outcomes. These elections include: (1) an election to allow small taxpayers to be taxed under TOFA; (2) an

election to use the tax hedging provisions; (3) an election to use the fair value accounting method; (4) an election to

use the forex retranslation accounting method; and (5) an election to book gains and losses on financial arrangements

for tax purposes in accordance with the accounts.

The elections are once off (i.e. if the election was made for the previous income year, the election would also apply to

the 2017 and subsequent income years) and require a number of conditions to be satisfied (for example, audited

accounts).

Where no election has previously been made, the elections will need to be made by 30 June 2017 if they are to apply

for the year ending 30 June 2017. Accordingly, this means your consideration of TOFA should be performed before this

date.


. TOFA allows a number of elections to align tax with accounting. Such elections need to be made before

30 June 2017.

Taxation of financial arrangements (consolidated groups)

Changes have been introduced that deem the head company to acquire the TOFA liabilities of the joining entity.

Accordingly, this sets a starting value for those TOFA liabilities in the head company. This means that a deduction

would be denied for the subsequent settlement of an out-of-the-money derivative, to the extent of its value at the

time the entity joined the tax consolidated group.

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.

Where a taxpayer has joined a consolidated group, ensure that TOFA liabilities acquired by the head

company are adjusted appropriately (which may deny a deduction for settlement of the liabilities or may

prevent a gain from accruing on settlement).

Taxation of financial arrangements (compliance issues)

Taxpayers should also be aware that the ATO is conducting targeted implementation reviews focusing on identifying

taxpayers who meet the TOFA thresholds to ensure they are correctly applying the TOFA rules (for example, the validity

of elections made under TOFA, compliance with the hedging method recording requirements and the appropriate

application of the TOFA tax-timing methods).


. Ensure that you have appropriately considered your TOFA positions for the year ending 30 June 2017 as

the ATO are conducting compliance activity through TOFA questionnaires.

Common reporting standard

From 1 July 2017, Australia will implement the Common Reporting Standard for the Automatic Exchange of Financial

Account Information (“CRS”). The CRS is a single global standard for the collection, reporting and exchange

information in respect of financial accounts held by foreign tax residents and will assist in ensuring that taxpayers are

complying with relevant tax laws.

Australian banks and other financial institutions will collect and report information to the ATO which will exchange this

information with the relevant participating foreign tax authorities. The ATO will also receive information in respect of

financial accounts held by Australian residents from other countries’ tax authorities. The first exchange of information

will take place on 30 September 2018.

The definition of a CRS Financial Institution that is required to report to the ATO is very broad and is likely to include a

large number of family offices as well as managed investment schemes. If you run a family office or an MIS, you should

consider whether these provisions may apply to you.


. If you are an Australian resident for tax purposes, ensure that you are disclosing income from foreign

financial accounts in your Australian income tax return.

. If you run a family office or a managed investment scheme, you may be required to report on accounts

held before and after 1 July 2017. You should confirm your status and your requirements as soon as

possible.

FATCA compliance for investment entities

Australian has implemented legislation and signed an intergovernmental agreement (“IGA”) which requires certain

entities in Australia to comply with FATCA. FATCA is the acronym for US legislation intended to attack US taxpayers

who fail to include foreign income in their US tax returns. The Australian legislation and IGA applies regardless of

whether the investor is a US resident or the investments held are US investments. Accordingly, it is possible for an


105

Australian company or trust to be caught up in these rules even if their only investments are in Australian managed

funds.

The Australian legislation requires investors to complete forms to identify their status for FATCA purposes. It also

requires an entity that is defined as a financial institution to report information to the ATO on an annual basis. An

entity that is a financial institution may also be required to register in the US. There are strict penalties for non-

compliance. There are also due diligence and reporting requirements (which are due to the ATO by 31 July 2017).

It is important to note that FATCA will run in parallel with the new CRS regime (see section 10H above). This means

that a US account may need to be reported to the ATO under both the FATCA regime and the CRS regime.


. If you have been asked to “certify” your FATCA status or produce a W8-BEN form, it is likely that FATCA

could apply to your entity. You should carefully consider your FATCA obligations.

. If you are a financial institution (as defined in the IGA), you need to ensure that you have considered

FATCA, including: registration requirements; due diligence procedures; and reporting requirements.

Financing structures

There have been a number of recent changes to financing structures. These include:

The introduction of a simplified taxation regime for managed investment trusts, which broadly applies from 1 July

2016 (i.e. the income year ending 30 June 2017)120.

Changes to the venture capital provisions to provide additional tax incentives on investments in ESVCLPs121.

The introduction of tax incentives for shares acquired by certain sophisticated investors in qualifying ESICs122.

The introduction of crowd-sourced equity funding for small unlisted public companies123.

The introduction of a funds passport regime with Asia124.

A proposed new collective investment vehicle regime for companies and limited partnerships that is due to apply

from 1 July 2017.

Some of the tax concessions apply to investments made during the 2016/17 income year, including investments in

certain ESVCLPs and investments in ESICs. There are also a large number of traps that can occur in applying the

legislation. For example, electing to be an AMIT may have inadvertent consequences for investors under the new cost

base adjustment provisions (CGT event E10). Due to the complexity in these provisions, we would recommend you

seek appropriate advice in considering any of these proposed options.


.

If you are considering creating a new investment structure, or considering investing in such a structure,

consider whether the AMIT rules, ESVCLP rules, ESIC rules, crowdfunding rules, funds passport rules, or

the CIV rules could be an appropriate structure for such investments.

120 ATO website: New taxation system for managed investment trusts. 121 ATO website: ESVCLP tax incentives and concessions. 122 ATO website: Tax incentives for early stage investors. 123 Australian Government: National Innovation & Science Agenda: Making it easier to access crowd-sourced equity funding. 124 Asia-Pacific Economic Cooperation: Asia Region Funds Passport.

https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/Trusts/New-taxation-system-for-managed-investment-trusts/

https://www.ato.gov.au/business/venture-capital-and-early-stage-venture-capital-limited-partnerships/esvclp-tax-incentives-and-concessions/

https://www.ato.gov.au/Business/Tax-incentives-for-innovation/In-detail/Tax-incentives-for-early-stage-investors/

https://www.innovation.gov.au/page/access-crowd-sourced-equity-funding

http://fundspassport.apec.org/

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representative.


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11. International tax

General

Generally, international tax issues are complex and the application of various provisions can have a significant impact

on your 30 June results. When dealing with international issues, it is always necessary to consider seeking foreign tax

advice.


. When dealing with international tax issues, it is always necessary to consider seeking foreign tax advice.

ATO compliance activities

International tax issues are becoming an increasingly important focus area for ATO compliance activity. Various

taxpayer alerts have been released in the past financial year that concern international dealings and cross-border

activity. They include:

TA 2016/7: Arrangements involving offshore permanent establishments125;

TA 2016/8: GST implications of arrangements entered into in response to the Multinational Anti-Avoidance Law126;

TA 2016/10: Cross-border round robin financing arrangements127; and

TA 2016/11: Restructures in response to the Multinational Anti-Avoidance Law involving foreign partnerships128.

In addition, the Government announced in the 2016/17 Budget that a new ATO Avoidance Taskforce will be created to

monitor and closely scrutinise multinational tax avoidance. It appears that large multinationals, large private groups,

and high net worth individuals, will be the main focus of the ATO taskforce.

If you operate internationally or hold assets overseas, you should review your tax affairs and consider making voluntary

disclosures.


. You should carefully consider whether your arrangements with international parties are likely to be

scrutinised by the ATO.

Non-resident individual tax rates

The following table outlines the tax rates that apply to non-resident individuals for the year ending 30 June 2017. As

noted at Section 5C, non-resident individuals are not required to pay the Medicare levy, but may be subject to the TBR

levy.


125 Taxpayer Alert TA 2016/7. 126 Taxpayer Alert TA 2016/8. 127 Taxpayer Alert TA 2016/10. 128 Taxpayer Alert TA 2016/11.

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https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300010%23TA%202016%2F10%20-%20Cross-Border%20Round%20Robin%20Financing%20Arrangements%3B%22&DOCID=%22TPA%2FTA201610%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300011%23TA%202016%2F11%20-%20Restructures%20in%20response%20to%20the%20Multinational%20Anti%20Avoidance%20Law%20(MAAL)%20invol...%3B%22&DOCID=%22TPA%2FTA201611%2FNAT%2FATO%2F00001%22

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0 — $87,000 32.5%

$87,001 — $180,000 $28,275 + 37% of excess over $87,000

$180,001+ $62,685 + 45% of excess over $180,000

In addition to these rates, the TBR levy is payable at a rate of 2% on any excess of taxable income over $180,000 for the


Tax residency and source (general)

Entities should consider their tax residency on an annual basis. The residency status of a taxpayer is dependent on

many factors. The consequence of a taxpayer being a resident is that the entity will be taxed on worldwide income and

capital gains, subject to available exemptions (for example, branch profits, non-portfolio dividends). A non-resident

taxpayer will only be taxed on Australian-sourced income and certain capital gains.

Whether an amount is sourced in Australia is a question of fact and degree. The ATO has released a taxation

determination129 providing rules for determining the source of gains from the disposal of shares. Australia’s taxing

rights may also be modified by an applicable Double Taxation Agreement (“DTA”).

Further, different tax provisions can apply depending on whether an entity is a resident or non-resident.


. You should carefully consider whether the relevant entity is a tax resident for the year ending 30 June

2017 and the tax implications that may follow.

. Where the taxpayer is a non-resident, you should carefully consider the source of income and whether

such income should be included in the tax return of the entity.

Tax residency and source (foreign incorporated companies)

A foreign incorporated company will be considered an Australian tax resident if it carries on a business in Australia and

has either its central management and control in Australia or its voting power controlled by shareholders who are

residents in Australia130.

A recent High Court decision131 and Draft Taxation Ruling132 have made it easier for foreign incorporated companies to

be considered an Australian resident for tax purposes. This can have significant tax implications. Accordingly,

Australian owned groups with foreign incorporated subsidiaries should carefully consider whether those subsidiaries

will be considered Australian residents for tax purposes.


. You should carefully consider whether foreign incorporated companies within your group will be

considered Australian residents for taxation purposes.

129 Taxation Determination TD 2011/24. 130 Income Tax Assessment Act 1936 (Cth) s6. 131 Bywater Investments Ltd & Ors v Commissioner of Taxation [2016] HCA 45. 132 Draft Taxation Ruling TR 2017/D2.



https://jade.io/article/505121?at.hl=%255B2016%255D+hca+45

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Temporary resident concessions

Under Australian income tax laws, a foreign individual may be considered a resident where they reside in Australia or

where they are in Australia for at least 183 days. Subject to DTAs, this could result in the individual’s worldwide

income being taxed in Australia.

A concession can apply if the individual is considered a temporary resident. Generally, an individual can be a

temporary resident if that person holds a temporary visa granted under the Migration Act 1958 and neither the person

nor their spouse (or de facto) is an Australian resident within the meaning of the Social Security Act 1991. Where the

requirements are satisfied, most foreign income (other than employment income) and most capital gains (except for

taxable Australian property) are considered not assessable and there is a relaxation of some record keeping rules.

Temporary residents were previously able to access the CGT main residence exemption. However, it was announced

by the Government in the 2017/18 Federal Budget that foreign and temporary tax residents will be denied access to

the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017. Properties held prior to this date will be

grandfathered until 30 June 2019.


. If you are a citizen of a foreign country and visiting Australia, you should consider whether this will make

you a resident of Australia.

. Where you are a resident of Australia, you should consider whether there is an opportunity to apply the

temporary resident concession to your income for the year ending 30 June 2017.

. Where you are a citizen of New Zealand, consider the potential impact TD 2012/18 may have on your

temporary resident status.

. Where you a temporary resident, you may be denied access to the CGT main residence exemption from

9 May 2017.

Working holiday makers

From 1 January 2017, the first $37,000 of a working holiday maker’s income is taxed at 15%, with the balance taxed at

ordinary rates for foreign residents. A taxpayer is a working holiday maker if they hold a visa subclass 417 (working

holiday) or 462 (work and holiday). A working holiday maker will be deemed to be a non-resident for Australian tax

purposes and will be required to lodge an income tax return each year.

If you employ or plan to employ working holiday makers, you need to register as an employer of working holiday

makers before making payments to them. In addition, you will need to ensure that you are withholding tax at working

holiday maker rates133. Alternatively, if you do not register as an employer of working holiday makers, you must

withhold in accordance with the foreign resident withholding rates.

133 ATO website: Tax table for working holiday makers.

https://www.ato.gov.au/Rates/Schedule-15--Tax-table-for-working-holiday-makers/

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. If you are a working holiday maker, the first $37,000 of income will be taxed at 15%, with the remainder

taxed at ordinary rates. You are required to lodge an income tax return each year you work in Australia.

. If you employ or are planning to employ working holiday makers, you need to register as an employer of

working holiday makers before making payments to them. In addition, you will need to withholding tax

at working holiday maker rates.

Changing residence

When a taxpayer ceases to be an Australian resident for tax purposes during the income tax year, a CGT event (i.e. a

deemed disposal) can occur for all CGT assets that are not taxable Australian property. Where the taxpayer is an

individual, a choice can be made to treat all assets as being taxable Australian property (subject to limitations placed on

Australia’s taxing rights under a DTA).

When a taxpayer becomes an Australian resident for tax purposes, special rules can apply to treat non-taxable

Australian property as being acquired at that time, generally for its market value. This can also occur where an

individual ceases to be a temporary resident but remains an Australian resident.

Special rules also apply under TOFA in respect of financial arrangements that are held by the taxpayer at the relevant

changeover time. Accordingly, it is critical that you consider the tax consequences for all of your assets and liabilities

on a possible change in residency.


. Consider the potential tax implications of a change in residency of the relevant taxpayer, if there is a risk

that the taxpayer has changed residency during the year.

Controlled foreign company regime

The CFC regime can apply to attribute income derived by a CFC to the Australian investor. The provisions operate

where a foreign company is controlled by an Australian resident(s). Accordingly, in some cases, it can apply to

Australian taxpayers that hold a minority interest in a CFC.

The complexity of these rules makes it easy for taxpayers to overlook whether they have invested in a foreign company

and the tax consequences associated with the investment. The consequence of an incorrect assessment can be quite

substantial where the underlying entity has income that may be attributable under these rules.


. Where you have foreign investments, you should consider the application of the CFC provisions — even

where you only have a minority interest in the relevant entity.


111

Distributions from foreign trusts to Australian resident beneficiaries

The ATO have recently released two draft Taxation Determinations134 outlining their views as to the taxation of capital

gains made by trustees of foreign trusts. Where such gains are distributed to residents, the beneficiary may not be

entitled to a 50% discount and may not be able to offset capital losses in respect of this amount. Care therefore needs

to be taken in distributing such amounts to residents on or before 30 June 2017.


. If you invest in foreign trusts, you should consider how the ATO’s view on the taxation of capital gains

affects your arrangements.

Transfer pricing (general)

Australia’s transfer pricing rules apply to all taxpayers that have international dealings and can apply to reconstruct all

types of international dealings (for example, loans, service fees, transfers of trading stock) if these are deemed to be

inconsistent with the arm’s length principle.

The rules interpret the arm’s length principle in accordance with international (i.e. OECD) guidance and ensure that the

transfer pricing articles contained in Australia's DTAs can operate independently of our unilateral domestic transfer

pricing rules. The ATO will continue to target this area, with increased funding and increased information from the IDS

(see Section 11L).

Taxpayers should review and/or consider formalising their inter-company services, sales/distribution and loan

agreements before year-end. In particular, where period end ‘true-ups’ (i.e. adjustments) are required to give effect to

any profit based transfer pricing methods, the relevant service/purchase/sale agreements should incorporate

provisions specifically acknowledging that such periodic adjustments have been agreed between the parties.


. If you have international dealings, you should ensure that you have appropriately considered Australia’s

transfer pricing provisions.

Transfer pricing (contemporaneous documentation)

Under Australia’s transfer pricing rules, Australian taxpayers are not required to prepare contemporaneous transfer

pricing documentation. However, they are precluded from receiving relief from penalties in the event of an ATO

adjustment if they do not have contemporaneous documentation in place at the time of lodging their income tax

return.

In light of the current focus on international base erosion and profit shifting (i.e. BEPS), this is another area where

taxpayers should expect an increased level of scrutiny, and thus taxpayers should ensure that their transfer pricing

documentation is both contemporaneous and robust.

As part of preparation of the income tax return, taxpayers are required to prepare an IDS. Amongst other things, the

IDS requires taxpayers to disclose the percentage of their dealings with related parties that are covered by

contemporaneous transfer pricing documentation (refer to section 11P below). It is the responsibility of the public

officer, in responding to these documentation questions, to ensure that he/she does not make a false or misleading

statement. Pitcher Partners can assist you to develop contemporaneous transfer pricing documentation.

134 Draft Taxation Determination TD 2016/D4 and Draft Taxation Determination TD 2016/D5.

http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2016D4%2FNAT%2FATO%2F00001%22

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. Ensure that you have adequate and appropriate transfer pricing documentation in place and that the

transfer pricing approach taken is fully and accurately reflected in the IDS for the year ending 30 June

2017.

Transfer pricing (simplified record keeping)

The ATO has developed some simplified record keeping options that enable certain taxpayers to minimise some of the

record-keeping and compliance costs involved in complying with Australia’s transfer pricing provisions135.

These options, can be broadly classed into two categories. The first category includes options for particular classes of

taxpayers (i.e. distributors and small business taxpayers). The second category includes options for particular classes of

international related party dealings, including transactions based on certain materiality levels, intra-group services,

management and administrative services, technical services and certain inbound and outbound low level loans.

Each of the options requires taxpayers to self-assess their compliance with Australia’s transfer pricing rules. Pitcher

Partners can assist you in accessing and implementing these simplified measures.


. Consider whether you are eligible to apply one or more of the simplified transfer pricing record keeping

options. If so, take action to record your self-assessment of your eligibility for the option.

Transfer pricing (offshore hubs)

The ATO has released guidance on their compliance approach to transfer pricing issues related to centralised operating

models (or hubs) involving procurement, marketing, sales and distribution functions136. The guidance applies to

income years commencing on or after 1 January 2017.

The guidance provides a risk framework that allows taxpayers to self-assess their transfer pricing outcomes using the

ATO’s risk framework. Broadly, the risk assessment framework has six risk classifications from the white zone (self-

assessment of risk rating unnecessary) to the red zone (very high risk).

Taxpayers work out the risk rating for their hub having regard to a number of factors including pricing indicators,

possible tax at risk and the quality of transfer pricing documentation.

Whilst ATO input and sign-off is not required, the guidance advises that taxpayers may be asked to inform the ATO if

they have self-assessed their rating, and if so, what their risk rating is. The ATO will tailor their engagement with

taxpayers according to their risk profiles. It is expected that the ATO will request this information through the IDS

(refer to section 11P) or RTP Schedule (refer to section 7BB).


.

If you are a multinational group with operating models (or hubs) involving procurement, marketing, sales

and distribution functions, you will be required to determine your risk rating with respect to these

operations.

135 Practical Compliance Guideline PCG 2017/2. 136 Practical Compliance Guideline PCG 2017/1.

https://www.ato.gov.au/law/view/document?DocID=COG/PCG20172/NAT/ATO/00001

https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwiJn6XP3JHTAhXIjVQKHT7jCIEQFggiMAE&url=https%3A%2F%2Fwww.ato.gov.au%2Flaw%2Fview%2Fdocument%3FDocID%3DCOG%2FPCG20171%2FNAT%2FATO%2F00001&usg=AFQjCNHvv7LNkTAG2Dt38yZd7PiO-oOy8Q&sig2=4SNPeRw0PYpO87N62yt1Xw&bvm=bv.152174688,d.cGw


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Transfer pricing (financing arrangements)

The ATO has released draft guidance on their compliance approach to taxation issues associated with cross-border

related party financing arrangements and related transactions137. The guidance will apply from 1 July 2017 and will

apply to existing and newly created financing arrangements/structures/functions.

The guidance provides a risk framework that allows taxpayers to self-assess and compare their transfer pricing

outcomes against the ATO’s risk framework. Broadly, the risk assessment framework has six risk classifications from

the white zone (self-assessment of risk rating unnecessary) to the red zone (very high risk).

Taxpayers work out the risk rating for their financial arrangements having regard to a number of factors including

sovereign risk of borrowing entity, interest coverage ratio, global group’s cost of funds, leverage of borrower and

headline tax rates for lending entity jurisdiction.

The ATO will tailor their engagement with taxpayers according to their risk profiles. It is expected that the ATO will

request this information through the RTP Schedule (refer to section 7BB).


. If you are a multinational group with financial arrangements, you will be required to determine your risk

rating in respect of these arrangements.

International dealings schedule

Entities with $2 million or more of international dealings are required to complete Section A of the IDS. The $2 million

threshold includes the value of any property/services transferred and the balance of any loans.

As the IDS requires significant disclosures to be made, we recommend that you contact your Pitcher Partners

representative if you are required to complete this form for the year ending 30 June 2017. Completion of this form

should be done contemporaneously with preparing your transfer pricing documentation. Due to its complexity and the

requirement for transfer pricing documentation, preparation of the IDS cannot be left until the lodgement of your tax

return.

Entities that are significant global entities (and do not qualify for the short form local file option) may choose to lodge

Part A of their local file with their income tax return, rather than prepare an IDS. This eliminates duplication of

information requested in the IDS and the local file.


.

Consider the information required to complete the IDS for the year ending 30 June 2017 well in advance

to lodging your return. Ensure that your IDS response is consistent with your transfer pricing

documentation.

. If you are a significant global entity, and do not qualify for the short form local file option, you may

choose to lodge Part A of your local file with your income tax return rather than prepare an IDS.

Significant global entities

A number of new measures (as outlined in sections 11R, 11S, 11T and 11U) apply to entities that are significant global

entities.

137 Draft Practical Compliance Guideline PCG 2017/D4.

https://www.ato.gov.au/law/view/document?DocID=COG/PCG20174/NAT/ATO/00001

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Significant global entities are entities that have annual total global income of $1 billion or more and are either:

Australian residents (Australian headquartered multinationals or Australian subsidiaries of multinationals outside

Australia).

Foreign residents with an Australian permanent establishment.


. Consider whether you are a significant global entity that will be subject to a number of new measures.

General purpose financial statements

Corporate tax entities that are significant global entities will be required to give the ATO a general purpose financial

statement (“GPFS”) if they do not lodge one with the Australian Securities and Investments Commission (“ASIC”) for

income years commencing on or after 1 July 2016138. The GPFS must be for the financial year that most closely

corresponds to the income year, and it must be given to the Commissioner by the time the entity is required to lodge

its income tax return.

For taxpayers with a 30 June year-end, the first income year that this measure will apply is the income year ending 30

June 2017, with lodgement likely due in early 2018. Pitcher Partners can assist you to determine whether you are

required to lodge GPFS with the ATO.


.

If you are a corporate tax entity and a significant global entity and you do not lodge GPFS with ASIC, you

may be required to lodge GPFS with the ATO in respect of income years commencing on or after 1 July

2016.

Multinational anti-avoidance law

The multinational anti-avoidance law (“MAAL”) applies to certain schemes entered into by significant global entities on

or after 1 January 2016, irrespective of when the scheme commenced139. Broadly, the MAAL is designed to capture

arrangements where entities seek to avoid a taxable presence in Australia in connection with sales to Australian

customers by booking their revenue offshore.

The MAAL will broadly apply if under the scheme, or in connection with the scheme, all of the following conditions are

satisfied:

A significant global entity supplies goods or services to an Australian customer.

An Australian entity, that is an associate of or is commercial dependent on the foreign entity, undertakes activities

directly in connection with the supply.

Some or all of the income derived by the foreign entity is not attributable to an Australian permanent

establishment.

The principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to

obtain both an Australian and foreign tax benefit.

138 Taxation Administration Act 1953 (Cth) s3CA. 139 Income Tax Assessment Act 1936 (Cth) s177DA.

http://www.austlii.edu.au/au/legis/cth/consol_act/taa1953269/s3ca.html

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s177da.html


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The Government announced in the 2017/18 Federal Budget that the MAAL will apply to corporate structures that

involve the interposition of partnerships that have foreign resident partners, trusts that have foreign resident trustees

and foreign trusts that temporarily have their central management and control in Australia. These changes will apply

from the date of the MAAL’s commencement on 1 January 2016.


. If you are a significant global entity, consider whether your arrangements on or after 1 January 2016 are

within the scope of the MAAL.

Diverted profits tax

The diverted profits tax (“DPT”) applies to income years commencing on or after 1 July 2017, and can apply to schemes

entered into by significant global entities before 1 July 2017140. Broadly, the DPT will apply if under the scheme, or in

connection with the scheme, the following conditions are satisfied:

A significant global entity has obtained a tax benefit in connection with the scheme in an income year.

The principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to

obtain both an Australian and foreign tax benefit.

None of the following tests apply: the $25 million income test, the sufficient foreign tax test or the sufficient

economic substance test.

The DPT does not apply to MITs, certain foreign collective investments vehicles, foreign-government owned entities,

complying superannuation entities or foreign pension funds.


. If you are a significant global entity, consider whether your arrangements after 1 July 2017 are within

scope of the DPT.

Country-by-country reporting

The country-by-country (“CbC”) reporting regime was introduced for income years commencing on, or after, 1 January

2016 and requires significant global entities to provide statements to the ATO within 12 months of the end of their

income year141. Broadly, the statements required to be lodged are:

A master file (i.e. a statement relating to the global operations and activities).

A local file (i.e. a statement relating to the Australian entity’s operations, activities, dealings and transactions).

A CbC report (i.e. a statement relating to the allocation between countries of the income and activities of, and

taxes paid by the Australian entity and other members of the group).

The CbC report should generally be lodged with the revenue authority of the country of residence of the parent entity

of the group. This report will generally be shared with the revenue authorities of other group members. In contrast,

the master file and local file should generally be lodged with the revenue authority of the country of residence of the

subsidiary of the group.

140 Treasury Laws Amendment (Combating Multinational Tax Avoidance) Act 2017 (Cth). Treasury Laws Amendment (Combating

Multinational Tax Avoidance) Act 2017 (Cth). 141 Income Tax Assessment Act 1997 (Cth) sd 815-E.



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For taxpayers with a 30 June year-end, the first income year that this measure will apply is the income year ending 30

June 2017, with lodgement due by 30 June 2018.

Taxpayers subject to the local file reporting requirements, where the taxpayer does not qualify for short form local file,

may choose to lodge Part A of the local file with their income tax return for the relevant year, rather than prepare an

IDS. This option is available to prevent duplication of information in the IDS (discussed at 11P above) and the local file.


. If you are a significant global entity, consider whether you will be required to provide statements to the

ATO (or another revenue authority) in respect of income years commencing on or after 1 January 2016.

Conduit foreign income

The CFI provisions enable an Australian company to make tax-free distributions of certain foreign income to non-resident

shareholders in the form of unfranked dividends that are not subject to withholding tax.

Examples of CFI income that can be flowed through an Australian company include: (1) foreign equity distributions142;

(2) foreign branch profits143; and (3) non-portfolio capital gains144. Where other income was subject to foreign tax the

grossed up value of the income may also be considered CFI (i.e. the amount on which no Australian tax has been paid).

The CFI provisions also require consideration of offsetting expenses in determining the net amount that may be

distributed. The CFI concession may also be available where the Australian entity is owned by a trust and the trust

distributes the income to a non-resident.

Certain time restrictions apply to the distribution of CFI income to a non-resident through a chain of entities (typically

the Australian company must on-pay a CFI distribution received before it is due to lodge its income tax return).


.

Where the Australian company is a conduit between two foreign entities (i.e. it is owned by a foreign

entity or is owned by a trust that has a foreign resident beneficiary) and the Australian company also

derives foreign income, consider whether you can access the CFI exemption to reduce Australian tax

paid.

Foreign income tax offset

Where the FITO rules apply, a taxpayer can claim a tax offset for foreign tax paid on their foreign income against their

Australian tax payable. FITOs cannot be carried forward, whereby excess FITOs can (easily) be wasted if there is

inappropriate planning or consideration.

If you expect there to be excess FITOs in a year (i.e. in this year or another year), you should consider whether there is

other lowly taxed foreign income that could be brought forward or derived that would utilise the excess FITOs. As

FITOs do not give rise to franking credits, strategies to maximise FITOs should also be compared with top-up tax

payable on the payment of company profit to shareholders by way of a franked dividend.

142 Income Tax Assessment Act 1997 (Cth) s802-30. 143 Income Tax Assessment Act 1997 (Cth) s802-35. 144 Ibid.





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. Consider your FITO position for 30 June 2017 to determine whether there are any excess FITOs that will

be wasted. Strategies can be put in place to help reduce FITO wastage.

. Beware of flowing through FITOs to loss trusts or loss companies, which may result in wastage of the tax

offset.

. Consider whether maximising FITOs or paying franked dividends provide a better tax outcome for

company shareholders.

Exempt type distributions and gains from non-residents

Amounts from a non-resident entity or business may be exempt or NANE income of the recipient. These include: (1)

branch profits of a resident company145; (2) dividends where there is an attribution account surplus146; (3) foreign

equity distributions received by a resident company147; and (4) capital gains made on the disposal of a shareholding in

an active foreign company148. In order to qualify for these exemptions, certain conditions may need to be satisfied.

For distributions after 16 October 2014, if: (1) an Australian corporate tax entity receives a foreign equity distribution

from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and (2) the

Australian corporate tax entity holds a participation interest of at least 10% in the foreign company, the distribution is

NANE income for the Australian corporate tax entity. In addition, the relevant rules look to whether an Australian

corporate tax entity holds an equity interest for the purposes of the debt/equity provisions and not whether they just

have an interest which is legally a share.


. Consider whether distributions from non-resident entities (including capital reductions) can or have been

made to an Australian entity in a tax free manner.

Sale of assets by non-residents or temporary residents

The sale of a CGT asset by a non-resident may not be taxable where the asset is not taxable Australian property.

Generally, taxable Australian property includes land, land rich entities, assets used by a permanent establishment

(“PE”) and certain assets held by non-residents on changing residency. (Note, assets that are used at any time by a

non-resident in carrying on a business in Australia through a PE are taxable Australian property).

These provisions can apply to indirect sales of land by non-residents or temporary residents. However, this will not

necessarily mean that a capital gain will be taxable in Australia. A review of the relevant DTA is required to determine

Australia’s taxing rights. It is also highlighted that the CGT exemption from the sale of non-taxable Australian property

does not apply to revenue assets. However, careful consideration of the DTA should also occur in this alternative

case149.

145 Income Tax Assessment Act 1936 (Cth) s23AH. 146 Income Tax Assessment Act 1936 (Cth) s23AI and s23AK. 147 Income Tax Assessment Act 1997 (Cth) sub-div 768-A. 148 Income Tax Assessment Act 1936 (Cth) sub-div 768-G. 149 Taxation Determination TD 2010/21 and Taxation Determination TD 2011/25.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s23ah.html


http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s23ak.html





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From 1 July 2016, a purchaser of certain Australian real property from a foreign resident vendor (where the market

value of the property asset is greater than $2 million) will be required to withhold and pay 10% of the purchase price of

such property to the ATO. The threshold will be reduced to $750,000 and the rate increased to 12.5% from 1 July 2017.


. Where non-residents or temporary residents are considering a sale of Australian assets, you should

consider whether such assets are taxable Australian property.

. If you are purchasing Australian property assets from foreign resident vendors, you may be required to

withhold and pay 10% of the purchase price of such property to the ATO.

Deductions in earning foreign income

A deduction may be denied for a loss or outgoing incurred in earning exempt income or NANE income. However, there

are two exceptions for foreign income. The first relates to previously attributed income150. The second relates to debt

deductions incurred in respect of previously attributed income and foreign equity distributions paid to a company151.

Note that interest deductions relating to branch income are not deductible.

Where expenses do not meet the above exceptions, they could be denied as a deduction. Examples where this may

occur include overhead expenses attributable to a foreign branch or blackhole deductions where the group has foreign

subsidiaries.


. Where there is a foreign branch or foreign subsidiary in the group that produces exempt or NANE

income to the group, closely consider whether any deductions incurred for the year will be denied.

Deemed dividends from non-resident CFCs

Integrity provisions can operate to treat certain transactions involving a CFC as a deemed dividend to the shareholder

or associate152. These provisions are similar to Division 7A but take precedence over Division 7A and can operate even

where the transactions are at an arm’s length price.

Where the group has a CFC, related party transactions should be reviewed to determine whether the provisions may

apply to treat such transactions as a deemed unfranked dividend. There is no ATO discretion in respect of such

provisions. Where the ATO is not notified of the deemed dividend (by lodging the return or within 12 months of year-

end), the provisions can operate to deny access to the FITO provisions and attribution credit provisions. The provisions

do not contain an exemption for benefits provided to other companies. However, limited relief may be available if the

benefit is provided to a shareholder in certain circumstances153.

150 Income Tax Assessment Act 1936 (Cth) s23AI(2) and 23AK(10). 151 Income Tax Assessment Act 1997 (Cth) s25-90. 152 Income Tax Assessment Act 1936 (Cth) s47A. 153 Income Tax Assessment Act 1936 (Cth) 23AI or Income Tax Assessment Act 1997 (Cth) s768-5.


http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s23ak.html






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. Closely consider related party transactions where benefits are provided by a CFC to a shareholder or

associate of the shareholder.

Thin capitalisation

Thin capitalisation rules are designed to ensure that multinationals do not allocate an excessive amount of debt to their

Australian operations. The provisions can apply to Australian entities that have controlled foreign entities and/or

operations (outbound) and to foreign entities that have controlled Australian entities and Australian operations

(inbound). Where the provisions apply, debt deductions (i.e. interest) on excess borrowings can be denied.

The thin capitalisation rules do not apply where an entity (together with its associate entities) has debt deductions of

$2 million or less for an income year. In the case of outward investors, there is also an exception where 90% or more

of the total average value of all assets of an outward investing entity (together with its associates) is represented by

Australian assets.

Where the thin capitalisation rules apply, the safe harbour debt to equity ratio of 1.5:1 is generally used to determine

whether deductions will be denied. This means that assets must be funded by at least 40% equity and no more than

60% by way of debt. Where the safe harbour ratio is breached, taxpayers may be able to look at alternative methods

of satisfying the thin capitalisation rules (for example, the worldwide debt test).

It is important to note that UPEs may need to be considered when applying the thin capitalisation rules. There are a

number of actions that may be taken to improve a taxpayer’s thin capitalisation position before 30 June 2017. These

include refinancing interest bearing debt with certain complying non-interest bearing debt, injecting further capital into

the taxpayer before 30 June 2017, or revaluing assets in accordance with the provisions. However, consideration

should be given to integrity provisions (See Section 13) that may also need to be complied with prior to adopting such

strategies.


.

Perform high-level calculations to see whether debt deductions exceed $2 million (for both inward and

outward investors) and whether the value of Australian assets represents at least 90% of all worldwide

group assets for the year (only for outward investors who fail the $2 million test) to determine whether

the thin capitalisation rules are likely to apply.

. Where the thin capitalisation measures are likely to apply, perform a high-level thin capitalisation

calculation based on latest available financial figures to determine whether there may be a denial of debt

deductions for the year ending 30 June 2017.

. Consider various strategies to improve your thin capitalisation position before 30 June 2017, taking into

account the various integrity provisions that apply.

Deductions where withholding tax payable is not paid

For certain payments made to a non-resident (for example, interest and royalties), withholding tax may be payable.

Where an entity fails to withhold and pay the withholding tax to the ATO, a deduction may be denied for the relevant

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payment to the non-resident154. Accordingly, you should ensure that you have considered the withholding tax

obligations in relation to payments made for the year ending 30 June 2017.


. Ensure that you have complied with the withholding tax provisions so that deductions for payments to

non-residents (for example, interest and royalties) are not denied for the income year.

Non-resident beneficiaries

If a trust has a non-resident beneficiary that is presently entitled to the income of the trust, the trustee will be assessed

on that non-resident beneficiary’s share of the net income of the trust. Where the income consists of interest,

dividends, royalties or CFI, special withholding tax rates may apply. The decision in the Bamford case155 and the ATO’s

view on streaming (refer to Section 6I) may impact your ability to stream such income to non-residents. The ATO has

indicated that while it may still be possible to stream income that is subject to the withholding tax rules, this may give

rise to anomalous results156. The full 50% CGT discount is not available on capital gains made by non-residents and

temporary residents which accrue after 8 May 2012 (see Section 9D).


. Where trusts in the group distribute income to non-resident and temporary resident taxpayers, consider

the income tax implications of those distributions, including withholding tax issues.

. Where streaming is required in respect of certain classes of income, consider carefully whether income

subject to the withholding rules can be streamed to non-residents and temporary residents (for example,

interest income and unfranked dividends), given the ATO’s views on streaming.

. The CGT discount can be denied to non-residents and temporary residents on capital gains flowing

through trusts. You need to consider these rules if you are distributing capital gains to non-residents and

temporary residents.

Non-resident trusts and other offshore assets

An interest in a foreign trust may give rise to a number of taxation issues including the application of the transferor

trust provisions or the deemed present entitlement provisions157 (where the trust is a fixed trust at law). These

provisions may deem you to have an amount of assessable income for the year ending 30 June 2017 attributable to the

foreign trust. Therefore, you should consider the application of these provisions closely if you have had any interest in

a foreign trust during the income year.

Further, you should also closely consider these provisions where either: (1) non-resident relatives control a foreign

trust (i.e. where the class of beneficiaries may be wide enough to include Australian residents); or (2) you have recently

changed residency to being an Australian resident (i.e. which may result in you having an interest in a foreign trust).

154 Income Tax Assessment Act 1997 (Cth) s26-25. 155 Commissioner of Taxation v Bamford [2010] HCA 10. 156 Refer to ATO Interpretative Decision ATO ID 2002/93 and ATO Interpretative Decision ATO ID 2002/94. 157 Income Tax Assessment Act 1997 (Cth) s95A(2).


http://eresources.hcourt.gov.au/showCase/2010/HCA/10





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.

Consider whether you have an interest in a foreign trust for the year ending 30 June 2017. You may be

required to include income in your tax return under the transferor trust provisions or the deemed

entitlement provisions (where the trust is a fixed trust at law).

Foreign owners of underutilised residential property

The Federal Government has announced that a charge will be imposed on foreign owners of residential property where

the property is not occupied or genuinely available for rent for at least six months of the year.

The charge will be equivalent to the relevant foreign investment application fee imposed on the property at the time it

was acquired by the foreign investor and will apply to foreign persons who make a foreign investment application for

residential property from 7.30pm (AEST) on 9 May 2017.


. If you are a foreign resident and are considering investing in residential property, you may be liable to a

charge from 9 May 2017 where the property is not available for rent.

Investment manager regime

Broadly, the IMR regime is designed to attract foreign investment to Australia and promote the use of Australian fund

managers by removing tax impediments to investing in Australia158.

The IMR applies to foreign entities that invest directly in Australia (direct investment concession) or investing via an

Australian fund manager (indirect investment concession). An entity may independently qualify for the direct

investment concession or the indirect investment concession. Whilst the tax consequences of either concession are

the same, the indirect investment concession applies to a broader range of transactions.


. If you are a non-resident investor, you should consider the application of the IMR regime for the


Managed investment trust fund payments

For the year ending 30 June 2017, the withholding tax rate for fund payments made by a MIT to a resident of an EOI

country is 15%, and 30% for all other non-EOI countries.

A fund payment is a component of a payment made by the trustee of a MIT that, in effect, represents a distribution of

the MIT’s net income. It excludes certain components of income including dividends, interest, royalty income and

income derived from foreign sources. In addition, a payment can only be treated as a fund payment if is made during

the income year, three months after the income or within six months if ATO agreement is sought.

MITs that hold one or more newly constructed energy-efficient commercial buildings (i.e. 5-star Green Star rating or a

predicted 5.5 star NABERS (National Australian Built Environment Rating System) rating) are eligible for a 10%

158 Tax and Superannuation Laws Amendment (2015 Measures No. 1) Act 2015 (Cth).

https://www.legislation.gov.au/Details/C2015A00070/Download

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withholding tax rate on fund payments made to foreign investors residing in countries with which Australia has

effective EOI arrangements. The reduced withholding rate will only apply where construction of the building

commences on or after 1 July 2012.


.

The withholding tax rate on fund payments to non-residents during the 2017 income year is equal to

15% for EOI countries and 30% for non-EOI countries. Ensure that you comply with the withholding tax

rates and obligations for MITs in respect of the year ending 30 June 2017.

. Ensure that fund payments are made either prior to 30 June 2017 or within three months thereafter to

ensure that you qualify for the concessionary withholding tax rate.

. Consider the ability to access the reduced 10% withholding tax rate for energy efficient buildings

constructed after 1 July 2012.

Treatment of foreign exchange gains and losses

The treatment of foreign exchange gains and losses is considered in Section 4N of the document.



representative.


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12. Superannuation, GST and state taxes

Superannuation


The ATO has announced that they will be looking closely at situations where it appears that circumstances have been

engineered to achieve a particular total superannuation balance, transfer balance or to gain access to CGT relief159.

In addition, the ATO also noted that arrangements involving the use of reserves, starting new pensions for several days

and then ceasing them and setting up additional SMSFs are likely to attract their attention.


. If you have a self-managed superannuation fund, carefully consider the ATO’s focus areas.

Employer deductions for superannuation contributions

An employer must contribute to a complying superannuation fund or retirement savings account, in respect of an

employee, before year-end (i.e. 30 June) in order to obtain a tax deduction for superannuation contributions.

The SG contribution rate for the year ending 30 June 2017 remains unchanged at 9.5% of an employee’s “ordinary time

earnings” (“OTE”). An employer does not have to make SG contributions in respect of employee’s salary over a

“maximum salary base”. For the year ending 30 June 2017, the maximum salary base is $51,620 per quarter.


. To claim a deduction for superannuation contributions, the contribution must be made (i.e. received by

the superannuation fund) on or before 30 June 2017.

Superannuation guarantee

Employers have to make a contribution of 9.5% of each employee’s OTE and pay this amount within 28 days of the end

of the quarter. An employer who fails to do this will have to pay a non-deductible SG charge — comprised of a SG

shortfall, interest and an administration fee.


.

If you are an employer, ensure you pay the required compulsory SG on each employee’s OTE within 28

days of the end of each quarter. It is important to note that certain awards, agreements or other

contractual arrangements may impose an obligation to make contributions at a greater frequency (for

example, monthly).

159 ATO website: Superannuation heading towards July 2017.

https://www.ato.gov.au/Media-centre/Speeches/Other/Superannuation-heading-towards-July-2017/

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. Consider if you have to make SG payments in respect of bonuses and allowances paid to employees and

payments made to non-employees (for example, contractors, consultants or members of the board who

are not paid via the payroll).

Concessional contributions cap

Each individual has caps on the amount of contributions that can be made by them or for them each year before tax

penalties are applied. The base annual concessional contribution cap for the 2016/17 income year is $30,000.

Individuals aged 49 and over on 1 July 2015 have a concessional contribution cap of $35,000.

The annual concessional contribution cap will be reduced to $25,000 from 1 July 2017. Individuals with salary sacrifice

arrangements should review their situation before 1 July 2017 to ensure that they do not breach this cap in respect of

the 2017/18 income year.


. Make sure you have complied with the annual concessional contribution cap.

. Consider whether additional concessional contributions could be made before the reduction in the

concessional contribution cap on 1 July 2017.

. Individuals with salary sacrifice arrangements should review their situation prior to 1 July 2017.

Non-concessional contributions cap

For 2016-17 income year, the annual non-concessional contributions cap is $180,000. Taxpayers under the age of 65

can bring forward up to two years’ worth of non-concessional contributions, meaning that they can make up to

$540,000 in non-concessional contributions in one year, representing their non-concessional contribution cap over a

three year period.

From 1 July 2017, a lower annual non-concessional contributions cap of $100,000 applies. This means that the

maximum non-concessional contributions that can be contributed for the 2017-18 income year is $300,000 (subject to

the member’s age). In addition, individuals with a total superannuation balance greater than the transfer balance cap

of $1.6 million will be unable to make non-concessional contributions into their superannuation funds from 1 July 2017

(refer to section 12I below). Transitional rules may apply in respect of the bring-forward rule.

The Federal Government have announced that they will not be proceeding with the introduction of the $500,000

lifetime cap on non-concessional contributions that was announced as part of the 2016/17 Federal Budget.

Amounts that are contributed from the 15-year asset exemption and retirement exemption as part of the small

business CGT concessions are not included in the non-concessional contributions cap (refer to section 9B).

The Government announced in the 2017/18 Federal Budget that the outstanding balance of some limited recourse

borrowing arrangements would be included in a member’s total superannuation balance.


. Make sure you have complied with the non-concessional contribution cap for the 2016/17 income year.


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. Consider whether additional non-concessional contributions could be made prior to the reduction in the

cap on 1 July 2017.

. If you have total superannuation balances in excess of $1.6 million, consider whether you could make

additional non-concessional contributions prior to 1 July 2017.

Personal superannuation contributions

Individuals can make concessional contributions. Currently, an individual is eligible for a tax deduction for personal

superannuation contributions when less than 10% of their income (being assessable income plus reportable fringe

benefits plus reportable employer contributions) is from employment activities.

An individual must lodge a valid “section 290-170 notice” with the receiving fund within specified time periods. The

notice tells the fund of the individual’s intention to claim a deduction for a specified part of their contributions. The

fund must acknowledge the notice in writing before the individual can claim the deduction. There are penalties for

breaching the relevant caps (see Section 12J).

From 1 July 2017, the ability to claim a tax deduction for personal superannuation contributions to complying

superannuation funds will be extended to most individuals, even if more than 10% of their income is from employment

activities.


. Consider whether the individual is eligible to make a deductible concessional contribution before 30 June

2017 and ensure notice requirements are met within time.

. If the individual does not satisfy the 10% test in respect of claiming a deduction for superannuation

contributions, you should consider the impact of delaying contributions until after 1 July 2017.

Low income superannuation contribution

The low income superannuation contribution (“LISC”) is a government payment of up to $500 paid into the

superannuation account of an eligible taxpayer with an adjusted taxable income of up to $37,000. The LISC is designed

to refund some of the tax paid on the concessional contributions of low income earners.


. If you are a low income earner, you should consider the impact of making a contribution to your

superannuation fund before 30 June 2017.

Low income spouse superannuation contribution

Taxpayers that make superannuation contributions on behalf of their low income spouse (married or de facto) may be

able to claim a tax offset. The contributing taxpayer will be entitled to a tax offset of up to $540 per year where their

spouse’s income (i.e. the sum of assessable income, total reportable fringe benefits and reportable employer super

contributions) was less than $13,800.

From 1 July 2017, taxpayers will be entitled to claim a tax offset of up to $540 per year where their spouse’s income

(i.e. the sum of assessable income, total reportable fringe benefits and reportable employer super contributions) is less

than $40,000.

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. If you have a spouse with a low income, you should consider the impact of whether contributions made

to their superannuation account will be eligible for the tax offset.

. If you have a spouse with income between $13,800 and $40,000, you should consider the impact of

delaying contributions to their superannuation account until after 1 July 2017.

Cap on superannuation transfers into retirement products

From 1 July 2017, a $1.6 million transfer balance cap applies to the total amount of superannuation an individual can

transfer into superannuation pensions. Subsequent earnings on these pension balances will not be restricted.

Amounts in excess of $1.6 million can be maintained in an accumulation account where earnings will be taxed at the

concessional rate of 15 per cent. Members with pension accounts in excess of $1.6 million will be required to reduce

their pension accounts to $1.6 million by 1 July 2017.

A tax on amounts that are transferred in excess of $1.6 million cap (including earnings on these excess transferred

amounts) will be applied. We believe taxpayers should commence consideration of the implications of these measures

as soon as possible.


.

If you are currently running pensions, or are about to commence pensions, consider the impact of the

introduction of the $1.6 million transfer balance cap on your superannuation account balances, and

whether you will need to transfer excess amounts in an accumulation account.

Excess contributions

If concessional contributions exceed an individual’s concessional contribution cap, the “excess” contribution will be

included in the individual’s assessable income and taxed at their marginal tax rate plus an interest charge. The

individual will have the choice of paying the excess contributions tax personally, through their superannuation fund or

fully releasing the after tax excess concessional contribution from the superannuation fund.

In terms of non-concessional contributions, contributions made in “excess” of the non-concessional contributions cap

can be released from the Fund and deemed earnings taxed at marginal tax rates if appropriate steps are followed. If

the excess non-concessional contributions are not released, they will be taxed at a rate of 47% in the hands of the fund.


.

When reviewing your superannuation strategy for year-end, carefully consider whether payments to the

superannuation fund are within your concessional and non-concessional contributions caps. Penalties

can apply if you are in breach of the contributions caps.

Additional contributions tax for higher income earners

Individuals with income (as defined) in excess of $300,000 are liable for an additional 15% tax on contributions,

bringing the effective rate of tax on concessional contributions to 30%. Income broadly includes taxable income,

reportable superannuation contributions (SG and salary sacrifice contributions), adjusted fringe benefits, and total net


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investment losses. If you are aged 55 to 59 years old, you exclude any taxed element of a superannuation lump sum,

other than a death benefit, which you received that does not exceed the $195,000 low rate cap amount.

If an individual’s income excluding their concessional contributions is less than $300,000 but the inclusion of their

concessional contributions pushes their income over $300,000 the higher tax rate will apply to the part of their

contributions above $300,000.

The higher contributions tax rate does not apply to excess concessional contributions. Individuals will have the choice

of paying the additional tax personally or by their superannuation fund.

From 1 July 2017, the income threshold, at which the additional 15% tax applies, will be lowered from $300,000 to

$250,000.


.

Individuals with income exceeding $300,000 pay an additional 15% contributions tax (i.e. 30%) on

contributions for the year ending 30 June 2017. You should take this into consideration when making

superannuation contributions prior to year-end.

. Individuals with income between $250,000 and $300,000 should consider contributing additional

amounts to superannuation prior to the introduction of the additional 15% tax on 1 July 2017.

Taxation of employment termination payments

The Government has limited the concessional taxation treatment of certain affected ETPs, such as golden handshakes,

so that only that amount which takes a person’s taxable income (including the ETP) to no more than $195,000 will

receive the ETP tax offset. Any amount of an ETP which takes the employee’s total income above the $195,000 cap will

be taxed at the employee’s marginal tax rate, typically 49%.

Certain ETPs such as genuine redundancy payments are taxed at a maximum rate of 16.5% for those over preservation

age (currently 55 years of age) and to a maximum rate of 31.5% for those under preservation age, up to an indexed cap

— which is $195,000 in 2016/17.


. If you have received an ETP during the year ending 30 June 2017, you should consider the taxation

treatment of such payments.

First home super saver scheme

The Government announced in the 2017/18 Federal Budget that it would allow contributions to be made to

superannuation by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated

deemed earnings.

Concessional contributions and earnings that are withdrawn may be taxed at marginal rates less a 30 per cent offset.

Up to $15,000 per year and $30,000 in total can be contributed within existing caps and can be made from 1 July 2017.

Withdrawals are expected to be allowed from 1 July 2018 onwards. The precise details of this measure are yet to be

confirmed.

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.

If you are a first home buyer, or contemplating purchasing a first home in the future, consider the impact

of delaying voluntary contributions to superannuation until after 1 July 2017, as these may be withdrawn

for a first home deposit in the future.

Contributing the proceeds of downsizing to superannuation

The Federal Government has announced that it will allow a person aged 65 or over to make a non-concessional

contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018. These contributions will be in

addition to those currently permitted under existing rules and caps.

The measure is expected to apply to sales of a main residence owned for at least 10 years. Both members of a couple

should be able to access this measure in respect of the same home.

The precise details of this measure are yet to be confirmed.


. If you are aged 65 or over, consider delaying the sale of your main residence until after 1 July 2018 so

that you may have the option to contribute some of the proceeds to your superannuation fund.

Goods and Services Tax (“GST”)

GST adjustments for bad debts written off

Where you have written off bad debts during the year or the debts have been overdue for at least 12 months, you will

be able to make a decreasing adjustment (which decreases your GST liability to the ATO) in the BAS relating to the

period in which you write off the bad debts or the period in which the debts become overdue by at least 12 months.

However, if you have previously made a decreasing adjustment in relation to a bad debt written off but the bad debt is

subsequently recovered, an increasing adjustment (which increases your GST liability to the ATO) will be required in the

BAS that relates to the period in which the bad debt is recovered.


.

If you write off a bad debt during the year, a debt has been overdue for at least 12 months or you

recover a bad debt previously written off during the year, you may need to make a GST adjustment in

the relevant BAS.

Accounting for GST on a cash or accruals basis

If you currently account for GST on a cash basis, you may have to change your basis of accounting if you no longer meet

the eligibility criteria for the cash basis of accounting. You are eligible to account for GST on a cash basis if you meet

any of the following criteria:

You are a small business with an annual turnover (including the turnover of your related entities) of $10 million or

less (for the 2016/17 income year);

You are not operating a business, but are carrying on an enterprise with a GST turnover of $10 million or less;


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You account for income tax on a cash basis;

You carry on a kind of enterprise that the ATO has determined is able to account for GST on a cash basis,

regardless of your GST turnover; or

Regardless of your GST turnover, you are either an endorsed charitable institution, a trustee of an endorsed

charitable fund, a deductible gift recipient entity or a government school.

If you change from accounting for GST on a cash basis to a non-cash basis (i.e. accruals), you may be required to make

an adjustment in relation to your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.

Note that prior to 1 July 2016, the GST turnover threshold for accounting on cash basis was an annual turnover of $2

million or less, however this was amended with effect from 1 July 2016 to be $10 million. Converting to a cash basis

(rather than an accruals basis) may provide cash flow savings to taxpayers.


. If you currently account for GST on a cash basis you should consider whether you still satisfy the

eligibility requirements for cash basis accounting.

. Where you change your basis of accounting for GST from cash to accruals, you may need to make an

adjustment to your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.

. If your aggregated turnover is less than $10 million (i.e. you are a SBE), consider whether you should

account for GST on a cash basis.

Annual apportionment of GST input tax credits

If you are a SBE, you can choose to claim full GST credits on your activity statements for items purchased partly for

private purposes and make a single adjustment to account for the private use percentage after the end of the income

year.

For the 2016/17 income year, the small business entity turnover threshold has been increased to $10 million, which

will allow a greater number of businesses to apportion GST input tax credits on an annual basis. Prior to 1 July 2016,

the turnover threshold was $2 million.


. If you currently claim full GST credits on your activity statements for items purchased partly for private

purposes, ensure that you adjust your activity statements at the end of the income year.

Financial acquisitions threshold

If you make financial supplies, such as buying and selling securities or lending or borrowing money, a calculation is

required to determine if input tax credits can be claimed on all expenses incurred in relation to making the financial

supplies. This test is known as the FAT test.

If the FAT is exceeded you will not be entitled to claim full input tax credits but may still be entitled to claim reduced

input tax credits (“RITC”) for certain specified acquisitions. A full input tax credit may still be available where the

financial acquisition relates to making GST-free supplies or if the financial acquisition relates to a borrowing and the

borrowing is itself used to make supplies that are not input taxed.

130



. If you make financial supplies, you should consider whether you have exceeded the FAT in order to

determine whether you can claim full input tax credits in relation to your acquisitions.

GST adjustments for changes in use

Where you have changed the use of something that has been acquired or imported (in respect of which an input tax

credit has been claimed), you may have to make an adjustment (to the input tax credit claimed) in your BAS for the

period ended 30 June. Generally, you use goods or services for a creditable purpose (with an input tax credit

entitlement) if you use them in carrying on your enterprise. However, you do not use goods or services for a creditable

purpose to the extent that they are either used to make input taxed supplies, or for private or domestic use. The

extent to which you use something that you have acquired or imported for a creditable purpose may change over time.

An example of a change in use is where you have previously claimed input tax credits on acquisitions relating to the

construction of new residential premises on the basis that your original intention was to sell the premises on

completion. In this situation the acquisitions relating to the construction would be for a creditable purpose as the sale

of new residential premises is a taxable supply. However, should your intention change from selling the premises to

leasing the premises or the premises are actually leased, there may be a “change in use” adjustment required. This is

because a lease of residential premises is input taxed and acquisitions for the purpose of making an input taxed supply

are not made for a creditable purpose.


.

If you have changed the extent to which an acquisition or importation is used for a creditable purpose,

you should consider whether a change in use adjustment is required in the BAS for the period ended 30

June.

Low value imported goods

Legislation is currently before Parliament which, if enacted in its current form, will extend the GST to supplies of low

value goods (less than or equal to $1,000) imported into Australia by “Australian consumers” from 1 July 2017160.

An Australian consumer is an entity that is not registered for GST, or if the entity is registered for GST, the entity did

not acquire the thing solely or partly for the purpose of their enterprise.

Suppliers with an Australian turnover of $75,000 or more in a twelve month period will be required to register for and

remit CGT to the ATO. In addition, the operator of an electronic distribution platform (“EDP”) will be treated as the

supplier of low value goods if the goods are purchased through the platform by consumers and brought into Australia

with the assistance of the supplier or the operator. The existing processes to collect GST on imports above $1,000 at

the border are unchanged.

160 At the time of writing, the Senate Economics Legislation Committee has released a report recommending that the bill be

passed, but that the implementation date be delayed until 1 July 2018.


131


.

If you are not currently registered for GST and supply Australian consumers with low-value goods (or you

are an electronic distribution platform), you may need to register before 1 July 2017 and consider the

impact of these new rules.

Digital products and services

The GST will be extended to supplies of digital products and other intangibles (including services) from offshore

providers to Australian consumers from 1 July 2017. Broadly, the measure will apply to sales of anything except goods

or real property.

Examples of digital products include the streaming or downloading of movies, music, apps, games, e-books. Examples

of other services include architectural, legal or IT consulting services.

Similar to the taxation of low value goods, if the goods are sold through an EDP, the EDP will be responsible for

registering for and remitting GST. Suppliers that have an Australian turnover of $75,000 or more in a twelve month

period will be required to register for and remit GST to the ATO. A simplified GST registration system will be available

for suppliers who are required to register as a result of these rules.


.

If you are not currently registered for GST and supply Australian consumers with digital products or

services from offshore (or you are an electronic distribution platform), you may need to register before 1

July 2017 and consider the impact of these new rules.

Digital currency

The Government announced in the 2017/18 Federal Budget that the GST treatment of digital currency (such as Bitcoin)

will be aligned with the GST treatment of money from 1 July 2017161.

Digital currency and its transfer from one entity to another is currently treated as a supply for GST purposes. This

means that consumers who use digital currencies for payment can in some circumstances effectively bear GST twice

(once on the purchase of the digital currency and again on its use in exchange for other goods and services). The new

measure will ensure that the sale of digital currency is not subject to GST and will be treated in the same manner as

standard currency.


. If you deal in or with digital currency, you should consider the impact of the proposed changes from 1

July 2017.

Specific requirements for the precious metals industry

On 31 March 2017 the Government announced that entities buying gold, silver and platinum that have been supplied

as a taxable supply for GST purposes will be required to reverse charge the GST liability (i.e. the acquirer will be

161 As at the date of writing, no legislation has been released in respect to this measure. Accordingly it is unclear how the

Government will legislate this change.

132


required to remit the GST to the ATO instead of the seller). It has also been announced that the definition of second-

hand goods will be amended to clarify that gold, silver and platinum are not second-hand goods. These changes take

effect from 1 April 2017.


. If you buy gold, silver and platinum (that has been supplied as a taxable supply for GST purposes), from 1

April 2017, you are required to account to the ATO for the GST liability.

Reporting requirements for certain industries

It is also relevant to note the compulsory reporting system in place that requires businesses in the building and

construction industry to report to the Commissioner the details of the payments they make to contractors for the

supply of building and construction services.

The Government announced in the 2017/18 Federal Budget that the reporting requirements would be extended to

contractors in the courier and cleaning industries from 1 July 2018 (with the first annual report required in August

2019).

Such payments will need to be reported annually by 28 August each year (i.e. the next report will be required by 28

August 2017). The Pitcher Partners taxable payments annual report (“TPAR”) system allows an automatic upload of

information from a client’s accounting systems, to help simplify the preparation of the report. Please speak to your

Pitcher Partners representative to find out more.


. Consider reporting requirements to the Commissioner for payments made to contractors for the supply

of building and construction services.

. If you engage with contractors in the courier and cleaning industries, you may be required to report

information to the ATO in the future, likely commencing in 2019 for the 2018 financial year.

. If you are required to prepare a TPAR, Pitcher Partners has a system that allows an automatic upload of

information from a client’s accounting software. Pitcher Partners can assist you in meeting this reporting

requirement.

State taxes

Stamp duty surcharge for foreign purchasers of property

A stamp duty surcharge of 7% can apply to foreign purchasers of Victorian residential property. A foreign purchaser

can include a foreign controlled company, or a trust with certain foreign natural persons, where those persons either:

(1) can be entitled to more than 50% of the capital of the trust; or (2) can sufficiently influence the trust. Notably,

discretionary trusts that are capable of making distributions to foreign beneficiaries are included.


. Consider whether you can modify the trust deed to exclude beneficiaries from receiving 50% or more of

the capital of the trust estate.


133

Off-the-plan stamp duty concession

The Victorian Government has announced significant changes to the off-the-plan (“OTP”) stamp duty concession.

These changes will increase the stamp duty cost to property investors and some home buyers. Once the changes come

into effect, the OTP concession will only be available to buyers who are purchasing an OTP property to live in as their

principal place of residence (“PPR”).

Certain thresholds and conditions must be met for home buyers to access the OTP concession. For buyers who are

eligible for the first home buyer (“FHB”) duty exemption or concession, the dutiable value of the property (“OTP

value”) must not exceed $750,000. For buyers who are not eligible for the FHB duty exemption or concession, but who

intend to occupy the property as their PPR, the dutiable value of the property must not exceed $550,000. There

additional criteria and requirements that must also be satisfied.

The concession will no longer be available in respect of commercial properties or to residential buyers who are

investors. The new rules will apply to any contract of sale signed on or after 1 July 2017. The existing OTP concession

will continue to apply to any contract signed before 1 July 2017, including in circumstances where a different purchaser

is nominated on or after 1 July.


. All buyers who will be affected by the changes to the OTP duty concession and who are currently in the

market to buy an OTP property should consider whether there is an opportunity to sign the contract of

sale prior to 1 July 2017 (which could result in a substantial stamp duty saving).



representative.

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13. Tax administration and integrity


The ATO releases various taxpayer alerts to inform taxpayers of the types of activities that the ATO believe may be

undermining the integrity of the Australian tax system. The following alerts which were released in the 2016/17

income year may be potentially relevant to the middle market. You should be aware of these target areas when

considering your year-end tax planning in the lead up to 30 June 2017:

TA 2016/7 – Arrangements involving offshore permanent establishments162;

TA 2016/8 – GST implications of arrangements entered into response to the Multinational Anti-Avoidance Law

(MAAL)163;

TA 2016/9 – Thin capitalisation – incorrect calculation of the value of ‘debt capital’ treated wholly or partly as

equity for accounting purposes164;

TA 2016/10 – Cross-border round robin financing arrangements165;

TA 2016/11 – Restructures in response to the Multinational Anti-Avoidance Law (MAAL) involving foreign

partnerships166;

TA 2016/12 – Trust income reduction arrangements167;

TA 2017/1 – Re-characterisation of income from trading businesses168;

TA 2017/2 – Claiming the Research and Development Tax Incentive for construction activities169;

TA 2017/3 – Claiming the Research and Development Tax Incentive for ordinary business activities170;

TA 2017/4 – Claiming the Research and Development Tax Incentive for agricultural activities171; and

TA 2017/5 – Claiming the Research and Development Tax Incentive for software development activities (including

TA 2017/5A)172.


. You should consider whether any of the issues identified in these taxpayer alerts apply to your tax

affairs.

Transparency of taxation debts

From 1 July 2017, the ATO will be able to disclose the tax debt information to credit reporting agencies of certain

taxpayers that have not effectively engaged with the ATO to manage their debts173.

162 Taxpayer Alert TA 2016/7. 163 Taxpayer Alert TA 2016/8. 164 Taxpayer Alert TA 2016/9. 165 Taxpayer Alert TA 2016/10. 166 Taxpayer Alert TA 2016/11. 167 Taxpayer Alert TA 2016/12. 168 Taxpayer Alert TA 2017/1. 169 Taxpayer Alert TA 2017/2. 170 Taxpayer Alert TA 2017/3. 171 Taxpayer Alert TA 2017/4. 172 Taxpayer Alert TA 2017/5.

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300007%23TA%202016%2F7%20-%20Arrangements%20involving%20offshore%20permanent%20establishments%3B%22&DOCID=%22TPA%2FTA20167%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300008%23TA%202016%2F8%20-%20GST%20implications%20of%20arrangements%20entered%20into%20in%20response%20to%20the%20Multinationa...%3B%22&DOCID=%22TPA%2FTA20168%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300009%23TA%202016%2F9%20-%20Thin%20capitalisation%20-%20Incorrect%20calculation%20of%20the%20value%20of%20%27debt%20capital%27%20tr...%3B%22&DOCID=%22TPA%2FTA20169%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300010%23TA%202016%2F10%20-%20Cross-Border%20Round%20Robin%20Financing%20Arrangements%3B%22&DOCID=%22TPA%2FTA201610%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300011%23TA%202016%2F11%20-%20Restructures%20in%20response%20to%20the%20Multinational%20Anti%20Avoidance%20Law%20(MAAL)%20invol...%3B%22&DOCID=%22TPA%2FTA201611%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2016%3A%2300012%23TA%202016%2F12%20-%20Trust%20income%20reduction%20arrangements%3B%22&DOCID=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300001%23TA%202017%2F1%20-%20Re-characterisation%20of%20income%20from%20trading%20businesses%3B%22&DOCID=%22TPA%2FTA20171%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300002%23TA%202017%2F2%20-%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20construction%20activities%3B%22&DOCID=%22TPA%2FTA20172%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300003%23TA%202017%2F3%20-%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20ordinary%20business%20act...%3B%22&DOCID=%22TPA%2FTA20173%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300004%23TA%202017%2F4%20-%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20agricultural%20activities%3B%22&DOCID=%22TPA%2FTA20174%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2203%3ATPA%3A2017%3A%2300005%23TA%202017%2F5%20-%20Claiming%20the%20Research%20and%20Development%20Tax%20Incentive%20for%20software%20development%20...%3B%22&DOCID=%22TPA%2FTA20175%2FNAT%2FATO%2F00001%22


135

The measure initially applies to taxpayers with Australian Business Number and a tax debt of more than $10,000 which

is unpaid for over 90 days. Importantly, taxpayers that have entered into a payment arrangement (that has not

defaulted) or have otherwise engaged with the ATO to manage their debts will not be affected.

Whilst the ATO have long engaged external debt collectors to pursue debts, this is the first time the ATO will provide

tax debt information to credit reporting agencies. As such, this represents a marked change in the ATO’s procedures

for managing tax debts. The measure is not yet law and is subject to normal parliamentary processes174.


.

If you have outstanding ATO debt, you should consider making payment or entering into a payment

arrangement with the ATO to ensure that your tax debt information is not disclosed to credit reporting

agencies.

Part IVA

As tax planning strategies may reduce your taxable income, it is always prudent to consider the potential application of

the general anti-avoidance provision contained in Part IVA to any strategy. Part IVA can apply to arrangements which

are entered into for the dominant purpose of obtaining a particular tax outcome. Examples include the re-

characterisation of income from trading businesses175 and trust income reduction arrangements176.


. You should consider Part IVA in relation to any material tax planning strategy that may be implemented

for the year ending 30 June 2017.

Promoted schemes

Taxpayers should be aware of schemes or arrangements that are promoted around year-end. The ATO has produced

guidance as to schemes they have identified177, what to look out for and what will attract the ATO’s attention as being

a tax effective arrangements.

The ATO has recently issued a warning for promoters that have been incorrectly advising grape growers and wine

producers that the compulsory Wine Grapes Levy can be claimed under the R&D Tax178. Other current areas of concern

for the ATO include:

The R&D tax incentive179;

Non-lodgement180;

Retirement planning schemes181;

Financial products182;

173 Mid Year Economic and Fiscal Outlook 2016-17 (December 2016). 174 ATO website: Improve the transparency of tax debts. 175 Taxpayer Alert TA 2017/1. 176 Taxpayer Alert TA 2016/12. 177 ATO website: Tax planning – schemes we have identified. 178 ATO website: Warning for promoters of tax schemes involving R&D in the wine industry. 179 ATO website: R&D tax incentive. 180 ATO website: What attracts our attention. 181 ATO website: Super Scheme Smart.

http://www.budget.gov.au/2016-17/content/myefo/download/2016-17-MYEFO-combined.pdf

https://www.ato.gov.au/general/new-legislation/in-detail/other-topics/improve-the-transparency-of-tax-debts/

https://www.ato.gov.au/law/view/document?DocID=TPA/TA20171/NAT/ATO/00001

https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22

https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Schemes-we-have-identified/

https://www.ato.gov.au/Media-centre/Media-releases/Warning-for-promoters-of-tax-schemes-involving-R-D-in-the-wine-industry/

https://www.ato.gov.au/Business/Research-and-development-tax-incentive/Helping-you-to-get-it-right/

https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-should-know/Transparency/What-attracts-our-attention/

https://www.ato.gov.au/general/tax-planning/tax-avoidance-schemes/super-scheme-smart/

136


Collapse and restructure of agribusiness managed investment schemes183;

Employee benefit arrangements184; and

Lump sum payments received by healthcare practitioners185.


. Be careful of schemes that are promoted to taxpayers to reduce their taxable income for the income

year. Consider the ATO guidance on what to look out for.

Phoenix activity

The ATO is a member of the recently established Phoenix Taskforce, which comprises over 20 Federal, State and

Territory government agencies aimed at combatting illegal phoenix activity186.

Illegal phoenix activity is broadly defined as the situation where a new company is created to continue the business of a

company that has been deliberately liquidated to avoid paying its debts, including taxes, creditors and employee

entitlements. The ATO conducted almost 1,000 audit and review cases involving phoenix behaviour in 2015/16, and it

is likely that this will continue to be an area of focus.


. Be wary of schemes that promote deliberately liquidating companies to avoid paying debts, including

taxes, creditors and employee entitlements.

Black economy

The black economy typically refers to people who operate entirely outside the tax system or who are known to tax

authorities but deliberately misreport their tax (and superannuation) obligations. The black economy may include

those engaged in organised crime. The interim report of the Federal Government’s Black Economy Taskforce has been

released187. In addition, the ATO have been provided with additional funding for audit and compliance programs to

target cash and hidden economy transactions188.


. You should ensure that you appropriately report your tax and superannuation obligations to the ATO and

other relevant authorities.

182 ATO website: Areas of focus – financial products. 183 ATO website: Collapse and restructure of agribusiness management investment schemes – participant information. 184 ATO website: Employee benefit arrangements of concern. 185 ATO website: Lump sum payments received by healthcare practitioners. 186 ATO website: Phoenix taskforce. 187 The Hon Kelly O’Dwyer MP: Black Economy Taskforce. 188 ATO website: The cash and hidden economy and Federal Budget 2017/18.

https://www.ato.gov.au/General/Tax-planning/In-detail/Areas-of-focus---Financial-products/

https://www.ato.gov.au/General/Tax-planning/In-detail/Collapse-and-restructure-of-agribusiness-managed-investment-schemes--participant-information/

https://www.ato.gov.au/General/Tax-planning/In-detail/Employee-benefit-arrangements-of-concern/

https://www.ato.gov.au/General/Tax-planning/In-detail/Lump-sum-payments-received-by-healthcare-practitioners/

https://www.ato.gov.au/General/The-fight-against-tax-crime/Our-focus/Illegal-phoenix-activity/Phoenix-Taskforce/

http://kmo.ministers.treasury.gov.au/media-release/113-2016/

https://www.ato.gov.au/general/building-confidence/in-detail/the-cash-and-hidden-economy/

http://www.budget.gov.au/2017-18/content/bp2/html/


137

Tax avoidance taskforce

The Federal Government announced in the 2015/16 Federal Budget that the ATO will receive $679 million over four

years to establish a Tax Avoidance Taskforce. The Taskforce is expected to recover $3.7 billion in tax liabilities over four

years. The objective of the Taskforce is to enhance the ATO’s current compliance activities targeting large

multinationals, private groups and high wealth individuals.


. You should ensure that you are appropriately report your tax obligations to the ATO and other relevant

authorities.

Related party deductions

Where a tax planning opportunity gives rise to a differential in the timing of income and deductions between two

related parties, you need to consider the application of special integrity provisions. Refer to section 4W for more

detail.


. Where tax planning arrangements involve related party transactions, consider carefully the application

of the anti-avoidance provisions that may deny deductions incurred by one of the related parties.

Wash sales

The ATO may apply Part IVA to “wash sale” arrangements where CGT assets are sold for the purpose of realising a

capital gain or loss and substantially the same assets are reacquired shortly thereafter. Refer to section 9J for more

detail.


. Consider the ATO’s view on wash sale arrangements where assets are disposed of for a loss or gain and

(subsequently) substantially the same assets are re-acquired.

Franking credit trading arrangements

Franking credits may be denied where an arrangement seeks to provide a franking credit benefit to a taxpayer. Refer to

section 7I for more detail.


. You should review any arrangements that purport to provide a return that is calculated with reference to

franking credits. Such arrangements may fall foul of the franking credit benefit provisions.

Trusts taskforce

The ATO have received significant Federal Government funding for targeted compliance action against people that

have been involved in tax avoidance or evasion using trusts. Refer to section 6A for more detail.

138



. The ATO will continue to dedicate compliance resources to people that have been involved in tax

avoidance or evasion using trusts.

Trust distributions to exempt entities

There are specific anti-avoidance rules that apply to prevent exempt beneficiaries being used to inappropriately reduce

the amount of tax payable on the taxable income of a trust. Refer to section 6U for more detail.


. Consider the trust anti-avoidance rules that apply to distributions made to exempt entities.

Trust stripping provisions (reimbursement agreements)

The trust stripping provisions can tax the trustee at 49% where the trustee distributes income to one beneficiary (that

pays little or no tax) and the economic benefits of the distribution are provided to an alternative taxpayer. Refer to

section 6V for more detail.


.

The ATO has indicated that it may apply the trust stripping provisions more broadly to family trust

arrangements. Care needs to be taken where income is distributed to a beneficiary, where it is

unlikely that the beneficiary will ever call on the funds (or be paid those funds).

Significant global entities

A number of integrity provisions have been recently introduced for significant global entities. Refer to Sections 11Q,

11R, 11S, 11T and 11U for integrity considerations relating to significant global entities.


. In considering your 30 June 2017 position, you should consider the application of the integrity rules

that apply to significant global entities.

Self-managed superannuation funds

The ATO have outlined a number of arrangements that are likely to attract their attention in respect of self-managed

superannuation funds. Refer to Section 12A for integrity considerations relating to self-managed superannuation

funds.


139


. In considering your 30 June 2017 position, you should consider the ATO’s integrity concerns in

relation to self-managed superannuation funds.



representative.

The contents of this document are for general information only and do not consider your personal circumstances or situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.

The contents of this document does not constitute financial product advice and should not be used in making a decision with respect to a financial product. Taxation is only one of the matters that must be considered when making a decision on a financial product. You should consider seeking financial advice from the holder of an Australian Financial Services License before making a decision on a financial product.

If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage arising from reliance upon any information contained in this document.

© Pitcher Partners Advisors Proprietary Limited, June 2017. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

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