In 2006, the former Government initiated a comprehensive review of Australia’s four anti-tax-deferral regimes – the controlled foreign company (‘CFC’) rules, the foreign investment fund (‘FIF’) regime, the transferor trust regime (‘TTR’), and the deemed present entitlement (‘DPE’) rules.  These regimes all address the taxation of Australian residents holding interests in offshore companies, trusts and insurance products.  This Tax Brief is about the current state of play in the various parts of that larger project, including the most recent announcement – a third Treasury Consultation Paper on the design of Australia’s future CFC rules.

The ongoing story of the project to reform the taxation of managed investment trusts (‘MITs’) has yet another chapter. On 24 June, Parliament passed a Bill which made significant amendments to the definition of a MIT, broadening the former provision in some respects but also adding important new restrictions. The Bill has received Royal Assent and is now law. This Tax Brief examines the new definition and how it has changed the range of trusts that are eligible to access the MIT withholding tax and CGT election concessions.

The ATO released on Wednesday 16 June 2010, several new employee share scheme (ESS) fact sheets. They outline the new employer reporting requirements – the 14 July and 14 August deadlines have not been extended – and provide more guidance on tax deferral requirements and acceptable methods of determining the market value.

For the third time in ten days the Government has announced a raft of tax measures, following on from the release of the Henry Review on 2 May and the Board of Taxation Report on Managed Investment Trusts (MITs) on 7 May. This Budget confirms that the Government’s approach to taxation is rolling reform (or change, depending on your point of view). Hence there are responses to more Henry Recommendations, to Board of Taxation Reports and to the Johnson Report on Australia as a Financial Centre, plus a range of micro-announcements generally designed to make the business and personal tax system work more effectively.

The long-awaited Report by the Board of Taxation into the taxation of Managed Investment Trust (MIT) was released by the Assistant Treasurer on 7 May 2010, together with the Government's response. While some aspects of the proposals may be considered far-reaching, it is probably more accurate to describe the recommendations, and the Government's responses, as evolutionary rather than revolutionary. In many respects, the Government has decided to adopt and endorse current practices within the MIT sector and provide a framework to allow the sector to grow. This Tax Brief examines the Board's report, the Government's responses and the next steps on the path to implementing these important proposals.

The guessing is over – we now know what a ‘root and branch’ tax review looks like. We were also reminded that, in an election year, caution can be a very attractive option for a government. In this Tax Brief we examine the background to the Henry Review of Australia's Future Tax System, the key recommendations for Australian business which the Government has indicated it will adopt, the second term initiatives still under consideration, the recommendations rejected out of hand and the recommendations which have not been specifically addressed at this stage but which business might want to encourage the Government to revisit.

With most of the pieces of the Taxation of Financial Arrangements (TOFA) jigsaw on the table, it is now a matter of making sure it all fits together. On 20 April 2010, the Assistant Treasurer released a number of proposed refinements to the TOFA puzzle, contained in an exposure draft (ED) and accompanying draft explanatory memorandum (EM).

In a very short time and judgment, the High Court has disposed of the appeals of both the Commissioner of Taxation and the taxpayers in Commissioner of Taxation v Bamford [2010] HCA 10, confirming in a joint judgment the decision of the Full Federal Court. The judgment, which was awaited with both expectation and some trepidation, will be welcomed as generally confirming long standing tax practices in both public unit trusts and private family discretionary trusts.

From 1 July 2010, indirect tax sharing agreements (ITSAs) will become part of the GST landscape. Under the proposed measures, GST group members and participants in an approved GST joint venture can limit their indirect tax liability by entering into an ITSA with the representative member / joint venture operator similar to the effect that tax sharing agreements (TSAs) have for consolidated groups under Division 721 of the Income Tax Assessment Act 1997.

The Tax Laws Amendment (2010 Measures No. 1) Bill 2010 was introduced into Parliament on 10 February 2010. The Bill contains an array of changes to the Consolidation provisions, primarily affecting the tax cost setting process when a group is formed, or entities join or leave a group. Many of the changes are retrospective and potentially advantageous to taxpayers. In addition, amendments of assessments to reflect an improved position are facilitated under the terms of the Bill.

The Tax Laws Amendment (2010 Measures No 1) Bill 2010 was introduced into Parliament on 10 February 2010 and contains the proposed final form of the measures that permit eligible managed investment trusts to elect to apply the capital gains tax regime as the primary measure for taxing gains and losses on assets.

The legislation to replace the current regulation of tax agents was introduced into Parliament in 2008 and passed along with separate transitional legislation in 2009. The regime gets underway on 1 March 2010. As with other new or revised regulatory regimes, there are borderlines that have to be established and which are currently uncertain in application. There is the potential for many corporate group service companies, funds management entities, financial advisers and others to have to register as tax agents under the new regime.

On 5 January 2010 Treasury took a further step in the long-running process to reform the anti-tax-deferral regimes that relate to foreign source income by issuing a consultation paper directed at the high-level design of the new controlled foreign company (CFC) rules. The proposals in the consultation paper are further developed than in the past and so provide further insight into the likely shape of important aspects of the new rules.

On 16 December 2009 the ATO released two draft tax rulings on the main issues arising in its notorious recent court action involving the private equity group, TPG (though that case is not mentioned by name of course). The rulings effectively leave the revenue capital treatment and treaty shopping issues to case by case treatment, though making clear the ATO view of the TPG situation.

Amid the flurry of pre-Christmas desk clearing in the ATO was one long running and important matter of great concern to corporate Australia. The ATO has replaced its 2007 draft determination on the relationship of the thin capitalisation and transfer pricing rules with a draft ruling, as well as releasing a draft practice statement and two opinions it has obtained from counsel on the technical issues. Though the matter is not yet settled, the ATO position has firmed up on the middle ground in terms of its previous consideration of the issue.

The Government has taken another step on the long road to reform of the tax rules for managed investment trusts (‘MITs’).  On 10 December, Exposure Draft legislation was released giving a first glimpse of the rules that are intended to make the capital gains tax regime (‘CGT’) the principal provisions for taxing gains and losses made by MITs.  The text contains a few surprises that were not previously foreshadowed either in the recommendations or consultations so far.  Moreover, the new measures add some confusion about the range of entities that will qualify for CGT treatment, which may render the entire project rather less useful than originally promised.  This Tax Brief examines the Exposure Draft.

The tax treatment of sovereign wealth funds (SWFs) in domestic and international tax law has recently been occupying the minds of tax officials in Australia and overseas. This Tax Brief examines recent proposals discussing the tax treatment of SWFs, proposals that will affect both the Australian tax position of SWFs themselves, and the Australian tax position of the entities into which they invest.

International Tax Agreements Amendment Bill (No 2) 2009 was introduced into Parliament on 25 November 2009 to give effect to the new tax treaty with New Zealand signed on 26 June 2009. This is Australia’s fourth full tax treaty with New Zealand, the highest number with any country, reflecting our close relationship. As in the past the negotiators have taken the opportunity to experiment with a number of provisions not previously found in Australia’s treaties. This Tax Brief explains the novelties, as well as indicating the main contours of the treaty.

The new taxation of financial arrangements (TOFA) regime cannot be left in the too-hard/not relevant basket for much longer. Affected taxpayers need to decide whether they should make any or all of the available elections that deal with the transition to TOFA. This decision has to be made relatively soon (by 15 January 2010 for taxpayers with a 30 June year end) and will require some careful consideration. This Tax Brief is a guide to these transition-to-TOFA elections.

The Bill to enact the proposed new regime for the taxation of employee shares and options was tabled in Parliament on Tuesday, 20 October 2009. It largely replicates the August exposure draft but there are both important new rules, and some previously announced rules which regrettably remain as they were. The explanatory memorandum also now provides more explanation of the new rules, including further key examples of a “real risk of forfeiture”. This Tax Brief outlines highlights the new and unresolved issues that are important for groups now gearing up for the new regime.

Treasury has released an Exposure Draft (‘ED’) of legislation to facilitate access to corporate losses for companies with multiple classes of shares on issue.  This Tax Brief examines the strengths and weaknesses of the proposed regime and identifies some issues with the way it is designed to work.

The regime for taxing financial arrangements (‘TOFA’) was passed by Parliament earlier this year and is now accessible to taxpayers who wish to ‘go early’ – that is, before the mandatory start date of 1 July 2010.  TOFA can affect both the investments made in the managed funds sector and the financing of those investments, but just how – and how much – activity in the funds management sector will be affected is neither obvious nor straightforward.  This Tax Brief examines some of the issues that the TOFA regime will present for managed funds such as domestic and international cash and bond funds, share funds and property trusts.

In December 2008, Senator Nick Sherry, then Minister for Superannuation and Corporate Law, announced that the Government would introduce a temporary tax measure to assist in the consolidation of superannuation funds.  The apparent goal behind the measure is to allow the industry to merge into fewer, more efficient, larger and presumably more stable funds by removing some of the tax impediments to consolidation.  The announcement proposed an optional loss transfer system for any net capital losses that resulted from the CGT events that would be triggered by the merger of an existing fund into an APRA-regulated fund.  This Tax Brief examines the many refinements to that proposal that occurred during the last eight months culminating, earlier this month, with the release by Treasury of Exposure Draft legislation.

The much anticipated new tax legislation for employee share plans was released on Friday and is to be tabled in Parliament during the current Spring sitting. The Senate Economics Committee report on this proposal was tabled yesterday. The Board of Tax is consulting on it tomorrow. It will significantly change the way employee equity is taxed. New limits on deferral, new reporting obligations, and no doubt new plan designs to accommodate the changes.

As part of the May 2009 Budget, the Government released the final report of the Board of Taxation’s project on reforming Australia’s “anti-tax-deferral” measures – that is, principally the rules concerning controlled foreign companies, foreign investment funds and transferor trusts. The Government also announced that it was accepting all but one of the Board’s recommendations. On 12 May, Treasury released a Discussion Paper seeking submissions on various options for implementing the Board’s recommendations. This Tax Brief examines the Board of Taxation’s proposals, the Budget announcement and Treasury’s first steps in what will be a major overhaul of one of the most significant elements in Australia’s foreign source income regime. We also examine some of the preliminary reactions from industry in the months since the release of Treasury’s paper.

The Assistant Treasurer announced on Wednesday afternoon further changes to the proposed new regime for taxing employee shares and options. This is the Government’s third announcement on the subject, and it has in large part now reverted back to the pre-budget tax arrangements, although with some very important qualifications. Sale restrictions are to be reinstated as a deferral mechanism – but with important limitations. The Government has also elaborated on what will constitute real risk of forfeiture. Rights and options will generally remain taxable when they vest, rather than later upon exercise. The start date remains 1 July 2009. 

In its recent decision in Bamford v Commissioner of Taxation [2009] FCAFC 66, the Full Federal Court has settled (at least at the level of the Federal Court) two issues in relation to the taxation of trusts that have been the source of debate between taxpayers and the ATO, especially in recent times when the ATO has been developing views partly at odds with the general professional understanding.

In the May 2009 Budget, the Government announced that it had accepted one of the interim recommendations made by the Board of Taxation as part of its current review of the tax arrangements applying to managed investments trusts – namely, that MITs would be able to elect to apply capital gains tax treatment exclusively to gains and losses made on certain types of trust assets.  Treasury has released a brief Discussion Paper giving some further detail on the Budget announcement and identifying the issues on which it is seeking submissions.  This Tax Brief examines the design features of the new proposal and the kinds of qualifications that are going to constrain its scope and operation.  This is a very welcome policy development, but as will be seen, the promise of implementing it in a regime that would prove to be simple, neat and elegant is now looking less likely.

The Government released last Friday afternoon its revised proposal for the taxation of employee shares, options & rights. The Government has conceded a number of key stakeholder complaints – significantly, there will not be taxation before vesting. But the revised proposal will still very significantly restrict the way that many plans have been operating in Australia. Deferral of tax on fully vested benefits has been a mainstay of long term employee share ownership in the past. It is now to be scrapped, as initially proposed by the budget announcement. The start date has been delayed briefly until 1 July 2009, and further submissions are due by this coming Friday, 12 June.

In an earlier Tax Brief [available at http://www.gf.com.au/477_634.htm ] we reported on a case denying St George Bank a deduction for interest paid on a subordinated loan issue.  The Full Federal Court recently heard the taxpayer’s appeal in this case and unanimously confirmed that the interest expense was not deductible.  In this Tax Brief we review the Court’s reasoning and the ongoing significance of this case.

As widely reported in the media, Australian employee share and option plans have been stalled this month by tax changes proposed in the Budget. After widespread criticism, the Government announced last Sunday that it would consult with industry to ameliorate the proposals, and revisions are expected by Friday, 5 June 2009. So far though, the start date for the changes remains 12 May 2009 and accordingly there is still significant uncertainty. But there is also potential opportunity in this review, because it has elevated employee share and option plan taxation to the Parliament’s legislation agenda. It is therefore an opportunity to address problems such as taxing shares on cessation of employment.

This paper discusses the operation of trust taxing provisions, specifically the meaning of “income” where that first appears in the introductory words of section 97(1) of the Income Tax Assessment Act 1936, and to what extent the meaning of income can be affected by trust law and the trust deed.

The new Taxation of Financial Arrangements regime (‘TOFA’) will have significant effects for most large companies and trusts.  Those effects will not be limited just to transactions which involve the obvious financial instruments – the debt capital they raise and the cost of servicing it – TOFA can also have implications for the assets they acquire and the arrangements they put in place to manage risks associated with debt, equity, assets and liabilities.  In this Tax Brief, we look at some issues arising from how the TOFA rules will affect domestic and cross-border M&A activity.

It is no secret that the Australian Taxation Office (“ATO”) has been concerned for some time about the tax issues arising from in-house finance companies operating within large listed groups.  A recent decision of the Federal Court involving an in-house finance company in the BHP Billiton group has, at least for the moment, stalled the ATO’s efforts to insist on its view of the way the tax issues should be addressed.  It also offers the first judicial guidance on the operation of the relatively recent limited recourse debt rules.

While extensive and apparently well-sourced leaks over the last 2 weeks may have revealed much of the detail of this year’s Budget, it still contained many tax measures, including a few surprises.

Today the Assistant Treasurer released in exposure draft form proposed legislative amendments dealing with 18 tax consolidation issues which had been foreshadowed in announcements going back as far as 1 December 2005. A further 6 issues remain under review.  These proposed amendments will impact on group ‘formation’ calculations and corporate acquisitions and disposals by consolidated groups. Many are also currently stated as having application back to 1 July 2002, with associated amendments being made to extend the normal 4 year amendment period.

It may be possible to find a silver lining in the cloud of economic woes being experienced by many struggling businesses unable to meet their interest and principal obligations. One option that may be open to a debtor is to recapitalise the business by entering into a debt for equity swap arrangement.  This Tax Brief considers some of the tax outcomes for creditors and debtors arising from a debt for equity swap.

On Tuesday 10 March, the Government released exposure draft legislation for its proposed Carbon Pollution Reduction Scheme (‘CPRS’).  The legislative package of six draft Bills contains a number of tax measures relevant for Australian businesses, as well as the rules for establishing and running the CPRS trading regime itself.  This Tax Brief sets out the main tax issues that businesses will need to grasp arising from a measure that many are saying will be the biggest structural adjustment to the Australian economy since the GST.

The Government introduced into Parliament on Thursday 19 March 2009 a Bill to enact the investment allowance. The Bill differs slightly from the Exposure Draft Bill released on 25 February 2009 in a few respects – there are new provisions about the location of assets, to deal with taxpayers with substituted accounting periods, to make it clearer that some amounts can be aggregated in determining whether expenditure has reached a required threshold and to clarify the interaction with the R&D regime, for example. This Tax Brief updates our earlier Tax Briefs on the Investment Allowance for these new developments.

The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, (‘Bill’) which contains the final stages of the taxation of financial arrangements (‘TOFA’) project, was introduced into Parliament on 4 December 2008.

On 3 February this year, the Treasurer announced a second investment allowance as part of the second economic stimulus package.  This announcement appears to represent the expansion of the investment allowance announced in December last year.  The February announcement varies the original investment allowance proposal in three ways:

• the amount of the incentive is increased to an additional 30% of the cost of acquiring or improving an asset;
• the threshold for access to benefits has been reduced for small businesses – an incentive is available to small businesses for expenditure of $1,000 or more; and
• the duration of the original (10%) benefit is extended by 6 months.

This Tax Brief outlines what has changed and what remains.

After much delay, the regime for taxing financial arrangements (‘TOFA’) now seems likely to be passed early this year.  TOFA can affect both the investments made in the property sector and the financing of those investments, but just how – and how much – activity in the property sector will be affected is neither obvious nor straightforward.  This Tax Brief examines some of the issues that the TOFA regime will present for the property industry.

As the world economy struggles to find its way through troubled times, many businesses find their financial condition deteriorating leading, unfortunately, to formal insolvency appointments for some. However that situation plays out, the GST treatment of asset sales and other workout solutions will be crucial in determining what funds can be generated to meets the demands of creditors.

The next step in the “root and branch” tax reform currently in progress occurred on 10 December 2008 with the release of a 300 page consultation paper on Australia’s future tax system and separately a 50 page paper on retirement income.

When recession threatens, private business investment usually falls and governments typically respond with a combination of public investment and increased tax benefits for private investment. History repeated itself on 12 December 2008 when the Rudd Government announced a 10% investment allowance in the form of a deduction for business investment expenditure on new equipment for use in Australia committed up to 30 June 2009 and in place by 30 June 2010.

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (the TOFA Bill), which contains the final stages of the taxation of financial arrangements (TOFA) reform project, was introduced into the House of Representatives by the Assistant Treasurer, the Hon Chris Bowen MP, on 4 December 2008 and has already been referred to the Senate Economics Committee for inquiry and report by 20 February 2009.

The Board of Taxation released its Discussion Paper, Review of the Tax Arrangements Applying to Managed Investment Trusts (“MITs”) on 29 October 2008. The Paper is very open-ended in raising issues for consultation but does not give any strong indications of the Board’s thinking on the issues. Accordingly, this Tax Brief will set out the background to the Review, indicate the main issues that the Board has raised for consultation together with some comments on them, and finally discuss the way forward.

The Federal Court has just released a second judgment on the interpretation of an Australian tax treaty, this time on the Australia – US treaty.  The judgment addresses the difficult intersection between Australia’s debt-equity classification rules and the characterisation of income flows for the purposes of tax treaties.  The Court held that the taxpayer, a non-resident financial institution, was liable to Australian withholding tax on amounts paid to it.

For several years, the Australian Taxation Office (‘ATO’) has been engaged in a long and multi-faceted tax dispute with the Virgin group about the Australian tax consequences arising from the sale of shares in an Australian company by a non-resident shareholder.

On 1 October 2008, the Assistant Treasurer released another Exposure Draft Bill and Explanatory Material for the proposed regime for the taxation of financial arrangements (TOFA Stages 3 and 4).

In a Tax Brief in July this year [available at http://www.gf.com.au/477_672.htm] we outlined measures which the Assistant Treasurer had just released proposing amendments to Division 6C of Part III of the Income Tax Assessment Act 1936 (Cth).  The proposed amendments were a milestone in the ongoing consultations being conducted by Treasury on ‘interim measures’ to improve the operation of Division 6C, pending the more complete review of Division 6C being undertaken by the Board of Taxation [see our earlier Tax Brief available at http://www.gf.com.au/477_624.htm].

We have already noted the long and difficult gestation of the project to reform the taxation of financial arrangements (‘TOFA’) – at least 15 years so far, and counting.  This Tax Brief examines two recent developments along the long road to TOFA:
• the announcement by the Assistant Treasurer of a firm start date; and
• recent work on the interaction between TOFA and the consolidation regime.

The proposal for a ‘root and branch’ review of Australia’s tax system first emerged from the Prime Minister’s ‘2020 Summit’ in April, and was then re-announced in the May Budget.  The committee selected by the Treasurer to undertake this review, now called Australia’s Future Tax System Review (‘the Review’), released its first paper yesterday.  The paper is a weighty work – it is well over 300 pages – and so this Tax Brief examines its main focus and broad thrust.

The Assistant Treasurer released a draft of proposed amendments to Division 6C of Part III of the Income Tax Assessment Act 1936 (Cth) for public comment on Wednesday 23 July.  This Tax Brief examines the scope and operation of the draft amendments.

Historically, the issue of rights to acquire shares or units by companies and trusts to their shareholders and unit holders has been treated as not giving rise to any assessable income or capital gain for the shareholders or unit holders. However, last year the High Court handed down its decision in the case of Commissioner of Taxation v McNeil [2007] HCA 5 (‘McNeil’) which rather unexpectedly changed this situation and engendered considerable uncertainty in the process.
 
This Tax Brief examines the new rules proposed by the Government to try to clarify the post-McNeil situation, and in particular some of the difficulties these new rules create, as well as the areas they leave untouched.

As promised in its March 2008 Position Paper (see our Tax Brief at http://www.gf.com.au/477_628.htm), the Board of Taxation has now released five Issues Papers to give more details on proposals in relation to reform of the CFC and FIF regimes. The Board has been working on this topic for sometime, having released a Discussion Paper in mid 2007 (see our Tax Brief at http://www.gf.com.au/477_556.htm) and conducted a first round of consultations and submissions then. 

The first GST case has been decided by the High Court of Australia. By unanimous judgement delivered on 22 May 2008 in Commissioner of Taxation v Reliance Carpet Co Pty Limited [2008] HCA 22, the Court found for the Commissioner that GST was payable where a deposit held by a vendor for the sale of commercial property was forfeited.

The Government has made further progress toward delivering one of its election promises, repeated in last week’s Budget – to change the regime for taxing distributions to foreign residents who invest in Australian managed funds.  This Tax Brief examines the recently released Exposure Draft of the provisions to accomplish this measure.  This will be very significant for the managed funds industry, especially listed property trusts, although wholesale funds and funds in sectors other than property will need to monitor their exposure.  In addition, any distributions from the property sector will now have to be carefully monitored if they flow through several trusts before leaving Australia.

Few expected the new Government’s first Budget would contain many tax surprises.  On the one hand, the Government has been keen to re-assure voters that it would implement all the promises made during last year’s election campaign.  On the other, during the last 3 weeks we have seen the carefully staged release of various Budget proposals that the Government wanted to accelerate.

As far as business tax was concerned, the Budget contained only a few new measures.  The Government followed the example of its predecessor and took the opportunity to re-announce many business tax measures.  Indeed, it even decided to re-announce measures which the previous Government had released.  Consequently, many of the measures will look quite familiar.  One very welcome innovation was the declaration by the Government of its position on the long list of measures that the previous Government had announced but not yet enacted.

It is now 5 years since the promoter penalty regime was first mooted by the former government and 2 years since it commenced operation.  The regime was enacted in large part as a response to the embarrassment caused to the government and the Australian Taxation Office (“ATO”) by the proliferation of “mass-marketed tax schemes” in the late 1990s and the public revelations in the ensuing Senate inquiry.

In a recent decision, the Federal Court has again ventured into the troubled area of the debt-equity distinction, again with surprising and concerning results.  The case concerned the deductibility of over AUD$250m of interest paid by St George Bank in 5 income years under a US$350m subordinated debenture it had issued.  The Court held the interest non-deductible on the basis that it was capital in nature.

Over the last 15 years there has been a noticeable discrepancy between word and deed.  On the one hand, the Australian Taxation Office (“the ATO”) has devoted enormous amounts of time and effort to transfer pricing – releasing Rulings and booklets, delivering speeches, making announcements and generally trying to get taxpayers’ attention.  The work in Australia was matched by an equally voluminous output from the OECD, not to mention the extensive work of the tax authorities of other countries, especially the US.

On 12 March 2008, the Assistant Treasurer Chris Bowen released the Board of Taxation’s Position Paper on the Review of Foreign Source Income Anti-Tax-Deferral Regimes – that is, the reform of the controlled foreign company (CFC), foreign investment fund (FIF) and transferor trusts measures. It is significant that the Press Release places the Position Paper in the context of making Australia an Asian financial hub. The same theme runs through the recently announced review of the taxation of managed funds. This link suggests that the Labor Government is giving some priority to the Board’s work in this area. We may have considerable rollback of foreign source income anti-deferral measures in the relatively near future.

Consistent with the election commitment from the Labor Government “to make Australia the financial services hub of Asia”, the Assistant Treasurer, Minister for Competition Policy and Consumer Affairs, the Hon Chris Bowen MP, made an announcement on Friday, 22 February 2008, that the Government has asked the Board of Taxation (Board) to review the taxation arrangements that apply to managed funds.

On 18 February 2008, the Federal Court of Australia released the decision of Brady King Pty Ltd v Commissioner of Taxation [2008] FCA 81 relating to a taxpayer’s entitlement to adopt the “valuation method” under the margin scheme. The case is important, and of particular relevance to property developers, as it establishes some interesting views on the margin scheme provisions which are inconsistent with the Full Federal Court’s earlier statements in the Sterling Guardian case.On 18 February 2008, the Federal Court of Australia released the decision of Brady King Pty Ltd v Commissioner of Taxation [2008] FCA 81 relating to a taxpayer’s entitlement to adopt the “valuation method” under the margin scheme. The case is important, and of particular relevance to property developers, as it establishes some interesting views on the margin scheme provisions which are inconsistent with the Full Federal Court’s earlier statements in the Sterling Guardian case.

Presentations given by the speakers at the Infrastructure Tax Conference hosted by Greenwoods & Freehills.

Elections are, quite understandably, fought on issues that will grab the voters’ imagination, and so far as tax is concerned, that usually means personal tax matters will receive the most attention – income tax cuts, child care tax rebates, education tax rebates and so on. Labor’s business tax proposals might not have captured the headlines but there is some important material that clients will need to factor into their forward planning and dealings with the new Labor Government. This Tax Brief principally examines the implications for business of Labor’s tax policies, with a few details included on some of the personal and superannuation changes.

On 17 October 2007, the Australian Taxation Office (the “ATO”) released a new Draft Taxation Ruling (the “Draft Ruling”) on the tax treatment of “earn out arrangements” – where, on the sale of a business or asset, some part of the agreed price is contingent on future economic performance.

They did not have the same headline-grabbing power as announcing a $34b tax cut, but the Assistant Treasurer recently released two important Press Releases on the interaction between the tax consolidation system and capital gains tax (“CGT”) rollovers which deserve careful attention.

On 20 September 2007, the Government finally introduced into Parliament a Bill to enact the final stages of the proposed general regime for the taxation of financial arrangements (“TOFA”). As we have written on many occasions, TOFA has been a long and difficult project but after almost 16 years of work, we have now reached a major milestone – most of the previous Exposure Drafts of legislation circulated to taxpayers and the profession for comment have been superseded by a Bill presented to Parliament.

On 16 August 2007, the Government introduced into Parliament the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 (“the Bill”).  The Bill contains two sets of measures that affect stapled entities and trusts – one that helps stapled groups to restructure without triggering adverse tax outcomes, and a second designed to permit Australian trusts to expand offshore.  Both measures have been introduced principally to facilitate the offshore expansion of Australian Listed Property Trusts (“LPT”) and have been driven by the recognition that Australian tax law needs to be flexible and accommodate the effects of tax rules in other countries.

On 16 August 2007, the Government introduced into Parliament the Tax Laws Amendment (2007 Measures No. 5) Bill 2007 (“the Bill”).  It contains new measures addressing the tax consequences of property and infrastructure projects that involve both private sector and tax exempt or non-resident participants and terminates the operation of the current draconian provisions.

One of the more welcome announcements in the May 2005 Budget was the decision to remove the rules which limit the utilisation of foreign losses and which require the allocation of foreign tax credits against separate classes of income.  The tax community has waited with growing impatience to see this announcement turned into legislative form.  After more than 2 years delay, the Government introduced a Bill (“the Bill”) to give effect to this announcement on 21 June, the last sitting day of the Winter session.  The tax community will have to wait a little longer for the new rules to commence  –  the new measures will not start until 1 July 2008 at the earliest.

In a very welcome development, the Assistant Treasurer announced today that the Government will amend the tax legislation to ensure that the value of rights issues is not subject to tax at the time of issue.

In October 2006, the Treasurer requested the Board of Taxation to review Australia’s foreign source income anti tax-deferral regimes – that is, Australia’s regimes that seek to prevent taxpayers deferring Australian tax by storing foreign source income in offshore entities.

Our Tax Brief of 24 January 2007 outlined the second Exposure Draft for the remaining stages of the taxation of financial arrangements (“TOFA”) reforms.  In late May, Treasury released two further pieces of the TOFA jigsaw.

The Government introduced the Tax Laws Amendment (2007 Measures No 3) Bill 2007 (“the Bill”) into Parliament on Thursday 10 May.  The Bill contains a collection of diverse legislative amendments designed to give effect to various announcements and Press Releases – including proposals which had been announced in the Budget only 2 days before.  The Bill was referred to the Senate Economics Committee for a report by 6 June.  It is not clear whether that process will lead to any significant changes.

After the many detailed leaks in the last few days and the obvious political imperatives of an election year, this year’s Budget held few surprises for business.

Since December 2006, the Superannuation and Financial Services industry has been inundated with approximately 700 pages of Bills and Explanatory Memoranda in relation to the Government’s announced “simplification” of the taxation of superannuation.  We recently held a seminar on these reforms.  A copy of the presentation can be found here.

The Assistant Treasurer has released a second Exposure Draft of legislation for the taxation of financial arrangements.  The new version fills in some of the gaps evident in the last version and changes some of the policy and legislative detail.

On 3 January 2007, the Assistant Treasurer released a second Exposure Draft and Explanatory Memorandum (“2007 ED”) of the Taxation of Financial Arrangements (“TOFA”) legislation, generally referred to as “TOFA Stages 3 and 4.” The 2007 ED now addresses some of the issues raised during the extensive consultations that occurred in the year since the first Exposure Draft (“2005 ED”) was released in December 2005.

The extensive changes (mostly concessional) to Australian capital gains tax (“CGT”) for non-residents first announced in the 2005-06 Budget, are now law.  The Bill to enact this announcement, introduced into Parliament in June this year, received the Royal Assent on 12 December after a troubled passage through the Parliament.

In FCT v CityLink Melbourne Ltd the High Court held that annual concession fees payable by CityLink to the State government are deductible as they accrue. Greenwoods & Freehills and Freehills acted for CityLink Melbourne Limited in relation to the Melbourne City Link project and this litigation.

One of the more unexpected announcements in the May 2005 Budget was the Government’s proposal to limit “the application of CGT [capital gains tax] to non-residents’ real property, and the business assets of Australian branches of a non-resident rather than the current wide range of assets.”  This measure, it was said, would “bring Australia’s … CGT rules and tax treaty practice into line with international standards.”  The ongoing cost of the measure was projected to be less than $65m per year, another surprising aspect of the announcement.

The Government has finally acted to re-instate legislation dealing with the tax consequences of share capital tainting – a new Bill was introduced into Parliament on 25 May 2006 and is expected to pass without delay or difficulty.  This Tax Brief examines the kind of transactions that are labelled “share capital tainting” and the tax consequences that follow. 

Every year there is frenzied speculation about the likely content of the upcoming Budget.  And, as is usually the case, some of the speculation proved to be close to the mark; other guesses proved to be misinformed. 

This Tax Brief examines the recently-enacted amendments to the definition of cost and cost base which accompanied the blackhole amendments. 

The Government and the Australian Taxation Office (“ATO”) were clearly embarrassed by the proliferation of so-called “mass-marketed tax schemes” in the late 1990s and the large number of citizens who found themselves under the unwelcome scrutiny of the ATO. So, in December 2003, the Government announced that it would enact measures to try to redress what it saw as an unfair balance – to expose the promoters of tax schemes to the same kinds of penalties that their clients faced, when the promoters’ claims turned out to be incorrect and the clients found themselves exposed to ATO penalties.  The Government released an Exposure Draft displaying its preferred approach in August 2005; the Act was passed by Parliament on 28 March 2006.

The tax consolidation rules provide for many elections of a transitional nature. Originally, these elections were irrevocable but the Government amended the law in early 2004 to allow a number of elections to be made or revoked by the end of 31 December 2004. On 20 December 2004, the Government announced that this period would be finally extended to 31 December 2005.

The Act giving effect to this extension, Tax Laws Amendment (2005 Measures No 5) Act 2005 completed passage through Parliament last week. Although further changes to consolidation retrospective to 1 July 2002 were announced by the Government on 1 December 2005, no mention was made of any further extension of the transitional elections. On 9 December 2005, the Minister for Revenue announced that the extension to 31 December 2005 had passed through the Parliament. We can assume that no further general extension will be forthcoming.

The second instalment of legislation to give effect to the recommendations in Treasury’s review of the self-assessment system for income tax was introduced into Parliament on 10 November.  A draft of this legislation had been released earlier in the year, but the final version contains several important changes.

Every so often, the High Court issues a judgment with difficult and potentially far-reaching implications which, one fears, were not fully explored in the case.  The recent judgment in CPT Custodian Pty Ltd is one such case.

The issue in the case involved a narrow and quite precise land tax question – whether the holder of some or all of the units in a unit trust which holds land is the “owner” of the land for land tax purposes.  The High Court concluded that the answer was no – the unitholder was not the owner in either case.

However, in the course of reaching this unremarkable conclusion, the High Court made observations which cast doubt on some of the trust law and practice that underpins current views about the way a variety of other tax provisions operate in the presence of a trust.

Given the volume of cases, legislative change and new or revised rulings relating to GST & property that have issued or been enacted since our last GST & property-related Tax Brief in March 2005, we are issuing this Update as a summary of all the major developments regarding GST & property.

After extended consultation and some modest re-drafting, legislation to enact proposed amendments to the corporate loss rules was introduced into Parliament on 14 September.  The gestation of these measures has been protracted: the original proposal was outlined in our Tax Brief on the Assistant Treasurer’s announcement in April 2004 and draft legislation was released for comment in February 2005.  This Tax Brief details the main effects of the new legislative regime.  The new rules will significantly affect the ability of companies to utilise their tax losses and some other tax attributes on an ongoing basis. 

In one of the more perplexing decisions to come out of the Full Federal Court in recent times, the Court has by majority upheld the decision of Hill J. that “interest” payable on notes issued by one company and stapled to preference shares issued by another was not deductible under s.8-1 of the Income Tax Assessment Act 1997.

In an important decision handed down today, 16 September, the Full Federal Court has dismissed, by a 2-1 majority, the appeal by Macquarie Finance Limited (“MFL”) in relation to a case on the deductibility of interest. The case is also of relevance as regards the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936. In particular, and although MFL lost on the prima facie deductibility of the interest expense, two of the three judges were of the view that Part IVA would not have been applicable.

Commissioner of Taxation v McNeil [2005] FCAFC 147

The decision of the Full Federal Court in Commissioner of Taxation v McNeil [2005] FCAFC 147 was handed down on 8 August 2005.  This was a test case funded by the Commissioner and involved Mrs. Helen McNeil, a widowed pensioner 90 years of age.  Despite the disparity between the two protagonists, the case raises some interesting tax issues which may have implications in characterising certain distributions made by a company to its shareholders for the purposes of s.6-5 of the Income Tax Assessment Act 1997 (“the 1997 Act”).  The decision is also a first in interpreting certain terms of s.104-155 of the 1997 Act (CGT event H2).

HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126

The Full Court of the Federal Court of Australia (Hill, Stone & Allsop JJ) in its decision on the appeal to the AAT Recoveries Trust case (H P Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126) has now given strong judicial guidance on the core GST concept of whether an acquisition is made for a “creditable purpose” such that the taxpayer is entitled to claim an input tax credit.

On 17 June 2005 the Government released draft legislation and explanatory notes on “Conduit Foreign Income”, one of the remaining items of business from the 2003 Budget response to the Review of International Taxation. There are still several outstanding items from the announcement of the reforms, as well as a promised more general review of the FIF regime. The rest of this tax brief deals with the recently released draft legislation and its place in the overall treatment of conduit income.

In a series of Tax Briefs in December 2004 and January 2005 we detailed the recommendations of Treasury’s report to the Government on aspects of the self assessment system (“the Report”) released on 16 December 2004. Legislation to give effect to the Report’s recommendations is now gradually being produced.  Three instalments have been released so far.  This Tax Brief outlines the provisions of the three instalments:  the first Bill which was released in March 2005 (“the Bill”), an Exposure Draft Bill released in May for public comment (“May Draft”), and a further Exposure Draft Bill released in June also for public comment (“June Draft”).  The Bill has passed both Houses of Parliament and received Royal Assent yesterday.  The Drafts will presumably become Bills and be introduced into Parliament once the public consultation process has concluded.

Commissioner of Taxation v BCD Technologies Pty Ltd [2005] FCA 708

The Federal Court has upheld the Commissioner’s appeal in Commissioner of Taxation v BCD Technologies Pty Ltd against the AAT decision that a company tax return lodged with no tax payable (often called a nil assessment) was an assessment by virtue of the deeming provisions of s 166A of the Income Tax Assessment Act 1936 (“the Act”).

Commissioner of Taxation v Linter Textiles Australia Ltd (In Liquidation) [2005] HCA 20 (26 April 2005)

On 26 April 2005, the High Court unanimously allowed the Commissioner’s appeal from the decision of the Full Federal Court in FCT v Linter Textiles Australia (in liq) (2003) 52 ATR 502.  The Commissioner won on a ground which had not been considered in the Courts below, but agreed to pay the costs of the appeal.

Apart from the headline-grabbing personal tax cuts and the abolition of the superannuation surcharge, the 2005 Budget tax measures cover a broad range of issues – more than was expected.  The Government is making a determined effort to clean up the remaining tax agenda from the past and many of the measures finally lay to rest issues that have been around since tax reform was announced in 1998. In the international area in particular there are new reforms that by Australian standards are quite refreshing because they do away with existing tax barriers to investment – the abolition of foreign loss quarantining and the removal of capital gains tax on non-residents except for land and business assets of a branch in Australia. This Tax Brief covers the more important new announcements in tonight’s Budget.

On 27 April 2005, the Government amended the Regulations to the Income Tax Assessment Act 1997 to give effect to an announcement in August 2004 by the Assistant Treasurer that regulations would be made elaborating the operation of the foreign exchange (“forex”) legislation.  The Regulations are (with some exceptions) backdated to operate from 1 July 2003, the date on which the forex legislation became operative.  They are designed to facilitate translating foreign currency into either Australian dollars or into a taxpayer’s functional currency by permitting taxpayers to adopt exchange rates and computational methods which are not strictly in accordance with the dictates of the legislation.

Pearson v Commissioner of Taxation [2005] FCA 250

On 16 March 2005, Justice Spender of the Federal Court of Australia handed down the decision of Pearson v Commissioner of Taxation. This judgement considers the operation of Division 6 in circumstances where the net income of a trust is increased subsequent to the conclusion of an income year. This is another in a series of cases where the ATO has delved in detail into the terms and procedures of trusts deeds to determine tax liabilities in relation to trust income, much to the alarm of the taxpayer.

While we all wait with baited breath for the latest Budget tax announcements, bear in mind that there can be a long while from announcement to delivery of new measures. We may be holding our breath for a very long time if the fourth bill to implement the New International Tax Arrangements announced in the 2003 Budget is any guide.

ACP Publishing Pty Ltd v FCT [2004] FCA 874

By a 2 to 1 majority, the Full Federal Court has upheld the conclusion of Dowsett J in the Federal Court in ACP Publishing Pty Ltd v FCT [2004] FCA 874 that the sale of a magazine business in accordance with the terms of a deed executed in 1980 was GST-free under section 13 of the A New Tax System (Goods and Service Tax Transition Act) 1999 (“the Transition Act”) even though it allowed the parties to determine the price for a supply after 1 July 2000.

This Tax Brief reports the concluded view of the Australian Taxation Office [“ATO”] on the exemption from withholding tax for interest paid by Australian residents to banks and other financial institutions resident in the US and the UK.  The concluded view is expressed in Taxation Ruling TR 2005/5 released on 16 March 2005.  Our Tax Brief of 8 September 2004 [http://www.gf.com.au/articles_319.htm] outlined the main provisions and some of the implications of the Draft version of the Ruling.  This Tax Brief reports what has changed (and touches on a few important matters that have remained unaffected) through the consultation process.

Some nine months after it was introduced into Parliament, the New International Tax Arrangements (Managed Funds and Other Measures) Act 2005 received Royal Assent and became law on 21 March 2005. The bill was originally introduced in the middle of 2004 and lapsed when the election was called. This is the third Act dealing with the 2003 budget announcements on international tax (with more to come) and the Act also includes measures on interest withholding tax announced on 4 March 2004.

Proposed amendments aimed at closing “unintended outcomes” in the use of the GST margin scheme may impact the profitability of current property development projects. 

Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3

Whilst the High Court decision in Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd (“Dick Smith”) involves NSW stamp duty, it is interesting to also consider whether it has any implications for the interpretation of the capital gains tax provisions of the Income Tax Assessment Act, 1997.

Pridecraft Pty Ltd v Commissioner of Taxation [2004] FCAFC 339

The Full Federal Court has dismissed an appeal by the taxpayer in Pridecraft Pty Ltd v Commissioner of Taxation [2004] FCAFC 339, upholding the decision of Merkel J at first instance and confirming the Commissioner’s  stance against what he viewed as a harmful tax scheme cloaked as an employee rewards system. This is one of a number of cases dealing with employee benefit schemes that have been in the courts in recent years.

AAT case [2005] AATA 47

Participants in joint venture arrangements should be aware that termination payments may not be capital in nature but may be assessable to the participant as ordinary income in the year of receipt.

G Cassegrain & Co Pty Ltd v Commissioner of Taxation [2005] AATA 72

Senior Member Lindsay of the Administrative Appeals Tribunal (the “AAT”) has held in AAT Case [2005] AATA 72, Re G Cassegrain & Co Pty Ltd and C of T that a $9.5 million settlement payment made to the taxpayer, a family company, was assessable as a capital gain. The case raises some intricate and fundamental issues of the operation of the CGT in the context of settlement of actions.

The Recoveries Trust v Commissioner of Taxation [2004] AATA 1075

This AAT decision examines one of the key concepts in the A New Tax System (Goods and Services Tax) Act 1999 (all legislative references are to this GST Act), namely that of whether an acquisition is made for a “creditable purpose” pursuant to section 11-15 such that an input tax credit can be claimed.

This is the last of our Tax Briefs on Treasury’s report to the Government on aspects of the self assessment system (“the Report”) released on 16 December 2004. In this Tax Brief we focus on the recommendations dealing with changes to the powers to re-assess tax liabilities, and with proposed changes to the rules concerning the imposition and remission of penalties and interest.

This is the second of three Tax Briefs on Treasury’s report to the Government on aspects of the self assessment system (“the Report”) which was released on 16 December 2004.  In this Tax Brief we focus on the recommendations designed to improve “the framework, reliability, accessibility, accuracy and timeliness of ATO advice.”  These recommendations should go some way to addressing some of the many criticisms about the way the Australian Taxation Office (“ATO”) has administered the self-assessment system.

The ATO has released a Practice Statement (Practice Statement) setting out its access policy for company board papers relating to taxation risk. The Practice Statement considers advice to the Board that addresses tax risks associated with both specific transactions and internal compliance systems. The Practice Statement was released on 23 December 2004 during the December season of desk clearing announcements by the ATO and Treasury before the employees involved take their break for summer holiday. Which leaves those affected by the announcements to take any necessary action during their holidays.

On 16 December 2004, the Treasurer released Treasury’s report to the Government on aspects of the self assessment system (“the Report”), and the Government’s response to the Report, accepting all of the recommendations.  The Review of Aspects of Income Tax Self-Assessment had originally been announced by the Treasurer in November 2003. 

Marana Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 307

The Full Federal Court has upheld in Marana Holdings Pty Ltd v Commissioner of Taxation (“Marana”) the decision of Beaumont J that the sale of a unit that had been converted from a motel room was not input taxed for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”). The decision provides guidance on the definition of ‘residential premises’ and ‘commercial residential premises’ for the purposes of the GST Act.

It has taken just under 20 years, but the Australian Taxation Office [“ATO”] has finally released a Draft Ruling outlining its interpretation of one of the pivotal concepts in the capital gains tax [“CGT”] rules for trusts. 

 

STOP PRESS - 20 DECEMBER 2004

On Monday 20 September 2004, the Minister for Revenue and Assistant Treasurer announced that a further extension until 31 December 2005 would be allowed for making the elections referred to in our Tax Brief of 15 December 2004.

 

The tax consolidation rules provide for many elections of a transitional nature. Originally, these elections were irrevocable but the Government amended the law in early 2004 to allow a number of elections to be made or revoked by the end of 31 December 2004.

City Link Melbourne Limited v FCT [2004] FCAFC 272 (12 October 2004)

On 12 October 2004, the Full Federal Court upheld the taxpayer’s appeal against the judgement of Merkel J in Transurban City Link Limited v FCT.  The issue before the Federal Court and on appeal was whether annual Concession Fees of $31.25 million in the 1996 year of income and $95.6 million in each of the 1997 and 1998 years of income were allowable deductions to Transurban City Link Limited (“Transurban”).

Commissioner of Taxation v Amway of Australia Limited [2004] FCAFC 273

The Full Federal Court has allowed the taxpayer’s appeal in Commissioner of Taxation v Amway of Australia Limited [2004] FCAFC 273. The taxpayer, Amway, sold a variety of products directly to the public through a network of individuals who sold as its agents on a commission basis. The tax deductibility of expenditure incurred by Amway in conducting annual seminars for its distributors was in dispute.

STOP PRESS: 11 FEBRUARY 2005

The legislation giving effect to the end of GST-free transitional relief passed through Parliament on 8 February 2005 with only one minor Senate amendment which the House of Representatives approved. Royal Assent is expected shortly for the legislation – the Tax Laws Amendment (Long-term Non-reviewable Contracts) Act 2005, which amends the GST Transition Act.

The one amendment sets a 28 days time limit from the end of the initial offer period (ie the offer made by the supplier) for an assessor appointed by an arbitrator to assess an appropriate change. It is unclear what will happen if the 28 day timeframe isn’t met, but the amendment serves to strengthen the supplier’s position by capping, at least in theory, the price change process to under 3 months. The Regulations which will identify who can act as arbitrators/assessors are yet to be drafted.

On 14 September 2004, Justice Hill in the Federal Court handed down the long-awaited decision on the treatment of payments made under Macquarie Bank’s Income Securities.  The decision continues the unhappy trend of taxpayers being denied deductions for interest expense.  It will give pause to others who have similar products on issue; it may have a bearing on the interpretation of the new debt equity regime; and may survive as an impediment to future transactions which do not fall neatly within the classes of instruments created by those rules.

The Federal Court has held in Idlecroft Pty Ltd v Commissioner of Taxation [2004] FCA 1087 that a trust stripping scheme was caught by reimbursement agreement provisions of s.100A of the ITAA 1936.

Macquarie Finance Limited v FCT [2004] FCA 1170

The Federal Court (Hill J) has held that “interest” payable on notes issued by the taxpayer (MFL) which were stapled to preference shares issued by Macquarie Bank Limited (MBL) was not deductible under section 8-1 of the Income Tax Assessment Act 1997 (1997 Act). As obiter, Hill J stated that even if the payments were deductible under section 8-1, the deduction would be denied pursuant to Part IVA of the Income Tax Assessment Act 1936 (1936 Act).

The issue in the case, although a straightforward one, is potentially an extremely significant one for a large number of overseas companies and Australian taxpayers.  The issue was whether a Singapore company, which had no office, staff or other facilities in Australia, had a permanent establishment in Australia by virtue of it chartering a vessel to an Australian resident company.

On 16 June 2004, Lee J of the Federal Court handed down his decision in Lopez v Deputy Commissioner of Taxation [2004] FCA 756. The issue in dispute was whether fees received by a chemical engineer for “consultancy and management” services whilst working in Nigeria (over a period of 8 months) was exempt foreign employment income pursuant to s.23AG(1) of the Income Tax Assessment Act 1936 (“ITAA36”).

On 1 September 2004, the ATO issued its preliminary view – in the form of Draft Taxation Ruling TR 2004/D16 – of the operation of the relatively new interest withholding tax (IWT) exemption in Australia’s double tax conventions (DTCs) with the United Kingdom and the United States.

The morass that is TOFA – the Taxation of Financial Arrangements – continues its descent into farce.  The 13 year gestation of this collection of disparate measures has been prolonged even further by an announcement from the new Assistant Treasurer, Mr Mal Brough, on 5 August 2004.

ACP Publishing Pty Ltd v Commissioner of Taxation [2004] FCA 874

The Federal Court in ACP Publishing Pty Ltd v Commissioner of Taxation [2004] FCA 874 has held that sale of a 50% interest in a magazine business pursuant to a “Savoy Clause” in an agreement executed in 1980 was GST-free under s 13 of the A New Tax System (Goods and Service Tax Transition Act) 1999 (“the Transition Act”) even though it allowed the parties to determine the price for a supply after 1 July 2000.

Rataplan Pty Ltd v FCT [2004] FCA 920 & Westrac Equipment Pty Ltd v FCT [2004] FCA 921
The first-instance decisions of Justice Carr in Rataplan Pty Ltd v FCT [2004] FCA 920 and its companion case, Westrac Equipment Pty Ltd v FCT [2004] FCA 921, are noteworthy not so much for the judicial observations expressed in the judgments that were rendered, but for their illustration of the inability of the tax law in force in 1991 to deal appropriately with related-party dealings producing what might be seen as mischievous tax results (though there is no suggestion on the facts of the cases that the parties involved were moved by a tax-avoidance purpose or other mischievous end).

Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650

Justice Merkel has ensured that the Commissioner of Taxation has maintained his firm stance against abusive tax schemes with a victory at first instance in the Federal Court in Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCA 650.

Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors [2004] NSWSC 381 (11 May 2004)

For professional advisors, the decision of Gzell J in the New South Wales Supreme Court in Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors [2004] NSWSC 381 may well be of greater interest in the course of administering their own practices than in the resolution of client issues.

Sun Alliance Investments Pty Ltd (In Liq) v Commissioner of Taxation [2004] FCAFC 11

The full Federal Court has allowed, in part, the appeal by Sun Alliance Investments Pty Limited (“Sun Alliance”) against the decision of Stone J in Sun Alliance Investments Pty Ltd (in liq) v. Commissioner of Taxation [2003] FCA 75 (refer to previous case summary in Issue 37, No. 11 June 2003).

When the ATO seeks access to taxpayer related records one of the most vexed issues is whether accountant’s documents have to be produced.  The recent Full Federal Court decision in Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122 brings some much needed clarity to this area.  It also makes the Australian common law of legal professional privilege more coherent and logically based.

The High Court handed down its much-anticipated judgment in Hart’s case on Thursday 27 May.  The case was argued and won by the Commissioner of Taxation relying on the general anti-avoidance rule – Part IVA of the Income Tax Assessment Act 1936.  It was hoped that this case would draw some clear lines for interpreting and applying the provision in the context of a transaction that most commentators considered relatively innocuous.

The Treasurer’s 2004-05 Budget will no doubt be remembered for its generosity to families, not to mention the size and speed of the cash handouts it offered.  Business tax measures were few; indeed, tax measures of any kind were scarce.  Significant measures that made it into the Budget Papers mostly dealt with superannuation matters.  Our special Budget Edition Tax Brief will concentrate on these.

Transurban City Link Limited v FCT [2004] FCA 40 (2 February 2004)
On 2 February 2004, Merkel J in the Federal Court handed down his decision in Transurban City Link Limited v FCT. The issue in dispute was whether annual concession fees payable by Transurban City Link Limited (“Transurban”) to the State of Victoria (“the State”) for a concession to establish and operate the Melbourne City Link were allowable deductions from Transurban’s assessable income for the income years ended 30 June 1996, 30 June 1997 and 30 June 1998.

The Full Federal Court (per Allsop J; Ryan and Finkelstein JJ concurring) has upheld Emmett J’s decision at first instance in relation to the Commissioner’s discretion to grant extensions of time under s 80G(6A)(b) of the Income Tax Assessment Act 1936 (“ITAA36”).

It is no secret that for several years Treasury has been dissatisfied with the operation of the rules affecting the ability of companies to use revenue and capital losses after a change to the ownership or control of the company.

On April Fools’ Day the second tranche of legislation arising out of the Review of International Taxation was introduced into Federal Parliament. The timing of the release of the Bill may not have been propitious, but the rules are important and generally welcome. Of course, the terms of the Bill are considerably more complicated than proposed by the Board of Taxation and do not achieve the large scale winding back of CFC and related legislation that the Board had recommended.

The Federal Court recently considered the depreciation provisions contained in former Division 42 of the Income Tax Assessment Act 1997.  In order to depreciate an item of plant under Division 42, items of plant were required to be "used to produce assessable income".  The Court in Reef Networks considered the meaning of the expression "used to produce assessable income".

Division 40 of the Act now provides for depreciation deductions.  Under Division 40 a depreciation deduction is reduced to the extent that it used for a purpose other than "producing assessable income".  Accordingly, Reef Networks has significant impact on the way in which Division 40 is interpreted.

Sherlinc Enterprises Pty Ltd v FCT (2004) AATA 113

The AAT has found that a purported choice to apply the now repealed replacement asset rollover under Div 123 was not a “choice” for the purposes of the Income Tax Assessment Act 1997 (“the Act”). As a result, the AAT have held that the applicant was not precluded from applying the former 50% goodwill exemption concession under the repealed s.118-250.

On 21 August 2003, the new Australia UK treaty (2003 Treaty) was signed in Canberra following two years of negotiations. The treaty replaces the Australia UK treaty signed in 1967 and updated by a Protocol in 1980 (1967 Treaty). In fairly short order both Parliaments have been through the necessary procedures with Australia shortening its usual treaty approval process. On the same day as the 2003 treaty was signed, there was an Exchange of Notes which elaborates and explains the operation of various provisions of the treaty. The amending legislation giving effect to the 2003 treaty includes the Exchange of Notes so that they have the force of law in Australia.

Commissioner of Taxation vs. Energy Resources of Australia Limited [2003] FCAFC 314 (24 December 2003)

On 24 December 2003, the Full Federal Court gave Energy Resources of Australia Limited (ERA) an early Christmas present, by confirming the decision of Lindgren J (Energy Resources of Australia Limited vs. Commissioner of Taxation 2003 ATC 4024) that ERA’s opening value for trading stock could properly be calculated as a figure higher than originally returned by ERA, notwithstanding that the Commissioner no longer had statutory power to make a corresponding amendment increasing ERA’s closing value of trading stock for the previous year. In effect, therefore, ERA’s tax liability for one year had been calculated on the basis of one value of its stock as at the end of June, but a different value for that stock was applied on the other side of midnight for the purpose of calculating ERA’s tax liability for the following year.

Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation [2004] FCA 2

Charles Dickens’ last major work, entitled Our Mutual Friend, was first published as a serial in 1864 and 1865. 

Just as in Our Mutual Friend, where a difficult marriage is required to obtain a fortune, the mutuality principle requires a “marriage” between the participants and the contributors before it can be applied.  In the case of Coleambally Irrigation Mutual Co-operative Ltd v Commissioner of Taxation [2004] FCA 2, that “marriage” of participants to contributors proved too difficult for Hill J to find.

After many delays, the Treasurer has now announced the Government's much-anticipated superannuation and retirement income proposals. The discussion paper, Australia's Demographic Challenges, was released on 25 February 2004 and has received much media attention.

In this Tax Brief we examine the recent Federal Court decision in Amway of Australia v Commissioner of Taxation (No 2) [2003] FCA 1533. Somewhat surprisingly, it is the first judicial analysis of the important rules denying deductions for "entertainment" expenses since those rules were enacted in 1985.

The Federal Court’s judgment in Amway of Australiav Commissioner of Taxation (No 2) [2003] FCA 1533 (19 December 2003) provided the first judicial analysis on what constitutes non-deductible entertainment under the former s51AE in the Income Tax Assessment Act, 1936 (“1936 Act”) since its introduction in 1985.

The Commissioner of Taxation will need to reconsider the terms of two Public Rulings after they came under criticism in a recent Federal Court judgment.The case has important ramifications for the Commissioner’s ability to define limits to his exercise of general discretions given to him by Tax Legislation.  It also sheds valuable light on the Commissioner’s power to grant substituted accounting periods [SAPs].

The two related decisions, Bartlettv FC of T; Falcetta v FC of T 2003 ATC 4962; [2003] FCA 1125 (“Bartlett: Falcetta”) should be of interest to most TIA members.  Hill J of the Federal Court had to consider the operation of s.25-5 of the Income Tax Assessment Act, 1997 (“ITAA 1997”) as it applied before 22 December, 1999 as the ATO wholly denied each of the taxpayers a deduction for fees incurred to a tax agent during the year ended 30 June 1999.  The Court heard the two applications consecutively as they involved similar issues and facts and gave one judgment covering both.

Now that the rush to make forex elections has passed for most taxpayers, it's time to give attention to other international developments. The New International Tax Arrangements Bill 2003 (NITA Bill) introduced on 4 December 2003 contains the first tranche of changes foreshadowed in the government's 2003 Budget response to the Review of International Tax Arrangements. Compared to the legislation and regulations still to come in the first half of 2004, particularly in relation to CFCs, the changes are only a small part of the overall package.

The ability of a private company employer to obtain unlimited deductions for contributions made to a superannuation fund benefiting employees who are directors and shareholders without either the trustee of the fund being liable to pay tax on the amounts contributed or the employer being liable to pay fringe benefits tax must be the holy grail for tax planners.

On 8 December 2003, the Full Federal Court rejected the taxpayer's appeal against the judgment of Lindgren J. in Spassked Pty Limited and others v Commissioner of Taxation.

On Wednesday 17 December, 2003, the Governor General gave Royal Assent to the legislation enacting the new foreign exchange gains and losses (forex) regime. That action started the very short countdown to make several critical choices and elections under the forex regime. Making these choices – or failing to make them – can have significant and permanent tax effects for taxpayers, and there are both opportunities to be exploited and pitfalls to be avoided.

In a recent judgment of the Full Federal Court the latest case in the long-running Spassked saga the Commissioner has successfully defended assessments denying substantial interest deductions, and the transfer of losses arising from those deductions. Obviously pleased with the result, he issued a Press Release announcing the Tax Office's win in Australia's largest tax case. The amount of denied interest deductions exceeds $6.5 billion over 7 years.

After a gestation of more than 10 years, the Government has moved one step closer to completing the project to reform the taxation of financial arrangements (TOFA). Last night, the Senate passed legislation to enact the foreign exchange (forex) elements of the TOFA project. The legislation, which was substantially amended in the Senate, will now go back to the House of Representatives for the formality of confirming the amendments and then to the Governor General for Royal Assent, presumably before Christmas.

Highlights

Automatic penalty of 30% of franking deficit tax if deficit more than 10% of franking credits during income year – ATO no longer has discretion to reduce penalty

Penalty more likely to apply because of franking account changes under simplified imputation system

Penalty applies even if no dividends paid during year

In FCT v Zoffanies Pty Ltd [2003] FCAFC 236 (24 October 2003), the Full Federal Court of Hill, Hely and Gyles JJ allowed an appeal from the decision of the Administrative Appeals Tribunal, Zoffanies Pty Ltd v FCT [2002] AATA 758 (4 September 2002).

The High Court's judgements in Australian Communication Exchange Ltd v Deputy Commissioner of Taxation [2003] HCA 55 (1 October 2003) provide an analysis of an employer's obligations under the Superannuation Guarantee Charge Act 1992 (the SGC Act) and Superannuation Guarantee (Administration) Act 1992 (the Act) (together, the SGC legislation) where employees are covered by an award made under State industrial legislation. In particular, this case highlights the difficulties associated with interpreting the meaning of ordinary time earnings in the context of casual workers.

During the past four months, the ATO has been sending the unmistakeable signal that it is back in the enforcement business. The message has been clear and simple—the ATO is moving resources out of the taxpayer education and support functions that were put in place during the implementation of the business tax reforms, and allocating those resources to investigation, enforcement and punishment. Just in case the message wasn't getting through, the Commissioner has also announced and re-announced it in a series of speeches, press releases and publications.

In Sleight v. Commissioner of Taxation [2003] FCA 896, Nicholson J of the Federal Court has allowed the claims for deductions by the taxpayer in connection with his investment in a tax effective investment scheme. Moreover, his Honour has held that Part IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act had no application.

In FCT v MacArthur [2003] FCA 903 (28 August 2003), the Federal Court allowed an appeal by the Commissioner from the decision of the Administrative Appeals Tribunal in MacArthur v FCT [2002] AATA 1110 (29 October 2002). The relevant issue considered by Dowsett J was whether the taxpayer had obtained a tax benefit in connection with a scheme under s 177C of the Income Tax Assessment Act 1936 (ITAA36) as a result of a contracting services arrangement.

The arrival of the first court decision considering the application of the personal services income tax regime by the Commissioner has been disappointing. Any analysis of the personal services income tax provisions by the court in Commissioner of Taxation v Metaskills Pty Ltd [2003] FCA 766 (23 July 2003) were vitiated by a technicality, in particular, the failure of the taxpayer to come within the operation of the specific provisions of the regime.

On 1 August 2003, the Full Federal Court ([2003] FCAFC 105, Spender, Hill, Hely JJ) upheld the decision of Dowsett J in the Federal Court who in turn upheld the Commissioner of Taxation's (the Commissioner) decision to deny deductions for outgoings incurred in connection with the conduct of air-show activities by the taxpayer. Further, the Full Federal Court ruled that the taxpayer (or in this case the taxpayer's agent) was reckless in claiming those losses as deductions under s.226H of the Income Tax Assessment Act 1936 (ITAA 1936).

The Australian Taxation Office ('ATO') has just released its compliance program for the current financial year, complementing the detailed large business compliance plan released in June.

In the decision of Electricity Supply Industry Superannuation (Qld) Ltd v Deputy Commissioner of Taxation [2003] FCA 138 (25 June 2003), the Full Court of the Federal Court upheld the decision of Cooper J at first instance in Electricity Supply Industry Superannuation (Qld) Ltd v Deputy Commissioner of Taxation [2002] FCA 1274 (17 October 2002). The case considered whether there was a franking credit streaming arrangement within the meaning of Part IVA (and specifically, s 177EA) of the Income Tax Assessment Act 1936 (ITAA36).

The Full Federal Court has allowed a former Olympic athlete's appeal against a Federal Court decision that prize money she won and grants she received were assessable income.

Superannuation Guarantee rate is 9% (for 2002/2003 and 2003/2004) Payable Quarterly from the Quarter beginning 1 July 2003

The Administrative Appeals Tribunal has decided that a lump sum paid in arrears of invalidity benefits under a Defence Force benefits scheme, was not an Eligible Termination Payment ("ETP"), and rather, was assessable income derived in the year the lump sum was paid.

In the decision of Commissioner of Taxation v La Rosa [2003] FCAFC 125 (5 June 2003), the Full Federal Court of Australia (per Carr, Merkel and Hely JJ) dismissed the appeal by the Commissioner against the allowance of a deduction in respect of money stolen from Francesco Domenico La Rosa (the "taxpayer"), a convicted drug dealer. The Court also dismissed a cross-appeal by the taxpayer that he was denied procedural fairness by the Administrative Appeals Tribunal ("AAT") by its decision not to issue summons to two Australian Federal Police ("AFP") officers to give evidence in support of the taxpayer's contention that the stolen monies were not his but those of the AFP.

The taxation landscape for wholly owned corporate groups has now irrevocably changed as a result of the operation of the new consolidation regime, the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, said today.

On 21 February 2003, the Full Court of the Federal Court handed down its decision in Federal Commissioner of Taxation v Mochkin [2003] FCAFC 15, which dealt with the operation of Part IVA of the Income Tax Assessment Act 1936 ("the 1936 Act"), and the diversion of personal services income.

In the decision of Commissioner of Taxation v Linter Textiles Australia Ltd (in liq [2003] FCAFC 63 (14 April 2003), the full Court of the Federal Court upheld the decision of Hely J at first instance in Linter Textiles Australia Ltd (in liq) v Commissioner of Taxation [2002] FCA 1089. While this unanimous decision provides a useful discussion of the term 'beneficial ownership', it stops short of eliminating any lingering ambiguity in the ownership of assets held by a company subject to a winding up order.

Stone J of the Federal Court has found that the Commissioner correctly made a dividend rebate adjustment to the reduced cost base of a company's shares to effect a significant reduction in the capital losses available for transfer to a subsidiary.

Earlier tonight the Treasurer handed down the 2003-4 Federal Budget. Tax matters related primarily to:

personal income tax cuts by raising the low income tax offset and raising the income tax rate thresholds;

reiteration of a number of previously released proposals including the deferral of the TOFA currency proposals to 1 July 2004; and

reforms to Australia's international tax system.