Monthly tax training - April 2016

www.bwslawyers.com.au Brown Wright Stein tax partners: Chris Ardagna E: [email protected] P: 02 9394 1088 Andrew Noolan E: [email protected] P: 02 9394 1087 Michael Malanos E: [email protected] P: 02 9394 1024 Geoff Stein E: [email protected] P: 02 9394 1021 TAX TRAINING NOTES Monthly tax training April 2016 Brown Wright Stein Lawyers Level 6, 179 Elizabeth Street Sydney NSW 2000 P 02 9394 1010 www.bwslawyers.com.au 1 Cases .....................................................................................................................................................4 1.1 Fisher v Nemeske – distribution of asset revaluation reserve...........................................................4 1.2 Metricon QLD – entitlement to primary production exemption..........................................................7 1.3 Rigoli – discharging onus in AAT ......................................................................................................8 1.4 Falvo – principal place of residence ............................................................................................... 10 2 Legislation.......................................................................................................................................... 12 2.1 Progress of legislation .................................................................................................................... 12 2.2 TSLAB2 2016 ................................................................................................................................. 12 2.3 Tax Incentives for Innovation Bill.................................................................................................... 12 2.4 Intangible asset write-offs............................................................................................................... 15 2.5 Draft Bill to enact Australia/Germany tax treaty ............................................................................. 16 3 Rulings................................................................................................................................................ 17 3.1 TR 2016/D1 – Website expenditure ............................................................................................... 17 4 ATO Materials..................................................................................................................................... 20 4.1 PCG 2016/D1 – Practical Compliance Guidelines ......................................................................... 20 4.2 PCG 2016/5 – LRBAs and arm's length terms............................................................................... 20 4.3 LCG 2016/D2 – Small Business Restructure Rollover................................................................... 22 4.4 LCG 2016/D3 – SBRR: genuine restructure .................................................................................. 24 4.5 Making deferral requests from 15 April 2016 ................................................................................. 25 4.6 Small Business – immediate deductibility of professional expenses ............................................. 25 4.7 Small Business – businesses targeted for employee and contractor obligations .......................... 26 4.8 SMSFs – review of trust distributions to SMSFs ............................................................................ 26 4.9 PAYG Withholding varied – body corporates................................................................................. 26 4.10 2016 FBT returns – ATO's special arrangement for cars............................................................... 26 Monthly tax training – April 2016 Liability limited by a scheme approved under Professional Standards Legislation About Brown Wright Stein Brown Wright Stein is a medium-sized commercial law firm based in Sydney. We provide legal advice in the following areas:  Tax  Dispute Resolution  Corporate & Commercial  Franchising  Property  Employment  Estate Planning  Elder Law  Intellectual Property  Corporate Governance  Insolvency & Bankruptcy Our lawyers specialise in working with business owners and their business advisors, such as accountants, financial consultants, property consultants and IT consultants – what we see as our clients' 'business family'. We develop long-term relationships which give our lawyers a deep understanding of our clients' business and personal needs. Over the years we have gained a unique insight into the nature of operating owner-managed businesses and the outcome is that we provide practical commercial solutions to business issues. At Brown Wright Stein, we believe in excellence in everything we do for our clients. It's this commitment that enables us to develop creative, innovative solutions that lead to positive outcomes. This paper has been prepared for the purposes of general training and information only. It should not be taken to be specific advice purposes or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained within. All rights reserved. No part of these notes may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without prior written permission from Brown Wright Stein Lawyers. These materials represent the law as it stood on 7 April 2016. Copyright © Brown Wright Stein Lawyers 2016. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 4 1 Cases 1.1 Fisher v Nemeske – distribution of asset revaluation reserve Facts On 3 May 1994 Nemeske Pty Ltd as trustee of the Nemes Family Trust recorded an oral resolution of Emery Nemes to change the vesting date from 60 years to 18 years from the date of settlement. If such a resolution was effective, the trust would have vested on 24 June 1992 instead of 24 June 2034. In July 1994 Nemeske revalued an asset of the trust, shares in Aladdin Ltd from $1,000 to $3,905,300 creating an asset revaluation reserve of $3,904,300 in the process. On 23 September 1994 Nemeske resolved to appoint the whole the Asset Revaluation Reserve of the Nemes Family Trust, to Emery and Madeleine Nemes. The purported power to make such an appointment was found in clause 4(b) of the Deed of Settlement for the Nemes Family Trust, which provided as follows: ‘The Trustee may from time to time exercise any one or more of the following powers that is to say:- ... (b) At any time or times to advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance education advancement in life or benefit of any of the Specified Beneficiaries ... The balance sheet for the period ended 30 September 1994 showed a non-current liability comprising loans from Emery and Madeleine in the amount of $3,904,300. The only other asset of the trust was $1,000, being the original settlement sum. On 30 August 1995 Nemeske and Emery and Madeleine entered into a Deed of Charge through which Nemeske purported to charge the Aladdin shares in favour of Emery and Madeleine to secure the debt owed to them. Under clause 5 of the Deed of Charge, Nemeske covenanted to pay the principal monies to Emery and Madeleine on their demand. Madeleine died on 9 November 2010. Emery was the sole beneficiary under Madeleine's will. Emery died on 26 September 2011. Emery bequeathed all the shares in Nemeske and Aladdin to two siblings of the Fischer family, whose mother was Emery's cousin (note that Emery did not own the Aladdin shares). Emery's residuary estate was left to a number of other persons, not including the Fischers. The debt owed to Emery's estate by Nemeske meant that the Fischers would not receive the benefit of the bequeath by Emery. The Fischers disputed the debt was owed by Nemeske to Emery's estate. The Fischers contended that: 1. given no money or property had been distributed to Emery and Madeleine, no capital or income of the trust had been advanced or paid to, or applied for, Emery and Madeleine as required by clause 4(b) so that there was no debt to them; 2. clause 4(b) did not provide Nemeske with the power to create a debt to be satisfied out of the assets of the trust; and 3. any debt owing to Emery was statute barred as a claim in relation to an at call loan covered by a deed had to be made within 12 years of the amount becoming due and it was due when the loan was made. The Fischers commenced proceedings in the Supreme Court of New South Wales. In the first instance decision, Stevenson J in the Supreme Court of New South Wales held as follows: Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 5 1. the purported variation of the vesting date of the trust 3 May 1994 was not effective because as a matter of principle the vesting date of a trust could not be varied retrospectively; 2. that the distribution made on 30 September 1994 was an effective exercise of the trustee's power in clause 4(b) to appoint $3,904,300 to Emery and Madeleine; 3. that there was a debt owing to Emery in accordance with clause 5 of the Deed of Charge; 4. the cause of action in relation to the debt accrued from the date Emery or Madeleine made a demand for payment and until such time the limitation period did not commence. Accordingly, the debt was not statute barred. Stevenson J noted that even if he was wrong on this point, the debt had been acknowledged in the accounts of the trustee in 2003, the limitation period commenced again from that date in accordance with section 54 of the Limitation Act 1969 (NSW). The Fischers appealed to the Court of Appeal of New South Wales. Issues 1. Whether the 23 September 1994 resolution and the entry into the accounts was an effective and valid exercise of Nemeske's power to appoint income or capital under clause 4(b) of the Trust Deed. 2. Whether the charge in favour of Emery over the Aladdin shares by the Deed of Charge was effective. 3. Whether the debt owing to Emery was statute barred. 4. Whether the vesting of the trust could be effected retrospectively. Decision The Court of Appeal dismissed the Fischers appeal for the reasons that follow. Valid distribution of income or capital The Court of Appeal confirmed the decision in Clark v Inglis [2010] NSWCA 144; 79 ATR 447 that unrealised gains arising upon revaluation of investments could be properly treated as part of a year’s income. The Court of Appeal also noted that clause 4(b) provides power to earmark or assemble income or capital for use and to use it, and the availability of the power at any given time does not depend on there being cash in Nemeske's hands at that time. The Court of Appeal concluded that the resolution on 23 September was an effective exercise of Nemeske's power to appoint capital or income. Did the Deed of charge grant a charge over the shares? The Court accepted that the Deed of Charge did not validly charge the shares in Aladdin as there was no power in the trust deed or the Trustee Act 1925 (NSW) for the Trustee to grant a charge over the assets of the Nemes Family Trust. However, the Court also accepted that covenants in the Deed of Charge supported the existence of a debt owing by Nemeske to Emery and Madeleine. Was the debt statue barred? The Court of Appeal disagreed with the first instance decision in relation to this issue, finding that the relevant cause of action accrued to Emery and Madeleine on the date of entering into the Deed of Charge and therefore that on this basis the debt could become statute barred in August 2007. However, the Court of Appeal agreed that the debt was acknowledged in 2003 and hence the limitation period commenced again from that date. The Court considered whether the accounts of a company could constitute a valid acknowledgement of a debt when the person to whom the money owed was a director of the company and had signed the accounts. Without resolving that issue, the Court of Appeal noted that the accounts were certified as being true and correct by two directors other than Emery and Madeleine and that therefore there was no reason not to treat the accounts as a valid acknowledgment of the debt. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 6 Could the vesting date be varied retrospectively? The Court of Appeal considered but did not determine whether, as a matter of principle, a vesting date could be varied retrospectively. However, the variation clause in the trust deed for the Nemeske Family Trust provided that ‘no such power of variation shall extend to the trusts hereof in relation to the income of the Trust Fund derived up to the date of exercise of such power of variation’. The Court concluded this clause prevented any variation that altered the trusts in relation to income derived before the exercise of the power. As the retrospective variation of the vesting date would alter the terms of the trust in relation to income derived prior to 3 May 1994, being the date of the purported resolution to vary the vesting date, it was not valid exercise of the variation power for the Nemes Family Trust. High Court Appeal The Fischers subsequently appealed the decision of the Court of Appeal to the High Court and the decision was handed down on 6 April 2016. A majority of the High Court accepted that the intention of the resolution was to distribute an amount equal to the balance of the Asset Revaluation Reserve to Emery Madeleine and to create an immediate debt owing to them. This intention was confirmed by the subsequent treatment in the Beneficiaries Accounts and Balance Sheet for the Nemes Family Trust. The majority of the Court considered that the creation of a debt to be satisfied out of the property of the trust was a means of effecting an ‘advance’ and ‘application’ of capital and therefore was within the power created by clause 4(b). French CJ and Bell J stated as follows: It was not in dispute that the resolution of 23 September 1994 was badly worded. It seems likely that it was framed by reference to declarations of dividends payable by companies, which create debts due to their shareholders. There was no fund represented by the Asset Revaluation Reserve from which to make a distribution to give effect to the resolution. The text of the resolution, however, disclosed a clear intention, indicated by the use of a form of words appropriate to the declaration of a dividend, to create a debt due by the Trustee to Mr and Mrs Nemes to the extent of the amount shown in the accounts of the Trust relating to the Asset Revaluation Reserve. The entry in the accounts was an action by the Trustee which further demonstrated and gave effect to its intention. COMMENT – despite the majority decision of the High Court being that the appointment was validly supported by the powers in clause 4(b) of the Trust Deed, two judges in the High Court disagreed with that conclusion. The problem in this case was that under the power of appointment there were only limited means by which income or capital could be appointed. To avoid requiring a wide construction by the courts, such clauses should be drafted to account for the wide variety of ways that a trustee may wish to appoint income or capital. TIP - an amount equal to the balance of the Asset Revaluation Reserve can be validly appointed as income or capital so long as it falls within the powers of appointment in the applicable trust deed. Whilst the Court adopted a liberal interpretation of the resolution in this case, supported by the subsequent treatment in the accounts, resolutions to appoint the balance of an Asset Revaluation Reserve should be drafted with care. Importantly, the resolution should be appointing an ‘amount equal to the reserve’, or such similar words, rather than purporting to appoint the reserve itself. Citation Fischer v Nemeske Pty Ltd [2015] NSWCA 6 (Beazley P; Barrett JA and Ward JA) w http://www.austlii.edu.au/au/cases/nsw/NSWCA/2015/6.html Citation Fischer v Nemeske Pty Ltd [2016] HCA 11 (French CJ, Kiefel, Bell, Gageler and Gordon JJ) w http://www.austlii.edu.au/au/cases/cth/HCA/2016/11.html Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 7 1.2 Metricon QLD – entitlement to primary production exemption Facts Metricon Qld Pty Ltd is a property developer. In 2008 and 2009, Metricon purchased seven parcels of undeveloped rural land located at Terranora in the Tweed Valley that had recently been rezoned for urban development. The land was acquired by Metricon for the purpose of future residential development. For each of the land tax years in question (2009-2013 inclusive) no development works had commenced on the land but Metricon had carried out preliminary activities to obtain development approval. From April 2009, the land was used by farmers for cattle-grazing operations under an agistment agreement. The Chief Commissioner of State Revenue issued land tax assessments for the 2009, 2010, 2011, 2012 and 2013 years on the basis that the land was not eligible for the primary production exemption. Metricon sought a review of these assessments on the basis that they were entitled to the primary production exemption. Issue Whether Metricon is entitled to a land tax exemption on the basis that certain lands included in the notices of assessment as being taxable were exempt from taxation because their dominant use was for primary production. If so, Metricon would be exempt from land tax. Decision The NSW Supreme Court held that primary production was the dominant use for the land, except for one parcel in one tax year. The Chief Commissioner argued that the dominant use of the land was not for the maintenance of cattle when compared with competing uses of the land being the land bank of Metricon that was held for the purpose of being developed and resold for profit. The court rejected this argument, concluding that while the land may have been held for such a purpose it was not being used for that purpose: ‘A 'use' for the purposes of s10AA must be a current use, not an intended future use. It does not follow that Metricon was using the land because it had acquired it for the purposes of residential development and the land formed part of its 'land bank'… ‘ This was despite the fact that Metricon had carried out activities necessary to obtain development approval (spending approximately $2.2million in consultancy fees). The NSW Supreme Court set aside the assessments of land tax and established that Metricon were entitled to the primary production exemption. TIP – the fact that land is being ‘held’ for a certain purpose does not mean that it is being ‘used’ for that same purpose for Land Tax. Importantly here, there were not substantial works being done on the land in the period considered by the Court as that would have been ‘use’ for a purpose other than primary production. Citation Metricon Qld Pty Limited v Chief Commissioner of State Revenue (No. 2) [2016] NSWSC 332 (White J, Sydney) w http://www.austlii.edu.au/au/cases/nsw/NSWSC/2016/332.html Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 8 1.3 Rigoli – discharging onus in AAT Facts Mr Rigoli was a partner in a partnership that carried on a business of manufacturing and sale of polystyrene boxes. Mr Rigoli failed to lodge income tax returns for the years ending 30 June 1994 to 2001. In January 2002, the Commissioner issued default assessments in relation to those years. Mr Rigoli objected to the default assessments issued by the Commissioner and the Commissioner disallowed the objections in part. The Commissioner's reasons for the objection decisions referred to an analysis of the gross income, expenses and change in net assets of the partnership based on documents and information available to the ATO. Mr Kompos, a director of accounting firm Ferrier Hodgson, was engaged by the Commissioner to prepare an analysis for the years ended 30 June 1994 to 1997. The ATO's auditor was then instructed to use Mr Kompos' methodology in relation to the preparation of an analysis for the years ended 30 June 1998 to 2001. The reasons noted that as Mr Rigoli was a partner in a partnership, Mr Rigoli was liable to include in his assessable income his interest in the partnership net income and was entitled to a deduction for his share of the partnership loss. After taking into account diesel fuel rebates, benefits received from Centrelink and capital gains, the reasons set out the amounts considered to be Mr Rigoli's taxable income for each of the years of income. Mr Rigoli applied to the AAT for a review of the objection decisions. The evidence at the Tribunal included an opinion by Mr Kompos in relation to the ATO auditor's analysis of the 1998 to 2001 years (the Kompos Report). Mr Rigoli accepted the Commissioner's estimate of his income and submitted the only remaining issue was that depreciation expenses ought to have been taken into account. On 1 November 2012, the Tribunal held the objection decisions were incorrect as they disallowed the depreciation expenses and remitted the matter to the Commissioner for reassessment taking into account the depreciation expenses. The Commissioner appealed to the Federal Court on a question of law. The judge held that the Tribunal erred in concluding that Mr Rigoli had discharged the burden of proving the Commissioner’s assessments were excessive by allowing Mr Rigoli to concede some elements upon which the assessments were made (i.e. the Kompos Report) and allowing Mr Rigoli to establish a claim for depreciation allowance. The Tribunal's decision was set aside and the proceeding remitted to the Tribunal. Mr Rigoli appealed from that judgment to the Full Court of the Federal Court and the appeal was dismissed. The Full Court also ordered that the remitted proceeding be heard and determined on the evidence before the Tribunal in its 1 November 2012 decision. On 24 March 2015, the Tribunal decided the objection decisions should be affirmed for the following reasons:  To discharge the onus of proving that the assessment was excessive, the taxpayer must prove, on the balance of probabilities, that he or she did not derive from any source taxable income to the amount of the assessment (George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183], at 189);  Mr Rigoli failed to adduce evidence of the amount/source of his income in the relevant years and simply sought to rely on the Kompos Report. The Kompos report was not intended and did not establish the actual taxable income of the taxpayer from all sources for the income years in question. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 9 Mr Rigoli appealed to the Federal Court and lost. He then appealed to the Full Court of the Federal Court contending that the primary judge erred as follows:  in finding that the Tribunal did not deny Mr Rigoli the opportunity of relying on evidence produced by the Commissioner as a means of discharging Mr Rigoli's burden of proof;  in not finding that the Tribunal erred in finding that Mr Rigoli was required, before the s14ZZK(b) TAA 1953 burden could be discharged, to prove he did not derive from any source taxable income to the amount of each assessment and that there was no other possible source (aside from those asserted in the Kompos Report) from which Mr Rigoli could have derived taxable income  in not finding that the Tribunal erred in not finding that Mr Rigoli could rely on the Kompos Report or Mr Rigoli's evidence regarding depreciation claimed as sufficient to establish a basis to draw an inference as to Mr Rigoli's taxable income for the 1994 to 2001 income years and prove the assessments were excessive Issue Was the Federal Court wrong in upholding the AAT decision? Decision The Court concluded that the Tribunal: …is to be understood as saying, not that the taxpayer could not rely on the Kompos report because it was not evidence led by the taxpayer, but rather that it was insufficient to discharge the burden on the taxpayer of establishing his actual taxable income… …[the Tribunal's] statement that ‘Mr Rigoli did not adduce any evidence of the amount or source of his income for any [of] the income years in issue’ was merely recording the fact that the taxpayer had not, through his own evidence, sought to establish his actual taxable income from all sources; it was not saying that such evidence needed to be adduced by him….. … the Tribunal was not excluding the report from consideration because it was not evidence led by the taxpayer, but rather was saying that it was insufficient to establish his actual taxable income from all sources… It was the Court's view that the Tribunal did not seek to exclude the Kompos Report from consideration because it was not led by the taxpayer but rather the Tribunal was saying that the Kompos Report was insufficient to discharge the burden on the taxpayer. The Court held that the Tribunal's conclusion that the Kompos Report was insufficient to establish the taxpayer’s actual taxable income from all sources was a finding of fact open to the Tribunal to make. The Tribunal did not adopt an incorrect approach as to what the taxpayer needed to prove to discharge his burden of proof but rather concluded that the material relied on by the taxpayer was insufficient to discharge his burden of proof. COMMENT – a taxpayer is permitted to rely on evidence led by the Commissioner in the Tribunal without adducing its own evidence. However, unless such evidence establishes that the assessment(s) were excessive, such an approach is unlikely to be sufficient for the taxpayer to have discharged its burden. If the evidence adduced by the Commissioner does not cover the taxpayer's actual taxable income from all sources for an income year, it would be open for the Tribunal to conclude that the taxpayer has not discharged its onus of proving that the Commissioner's assessment was excessive. Citation Rigoli v Commissioner of Taxation [2016] FCAFC 38 (Kenny, Davies and Moshinsky JJ, Victoria) w http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/38.html Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 10 1.4 Falvo – principal place of residence Facts Ms Falvo was a successful applicant for a First Home Owner Grant and a First Home Owner Boost (the FHO Grant) when she acquired a property in Collaroy. On 18 November 2009, Ms Falvo received a $14,000 FHO Grant. On 22 December 2009, Ms Falvo acquired the Collaroy property from a company, whose directors and shareholders were Ms Falvo's parents. On 21 July 2014, the Commissioner issued an assessment to Ms Falvo requiring her to repay the FHO Grant and a 60% penalty on the basis that Ms Falvo had failed to satisfy the residence requirement to be entitled to the FHO Grant. The residence requirement, contained in Part 2 of Division 2 of the relevant Act, provided: 12 Criterion 5 – Residence requirement (1) An applicant for a first home grant must: (a) commence occupation of the home to which the application relates as the applicant’s principal place of residence within 12 months after completion of the eligible transaction or the period approved by the Chief Commissioner under this section, and (b) occupy the home as a principal place of residence for a continuous period of at least 6 months or the period approved by the Chief Commissioner under this section. On 16 September 2014, Ms Falvo lodged an objection to the assessment on the basis that she had ‘lived in the property but (had) rented rooms out that were not needed by me throughout my entire ownership.’ The Commissioner disallowed the objection on 8 October 2014 and Ms Falvo filed an application for review of the Commissioner's assessment on 8 December 2014. Ms Falvo gave evidence she commenced her occupation from 31 December 2009, when her personal effects were moved into the Collaroy property. During this time, Ms Kruse (who had a previous tenant/landlord relationship with Ms Falvo's parents) also occupied the property and paid rent directly to Ms Falvo's parents. Ms Falvo stated that rent was paid directly to her parents and not to Ms Falvo to offset a loan Ms Falvo owed her parents. It was Ms Falvo's evidence was that there was an agreement with Ms Kruse that Ms Falvo and Ms Kruse 'share' the Collaroy property. Ms Falvo gave evidence of her occupation of the Collaroy property stating that Ms Falvo was absent from the Collaroy property during the day as worked office hours and after work, as she attended the gym, collected food, prepared dinner at her boyfriend's house but would return to the Collaroy property between 12am and 3am each day. Ms Falvo would sleep at the Collaroy property until 7am (and the above schedule would repeat). It was also Ms Falvo's evidence that Ms Kruse worked through the night and thus the two rarely met. During this time, Ms Falvo did not change her address on her driver's license or on the electoral roll to the Collaroy property although she did produce bank statements, a phone statement and electrical power invoice which were addressed to Ms Falvo at the Collaroy property. Ms Kruse denied there was any agreement with Ms Falvo to share the Collaroy property and that Ms Falvo did not occupy any of the rooms as these were all occupied by either Ms Kruse or sublet to other tenants during the relevant time. Ms Kruse's evidence was corroborated by two sub-tenants who had occupied the Collaroy property at the relevant time. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 11 Issue Did Ms Falvo occupy the residence as her principal place of residence for a continuous period of six months? Decision The Tribunal concluded that Ms Falvo did not occupy the residence as her principal place of residence and affirmed the Commissioner's assessment on two grounds. The Tribunal wasn’t satisfied that Ms Falvo was residing in the Collaroy property as she claimed. The Tribunal noted that two independent witnesses – Ms Kruse and Ms Burgess (a sub-tenant) had both stated that Ms Falvo wasn’t residing at the Collaroy property, they had been available for crossexamination and Ms Falvo did not challenge their evidence. Ms Falvo was unable to provide any independent evidence that she had actually used the room at the Collaroy property during the relevant period. Also, her boyfriend (and current husband) did not provide any evidence to support her assertions that she left his house at odd hours to return to her Collaroy property. The Tribunal noted that as 'principal place of residence' is undefined in the relevant Act, it must take its ordinary meaning. In the Ferrington case, the Appeal Panel noted: to occupy as his or her principal place of residence a person’s occupation must have a degree of permanence to it: a connection to a place of residence of transient, temporary, contingent or passing nature is not sufficient, nor occupation for any other reason. The Tribunal concluded that even if Ms Falvo's evidence established that she had occupied the Collaroy property for 3 to 4 hours each day, this did not satisfy the residence requirement. Merely sleeping at a place is not sufficient to establish a principal place of residence. The Tribunal also noted that, even if it were to accept that there was an agreement between Ms Falvo and Ms Kruse to allow Ms Falvo to occupy a room, Ms Falvo's occupation would not have been as a first home-owner but as a mere licensee. In the Flaracos case, Justice Gzell stated: On the findings I have made I am of the view that the plaintiff was in occupation of the Peakhurst premises. Notwithstanding the contemporaneous presence of a tenant, it was the plaintiff who maintained control over the premises. This was not a case in which the premises were handed over to a tenant who thereby obtained exclusive possession of them. To establish that Ms Falvo occupied the Collaroy property as her principal place of residence, Ms Falvo would have to establish that she maintained exclusive possession and control of the property and not just one room. The evidence demonstrated that it was Ms Kruse who always maintained exclusive possession of the Collaroy property. COMMENT – applicant owners who wish to obtain the FHO Grant whilst occupying property with a tenant have a greater burden of proof compared with applicant owners who solely occupy a property. To be successful, such an applicant would need to demonstrate that they maintain exclusive possession and control notwithstanding the existing tenant, that their occupation of the property goes well beyond use as a sleeping quarters and that there are independent, unrelated parties who are in a position to verify this occupation. Citation Falvo v The Chief Commissioner of State Revenue [2016] NSWCATAD 51 (SM A Verick, Sydney) w https://www.caselaw.nsw.gov.au/decision/56e0fc6ee4b0e71e17f500ca Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 12 2 Legislation 2.1 Progress of legislation Title Introduced House Passed House Introduced Senate Passed Senate Assented Superannuation Legislation Amendment (Trustee Governance) 2015 16/9 20/10 9/11 Tax and Superannuation Laws Amendment (2015 Measures No 3) 2015 27/5 17/6 18/6 Tax and Superannuation Laws Amendment (2016 Measures No 1) 2016 10/2 3/3 16/3 Tax and Superannuation Laws Amendment (2016 Measures No 2) 2016 17/3 Tax Laws Amendment (New Tax System for Managed Investment Trusts) 2015 3/12 10/2 22/2 Tax Laws Amendment (Small Business Rollover) 2016 4/2 22/2 23/2 29/2 8/3 Tax Laws Amendment (Tax Incentives for Innovation) 2016 16/3 Tax Laws Amendment (Tougher Penalties for Country-by-Country Reporting) 2016 29/2 Treasury Legislation Amendment (Repeal Day 2015) 2015 12/11 16/3 16/3 2.2 TSLAB2 2016 On 17 March 2016 Government introduced the Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill. The bill contains four measures, which, briefly:  Provide the Commissioner with a statutory remedial power to make a modification to income tax law if it does not achieve its intended purpose or object;  Allows primary producers who have opted out of averaging to re-enter the system 10 years or more after they have opted out (currently opting out is permanent);  Provide relief from luxury car tax where certain public institutions, such as museums, import or acquire luxury cars for the sole purpose of public display;  Make other minor modifications to the law. w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome% 2Fr5645%22 2.3 Tax Incentives for Innovation Bill The March Tax Training Notes outlined details of proposed tax incentives for investments in early stage innovation companies. At the time, the full details of the proposed incentives had not been released. On 16 March 2016 the Government introduced into Parliament the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016. The Bill introduces tax incentives for investments in qualifying early stage innovation companies and amends the current regimes for venture capital limited partnership and early stage venture capital limited partnerships. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 13 2.3.1 Early stage innovation measures The qualifying early stage innovation measures introduce tax incentives for investments in qualifying early stage innovation companies: 1. a non-refundable carry forward tax offset of up to 20% of the amount invested but subject to the following restrictions: (a) for sophisticated investors, as defined in the Corporations Act 2001 (Cth) – the tax offset is capped at $200,000 per year for each investor and their affiliates; and (b) for non-sophisticated investors, as defined in the Corporations Act 2001 (Cth) – the amount invested in one innovative start up company cannot be more than $50,000. If the amount invest exceeds $50,000, the investment in that company is not entitled to the tax incentives at all. 2. the shares are deemed to be held on capital account with a CGT exemption for the sale of shares in a qualifying early stage innovation company where the shares are held for at least 1 year and less than 10 years. Where the shares are held for longer than 10 years, the cost base of the shares are reset at market value at 10 years. The rationale given for why non-sophisticated investors are not able to invest more than $50,000 is that this will protect vulnerable investors. An example of the offset from EM is as follows: During the 2016-17 income year, Michael (a sophisticated investor) is issued with $3,000,000 of shares in Shar Rock Services Co (which is a qualifying ESIC immediately after that time). Subject to meeting the other eligibility requirements, Michael is eligible to claim a tax offset of $200,000 in relation to those shares for 2016-17 (whilst 20 per cent of $3,000,000 is $600,000, the value of the offset is capped at $200,000). However, Michael does not have a tax liability in 2016-17, so the tax offset is of no value to him in that income year. Michael may carry forward the $200,000 offset to apply against his income tax liability in 2017-18. Michael can only carry forward the portion of the tax offset that he is entitled to and has not used in the current income year ($200,000 and not the full $600,000). The remaining $400,000 that does not qualify for the tax offset in the 2016-17 income year is not carried forward for use as a tax offset in any future income years. The entitlement to the tax off-set for an investment by a trust or partnership is subject to special rules to ensure that the 20% total off-set is appropriately shared between beneficiaries and trustee, for a trust, and the partners, for a partnership. There are rules to prevent the tax offset being claimed where the innovative start up company is an affiliate of the investor, or where the investor and any entities ‘connected with’ the investor hold more than 30% of the shares in the start-up company (tested after the acquisition). 2.3.2 Qualifying early stage innovation companies There are conditions that must be met in order for a company to be a qualifying early stage innovation company. These conditions are for the purpose of ensuring the company is at an early stage (the early stage limb) and is carrying on activities that are sufficiently innovative (the innovation limb). These conditions must be met at the time the investor acquires the shares in the company. The early stage limb The conditions for this limb are as follows: 1. the company needs to be an Australian-incorporated company; and Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 14 2. the company needs to have been: (a) incorporated within the last 3 years; or (b) if not incorporated within the last 3 years, then either: (i) it was incorporated within the last 6 years and across the last 3 income years (including current year of income) it and its wholly owned subsidiaries incurred total expenses of $1 million or less; or (ii) it was registered in the Australian business register within the last 3 years; 3. the company and any of its wholly-owned subsidiaries must have not incurred ‘total expenses’ of more than $1,000,000 in the previous income year; 4. the company and any of its wholly-owned subsidiaries must have derived assessable income of no more than $200,000 in the previous income year; and 5. it is not listed on a stock exchange. The innovation limb This limb requires that the company be ‘developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return’. You can assess whether this test is met by applying either a specific statutory criteria or by applying a principles based definition as follows: 1. specific statutory criteria – the Bill lists a number of factors and ascribes points to those factors. If the company has at least 100 points it meets to the innovation limb. Examples of some of the factors are as follows: (a) at least 50 per cent of its total expenses in previous income year are eligible for the R&D tax offset – 75 points; (b) between 15 to 50 per cent of its total expenses for previous income year are entitled to R&D tax off-set – 50 points; (c) it has received an Accelerating Commercialisation Grant – 75 points; (d) completed or undertaking eligible accelerator programme – 50 points; (e) a third party has previously (at least 1 day before) paid at least $50,000 for issued shares in the company – 50 points; and (f) it has one or more enforceable rights on an innovation through a standard patent or plant breeder’s right that has been granted, within the last 5 years, in Australia or an equivalent intellectual property right granted in another country – 50 points. 2. the principles based test – to pass the principles based test the company must: (a) be ‘genuinely focussed on developing for commercialisation one or more new, or significantly improved, products, processes, services or marketing or organisational methods’ – the EM provides the following example: Example 1.4 PAM One Co is a start-up clothing company that has developed a new organisational method where the company utilises an integrated crossfunctional structure resulting in reduced response times to shifting customer styles. PAM One Co has also identified that the company’s addressable market is the Australian market. As existing clothing companies in PAM One Co’s Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 15 addressable market are typically organised around individual functions, the integrated cross-functional structure is new to that addressable market. As a result, PAM One Co has developed a new or significantly improved organisational method. The EM cites the customisation of current products, minor extensions such as updating existing equipment or software, changes to pricing strategies as examples of changes that are unlikely to satisfy the significant improvement threshold; and (b) show that the business relating to that innovation: (i) has the potential for high growth – the EM distinguishes high-growth companies from typical small to medium enterprises from typical small to medium enterprises such as cafes, local retail stores, local service providers that service a single local market; (ii) has scalability – the EM states that the company needs to demonstrate it has potential to scale its business and here scale appears to be about declining marginal costs; (iii) can address a broader than local market – the EM explains that this requirement means that company must have the potential to address a market that is broader than a local city, area or region. There does not need to be a serviceable market at the test time; and (iv) has competitive advantages – the EM again states that this requirement is concerned with potential rather than already existing at the test time. It is open to an investor to self-assess whether the principles based requirements can be met or to apply to the ATO for a ruling. 2.3.3 Part IVA The Bill specifically provides that Part IVA will apply where taxpayers obtain tax benefits through the innovative start up measures where a scheme is entered into or carried out for the purpose of creating a circumstance or a state of affairs that is necessary to make the election to apply the measures. 2.3.4 Commencement If the Bill becomes law it is proposed to commence in relation to shares issued on or after the later of 1 July 2016 or the day the Bill receives Royal Assent. w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome% 2Fr5648%22 2.4 Intangible asset write-offs Government has issued an Exposure Draft Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016: Intangible asset depreciation which proposes to amends the ITAA 1997 to provide a choice to either self-assess the effective life of certain intangible depreciating assets or use the statutory effective life in working out the decline in value. The intangible assets to which this choice applies are:  a standard patent;  an innovation patent;  a petty patent;  a registered design;  a copyright (except copyright in film);  a licence (except one relating to a copyright or in-house Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 16  software);  a licence relating to a copyright (except copyright in a film);  an in-house software;  a spectrum licence;  a datacasting transmitter licence; and  a telecommunications site access right. The new law also allows the taxpayer to recalculate the effective life in later income years if the effective life the taxpayer has been using is no longer accurate because of changed circumstances relating to the nature of the asset’s use. If the cost of the asset increases by at least 10 per cent in a later income year the taxpayer must recalculate the effective life of the asset. The new rules will apply eligible intangible depreciating assets that an entity starts to hold on or after 1 July 2016. COMMENT – the important part of this change will be in relation to copyright. At present copyright has a statutory effective life of the lesser of 25 years or the remaining term of the copyright. This means that non-SBEs have had to depreciate software costs over 25 years in most instances, even though the software may well become obsolete over a far shorter period. w http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/NISA-intangible-assetdepreciation 2.5 Draft Bill to enact Australia/Germany tax treaty Treasury has released a draft Bill to give effect to the new treaty between Australia and Germany signed on 12 November 2015. This treaty replaces a previous double taxation agreement between Australia and Germany signed in 1972. The treaty also gives effect to the OECD/G20 Base Erosion and Profit Shifting (BEPS) recommendations. The treaty will enter into force after both countries have completed their respective domestic requirements and instruments of ratification have been exchanged. In relation to the withholding tax rates the new treaty differs from the old in that:  No source country tax is payable on intercorporate dividends where the beneficial owner of those dividends is a company (other than partnership) that is a resident of the other country which holds directly at least 80 per cent of the voting power of the paying company throughout a 12 month period, subject to certain conditions.  A 5 per cent limitation applies to intercorporate dividends where the beneficial owner of those dividends is a company (other than a partnership) that is a resident of the other country that holds directly at least 10 per cent of the voting power of the company paying the dividends throughout a specified 6 month period.  With respect to royalties, the rate limit on source country taxation is 5 per cent. The definition of ‘royalties’ excludes payments or credits in respect of the use of, or the right to use, industrial, commercial or scientific equipment. w http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Tax-treaty-betweenGermany-and-Australia Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 17 3 Rulings 3.1 TR 2016/D1 – Website expenditure The ATO has issued Draft Taxation Ruling TR 2016/D1 outlining its views as to the deductibility of a expenditure on a commercial website which was previously addressed in TR2001/6. The draft ruling outlines the position as to when expenditure on a website will be: 1. revenue and therefore deductible; 2. capital and therefore not deductible unless it is a depreciating asset; 3. ‘in-house software’ such that it is treated as a depreciating asset and deductible over 5 years. A key difference under TR2016/D1 from the approach in TR2001/6 is that the Commissioner previously allowed the cost of content creation to be deductible, but he now considers that it is either part of the cost of the software, or, if it has independent value, it will be a capital asset. Revenue or Capital? The Commissioner's position on how website is treated can be summarised as follows: 1. Prior to carrying on business – expenditure incurred on commercial websites prior to the carrying on a business forms part of the cost of the depreciating asset and has the following consequences: (a) the decline in value and adjustable value are calculated at time of acquisition, irrespective of when it is first used in carrying on a business; and (b) deductions for decline in value are not available until a business commences to be carried on. 2. Acquiring or developing a website – expenditure on developing or acquiring a website for a new or existing business is capital. Where the expenditure relates directly to commercial website, it is expenditure on ‘in-house software’ and not deductible outside the capital allowance regime. 3. Maintaining a website – maintaining a website is revenue in nature but the ATO makes a distinction between maintenance and modifications that go beyond maintenance. The distinction is matter of fact and degree. The ATO considers that the following modifications are maintenance and therefore deductible: (a) modifications that that preserve but do not alter the functionality of the website, improve the efficiency of the functions of the website or extend its useful life; and (b) modifications that add minor functionality or minor enhancements to existing functionality. 4. Modifying a website – the ATO considers that there a number of factors should be considered in determining whether a modification has the character of capital, including the role of the website in the business, the nature of the modifications, the size and extent of modifications, the resources involved and expected useful life of the modification. The ATO notes that expenditure to enable a website to be viewed correctly through new mobile devices, browsers or operating systems will usually be revenue in nature. 5. Content migration – the ATO considers expenditure on content migration in establishing a website is capital. Where content migration is undertaken in relation to an existing website that does not significantly enhance or replace the website, the expense is revenue in nature. 6. Social media – the ATO considers expenditure on establishing a social media presence to be capital whereas expenditure incurred in maintaining such a presence is revenue and deductible. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 18 In-house software The Commissioner considers that in-house software includes: 1. software on the website to improve the businesses interaction with the user, rather than software that the user will use for their own benefit – an example would be software enabling instant messaging with the user; 2. software to be downloaded on a user's device where it is solely for the purpose of improving interaction with the business – an example would be an internet banking application on a mobile device; and 3. content that is incidental to the website and has no independent value to the business. TR2016/D1 provides a number of examples outlining the Commissioner's position. We have extracted some of the key ones below. Example 4 - existing business establishes a basic website (from ruling) Eve has owned Fashion from Eden, a suburban boutique for many years. She decides to establish a website and engages a web developer. The developer sources the domain name, designs the website and arranges hosting. The total establishment cost is $2,500. Eve makes a series of progress payments while the website is being constructed. Additionally, the web developer agrees to make content updates as needed. Eve's regular ongoing costs are domain name registration and server hosting. The website is a single page, containing:  the business name and contact details,  opening hours,  some promotional text identifying clothing brands sold,  a subscription facility for promotion and sales emails, and  links to the business's social media pages. There is no online sales facility. The website requires updating only when the business's details change. In 2015, the business wins a local business award and has the website content updated to display this. The website is an enduring feature of the business, established to promote the business in new markets and attract new customers. It is more than a transitory advertisement; it is a modern equivalent of a hoarding. The expenditure incurred to create the website is a capital expense. The progress payments retain their capital nature despite the payments being made by instalments. However, any developer fees for content updates with transitory benefit, such as the reference to the local business award, are of a revenue nature. The website is a depreciating asset; it is software used by the business in the business to perform the function of increasing brand awareness. It is 'in-house software' and depreciable under the capital allowances provisions. (Return to paragraph 19 of this draft Ruling) Example 11 - business website - back-end upgrades (from ruling) TBug Limited carries on a business of on-line travel bookings. The company upgrades its website architecture to increase its business efficiency. The upgrade is expected to reduce response times for users, enhance the efficiency of storage, enable future functionality improvements and reduce maintenance costs. It is expected not to need further major upgrade for at least two years. The appearance and functionality of the website for users will not change. The upgrade is specifically planned and budgeted, including: Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 19  engaging IT staff and consultants to present options to the Board  constructing a beta (parallel) website for testing  release and troubleshooting, and  post-deployment monitoring, analysis and reporting. The website is integral to the income-earning operations of the business. The improvement of the website's efficiency through the back-end upgrade goes beyond the ordinary operation of the business. The project planning, specific provisioning in the budget and involvement of the Executive indicate this project is to provide significant structural enhancement to the business. Expenditure on the upgrade is capital expenditure, and deductibility is worked out under Division 40 because the upgrade is part of the cost of 'in-house software'. Example 20 - software - not part of a website (from ruling) BigSystems Ltd owns the rights to a popular operating system and associated suite of software applications. Historically, BigSystems has exploited these products for profit by licensing their installation on customer devices but more recently has introduced a subscription service. BigSystems markets the applications both as a suite and individually, releases new versions of the products from time to time and provides regular security, debugging and minor enhancement updates online. BigSystems introduces Nebula, a browser-based service containing light versions of some of its more widely-used applications. Users sign in to Nebula on the BigSystems website and use the applications online through BigSystems' servers. Fully functional versions of these applications are available by subscription or as one-time purchases. Nebula is provided free of charge. BigSystems provides Nebula mainly to users to use for their own benefit and not as a means of further interaction with users. The character of the software is indistinguishable from the versions that BigSystems exploits for profit by subscription or sale. Nebula is not part of BigSystems' website and is not 'in-house software'. ATO reference TR 2016/D1 w http://law.ato.gov.au/atolaw/view.htm?DocID=DTR/TR2016D1/NAT/ATO/00001&PiT=99991231235958 Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 20 4 ATO Materials 4.1 PCG 2016/D1 – Practical Compliance Guidelines On 16 March 2016 the Commissioner issued Draft Practical Compliance Guideline PCG 2016/D1 outlining the Commissioner’s approach to provide advice and guidance to taxpayers to assist them in complying with the tax laws. Practical Compliance Guidelines PCG2016/D1 provides that Practical Compliance Guidelines will be issued by the ATO and will be the principal source of compliance guidance provided by the ATO. PCG 2016/D1 states that an example of a Practical Compliance Guideline is an administrative safe harbour and the resource allocation decisions consistent with the safe harbour approach. Such decisions will be expressed in Practical Compliance Guidelines. Relationship with Law Administration Practice Statements PCG2016/D1 notes that there is a key distinction between Law Administration Practice Statements and Practical Compliance Guidelines. Practice Statements are intended for ATO staff and their main purpose is to provide instructions to staff on the manner of performing law administration duties. Practical Compliance Guidelines are intended for taxpayers and their main purpose will be to provide broad law administration guidance to taxpayers. Status of Practical Compliance Guidelines PCG2016/D1 states that Practical Compliance Guideline, unlike Public Rulings, will not be prepared for the primary purpose of expressing a view on the law. Rather, they represent how the ATO will allocate resources and the administrative approach to be adopted by the ATO to mitigate practical difficulties in the operation of tax laws. Whilst PCG2016/D1 does not rule out that Practical Compliance Guideline may also be a Public Ruling, it states that they generally will not. The ATO caution from this is that Practical Compliance Guidelines will not provide taxpayers with the legislative protection afforded by the rulings system. ATO reference PCG2016/D1 w https://www.ato.gov.au/law/view/document?DocID=COG/PCG20161/NAT/ATO/00001&PiT=9999123123 5958 4.2 PCG 2016/5 – LRBAs and arm's length terms Practical Compliance Guideline PCG 2016/D5 considers the application of the non-arm's length income provisions in section 295-550 of ITAA1997 which apply to remove the tax concessional treatment of the ordinary or statutory income derived from an asset held by a superannuation fund if the terms of the LRBA are not consistent with an arm's length dealing. PCG2016/D5 sets out two safe harbour arrangements for the purpose of the non-arm’s length provisions. One where the asset acquired is real property and the other where the asset acquired is a collection of listed shares or units. Safe harbour for real property The ATO accepts that an LRBA used to acquire real property, or to refinance a borrowing used to acquire real property, is consistent with an arm's length dealing if the terms of the borrowing are as follows:  interest is rate consistent with RBA Lending Rates for banks providing standard variable home loans for investors. For 2015-16, the applicable rate is 5.75%; Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 21  the interest rate may be variable or fixed o if variable, the applicable rate set out above is used for the loan; o if fixed, trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 5 years, using the RBA rate for the May before the relevant financial year;  the term of the loan should not exceed 15 years. Where the loan is re-financed, the new loan must not exceed 15 years less the duration of the previous loans;  there should be a maximum 70% loan to market value ratio;  a registered mortgage over the property is required;  a personal guarantee is not required;  repayments should be monthly with each repayment including both principal and interest; and  a written and executed loan agreement is required. Safe harbour for listed shares and units The ATO accepts that an LRBA used to acquire a collection of listed shares or units is consistent with an arm's length dealing when:  interest is rate consistent with RBA Lending Rates for banks providing standard variable home loans to investors + 2%. For 2015-16, the applicable rate is 5.75% = 2% = 7.75%;  the interest rate may be variable or fixed; o if variable, the applicable rate set out above is used for the loan; o if fixed, trustees may choose to fix the rate at the commencement of the arrangement for a specified period, up to a maximum of 3 years, using the RBA rate for the May before the relevant financial year + 2%;  the term of the loan should not exceed 7 years. Where the loan is re-financed, the new loan must not exceed 7 years less the duration of the previous loans;  there should be a maximum 50% loan to market value ratio;  a registered charge or similar security should be provided;  a personal guarantee is not required;  repayments should be monthly with each repayment including both principal and interest;  a written and executed loan agreement is required. That a LRBA does not comply with the requirements set out in PCG2016/D5 does not mean that the LRBA will on non-arm's length terms. However, SMSF trustee will not be able to take advantage of the safe habour in PCG2016/D5 and will need to otherwise establish that the LRBA is an arm's length dealing. LRBAs for 2014-5 and prior income years Where a LRBA was in place for the 2014-15 income year or prior years, SMSF trustees have the opportunity to review the terms of those LRBAs before 30 June 2016 and can avoid having to report NALI for those years by:  altering the terms of the loan to meet guidelines;  refinancing a related party loan through a commercial lender; and/or  repaying the loan to the related party, and bringing the LRBA to an end before 30 June 2016. The ATO ask that trustees who cannot bring their arrangements within what they consider to be commercial terms by 30 June 2016 contact them. COMMENT – the ATO are not asking that older LRBAs be brought up to date with catchup payments of principal and interest, only that the 2016 arrangements are on commercial terms or wound up by 30 June 2016. This PCG is necessary given the two ATO IDs reported in last months tax training notes, in which the ATO indicated that loans on non-commercial terms could give rise to all of the income from an asset funded by such a loan being treated as NALI. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 22 ATO reference PCG 2016/5 w https://www.ato.gov.au/law/view/document?DocID=COG/PCG20165/NAT/ATO/00001&PiT=9999123123 5958 4.3 LCG 2016/D2 – Small Business Restructure Rollover LCG2016/D2 outlines the consequences and adjustments that occur when the Small Business Restructure Rollover (SBRR) is chosen in relation to the following examples: 1. restructure from company to discretionary trust; 2. restructure from partnership to company – cost base of share 3. capital loss on shares attributable to transfer of asset; 4. transfer of assets that form a small business pool; 5. FX Loan; and 6. subsequent debt forgiveness. The ATO intend that this guidance will become a public ruling following consultation. We outline the approach in LCG2016/D2 to examples 1, 2, and 6. Restructure from company to discretionary trust (from LCG) LCG2016/D2 provides an example involving Pep and Sally, a married couple, who hold all the shares in Vitamin Pty Ltd. Vitamin has the following active assets:  a small consulting room, which was acquired by Vitamin Pty Ltd for $200,000 in 2010 and which now has a market value of $230,000;  a pill press, with an adjustable value of $14,000;  self-generated goodwill; and  50 bottles of homeopathic pills, which were made and processed by Pep and Sally, and became Vitamin trading stock during the income year at a cost of $250. Vitamin has liabilities of $24,000. Pep and Sally establish a discretionary trust, the P&S Trust, and Vitamin transfers all of its assets to the P&S Trust in consideration for the P&S Trust discharging its liabilities. A family trust election is made nominating Pip. Vitamin and the trustee of P&S Trust choose to apply the SBRR. The direct tax consequences for transfer of assets are:  No capital gain or loss from transfer of room or goodwill;  No assessable income or deduction for balancing adjustment event for pill pressing machine;  Pills transferred at cost, not market value. Cost ($250) included in Vitamins assessable income under s 70-90 (disposal outside the ordinary course of business) instead of market value.  No Division 7A deemed dividend. The tax values of the assets for P&S Trust are as follows:  Cost base for consulting room is $200,000 being Vitamin's cost base;  Cost base goodwill is nil being Vitamin's cost base;  The adjustable value for the pill press remains $14,000;  P&S Trust can depreciate pill press using same method and effective life as Vitamin; and  Cost of homeopathic pills, which are trading stock, is the cost to Vitamin ($250), which deductible. The acquisition times for the CGT assets are as follows:  for the purpose of the 50% general CGT discount, the time that P&S Trust acquired the asset; and  for the purpose of the 15 year CGT exemption, the time that Vitamin acquired the asset. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 23 Restructure from partnership to company - cost base of shares (from LCG) Leon and Michelle carry on a car and tyre services business in a partnership. The active assets of the business are:  a small suburban garage acquired for 1980 (pre-CGT); and  goodwill; and  an improvement to the garage post-1985 with a cost of $40,000. Employee liabilities of the business are $20,000. Leon and Michelle established LM Services Pty Ltd with shareholders in the same proportionate ownership as they had in the partnership. Leon and Michelle transfer all the assets to LM Services Pty Ltd in consideration for  10,000 newly issued ordinary shares;  assumption of the liabilities for employee entitlements, and  $10,000 cash, borrowed from Leon and Michelle, in their capacity as shareholders. They elect for the SBRR to apply. LCG2016/D2 notes that where membership interests are issued as consideration for a transfer, the cost base of each new membership interest is the sum of the roll-over costs (excluding pre-CGT assets) of the transferred assets less any liabilities that the transferee assumes, divided by the number of new membership interests. The cost base of the shares is determined as follows  $40,000 – the cost of the improvements which is a separate post-CGT asset to the garage less  $20,000 – the cost of the employees assumed;  the $20,000 is then reduced by other consideration, being the $10,000 cash consideration;  this leaves a total cost base of $10,000 which is divided over all the 10,000 shares;  the cost base of each share is $1. Note: the cost base of the pre-CGT garage is excluded. COMMENT – it was not clear from the Bill or the EM, but it appears that the SBRR could be used to create a credit loan account as set out in the example above. Subsequent debt forgiveness Dean operates a fishing tour business through a company, where he is the sole director and shareholder. The active assets of the business include a fishing boat, which cost the company $300,000. In January 2017, a discretionary trust is set up, Dean is one of the beneficiaries and a family trust election is made with Dean as the primary individual. The termination value and adjustable value of the boat is $260,000 at this time. The company transfers the boat to the trust for $260,000 as consideration, payable within 60 days. The trustee does not pay immediately and enters into a Division 7A loan agreement with the company. In June 2018, the company forgives the loan. LCG2016/D2 notes that the subsequent application of Division 7A to the loan, which was created in connection with the transfer of the assets, is an indirect consequence of the transfer and is not turned off by section 328-450. The forgiveness of the loan or failure to make minimum yearly repayments may give rise to a deemed dividend under Division 7A. Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 24 COMMENT – it is not necessary for there to be a complying loan agreement, if the boat had been transferred for no consideration there would be no Division 7A deemed dividend. ATO reference LCG 2016/D2 w http://law.ato.gov.au/atolaw/view.htm?DocID=COG/LCG20163/NAT/ATO/00001&PiT=99991231235958 4.4 LCG 2016/D3 – SBRR: genuine restructure Law Companion Guideline LCG 2016/D3 considers, and outlines the Commissioner's positionin relation to whether a SBRR will involve a ‘genuine restructure of an ongoing business’. LCG2016/D3 notes that a 'genuine restructure of an ongoing business' is one that could be reasonably expected to deliver benefits to small business owners in respect of the efficient conduct of their business going forward. The SBRR will not be available where a business is restructured in the course of winding down or as part of a subsequent sale. LCG2016/D3 outlines the factors that the Commissioner considers indicates a genuine restructure of an ongoing business and those factors that do not as follows: The ATO consider that factors indicating genuine restructure include:  a bona fide commercial arrangement undertaken in a real and honest sense to o facilitate growth, innovation and diversification o adapt to changed conditions, or o reduce administrative burdens, compliance costs and/or cash flow impediments.  the economic ownership of the business and assets remain the same.  there is continuity in the operation of the business. For example, there is o continued use of the transferred assets as active assets of the business o continuity of employment of key personnel o continuity of production, supplies, sales, or services.  the new structure is likely one that would have been adopted had appropriate professional advice been obtained when setting up the business. The ATO considers that factors indicating that the restructure is not genuine include  where it is a preliminary step to a sale;  where it involves a extraction of wealth from the assets for investment or personal purposes;  where artificial losses are created or they are brought forward;  there is a permanent non-recognition of gain or the creation of artificial timing advantages; and  there are other tax outcomes that do not reflect economic reality. The Commissioner accepts that tax considerations are a factor that can be taken into account for a restructure but not without limits. Where a restructure is contrived or unduly tax driven it will not be a genuine restructure of an ongoing business. Safe harbour rule LCG2016/D2 refers to the legislative safe harbour rule of meeting ‘genuine restructure’ which is satisfied where:  no significant assets, apart from trading stock, are disposed of, or used for private purposes, by the small business owners for three years after the transfer; and  those assets continue to be active assets. LCG2016/D2 notes that Part IVA may still apply even where the safe harbour rule is satisfied. The LCG then goes on to illustrate examples of genuine and non-genuine restructures: Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 25  moving from a sole trader to a discretionary trust with a corporate trustee for a financial planner who has been sued before - genuine;  moving from a discretionary trust to a company so that shares can be issued to key employees – genuine;  moving from a partnership to a company to get an equity injection – genuine unless it is part of a divestment process;  moving from a trust to a sole trader to simplify affairs – genuine;  moving from a company to a trust so that you can access the CGT general discount on a business sale – not genuine;  moving from a company with two businesses to two companies with a business each to give a company to each of 2 sons – not genuine;  moving a business from a trust with a UPE to a company, to the company to extinguish the UPE, to another trust – not genuine and Part IVA potential even if safe harbour met;  in a variation on the above - moving a business from a trust with a UPE to a company, to the company to extinguish the UPE – genuine. COMMENT – the Commissioner’s blessing of the last transaction may be attractive to business owners who are tired of the Division 7A/UPE treadmill. ATO reference LCG2016/D3 w http://law.ato.gov.au/atolaw/view.htm?DocID=COG/LCG20163/NAT/ATO/00001&PiT=99991231235958 4.5 Making deferral requests from 15 April 2016 The ATO have announced that from 15 April 2016, tax agents must make lodgement deferral requests using new simplified deferral application forms, which are now in excel format. There are now three deferral application forms:  Agent assessed deferrals;  ATO assessed deferrals; and  Additional time to lodge for clients with overdue returns. This is a new form which lets the tax agents request additional time to lodge for clients with one or more overdue returns who you have recently added to your client list so the tax agents are not penalised for these late lodging clients in achieving their 85% performance benchmark. w https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Making-deferral-requests-from-15- April/ 4.6 Small Business – immediate deductibility of professional expenses As announced in the 2015 Federal budget, from 1 July 2015 SBEs, or entities that are not in business and not connected with or an affiliate of a non-SBE, are entitled to upfront deductions when starting up a small business under subsection 40-880(2A) of the Income Tax Assessment Act 1997 (Cth) – a new addition to the black hole provisions. While the black hole provisions ordinarily provide for a 5 year write off, the new addition allows an SME or an entity not in business (and not connected to a non-SBE in some way) to immediately write of some start-up expenses. These start-up expenses must relate to a small business that is proposed to be carried on, and include professional, legal and accounting advice relating to the proposed structure or proposed operation of the business, and government fees, taxes and charges incurred in relation to setting up the business or establishing its operating structure. w https://www.ato.gov.au/business/income-and-deductions-for-business/depreciating-assets/othercapital-expenses/ Monthly tax training – April 2016 Brown Wright Stein Lawyers © 2016 page 26 4.7 Small Business – businesses targeted for employee and contractor obligations The ATO has announced that it considers that businesses in the bakery, supermarket, car retailing, and computer system design industries are more likely to not be meeting their super and tax employer obligations. These are industries are to be targeted for audit activity in this area from 1 July 2016. The high risk areas in these industries the ATO say are SGC, PAYG withholding and FBT. The ATO stated that letters will be sent in April advising of clients who will be audited from 1 July 2016. w https://www.ato.gov.au/Tax-professionals/Newsroom/Superannuation/High-risk-industries-for-superguarantee-obligations/?landingpage 4.8 SMSFs – review of trust distributions to SMSFs The ATO has announced that it is reviewing SMSFs that have received trust distributions. The ATO considers that such trust distributions are likely to be non-arm’s length income. The ATO publication states: We are looking at complex arrangements between related entities in a private group that result in large capital gains or inflated income being distributed to SMSFs. This is sometimes done through a chain of trusts. Legislation is in place to prevent this from occurring. Non-arm's length income should be taxed at the top marginal rate rather than the 15% concessional rate. w https://www.ato.gov.au/Tax-professionals/Newsroom/Superannuation/Review-of-trust-distributions-toSMSFs/ 4.9 PAYG Withholding varied – body corporates On 29 March 2016 the ATO has issued a new PAYG Withholding Variation Instrument in relation to body corporates. This instrument means there is no need to withhold if a body corporate of residential or commercial property does not quote an ABN to a member that is making a payment in respect of: 1. body corporate levies; 2. access fees to inspect books of account, insurance policies, rolls, minutes etc.; or 3. fees payable to the body corporate for the collection of rents from the common property. The instrument commences on 1 April 2016 and will be withdrawn on 31 October 2016. The instrument extended an existing arrangement so that further consultation can occur on whether the arrangement should be extended further. w https://www.legislation.gov.au/Details/F2016L00440 4.10 2016 FBT returns – ATO's special arrangement for cars The ATO recognises there has been uncertainty about the correct rate to apply for 2016 FBT returns containing calculations for certain expense payment fringe benefits involving the reimbursement of an employee's car expenses on a cents per km basis. The ATO will accept 2016 FBT returns based on the 2014/15 cents per km rates (which are 65, 76 or 77 cents, depending on the engine capacity of the employee’s car), even though the correct rate for the 2016 FBT return is the single rate of 66 cents per km for all motor vehicles. For future FBT years ending on 31 March, employers will be required to use the rate determined by the Commissioner for the income year that ends on the following 30 June. w https://www.ato.gov.au/Business/Income-and-deductions-for-business/Business-travelexpenses/Motor-vehicle-expenses/Calculating-your-deduction/Cents-per-kilometre/