ATO updates

TR 2017/4 – taxation of rights and retail premiums under renounceable rights offers where shares are held on capital account

The Commissioner of Taxation has recently issued Taxation Ruling TR 2017/4 (Ruling) which concerns the taxation of rights granted, and the retail premiums paid, to retail shareholders in connection with renounceable rights offers where shares are held on capital account.

The Ruling concerns the tax treatment of eligible shareholders (Australian or New Zealand residents) and ineligible shareholders (foreign residents). Eligible shareholders covered by this Ruling do not need to include anything in their assessable income upon the grant of entitlement. Further, any retail premium received is treated as the realisation of a capital gains tax (CGT) asset.

The Ruling finalises and is substantially in the same form as, Draft Taxation Ruling TR 2017/D3 which featured in Talking Tax – Issue 77.

This Ruling applies to years of income both before and after its date of issue. If you have issued or have been issued rights entitlements that may be subject to this Ruling, please contact a member of our tax team for further details about the potential tax treatment.

AASB says more companies should report on contingent tax liabilities and positions

In a media release dated 4 July 2017, the Australian Accounting Standards Board (AASB) has stated that more Australian companies could be recognising amounts in dispute with the ATO in financial reports, under new guidance from the IFRS Interpretations Committee (IFRIC).

Previously, companies only needed to recognise tax liabilities in their financial reports where it was probable that it would be required to pay tax. The new rules will broaden the types of tax liabilities that need to be disclosed to those that the ATO is likely to dispute having regard to ATO guidance and cases. It will require directors to closely monitor the tax law and continually assess their tax risks to ensure that the correct disclosures are made.

The proposed measures are not effective until 1 January 2019. However, the AASB has recommended that all companies reassess whether to record a tax liability in their 2017 reporting.

The AASB has yet to release the IFRS guidance but has indicated it will do so shortly.

The AASB made the following comments in relation to the measures:

  • directors will be required to continually assess the aggressiveness of tax positions taken, and will have to assume that the tax authority has full knowledge of all relevant facts, regardless of whether their companies have had or are likely to have a tax audit, or are likely to be issued an amended assessment
  • if it is probable that the tax authority will not accept the company’s treatment, a tax liability for the expected settlement amount must be recognised in the Statement of Financial Position, with an associated tax expense and
  • even if it is probable that the tax authority will accept the treatment, directors still need to assess whether disclosure of a contingent liability is necessary.

More information about the operation of these measures will be available once the IFRS guidance has been released in full.

Reminder about claiming work-related expenses

The ATO has recently issued a reminder that it is paying attention to people who are over-claiming work-related expenses, and has reiterated that persons need to satisfy the following conditions to claim deductions:

  • they must have spent the money and were not reimbursed
  • it must be directly related to earning their income, and not of a private nature and
  • they must have a record to prove it.

The ATO reminds taxpayers that:

  • they must consider if their employer would confirm the expenses were required to earn their income and that they were not reimbursed
  • they are not automatically entitled to claim standard deductions
  • receiving an allowance from their employer does not necessarily entitle them to a deduction and
  • they can keep track of their deductions using the myDeductions tool in the ATO app then email their data to their tax agent for inclusion in their tax returns.

If you are preparing your tax return and are unsure about the extent to which you can claim work related deductions, our tax lawyers will be able to assist.

Reminder – changes to PAYG instalment conditions

From 1 July 2017, there will be changes to PAYG instalment conditions for companies and superannuation funds (including self-managed superannuation funds) (Entities).

Entities will only be required to pay PAYG instalments if:

  • their instalment rate is more than zero percent and their notional tax is $500 or more
  • their business and/or investment income (excluding capital gains) included in their most recent income tax assessment is $2 million or more or
  • they are the head of a consolidated group.

Entities do not need to take any action in response to this change. The effect of these measures is that Entities will be automatically removed from the PAYG instalment system if their notional tax is less than $500. This will apply even if their instalment rate is greater than zero percent, and includes those registered for GST. However, an exception applies where the Entity included investment income of $2 million or more in their most recent income tax return, or is the head of a consolidated group.

Early stage innovation companies reporting

Early stage innovation companies (ESICs) are now required to report on qualifying investments under the tax incentives for early stage investors annually.

The new ESIC form can be completed and lodged through the Business Portal or the Tax Agent Portal. For reporting for the 2016-17 income year, the form is due by 31 July 2017.

For more information about the rules including what companies will be ESICs and who can access the tax incentives, please see our update ‘New tax incentives for early stage investors’.

OECD-G20 tax avoidance measures get tick of approval in recent report to G20 leaders

A recent report from OECD Secretary-General Angel Gurria to G20 leaders (Report) has found that countries are making ‘major progress’ towards the goal of creating a fairer and more effective international tax system, including increasing efforts to close down loopholes, improve transparency and ensure that multinational enterprises pay tax where they carry out their business activities.

The Report identifies that Australia is one of 22 jurisdictions to have received the highest possible overall rating of ‘Compliant’ as part of the first round of peer reviews on the implementation of the Exchange of Information on request as standard.

Australia has been actively participating in the fight against global tax avoidance with the implementation of Country by Country reporting, increasing penalties for Significant Global Entities, and the introduction of the Multinational Anti-Avoidance Law (MAAL) and the Diverted Profits Tax (DPT).

If you are an Australian entity that is part of a global group and need assistance with understanding these new measures and how they may impact your business, please contact a member from our tax team.

The report updates progress in key areas of OECD-G20’s tax work, including movement towards automatic exchange of information between tax authorities and implementation of key measures to address tax avoidance by multinationals.

Specifically, the Report highlights the considerable progress that has already been achieved in 2017, with the implementation of:

  • the Common Reporting Standard and the first automatic exchanges of financial account information (AEOI) to take place in September 2017 and
  • measures to address tax avoidance by multinationals under the OECD-G20 base erosion and profit shifting (BEPS) project, with the OECD/G20 Inclusive Framework on BEPS implementation now fully operational.

The Report notes that 101 countries and jurisdictions are now working on an equal footing to set standards and monitor implementation via the OECD/G20 Inclusive Framework on BEPS. The OECD has established a peer review process to assess implementation of the BEPS minimum standards and work continues on pending issues, including transfer pricing.

Case law

Beneficiary under a Will denied the land tax primary residence exemption

On 7 July 2017, the Court of Appeal of the Supreme Court of Western Australia published its reasoning in respect of its decision in Caratti v Commissioner of State Revenue [2017] WASCA 128 to dismiss the Taxpayer’s appeal for an exemption of land tax under section 22 of the Land Tax Assessment Act 2002 (WA) (LTAA).

Broadly, the Taxpayer was unable to claim an exemption from land tax for a property he held on trust, as an executor of the deceased’s estate, because there was no right under the Will in favour of a beneficiary to reside in the property. Rather, the right to reside in the property derived from either a pre-testamentary arrangement or post testamentary decision by the Taxpayer, as trustee.

This decision highlights a clear distinction between pre-testamentary and post-testamentary arrangements and rights under a Will showing the importance of documentation.

This case demonstrates that taxpayers should take care to contemplate all ways in which their real property could be administered by a trustee and beneficiary as a place of residence in addition to capital for sale.

The Taxpayer was the executor of a Will and held a residential property in Perth (Property) on trust for the beneficiaries under the Will, being the children of the deceased.

Following the deceased’s passing, one of the beneficiaries (Beneficiary) continued to live in the Property.

In 2015, the Commissioner rejected the Taxpayer’s application for an exemption from land tax pursuant to section 22 of the LTAA.  Later that year, the State Administrative Tribunal (Tribunal) upheld the Commissioner’s finding.

Under section 22 of the LTAA, private residential property may be exempt for an assessment year if, among other things:

  • it is owned by an executor or administrator of a Will as trustee and
  • an individual identified in the Will has a right under the Will to use the Property as a place of residence for as long as he or she wishes.

The Taxpayer appealed the Tribunal’s decision on the basis that the Tribunal erred in finding that the Property, legally held by the Trustee, was not exempt from land tax pursuant to section 22 of the LTAA, by virtue of its use by the Beneficiary, as a beneficiary identified in the Will, as his place of residence.

The Taxpayer submitted, among other things, that:

  • in his capacity as trustee, he had put into effect an earlier arrangement with the deceased, under which it was agreed the Beneficiary would reside in the Property for as long as he wished in accordance with section 24(1)(b) of the Trustee Act 1962 (WA) (Trustees Act) (Arrangement)
  • the Taxpayer had, for the purpose of the Arrangement, indefinitely postponed the sale of the Property, as he was empowered to do so under clause 8(i) of the Will and
  • the words ‘right under the will’ in section 22(b)(ii) of the LTAA, meant and included the right of use of the Property as a residence granted to a Beneficiary under section 24(1)(b) of the Trustees Act by means of the Arrangement.

The Court of Appeal ultimately found that the exemption was not available to the Taxpayer on the basis that there was no such right under the Will in favour of a beneficiary for purposes of section 22(b)(ii) of the LTAA to use the property as a place of residence. Indeed, the Court of Appeal considered that pre-testamentary arrangements or any post-testamentary decisions by a trustee are irrelevant and do not constitute rights under a Will for the purposes of section 22(b)(ii) of the LTAA.