Stapled structures review period extended

A week out from last month’s Federal Budget, the Treasurer announced that the timeline for the review on policy options for Stapled Structures will be extended to the end of July 2017.

The Treasurer said the extension “will allow more time to formulate relevant options that minimise unintended consequences”. This is in recognition of “the economic significance of stapled structures in the Australian economy and (the fact) that this is a complex and sensitive issue”.

ATO guidance on over-franking in 2016-17 income year because of tax rate change

On 22 May 2017, the Australian Taxation Office (ATO) released a draft Practical Compliance Guideline PCG 2017/D7 which sets out a practical compliance approach for small business companies that may have over-franked a distribution prior to the enactment of the new company tax rate change (following the enactment of Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 which became law on 19 May 2017).

According to the PCG if a corporate tax entity fully franked a distribution during its 2016-17 income year based on the 30 per cent corporate tax rate when the entity's tax rate for that income year may in fact be 27.5 per cent because of the law change, the amount of the franking credit on the distribution statement provided to members may be incorrect. The draft Guideline sets out a practical compliance approach that corporate tax entities may choose to use to inform members of the correct amount of franking credit attached to their distribution. The approach may reduce compliance costs for corporate tax entities by providing an alternative to seeking an exercise of the Commissioner's discretion to allow amendment of distribution statements.

For further information about the newly enacted company tax rate changes, refer to TaxTalk Alert on 28 April 2017.

AAT rejects R&D applications for an advance/overseas finding

The Administrative Appeals Tribunal (AAT) in DZXP, KRQD and QJJS and Innovation and Science Australia [2017] AATA 576 has dismissed an application for review of the decision of Innovation and Science Australia (Innovation Australia) in relation to applications for an advance/overseas finding made by subsidiary members of multiple entry consolidated (MEC) groups in respect of certain overseas research and development (R&D) activities. In dismissing the application, the Tribunal agreed with Innovation Australia that the incorrect entities had applied for the advance/overseas findings, and that the “head entities” of the MEC groups should have made the application.

AAT finds that mining operations were not R&D activities

The AAT in Rix's Creek Pty Limited; Bloomfield Collieries Pty Limited v Innovation Australia (General) [2017] AATA 645 has affirmed decisions made by Innovation Australia that activities carried out by the applicant in relation to mining operations were not R&D activities within the meaning of section 73B of the ITAA 1936 as it was not convinced that the claimed activities were carried on for the purpose of acquiring new knowledge or creating new or improved materials, products, devices, processes or services.

The Tribunal noted the importance of documentary evidence to substantiate R&D activities, although this is not a statutory requirement, and stated that "documentary evidence is an expected feature of an activity that is systematic, investigative and experimental. Documentation is necessary to record the activity undertaken, its purpose, progress and, of course, the results of the activities and the evaluation of those results. Without such documentation, it is near impossible to establish the progression of the activities undertaken and that the purpose of the activities was to generate new knowledge in the form of new or improved materials, products, devices, processes or services".

Incorrectly claiming the Wine Grapes Levy as R&D expenditure

The ATO and the Department of Industry, Innovation and Science (DIIS) are warning about a scheme where some promoters are advocating that companies who pay the compulsory Wine Grapes Levy, can register the activity with DIIS or simply claim the levy, as all or part of a notional deduction in calculating their entitlement to a R&D tax offset.

The ATO advise that the way R&D commissioned by Wine Australia is conducted means that the levy cannot be claimed in calculating a refundable or non-refundable R&D tax offset for the wine producer. The levy can usually be claimed by a wine producer as an ordinary business deduction.

Draft ruling on taxation of rights and retail premiums under renounceable rights offers

Draft Taxation Ruling TR 2017/D3, issued on 10 May 2017, sets out the Commissioner’s preliminary view about the taxation of rights granted, and retail premiums paid, to retail shareholders in connection with renounceable rights offers where shares are held on capital account. Shareholders that are covered by the draft ruling are not required to include anything in their assessable income upon the grant of the entitlement. Any retail premium received is treated as the realisation of a CGT asset. The draft ruling does not cover the application of Australia's tax treaties.

Comments on the draft ruling can be made until 9 June 2017.

Draft ruling on when a limited partnership 'credits' an amount to a partner

Draft Taxation Ruling TR 2017/D4, issued on 17 May 2017, sets out the Commissioner’s preliminary view as to when a corporate limited partnership (CLP) is taken to 'credit' an amount to a partner in that partnership within the meaning of section 94M of the ITAA 1936. According to the draft ruling, a CLP 'credits' an amount to one of its partners if it:

·       applies or appropriates its resources to confer a benefit on the partner that is not subject to a condition precedent, and

·       is legally enforceable by the partner, and is separate and distinct from the partner's existing interest in the CLP and its assets.

A mere credit entry in a CLP's accounts is not a crediting within the meaning of section 94M unless it records an underlying act or transaction that meets the above requirements. However, a CLP does not need to make a distribution or pay an amount to a partner in order for it to credit an amount to that partner.

Comments can be made on the draft ruling by 30 June 2017.

Full Federal Court finds “buy-back reserve” account is not a share capital account

The Full Federal Court in Cable & Wireless Australia & Pacific Holding BV (in liquidatie) v Commissioner of Taxation [2017] FCAFC 71 has unanimously dismissed the taxpayer's appeal against the decision of the Federal Court and held that a debit entry to a buy-back reserve did not record a transaction reducing a “share capital account” and accordingly, it was correctly treated as a dividend that was subject to withholding tax.

The substantive issue in this case related to the correct characterisation for taxation purposes of an amount debited to the buy-back reserve account as part of a share buy back transaction. This characterisation turned on whether the buy-back reserve account was a share capital account for the purposes of the definition in section 6D of the ITAA 1936.

The Full Federal Court agreed with the approach taken by the primary judge in relation to the meaning of “share capital account” in the context of the relevant transactions and accounts. The Court provided general observations relating to the approach taken by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 (Consolidated Media), which dealt with a similar issue, and provided various points to distinguish Consolidated Media from the current case before the Court. In particular the following observations were made in relation to the current case before the Court:

·       The buy-back reserve was an account of equity, not a share capital account.

·       The “contributed equity” or share capital account did not require for its understanding any reference to the buy-back reserve.

·       The only return of capital was the proportionate return of capital being the proportion of shares bought back multiplied by the share capital account balance of the company. This was the amount debited to the share capital account, but not the amount debited to the buy-back reserve. According to the Court, this latter additional amount was a return on capital rather than a return of capital.

·       The rulings the taxpayer sought and obtained from the Commissioner, the buy-back Implementation Agreement, and the company’s financial accounts and statements all reflect the commercial, economic and legal reality that the debit to the buy-back reserve was not and was not seen to be a reduction or a return of capital.

·       Even though the buy-back reserve concerned shares, this did not make it a share capital account. The concept of “capital” is a reference to the value or amount that shareholders had originally contributed.

·       The Court distinguished Consolidated Media stating that the “buy-back reserve in that case was both a record of a transaction reducing share capital and a record of Crown’s financial position in relation to its share capital. Contrastingly, in the present case the debit entry to the buy-back reserve did not record a transaction reducing share capital. Moreover, the reserve and the debit entry recorded Optus’ financial position in relation to part of its equity, but not share capital or as described in the accounts, “contributed equity”.”

Commonwealth grant treated as an assessable recoupment

The Federal Court in Denmark Community Windfarm Ltd v Commissioner of Taxation has held that a Commonwealth grant was an assessable recoupment under section 20-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997). The Court found that the amounts were received as compensation for an “expense” incurred by the company and although the expense being compensated for was on capital account, this did not prevent the grant from being characterised as a payment by way of indemnity.

The Court also held that the grant was an assessable recoupment under section 20-20(3) of the ITAA 1997 as the amounts were received in respect of a loss or outgoing incurred in relation to depreciating assets, which were deductible under Division 40 of the ITAA 1997. The Court held that, even though the taxpayer had claimed depreciation deductions for the relevant asset under the small business capital allowance provisions found within Subdivision 328-D of the ITAA 1997, the fact that this provision is not listed in the table in section 20-30 of the ITAA 1997 was irrelevant.