Parliament has passed the first tranche of consolidation legislation, and a second tranche has been introduced for debate.

Contrary to public perception, the consolidation rules will have broad impact for both large and small taxpayers, potentially applying whenever a company wholly owns one or more other companies or unit trusts.

The basic features of these rules are as follows:

• Applicable from 1 July 2002.
• One consolidated tax return will be lodged for each consolidated group (CG).
• Losses and franking credits are transferred into the CG.
• Intra-group transactions, including dividends, are ignored.
• Consolidation is optional but intercorporate CGT rollover relief, loss transfers and dividend rebates will not be available to non-consolidated groups after 1 July 2003.
• An election to consolidate can be made before lodging a tax return for the relevant year.

• TIP: There are a range of planning opportunities that taxpayers should consider before electing to consolidate. Contact our office for assistance.

Under shareholder loan rules, a loan by a company to a shareholder or their associate can be deemed to be a taxable dividend in certain circumstances, limited to the amount of the company’s distributable surplus.

The distributable surplus is reduced by, amongst other things, the company’s present legal obligations.

In a recent case the Administrative Appeals Tribunal found that a provision for tax was a present legal obligation that reduced the distributable surplus and the ultimate deemed dividend. This was a great win for taxpayers.

Certain private company loans
to shareholders or associates are not deemed to be a dividend provided the loan is made under
a written agreement, the interest rate equals or exceeds the benchmark interest rate, the term does not exceed the prescribed maximum, and the required interest and principal repayments are made.

The Tax Office has announced that the benchmark interest
rate for the 2003 income year
is 6.3%.

Parliament has passed legislation providing CGT rollover relief for assets transferred from a fixed trust to a company.

CGT rollover will apply where:

• a fixed trust disposes of all of its assets to a company; and
• the beneficiaries’ interests in the trust are exchanged for shares in the company.

The rollover will be available for both the trust and its beneficiaries, however it will not apply to discretionary trusts.

The trust must cease to exist within six months of the initial asset transfer, although this period can be extended in limited circumstances.

This measure applies to assets disposed of under a trust restructure starting on or after 11 November 1999.

Taxpayers may satisfy CGT substantiation rules by keeping
an asset register.

The Tax Office has issued a
ruling concerning whether a register complies with these
rules.

If a complying register is kept, original documents need only
be kept for five years after valid certification.

Otherwise, original records
must be kept for five years
after disposing of the relevant asset.

• Caution: In many cases, the time and cost associated with maintaining a complying register may outweigh the benefits of the concession.

Employees beware. The Tax Office intends to take a
closer look at work related expenses.

Employees should ensure that sufficient evidence of claims is maintained to satisfy substantiation rules.

A detailed receipt will typically suffice, although this will not be necessary where total claims are less than $300.

A recent Taxpayer Alert describes an arrangement whereby a professional taxpayer who earns income from personal services enters into a partnership with similar unrelated taxpayers.

The intention of the arrangement is to characterise income as partnership income to enable the taxpayer to split their income with a spouse or related party.

The Commissioner is considering in these circumstances whether there is a genuine partnership, whether a business is being carried on through the partnership, whether the arrangement circumvents personal services income rules, and the potential application of general anti-avoidance provisions.

• CAUTION: Taxpayers should steer clear of tax planning arrangements which appear artificial and contrived.

The Full Federal Court has confirmed that ‘special rental’ payments made by a casino operator under an agreement with the Queensland State Government, were of a non-deductible capital nature.

Although described as ‘special rental’, the payments were made in exchange for exclusive rights to operate a casino in the Brisbane area.

It was held that the exclusive rights were an advantage of an enduring kind and that the outgoings related to the character and organisation of the profit-earning business, and were therefore incurred on capital account.

• CAUTION: Deductibility depends on the substance of transactions, rather than the description given to them.

The Tax Office has released a draft ruling concerning the alienation of personal services income measures.

Under these rules individuals may be attributed with and taxed on income derived by their company or trust from the provision of their personal services, unless a personal services business is conducted.

The draft ruling considers the application of the attribution rules in various circumstances.

In a recent Federal Court case a company has been denied deductions for interest on borrowings on-lent interest free to an associate, to fund the acquisition of a business property.

The property was purchased for redevelopment, and was acquired by the associate rather than the company for asset protection reasons. However, by the time of the redevelopment, the company had sold its retail business.

The key issue was that the borrowing company did not charge interest on its loan to the related entity, which in turn did not charge rent.

Accordingly, the Court found that the interest incurred did not have a sufficient nexus to assessable income.

• TIP: This case highlights the need for related parties to deal
  on commercial terms and to document arrangements between them.