R&G TAX REPORT
| Consolidation Preview | TOP |
As part of tax reform it is proposed that certain groups of entities will be taxed on a consolidated basis from 1 July 2001. However, despite the complexity and short lead-time there is still no sign of draft legislation.
It is envisaged that a consolidated group would lodge a single tax return, pool tax losses and franking credits and ignore inter entity transactions within the group.
Although consolidation is optional, there will typically be no ability to transfer losses, undertake CGT rollovers or pay (unfranked) rebateable dividends if entities are not consolidated.
If a group consolidates it must include the head entity and all wholly owned Australian entities. This will include discretionary trusts and hybrid trusts, in some cases.
Contentious issues include:
• which trusts will be included in a consolidated group;
• the basis on which tax losses will be brought within a consolidated group;
• determining cost bases for equity in group entities using a proposed asset model; and
• the application of the consolidation regime to entities with substituted accounting periods.
We will report in detail when legislation is released.
| GST Input Tax Credits |
There is a Parliamentary Bill to amend various GST input tax credit provisions, including:
• allowing input tax credits for GST paid on all expense payment fringe benefits provided from 1 July 2000; and
• limiting input tax credits in relation to meal entertainment and entertainment facility leasing expenditure to the extent that expenditure is income tax deductible.
The Government has released exposure draft legislation concerning the proposed simplified tax system (STS). This is an alternate method of calculating taxable income for qualifying small businesses.
The STS has three main elements:
• Most business income and deductions are recognised only when they are received and paid respectively (cash basis).
• Trading stock movements are ignored in limited circumstances (purchases are expensed on a cash basis).
• A simplified depreciation regime under which assets costing less than $1,000 are written off immediately. Other depreciable assets are typically pooled and depreciated at prescribed rates.
To qualify, small businesses and related entities must have annual turnover of less than
$1 million and depreciating assets (excluding buildings) of less than $2 million.
It is proposed that the STS will apply for the 2001/02 income year.
On appeal, the Full Federal Court has found in BHP v. FCT that payments made on acquisition of shares, including an element for deferred settlement, were entirely capital in nature and therefore not tax deductible.
This overrules the earlier Federal Court decision that a portion of the purchase price represented deductible interest.
The Court held that the purchase price could not be split between the capital cost of acquisition and a deductible amount effectively representing interest arising from a delayed settlement.
Although the contract specified that the purchase price included an element of interest representing profits earned after a particular date, the Court held that the amount was simply part of the consideration paid on acquisition of the shares.
Furthermore, as there was no loan agreement, the amount was not in the nature of interest.
Accordingly, BHP was denied a deduction of $198 million.
This case highlights the need to carefully consider the tax implications when structuring sales or acquisitions.
| Undissected Lump Sum Settlement | TOP |
The Full Federal Court has confirmed that an undissected lump sum compensation payment of $100 million received by CSR Ltd in settlement of an insurance claim was a capital gain and not income.
The Court followed Allsop’s case which held that an undissected amount of damages received in settlement of revenue and capital claims is capital in nature and cannot be income. Therefore it is assessable only as a capital gain.
This is contrary to the position taken by a Tax Office ruling, which states that apportionment is required.
The decision may be of particular relevance where capital gains are exempt from CGT or subject to a 50% discount, or for taxpayers with carry forward capital losses.
| Penalties and the New Tax System | TOP |
The Commissioner has announced that in the first year of the New Tax System, the Tax Office will recognise that failures to comply with tax obligations are likely to be caused by lack of knowledge.
When applying penalties, the Tax Office will distinguish between people who make a genuine attempt to understand and meet their obligations, and those who deliberately fail to comply.
| Deduction for Secretarial Costs |
The Administrative Appeals Tribunal (AAT) has found that a taxpayer was entitled to a deduction for amounts paid to his wife for secretarial services.
The taxpayer was a business development manager with a bank, and was paid in part on a commission basis. To allow more time for commission earning work, he engaged his wife to undertake certain time consuming administrative duties.
The AAT found that there was a direct link between the expense and the taxpayer’s subsequent increase in commission income.
The AAT also considered it significant that the taxpayer’s employer was aware of the arrangement.
The Government has given a potential increase to the duty free alcohol limit from 1125ml to 2250ml (say, two 1125ml bottles).
The second bottle of alcohol purchased will only be subject to duty if it, with other goods purchased, exceeds the general $400 duty free limit.