The Report - March 2000

Tax Changes – Keeping You Informed 

Capital Gains Tax (CGT) Reform and Trusts 

The Treasurer has announced further details of the CGT treatment of assets owned by trusts in connection with tax reform. Readers will recall that individuals and trusts (but not companies) can benefit from a CGT 50% discount, and that trusts will be taxed as companies (entity taxation) from 1 July 2001. 

Assets acquired by trusts before 24 December 1999 will be entitled to the 50% discount, regardless of when the asset is disposed of. If the disposal occurs post entity taxation (1 July 2001), the exempt amount will form part of the trust’s contributed capital and may be distributed tax free to beneficiaries, although this may be subject to a profits first rule. 

For trust assets acquired after 23 December 1999, the 50% discount will apply to disposals before 1 July 2001. For disposals after that date, the trust will be taxed on the gain at the entity tax rate without the 50%discount.

Other CGT concessions applicable to small business taxpayers are not covered by the announcement but apparently may apply in the same way.  In short, a trust will often remain the preferred structure for retention of pre 24 December 1999 appreciating assets, or for new assets that will be sold before 1 July 2001. 

Value Shifting Through Debt Forgiveness 

Recently passed legislation concerning value shifting through debt forgiveness may have important implications for corporate groups.

Briefly, where debts between commonly owned companies are forgiven, the amendments may require cost base adjustments to shares in (or loans to) the creditor company. There can also be compensating adjustments to the cost bases of shares in the debtor company.

The amendments are intended to prevent the disposal of a share or loan at capital loss after a shift in value through debt forgiveness. The rules apply in addition to ordinary debt forgiveness rules and will catch relevant transactions from 22 February 1999. 

Tax and the Internet

 In response to the burgeoning area of e-commerce, the Tax Office has recently released its second report on this area.

The report considers the Tax Office’s likely approach to both technical and administrative e-commerce issues. In particular, it considers the application of existing tax concepts in an e-commerce environment including:

Taxation of business profits, including whether international sales made over the internet involve a permanent establishment; Income characterisation issues (for example, does any supply over the Internet constitute a royalty); Residence and source in relation to e-commerce operations; Allocation of income; and Transfer pricing issues.

These issues must be considered together with a myriad of legal and commercial matters that arise in connection with e-commerce strategies. Closely Held Trust Rules to be Amended The Government has announced amendments to the closely held trust rules, in an attempt to improve their practical operation. By way of background the rules require trustees of closely held trusts which distribute to other trusts to provide a statement (UB statement) disclosing the ultimate beneficiaries of the distribution.

Proposed amendments include:

Allowing an extension for lodgment of UB statements where genuine difficulties arise in obtaining information; Allowing amendments (within four years of date of the tax liability) for correct UB Statements made on reasonable ground; 

Allowing trustees to recover damages from ultimate beneficiaries who have UB tax or where penalties have resulted. Nil Assessments A recent High Court decision concerning, amongst other things, whether a nil assessment is an assessment, may have important implications for companies.

Whilst the majority decided the case on different grounds, the minority found that a nil assessment was an assessment. This may prevent the Tax Office from amending tax returns of loss companies where more that four years have passed sine the relevant returns were lodged. 

CGT – Main Residence Exemption

 The Tax Office has issued a number of tax determinations concerning the CGT main residence exemption. The determinations clarify the Tax Office’s view of particular areas including ownership interests acquired under a deceased’s will, the CGT treatment of dwellings situated on more than two hectares of land and rules where a joint tenure dies.

The main residence exemption provisions are complex and should always be considered when disposing of a dwelling. 

CGT – Change of Residency Status for Trusts 

The Tax Office has recently released a tax determination concerning trusts, which change their residency status and the timing of deemed disposals and acquisitions for CGT (which will impact on CGT liabilities).  A trust (other than a unit trust) is a resident trust for CGT purposes for an income year if, at any time during the year, the trustee is an Australian resident or the trust is centrally managed and controlled in Australia.      

Fringe Benefits Tax Return

Action Checklist

 Important Changes For 2000.

The following is a brief overview of some of the important developments affecting the 1999/2000 FBT year. 

FBT Rate

The rate of FBT for the year ending 31 March 2000 is 48.5%. 

Fringe Benefits Reporting on Group Certificates

From 1 April 1999 employers must report on group certificates the value for FBT purposes of most benefits provided to employees. The first group certificates affected will be for the year ended 30 June 2000.  The reported amount for each employee will be taken into account when applying, for example, the superannuation surcharge and the Medicare surcharge. 

Motor Vehicle Lease Novation Arrangements

The Tax Office has finalised a Taxation Ruling covering the taxation consequences of motor vehicle lease novation arrangements. The ruling considers full novations, split full novations and partial novations. 

Salary Sacrifice Draft Ruling

The Tax Office has issued a Draft Ruling on salary sacrifice arrangements. The Draft Ruling draws significant distinction between retrospective and prospective arrangements. 

Checklist – Types Of Benefits 

The main types of benefits include: 

Motor VehiclesStatutory Formula Method

What is the cost price of the vehicle (or lease value), excluding stamp duty and on-road costs? 

What are the costs of any fitted accessories? 

What were the opening and closing odometer readings for the current FBT year?

 How long has the vehicle been owned or leased? (If owned for more than four years on 1 April 1999, the cost base cab be reduced by one-third.)

 Were there any days during the year when the vehicle was unavailable for private use? 

What running costs have been paid by the employee 

Are appropriate evidentiary documents maintained? 

Operating Cost Method

Is this the first year the car was held? 

If so, has a log book been kept for a minimum continuous period of 12 weeks? 

What were the opening and closing odometer readings for the current FBT year? 

Have you made an estimate of the business kilometres travelled and the business use percentage? (This must be in writing) 

Where the employer already owned the vehicle at the start of the FBT year, what is its written down value on 1 April 1999? 

What are total running costs of the vehicle? 

Log Book Records

These records must be maintained for a minimum continuous period of 12 weeks (this will generally be in the first year of the vehicle’s use). 

A new log book will need to be kept every five years.

The log book must at least include:

The date the business journey began and ended; 

The odometer reading at the beginning and end of the business journey; The purpose of the journey and; The number of kilometers travelled in the course of the journey.

It is imperative that all entries in the log book are made at the end of the journey or as soon as reasonably practicable after the journey. 

Car Parking

Where car parking benefits have been provided you will need to consider five different methods for valuing the taxable car spaces.

These are the commercial parking station method, market value method, average cost method, statutory formula method, and 12 week register method.

For 1999/2000 the car parking threshold is $5.31 per day. 

Loans and Debt Waivers

For 1999/2000 the benchmark interest rate is 6.5%. 

What is the interest rate charged on the loan? Has the loan been used for income-producing purposes by an employee? What is the loan balance at the beginning of the FBT year and has the balance changed during the year? What documentation is available for the loan? When was the loan granted and was the loan wholly for private purposes? Have any employee debts been waived or released since 1 April? 

Expense Payments/Reimbursements

Have any expense payments/reimbursements been made on behalf of or to employees? Would any of the expenses or reimbursements have been tax deductible to the employee had they bee paid for by the employee? If so, have appropriate declarations been obtained to substantiate the reduction in taxable value? 

Housing and Board

Has the employee been granted a right to occupy a unit of accommodation as the employee’s usual place of residence? Is board provided to employees where two or more meals per day are cooked on the employer’s premises and provided to employees? 

Living-Away-From –Home-Allowances (LAFHA)

What is the value of LFHAs paid to employees? 

Property Fringe Benefits

Property includes goods, shares and real property. What goods are provided to each employee, excluding goods provided for business purposes? What amounts are paid by the employee for goods provided? Would the goods have been tax deductible to the employee had they been purchased by the employee? Identify employer-provided goods and those provided from other sources. Have you allowed for the $500 exemption for in-house benefits? 

Entertainment

The provision of employee entertainment may result in a number of fringe benefits, e.g. a property, expense payment or residual benefit with the taxable value calculated as per the rules of the benefit concerned.

Employers who provide meal entertainment benefits can calculate their FBT liability via three different methods;

50/50 split methods; 12 week register method; and actual expenditure method. 

Residual Benefits

If there are any additional benefits provided to employees, determine the value and amount, if any, paid by the employee. Would any of these benefits have been tax deductible to the employee had they been paid for by the employee?

Fringe benefits tax is a complex area. We suggest that you contact us if you require assistance with your FBT compliance requirements or would like to discuss the possible impact on the provision of certain fringe benefits.