Following the scrapping of its entity tax proposals (which were going to tax many trusts in the same way as companies), the Government has announced a timetable for the remaining business tax reform measures.

Measures still proposed to begin from 1 July 2001 include:

Measures to be deferred until 1 July 2002 include:

Commencement dates are yet to be determined for other reforms including:

If you have any questions on how these tax reforms will affect you please contact us.

The Government has clarified the ongoing application of capital gains tax (CGT) concessions to trusts. The general 50% CGT discount will potentially apply to all trust assets regardless of when they were acquired, provided each asset has been held for at least 12 months.

Surprisingly, the Government also announced that from 1 July 2001, CGT adjustments will not arise where CGT 50% discount amounts are distributed by fixed trusts to beneficiaries.

Presently, such distributions result in a cost base adjustment to the asset or a deemed capital gain.

However, adjustments will need to be made in relation to distributions to beneficiaries of tax-free amounts associated with building allowances.

Under existing law, amounts paid to a departing partner relating to work in progress are assessable income for the partner but are not tax deductible to the partnership. However, amounts subsequently received by the partnership concerning the work in progress are still assessable income, resulting in double taxation.

The Government has announced the introduction of amendments to prevent this potential for double taxation. The amendments will allow a tax deduction for payments on a transfer of work in progress and will apply retrospectively from 23 September 1998.

Precisely which payments will be covered is not yet clear. We will keep you informed of any developments.

Sale and lease-back arrangements occur when taxpayers sell assets to a finance company and then lease those assets back from the financier.

In two recent cases the Federal Court decided that taxpayers were entitled to a tax deduction for lease payments made under sale and lease-back arrangements concerning industrial plant.

The Tax Office argued that the lease payments were capital (and therefore not tax deductible), because they would potentially result in a lower purchase price for the lessee on termination of the lease. The Court rejected that argument.

The Court also held that the general anti-avoidance rule had no application to the arrangement.

The general anti-avoidance rule prevents taxpayers from entering into arrangements for the sole or dominant purpose of avoiding income tax.

In one case, it was also held that valuation and establishment fees connected with the lease arrangement were also tax deductible, on the basis that raising finance was a regular feature of the taxpayer’s business and the funds raised were used in carrying on the business.

In another recent case it was found that a director who purchased land in a company’s name and proceeded to sell it for a profit clearly had an intention to make a profit from resale of that land.

Accordingly, profits from the sale were held to be assessable income.

The director gave evidence that the land was purchased to establish a corporate head-quarters for the company. However, the Court considered this was outweighed by other evidence including the high potential for subdivision and resale, advantageous zoning, good location and the director’s experience as a property developer. It found this clearly indicated a profit-making intention.

The Labor party has ruled out an increase in mandatory employer superannuation contribution levels (which are currently at 8%) should it win Government.

It has, however, suggested that changes to the 15% superannuation surcharge would be considered on the basis that the current approach is ‘monumentally inefficient’.

The Government has released an exposure draft concerning new rules for the tax treatment of certain non-commercial loans to companies, which are proposed to commence from 1 July 2001.

Key points in the exposure draft propose that:

The precise range of arrangements that would be caught by the proposals is unclear, as certain key definitions (including the definition of a non-commercial loan) have not yet been included in the exposure draft. We will keep you informed of developments.

The Tax Office has issued two draft rulings concerning the alienation of personal services income rules. These rules ensure an individual is taxed on all their personal services income (whether derived personally or via an interposed entity) unless they are carrying on a personal services business.

The first draft ruling considers the meaning of personal services income, which is defined as income that is ‘mainly a reward for an individual’s personal efforts or skill’. In particular, the ruling notes that the word ‘mainly’ requires that more than half of the income be a reward for personal effort or skill.

The second draft ruling discusses the meaning of personal services business and considers the application of the three relevant tests (the unrelated clients test, the employment test and the business premises test).

The personal services income rules are complicated and particularly affect individual contractors who operate through a company or trust. Please contact us if you need assistance in this area.