We are pleased to enclose the November 1999 edition of The Report.

After the tax reform announcements from the Ralph Committee's review of business taxation, there are a number of interesting points to consider. These include:

• Possible delays in legislating the reforms.
• The abolishment of up front deductions for prepaid expenses may have a significant impact on year end tax shelters.
• Whether Capital Gains Tax concessions apply to trusts who distribute to individuals.

Other recent developments are covered that may impact your tax situation, including:

• Tax avoidance and dividend stripping.
• The tax deductibility of indemnity payments.
• Some GST developments.
• Concerns about the proposed PAYG tax collection system, which is set to apply from 1 July 2000.

Reports suaaest that the Federal Opposition and the Australian Democrats may pursue an inquiry into proposed Ralph reforms amid concerns that proposals are not revenue neutral.

This may lead to delays in introducing legislation and prolonged uncertainty for business while the Governmerit battles to get the proposals through Parliament.

The recent Tax Reform announcement that up front deductions will no longer be available for prepayments may have a significant impact on year end tax shelters.

Many products, particularly those based on agriculture, rely on expense prepayments such as interest and management fees and promote upfront deductions.

The recent Ralph Report on tax reform recommended stronaer action concerning all income from personal services provided in an employee-like manner.

The Government has now indicated that it will move to ensure that individuals are prevented from incorporating or being treated as contractors to reduce their personal tax liability. The exact nature and time frame for implementation remain unclear.

It is not clear whether capital gains derived by a trust and distributed to an individual will be covered by the recently announced 50% CGT concession applicable to individuals. The concession applies from 1 October 1999 to assets held for at least 12 months.

The Government was silent on this issue in its response to the Ralph Report.

The Report supports application of the concession to gains distributed by trusts, at least until the introduction of entity taxation (1 July 2001).

It may be that this recommendation is adopted by the Governmerit, but there are no guarantees.

We will keep you informed of developments.

The Govemment's response to the Ralph Report also included a proposal concerning loans by members to closely held entities.

Loans from 22 February (excluding those on commercial terms) would be treated as equity from 1 July 2001.

Repayments could then be treated as income distributions, under a profits first rule, until all profits have been distributed.

Although unpaid beneficiary entitlements are typically not loans, there are indications in the Ralph Report of a possible intention to include such amounts in this reform. The Ralph Report specifically mentions unpaid distributions out of unrealised capital gains.

In summary, it may be difficult after 1 July 2001 to repay loans or beneficiary entitlements, unless commercial loan terms are imposed. However, there may also be planning opportunities under these measures.

The Full Federal Court has unanimously held that interposing an Australian company, allegedly to ensure that interest deductions were not quarantined against foreign income, was tax avoidance under Part IVA of the Income Tax Assessment Act.

The Court found that the taxpayer adopted tax advice given for the sole or dominant purpose of ensuring that it received a tax benefit (interest deductions).

In the same case, a series of transactions resulting in an Australian owned Bahamas company stripping assets out of UK companies was considered.

The Court held that the transactions did not amount to dividend stripping under Australian tax law because they were not entered into for the sole or don-dnant purpose of obtaining an Australian tax benefit. Interestingly, there is no express purpose test in.these provisions.

The Full Federal Court has reversed a previous decision in the case of FCT v. Email Ltd. The court held that indemnity payments were non-deductible in nature. The payments related to indemnities given to facilitate the sale of shares in a 50% owned subsidiary and to maximise the sale price. Vendors and purchasers should carefully consider indemnity arrangements in light of this decision.

The Government has introduced a bill which proposes various minor amendments to the GST law. These include:

• allowing taxpayers who account for income tax on a cash basis to also account for GST on a cash basis if annual turnover does not exceed $1 million (up from the previous $500,000 threshold); and
• clarifying that, broadly GST collected on sales is not assessable income, and GST creditable as an input tax credit will not be deductible.

Some potential complexities arise in relation to certain change of purpose adjustments and financial supplies.

The Tax Office has released GST booklets for the Road Transport and the Retailing and Wholesaling Industries covering various GST technical and compliance issues.

The booklets are available from the Tax Office web site www.taxreform.ato.gov.au; or by ringing the Tax Reform infoline on 13 24 78.

A number of concerns have emerged regarding the proposed PAYG legislation.

These include:

• potential cash flow pressures on small to medium enterprises;
• additional compliance costs;
• difficulties created by seasonal income fluctuations; and
• the application of instalment rules to beneficiaries who may be unaware of any entitlement to income at the PAYG due date.

We will keep you informed of developments.

It is understood that the Tax Office accepts that an individual, acting as a trustee, may also be an employee of the trust in some circumstances.

This is based on the legal principle where a person having different capacities may have power to contract in their representative (trustee) capacity with themselves as an individual.

Where appropriate, the trustee may have all the obligations of an employer.

In addition, deductions may be allowed for superannuation contributions made in respect of the employee, in appropriate cues.