November 2000

Index

Your Tax Newsletter

The Government has finally released a draft of the long awaited Entity Tax rules that will apply from 1 July 2001. The Entity Tax regime will be a radical new system of taxing entities; it will tax companies and trusts on a more consistent basis.

The draft contains some surprises, most notably the exclusion of fixed trusts (which includes most unit trusts) from the regime. It also includes new rules concerning dividend franking and imputation and concerning franking credits for foreign dividend withholding tax.

We will issue a comprehensive summary of the proposals in the near future.

Where there are two or more owners of a closely held business, a buy-sell agreement should be considered.

Such agreements allow proprietors to buy the interest of a proprietor who departs because of death or trauma. Agreements typically assume the transfer will be funded by insurance.

It is preferable to structure arrangements so insurance proceed are received tax free. This has traditionally created some complex tax issues and a degree of uncertainty. The Tax Office has recently issued a discussion paper which, although not binding, at least gives a good indication of its likely views.

It now seems clear that parties can enter into relatively simple arrangements which the Tax Office will accept. These arrangements should:

• Allow the departing proprietor (or their estate) to receive proceeds tax free;
• Ensure that for capital gains tax the date of disposal corresponds to the time of transfer (not the time when the buy-sell arrangement was made); and
• Provide the remaining proprietors with a market value cost base for the interest acquired.

More sophisticated arrangements may involve holding life (not trauma) policies in a trust or super fund. A trust allows greater flexibility, whilst a superannuation fund is entitled to a deduction for the premiums (typically not otherwise available). Such arrangements are particularly complex and should not be entered into without careful consideration.

Readers may recall the decision in the Knowles case in which the Full Federal Court held that interest-free loans provided to directors of a corporate trustee were not necessarily provided in relation to employment. The case was referred back to the Administrative Appeals Tribunal (AAT) to be decided on its facts.

The AAT has now found that fringe benefits tax did not apply, as there was insufficient connection between the loans and the director’s employment. The important factors were as follows:

• The trust was established for the benefit of the directors and their families.
• Though they were not owners in law, the directors regarded themselves as such.
• There we no written agreements which connected the loans to their employment as directors.

This decision follows an earlier decision in which payments by a company on behalf of its directors were found to be exempt from FBT because they were related to ownership rather than employment.

Does CGT apply to sales involving a transfer of knowledge? This is a particularly important question given the various CGT concessions that might apply.

The Tax Office has recently released a determination which states that know-how is ‘knowledge and information rather than an CGT asset’. As such, it is not subject to CGT.

Any rights associated with know-how, such as agreement to disclose it or a license to use it, are considered CGT assets.

Payment for supplying knowledge or information may be considered income.

The Tax Office has released a fact sheet about the interaction between FBT and GST.

It provides no further guidance on difficult issues such as an employer’s input tax credit entitlement on the reimbursement of employee expenses.

The Government has announced its intention to further clarify these rules. We will keep you informed of developments.

The Tax Office has issued a new fact sheet about the calculation of PAYG instalment income on a cash basis. This applies to taxpayers who are not required to register for GST or who elect to cash account for GST.

According to the fact sheet, instalment income for such taxpayers will include all amounts received during the period, even if those amounts are assessable income for a different income period.

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