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

In this edition we feature three articles on GST. It is important for you to keep up to date with the latest GST developments up to and beyond the 1 July 2000 start date.

We also cover other important tax developments such as:

• Fringe Benefits Tax being payable on loans to directors.
• A case where lease incentives paid to a legal firm were assessable income.
• The Tax Office's opinion regarding Fringe Benefits Tax and employer provided childcare.
• A recent case where share trading losses were tax deductible, even though the taxpayer was carrying on a share trading business in addition to their full-time employment.
• The meaning of 'employee' for tax instalment deduction purposes.
• Further changes to the proposed new superannuation investment rules.

The Treasurer has announced the first raft of tax reforms following on from the review of business taxation conducted by the Ralph Committee. The main reforms announced are discussed below.

The corporate tax rate will reduce to 34% from 1 July 2000 and 30% from 1 July 2001.

Major CGT reforms include:

• Indexation frozen as at 30 September 1999.
• For assets acquired before implementation and held for at least 12 months, individuals may choose between retaining indexation (to 30 September 1999) and being assessable on the total gain, or including 50% of the nominal (unindexed) gain as assessable income. Capital gains derived by superannuation funds will be taxed at 10% (not 15%).
• For assets acquired after 30 September 1999 (and held for 12 months) individuals and superannuation funds to be taxable on 50% and 66% of the gain respectively.
• For disposals from 21 September 1999:
• Averaging is abolished;
• Gains on depreciable assets excluded from CGT, but treated as ordinary income;
• 50% goodwill exemption replaced by a 50% active asset exemption available to small businesses with net assets of up to $5 million.

Other reforms include:

• 4D rollover relief for scrip-forscrip takeovers;
• improved incentives for investments in venture capital; and
• CGT exemption on retirement in some circumstances where active assets held for 1 5 years or more.

An optional Simplified Tax System is to be introduced for small businesses, effective from 1 July 2001.

The Simplified Tax System comprises:

a cash accounting regime;

a simplified depreciation regime (see below); and

A small business is a business that, together with any connected entities, has an average yearly turnover over for the current year, and the two previous years, of less than $1 million.

Changes to the depreciation provisions include:

For assets acquired from 21 September 1999:

• no accelerated depreciation. Depreciation to be based on the effective life of the asset (not applicable to small businesses until 1 July 2001);
• rates may be altered if the expected effective useful life changes;
• the balancing charge offset will be removed. Not applicable to small business taxpayers (until 1 July 2001) and involuntary disposals; and
• plant and equipment will be excluded from CGT.

From 1 July 2000 non-small businesses will no longer be entitled to immediately write off plant costing $300 or less but may depreciate all items costing less than $1,000 at a declining balance rate of 37.5%.

Small business taxpayers can continue to write off plant costing $300 or less. The threshold will be increased to $1,000 from 1 July 2001.

From 1 July 2001 (subject to further consideration) new rules will apply for all depreciating assets.

With the progressive reduction of the company tax rate, corresponding changes will also be required to restate the current Class C franking credits.

Companies may be able to maxin-dse benefits available to shareholders by paying a dividend prior to the required restatement of the franking account balances. Each company will need to consider its particular circumstances once more detail is available.

Also, imputation credits may be allowed (from 1 July 2001) for foreign dividend withholding tax (up to 15%) paid overseas.

The Government has not accepted the Ralph Comn-littee's recommendation for further FBT changes. Presumably then, FBT on cars will not increase.

It has announced that certain benefits provided by companies to shareholders and trusts to beneficiaries will be assessed as income in the recipient's hands. Accordingly, FBT will not be imposed on such benefits.

Entity tax reform will be introduced from 1 July 2001.

These reforms include:

We shall advise further once more detail is available.

Broadly, with effect from 22 February 1999, the Government will prevent deductions for revenue and capital losses created as a result of transfers of assets within majority owned groups.

The Government will also address defects in the continuity of ownership test where there are changes in the underlying ownership stake.

In addition, this test will have to be satisfied in the interim period between the loss year and the year the loss is recouped.

Measures will be introduced to prevent lessors from gaining tax benefits by assigning leases of plant to non-taxable entities or selling leased plant and exploiting the balancing charge roll over rule.

Upfront deductions for prepayments are abolished from 21 September 1999 (except for certain small businesses and individuals).

Loans provided from 22 February by certain related persons to closely-held entities will be treated as equity unless made on 'commercial' terms. Repayments will be subject to a profits first rule.

A loan will not be 'commercial' unless it satisfies essentially the same criteria as is applied to 'excluded loans' under the private company loan rules.

The Federal Court has found that certain loans by a unit trust to directors of its trustee company were made in respect of employment. The trustee was liable for FBT on the notional interest component of a loan fringe benefit.

The group structure showed that the directors had no right to the assets or profits of the business. The unit trust was owned by various discretionary trusts of which the directors were beneficiaries, so their respective rights were merely contingent. Therefore, it was only in their capacity as directors (employees) that they were able to access the loan funds.

Company directors and associates should take care before drawing funds from a business that they 'control' but do not (@cdy speaking) 'own'.

1-a

The Tax Office has released a ruling explaining the tax treatment of expenditure incurred in gearing up for GST. Items qualifying for an immediate tax deduction include new stationery, professional advice and costs of training and hiring staff.

Expenditure incurred on new plant and equipment should be written off over its effective life, while software may be written off over two and a half years. An immediate write-off applies to items of plant or software costing less than $300.

In addition, the Treasurer recently announced a proposal to allow small and medium businesses (turnover $IOM or less) to claim an immediate tax deduction for certain capital expenditure incurred before 1 July 2000 in gearing up for the GST.

The Treasurer recently announced that the GST cash accounting turnover threshold would be doubled (from $500,000) to $1 million.

This threshold is relevant for determining how to account for GST.

The two methods for accounting for GST are the cash basis method and the accruals basis method.

A registered enterprise (for GST purposes) may account for GST using the cash basis method where their annual turnover does not exceed $1 million.

Using the cash basis method means that GST is accounted for at the time payment is made or received.

The Tax Office and Treasury have recently announced that the GST will not apply to employee fringe benefits.

However, it is understood that the Government is reconsidering its position, following representations from professional bodies. Options may include imposing FBT on:

A further announcement is expected shortly. We will keep you informed as to developments.

A majority of the Full High Court has held that a lease incentive paid to a legal firm as an inducement to take up a lease of premises was assessable as income. The majority rejected the taxpayer's argument that the amount was not assessable because the firm was not seeking to move premises for the purpose of receiving the incentive.

The Court considered that the gain made was an ordinary incident of the firm carrying on its business. Further, the fi@ exploited its capital (being its goodwill, or the agreement to lease to receive the incentive).

The incentive did not add to the capital of the business but rather, like income, it flowed from the use of its capital. As such the majority found that the amount was assessable as income. This case may have wider application, when determining whether receipts are income or capital.

The Tax Office has released a draft ruling concerning the meaning of business premises in relation to childcare and a FBT exemption. It broadly adopts the position taken by the Federal Court in the Esso case, concerning the childcare exemption.

For premises to be business premises of an employer, the ruling requires some form of possession over the premises. The extent of possession needed will depend on the facts in each case.

Businesses providing childcare will need to consider the ruling carefully.

The Federal Court has confirmed that a taxpayer, otherwise employed full-time, was carrying on a share trading business. Consequently, trading losses were tax deductible.

Although the taxpayer's trading activities were short-lived (lasting less than one month) and undertaken from the employer's premises, it was held that most of the criteria required for a business were satisfied.

The Tax Office has issued a rulin. concerning the meanina 0 of e employee for tax instalment deduction purposes. The ruling considers the distinction between a contract for service (employee), and contract for services (perhaps a contractor) and the key tests to be applied, including:

• control;
• result of engagement
• power to dele-ate;
• risk; and
• integration.

The Government has introduced further changes to its proposed new superannuation fund investment rules.

The main change is that a fund will be able to elect to subscribe for further units in a unit trust it owns, up to the amount of external debt in the trust as at 12 May 1998. Unit subscriptions can occur at any time up to 30 June 2009.

If the fund makes this election, it cannot reinvest trust distributions into further unit subscriptions from 12 May 1998. It will also lose certain other concessions.