Business Tax GST Note

8/18/2019 Business Tax GST Note

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Business Tax and GST Sunday, 1 November 2015- the service are provided as direct result of advertising or otherwise offering the service to the

public at large or to a section of the public

• Employment Test- engage more 1 entities to perform work and the market value of the principal work performed

is at least 20% of the the PSE’s principal work for that year S87-25(1)

- an individual or PSE will also satisfy this test if it has an apprentice engaged for a least halfof the income year• Business Premises Test

- owned or lease by the contractor- mainly used more than 50% for PSI producing activities- exclusively used by the entity or the individual contractor- are physically separated form the individual or associate residence

Non Commercial Losses

• must be carried on business and Test on non commercial losses is:- assessable income Test [ income from the activity for the income year at least $20,000 or

would be reasonably estimate to be at least $20,000 for the whole year. [S35-30]- Profit Test [the activity has made profit in at least 3 for the past of 5 years] [S35-35]- real property test [ the total value of real property at least $500,000] [S35-40]- Other asset test [ the total value of other asset used on continuing basis in the activity is at

least $100,000] [S35-45]. also apportion for not carried on business [S35-50]- Division 35 does not apply to losses for a primary deduction or professional art business where

assessable income for the year from other sources is less than $40,000.

• exemption- special circumstances outside the taxpayer control- nature of the business activity

Interest Deduction

• the use to which the borrowed money is put• interest incurred before income produced - interest deduction is allowed

• interest incurred after business ceased - is deductibleUniform Capital Allowance• a taxpayer may use the prime cost or diminishing value method to calculate the decline• yearly decline in value of the asset S40-25(1)• must hold the asset during the year in question• Once a choice has been made to allocate an asset to a low value pool. all low cost asset acquired

in that income year and future year must be allocated to the pool and those asset must remainingthe pool [S40-430]- a low cost asset is an asset that cost less than $1,000 [S40-425]- a low value asset is an asset had been made depreciated using diminishing value method and

that has an opening value of less than opening value less than $1,000

•Low value pool

1. take 18.75% of taxable use of percentage of the cost of each low cost asset allocated to thepool for that year

2. add to the result from 37.5% of the sum of the pool closing balance for the previous incomeyear and the opening adjustable value of low value assets allocated to the pool for that year

3. the declining value of the depreciation assets in the pool and fully deductible.

• long life pool• take 15% of the cost of all asset acquired during the year multiplied by their taxable use

percentage

• take 30% of the closing pool balance from the previous year plus 30% of existing assets addedto the pool this year

• add the total from steps 1 and 2 and this is decline in value claimable this year.

Deduction for blackhole expenses• business capital expenses cannot be deductible under S8-1• if no other specific provision applies depreciation or special building write off

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Business Tax and GST Sunday, 1 November 2015

GST

Taxable supply S9-5 [5 elements]

Supply

• supply goods or service, provision of advice or information , grant assignment or surrender goreal propertyConsideration

• any paymentAustralia

• Delivered or made available to the recipient of the supply in Australia S9-25(1)• Removed from Australia S9-25(2)• Bright into Australia S9-25(3)

Registered

• annual turnover threshold 75,000 for business and 150,000 for Not for Profit bodies S23-15• current annual turnover• projected annual turnoverEnterprise• definition raised the issue of wether a business is being carried on S29-20• Business is any profession, trade, employment vocation or calling but does note include

occupation as an employer S195-1

GST Free S38-4Food is defined

• food for human consumption, ingredient for food for human consumption, good to be mixedwith food for human, fat and oils marketed for culinary purposes, also packaging for food whereit must be consider necessary

Medical Service S38-7

• Other health service S38-10 (dental, optical, chiropractic and physiotherapy.)• Medical service not under medicare is not GST free Cosmetic(S38-7(2)(a) & (b)• Private insurance and ambulance insurance is GST free [S38-55]Education

• the supply of school or tertiary education is GST free S38-85 & 95• course lead to qualification is GST free• Training not GST freeChildeCare

• GST free for government funding facilities and registered carer for purpose of the childcare rebateS38-140 to 150

Exports

•must leave Australia before 60 day after issues of Invoice S38-185

Other than Goods [S38-190)

• the supply directly connected outside Australia• the supply is made to non resident who is not not in Australia or• the supply is of right that are use outside of Australia and supply to non residentFarm Land S38-480

• intended for carrying on a farming business will be GST Free if that land has been used forfarming purpose for at least 5 years (at least someone)

Supplies of Going Concern

• 3 condition [S38-325 (1)(a-c)• there must be a consideration• the recipient is registered or require to be register for GST

• agreement of supply of going concern(writing) In Re Midford [n stated going concern on thewriting agreement]

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Business Tax and GST Sunday, 1 November 2015• 3 condition must also have have arrangement, supplier must supply and all thing necessary for

continued operation

• Now looked at from POV of the purchaser where necessary need is fulfilled.

Margin Scheme

it is applied when the seller is not unregister for GST• Conditions apply1. There is a taxable supply of real property2. The supply is: A sale of a freehold interest in land, A sale of a stratum unit or A grant or sale

of a long-term lease3. The vendor and the purchaser agree in writing to use the margin scheme on or before the

date of supply4. Not if entire interest through supply “ineligible for the margin scheme”

Requirement

• For the margin scheme to apply both parties must also agree in writing on or before the day ofthe supply that the supply is subject to the margin scheme. This can be by way of email orseparate letter and does not need to be in the sale contract.

Exports

• must leave Australia before 60 day after issues of Invoice S38-185

Other than Goods [S38-190)

• the supply directly connected outside Australia• the supply is made to non resident who is not not in Australia or• the supply is of right that are use outside of Australia and supply to non residentFarm Land S38-480

• intended for carrying on a farming business will be GST Free if that land has been used forfarming purpose for at least 5 years (at least someone)

Supplies of Going Concern• 3 condition [S38-325 (1)(a-c)

• there must be a consideration• the recipient is registered or require to be register for GST• agreement of supply of going concern(writing) In Re Midford [n stated going concern on the

writing agreement]

• 3 condition must also have have arrangement, supplier must supply and all thing necessary forcontinued operation

• Now looked at from POV of the purchaser where necessary need is fulfilled.

Margin Schemeit is applied when the seller is not unregister for GST

• Conditions apply1. There is a taxable supply of real property2. The supply is: A sale of a freehold interest in land, A sale of a stratum unit or A grant or sale

of a long-term lease3. The vendor and the purchaser agree in writing to use the margin scheme on or before the

date of supply4. Not if entire interest through supply “ineligible for the margin scheme”

Requirement

• For the margin scheme to apply both parties must also agree in writing on or before the day ofthe supply that the supply is subject to the margin scheme. This can be by way of email orseparate letter and does not need to be in the sale contract.

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FRINGE BENEFIT AND REMUNERATION TAX

• FBT is a separate tax from income tax and is administered under its own Act, the Fringe BenefitsTax Assessment Act 1986 (FBTAA).

• The FBT year always runs from 1 April to 31st March.

• A fringe benefit is defined in s136(1) of the FBTAA as:- a benefit- provided by an employer (or someone on the- employer’s behalf);- to an employee or an associate (family member) of the employee;- at some time during the FBT year;- in respect of the employment of the employee.

• FBTAA to include any right, privilege, service or facility.• The term ‘associate’ is defined to take the same meaning as that term has in s318 of ITAA36 and

so includes a spouse (whether legally married or not) or other relative (including spouse or childof a relative).

• To work out the taxable value of a fringe benefit, the value is “grossed up” to increase it to theapproximate value of the amount a recipient would have had to receive before tax to acquire thesame value as the fringe benefit.

• After this “grossing up” the FBT rate (currently 47% for 2015 year) is applied to work out the FBTliability.

• The FBT gross-up rate takes account of GST to ensure neutrality between the treatment of fringebenefits and cash salary.

• As a result of GST, there are now 2 gross-up rates.• If the employer is entitled to an input tax credit: the gross-up formula

1. Grossed up value for GST; 2.08022. Grossed up value without GST; 1.8868

• Any FBT paid is deductible to the business for income tax purposes under s8-1 second limb,

being an expense “necessarily incurred” in carrying on a business per Magna Alloys test 80 ATC4542.

Type of Fringe BenefitCAR

• A car fringe benefit arises where a car is made available to an employee for private use and thevehicle is owned or leased by the employer.

• Vehicles covered are passenger cars, station wagons, mini- buses, panel vans and utilities(except those designed to carry a load of 1 tonne or more) or any other vehicle designed to carryless than 1 tonne or fewer than 9 passengers.

• The term “private use” is defined in 136 (1) as any use not exclusively in the course of producingassessable income of the employer. Home/work travel is normally regarded as private use (ATO-Ruling MT 2027).

• A car garaged at the employee’s private residence is treated as being available for privateuse.

1. Statutory Method

• (ABC/D) - E• A is the base value of car• B is the relevant statutory fraction• C is the number of days during the year in which the car was privately used or available for

private use

• D is the number of days in the FBT year of tax• E is the amount of the recipient payment

the general rule is that the base value is the cost price of car S9(2). cost price is defined in S136(1)as the amount of expenditure incurred in acquiring the car, including any delivery cost & GST(excluded registration and stamp duty)

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Business Tax and GST Sunday, 1 November 20152. Operating Method

• Business Kilometres/total kilometres = percentage• C X (100% - BP)-R• C is operating cost (fuel repairs and maintenance cost, registration and insurance cost, where

the car depreciation and deemed interest charge, where the car is leased, the amount of any

leases charges)• BP is the business percentage to the car• R is the amount of the recipient payment

logbook is require to be kept for minimum period of 12 weeks and to be updated at leas every 5years.

CAR PARKING FRINGE BENEFITSBenefits in the form of car parking provided to employees are subject to FBT where the employermeets the costs provided certain conditions are met:

• The car is parked at or in the vicinity of the employer’s business premises;• The car is used by the employee to travel between home and work;• The car is parked for periods totalling more than 4 hours between 7am and 7pm; and• A commercial car parking station is located within 1km and the charge is more than the “car

parking threshold” amount($8.26 per day for the 2015 FBT year).

• There are 3 different methods available. If no choice made, then actual number is used.- Actual number of spaces provided (s39C)- actual records need to be kept;- Statutory formula (s39FA)- a fixed statutory number of days (228) applies to each space. This

is multiplied against the number of car park spaces available and the number of employees;12-week register method (s39G)

- 12 week register recording total number of car parking benefits provided can be used.• There are also 3 different methods to value the parking benefits provided.

- Commercial parking station method (s39C)- use the value of the lowest all-day parking feeduring business hours by a commercial parking station located within a 1km radius;

- Market value method (s39D)- requires a valuer to provide the market value of the parkingspaces provided.- Average lowest cost method (s39DA)- employer takes average of the lowest fees charged to

members of the public for all day parking by a commercial parking station within a 1km radiuson the first and last day of the FBT year.

DEBT WAIVER FRINGE BENEFIT

• If an employer, or an associate or a third party, pursuant to an arrangement with the employer,releases an employee (or an associate of the employee) from an obligation to pay an amountowing, then a debt waiver fringe benefit arises,s14.

• The taxable value of the fringe benefit is the amount released from payment, s15.

•The waiver must be in connection with the employment of the employee.

LOAN FRINGE BENEFIT

• A loan fringe benefit arises where an employer makes a loan to an employee.The loan exists aslong as the debt remains, s16.

• A “loan” includes an advance of money, the provision of credit, the payment of money on accountof another where there is an obligation to repay or any other transaction that is a loan insubstance, s136 (1).

• A loan that carries interest that is not payable at least every 6 months, will give rise to a new loanequivalent to the deferred interest component, s16 (3), (4). The new loan will arise at the end ofthe 6-month period and will be of an amount equal to the unpaid interest.

• Notional interest is calculated by reference to the “benchmark interest rate”, which for the FBT

year ending 31 March 2015 was 5.95%.• However, as the loan is used to buy shares- which are income-producing property, s19 allows a

reduction of the taxable value based on the “otherwise deductible” rule.

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Business Tax and GST Sunday, 1 November 2015• As the loan proceeds are used 100% for an income producing purpose, this reduces the taxable

value of the loan fringe benefit by 100% to nil.

EXPENSE PAYMENT FRINGE BENEFIT

• An expense payment fringe benefit arises when an employer pays for or reimburses expenses

incurred by an employee or an associate, s20.• The amount that is paid or reimbursed by the employer is generally taken to be the taxable valueof the fringe benefit in the case of an external expense payment fringe benefit.

• Concessional valuation rules apply to “in- house” expense payment fringe benefits.• In-house means benefits of a kind that the employer provides for sale to the public e.g. Telstra

reimbursing its employees their telephone expenses.

• Important to distinguish between the 2• In the case of Roads and Traffic Authority of NSW v FCT (1993) 26 ATR 76, the court made a

clear distinction between an allowance and reimbursement, with an allowance not being subjectto FBT as it is included in the definition of “salary and wages”.

LIVING AWAY FROM HOME ALLOWANCE

• An allowance paid by an employer to his or her employees to compensate them for additionalnon-deductible expenses incurred due to the employee (and family) being required to live awayfrom home in order to perform their duties may be a fringe benefit, s30.

• For the employer to obtain concessional taxtreatment the employee must pass 3 tests:

- The employee must maintain a home in Australia;- The employee must incur expenses for accommodation and food for a maximum period of 12

months;- The employee must provide the employer with a declaration about LAFHA.

Accomodation is exempted fromFBT

• If the employee passes these 3 tests then the taxable value of the LAFHA can be reduced by theamount of the employee’s actual substantiated accommodation expenditure, not a reasonable

estimate, and the amounts incurred by the employee on food or drink, less a statutory amount.• Location allowances paid to attract or retain employees at a particular area that are calculated

without regard to additional living expenses are not treated as LAFHA fringe benefits, TD 94/14.AIRLINE TRANSPORT

• An airline transport fringe benefit arises under s32 where free or discounted travel in passengeraircraft is provided to an employee of an airline or a travel agent on a flight and the flight isprovided under stand-by arrangements.

• The taxable value of these benefits is calculated as 75% of the standard economy airfare fordomestic stand-by passengers (which is 50% of the usual economy fare).

ENTERTAINMENT

• The general position is that the provision of entertainment to an employee is a fringe benefit.

•Entertainment is defined in s32-10 of ITAA97 as “entertainment by way of food, drink orrecreation, or accommodation or travel to do with providing such entertainment”.

• Entertainment expenses are generally not deductible for income tax purposes, 32-5 ITAA97.However, where the provision of the entertainment constitutes a fringe benefit, an employer isentitled to a deduction, s32-20 ITAA97, but of course FBT is payable.

• Some entertainment expenses are exempt benefits, such as where meal entertainment isconsumed by an employee on an employer’s premises on a business day, s41 FBTAA.

• The provision of entertainment to a person other than an employee (e.g. a client or customer) isnot subject to FBT (and also no tax deduction would be permitted, s32-5).

• ‘Business premises’ in 136 (1) includes corporate box facilities.• Meal expenses do not include meals purely for sustenance or refreshment e.g. morning and

afternoon teas and light meals or meals provided to employees working overtime.

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Business Tax and GST Sunday, 1 November 2015• Taxable Value

- Employers can elect under s37AA that 50% of the GST-inclusive cost of the total mealentertainment is subject to FBT (s37BA) and 50% will therefore be non-tax deductible (s32-10ITAA97).

- This 50/50 option reduces compliance costs and is very widely used in practice.

- As an alternative, the employer can elect (under s37C) to maintain a 12-week register todetermine the percentage of total meal entertainment that is subject to FBT (s37CB). Thisregister will be valid for the FBT year in which it ends and 4 additional years, unless the totalGST-inclusive meal entertainment costs vary by more than 20%, s37CD.

- If no election is made to adopt the 50/50 or 12- week register method, the taxable value isdetermined on the basis of actual expenditure.

In-house property fringe benefits

• An ‘in-house property fringe benefit’ is defined in s136 (1) as a benefit where the employerprovides a benefit (in respect of tangible property) to an employee and the employer’s businessincludes the sale of identical or similar property.

• Concessional valuation rules apply (and are set out in s42). These rules provide:- · If the goods are identical to those supplied by the employer to manufacturers, wholesalers or

retailers,- by wholesale sale then the taxable value is the difference by which the lowest arm’slength selling price exceeds the amount charged to the employee;

- If the goods are identical to those normally sold by the employer to the public by retail, (retailsales) then the taxable value is 75% of the lowest price charged to the public less any amountpaid by the employee;

- If the goods are similar, but not identical, to the goods sold in the ordinary course ofbusiness, (for example seconds), the taxable value of the benefit is 75% of the amount thatthe employee could reasonably expect to pay for the goods (under an arm’s length sale)less any amount actually paid by the employee.

Division 14 provides that the first $1,000 of the taxable values of ‘in-house’ property fringebenefits and airline transport fringe benefits provided to an employee during an FBT year

reduces the taxable value of any fringe benefit.

SUPERANNUATIONTax payable on contribution phase

• A complying superannuation fund must deduct tax at the rate of 15% on all deductiblecontributions (concessional contributions) into the super fund.

• No tax is payable on an un-deducted contribution (Non-concessional contributions) to the fund.Accumulation phase

• The funds invested into the superannuation fund are themselves invested to provide retirementbenefits for the members of the fund.

• The rules which govern the assessable income, allowable deductions and the calculation of tax inrelation to a superannuation fund are generally contained in Part 3-30, Div. 280-312 of theITAA97.

• The tax treatment of a superannuation fund depends upon whether it is a complying or a non-complying superannuation fund.

• Complying superannuation funds are taxed at a concessional rate of 15% on earnings in thefund, whilst non-complying funds are taxed at 45%.

• This is true until the members of the fund are aged 60 or over and eligible to receivebenefits.

Withdrawal phase

• The third phase in the life cycle of superannuation funds is the withdrawal phase, where thesuperannuation benefits are withdrawn.

• The fundamental purpose of superannuation benefits is to enable people to financially

support themselves in their retirement.• As a result, the government requires that (with limited exceptions) that benefits be preserved until

retirement age.

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Business Tax and GST Sunday, 1 November 2015• Once a member retires or a specified circumstance occurs (e.g. death), then the accumulated

superannuation benefits may be accessed.

• From 1 July 2007 no tax is payable on super benefits paid to a member who is 60 years of age orolder (if the fund is fully funded).

• that all benefits whether taken as a lump sum or a pension are exempt from tax when paid by a

superannuation fund to persons aged 60 years of age or older.• This only applies where the pension and/or lump sum is paid from a ‘fully funded’ superannuationscheme. Many government superannuation schemes are not fully funded and so pensions and/orlump sums drawn from these will not be fully exempt. A rebate is available to reduce any taxpayable.

• This ‘unfunded’ superannuation liability of many government run superannuation schemes wasthe main reason for the creation of the so called ‘future fund’.

• The current minimum retirement age is 60 but this age may increase in the future (given the agepension is no longer available for person after 1965 until they turn 70). For persons born between1960 and 1964, there is graduated retirement age, so that someone born in late 1962 has aretirement age of 58.

• Generally, if the taxpayer is under 55 years of age then the maximum tax on the superannuationproceeds paid to the member would be for the year ended 30 June 2015: 20% but if the person isaged 55 years or over, then no tax is payable for an amount paid up to $185,000 and15%ispayable on the amount paid over $185,000.

Employee contributions

• Employee are not able to claim tax deduction for personal contributions to superannuation.• Amounts contributed to a superannuation fund by persons not able to claim a tax deduction for

the contributions are known as NON-CONCESSIONAL CONTRIBUTIONS.

• Prior to 1 July 2006 there had not been any limit on the amount of these NON-CONCESSIONALcontributions.

Self employed or substantially self employed

• If a taxpayer is self-employed or substantially self-employed person and they meet the maxim

earnings test under s290C then they can claim a tax deduction for super contributions.• A self-employed person is someone who gets no employer-support. There is, however, a limit on

how much can be claimed as a tax deduction for super contributions.

• This limit is known as the concessional contribution limit• Substantially self employed person• A ‘substantially self-employed’ person as set out in s290-160 ITAA97 is someone who has been

an employee during the year of income and has had superannuation contributions paid on his orher behalf but whose total assessable income (plus reportable fringe benefit amount) fromemployment during the year of income is less than 10% of their total assessable income.

• Assessable income from employment must be less than 10% of total assessable income.• Concessional contribution Limit

- The contribution limit is $30,000 (for taxpayers aged under 49).- For taxpayers aged 49 years or over their limit is $35,000 for the year ended 30 June 2015.

If exceed concessional contributions limit

• Section 291-15 provides that if an employee exceeds the concessional contribution limit then theexcess is included in their assessable income and taxed at their marginal rate but they areentitled to a 15% tax offset.

• This ensures the excess amount is taxed at no more than 47% (but it could be less).Non-concessional contribution limit- All taxpayers

• From 1 July 2014, taxpayers have a limit of $180,000 per year or $540,000 over 3 years, of theamount of un-deducted contributions (also called non-concessional contributions) that can bemade to their superannuation fund.

• This non-concessional contribution limit is set out under s292-85.

Excess non-concessional contributions• Any un-deducted contributions made that exceed this limit are taxed at 47% to the individual.• The marginal tax rate also can be apply in their individual tax return

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CGT

Capital Gain = capital proceed -cost baseSmall Business CGT concession

• Subdivision 152-A sets out the 3 basic pre-conditions that are common to all of these

concessions and that must be satisfied.• The 3 basic pre-conditions to be satisfied common to each of the 4 concessions are:1. $6 million limit on the net assets of the small business and entities (before 1 July 2007 the

limit was $5 million) OR2. be a small business entity (as defined in s328-110); AND3. Each CGT asset must be an active asset (and so pass the active asset test); and4. If the asset is a share in a company or an interest in a trust there must be an individual

with a significant interest and for the individual claiming the concession he/she must be aCGT concession stakeholder.

• The assets taken into account for the purposes of the maximum net asset value test are the:• Net value of the CGT assets owned by the taxpayer;• Net value of CGT assets of any entities connected with the taxpayer; and• Net value of CGT assets of the taxpayer’s “affiliate” (which is defined to be anyone who might

reasonably be expected to act in accordance with the directions or wishes of the taxpayer inaccordance with their business affairs (it is no longer automatically the taxpayer’s spouse andany children under 18) s328-130.

• An entity is connected with another entity if the first entity controls at least 40% of the ownershipinterests in the other entity (s328-125(4)), unless another entity controls the majority interest inthat other entity.

• In the case of a discretionary trust, a beneficiary will be considered to control that trust undereither of 2 tests- the distributions test or the influence test.

• The distributions test applies if the beneficiary has received at least 40% of the totaldistributions of income or capital of the trust in at least 1 of the 4 preceding years before the

CGT event or they are a trustee or appointer of the trust. (NOT year of event)- s328-125(4).ActiveAssetTest

• An active asset is defined in section 152-40 as an asset owned either by the taxpayer or theiraffiliate or an entity connected with the taxpayer, and used in the carrying on of thebusiness.

• It includes land and buildings used in carrying on a business and also intangible assets, such asgoodwill and trade names inherently connected with the carrying on of a business.

• A share or an interest in a trust will also qualify as an active asset if the market value ofthe active assets of the company or trust are 80% or more of the market value of all assetsof the company or trust: s152-40 (3).

• The asset only needs to be an active asset for half the period of ownership

•However, an active asset cannot include (under section 152-40(4)): ·

• Interests in a connected entity, company or trust (unless the connected entity satisfies the80% active asset test);

• A financial instrument or Any asset used mainly to derive interest, annuities, rent,• royalties or foreign exchange gains.

• If the asset being disposed of is a share in a company or an interest in a trust,, to access therules you need to also be a “significant individual”.

• To hold significant interest:• In a company- the individual must have a small business participation percentage of at least

20% of voting, capital and dividend rights, s152-55;

• In a Fixed Trust- the individual must have entitlements to at least 20% of the income andcapital of the trust, s152-55

15-year retirement exemption (Subdivision 152-B)• The exemption will apply to an individual (s152-105) if:

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Business Tax and GST Sunday, 1 November 2015• The CGT asset was owned by the individual for at least 15 years continuously just before the

event; and

• The taxpayer must be at least 55 years old at the CGT event time and (retirement or they arepermanently incapacitated)

• The 15-year continuous ownership period is extended where the CGT asset is compulsorily

acquired, lost or destroyed or the CGT asset is transferred under the marriage breakdown rules(s152-115).

• The exemption also applies to the disposal of an asset by a company or trust, s152-110 (if gaindistributed within 2 years of the event, s152-125 (2)) and:

• The above 2 conditions are met and the significant individual just before the event was at least 55years old and retiring or permanently incapacitated; and

• The entity had a significant individual (but not necessarily the same one) during the whole 15-year period.

• The 15-year rule has priority and so must be applied first (s152-215). It results in completeexemption of any capital gain (and so other capital losses are not affected).

50% Active Asset Reduction (Subdivision 152-C)

• This concession applies automatically if the basic conditions are met, s152-205.• The taxpayer does have a choice of which of the 3 remaining concessions apply and in which

order

• (s152-220). Therefore, the taxpayer can elect, whether to apply this 50% reduction or instead touse the retirement exemption and the replacement asset rollover, whichever is more beneficial tothe taxpayer, s152-210.

The Small Business Retirement Exemption

• This Subdivision requires that the proceeds be used in connection with the retirement of thetaxpayer and as such there is a lifetime limit of $500,000 for an individual; however, the amountapplied under this exemption must be used to pay an ETP.

• must have“connection with retirement”.• If the individual is under 55, at the time of the event, the exempt amount must be rolled over as

an ETP into a super fund or approved deposit fund (s152-305).• If the taxpayer is aged 55 or older at the time of the event, the taxpayer is entitled to receive the

exempt amount in cash as a tax-free ETP.

• For companies and trusts (section 152-325):• The ETP must be made to the significant individual within 7 days of the later of making the

election (at time of lodging tax return for the year the capital gain was made) or the receipt ofthe consideration for the disposal of the asset;

• The significant individual test need only be satisfied just before the disposal and so does notneed to be met for the whole period of ownership.

• Companies and trusts are unable to claim a tax deduction for the payment of this ETP to asignificant individual.

The Small Business Rollover Concession (Subdivision 152-E)

• Rollover relief can apply where replacement active assets are acquired within 2 years after or upto 1 year before the date of the CGT event.

• The gain is effectively deferred.• Any amount of capital gain remaining after the application of• this roll over relief will be taxed, s152-415• The rollover acts as a deferral of the CGT liability but this will again be triggered when the

replacement asset is later sold or disposed of or the replacement asset ceases being an activeasset (s104-185)- CGT Event J2 However, further rollovers are permitted.

• If the status of a replacement asset changes (that is, it ceases to be an active asset or becomestrading stock), then CGT Event J2 will be triggered and a gain will accrue equal to the gainignored under the concession.

• CGT Event J5 will occur if the replacement asset is not acquired within the 2 year period after theCGT event occurred.

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STATE TAXES

Stamp Duty (only for year ended 30 June 2015)Is a charge on a certain document and transaction

Share TransactionThe rate applies $0.60 for ever $100 or part of it ( this was abolish on 18 June before the date stamp dutyapplies)

Motor VehicleIt is applies to new register vehicle and second hand vehicle[second hand is calculate as the higher of thesale price or the market value]. where there also 2 type of vehicle which is commercial vehicle (design forcommercial) and private vehicle (design for private vehicle)

• Private Vehicle [value exceeding $3,000 the duty payable is $60 plus $4 for every $100 part of $100 over$3000]

• Commercial Vehicle [value exceeding $3,000 the duty payable is $60 plus $4 for every $100 part of $100over $3000]

Stamp duty is applied on additional equipment added to the motor vehicle by the manufacturer

Insurance

• Life insurance [1.5% of the premium• General Insurance [11% of the premium]the liability to duty in SA would be based on then value of the insurance risk allocated in SA [Apportionmentshould be Applied]

Real Property

• any contracts or agreement in writing for the sale of any estate or interest in any property• all transfer of land are subject to duty under section 60 on the instrument of transfer of the land (including

improvement) or the consideration (including GST) whichever is greater.

Conveyances rate

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Business Tax and GST Sunday, 1 November 2015Transfer of BusinessAlready abolished just when the landholder provision apply conveyances rate on the share or unit oftransfer.

• majority interest more 50%• a person acquired an interest which aggregated with acquisition made them and related a party in previous

2 years result in majority interest being acquired.

• the value of the land must no be less than 1 million

PAYROLL TAXLiability to register for payroll taxes where the amount of any wages paid through Australia exceed the full SAdeduction entitlement available to the employer and the employer pays wage in SA

• maximum deduction entitlement is $600,000• the rate is 4.95%

Land Tax

• In SA it is only land owned by a natural person and used as his or her principal place of residence that isentitled to the exemption.

• Where a person conducts a business from their principal place of residence, the property will remain

exempt from land tax if the land area used for conducting the business is less than 25% of the total floorarea of all the buildings on the land (excluding outside and garden areas).

• Primary production land exemption• Land used for primary production is exempt in all jurisdictions.

• Primary Production is defined as land held for cultivation for the purposes of selling what is produced fromthat cultivation, the maintenance of animals and poultry, the keeping of bees, commercial fishing and thecultivation and propagation of plants, seedlings and trees.

• In SA, an exemption is available in respect of land not less than 0.8 hectare if the land is used wholly ormainly for the business of primary production.

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Anti Avoidance

NationalTaxPractitionersBoard, replace the various State based Boards to monitor and enforcecompliance with standards. Advantage:Wider and more flexible.Purpose: Tax agent and BASservices provided to public are of an appropriate ethical and professional standard.

• Tax agent: ascertaining, advising an entity about liabilities, obligations or entitlements of an entitythat arise under a taxation law or representing an entity in their dealings with the Commissioner.BAS agents :only provide a limited range of services relating to the taxation laws relevant to aBAS provision in the law.

• Meeting the fit and proper person test, as well as minimum educational qualifications and relevantexperience to provide tax agent services for a fee or other reward.

• In determining whether someone is a fit and proper person, regard must be had as to whether theindividual is of good fame, integrity and character. Bankrupt, term of imprisonment, convictedof a serious taxation offence, fraud or dishonesty or being a promoter of a tax scheme.

• Section 30.10 code of professional conduct. act honestly and with integrity, comply with the taxlaws,act lawfully in the best interests of the client,act confidentially and professional competence(

keep up to date), failed result in penalties.• if Tax and BAS agent breached the code, Board may require agent to complete a course of

training, practise under supervision, caution, suspend or terminate agent registration and subjectthem to type that agent allow( practising restriction) pay a pecuniary penalty for certain seriousmisconduct, seek injunction to prevent entity from engaging in or compel an entity to undertake,certain conduct.

• A taxpayer who uses a tax agent or BAS agent will benefit from a safe harbour. Penalty no longerapply to taxpayer where a false or misleading statement is made carelessly, provided thetaxpayer has taken reasonable care to comply with their tax obligations by giving their tax agentor BAS agent the information necessary to make the statement,document (such as a return,notice or statement) is not lodged on time due to the tax agent 's or BAS agent 's carelessness.

• Cannot charged people if you are not tax agent. If lawyer/accountant give tax advice need to betax agent.• Penalties.Penalties are levied according to the extent of “culpability” and are based upon any

“shortfall amount” being the difference between the tax correctly payable and tax payable basedupon the taxpayer’s tax return.intentional disregard- penalty is 75% .acts with recklessness-penalty is 50%.If the taxpayer has taken a position that is not “reasonably arguable” -penalty is25%.

• Additional to any such penalties is the “general interest charge” (set each quarter and for theSeptember 2015 quarter was 9.15%), which is designed to recompense the Treasury for the“time use” of money by the taxpayer for the period that the shortfall amount was overdue.

• Pre-conditions for operation of Part IVA

• For Part IVA to apply 3 elements must be satisfied:- There must be a ‘scheme’; S177A- A taxpayer must obtain a ‘tax benefit’ in connection S177C with that scheme; and- It would be concluded that the scheme was carried out for the dominant purpose of enabling

the taxpayer to obtain a tax benefit in connection with that scheme.

Scheme

• “any agreement, arrangement, understanding, promise or undertaking, whether express orimplied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

• any scheme, plan, proposal, action, course of action or course of conduct”.• FCT v Peabody (1994) 28 ATR 344, that where a scheme consists of a series of steps, or a

course of action, the Commissioner cannot isolate one step out of the course of action and

classify that as a scheme.but that the scheme must still be capable of standing on its own withoutbeing robbed of all practical meaning.

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Business Tax and GST Sunday, 1 November 2015Tax Benefit

A ‘tax benefit’ as defined in s177C will arise whenever:

• An amount is not included in the assessable income of the taxpayer,• A deduction is allowed to a taxpayer, which would not have been allowable,• A capital loss is incurred by the taxpayer; or

• A foreign tax credit being allowable to the taxpayer,• which would not have been allowable, or might reasonably be expected to not have been

allowable, if the scheme had not been entered into (foreign tax credit allowable).

Purpose of entering into the scheme

• Section 177D lists 8 factors, which must be taken into account in determining whether or not thepurpose of the taxpayer entering into the scheme was to obtain a tax benefit.

• These 8 factors listed are:- The manner in which the scheme was entered into or carried out;- The form and substance of the scheme;- The time at which the scheme was entered into and the length of- the period during which the scheme was carried out;- The result in relation to the operation of the Tax Act, but for Part IVA, would be achieved by the

scheme;- Any change in the financial position of any person, who has any connection (whether of a

business, family or other nature) with the relevant taxpayer, that will result from the scheme;- Any consequences for the relevant taxpayer or other connected person of the scheme having

been entered into or carried out;- The nature of the connection (whether of a business, family or- other nature) between the relevant taxpayer and that other- connected person; and- Any changes in the financial position of the taxpayer.

Anti-avoidance provisions

• The Commissioner has on many occasions referred to the application of these criteria asapplying a “smell test” meaning do the factors give “a smell of tax avoidance”.

• This requires looking at the degree of artificiality or contrivance present.

• Spotless Services Ltd v FCT (invest in cook island)• WD & HO Wills (Australia) Pty Ltd Sackville J concluded that the purpose of obtaining the

insurance cover was commercially driven- to obtain indemnity against health risks that otherwisewould not have been available.

• In Mochkin (2003) 52 ATR 198, the Full Federal Court found that Part IVA did not apply wherethe taxpayer used trusts to carry on a stockbroking business as again the purpose by thetaxpayer in entering into the scheme was not tax driven, but rather to limit personal liability, eventhough the arrangement involved distributions to loss trusts.

• Puzey v FCT The Federal Court (2003) 53 ATR 614 held that the first limb of s8-1 was satisfiedbut that PartIVA applied to disallow the deductions.The tax payer incurred expenses in asandalwood plantation project. These expenses were incurred over a number of years and asthere was a reasonable expectation to produce income from the project, the expenditure wasdeductible under s8-1 as it was held the taxpayer was carrying on a business.

• FCT v Consolidated Press Holdings (2001) 207 CLR 235 The case provides authority that thedominant purpose test is not limited to consideration of the taxpayer’s purpose, but of thepurpose of any person who entered into or carried out the scheme or any part of the scheme.This could include an accounting or legal adviser,a promoter of an investment scheme or perhapseven a relative of the taxpayer (for instance, a parent conferring a tax benefit on a child).

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Business Tax and GST Sunday, 1 November 2015• FCT v Hart The High Court (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ) on 27 May

2004 has unanimously upheld the Commissioner's appeal against the decision of the Full FederalCourt, and held that Part IVA applied to deny the taxpayers a deduction for part of the interestincurred by them under a "split loan facility" containing what was called a "wealth optimiserstructure”. The transaction under review involved a single loan that was split into 2 portions, one

referable to a “home loan” and he other referable to an “investment loan” account.• Gleeson CJ and McHugh J (in a joint judgment) rejected the Full Federal Court's decision that

the taxpayers' dominant purpose in entering into the scheme was to obtain finance, their Honourssaid:

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International TaxChap 7: International Business TaxationResidence. Taxation of non-resident: Under s6-5(for ordinary income) and s6-10(Statutory income) a resident Au taxpayer is assessable totax in AU on their income from all sources, both Australian and overseas, s6-5(2) & s6-10(4). Residence test for individual only

1 need to be satisfy. The test are: 1)resides in Au, domicile is in Au unless the Commissioner satisfied that his permanent placeof abode is outside Au, been in Au for more than one-half of the year of income unless the Comm..place of abode..does notintend to take up residence in Au or member of the Commonwealth Superannuation Scheme. Residence test for company: 1)incorporated in Au, or carries on business in Au and has its central mgt and control in Au or carries on buss in Au and has itsvoting power controlled by Au resident taxpayers. Income tax and CGT exemptions for ‘temporary resident’: Exemption from Au taxation (on their foreign source income) if thetaxpayer is the holder of an Australian temporary entry visa and has not been an Australian resident at anytime in thepreceding 10 years. DTA: Minimized taxation. Agreement between 2 countries outlining an agreed basis for taxing their residents. To preventdouble taxation by limiting or excluding the right under its domestic law, of one of the Contracting States to impose tax in aparticular situation. Where any provision of a DTA is inconsistent with any other Au law, including the ITAA, the provision ofthe DTA take precedence. Article 5 provides a checklist on whether non-resident have a PE in Au.

Question 1:

A non-resident manufacturer based in the US derives profits from sales to Australian customers. The US manufacturer has a salesrepresentative in Australia operating out of a serviced office, and this sales representative has been instrumental in obtaining orders from Australian customers. Are the profits from the Australian sales by this US manufacturer taxable in Australia? (You can assume the source of these payments is in Australia)

The first thing to consider is does the non-residence have a permanent establishment in Australia? P.E is generally defined as a fixed place of business in Au. They do have a permanent office in Au. Hence, the profits are taxable in Au. Now that the PE has beenestablished; the next issue is whether business profits are attributable to that PE. This requires there to be some connection or activity performed by PE giving rise to the establishment of profits. In Thiel v FCT’s case, the High Court held that the protection of Article 7of the Swiss DTA (business profits) was available to the taxpayer. The facts that the US sales rep operate by taking order from Aucustomer from Au based office, hence the profits are taxable in Au.

Services income Australian tax is collected from non-residents who derive salary and wages in Au through the PAYG system. In order for an

employment income for a NR to be exempt from Au tax: 1) Employee has to be in Au for less than 183 days in aggregateduring tax year, paid by a non-resident employer, and salary of employee must be non-deductible to a PE or fixed base in Au(Article 15 US DTA). Article 14: upper dollar limit on the amount an indie personal service can earn. Exceed limit=lostexemption. Government employees: Art 19 US DTA: Exempt from taxation in other state. Students: Art 20: receive income orthe purposes of their maintenance and education, will be exempt on that income in the State that they are a student. Visitingprofessors or teachers: Art 21 Polish DTA: exempt from tax if present here for less than 2 years & vice versa where there arean Au resident visiting a country with which Au has a DTA. US only 183 days. Must still be paid by non-resident employer.Annuities and pensions paid are usually only taxed in the country in which the taxpayer is a resident (art 18(1)).

Question 2:

David Leviman is a US resident and a famous and well-liked comedian, who comes to Adelaide for a one-night concert. The tour promoters pay for David’s airfare (A$3,600 return) and accommodation (A$2,400). They also pay him an appearance fee of A$5,000 for the night. I s David Leviman subject to Australian tax on his one night only concert appearance in Australia in 2015? For the purposes of this question use an $A/$US exchange rate of $0.75.

Article 17 US DTA deal specifically with entertainers and sportspersons. Under US DTA, if fees do not exceed US $10k, then alltaxed in country of residence (not in other DTA). Total fees = $11k x $0.75 = $8,250. Since, total fees for David is less than 10k, he isonly taxable in US.Airfare = $3,600, Accommodation = $2,400, Appearance fee =$5,000, TOTAL = $ 11,000 x $0.75 = $8,250.

CGT: Only direct real property interests or indirect real property interests will remain as ‘taxable Australian assets’ to a non-resident.Direct real property interests are interest in real estate located in AU. An indirect RP interest-NR has an ownership interest is atleast 50% of the market value of all assets owned by that entity.Example: James:NR. Not been in Au for the past 10 yrs. Profit on sale of 15k shares in BHP would not amount to at least 10% of theshares in BHP as required by item 5 of s136-25. Therefore, the sale of these shares will not be taken to have an effectively Au sourceunder the CGT. Profit on sale of apartment in Adl: subject to CGT as an asset with the necessary connection with AU pursuant to item1(a) s136-25 on rules up to 12/12/06. 12 mth of rental income in Adl will be sourced in AU under common law source rule, being thelocation where the property is situated. The gain on sale of shares in M (priv co) will not be subject to CGT unless the share rep anindirect real property interest. It is also necessary to determine what proportion of M shares j held(10% or more) and how much if any

of M total assets are Au real prop interest.

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Business Tax and GST Sunday, 1 November 2015When taxpayer becomes a resident they are taken to have acquired certain assets at that time for their MV at that time. This rule onlyapplies to assets owned by the new resident that were not taxable Au assets (that is the assets were not direct real property interests orindirect RPI, as defined in Div 855).If taxpayer ceases to be a resident of AU they are taken to dispose of all assets that are not DRPI or IRPI for the MV of these assets onthe day the taxpayer ceased being an Au resident. CGT Event I1 is taken to happen (s104-160).

Question 3:

Trevor is an Australian resident who accepts the offer of a long-term manager position with the AWB in Iraq and leaves Australia on20 June 2015 for at least a 5-year absence. You can assume that Trevor ceases to be an Australian resident for tax purposes on 20 June2014. Trevor owns 1,000 Macquarie Bank shares, which are valued at $30,000 when he leaves Australia. He purchased these shares in2002 for $20,000. Trevor wants to know if he is liable for any Australian capital gains tax with respect to these shares?

! Away for 5-year period- non-residence. Ceases to be an Australian resident.! CGT event I1. Incurred when someone cease their residency. No longer have the Australia connection. When taxpayer cease

to be resident, they are taken to dispose of all assets that are not DRPI or IRPI for the MV of these assets on the daytaxpayer ceased being an Au resident.

! The Macq. Bank shares are not direct real property interests. Are they an indirect real property interest? ! Must own at least 10% of total shares issued.! Company must have 50% or more of total asset in Au. ! No longer be Australian assets. Therefore, not subject to Australian tax. I1 triggers a disposal of the Macq. Bank shares. ! Non residence- Direct property interest. ! $10,000 capital gain ($30k-$20k)

! 50% discount. Net capital gain = $5,000. ! Trevor has a choice to defer the gain and not have event I1 occur. Gain is deferred until he actually sells shares. If this

option chosen, then each asset will be deemed to be taxable Au property for future CGT event purposes until either a CGTevent happens in relation to the asset or the individual again becomes an Au resident.

Question 4:What rate of withholding would apply to a gross payment of $20,000 interest by an Australian resident to a US resident? What amountof interest withholding tax will apply to this payment?

" 10% withholding tax applies to interest payment to a non-resident. " $2,000 wht would apply to $20,000 interest paid. " 32.5% for individual

Question 5: Professor Ryan is about to take leave from Adelaide University for 2 years and travel overseas for the purposes of teaching and

research. He will be continued to be paid only by his Australian employer during his entire 2- year period of absence.You can assume that Professor Ryan will continue to be an Australian resident despite being absent for this 2 year period. He will be based exclusively at the UCLA- Berkeley campus. Advise Professor Ryan of the income tax implications of his visiting theUSA. Does your answer change if he was only going to be away for 1 month in the USA and then return to Australia?

! Article 15. 183 day rule = employment income. ! Subject to US tax because he stays there for 2 years, which is more than 183 days. ! England=stay less than 2 years=not taxable in Europe. ! Away for 1 month = US government can tax him.

Question 6:

What is the rate of dividend withholding tax that applies to an unfranked dividend paid from Australia to a resident of the USA? What if a fully franked dividend is paid to a resident of the USA?

! Rate of wht of an unfranked dividend to a US resident from an Australian company = 15% ! Fully franked dividend rate of withholding tax = 0% ! 30% for country with no DTA with Au.

Royalties: amount paid or credited as consideration for the right to use any copyright,patent,design or model,plan, secret formula or process, trademark or other, The use of or supply of scientific or industrial or commercial knowledge or info, the use of tv orbroadcasting right. Rate: 30% royalty paid to NR in country without DTA with AU. DTA with Au:lower of withholding tax (10 or15%). Royalties paid to or received from US: 5%. FTC System: Foreign tax paid not more than 1k, this is all claimable. If it is more than 1k, taxpayer can either limit their claim to 1kor calculate the foreign tax offset cap. The cap is the Au tax payable on the grossed-up foreign income.

Question 7: Roc Pty Ltd, an Australian resident, derived the following income during the 2015 year:

! Australian business income of $300,000: Australian sources ! US business income (derived through a permanent establishment in the US of $600,000 gross (US tax of $120,000 was paid

on this gross income). All amounts are shown in A$. What amount of foreign tax credit is Roc Pty entitled to?

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Business Tax and GST Sunday, 1 November 2015Step 1: Amount of tax payable Taxable Income: 600+300 =900k Step 2: Tax payable if foreign income is excluded

Step 3:Amount payable at step 1 les amount payable at step 2

! Taxable income= $900,000

! Limit capped at Australian tax payable on foreign income ! 30% x $600,000 =$180,000: Maximum credit can be claimed ! Can claim all $120,000 of US tax paid.

Individual Robert received 27k in foreign dividends and had 3k in DWT withheld, what amount of foreign tax credit will be allowed?

Foreign income- 27+3 = 30k Foreign tax paid=3k Australian tax payable on foreign income =30k x 45% = 13,500.

Robert would therefore be entitled to a FTC of 3k. The rule is to allow only the amount of Australian tax payable as a max credit.

Foreign employment income derived by an Au resident individual from foreign service for a continuous period of 91 days or more willbe exempt from Au tax but only if that income is not exempt in the country in which the services was performed. NEW RULE (from

1/7/09)-exemption is limited to only income earned as a charitable worker or as a specified government employee. Eg. Defence or police force personnel employed overseas.

• Witholding tax applies. Dividends , rate is 30%. to the extend that the dividend is franked. There will be nowithholding tax on the dividend. DTA exists between Australis and the non-resident’s home country, the rateof withholding tax may reduce to 15%. Subject to withholding tax are treated as non-assessable, non-exempt income of the non-resident.

• Interest, rate is 10%, imposed under s128B(2).Section 128F paid on certain public debentures issued bycompanies. Obtain the exemption under 128F, public offer test set out in 128F(3) & (4).

• Royalty under s128B (2B),(2C)&(5A), applies to royalty paid or credited to non-residents. The royalty payers

is 30% where the royalty is paid to non-resident in a country without aDTA in Australia. Paid to non-residentin a country with a DTA with Australia, lower withholding rate 10 or 15%. received from the US the rate ofWithholding is 5%.

• Exempt foreign employment income-OLD RULE. 23AG used to provide that foreign employmentincome(salaries,wages,commisions,bonuses or allowances) derived by an Australian resident individualfrom foreign service for a continuous period of 91days or more will be exempt from Australia tax but only ifthat income is not exempt in the country in which the services were performed.

• The exemption is limited to only income earned: charitable worker or as a specified government employee.defence or police force personnel employed

• foreign loss and foreign tax quarantining rules have been replaced by new simplified foreign tax offset rules.Foreign tax credits allowed was determined on a worldwide basis and so were not affected by the operation

of the DTAs

• Foreign losses arena longer quarantined. Gross-up a double taxed amount.

• Foreign tax paid is not more than $1000 this is all claimable. If is more than 1000 then the taxpayer caneither limit their claim to $1000 or calculate the foreign tax offset cap.

• Was applied to a company. Same process applies to individual except rate is not a fixed 30%. Given this taxpayable figure in any exam question asked on this issue.

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Tax Entity

Liquidator Distribution capital gain lossesSection 47(1A) applies to all distributions by a liquidator in the course of the winding up of the company andincludes any amount included in the company’s assessable income but excluding a net capital gain.It does includes the full capital gain without reference to indexation and without any reduction for capitallosses.

Liquidator distribution S41 [1A]The Full High Court in Archer Bros Pty Ltd v FCT (1953)90 CLR 140 confirmed that:By an adequate method of bookkeeping, the liquidator ofa company could keep accounts in the same way as theaccountant of a company as a going concern in order thatdistributions could be made out of certain profits or funds,which would be capable of determining the accessibility ofthe distribution in the hands of the shareholder. In plainEnglish this means that the liquidator can determine

whether a distribution to a shareholder is: out of paid upcapital (not income) or retained profits (income).

The case of Glenville Pastoral Case is also authoritythat a liquidator can apply an amount of distributable profits

to repay paid-up capital and that this would not amount to income. The Commissioner in Tax DeterminationTD 95/10 accepts the application of both the Archer Bros and Glenville Pastoral Co principles toappropriate particular funds of profit or income in making a distribution, including an amount representing areturn of share capital. Where a distribution is made to a shareholder in specie (i.e. in kind), it is the real(market) value of the assets distributed and not the book value that determines the amount.EZY Company has a balance sheet as follows: Example

$

Paid-up capital 20,000Capital Gain 60,000Capital Loss (40,000) 20,000Cash on Hand 40,000In this scenario, the liquidator has only $40,000 in assets to distribute. There is $20,000 of paid-up capital tobe distributed to shareholders as well as $20,000 in net capital gains.However, for the purposes of s47 (1A) there would be $60,000 to distribute as income as the companywould not get any credit for the capital loss of $40,000.

Distribution surplus vs amount of LoanForgiven Debt-s109FUnder section 109F a private company is taken tohave paid a dividend if all or part of a debt owed to the company by the entity is forgiven during the year.

Division 7A will not apply where:• The debt is owed by another company;• The debtor has become bankrupt; or where• The Commissioner is satisfied that the deeming of adividend will cause undue hardship. This is restricted to circumstances beyond the control of the taxpayer.In each of the above 3 cases, the amount of the deemed dividend is restricted to the amount of the company’sdistributable surplus (109Y)- this essentially means the amount of net assets (retained profits) in thecompany.The dividend is taken to be paid out of the company’s profits (s109Z) and the dividend can not be franked, s960-120.Example- common caseCompany A has 2 shareholders, Mike and Sue.

It has a distributable surplus as at 30June 2015 of $100,000 and during the year ended 30 June 2015 it hasmade a loan of $40,000 to each of Mike and Sue. Loan = $80,000 in total. This loan remains outstanding as at30 June 2015. There is no loan agreement in place.Are there any Division 7A issues that are likely to arisehere?

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Business Tax and GST Sunday, 1 November 2015Yes- the Company A has made a loan to shareholders and this will give rise to a deemed dividend equal to thelesser of the amount of the loan ($80,000 in total) or the amount of the distributable surplus (of $100,000). Inthis case, the deemed dividend will be $80,000. Whilst there is no loan agreement in place it may be stillpossible to have an effective one in place as long as it in place before the due date for the lodgement of the2015 Company tax return (not due to be lodged in most cases until May 2016).

UPE, Loan or Distribution Surplus

Under s109N a loan made by a private company will not be taken to be a dividend if all of the following criteriaare satisfied:

• The loan is made under a written agreement;• The interest rate on the loan for years of income after the year in which the loan was made equals or

exceeds the “benchmark interest rate” for the year (5.95% for 2015; TD 2014/20);

• The maximum term of the loan for a loan fully secured by a mortgage, does not exceed 25 years, and forall other loans, not secured, does not exceed 7 years.

• There is no requirement that interest is paid or payable under the loan in respect of the year of income inwhich the loan is first made.

Example- trust s109XB case

• ABC Trust has 3 beneficiaries each entitled to 1/3rd of the trust income or capital. The trust net income forthe year ended 30 June 2015 is $90,000. The trust has not paid any of these entitlements. Company A isone of these beneficiaries. Company A has 2 shareholders, Mike and Sue. It has a distributable surplus asat 30 June 2015 of $20,000. During the year ended 30 June 2015, the ABC Trust has made a loan of$20,000 to each of Mike and Sue. Are there any Division 7A issues that are likely to arise here?

Yes- this a s109XB scenario as a Trust has made a loan to shareholders in circumstances where it hasa company as a beneficiary and this company beneficiary has not been paid its entitlement. Thecompany therefore has an unpaid present entitlement.

• The deemed dividend will be equal to the lesser of the amount of the loan ($40,000 in total), the amountof the distributable surplus in Company A (of $20,000) and the amount of the unpaid present entitlement($30,000).

In this case, the deemed dividend will therefore be $20,000.

• Why is it important to distinguish between a debt interest and an equity interest in a company?• Payments on a debt interest are deductible for tax purposes but not frankable whereas payments on an

equity interest are not deductible but frankable.Campbell Co issued 9 year convertible notes for $8 each. The notes have a coupon interest payable of 11.5%and repayment is not subject to any contingency and so payment cannot be deferred under anycircumstances. The ordinary shares of Campbell Co were valued at $3 on the issue date. Campbell Co usedthe proceeds of the note issue to satisfy working capital requirements of its business. Are the payments on thenotes deductible for tax purposes?

The convertible notes are an equity interest s975- 75 item 4. The convertible notes are also a debtinterest as it is more likely than not that the value of the financial benefit provided, being $8.28 (9 x

11.5% x $8) is at least equal to the financial benefit received $8. As the term of the financing arrangement isless than 10 years, just take nominal figures into account. As the notes are both an equity and a debtinterest, then they are treated as a debt interest. Therefore payments on the notes are deductible.

Consolidated

• A consolidated group is formed where an election is properly made to consolidate a group of entities. Thechoice to consolidate is optional, but once made, all entities in the group must be included (a “one in, all in”approach). This choice is irrevocable and remains in place until the consolidated group ceases to exist

• A consolidatable group consists of a head company and all the subsidiary members of the group,703-10(2).

• Consolidation allows the use of losses made by entities before the time they join a consolidated group butonly subject to an available fraction test

• Available use of transferred tax losses- Subdivision 707-C limits the use of transferred losses by a consolidated group- The method to use transferred tax losses is the available fraction method. The main object is to replicate

the tax result that would have occurred under the pre-consolidation regime.

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Business Tax and GST Sunday, 1 November 2015- Broadly, the loss factor seeks to approximate the joining entities contribution to the consolidated’s group

income by using a percentage of the market value of the joining entity compared with the market valueof the consolidated group. The loss fraction is rounded to 3 decimal places

ExampleSuppose Head Co has a market value of $15,000 and a loss of $1,000 and Head Co owns 100% of Sub Co Aand 100% of Sub Co B. Sub Co A has a market value of $5,000 and losses of $900, whereas Sub Co B has a

market value of $10,000 and losses of $1,500.t is assumed that Head Co will have a taxable income of $3,000in 2014 (this being the group’s taxable income). As Head Co has nominated to form a consolidated group withSub Co A and Sub Co B, Head Co can utilise its own $1,000 loss assuming it satisfies the COT or SBT in2015.

The rate at which the losses from the Head Co and subsidiary members incurred before consolidation can beused is subject to the loss factor. Head Co’s loss factor is 0.5 (calculated as the Market Value of Head Co/Market value of the Group, namely 15,000/30,000). Therefore the full amount of the $1,000 loss could berecouped in 2015 ($3,000 x 0.5 = $1,500 maximum loss it could recoup). Sub Co A’s loss factor would be0.167 (Market Value of Sub Co A/ Market Value of the Group, 5,000/30,000). Therefore the maximum lossesof Sub Co A that could be recouped by the group in 2015 would be $3,000 x 0.167 = $501. The remaining$399 ($900 less $501) loss would be carried forward. Sub Co B’s loss factor would be 0.33 (10,000/30,000)

and so the maximum losses of Sub Co B that could be recouped in 2015 by the group would be $3,000 x 0.33= $1,000.The remaining $500 ($1,500 less $1,000) would be carried forward.

• TI of Group in 2015 = $499 ($3,000 - $2,501)• Carry forward losses of $899 remain.

Tests for carry forward of company losses

• Continuity of ownership test- Section 165-12 provides that for a company to satisfy the COT it must have had for the whole of the

ownership test period (defined in s165-12 (1) as being from the period from the start of the lossyear to the end of the income year), persons who had more than 50% of the voting power (s165-12(2)), or rights to more than 50% of the company’s dividends (s165-12 (3)), or had rights to more than50% of the company’s capital (s165-12 (4)).

• The Same Business Test (SBT)- provides in s165-210 (1) that the company will satisfy the same business test if throughout the same

business test period it carries on the same business as it carried on immediately before the test time.- However, s165-210 (2) provides that the company will not satisfy the SBT if it derives assessable income

from a business of a kind that it did not carry on before the test time or a transaction of a kind that it hadnot entered into before test time.

• Continuity of ownership test- To satisfy this test, shares carrying more than 50% of all voting, dividend and capital rights are to be

beneficially owned at all times during the “ownership test period” by one or more persons whoindividually or together held shares carrying similar rights at all times during the loss year. The“ownership test period” is from the start of the loss year to the end of the income year (s165-12).

Documents

Business Tax GST Note