Income Tax Planning Stuff Tax Policy

UPEs and Division 7A…

Another discussion paper on how to solve the problem of UPEs and Division 7A has been released... And it is very very interesting.


This discussion paper is by the Board of Taxation. And they suggest that a UPE to a corporate beneficiary should be excluded from Division 7A. But if you want a trust that can use income that has only been taxed like a company (at 30%), then just like a company the trust does not get the 50% CGT Discount.

They say, either treat the UPE to a company as a distribution loaned back that is subject to Division 7A, or tick a box on the trust tax return and stop the trust claiming the 50% CGT Discount. This new rule would not apply to assets held by the trust before this rule. Also, it will never apply to CGT on goodwill owned by the trust.

Its just a discussion paper but it seems like an idea that might get up.

And, if it gets up, how do you decide what to advise your clients? It will mean every CGT asset will now be bought in the bucket company or a service trust…

I know everyone will not agree with me but I think this is a brilliantly argued discussion paper as it understands SME structures and financing and finds an answer that supports these structures. And I hope it gets up.

I should mention the paper also looks at many other changes to Div 7A, like a single 10 year repayment plan (rather than 7 or 25 years if secured over real property) and payments not required every year, but subrules like 25% repaid by year 3, 50% by year 5… These sound good as well. But I would prefer a straight line ten year repayment with the ability to miss two year’s payment that are made up over the following two years.

The final report is due in October so lets wait and hope for a great outcome.

Income Tax

Increased tax rate starts now

Remember that from 1 July 2014 the Medicare Levy goes to 2% (from 1.5%) so the marginal tax rates all go up.

And remember we are doing this to afford the NDIS… Raising $3.3 billion a year to “afford” a $9-14 billion a year program… Thanks greatest Treasurer in the world…

But you don’t have to wait 3 months.

From 1 April 2014 the FBT rate goes to 47% (up from 46.5%). This also means the FBT gross up rates go to

Type 2 gross-up rate 1.8868.

Type 1 gross-up rate 2.0802.

And remember, going three months early saves a potential loss of $40 million of the Federal Governments $440 billion a year (or .00001). Love the attention to detail…

Legislation Tax Policy

Why worry about what is important when you can focus on the irrelevant?

Late last year the government indicated it was not going to continue with more than 60 “announced but unenacted” tax and super measures.


But it is hard to keep people (and especially tax lobbyists) happy. Even while they applauded this announcement they started to scream… “But what if taxpayers have acted on these announced changes.” The argument has merit… Until you see what the government announced what it is not going ahead with.

Most are negative for the taxpayer, ridiculously technical or are so vague we never really understood what the government was going to do.

But rather than finally making the outstanding changes they have promised (please fix earnouts and the Small Business CGT Concessions… Please… Go on… Please… Seven years of having to advise on a badly drafted press release!!!) the government has taken the time to draft a solution to a non existent problem.

They have released draft legislation so that the Commissioner is prevented from amending income tax assessments reflecting self-assessed positions anticipating the impact of certain announced but discontinued measures in a way that meet the conditions set out in the law.

Further, taxpayers are taken to be entitled to payments made on the basis of income tax assessments reflecting such self-assessed positions.

First, out if the 60 changes the government announced it was not going ahead with, these new rules only apply to 13 announcements that are not going ahead – and of those 13 most are irrelevant.

To see how hard it is to find an actual situation where this draft law will apply, lets look through the list of examples the government gives us  in its 18 page explanatory memorandum…

There is just one…

The only example in the EM, and the only change that this will practically apply to, is the announcement to broaden relief for taxpayers affected by natural disasters where taxpayers participate in replacement asset programs after a natural disaster. So if you had a natural disaster, lost a CGT asset, replaced with another CGT asset and could not fit within the current rules (like the small business CGT rollover)… then this might be useful.

How many times will this happen???? And let me guess why the current government decided not to go ahead with this change… My guess is that it had so little practical effect.

GST Rulings

Luxury Cars and Hire Purchases

We now have a final ruling that is exactly like the draft – LCTD 2014/1 – so have a read about the draft

Picture 9

Funny Stuff

Tax avoidance history…

In 1660 there was a tax on fireplaces in England. So everyone covered up their fireplaces and the tax was repealed in 1689.

Picture 1

In 1696 there was a tax on the number of window a house had in England. So houses had less windows and the tax was repealed in 1851 (people argued less windows was unhealthy so the law should be repealed)

In the 1700’s there was a tax on the number of bricks used in a house in England. So people used bigger bricks. So the government put a higher tax on bigger bricks…

England also tried tax on wallpaper (everyone painted their walls), a tax on hats ( people just called them “head gear” not “hats”) and a tax on wig scent power (so people stopped wearing wigs).

Will there ever be a tax we wont try to avoid?

GST Income Tax Legislation Super Tax Policy

Clearing the Tax and Super Decks

Apart from the changes in the Mining Tax and Carbon Tax repeal bills (small business instant asset write off, carry back losses…), and the promise to remove the means testing of the private health insurance offset, the government only has a series of promises to do certain things the previous government announced.

There are 37 of these “announced but unenacted” changes. Right now there are bill before the parliament (or just about to be released like TLAB2) that cover 10 of these announcements, two excise ones are already being collected, there are two discussion papers (dividend washing and data matching) and draft legislation for the investor manager regime.

There are 15 that relate to mining, consolidations, foreign exchanges rules, debt/equity rules, MITs, OBUs or thin capitalisation… so irrelevant to the vast majority of taxpayers.

That just leaves ten issues…

These include:

1. Non resident withholding for sales of commercial and residential property

2. CGT issues with earnouts and installment warrants (this is just making the law do what you always thought it did)

3.  Changes to GST going concerns and GST “connected with Australia” rules to make things easier.

4. Removing the need for small business with less than $2 million in interest to need to consider the thin cap rules.

5. Extending CGT rollovers where assets are not held as CGT assets

Hopefully this link has them all and I will start to look at some of these in future posts… But maybe we might have a relaxing tax year…

Government Tax announcements

FBT Income Tax Part IVA Planning Idea Planning Stuff

Employee Benefit Trusts And “Deep Throat”


Many years ago I received a call from a very junior ABC journalist (her career has very much blossomed since the and she is now a household name). We met in a meeting room where I worked an she provided me with two private rulings – both about employee benefit trusts.

The first was a very simple arrangement and the private ruling was favourable – deductible contributions, no FBT…

The second was pretty much the same arrangement, so much I suspected it was written by the same firm. BUT THIS ONE WAS NEGATIVE!

I said that I could not believe that the ATO had stuffed this up so badly… And that was the end of our discussion.

What I did not know is that this very quick meeting started an investigation about whether an employee at the ATO was providing positive rulings to “friendly” applicants.

Since then I have steered away from Employee Benefit Trusts – but now the Commissioner has released a draft taxation ruling (TR 2014/D1) that clears up his position. He has also released a guide on these trusts.

What are the three most important things in these documents…

1. If you are an employer, contributions you make to the trustee of an ERT are generally deductible if you have a genuine purpose for it being applied within a relatively short period towards remunerating employees. What is a relatively short period? It must be less than 5 years – any longer and there will be no deductions. This is a big change to many earlier private rulings.

2. As an employer, if you made a contribution to an ERT at the direction of, or on behalf of, your employee and that contribution is remuneration, you are required to withhold an amount from the contribution as a Pay as you go Withholding amount.

3. Fringe Benefits Tax and Division 7A can apply to contributions made by an employer to the trustee of an ERT, to benefits provided by the trustee of the ERT and on loans provided by the trustee of the ERT to employees. SO WATCH OUT!

These documents also remind us that the Commissioner has applied Part IVA to these types of arrangements. So don’t jump in without clearly documenting the purpose of the arrangement. But at least we have some more clarity now.

But this does mean I may never get to have cloak and dagger meetings with investigative journalists about tax again…

Income Tax Planning Idea Planning Stuff

The purpose of Dividend Access Shares

Picture 1I have been asked for as long as I have been working in tax about dividend access shares. I have lots of profits in company but the shares are owned by high taxed individuals.

Sell the shares? But there is a whopping huge uncrystalised capital gains on the shares so this does not work. So what you do is issue dividend access shares to a discretionary trust and pay the dividend out to the trust.

But now the Commissioner has released a Taxation Determination (TD 2014/1) that indicates he is of the opinion that some of the common uses of these shares may lead to Part IVA applying.

But he is looking for specific arrangements. Not just dividend access shares but dividend access shares with the following characteristics:

The constitution is amended to create these dividend access shares.

The company has a right to buy back the dividend access shares with 4 years of issuing them.

All the accumulated profits are paid out. AND…

The dividend is paid by a promissory note, not is actual cash.

So it is not going to cover every dividend access share arrangement… but maybe it should. In this Determination, the Commissioner states that if any alleged non-tax purpose could have been achieved in a simpler or more commercially usual manner this will suggest the dominant purpose is to avoid tax. This Determination means that we do have to be very careful in using dividend access share arrangement. Could the “asset protection goals” be achieved by an easier means????