Income Tax Legislation

A new”ish” CGT rollover

The Government has introduced Tax and Superannuation Laws Amendment (2014 Measures No. 6) Bill 2014 into the Parliament. Most of the amendments in this Bill will be of no consequence for the majority of taxpayers.

However, as a part of making some changes to certain CGT rollovers, the Government has decided to rewrite them into a new Division, Division 615.

This division is a merging of the current subdivision 124-G and subdivision 124-H. Subdivision 124-G allows a CGT rollover where interest holders in a company exchange all of their shares in a company for shares in an interposed company. Subdivision 124-H applies where interest holders in a unit trust either transfer their units in a unit trust to a company or redeem or cancel their units in exchange for shares in the company.

These subdivisions work well when the share and units are held on capital account, but, apart from certain situations in consolidated groups, they provided no relief where the shares or units are held as trading stock or revenue assets.

So the first change is that Division 615 offers a rollover of tax consequences irrespective of whether the unit or the share that is being replaced by a share in the new entity is trading stock, on revenue account or on capital account.

Just like the original rollovers, there are heaps of anti avoidance measures to stop any unintended benefits; including:

  • There must be more than one shareholder in the original entity;
  • You must elect for the rollover to apply; and
  • Market values and percentages of shares held before and after must be the same.

So if you want to interpose a company between the owners and another company or trust, Division 615 is the answer.

PS – It is probably (probably not) worth mentioning another amendment to CGT rollovers in this Bill. Currently, a CGT rollover is available where a trust transfers a CGT asset to a company (Subdivision 124-N) or another trust (Subdivision 126-G). A key condition for both of these roll-overs is that the company or trust receiving the asset must hold no CGT assets other than a small amount of cash or debt. This will be modified ensuring that the rollovers will also be available where the entity receiving the asset holds rights under an arrangement that facilitates the transfer of assets to that entity. These rights, when treated collectively, must only be used to facilitate the transfer of assets from the transferring entity to the receiving entity (probably not worth mentioning…).

FBT Planning Idea Rulings

FBT and Public Hospitals

FBT exemptions are amazing ways to reward employees. And one of the most used FBT exemptions relates to employees of public hospital. These employees can receive up to $17,000 worth of grossed up benefits. What does grossed up mean? That there is no FBT payable if the value of the benefits, multiplied by the appropriate gross up rate is less than $17,000.

The gross up rates are:

  • a gross-up rate of 2.0647 where the benefit provider is entitled to a GST credit for the provision of a benefit
  • a gross-up rate of 1.8692 if the benefit provider is not entitled to GST credits.

So who can get a bit over $9,000 of their mortgage payments paid by their public hospital employer under a salary package without any FBT being payable?

In draft Taxation Determination TD 2014/D17, the Commissioner considers “when are the duties of the employment of an employee of a government body exclusively performed in, or in connection with, a public hospital or ‘non-profit hospital’ for the purposes of paragraph 57A(2)(b) of the Fringe Benefits Tax Assessment Act 1986?”

Subsection 57A(2) of the Fringe Benefits Tax Assessment Act 1986 provides that where the employer of an employee is a government body and the duties of the employment of the employee are exclusively performed in, or in connection with a public hospital or a hospital carried on by a society or association that is a rebatable employer, then a benefit provided in respect of the employment of the employee is an exempt benefit.

This means that be eligible for the exemption, the duties must be performed either ‘in’ or alternatively ‘in connection with’ a hospital.

The draft Determination states that in assessing this we need to look at the employee’s statement of duties and the actual duties being performed at a particular time.

In assessing whether the employee meets this test the Commissioner states you need to look to see if either:

  • The duties are performed ‘in’ the hospital such that the employee performs their duties in the physical location of the hospital facility and within that facility at a place where activities are conducted that enable the hospital to carry out its functions, or
  • The duties are performed ‘in connection with’ the hospital such that the employee is engaged in activities that enable the hospital to carry out its functions. These duties may be performed at places other than ‘in’ the hospital.

Using these tests the draft Determination considers 9 employees and assesses if they can take advantage of the exemption in subsection 57A(2). These employees are:

  • A hospital employed cleaner performing duties ‘in’ two or more public hospital or a non-profit hospital – Can get the exemption.
  • A hospital employed clinical nurse performing duties ‘in, or in connection with… a public hospital’ both in the hospital and in the homes of patients – Can get the exemption.
  • A construction project manager working on a hospital site building new facilities – Cannot get the exemption
  • An administrative support officer across a number of metropolitan public hospitals doing procurement of hospital goods and services and payment of suppliers – Can get the exemption
  • A shared services manager providing services across government entities, some of which are hospitals – Cannot get the exemption
  • Employees changing jobs – each gets assessed separately
  • Employees being moved from a job at the hospital to a corporate role in government not at the hospital – Cannot get the exemption once they move to the second role.
  • The CEO of a public hospital – Can get the exemption

This, especially the CEO decision, is a minor change from the Commissioner’s previous position. In ATO Interpretative Decision 2003/40 the Commissioner concluded that a State Government employee who had the job of finding alternate funding options for public hospital, monitored spending at public hospitals and advised the Minister about funding allocation and performance of public hospitals could not claim the section 57A exemption.

Therefore, it is worth considering any clients you have who work for a public hospital or for the appropriate Department.

Tax Policy

Tax policy without Parliament

In a media release the Finance Minister has announced he will be Implementing the Fuel Excise Indexation announced in the Budget, even though it looks like the government cannot get the amendment through the Senate.

He will effectively tell the Commissioner of Taxation to raise the Fuel Excise rate and promise to get the law through the Parliament in the next 12 months justifying legislatively this change.

Tax law changes without law changes? I feel very uncomfortable about this, even though the previous government did the same with the Alcopops tax rate rise.

If this all goes pear shaped and the law is not passed the excise must be refunded, meaning a windfall gain for those who pay the excise (not you and me but the petrol companies).

(And don’t get me started on the Greens as this indexation was their policy until Tony Abbott suggests it and then they block it. And for any Greens voters, the argument that they blocked it as some of it would be used for roads funding is:

– firstly prove the Greens cannot read the constitution as all funds go to consolidated revenue and then get spent; and

– secondly some of the revenue of the Carbon Tax was used for roads funding… Hypocrites)

Rulings Super

Super paid for the dead… Required by law???

What do you do regarding super payments if an employee dies? In ATO Interpretative Decision ATO ID 2014/31 the Commissioner considers whether you have SG obligations on salary and wages paid to an employee after they died. In this case the payment was made as the employer owed the employee salary for the last fortnight they had worked before they had died.

An employer’s SG shortfall for an employee for a quarter is based on the total salary or wages paid by the employer to the employee for the quarter. So can a dead person be an employee?

Section 15B of the SGAA says that former employees as employees. So a deceased employee will be a former employee and therefore an employee under the SGAA.

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 specifically stated that a deceased employee is a former employee at paragraph 1.39 when discussing the deductibility of super payments.

So there you have it. Super paid for the dead required by law.

Income Tax Planning Idea Planning Stuff

Capital losses and death… There still is some life in the losses

In relation to prior year net capital losses, if a deceased person had any unapplied net capital losses when they died, these can be taken into account in their final (date of death) return, but can’t be passed on to the beneficiary or legal personal representative to offset against any net capital gains.

So the only way to use the losses is to have a capital gain happen before death as once they are dead the losses disappear.

There is only one situation where you can retrospectively (after death) do something to use the capital losses.

Generally, when CGT assets are transferred under a will no CGT is payable as a CGT rollover applies. However, if the CGT asset is transferred under the will to a “tax preferred entity” it is deemed that the deceased transferred the shares to the tax preferred entity at market value just before they died.

So if the share owned by the deceased are transferred under the will after the death to a non resident, a charity or a complying super find, in the tax return of the deceased (their final return) the uncrystalised capital gain on the shares becomes taxable… and any capital losses the deceased had can be applied against the gain.

If shares were transferred to a super fund under a will, and the deceased person had capital losses, there would be no CGT payable due to the losses offsetting the gain.

Interestingly, the superfund would get a cost base equal to the market value at the time of death. In other words the capital losses have been used to increase the cost base of the shares in the super fund rather than just disappearing

FBT Planning Idea Planning Stuff Rulings

Religious Practitioners and Fringe Benefits

Believe it or not, I get asked this question all the time so to save you asking me…

Section 57 of the Fringe Benefits Assessment Act 1986 includes an exemption from Fringe Benefits Tax on benefits for certain employees of religious institutions.

Under this section, if a benefit is provided by a religious organisation to assist a religious practitioner with pastoral duties it is both not taxable to the employee (as it is a benefit and not salary) and exempt from FBT being paid by the employer… Nice outcome…

But what is a religious organisation covered by this section?

In practice, if the entity set up for the furtherance of a religion such that it could get income tax exempt charity status, it is a religious organisation. Simple. At law a religious organisation has a “belief in a supernatural Being, Thing or Principle” and the “acceptance of canons of conduct which give effect to that belief, but which do not offend against the ordinary laws.” So don’t tell me AFL is your religion…

But are all employees of religious organisations covered? No, just religious practitioners. A ‘religious practitioner’ is defined in subsection 136(1) to mean:

(a) a minister of religion;
(b) a student at an institution who is undertaking a course of instruction in the duties of a minister of religion;
(c) a full-time member of a religious order; or
(d) a student at a college conducted solely for training persons to become members of religious orders.

So if you are the office manager or the bookkeeper… you will not be a religious practitioner.

If you pass these two tests, and have a religious organisation employing a religious practitioner, certain benefits will be non taxable for the employee and exempt from FBT for the employer.

Taxation Ruling TR 92/17 covers this exemption specifically and has examples of a religious practitioner being provided housing, use of a car and schooling and all of this being effectively tax free.

Having done the books or audited many of these organisations I can say I have never met any religious practitioner who is doing their job for the money – I could not live off what many are paid. But if you are going to employ religious practitioners, how about doing it in a way that saves everyone tax by providing more benefits and less cash salary.

Planning Idea Tax Policy

The end of Ireland as a global tax power…

In its most recent Budget, the Irish Government announced it would change its tax residence rules for companies – rules that have been used by thousands of multinationals to avoid tax.

The residency rule currently are that a company is a tax resident where it has its central management and control, irrespective of where the entity was incorporated (unlike Australia where it is a resident if it it either incorporated in Australia or has its central management and control here).

The standard structure used by these multinational entities is to transfer the intellectual property used outside the US to a company incorporated in Ireland but with its central management and control in a tax haven. This could be a problem for the US company due to its controlled foreign company rules if the US company owned the tax haven company directly. So between these two companies sits another Irish company that has its management and control in Ireland and so is a tax resident of Ireland.

So my US pharma or internet business wants to set up business in Australia. The Irish tax haven resident entity licences the intellectual property to the Irish entity (often through the Netherlands… That is another story), and the Irish entity licences the intellectual property to the Australian entity.

The Australian entities profits are almost zero as the royalties paid by the Australian entity are very large ($0 Aussie company tax) but justifiably large as the intellectual property is totally fundamental to the business. These large royalty payments go to an Irish company but it has its own large, but not as large, royalty payments to the Irish tax haven resident entity (so limited tax is paid at the Irish corporate rate of 12.5%). And finally, the Irish tax haven resident entity gets a large royalty payment and it puts it in its bank account Ireland as it is not taxed as the company is a resident of a tax haven.

From January all new companies incorporated in Ireland will also be tax-residents there, making this idea no longer possible.

To avoid a series of multinationals leaving, the Irish Government has propose what it calls a “knowledge development box”. This will allow entities to pay a lower tax rate on profits from intellectual property booked in Ireland. But this wont be zero.

Companies already registered in Ireland are being given six years to alter their accounting structures.

Now that leaves countries with a networks of tax treaties that have almost no royalty withholding taxes, like the Netherlands… If this could be “fixed” then international corporate tax planning gets a bit easier… 30% in Australia or 12.5% in Ireland??? Not a hard question.

Back to work and stop dreaming about being an international tax structuring boffin having a whisky in Dublin, a cycle in Amsterdam and a swim in a tax haven…

Income Tax Tax Policy

Non-residents entities trying to legally avoid lodging Aussie tax returns

I love working for North Asian entities. When the are looking to operate in another country (like Australia), they first ask the question “can we avoid having to pay tax and lodging tax returns in the other country?” They are also willing to change their practices to simplify tax outcomes – not reduce tax payable overall but to just make the complexity of tax outcomes less of an issue.

This means when they are providing equipment into Australia they will attempt to avoid creating a permanent establishment (“PE”) in Australia. By doing this they avoid income tax in Australia on any of the fee and avoid needing to register for GST or agreeing to a reverse charge.

So how do they do this? They don’t install the product in Australia themselves and get the customer to sign and instalment agreement with an Australian entity, they don’t offer training in Australia and they don’t import the equipment.

But how far do they have to go to avoid a PE arising? Well ATOID 2014/29 considers a Japanese entity that wins a contract for plant to be installed in Australia. They don’t get the customer to contract for installation with an Australian entity but subcontract the work to an Australian entity. Is this subcontracting Australian installation enough to avoid a PE? No… “The Japanese entity will have a PE in Australia under Article 5(3) of the Japanese Convention where it uses an Australian subcontractor to perform the construction or installation duties for which it is contractually responsible – and the subcontractor spends more than 12 months on the construction site.”

So the answer is don’t subcontract but get the customer to contract with the Australian installer.

But even if they do this, they need to watch out for the “supervisory activities” provision in the definition of a PE in the tax agreements… “The Japanese entity will also have a PE in Australia under Article 5(4)(a) of the Japanese Convention because of its supervisory activities in connection with the construction or installation project.”

In this case, the income earned by the Japanese entity from the construction or installation project in Australia is assessable under section 6-5 and the subcontracting costs are deductible under 8-1. So to gain what may be a very small, or even non existant, mark-up and pay what might be a very small amount of Aussie tax on that mark-up the Japanese entity has to get a TFN, an ABN, lodge an Aussie tax return and manage the GST issues (lodge activity statements or organise a reverse charge agreement).

It might be easier, and possibly cheaper, to avoid a PE… And is definitely worth serious consideration BEFORE the final contract is signed.

Income Tax Planning Idea Planning Stuff

Employee Shares Schemes are back from 1 July 2015

Back in 2009 the previous Government put certain divisions of the big accounting and law firms out of business, generally called “executive remuneration”.

But they need to get ready to go back to flogging their delayed tax income from 1 July 2015 as the new Government intends to reinstate one of their best ideas.

In addition the Government in going to give them another planning idea that is not just a deferral but so tax exempt income.

In a fact sheet titled “Improving taxation arrangements for employee share schemes” the Government has announced its plans for taxation of employee share schemes.

In summary, these will be the new rules from 1 July 2015…

No change for where employees receives shares (not options), except the “start-up” rules below. This means if my employer gives me $10,000 worth of shares and there is no risk of forfeiture I include the $10,000 as assessable income in the year I got the shares. When I sell the shares later my cost base is $10,000. If there is a real risk of forfeiture I delay including the amount in my assessable income until the risk is gone, 15 years (currently 7 but will go to go by 1 July 2015) or I leave the employment, whichever is earliest.

Big change for options to buy shares. The rules are the same as for shares in the paragraph above… Except… Even if there are no risks of forfeiture, the discount can be deferred to when the options are exercised. This has been done as some option schemes do not have forfeiture but you can’t exercise them for a series of years meaning you pay the tax before you can get any cash. My guess is the new rules will say if there is no risk of forfeiture and you give me options, the discount will not be assessable income until, 15 years, I leave the employment or I exercise the options and get my shares. Again the cost base of the shares will be the discount.

AND HERE IS OPPORTUNITY 1: if the employee does not need the income this year, replace it with share options and over the next 15 years, when marginal rates are lower, the employee can choose to exercise some options. It is like income averaging for farmers.

The third scenario is the new Start Up Scheme rules. These will be regularly used so get to know them. If i am an employee of a start up company and am issued shares at a discount 15% or less of their market value, the discount is not assessable income and my cost base is the market value of the shares. OPPORTUNITY 2: “Don’t pay me after tax bonus of $85,000 but rather issue me $100,000 if shares”. If you pull this off you just got $15,000 worth of shares tax free as I just paid 75% for my shares (i do have to hold them for three years… See below).

For options the deferral applies if the options are issue out-of-the-money (you can only buy shares at $5 but their current value is $4). You defer any tax until you sell the shares and your cost base assumes you paid market price for the out-of-the-money options.

These two Start Up options, shares or options, mean you effectively give your employees stuff tax free (a 15% discount on shares or out-of-the-money options)

BUT WHAT IS A START UP KEN! We don’t exactly know yet but Criteria will include turnover of not more than $50 million, being unlisted and being incorporated for less than 10 years. And if this is all I will be driving a personal services entity truck through these conditions (not employed be BHP but by my personal company…). And for this Start Up treatment to apply the shares or options need to be held for three years.

I should just say that the existing up-front tax concession, which exempts from income tax the first $1,000 of ESS interests given to an employee who earns less than $180,000 per annum, will also be retained.

So by 1 July 2015 there will be a couple of new ways to remunerate executives so they pay less tax or at least defer the tax… Let the advice begin!!!

Legislation Planning Idea Super

The ALMOST end of Excess Contributions Tax

In the last budget the Government announced the end of Excess Contributions Tax.

The announcement was that, just like was already the case for excess concessional contributions, from 1 July 2013 if a taxpayer makes excess non concessional contributions, rather than assessing them with Excess Contributions Tax, the super fund could refund the excess amount.

Sounds simple? Not quite…

In a recent exposure draft, titled “Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014: Excess non-concessional contributions”, the Government attempts to implement this change.

The draft Bill provides that an individual who has made non-concessional contributions in excess of their cap in the 2013-14 year or in later years can elect to release that amount  plus an “associated earnings amount”. The associated earnings amount will be included in the individual’s assessable income.

Excess non-concessional contributions tax will not be imposed on excess contributions to the extent that an amount of those contributions is released from superannuation, or where the value of an individual’s remaining superannuation interests is nil.

But remember, if you don’t elect to have the amount refunded there will be Excess Contributions Tax… It can still apply if you forget to respond to the Commissioner’s assessment (or if you have a defined benefit fund… see below).

Some of this is very hard to implement in law. Especially, what are the “associated earnings”, when will there be “nil” superannuation interests and how do defined benefit funds handle all this… And this is where a simple idea gets messy…

Associated earnings

Where the amount of the excess contributions are refunded or the Commissioner determines that the value of the individual’s superannuation interests is nil the associated earnings amount is included in the individual’s assessable income. This removes a taxation benefit of having the earnings taxed in the fund and not in the hands of the individual.

But how does a fund work out what the associated earnings on the excess contributions were?

The draft Bill states that the associated earnings amount is calculated using an average of the General Interest Charge rate for each of the quarters of the financial year in which the excess contributions were made and compounds on a daily basis. In addition the period that this rate applies is deemed to commences on 1 July of the financial year that the excess contributions were made and ends on the day that the Commissioner makes the first determination of excess non concessional contributions.

Using the 2014 year as a guide, this means it is assumed the fund earned 9.66%. Also it assumes that the excess contributions were made on 1 July 2013, even if all the contributions were made on 30 June 2014. This can lead to some unfortunate outcomes…


Belinda makes a $550,000 non-concessional contributions on 30 June 2014 and therefore exceeds her non-concessional contributions cap by $100,000. She lodges all her returns promptly in July and August 2014 and the Commissioner issues Belinda an excess non-concessional contributions determination on 1 November 2014.

Even though the $100,000 excess contributions have only been in her super fund for 4 months she is taken to have associated earnings calculated as follows:

0.02646575% (9.66%/365) x ($100,000 plus the sum of the earlier daily proxy amounts) for the 489 day period from 1 July 2013 until 1 November 2014 (not a 120 day period from 30 June 2014 to 1 November 2014).

The result of this formula is that the associated earnings equal $13,814.

Because the fact that the excess contribution was made on 30 June 2014 is ignored and rather it is assumed that the excess contributions were made on 1 July 2013, the earning are substantially higher. And remember these earnings are refunded from the super fund and taxed in the hands of the individual.

Using the example above, to get earnings of $13,814 on $100,000 over the period of 30 June 2014 to 1 November 2014 would require an annualised return rate on 39.7%.

In effect there is a penalty in making excess non concessional contributions as it is likely that more than the actual earnings on those contributions will be required to be withdrawn from the fund and taxed at marginal rates.

Commissioner’s direction if value of superannuation interest is nil

Individuals who make non-concessional contributions in excess of their cap might have been paid some or all their superannuation benefits by the time they receive a determination from the Commissioner.

So how does the fund refund amounts it does not have any more?

If this occurs the Commissioner can make a direction if he is satisfied that the value of all the individuals remaining superannuation interests is nil following the release of any amount stated in an excess non-concessional contributions determination. Alternatively, the individual can elect not to release any amount from superannuation because the value of their superannuation interests is nil.

Where this occurs an individual will not have excess non-concessional contributions that will be subject to excess non-concessional contributions tax for the financial year to which the determination relates.

That’s easy…

Defined benefits

As always, the final problem is defined benefit funds. But this is not much of a problem as if the defined benefit fund or the individual do not or cannot elect to refund the amounts… Excess Contributions Tax will apply as it always has

So in summary… In most situations there will be no Excess Contributions Tax as, from 1 July 2013, any excess concessional or non concessional contributions will be refunded to the taxpayer if the taxpayer elects to have it refunded. If the taxpayer does not elect, or the fund legally cannot release the amount Excess Contributions Tax will apply.

And for all those people planning to park income in super funds through excess non concessional contributions to delay tax payments… there is a penalty as the earning calculation is almost always going to be higher than the actual earnings. This effectively means some of the non concessional contributions within the cap will be refunded to the taxpayer and taxed at marginal rates.