Income Tax Planning Idea Planning Stuff

A great reminder with related party transactions

Section 82KK of the ITAA36 is one of those section that I knew existed once but have not thought about for years. This section applies where there is a timing mismatch in payments to associates so that income is recognised in a later year than the matching deduction. When this section applies the deduction is deferred to the later year.

Well this section has raised its head again in ATOID 2014/34.

In this decision, an associate  legal services to a taxpayer. And due to the way the two entities return income (one on cash and one on accruals) there was a deduction and income offset.

But the decision reminds us that for this section to apply there needs to be an agreement to make this mismatch occur. So remember, if the mismatch is more than just coincidence, the deduction will be deferred.

Income Tax Tax Policy

A withholding tax nightmare starts in 2016…

As we have looked at before, the previous government announced it was going to introduce a new non-resident withholding tax. This would apply where a taxpayer buys certain CGT assets from non-residents.

Unfortunately, late last year the current government confirmed they were going to continue with this announcement. And now they have released a discussion paper on this new withholding tax.

Just as a reminder, the government will introduce a 10% non-final withholding tax on the disposal of certain “taxable Australian property” by foreign residents. The only exemption to this is withholding will not apply to residential property transactions under $2.5 million. This is proposed to apply from 1 July 2016.

The Discussion Paper acknowledges the difficulty there may be for those who purchase CGT assets as, under the proposed rules, they will need to identify if the seller is a foreign resident and if the CGT asset is a taxable Australian property.

Given the fact that there is about 6+ residency decisions in the AAT (for example, the AAT Case [2014] AATA 335, Re Dempsey v FCT) each year, it is unreasonable to expect non sophisticated taxpayers, possibly even those who are not carrying on a business, to be able to identify if other taxpayers are non resident. The current non resident withholding tax rules apply only to income sources that will apply to sophisticated taxpayers or those in business (interest, dividends and royalties).

Therefore, a payee declaration option, as used in other jurisdictions, seems like the only reasonable outcome (and is suggested in the paper).

But if this is not used and the taxpayer is required to assess whether the taxpayer is a non resident, hopefully the new rule will allow purchasers to use the assessment done by the payee. If the payer were to ask whether the payee:

  1. Have you previously lodged a tax return with the Australian Taxation Office?
  2. If so, did you identify as a “non resident” in that return?

If the payee has lodged a tax return they have made a decision as to whether they are a non resident. If they have not lodged a return, and have been in existence for some time, they have decided they need not lodge a return, and this may be that they have not tax presence in Australia.

My “administrative” suggestion is that the payer can rely on the lodged tax returns by the payee, or can assume the payee is not a resident if they have never lodged a tax return.

But my preferred option… dump a bad policy!


“Buy our properties in an SMSF”

Very interesting… In a Media Release, ASIC has announced that it has commenced proceedings to prevent a property investment promoter from promoting the use of Self Managed Super Funds to purchase investment properties.

ASIC claims to have evidence of where this entity has given advice to set up an SMSF to hold the rental property to over 500 people… AND THEY DON’T HAVE AN AUSTRALIAN FINANCIAL SERVICES LICENCE…

So to all the real estate agents out their telling people to buy the rental property in an SMSF…

It is worth noting that in almost all these cases the first investment property acquired by the newly formed SMSF was owned or promoted by the entity that gave them the advice to set up the SMSF. DODGY

GST Rulings

Gloxina GST idea is now 110% dead…

Following the 2010 Gloxina case I have had a lot of people tell me they have a great way to avoid developers having to charge GST on the new residential premises they build.

You have heard the same line… Well can I just say it is now 110% dead.

You would think that the Government changing the legislation in 2012 to kill the idea would make it 100% dead, but now the Commissioner has released a draft GST Ruling adding another 10% to the death.

What happened in the Gloxina case was a development lease arrangements with a government agency. This is where:

  1. The government agency charges a developer either a lump sum or a regular lease to access vacant land owned by the government agency;
  2. The developer and the government agency agree that if the developer, builds stuff on the land to an appropriate standard they will transfer the land to the developer.

The government does this as it gets the payment at item 1 above and normally requires the developer to put in roads, parks and other common goods the government agency ends up owning.

In Gloxina, the Courts concluded that the first sale of residential premises was from the government agency to the developer, and so every sale after that was input taxed. Now, to be very clear, this has not been the law for some time.

But as people still think this idea works today, the Commissioner has released GST Ruling GSTR 2014/D5 to make sure people release how dead this GST saving idea is.

In this draft ruling the Commissioner considers all the supplies that are made between the government entity and the developer… and none are a supply of new residential premises.

The supplies, and their GST treatments, are:

  • Grant of a development lease by the government agency to the developer. The rent on this lease is consideration for the supply of land and is a taxable supply of vacant land.
  • Development works on the government agency’s land made by the developer, in accordance with the terms of a development lease arrangement. Here the developer makes a supply of development services to the government agency. The supply of the land to the developer by the government agency is consideration for the developer’s supply of development services. Therefore, the developer makes a taxable supply of development services and the government agency makes a taxable supply of land.
  • The transfer of the land by the government agency to the developer. This is just the reverse of the supply above…

The draft ruling states that the value of the development work provided by the developer will almost always be the value of the land provided by the government agency. So all these parties need to do is swap tax invoices at the agreed value.

The ruling does go into issues like attributions of the GST for both parties, where the land is not transferred but a call option is given to the developer and additional payments made by the developer to the government agency. But all of these are as you would expect using the basic GST rules.

In summary, a development lease arrangement is fundamentally a barter transaction where the developer provides developing work and the government entity provides land. The developer gets new residential premises to sell (subject to GST) and the government agency get roads, lights, parks… built for them at an agreed standard (and maybe some additional funds for accessing the site).

Can we just put this Gloxina idea in the recycling bin please…

Tax Policy

The end of tax policy?

Bill Shorten today said what is probably the worst tax policy statement I have ever heard…

“If Tony Abbott wants to increase taxes – be it petrol, be it GST – he should take it to an election,”…

If this becomes the political norm then revenue/taxation policy discussions can only occur once every three years, at election time, and in the year when politicians are least likely to make brave decisions – like raising tax…

The three year election cycle has always been (other than Whitlam and Rudd), first year implement election promises (goodies for voting for me), second year implement good adult policies (the medicine we need but would never take) and the third year start announcing the goodies for the next election. It appears Bill Shorten is just going to live in year one and year three.

And of course no Labor government increased taxes without taking it to an election (increase in medicare levy, div 293 increases in super contributions tax, carbon tax…).

Please tell me we have not got to this point in the political spin where we can never politically raise taxes…