Pre Budget Submission – Read the Board of Tax report on Div 7A

I don’t generally get excited about pre budget submissions as I have not seen many ideas taken up in the Budgets (consult so you can say you consulted rather than looking for ideas) but I did write a very short submission this year.

Pre Budget Submission

Respond to the recommendations of the Board of Taxation report of November 2014 titled “POST IMPLEMENTATION REVIEW OF DIVISION 7A OF PART III OF THE INCOME TAX ASSESSMENT ACT 1936”

Summary: Given that the Re:Think tax review appears to have ended, as a part of the 2016/17 Budget, the Government should respond to the recommendations of the Board of Taxation in its post implementation review into Division 7A that was to be considered as a part of this review.

Why is this important? Since 2009, business owners and tax practitioners have been unhappy with a change in position the Commissioner made in relation to the operation of Division 7A of Part III of the Income Tax Assessment Act 1936. As a result of these concerns, various Assistant Treasurers have promised to have the concerns reviewed and act on the recommendations.

As can be seen in the timeline below, the review has occurred and the recommendations have been made. However, any Government response has not been made as the release of the report was substantially delayed and the results of the review were referred to another review.

Now that this second review appears to have been closed it is very important that in the 2016/17 Budget some clarity is provided for business owners and practitioners on the operation of Division 7A to unpaid present entitlements to corporate beneficiaries. It is over 6 years since the issue arose, a very detailed review has been completed 15 months ago, and it appears the extra review of the finding of the review has effectively ended.

Timeline: On 18 May 2012, the then Assistant Treasurer announced that the Board would undertake a post-implementation review of Division 7A of Part III of the Income Tax Assessment Act 1936, which was to be completed by 30 June 2013 (see .

On 8 November 2013 the then Assistant Treasurer announced an extension to these terms of reference and extended its reporting date to 31 October 2014 (see

In November 2014 the Board of Taxation provided its report and recommendations to the Assistant Treasurer (see

On 4 June 2015, the Government announced the release of the Board’s report on its post-implementation review of Division 7A of Part III of the Income Tax Assessment Act 1936. On the same date the then Assistant Treasurer announced that the recommendations of this review “will be carefully considered alongside the submissions we have received from all parts of the community in response to Re:Think, the tax discussion paper.” (see

Seven months after receiving the report from a detailed review of Division 7A of Part III of the Income Tax Assessment Act 1936 by a series of subject matter experts, the Government decided to hand the report to another review to once again consider the same issues.

The Re:Think review was due to report in late 2015. However, since August 2015 there has been no press, news, tweets or any other form of communication from the review.


Budget Income Tax Planning Idea Planning Stuff Tax Policy

More Wow!

I was thinking about yesterday’s post and I have a strange thought.

If I have a CGT asset owned by a company I am not going to get the CGT discount. But if I use the rollover from yesterday’s post to move the CGT asset to a trust and sell it the next day I get the discount on the whole gain (the 12 month rule includes the time the company owned the asset under the new rollover).

Now I need to decide if a potential second stamp duty is more than half the tax on the capital gain…

Budget Income Tax Legislation Planning Idea Planning Stuff

Wow! I mean wow!!! Like wow!!!

In the May budget the government promised a new rollover for small businesses that allowed them to change their structure without (federal) tax effects.

The Treasury has released a draft of this rollover and it is amazing.

Listen to this… You can roll small business assets into a new structure if ultimate economic ownership of the assets do not change and for discretionary trusts…

“every individual who, just before or just after the transfer took effect, had ultimate economic ownership of the asset was a member of the family group of that family trust.”

So from 1 July 2016 you will be able to change a small business structure to a discretionary trust if the individual owners of the old structure, looking through the structure, are covered by a family trust election over the new discretionary trust.


This rollover will cover depreciable assets, trading stock, CGT assets and othe revenue assets. It does this by deeming the new entity to have purchased the assets from the current structure at its tax value (cost base, written down value…) rather than market value.

This is only draft legislation At the moment but if this gets up we will be able to change small business structures to a discretionary trust after the business has proven itself to be successful WITHOUT crystalising any capital gains tax! Of course the discretionary trust will have the same cost base for the assets as the previous structure did.

This would mean you could transfer to other structures if you wanted to (other than super funds).

Want an example:

Victoria and Chris are husband and wife and are the only shareholders in Puppy Co the premises, a vehicle, cash, accounts receivable, and goodwill. Victoria and Chris wish to transfer the premises from Puppy Co to a recently settled discretionary trust, the Fluffy Trust, which will lease the premises to Puppy Co. Victoria and Chris, and their family members, are the only objects of the Fluffy Trust, which has made a family trust election. Puppy Co is a small business entity that satisfies the maximum net asset value test, and the premises are an asset of the business carried on by Puppy Co. The Fluffy Trust is not a small business entity in the income year, but it is connected with Puppy Co, and the premises satisfy the test in subsection 152-10(1A). For the purpose of the roll-over, there has not been a change in the ultimate economic ownership of the premises by the transfer of the asset from Puppy Co to the Fluffy Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer. The premises are a CGT asset of Puppy Co, which it acquired on 1 July 2002 for $300,000. The current market value of the premises is $600,000. Under the roll-over, Puppy Co is taken to have disposed of the premises for the roll-over cost, and the Fluffy Trust is taken to have acquired the premises for the roll-over cost. This is the amount necessary so that Puppy Co makes neither a capital gain nor a capital loss from the transfer of the premises. Therefore the roll-over cost is $300,000. Following the transfer of the premises from Puppy Co to the Fluffy Trust, the value of Puppy Co has been reduced by the market value of the premises, namely $600,000. The cost base of each of Victoria and Chris’s shares in Puppy Co is reduced by $6,000 to reflect the transfer of value from the trust.

Budget Tax Policy

What is coming in the budget? Budget lotto 2015

After failing so badly guessing what was in the budget last year it is time to have another go.

So what is coming in next Tuesdays budget:

1. No changes to super at all. To differentiate them from the opposition.

2. A 2% reduction in the company tax rate for small business (>$5 million taxable income). Yes I am picking 2% rather than 1.5%.

3. 40-880 five year black hole deductions becomes one year deductions.

4. A change to the small business CGT rollover that “you” don’t need to buy a new CGT asset in the two years after sale but an entity in your group has to. This will let you change your business structure (including rolling assets into a discretionary trust… Wow…).

5. A change to apply GST to intangible imports – just call it the Joe hated Netflix tax…

6. A change to GST such that an intermediary arranging crowd source funding does not need to remit GST (likely input taxed).

Yes I know they are pretty boring but I think it will be pretty boring…

And now to sit up on Tuesday night reading budget paper 2.


Budget 2014/15 – Tax and Super announcements

Yes… I got it wrong…

The first Budget of the current government is pretty much as expected on a tax and superannuation front.

The big news, which we already knew about, is that the Government will introduce a three-year levy, called the Temporary Budget Repair Levy from 1 July 2014.

The Temporary Budget Repair Levy will apply at a rate of 2% on individuals’ taxable income in excess of $180,000. This effectively means the highest marginal tax rate will go from 47% to 49% (remember that the Medicare Levy goes from 1.5% to 2% on 1 July 2014 so the highest marginal tax rate goes to 47%).

Therefore, for these high wealth individuals, if they can bring income into this year, or push deductions to the following year they can save 2% of the amount. Year-end tax planning this year will be interesting.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased. For example, the FBT rate will be increased from 47 per cent to 49 per cent from 1 April 2015 until 31 March 2017.

On the Superannuation front the main announcement is that the Government will allow individuals the option of withdrawing superannuation contributions in excess of the non‑concessional contributions cap made from 1 July 2013. This will mean inadvertent breaches of the non-contribution cap will result in a disproportionate penalty.

The second super change is to the schedule for increasing the superannuation guarantee rate to 12%. The superannuation guarantee rate will increase from 9.25% to 9.5% from 1 July 2014. The rate will remain at 9.5% until 30 June 2018 and then increase by 0.5% each year until it reaches 12%.

Other than these changes, most of the other changes to the tax system are minor, and include the following:

  • Both the Dependent Spouse Tax Offset and the Mature Age Worker Tax Offset, which have been limited over the last years, will not be available for anyone from 1 July 2014.
  • The income thresholds for the private health insurance offset and the Medicare levy surcharge will be frozen for 3 years from 1 July 2015.
  • The Research and Development Tax Incentive will see its rates reduced by 1.5%, effective from 1 July 2014. This will mean the rate for the refundable offset will be 43.5%.
  • The Seafarer Tax Offset will be abolished from 1 July 2015 – has anyone ever heard of this before this budget????

Some other interesting announcements include in the budget are that:

  • The Government will introduce a receipt for taxpayers providing information about “where and how their taxes were used”. You will start seeing these from 1 July 2014;
  • The Government will reduce ATO funding by $142.8 million over three years from 1 July 2015; and
  • The Government will abolish the First Home Saver Accounts scheme form Budget night, with no further Government co‑contribution from 1 July 2014 and not tax concessions from 1 July 2015.

Late last year the Government announced what it is doing regarding the announced but unenacted measures of the previous government.  In the Budget the Government has changed its position in relation to some of these measures. The Budget states that the Government has decided to:

  • Not proceed with changes that would have applied to multiple entry consolidated groups;
  • Modify integrity measures in relation to the foreign resident CGT regime;
  • Modify integrity measures in relation to the consolidation regime;
  • Defer the start date of the new tax system for managed investment trusts by 12 months to 1 July 2015;
  • Defer the start date of reforms to the offshore banking unit regime to 1 July 2015;
  • Defer the start date of the legislative elements of the measure to improve tax compliance through third party reporting and data matching to 1 July 2016; and
  • Not proceed with changes to better target tax concessions provided to charities and other not-for-profits organisations.

In summary, other than year end tax planning for individuals with taxable income over $180,000, there is little for us to be concerned about.


Budget lotto

Having worked as a lobbyist for the Institute of Chartered Accountants (the exact title was a tax specialist) and in the office of the Assistant Treasurer under the previous Government, I am supposed to have my inside information on what will happen on Tuesday night…

But my imaginary inside mole has forgotten to email me the complete Budget papers… So I am going to tell you what will be in the Budget for tax and super from consulting the stars, my crystal ball and a my wife’s tea leaves.

The best part of doing this is that you can all chuckle at me when I get it very, very wrong.

No points for guessing that the highest marginal rate goes to 49% or that indexation is back for the fuel excise… But I reckon they will announce changes to the taxation of super but they will come in AFTER the next election.

If you want to share the pain then super is a place to tinker with – changes to earnings tax rate, changes to contributions tax rate… But only after the 2016 election as there have been enough broken promises.

There is a lot of reasons to change the taxation of super.

1. Since 1992 when SG kicked off there has been no reduction on the percentage of the elderly on the pension – super concession are not keeping people off the pension as is regularly argued.

2. I spoke to lots of people when Div 293 tax was introduced (the extra 15% contributions tax for those earning $300,000+) and everyone said they were not going to decrease super contributions – so the Goverment decreased the “encouragement” to put amounts into super and there was no change in the amounts contributed… This means the original concession was obviously too generous.

I don’t want to guess exactly what they will do but the guess is super changes in 2016… And pretty much nothing else.

You can all laugh at me at 7:30pm tommorrow!!!!


Put my budget money where my budget mouth is…

If you have been reading this blog (poor you) you will have noticed I am pretty sure the Australian public finances are pretty sad and need fixing (and if you don’t please don’t say “we have a triple A rating” as all this means we are likely to pay back our 20 year bonds issued today – in 20 years time if we keep going the way we will be going we will be relatively as bad a greece is today – read the MYEFO and weep). Also I don’t believe you can fix this just by increasing taxes.

Screen Shot 2014-05-08 at 9.08.37 pm

But someone has emailed me saying that if I had an offer on the table where by the “spendies” (His word not mine) where willing to reduce spending by $2 for every $1 of increases in tax (and real increases in taxes, not bracket creep) what would I put on the table.

So if the structural deficit is $30 billion, if I can find $10 billion in additional tax they will give me $20 billion in expenditure savings…

This would be easy if I was politically naive as I could say “increase the GST to 12.5%”. However, lets make it hard for me. I have to do this while not destining a government from spending a lifetime in opposition.

1. When the previous government announce to was removing the statutory method for car fringe benefits, the packaging companies yelled “this will be the end of the car manufacturing industry in Australia”. Unfortunately, that will happen in 2016 so lets save just under a billion and get rid of it now.

2. Division 293 tax is the addition 15% contributions tax charged on concessionally taxed super contributions for those earning over $300,000. It is supposed to raise about $330 million a year. The argument was, if you are earning more than $300,000 you don’t need large tax encouragements to save for your retirement. However less than 1% of taxpayers (of the 10 million taxpayers) earn more than $300,000 and even with this additional tax the tax rate on their super contributions is only 30% rather than 47% (from 1 July 2014). So lets decrease the threshold to $180,000 (where the 47% kicks in covering 3% of taxpayers) and increase the rate to 22% so the tax on their contributions is 37% rather than their marginal tax rat of 47% – they still get a 10% encouragement to contribute to super. The decrease in the threshold means we triple the revenue, and the rate change adds another 50%. So this will get use another $1.5 billion.

3. Yes economists capital is mobile, but non residents already don’t get the CGT discount so lets reduce it from 50% to 25%. There still is a benefit, but not as big. BUT WHAT WILL IT DO TO THE SHARE MARKET AND THE INVESTMENT PROPERTY MARKET! With interest rates at record lows it is unlikely a massive flow of investments will move to debt. Saving $2.2 billion.

4. And now I give you a choice. Either increase the marginal rates on the top 10% of taxpayers (those earning greater than $110,000) by 2% – I mean there effective tax rate not the marginal rate so something like an increased medicare levy for the  top 10% only – raising $5 billion OR increase the earnings tax on super funds to 19% (the second lowest marginal tax rate) and refund the earnings on super accounts with members who earn less than $18,200 a year (where the 19% rate kicks in) – raining about $4 billion.

5. The R&D tax incentive costs $1 billion a year. Currently if your turnover is greater than $1 billion you are ineligible as you are so large you will do R&D anyway. I would suggest (of course without an evidence other than claiming the R&D concessions for hundreds of companies) the same applies to any company with a turnover greater than $100 million. Give me $0.5 billion for making this change.

$10 billion easy, without touching the GST and without smashing any one politician can’t pick on.

Now I am being disingenuous as we all know the hardest part is writing the rules transitioning from one rule to another but lets grandfather cars, CGT assets… and in four years all the saving will be in full swing.

So lets see what the budget does… Cut expenditure Joe, cut it hard.