Income Tax Legislation Planning Idea Planning Stuff Rulings

More on the Small Business Rollover

Yes I am way too excited about this… But the Commissioner has produced his first two bits of guidance on using this rollover.

In the first he looks at the consequences of using the rollover. This is all pretty simple stuff (cost base transfer…) but the final example has the trick in it…

Example 6 – Indirect tax consequence – subsequent debt forgiveness


  1. Dean operates a fishing tour business through a company, where he is the sole director and shareholder. The active assets of the business include a fishing boat, which cost the company $300,000.
  2. In January 2017, a discretionary trust is set up, Dean is one of the beneficiaries and a family trust election is made with Dean as the primary individual. The termination value and adjustable value of the boat is $260,000 at this time.
  3. The company transfers the boat to the trust for $260,000 as consideration, payable within 60 days. Both the company and the trust choose to apply the SBRR.
  4. The trustee does not pay at that time and enters into a written loan agreement that complies with the requirements of section 109N of the ITAA 1936.
  5. In June 2018, the company executes an effective deed to forgive the loan.

Other tax consequences are recognised

  1. A transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G. Related rollover relief for depreciating assets is available under section 40-340.
  2. The subsequent application of Division 7A to the loan, which was created in connection with the transfer of the assets, is an indirect consequence of the transfer and is not turned off by section 328-450. The forgiveness of the loan or failure to make minimum yearly repayments may give rise to a deemed dividend under Division 7A.

So a simple transfer of assets out of a company to a trust can lead to a big DIV 7A issue… But maybe not. Have a look at paragraph 1.65 of the EM to the Bill that introduced the rollover…

1.65 Consistent with the object of allowing small business owners flexibility to change their legal structure, the roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets. A transferor and transferee may, for example, agree to transfer the assets at cost in order to eliminate any future unrealised gains on membership interests held in the transferor entity. Where an asset transfer is made at other than market value, decreases and increases in the market values of any interests that are held in the transferor and transferee can result.

So if you transfer the assets for no consideration you get no debt to forgive and no Division 7A issues. The accountants scream “how do I account for this???” I say “work it out because if we transfer it at book value to make your accounting easy we have the company making a loan to the trust and that is much worse than your accounting problem!”

So beware of Division 7A traps when transferring out of a company using the rollover – especially as they are very easily fixable (if fixable is a word?).

In the second document the Commissioner considers what is a ‘genuine restructure of an ongoing business’? Remember that if we don’t have one of these genuine restructures we can’t use the rollover. SO what is a genuine restructure?

The following features indicate that a transaction is, or is part of, a ‘genuine restructure of an ongoing business’:

It is a bona fide commercial arrangement undertaken in a real and honest sense to facilitate growth, innovation and diversification, adapt to changed conditions, or reduce administrative burdens, compliance costs and/or cash flow impediments.

It is authentically restructuring the way in which the business is conducted as opposed to a ‘divestment’ or preliminary step to facilitate the economic realisation of assets.

The economic ownership of the business and its restructured assets is maintained.

The small business owners continue to operate the business through a different legal structure. For example, there is continued use of the transferred assets as active assets of the business, continuity of employment of key personnel and continuity of production, supplies, sales, or services.

It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

And if this is too vague (which it definitely is) the law provides a safe harbour rule…

To provide certainty to small businesses using the roll-over, a ‘safe harbour’ rule is included. A small business will be taken to satisfy the requirement that the transaction is, or is a part of, a genuine restructure of an ongoing business where, for three years following the roll-over:

There is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;

Those significant assets continue to be active assets; and

There is no significant or material use of those significant assets for private purposes.

But in this document the Commissioner applies this rule to examples. He states that restructures that achieve substantially better asset protection, or allow employees to buy in, or allow new capital, or simplify complex affairs are all genuine restructures

But he goes on to say that transferring assets from a company to an individual and waiting 12 months to get the CGT discount on those assets is not a genuine restructure.

Neither is succession planning where the assets of one company are split into two companies to allow Dad to give a company each to his two sons a genuine restructure (unless Dad meets the safe harbour above by waiting three years).

Finally he states that having a trust that transfers assets to a company to pay of a UPE and then having the company transfer it back at no consideration is not a genuine restructure as it just wipes out the UPE.

Getting the CGT discount and succession planning will come to your mind when planning a small business restructure but it cannot be the main reason you did it!

1 July 2016 is almost here and the Small Business Restructure Rollover is almost available…


Are ATOIDs over?

On the 28th of November the Commissioner released two ATO Interpretative Decisions on non arms length income and limited recourse borrowing arrangements…

And since that date, no more ATOIDs. Strange.


ATOIDs arose to fill in a gap between public rulings and private rulings.

What if a complex tax issue is not covered in a public ruling, but the Commissioner has a position in the various private rulings he gives? Then he releases an ATOID so we all can know these positions and act in accordance with them.

And initially the Commissioner gave us lots of these to consider (in 2013 there was over 1,200 released) helping us understand how the Commissioner approach various tax issues.

But the Commissioner has never been comfortable with these “non binding” opinions, and much of the text of an ATOID is taken up with caveats about how the ATOID should, and according to tne Commissioner, and should not be used. When arguing with the Commissioner in an audit, objection or the AAT, I have sern ATO staff hate the fact that I can show through an ATOID how the Commussioner has acted in previous factual situations.

So my guess is the Commissioner has just decided to stop issuing ATOIDs. He has decided to stop looking for issues covered in private rulings that would be helpful to be more widely known.

He can do this if he wants but at least he should tell us he is doing this and why he is doing it.

I may be wrong and next Friday (they are generally released on a Friday – good weekend reading) we will see an ATOID or two.

But with no ATOIDs for almost two and a half months, I think it is about time the Commissioner let us know about the future of ATOIDs.

And the picture is the Solomon Island flag made into a tax officer’s uniform… Love it.

Income Tax Rulings

How do I fix up a large UPE

I know they are not as common since December 2009, but now that we are generally paying interest on new UPEs to corporate beneficiaries (as required under TR 2010/3) these UPEs can be a real pain.

Especially if the trust that retains the cash that created the UPE is not making a lot of money and so paying the interest and/or principal can become a problem.

Well the Commissioner has an answer. In Taxation Determination TD 2015/20 the Commissioner states that generally, if the company that is owed an amount by a trust that is represented by an Unpaid Present Entitlement “forgives” the UPE so that the trust no longer has to pay the company the amount, the “forgiveness” will be a deemed dividend under Division 7A.

For the tax nerds, the Commissioner concludes that it is not a debt forgiveness as the UPE is legally not a debt but rather it is a payment – same effect but different reasoning, it is still treated as a division paid by the company to the trust.

But have a look at example 2 from the Determination…

Example 2

8. Unlucky Bob (an individual) is the trustee of Unlucky Trust, a sub-trust (within the meaning in TR 2010/3) settled in the 2011-12 income year with $1,000 of trust property to which a UPE relates. The sole beneficiary, and owner of the UPE, is XYZ Beneficiary Pty Ltd. Unlucky Bob is a shareholder of XYZ Beneficiary Pty Ltd. The subsisting UPE was not a Division 7A loan within the meaning of Taxation Ruling TR 2010/3 and was not a debt for the purposes of section 109F.

9. Unlucky Bob entered into a range of investments with the proper care and skill that a person of ordinary prudence would exercise.

10. During the 2013-14 income year, a market fall caused the value of the investments to become worthless. No amount of the loss was caused by an act or omission intentionally or negligently done, and there was no breach of trust which Unlucky Bob was required to make good to the Unlucky Trust estate.

11. XYZ Beneficiary Pty Ltd subsequently entered into a deed, by which it relinquished its entire equitable interest in the Unlucky Trust. It accounted for the released interest by making a credit entry against a ‘trust entitlement’ ledger to reflect that the interest ceased to be an asset of the company.

12. In these circumstances, the release by XYZ Beneficiary Pty Ltd confers no financial benefit upon Unlucky Bob. Accordingly, the release is not a payment within the meaning in subparagraph 109C(3)(b)(iii).

So if the trust is enough of a basket case, you can have the company forgive the UPE without Division 7A applying. Or at least some of the UPE could be written off if not all of the UPE will ever be able to be paid.

So it is possible to get the 30% tax rate in a trust and never have to given the money to the company, as long as the trust loses all of the money in bad investments.

Income Tax Rulings

Common property in blocks of units

So who owns the common property in a block of units, the strata trust or the owners. Legally it depends on the state legislation.

However, in Taxation Ruling TR 2015/3 the Commissioner simplifies this

40. Each strata title legislation is different in its description of how common property is held. Notwithstanding these differences, the Commissioner will accept, in relation to strata schemes registered under all the State and Territory Acts, that it is the proprietors, rather than the strata title body, that are entitled to the deductions under Division 40 and Division 43 of the ITAA 1997 and who are assessable on any income from common property under section 6-5 of the ITAA 1997.

So make sure the owners claim these deductions going forward.

Income Tax Rulings

The Commissioner believes in drinking in moderation?

In Taxation Determination TD 2015/9 the Commissioner provides amounts that he will accept as estimates of the value of goods taken from trading stock for private use by taxpayers in named industries.

This helps certain businesses estimate what trading stock has been “sold” outside the normal course of business (like eaten by the owners).

So if you are advising a licensed restaurant or cafe let them know the Commissioner expects them to drink $1,030 of alcohol each year… why? here are the two estimates from the determination

Restaurant/cafe (licensed) $4,490
Restaurant/cafe (unlicensed) $3,460

I can have imported beer now!

Legislation Rulings

Earnouts – the wait is over

A long, long time ago in a Tax Office far, far away…

After waiting 6 and a half years the Treasury has finally drafted some legislation to fix up how capital gains tax concessions apply to earnouts.

But just a quick reminder on the history of this issue…

In October 2007 the then Commissioner of Taxation released a draft ruling (Draft Taxation Ruling TR 2007/D10) that stated the small business CGT concessions could NOT apply to payments under earnout arrangements. As this outcome was ridiculous, the Commissioner never finalised the draft ruling waiting for the Treasury to fix the legislation. And the clock started ticking…

In 2010 the then Assistant Treasurer announced they would make a legislative changes to overcome some some consequences of the Commissioner’s position in the draft ruling (3 years to get a press release).

In 2013 the then Assistant Treasurer confirmed they would continue with this proposed legislative change (another 3 year to get another press release saying they will do what the first press release said).

During this time the Treasury was working hard to come up with the obvious solution that everyone knew. They released a discussion paper saying what we all thought, and had consultation in 2010 and 2011 where we told them we agree with what they want to do. It was so obvious what was going to happen that the Commissioner has allowed taxpayers to apply the law in expectation of what it will be under these changes all the way back to 2007 …

And now on to what the Treasury has done in the last 6 and a half years…

The draft law does four things:

  • Capital gains and losses in respect of a look-through earnout right are disregarded;
  • Financial benefits under or in respect of a ‘look-through’ earnout right are included when determining the capital proceeds or cost base of the underlying business asset to which the arrangement relates;
  • A taxpayer’s assessment for a tax related liability that can be affected by financial benefits provided or received under a ‘look-through’ earnout right may be amended for up to four years after the earnout arrangement expires.
  • Capital losses arising from a CGT event related to an earnout right may not be taken into account in determining tax liabilities until such time as they cannot be reduced by future financial benefits received under a relevant look-through earnout right.

So the draft law means that where there is an earnout, the only CGT event is the sale of the business and any future payments under the arrangement is just a change in consideration for that sale. Therefore, the small business CGT concession can apply to all the consideration for the sale of the business. Exactly what we always thought.

Just a few quick notes:

  1. This only applies to active assets;
  2. This only applies to real earnouts, and not to just deferred payment plans – the financial benefits provided must also be not able to be reasonably ascertained at the time the right is created;
  3. All the payments under the earnest have to be paid within four years;
  4. All look-through earnout rights must be created as part of arrangements entered into on an arm’s-length basis.

An 18 page bill, a 33 page EM and a two page issue register in 78 months since the issue arose, and remember there was a pretty obvious answer in October 2007 – so obvious we just kept lodging returns as if the law was as this draft law is.

But at least the Commissioner has learnt a lesson. Releasing a draft Ruling with a ridiculous outcome (but correct at law) is not an effective way to encourage the Treasury to quickly fix the law…

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…

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.

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.

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.