Archive for March, 2015

Tax concessions following business sale cancelled

Thursday, March 26th, 2015

The Administrative Appeals Tribunal (AAT) has confirmed that the general anti-avoidance rules under the tax law applied to a “scheme” carried out by taxpayers in order to enable them to qualify for the capital gains tax (CGT) concessions for small businesses on the sale of a business. In particular, the AAT examined the effect of a “restructure” of the business which occurred several weeks before the sale. An effect of the “restructure” was to enable the taxpayers to meet a requirement to access the CGT small business concessions.

Before the AAT, the taxpayers sought to argue that, contrary to the position they took on claiming the tax concessions on the lodgment of their tax returns, they did not qualify for the concessions. However, the AAT held the taxpayers did qualify for the concessions. It also held that, after finding that the steps to “restructure” the business constituted a “scheme”, the general anti-avoidance rules under the tax law applied to cancel the “tax benefit”. The AAT found the taxpayer entered into the scheme for the dominant purpose of obtaining a tax benefit (reduced tax) and not for any asset “protection purpose”.

TIP: The ATO uses data-matching to identify taxpayers that may be inappropriately seeking the CGT small business concessions. Business “restructures” which occur just prior to a particular transaction which result in significant tax benefits could potentially raise red flags. Where a restructure is effected for purposes such as asset protection (which the courts have said is a legitimate non-tax purpose), such benefits must be real and not simply illusory.

Penalty for promoting pharmaceuticals donations scheme

Wednesday, March 25th, 2015

The Federal Court has imposed a $1.5 million penalty after finding a promoter of a scheme involving the purchase and donation of pharmaceuticals to charities with foreign operations engaged in conduct that resulted in himself and two other corporate entities being promoters of a tax exploitation scheme.

The ATO noted the penalty of $1.5 million was the “highest civil penalty to date”. In commenting on the decision of the Federal Court, ATO Deputy Commissioner Tim Dyce said the scheme involved the purchase and donation of AIDS pharmaceuticals to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%,” said Mr Dyce.

GST credits for employee accommodation refused

Wednesday, March 25th, 2015

The Federal Court has held in the recent decision of Rio Tinto Services Ltd v FCT [2015] FCA 94 (handed down on 19 February 2015) that the taxpayers are not entitled to input tax credits for providing remote region residential accommodation to employees who are required to live remotely in order to carry out their employment duties.

Broadly, the Federal Court held that the taxpayer, Rio Tinto, was not entitled to input tax credits for the acquisition made by Hamersley Iron Pty Ltd (Hamersley), a related company in Rio Tinto’s GST group, in providing and maintaining heavily subsidised residential accommodation for their employees in the remote Pilbara region of Western Australia, where they conducted mining operations.

The Federal Court was prepared to accept that Hamersley’s leasing activities may have been wholly incidental to its mining operation and merely a means to carrying on its business. However, the Court denied Hamersley input tax credits in relation to that activity on the basis of a narrower interpretation that the acquisition “relates to” the supply of residential accommodation by way of lease, being an input taxed supply (which means there is no GST credit).

TIP: At the time of writing, Rio Tinto has appealed to the Full Federal Court against the decision handed down by the Federal Court. The principles followed by the Federal Court could have wide-reaching implications for GST registered businesses, and the appeal process should be followed closely.

Time limits on trustee tax assessments clarified

Wednesday, March 25th, 2015

The ATO has issued Practice Statement PS LA 2015/2 which outlines its practice of limiting the period within which it will raise an original trustee assessment. The practice means that returns lodged by trustees are broadly exposed to similar time limits for review as other taxpayers.

Generally, the ATO notes it will not issue an original trustee assessment more than four years after the relevant trust tax return was lodged, or more than two years after lodgement for the 30 June 2014 and later income years if the trust was a small business entity (and certain specific qualifications under the tax law do not apply). However, the ATO notes that the time limits can be extended in certain cases.

The following example illustrates the time limit within which the ATO can raise an original trustee assessment:
The 2010 income tax return for the Oak Family Trust was lodged on 9 May 2011. The trust was not a small business entity for the 2010 income year. An audit of the trust reveals that some of the trust net income should be assessed to the trustee. The Practice Statement provides that the Tax Office must issue an assessment to the trustee by 9 May 2015 (unless the time limit is extended).

Single Touch Payroll consultation noted big changes afoot

Wednesday, March 25th, 2015

Businesses need to be aware of big changes afoot with the implementation of the Government’s proposed Single Touch Payroll. Under Single Touch Payroll, employers will be required to electronically report payroll and superannuation information to the ATO when employees are paid, using Standard Business Reporting-enabled software.

According to the Government, Single Touch Payroll would cut red tape for employers and simplify tax and superannuation reporting.

TIP: Single Touch Payroll is expected to be launched in July 2016. In a brief public consultation period, the ATO highlighted potential impacts that the implementation of Single Touch Payroll could have on employers. Businesses or their payroll providers may be required to either purchase or upgrade existing software, potentially at an additional cost. Another concern is the immediate impact on cash flow, particularly during transition.

Separate ATO appeals unit needed to resolve tax disputes

Wednesday, March 25th, 2015

The Inspector-General of Taxation has called for a separate appeals unit within the ATO following a review of the ATO’s management of tax disputes.

The Tax Inspector noted that while the ATO’s recent initiatives represent a positive step in tax dispute management, more could be done to help small businesses and individual taxpayers. Mr Ali Noroozi said a separate, dedicated appeals unit within the ATO, should be led by a new Second Commissioner.

The unit within the ATO proposed by the Tax Inspector would manage and resolve tax disputes for all taxpayers including the conduct of pre-assessment reviews, objections and litigation (including providing oversight on settlements), as well as championing the use of alternative dispute resolution. The Government said it would consider the recommendation along with any other recommendations to be made by a parliamentary committee that was examining tax disputes.

March update from our superfund auditors

Wednesday, March 25th, 2015

Please follow this link to the March update from our superfund auditors.

Powers of Attorney

Thursday, March 12th, 2015

According to Partners Superannuation Services, the Powers Of Attorney Act 2014 (Victoria) will commence on or before 1 September 2015. Existing instruments entered into before the Act commences will be valid, although these will also be governed by the new Act.

An Enduring Power of Attorney (EPOA) will be required for superannuation purposes as a General Power of Attorney will no longer be effective for trusts.

The Act states that the Attorney under an EPOA is obliged to give effect to the Principal’s wishes and ‘encourage the Principal to contribute to decisions that promote the Principals’ personal and social well-being’ by:
• Recognising Principal’s inherent dignity
• Having regard to Principal’s existing supportive relationships, religion, values and cultural and linguistic environment
• Respecting confidentiality of confidential information

The Attorney has a duty not to enter into a transaction for the Principal if there is or may be a conflict between:
• the duty of the Attorney to the Principal; and
• the interests of the Attorney, or a relative, business associate or close friend of the Attorney.

Transactions permitted:
• Providing for reasonable maintenance of a dependant of the Principal having regard to the Principal’s financial circumstances, if the EPOA expressly permits it
• Dealing with an interest in property held jointly by the Attorney and the Principal (whether as joint tenants or tenants in common)
• A loan, guarantee or indemnity for this
• If the Principal has decision-making capacity for the matter
• Transactions expressly permitted by the Principal when the Principal has capacity
• Transactions expressly permitted by VCAT

A gift is permitted in these circumstances:
• Maintaining Principal’s dependants if expressly provided for
• Gift must be reasonable having regard to all the circumstances, particularly the Principal’s financial circumstances
• Gift to a relative or a close friend of the principal and is of a seasonal nature or for a special event
• Typical donations
• Attorney to keep written record of amounts >$100 paid to Attorney, Attorney’s relatives of friends or charities connected to Attorney

The Principal or Executor/Administrator (within six months of death) may apply to VCAT for an order that the Attorney compensate the Principal for loss arising from the Attorney’s contravention. The Act imposes heavy fines and up to five years imprisonment for dishonestly obtaining EPOA or revocation to obtain financial advantage or causing loss to the Principal.

Although this is specific to trustees that reside in Victoria, it is particularly important that any SMSF member has a valid financial enduring power of attorney in place. In the event of incapacity, this can allow the fund to continue with minimum disruption which is generally a trying time for the SMSF trustee/s.

Reversionary pensions – Why?

Thursday, March 12th, 2015

Every week Partners Superannuation Services receive questions relating to death benefits and SMSFs. Sometimes the member has died already and at other times, death may not be far away. Most couples, whether they be husband and wife or in a defacto relationship, usually want the benefit on the death of one to go to the other.

In one fund we saw this week, the pension documentation was specific. A reversionary pensioner had been nominated and the pension agreement between the trustees and the member discussed the operation of the pension when the pensioner died. The paperwork evidencing the pension had been completed properly. When one member died, the pension did not cease. It continued seamlessly with a new reversionary pensioner – the spouse. At a time of mourning, it was reassuring for the family to know here was one issue arising from the death of a loved one that automatically resolved itself.

Contrast that with the death of the member whose pension documents that consist of no more than: “Dear Trustees, I want to start a pension, signed member.”

There was no beneficiary named in the pension documents. Can the survivor, the widow for this SMSF, take the benefit as a pension? Maybe, maybe not. It depends on the trust deed governing the fund. Some deeds allow a beneficiary to commence a pension, others don’t. She may be forced to take the money out of the SMSF as a lump-sum benefit. The widow had to check the deed to see what she was allowed to do.

But assuming she can start a pension, what happens in the interim between the date he died and the date on which a new pension starts? His portion of the fund becomes taxable and an actuarial certificate is going to be needed for this tax year. Life was certainly easier for the survivor in the first fund.

Another problem is there was no reference, in the paperwork such as it was, to what portion of the pension was tax exempt. Upon asking, we were informed the member was over the age of 60 so no tax was payable on the pension paid. Our response was, unless the money is completely spent prior to death, it will in many cases go to adult children eventually. If no one in years to come can prove that some of the fund was tax exempt, the ATO will be wanting the full amount taxed (currently at 17%).

If you have any questions about the above, contact us and we’ll point you in the right direction.

Contributions – Beware

Wednesday, March 11th, 2015

According to Partners Superannuation Services, contributions made by means of cash or personal assets (by in-specie transfers) to SMSFs would be one of the most common SMSF strategies advisors are involved with. The restrictions on in-specie transfers of course being the related party acquisition rules, limiting these transfers to listed stock and business real property (units in compliant 13.22C can also qualify). The main considerations have always been the CGT event on disposal of the asset by the member and also any potential stamp duty that the member will incur on transfer of the asset (typically a consideration for property and can vary from state to state). In addition to ensuring the members’ relevant contribution cap is not breached, we have seen some interesting activity by the ATO recently concerning where the contribution came from.

Where is the contribution coming from?

Upon dealing with the ATO recently concerning contributions, we have seen the ATO delve deeper and request information from the SMSF about where the contribution came from. In one particular excess contributions case, there was a non-concessional contribution (NCC) made from the husband’s personal bank account to their SMSF account, claiming a portion of the amount contributed to be allocated as a NCC for the wife. In this particular case, as the bank account was not jointly held, the ATO held that there was no way to prove that part of the NCC had come from the wife also. As a result, the ATO issued an excess contributions notice to the husband and refused to budge.

Think twice before contributing

If the ATO are going as far as requesting information to confirm the source of the contribution, this could also have repercussions for in specie transfers. Quite often we have seen the scenario where one person in a married couple will hold an asset in their own name outside of the fund i.e. listed stock or property. When the decision is then made to transfer this asset into the fund as a concessional contribution (CC) or NCC for both members, typically the one member will transfer in the shares or property from their own name and advise that fund that a portion of the transferred asset is for the other member. It is usually done by this method because there is no additional tax or duty burden by transferring part to the other member individually first as well as saving the paper trail and time.

Solution?

Recent activity by the ATO indicates that this type of transaction may not work on proportional splitting of contribution assets or cash from one member individually. Failure to not be able to confirm this with the ATO could result in unwanted excess contribution assessments. For the time being we recommend taking the additional time to ensure that the cash or assets being contributed are coming directly from the member. This may result in additional delays and cost by transferring through bank accounts, registries and the Titles office, but you will have peace of mind. We recommend that you seek adequate advice before contributing to SMSFs around what the tax implications and potential duties are.