inTax Magazine Dec/Jan 2013 Awards Special Edition by Thomson Reuters

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Self-education expenses Coalition scraps Labor’s proposed $2,000 cap

Time of acquisition of asset from deceased estate For CGT and legal purposes!

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Unfinished business – GST reform In May this year the Prime Minister, then Opposition Leader, announced in his budget-in-reply speech that a Coalition Government would release a white paper into Australia's tax system. Unlike the Henry Tax Review of 2008, the Coalition intends that its white paper will include a much overdue review of the GST. The government has since announced its intention to release a discussion paper on tax reform to invite comments on the GST to inform the preparation of the white paper.

December 2013 – January 2014

Self-education expenses: Coalition scraps Labor’s proposed $2,000 cap

Time of acquisition of asset from deceased estate – for CGT and legal purposes!

Regular Tax update Tax calendar What do clients really want? In-Focus

Overall state-of-play

Tax-In-Action

At this stage the nature of any future GST reform remains unclear. The Prime Minister has committed to not changing the rate and base of the GST in the first term of his government, but a myriad of mismatching comments from government ministers makes it difficult to predict what to expect beyond that first term. The white paper will need to consider whether certain GST sub-systems within the GST Act require tinkering or whether a more substantial legislative overhaul is required. Up for review will be the crossborder application of the GST, with the $1,000 exemption for purchases of goods from overseas likely to again be reviewed. (However, note the government has recently advised that it will not proceed with the separation of the low value import threshold for customs duty and GST purposes as its says it has not yet considered the business case on the low value import threshold: see the Treasurer and Assistant Treasurer’s joint media release, 6 November 2013.) Balancing the interests of Australian retailers against those of consumers is a tough political balancing act. The government should put political considerations aside and carefully balance the administration costs against the revenue take that would result from the potential removal of this exemption. Complexity and compliance costs also need to be considered. One approach to reducing compliance costs would be to allow more business-to-business transactions to be treated as if they were GST-free. This would be particularly beneficial where some of the cash-flow costs associated with GST can be avoided. This treatment could be particularly beneficial for acquisitions of large one-off capital items. Of course, it would be necessary to target those transactions where the compliance benefits outweigh the added complexity of differential treatment.

Clive Bird Moore Stephens

– continued on page 23

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Are you interested in contributing an original article for inTAX Magazine? Do you want to read more on a particular topic? Contributions, suggestions and comments are always welcome – send to Lisa Lynch: inTAX Magazine, Lvl 5, 100 Harris St, Pyrmont NSW 2009 Tel: (02) 8587 7643 Fax: (02) 8587 7601 Email: lisa.lynch@thomsonreuters.com

An update of major rulings, determinations, announcements and cases of widespread practical interest to tax practitioners. Prepared by Lisa Lynch, Senior Tax Writer, Thomson Reuters

taxupdate Announcements Coalition position on unlegislated announcements On 6 November 2013, the Government announced its formal position with respect to some 92 previously announced tax, superannuation and related changes that have not been legislated. The Government said it is determined to resolve all policies relating to these matters by 1 December 2013 for inclusion in the Mid-Year Economic and Fiscal Outlook (MYEFO). The Government announced which measures it will proceed with (including some requiring amendments), measures requiring further consultation (although the Coalition has expressed a “disposition” not to proceed with them), and other measures it will not proceed with. The Government

inTAX MAGAZINE

| December 2013 – January 2014

intends that the bulk of legislation that is to be progressed should be passed by the Parliament by 1 July 2014. The full list of measures addressed by the Government is in the joint media release by the Treasurer and the Assistant Treasurer of 6 November 2013. The Government said there will be legislated protection for any taxpayer who has self-assessed with announced changes that the Government will not proceed with. The Government says it will ensure they have no liability. In addition, the Government’s statement says “taxpayers that have complied with previous announcements that will no longer proceed, and have paid additional taxation, will be entitled to a refund”. Importantly, the Government said it will not proceed with the following measures: ä Self-education expenses: Labor’s announcement to put a $2,000 cap on the amount people can deduct as

self-education expenses, including training and educational courses, textbooks and other accreditation expenses. The Government said it has been advised there is no credible evidence of substantial abuse of this deduction. See p 10 of this inTAX for an article on claiming self-education work-related expenses. ä FBT car changes: Labor’s proposal to abolish the FBT statutory formula method for car fringe benefits. ä Super pension earnings: Labor’s proposal which would have capped the tax exemption for earnings on superannuation fund assets supporting pensions at $100,000pa per person from 1 July 2014. Under Labor’s proposal (announced on 5 April 2013), a tax rate of 15% was proposed for superannuation fund earnings (such as dividends, interest,

taxcalendar January 2013 21

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Monthly BAS and IAS payments for December 2013 and quarterly BAS and IAS payments for December 2013 quarter due

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February 2013 21 rent and realised net capital gains) on pension assets above $100,000pa per person. In announcing that it will not proceed with Labor’s proposal, the Government said the complexity and compliance costs associated with this initiative were “extreme and essentially undeliverable”. As such, superannuation fund earnings (including net capital gains) on assets supporting income streams (ie pensions and annuities) will continue to be totally tax-free (ie exempt current pension income) where a complying superannuation fund satisfies the existing conditions in Subdiv 295-F of the ITAA 1997. ä Reforms to retirement incomes: Labor’s proposal to establish a council of superannuation guardians. The Government will not proceed with the creation of the Super Council or the Charter of Superannuation Adequacy and Sustainability. ä Low value import threshold: Proposal to set a threshold by regulation. The Government will not proceed with the separation of the low value import threshold for customs duty and GST purposes as it says it has not yet considered the business case on the low value import threshold. See p 3 of this inTAX for a discussion on the need for GST reform. Note also that a number of tax and super measures related to the mining tax is to be abolished or revised: see Legislation Update on p 8 of this inTAX.

Division 7A Board of Taxation Review extended The Assistant Treasurer has announced that the Board of Taxation will extend its post-implementation review of Div 7A of Pt III of the ITAA 1936 to include the broader taxation framework in which private business operates. Senator Sinodinos said “the Board’s examination of Div 7A highlights that complexities can arise because of the Division’s interaction with other areas of the tax code and its operation in the context of private group tax arrangements”.

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Payment of 2nd instalment for 2013-14 by quarterly payers (who are not deferred BAS payers) due

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PAYG withholdings from payments made in January 2014 by medium payers (who are not deferred BAS payers) due

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Payment of 2nd instalment for 2013-14 by quarterly payers who are deferred BAS payers due

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PAYG withholdings from payments made in December 2013 and January 2014 by medium payers who are deferred BAS payers due

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PAYG withholdings from payments made during December 2013 quarter by small payers who are deferred BAS payers due

Note: Where a due date for lodgment falls on a day that is not a business day (that is, the due date is a Saturday, a Sunday or a public holiday), lodgment may be made on the first business day after the lodgment day.

Under the extended terms of reference, the Board will examine whether there are any problems with the current operation of Div 7A that are producing unintended outcomes or disproportionate compliance and administration costs. The Board will also, to the extent there are problems, recommend options for resolving them so that, having regard to the policy intent of Div 7A and potential compliance and administration costs, the tax law operates effectively. The Board’s final report is due to the Government by 31 October 2014.

Tax Office information access guide updated The Tax Office has released a publication – Our approach to information gathering – which explains to taxpayers (including their representatives) how the Tax Office collects information as part of its compliance checks. It replaces the Access and Information Gathering Manual. The Tax Office said the guidelines in the new publication have been developed in consultation with a National Tax Liaison Group representative group, following a comprehensive review of its information gathering principles and practices. The new guidelines cover: ä the overarching principles that Tax Office officers are to apply;

ä information about the Tax Office’s formal access and notice powers, including when they will be likely to be used, and what taxpayers and their representatives can expect from the Tax Office when the powers are used; ä updated information on how the Tax Office accesses electronic records and information held offshore; and ä how the Tax Office intends to resolve disputes.

Tax Office explores “push” tax returns for individuals with simple tax affairs The Tax Office has revealed that it was looking at ways it could reduce (or even eliminate) the burden for compliant individuals with simple tax affairs by generating so-called “push” tax returns. The Tax Office has substantial amounts of information about taxpayers and for those with simple returns, Tax Office Second Commissioner of Law Design and Practice, Neil Olesen said the Tax Office estimates “that on current policy settings we could initially offer a ‘push’ tax return for as many as 1.4m people, and in fact are aiming to do so next year [2014]”. Mr Olesen said the prototype developed for “push” tax returns has reduced the number of e-tax screens

inTAX MAGAZINE

| December 2013 – January 2014

down to 10 (from 140), with improved navigation, and taking around 20-25 minutes to complete. Over time, he estimates around 4.5m taxpayers could be offered this service.

The Government said there will be legislated protection for any taxpayer who has self-assessed with announced changes that the Government will not proceed with.

Tax Office data-matching carer allowance recipients The Tax Office has announced that it will request and collect names, addresses and other personal details of individuals receiving Carer Allowance or Carer Allowance Healthcare Card Only from the Department of Human Services. It said the data will be electronically matched with certain sections of Tax Office data holdings to identify entitlements to claim a Dependent (invalid and carer) Tax Offset under taxation laws. The Tax Office said the program will enable it to identify individuals who are entitled to receive a Dependent (invalid and carer) Tax Offset to expedite the processing of income tax returns and refunds. The program will also allow the Tax Office to undertake compliance activities for higher risk claims of the tax offset. Records relating to approximately 600,000 individuals for each of the financial years 2011-12, 2012-13 and 2013-14 receiving the Carer Allowance or Carer Allowance Healthcare Card Only will be matched.

Tax Board focused on agents meeting regulatory obligations The Tax Practitioners Board (TPB) has released the second edition of its compliance booklet which sets out its compliance model, as well as a summary of some recent TPB compliance outcomes. The Board said it is investing “significant resources” in providing guidance and support to tax practitioners to help them understand their obligations and that it has increased its expectation that tax practitioners meet their obligations in respect of the Code of Professional Conduct contained in the Tax Agent Services Act 2009 (TASA). For the vast majority of agents, the Board wants to encourage their good behavior; for the small number of agents that are not compliant, the Board wishes to modify or stop their behaviour. In relation to sources of complaints, the Board notes that 69% comes from the public, followed by 23% from the Tax Office, then 7% from tax practitioners, and 1% from “other” sources.

inTAX MAGAZINE

| December 2013 – January 2014

Cases GST: no continuing supply after sale of leased apartments The Full Federal Court has overturned an earlier decision and unanimously held that a taxpayer, that had purchased 3 residential apartments which were subject to leases, did not have an increasing adjustment within the meaning of Div 135 of the GST Act, as there was no continuing supply in terms of s 1355(1). The Full Federal Court noted the relevant factual context in which the case arose had already been covered by the Court in South Steyne Hotel Pty Limited v FCT (2009) 74 ATR 41. Broadly, the taxpayer had purchased 3 apartments in a hotel complex from South Steyne which were subject to leases that had been granted to a hotel management company (MML) that was obliged to essentially operate a serviced apartment business. The taxpayer had also elected to participate in a “Management Rights Scheme”, which mirrored the scheme provided for under the lease agreements. In the Full Court’s view, the primary judge erred in concluding that, following the sale of the reversion from South Steyne to the taxpayer, there was a continuing supply by South Steyne to MML. It said there was no continuing supply, merely a continuation of a lease, the subject of the supply made by South Steyne to MML by the grant: MBI Properties Pty Limited v FCT [2013] FCAFC 112. Note the Commissioner has lodged an application for special leave to appeal to the High Court against the decision. At the time of going to press, the Tax Office issued an interim Decision Impact Statement pending the outcome of the application for special leave.

Currency denomination in Tax Office demand note irrelevant The Full Federal Court has unanimously allowed the Commissioner’s appeal and held that s 255 notices requiring a company to retain out of Canadian currency sufficient funds to meet 2 taxpayers’ Australian income tax liabilities were effective. The principal issue in the appeal was in essence whether the reference to “money” in s 255 was confined to Australian currency or does it include foreign currency? The Full Federal Court allowed the Commissioner’s appeal finding that “money” should be read in s 255 as including a debt which the recipient of the notice owes to the non-resident taxpayer, whether or not that debt is denominated in Australian dollars:

FCT v Resource Capital Fund IV LP & Ors [2013] FCAFC 118.

U-turn practice statement appeal in tax case unsuccessful The Full Federal Court has refused Macquarie Bank Ltd leave to appeal against the decision of Edmonds J in Macquarie Bank Limited & Anor v FCT [2013] FCA 887. Edmonds J had refused to review a decision of the Commissioner and his delegate to refuse to apply his view of the law on the allocation of Offshore Banking Unit expenses solely on a prospective basis. The Court concluded that the relief sought by Macquarie must fail and have no utility because the Practice Statement “cannot prevent the Commissioner from exercising his powers of assessment or of re-assessment”. It said Macquarie’s case was “bound to fail” because there was no basis upon which Macquarie could seek to enforce any adherence to the Practice Statement: Macquarie Bank Limited & Anor v FCT [2013] FCAFC 119.

Individual not an Australian resident for tax purposes The AAT has held a taxpayer was not an Australian resident for tax purposes during the 2009 to 2011 income years. The AAT was satisfied the taxpayer was not a resident of Australia according to ordinary concepts during any part of the 3 years in question. It was of the view the taxpayer had not been residing in Australia since mid-2006 and that he had established a home in Bali from early 2008. The AAT noted that from mid-2006, the taxpayer no longer had a regular place to live in Australia, and from early 2008, had resided in Bali with his then de facto partner (now his wife), had developed social relationships in that country, and that his assets were held in Indonesia: AAT Case [2013] AATA 780, Re Murray and FCT.

No deduction for legal expenses to fight ASIC ban and criminal charges The AAT has found that legal expenses incurred by a taxpayer in challenging an ASIC banning order prohibiting him from providing financial services for 5 years and in defending criminal charges for alleged insider trading, were not incurred by him “in the course” of gaining or producing assessable income and therefore were not deductible under s 8-1(1)(a) of the ITAA 1997 for the 2011 income year. (Note the taxpayer was acquitted on most of the criminal charges and ASIC withdrew the remaining charges.)

The Tribunal held there was an insufficient “connection” (“link” or “nexus”) between the legal expenses and the production of assessable income by the taxpayer, noting the taxpayer had ceased to occupy the position of an authorised representative at a financial services company when the expenses were incurred: AAT Case [2013] AATA 783.

Car and other work-related expenses deduction claims mostly denied A taxpayer who claimed $10,104 for work-related car expenses and $6,497 for other work-related expenses for the 2010 income year, which the Commissioner disallowed, has been partly successful before the AAT – but only to the extent of being allowed car expenses totalling $3,150 under the cents per kilometre method based on 63 cents per kilometre for the first 5,000 business kilometres travelled. Otherwise, the AAT found the taxpayer had not discharged the onus of proving the expenditure was incurred in gaining or producing his assessable income in accordance with s 8-1 of the ITAA 1997: AAT Case [2013] AATA 750, Re Schlottmann and FCT.

GST refund claim made too late The AAT has refused a taxpayer’s request for an extension to time to apply to the Tribunal for review of the Commissioner’s objection decision (dated 31 October 2011) refusing a GST refund in relation to the June 2004 quarter. The Commissioner

had refused the refund on the basis that the application was made after the 4-year cut-off date for the June 2004 quarter (ie 28 July 2008). The Tribunal accepted the Commissioner’s argument that there was no discretion which could be exercised in the taxpayer’s favour to enable him to obtain the GST refund. The Tribunal held it was not satisfied that it was reasonable in all the circumstances to exercise the discretion in s 29(7) of the Administrative Appeals Tribunal Act 1975 to grant an extension of time to the taxpayer to lodge an application for review of the Commissioner’s objection decision: AAT Case [2013] AATA 731, Re Hampson and FCT.

Tax debt waiver based on serious hardship claim refused The AAT has affirmed the Commissioner’s decision refusing to release a taxpayer from his tax liability under s 340-5(3) of the TAA. The Tribunal found the taxpayer’s serious hardship came from his liabilities, of which his tax debt was but one, exceeding his assets and that the outgoings required to service those liabilities exceeded his income. As a result, it said this was not serious hardship that would arise from him being required to satisfy his tax liability – which meant the taxpayer had not met the requirement in Item 1 of s 340-5(3) of the TAA for the discretion to release him from his tax debt in whole or in part to apply. As he had not met the criterion, the AAT said it did not have the power to release him from

his tax debts: AAT Case [2013] AATA 746, Re Rasmussen and FCT.

Rulings FBT: expense payment and once only deduction Taxation Ruling TR 2013/6 sets out the Commissioner’s views on whether a “once only deduction” arises in calculating the taxable value of an “external expense payment fringe benefit” under s 24 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) where the expenditure associated with that fringe benefit would be subject to the loss deferral rule in s 35-10(2) of the ITAA 1997. Division 35 is concerned with the deferral of losses from non-commercial business activities.

GST: moveable home estates Draft GST Ruling GSTR 2013/D2 provides the Commissioner’s preliminary views concerning the GST treatment of specific supplies made by operators of moveable home estates. According to the Draft Ruling, a moveable home estate is not commercial residential premises as defined in s 195-1 of the GST Act.

inTAX MAGAZINE

| December 2013 – January 2014

legislation update This table highlights important tax Bills currently before Parliament. Carbon tax repeal Bills introduced The Government has introduced a package of 11 Bills to repeal the carbon tax from 1 July 2014. The Bills are before the Senate. Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 Before the Senate, the Bill proposes to repeal the Minerals Resource Rent Tax (MRRT). Under the changes, taxpayers will not incur liabilities for MRRT on or after 1 July 2014. The Bill also proposes to repeal or revise MRRT-related measures. The Bill would repeal the following measures: ä company loss-carry back; ä low income superannuation contribution; ä geothermal expenditure deduction; ä the income support bonus; and ä schoolkids bonus. The Bill would also revise the following MRRT-related measures: ä capital allowances for small business entities – proposes to reduce the instant asset write-off threshold to $1,000 and discontinue the accelerated depreciation arrangements for motor vehicles; and ä superannuation guarantee charge percentage increase – proposes to delay by 2 years till 2021 the phase-in of the increase in the SGC to 12%. Note: The information above is based on information available at the time of going to press (22 November 2013). Please check the current status of the Bill for any updates.

inTAX MAGAZINE

| December 2013 – January 2014

By understanding your clients, accountants will be in a much better place to help clients and improve the way they deliver their service. Interview by James Evangelidis, Principal Consultant, Envoy Professional Search

What do clients really want? Interview with

Jim Kondonis CFO, Lowes Manhattan

The interview featured in the November 2013 edition of inTAX focused on the importance of a firm’s brand and service. The questions now focus on a bad experience with an accounting firm and what they could have done differently.

Tell me about a time when you received terrible service from an accounting firm. How did it make you feel? What could they have done differently? I won’t call it a terrible service; I’d rather call this a service that didn’t add value. It was in a past life of mine. I was working with a Big Four accounting firm and we were using them as an adviser on a particular acquisition we were working on. The company that I was involved with was looking at a major acquisition. We decided we’d outsource the due diligence process and obviously involve our accounting partner in the deal. To cut a long story short, it cost us a lot of money for very little value. What happened was that the deal fell over at the 11th hour and we had a big bill to pay. In fact, the owner of the business I was working with had to negotiate the big bill down to $300,000. At the end of the day, the due diligence process failed because certain parts of the sales contract were not

relayed back to the business owner. If they were communicated early on in the piece, we probably would have saved a lot of money, since the deal would not have proceeded very early in the due diligence process. It came down to the fact that the accounting firm didn’t really understand the operations of the business that they were involved with and didn’t understand the needs of our business. If they understood the needs, then looking at the sales contract, they would have picked up this anomaly in the contract and known for sure that it just wouldn’t have worked for the business.

It came down to the fact that the accounting firm didn’t really understand the operations of the business that they were involved with and didn’t understand the needs of our business.

owners”. If they really understood how a retail operation worked, then they would have known that this condition just couldn’t fly. The whole deal would have been sidelined in the first couple of weeks. We would have saved a huge amount of time, effort and expense.

What could they (ie the accounting firm) have done differently? They should have read the sales contract thoroughly. If they didn’t have the skills to review the contract then they should have said something or recommended another adviser to us. Their due diligence seemed to focus only on the numbers side and didn’t take into account the commercial implications of the contract. ... to be continued in the next edition of inTAX … [James Evangelidis is Principal Consultant with Envoy Professional Search – a boutique consultancy specialising in the search and placement of senior accounting and law professionals.]

They didn’t pick up this contract anomaly? It wasn’t discussed at all? No, until right at the 11th hour when they said, “Oh, and by the way, in the contract, there’s this and this, and you can’t use the brand without the permission of the current

inTAX MAGAZINE

| December 2013 – January 2014

feature Self-education expenses: Coalition scraps Labor’s proposed $2,000 cap On 6 November 2013, the Government confirmed that it will not proceed with Labor’s proposal to put a $2,000 cap on the amount that people can claim as a tax deduction for self-education expenses, including training and educational courses, textbooks and accreditation expenses. The proposed measure would have effectively increased the tax payable for people who claim work-related self-education expenses worth more than $2,000 per year from 1 July 2015. In announcing that it will not proceed with the $2,000 cap, the Government said it has been advised that there is no credible evidence of substantial abuse of self-education expense deductions. This announcement is good news for professionals who constantly need to maintain, improve, gain or upgrade their knowledge or skills (including qualifications, technical expertise and professional competency). For example, nurses, doctors, dentists, engineers, architects, lawyers,

inTAX MAGAZINE

| December 2013 – January 2014

barristers, accountants, financial planners, stockbrokers, postgraduate students, universities, directors and many other services professionals and tradespeople.

take care to maintain documentary evidence (eg receipts and travel records) and apportion any private element (where appropriate).

Self-education expenses Renewed Tax Office focus With the abandonment of the proposed $2,000 cap, the Tax Office is likely to tighten its administration of the existing law and review more self-education expense claims. As such, taxpayers need to ensure that they can substantiate any deductions claimed for self-education expenses, especially those involving travel to exotic destinations. The Tax Office is also likely to target people claiming large deductions for work-related self-education expenses that, while having some connection with their employment, provide a significant private benefit (eg first class airfares and 5-star accommodation). Although such claims are perfectly legitimate under the current law, taxpayers will need to

Broadly, a self-education expense must relate to current income producing activities of the taxpayer. Expenses incurred in maintaining or improving skills and knowledge in the taxpayer’s present occupation should be deductible, particularly if they are likely to lead to a pay increase. However, a self-education deduction is not available for a course if there is an insufficient connection with the taxpayer’s current employment/profession. Likewise, self-education expenses incurred before commencing an occupation or to obtain a new occupation are generally not deductible. In FCT v Anstis (2010) 76 ATR 735, the High Court allowed a full-time student in receipt of Youth Allowance a deduction for

various self-education expenses (eg a student administration fee, books and depreciation on a computer) as they were considered to be incurred in deriving the Youth Allowance, which was assessable income. However, from the 2011-12 income year, s 26-19 of the ITAA 1997 was inserted to specifically disallow such deductions against taxable Government assistance payments that are eligible “rebateable benefits”.

$250 no-claim amount Only the excess over $250 is deductible if a self-education expense relates to a course of education provided by a school, college, university or other place of education, and is undertaken to gain qualifications for use in a profession, business, trade or any employment: s 82A of the ITAA 1997. However, the $250 can include expenses that are compulsory and unavoidable but are not otherwise deductible (eg bus fares or child care costs). As such, the $250 no-claim amount can be “used up” by such non-claimable expenses and the taxpayer can then claim all of their deductible expenses.

Salary packaging and FBT In certain circumstances, it may be more advantageous for an employee to enter into a salary sacrifice arrangement whereby education and training are provided by an employer (or the employer reimburses such expenses incurred by an employee). If the education and training expense is paid (or reimbursed) by the employer, it will not be subject to the $250 no-claim amount. The “otherwise deductible rule” should also operate so that the employer will not be subject to FBT on those work-related education and training benefits, which are expense payment fringe benefits or residual fringe benefits (if provided in-house). The Treasury discussion paper, Reforms to deductions for education expenses, 31 May 2013, provides an example to illustrate the current use of salary packaging for education expenses. The paper suggests that an employee undertaking an MBA with annual course fees of $25,000 could enter into a salary packaging arrangement with the employer to forgo $25,000 in salary and wages in exchange for the employer paying the course fees on behalf of the employee (an expense payment fringe benefit). Assuming that the MBA meets the income nexus, the Treasury paper states that the expense would be deductible to the employer and the “otherwise deductible rule” would mean that the employer would not be liable for FBT.

Other work-related expenses A “work-related self-education expense” is typically claimed as a deduction at Label D4 of an individual’s income tax return. However, there are “other workrelated expenses” related to education (eg conferences, seminars, courses, workshops, training through professional associations and informal training) that are expected to be claimed at Label D5. Other work-related expenses claimed at Label D5 include: ä union fees; ä subscriptions to trade, business or

professional associations; ä overtime meal expenses; ä professional seminars, courses, conferences and workshops; ä reference books, technical journals and trade magazines; ä tools and equipment and professional libraries; and ä home office expenses. Therefore, taxpayers need to ensure only “self-education” work-related expenses (ie those involving a course to get formal qualifications from a school, college, university or other place of education) are claimed at Label D4 of an individual’s income tax return. If items that are more appropriately claimed at Label D5 (eg professional association expenses, conferences, professional libraries) are incorrectly included at Label D4, the taxpayer may attract unnecessary scrutiny from the Commissioner.

private benefit: see Taxation Ruling TR 98/9. Likewise, if the primary purpose of a conference is work or business-related then registration fees may be claimed in full, even where there are significant private benefits through sightseeing and other activities (eg a golf day or snowboarding). However, if the expenditure was incurred for 2 equal purposes, one income-producing and the other private, only half of the return airfare would be deductible.

Examples In TR 98/9, the Tax Office sets out the following examples to illustrate scenarios where apportionment is required (or not required) for a work-related expense including an incidental private benefit. Example 1: A qualified architect attends an 8-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sightseeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the Tax Office says that the total cost of the conference (airfares, accommodation and meals) is allowable. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income.

Books and journals Books and journals that assist taxpayers to improve their knowledge in fields related to their occupations are deductible. However, books forming part of a professional library should be depreciated over the effective life of the asset, although an annual edition or annual subscription should qualify for an outright deduction. The depreciation provisions also allow for an immediate 100% deduction in certain cases (eg a low-cost asset under $300).

Apportionment of ancillary travel expenses It may be necessary to apportion the cost of a self-education expense in circumstances where the expenditure involves more than one purpose (eg a private purpose). Nevertheless, travel expenses may be claimed in full where the main purpose of the travel is work or business-related, even where the travel may include an incidental

Example 2: A paediatrician has 2 equal purposes when she decides to attend a 5-day international conference on paediatrics in Singapore to be followed by a 7-day holiday in Thailand. The conference package is $2,500 ($1,000 return airfare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). The paediatrician paid another $2,000 for accommodation, meals and car hire for the 7-day holiday in Thailand. The Tax Office says a deduction of $1,500 is allowed for the conference cost and the accommodation and meals expenses at the conference. Only half of the return airfare ($500) is allowed as the expense was incurred for 2 equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

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Tax deductions for self-education expenses – overview and current state-of-play

In announcing that it will not proceed with the $2,000 cap, the Government said it has been advised that there is no credible evidence of substantial abuse of self-education expense deductions.

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Substantiation rules If the Tax Office disputes a self-education expense, it will typically look to deny the deduction by attacking the weakest link in the claim – the substantiation requirements. Section 900-115(2) of the ITAA 1997 requires a taxpayer to obtain written evidence (setting out prescribed details) from the supplier of the self-education expense. In AAT Case [2013] AATA 621, Re Russell and FCT, an IT network engineer was denied a $13,760 deduction for a self-education expense because he could not prove the expense was actually incurred as he was not able to produce an invoice in accordance with the substantiation requirements in s 900-115(2) of the ITAA 1997. The AAT noted that the IT network engineer had also failed to prove that the relevant course enabled him to maintain or improve his skills or knowledge relevant to his income-earning activities with an IT company. The taxpayer was only able to say in very general terms that he was “always doing self-education because in the IT industry things change constantly”. For travel expenses, specific travel records (eg a travel diary) must also be maintained, including a requirement to show which

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activities were income-producing activities: ss 900-150 and 900-155 of the ITAA 1997. For example, if a taxpayer flies to Los Angeles for the sole purpose of attending a 7-day conference, but he or she doesn’t record the conference in a travel record, the Example in s 900-155 says that the taxpayer cannot deduct the cost of the airfare. This is so even if the taxpayer has written evidence that he or she paid the fare (eg a receipt).

Conclusion With deductions for self-education expenses expected to face increased scrutiny from the Tax Office, taxpayers will need to ensure that they can substantiate claims with appropriate documentary evidence, eg written receipts and travel records. As deductibility will depend on the taxpayer’s particular circumstances, it may be appropriate to apply to the Commissioner for a private binding ruling in relation to a self-education expense (especially for claims involving substantial amounts). The Tax Office document, Supporting information for private rulings: Self-education, lists documents and information that the Commissioner typically requires to process private rulings about self-education.

By Stuart Jones, Senior Tax Writer Thomson Reuters Tel: (02) 8587 7662 Email: stuart.jones@thomsonreuters.com

THOMSON REUTERS 2013

EXCELLENCE AWARDS TAX & ACCOUNTING

2013 TAX & ACCOUNTING

Thomson Reuters celebrates Tax & Accounting Excellence

homson Reuters, the world’s leading provider of intelligent information for businesses and professionals, celebrated the winners of Thomson Reuters inaugural Tax & Accounting Excellence Awards at a gala dinner on October 31, 2013 at Sheraton on the Park, Sydney. The first of its kind in Australia, the awards recognised excellence across firms and individuals in the expertise of tax and accounting. With high calibre nominations over the range of categories, the winners were chosen across six awards of excellence in tax and accounting. Paul Brindle, managing director for the Tax & Accounting business of Thomson Reuters, Australia and New Zealand said: “The inaugural Tax & Accounting Excellence Awards have been a huge success and the response we’ve seen from the industry has been really outstanding. We’re proud to be recognising peers and partners in the Australian market. We wanted to create an occasion that recognises individuals and businesses

and rewards them for their innovative and ongoing contribution to the Australian tax and accounting industry. We work in a tough, competitive fast paced world so it was great to take a breath to celebrate industry achievements. On behalf of Thomson Reuters, I would like to congratulate all of our finalists and winners.” The black tie event began with pre-dinner drinks at the Sheraton Ballroom followed by a gastronomic three course meal. Celebrity MC Tony Jones of ABC TV fame kept the crowd entertained along with singing soprano sensation, the Three Waiters, who had us joining in and in fits of laughter throughout the night. What better way to finish the night but on the dance floor kicking up our heels to the sounds of a funky local band (despite it being a school night) … who said accountants don’t party! The winners of the Tax Team of the year award, Suncorp, were thrilled to accept the award on the night: “We have worked hard

and have a great team and pleased with our place in this ever-changing industry, winning an award such as this is the icing on the cake. We look forward to defending our title at the 2014 Thomson Reuters Tax & Accounting Excellence Awards.” And Thomson Reuters looks forward to seeing you all there again next year with plans for what promises to be a bigger event with even more award categories. If you haven’t already checked out our awards video please do so at: https://tax.thomsonreuters.com/products/ brands/onesource/synergy-2013-au#awards

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2013 TAX & ACCOUNTING

MEET OUR JOHN WINTER Head of ANZ for ACCA John became head of ANZ for ACCA, the global body for professional accountants, in September 2011. Prior to this, John worked as a senior marketing professional across industries including business services and finance. His key focus has been the creation of thought-leadership research, especially in the areas of workplace and industry trends. John previously managed the judging process of the Telstra Business Awards and Telstra Business Women’s Awards during his tenure at leading recruitment firm Hudson. John has also been a judge in the Telstra Business Awards and Telstra Business Women’s Awards for the last four years. “The inaugural Thomson Reuters Tax & Accounting Excellence Awards have attracted a great diversity of talent from across the profession. I’m personally delighted with the quality of finalists and winners that have been recognised this year across the range of Awards.”

FRANK DRENTH Executive Director at Corporate Tax Association Frank Drenth has been in the role of Executive Director of the Corporate Tax Association (CTA) since 1998. The CTA represents the taxation interests of about 120 of Australia’s largest companies. He is also Deputy Chair of the Business Coalition for Tax Reform, which brings together the views of the broader business community on tax reform issues. Over a period of many years he has had extensive experience as an external stakeholder in the development of Australia’s tax policy and law, as well as aspects of tax administration that are relevant to large companies. Mr Drenth has previously occupied corporate tax roles in large Australian companies. He has also worked in a large chartered accounting firm after starting his career with the Australian Taxation Office.

PAUL DRUM Head of Policy at CPA Australia Paul Drum FCPA is the Head of Policy at CPA Australia. CPA Australia has over 144,000 members in 127 countries. He has worked in the tax and business policy arena for over 28 years, principally in Australia, but also in Hong Kong, Malaysia, Singapore, Indonesia and New Zealand. Paul’s work with CPA Australia principally involves leading a team that considers economic policy, taxation, superannuation, financial planning, financial reporting, audit and assurance and business management. He is actively involved in organisational representation and advocacy initiatives with various governments, and their committees and agencies. Paul is a fellow member of CPA Australia, a Chartered Tax Adviser, and a member of the Australian Institute of Company Directors. He is also the Chairman of Directors for the Association of Accounting Technicians (Australia), and CPA Australia’s leading spokesperson on a range of policy issues in the Australian media.

YVONNE HOWIE Chief Executive Officer, New South Wales, The CEO Institute An experienced CEO and non-executive director, Yvonne is CEO, NSW for The CEO Institute. Formed in 1992, it’s a peer-membership organisation for CEOs who connect with 1,000 peers nationally in a supportive, confidential environment. In 2011, it became the world’s first global certification body for CEOs.

EXCELLENCE AWARDS 2013

AWARDS JUDGES PETER MEEHAN Chief Executive Officer, Group of 100 Peter was appointed the Chief Executive Officer of the Group of 100 in February 2011. The Group of 100 is an association of Australia’s senior finance executives from the nation’s largest business enterprises with its main objective to advance Australia’s financial competitiveness. Prior to this, Peter had been Australia Post’s Chief Financial Officer since September 2000. Previously, Peter was the Group Finance Manager, National Mutual Holdings (now AXA), and has over 25 years experience in senior finance and administration roles including Chief Information Officer. He is a Fellow of both the Australian Institute of Chartered Accountants and the CPA Australia. Through his participation, with a number of other current and ex-CFOs, in FEI, Peter mentors aspiring young financial executives. Peter is a member of the Council of Deakin University where he is also a Deputy Chancellor and Chairman of the Audit Committee.

HELEN HODGSON Senior Lecturer, University of NSW and President of the Australasian Tax Teachers Association Helen Hodgson (B.Bus; PGrad Dip Business (Bus Law), MTax) is a lecturer in Taxation in the School of Tax and Business Law at the University of NSW. Her areas of research include tax policy, the tax-transfer system, superannuation and the taxation of small business entities, and she is particularly interested in the gender impacts of the system. Helen has just completed a PhD comparing the family tax-transfers systems in Australia and the UK. She attended the Australia’s Future Tax System Forum in 2010. Helen has been teaching at UNSW since 2004, and at ECU and Curtin University in Western Australia between 1989 and 2004. From 1997 to 2001 Helen was a Member of the Legislative Council in WA, representing the Australian Democrats in the North Metropolitan Region. She is a Fellow of CPA Australia, a Chartered Tax Advisor and a member of SPAA. “We were impressed by what the graduates nominated for this award have achieved so early in their careers. They all understood the balance between technical expertise and teamwork in achieving the best outcome for a client. Congratulations to the winners and their mentors.”

DALE PINTO Head of Department of Taxation, Curtin Law School Dale Pinto is a Professor of Taxation Law at Curtin University’s Law School in Western Australia. Dale has been a member of CPA Australia’s Centre of Tax Excellence and is currently Chair of the Taxation Institute’s Education, Examinations and Quality Assurance Board (EEQAB). He is the author/co-author of numerous books, refereed articles and national and international conference papers, and is on the editorial board of a number of journals as well as being the Editor-in-Chief of several refereed journals. Dale served as an inaugural member of the National Tax Practitioners Board and is a current member of the Board of Taxation’s Advisory Panel and the ATO’s Tax Technical Panel.

“I was thoroughly impressed by the universally high standard of nominees for this award [Graduate of the Year]. I was equally impressed by the dynamic, challenging and interesting work that each of the nominees was engaged in, especially at such an early stage of their careers. Who said tax was boring?”

2013 TAX & ACCOUNTING

O u t o f t h e O rd i n a r y

Specialist Bank

Bank on our support Investec supports the Tax and Accounting Awards 2013 We would like to congratulate Pitcher Partners for winning the Investec Medium Accounting Firm Award. It’s good to see shining ambition meet celebration. At Investec, we provide an extensive range of personal and practice finance for qualified accountants and their firms, including transactional banking, credit cards, savings and deposits, home loans, equipment finance and commercial property loans. You could call us a one stop shop. For more information, please visit investec.com.au/accounting or call 1300 131 141

Commercial property finance | Car finance | Credit cards | Equipment and fit-out finance | Foreign exchange | Goodwill funding Home loans | Insurance services | Savings and deposits | SMSF lending and deposits | Transactional banking and overdrafts Investec Bank (Australia) Limited ABN 55 071 292 594, AFSL 234975, Australian Credit Licence No. 234975 (Investec Bank). All finance is subject to our credit assessment criteria. Terms and conditions, fees and charges apply. Information contained in this document is general in nature and does not take into account your personal financial or investment needs or circumstances. We reserve the right to cease offering these products at any time without notice. You should review relevant disclosure documents and obtain independent financial and legal advice, as appropriate.

2013 TAX & ACCOUNTING

CFO OF THE YEAR

TAX TEAM OF THE YEAR

WINNER: Paula Kensington – Rubik Financial Limited

WINNER: Suncorp Metway

TRANSFER PRICING TEAM OF THE YEAR

INDIRECT TAX TEAM OF THE YEAR

WINNER: Transfer Pricing Solutions

WINNER: AMP

EXCELLENCE AWARDS 2013

MEDIUM ACCOUNTING FIRM OF THE YEAR

ADVISORY SERVICES FIRM OF THE YEAR

WINNER: Pitcher Partners

WINNER: Grant Thornton

GRADUATE OF THE YEAR

ACCOUNTING FIRM GRADUATE OF THE YEAR

WINNER: Sally Dole – KPMG

Highly Commended: Elizabeth Sheaffe – KPMG

2013 TAX & ACCOUNTING

EXCELLENCE AWARDS 2013

A WORD FROM OUR SPONSORS EVENT PARTNER ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. We believe that accountants bring value to economies in all stages of development. We aim to develop capacity in the profession and encourage the adoption of consistent global standards. We support our 154,000 members and 432,000 students in 170 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a network of over 80 offices and centres and more than 8,400 Approved Employers worldwide, who provide high standards of employee learning and development. “As the global body for professional accountants, ACCA has enjoyed supporting Thomson Reuters on its first ever Tax & Accounting Awards 2013. As we have more than a century of commitment behind us to develop and lead the accounting profession across the world, supporting these types of initiatives is always important to us and our members around the world. We understand the importance of recognising and rewarding excellence, leadership and best practice is essential to continue to set the bar for the industry as a whole, and by showcasing and celebrating the industry’s very best it inspires great performance that benefit all.” John Winter, Head of ACCA Australia & New Zealand

Melbourne Business School offers two programs in its Executive MBA suite: the Senior Executive MBA, and the Executive MBA. Both programs encompass an intensive, rigorous study format focused on high-level outcomes. The modular structure of each program means minimal disruption to participants’ work and personal commitments. There is an immediate return on investment as learning is brought directly back into the workplace at the completion of each module. The Senior Executive MBA is completed through four one-month residential modules spread across a 14-month period, while the Executive MBA is completed through 17 weekend residential modules plus one week-long overseas module over an 18-month period. “The recognition of achievement is critical for professional organisations, and we are very pleased to support the Thomson Reuters Tax & Accounting Awards. Managing strategy and risk issues in a complex business environment requires tax directors and professionals committed to a global perspective and excellence in practice.” Patrick Butler, Associate Dean for Executive MBA Programs

Investec believes that not all professions are the same. When we view the accounting profession, we understand the value of an accountant’s qualifications. That’s why we offer a suite of innovative products that are directly tailored to both the accounting practice and also to your personal life as a practicing accountant.

“Investec were proud to sponsor the Medium Accounting Firm of the Year and would like to congratulate the winners, Pitcher Partners”. “Investec is a keen supporter of celebrating success, whether that is in the boardroom or on the sports field. We look to support ambitious businesses, embracing innovation and entrepreneurialism. Pitcher Partners were an exceptionally worthy winner”. Diana Shoolman, Accounting Finance Specialist, Investec Specialist Bank

feature Time of acquisition of asset from deceased estate – for CGT and legal purposes! Most practitioners would now be very familiar with the CGT rule which provides that, for CGT purposes, a beneficiary of a deceased estate is considered to have “acquired” an asset of the estate which has been bequeathed to them at the time of the deceased’s death. And this is the case regardless of when the asset is actually transferred or transmitted to the beneficiary – even if the asset is not transferred to the beneficiary many years later because, for example, it is subject to a life interest in favour of a surviving spouse or another person. The same principle applies to the executor or “legal personal representative” (LPR) of the estate – namely, that under the CGT rules they are considered to have acquired the asset at the time of the deceased’s death for the purposes of determining the extent that they may be liable to CGT for any subsequent dealing with the asset (although as matter of law all the assets of the deceased are taken to

vest in his or her executor or LPR at the time of the deceased’s death also). Likewise, for the purpose of calculating any capital gain or loss in the hands of the beneficiary or LPR for which they may become liable from any subsequent CGT event happening to the asset, the beneficiary or LPR is considered to have acquired the asset for its cost base or market value at the date of the deceased’s death – depending on when the asset was acquired by the deceased and/or how it was being used by the deceased at their time of death (or the deceased’s residency status). For example, if the asset was the deceased’s main residence at the date of their death and was not then used for producing assessable income, then the dwelling will be considered to have been acquired by the beneficiary or LPR, as the case may be, for whatever its market value was at the deceased’s date of death, regardless of when it was acquired

by the deceased. (As an aside, this can include where the deceased’s main residence is “deemed” to be the deceased’s main residence at the date of their death by virtue of applying the absence concession, provided it wasn’t being used to produce assessable income at that time.)

When does a beneficiary acquire legal ownership But when does a beneficiary actually come to own the asset for legal purposes as a question of law? And the question is not just relevant solely for non-tax purposes. It can also be relevant for CGT purposes. No doubt professionals in this area of law will explain that it can be a complex question of law (and equity) depending on the circumstances. But presumably as a question of law, a

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CGT and legal issues concerning assets acquired from deceased estates.

beneficiary will become the owner of the asset under ordinary legal ownership principles – so that if for example the asset in question is real property, the beneficiary will become the owner when they are registered as the legal owner. And presumably, where it is other property, the beneficiary will become the owner when it is actually transferred to them or transfer is effected by other required ways (eg registration in the case of a motor vehicle). Moreover, presumably such transfer of the ownership of assets of a deceased estate can generally not take place until finalisation of the administration of the estate so that sufficient assets remain available to pay any debts of the deceased or the estate – or at least until the executor has set aside sufficient assets to meet ascertained debts. (In addition, this author also vaguely remembers a principle of equity associated with deceased estates whereby ownership of an asset can be transferred to a beneficiary before finalisation of the estate is complete by a person standing in the shoes of an executor – and with the apparent authority of an executor – known by the lyrical and poetic phrase as a “executor de son tort”). More prosaically, once finalisation of the administration of an estate is complete, it seems that – at least at equity – a beneficiary will become owner of an asset bequeathed to him or her by virtue of the right to call (or demand) that the asset be transferred to him or her by the executor. In other words, the beneficiary may become the owner of the asset at this time by dint of “absolute entitlement” – again regardless of when the asset may be actually transferred or transmitted.

Relevance of time of legal ownership for CGT purposes So, how then is this question of when a beneficiary becomes the legal owner of an asset of a deceased estate relevant to CGT (regardless – or independently – of what the CGT rules says about the matter)? Well, try this scenario. You enter into a contract to sell an asset you have used in a business for the requisite time and which therefore qualifies for the CGT small business concessions (SBC) to apply to any gain arising from the sale. However, what happens if, for example, a month or so before entering into the contract to sell the asset, a relative dies and bequeaths to you an asset which is not otherwise exempt from the “maximum net asset value” (MNAV) test in s 152-15 of the ITAA 1997 – such as

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vacant land, a farm or other business and, moreover, the value of which would now take you over the $6m threshold for the MNAV test.

In any event, now I think I understand why the drafters of the CGT provisions made the rule that for CGT purposes a beneficiary is “deemed” to have acquired a bequeathed asset at the time of the deceased’s death (and for its market value or cost base at that time) given all the possible difficulties associated with determining when a person may actually come to “legally” own an asset bequeathed to them. Is that asset included in the $6m MNAV test given that s 152-15 provides: “You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the *net value of the CGT assets of yours; ... [emphasis added]”.

right to call for the transfer of the asset)? And what about as a matter of planning, if you delay “finalisation of administration” of the estate (either in a “legitimate” or in an artificial way) – but perhaps at the risk of attracting Pt IVA. Alternatively, what about entering into an agreement or a deed between the beneficiaries to alter their entitlements to the assets of the estate in order to enable the $6m MNAV test to be met by our friend – as s 128-20(d) of the ITAA 1997 appears to allow a legitimate change to entitlements to assets of an estate under such a “deed of arrangement” where the relevant conditions are met.

No wonder ... In any event, now I think I understand why the drafters of the CGT provisions made the rule that for CGT purposes a beneficiary is “deemed” to have acquired a bequeathed asset at the time of the deceased’s death (and for its market value or cost base at that time) given all the possible difficulties associated with determining when a person may actually come to “legally” own an asset bequeathed to them.

Is this inherited asset “yours” just before the CGT event (ie the making of the contract) in this case? This, then, is why the issue of “when do you become the legal owner of an inherited asset” becomes important for CGT purposes (independently of the rule that you are deemed to have acquired it for CGT purposes at the date of the deceased’s death).

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This, of course, assumes that the terms “yours” equates with legal ownership. (It is at times like this that one questions the value of the plain English rewrite of the tax laws with all its “kindergartenese” instead of plain old fashion legal language.). So when does our friend become the owner of the asset in these circumstances – because it could make all the difference between being eligible for the CGT SBC and not? Is it at the time of transfer (in the case of real property) or registration (in the case of other assets) – or perhaps just the taking of physical possession in other circumstances? Does administration of the estate have to have been completed and formalised? If the estate has been administered, does ownership of the bequeathed asset automatically arise at that time under the principle of “absolute entitlement” (ie the

By Kirk Wilson, Senior Tax Writer Thomson Reuters Tel: (02) 8587 7633 Email: kirk.wilson@thomsonreuters.com

–Focus In-Focus provides hands-on technical refresher courses on a wide range of tax hot topics.

Recouping losses in companies with different classes of shares It may be difficult for companies to recoup tax losses if they have issued multiple classes of shares that have voting, dividend and capital rights that vary depending on the circumstances. Once a company’s share capital consists of unequal rights in this way, it may not be possible to identify which particular group of shareholders have more than 50% of the relevant rights at a particular time to pass the continuity of ownership test (COT). In these circumstances, companies may technically fail the COT even though there is no significant change in underlying beneficial ownership during the ownership test period (see Paragraph 1.6, Exposure Draft: Tax Laws Amendment (2009 Measures No 6) Bill 2009: Company Losses (Explanatory Material)).

This article considers the loss recoupment difficulties faced by companies with multiple classes of shares under the current rules. It also considers the proposed legislative amendments (released by the then Labor Government for consultation) that will make it easier for companies with multiple classes of shares to recoup their losses.

end of the income year in which the loss is sought to be recouped (the “test period”). Ordinarily, companies must trace through interposed entities such as companies, trusts and partnerships to identify natural persons who ultimately hold voting power and right to dividends and capital distributions. Concessional tracing rules can apply to listed and widely held companies.

Background A company cannot recoup tax losses incurred in prior income years unless it passes the COT or the same business test (SBT).

Application of the current COT to companies with multiple classes of shares

The COT is satisfied if the same people hold more than 50% of the voting power and rights to dividends and capital at all times from the beginning of the loss year until the

The difficulty faced by loss-making companies with multiple classes of shares can be demonstrated in the following example:

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A look at loss recoupment difficulties faced by companies with multiple classes of shares under the current rules. Example 1

Proposed amendments to the COT

A company has issued ordinary shares and preference shares. As a dividend on a preference share takes priority over a dividend paid on an ordinary share, the rights attributable to both classes of shares “vary” depending on the size of the dividend. If the preference shareholders of a company have an entitlement to a $100 dividend and the company declares a dividend of $500, the preference shareholders will have a right to 20% of that dividend. If 6 months later the company declares a dividend of $125, the preference shareholders will have a right to 80% of that dividend. The 60% change in dividend rights will be sufficient for this company to fail the COT even though there has been no change in ownership in the company. At all other testing times it is not possible to determine the dividend rights attached to these preference shares, so the company is unable to demonstrate whether it can satisfy the COT.

In September 2009, the then Labor Government publicly released details of proposed amendments to allow companies with multiple classes of shares to make it easier to pass the COT where they are otherwise not able to. The proposed amendments were contained in Exposure Draft Legislation – Tax Laws Amendment (2009 Measures No 6) Bill 2009. The proposed amendments have never been legislated but a further exposure draft of the proposed amendments was circulated on a restricted basis in 2010. It is unclear whether the new Coalition Government will accept the proposed changes.

Not all companies that issue different classes of shares will have unequal rights attached to those classes. Nor will every company experience COT difficulties as a result of issuing shares with unequal rights. It is of course necessary to carefully examine the terms of any class of shares that are on issue to confirm that they will in fact be problematic for COT purposes. Further, the terms of the company’s share classes must then be applied to the facts and circumstances that prevailed at the relevant test period.

(At the time of writing, the Coalition Government has indicated that it was undertaking consultation with tax experts as to whether it should proceed with the measure. Note the Coalition has expressed a “disposition” not to proceed with a number of outstanding tax reforms including this one, though one would hope that the Government will recognise the need to proceed with this measure following the consultation process. The outcome of the consultation is expected to be announced by 1 December 2013: see the Treasurer and Assistant Treasurer’s joint media release, 6 November 2013.) The proposed new rules, as discussed in the publicly released exposure draft, have 2 parts: ä

Example 2 A company has issued ordinary shares that provide the holder with the right to exercise one vote for each share. The company has also issued preference shares that provide no voting rights to the holder except in relation to proposals dealing with: ä ä ä ä ä

reductions in share capital; rights attaching to preference shares; the winding up of the company; share buy-backs; or a disposal of the business by the company.

During the COT period, the company’s shareholders are not required to vote on any of the 5 excepted matters listed above. Accordingly, even though the company has issued different classes of shares with unequal rights, the ordinary shares have retained 100% of the voting rights throughout the test period. Consequently, in relation to voting rights, the COT can be applied by simply focussing on changes in ownership in the company’s ordinary shares.

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rules dealing with companies whose shares have unfixed rights to dividends and capital distributions, commencing 1 July 2002; and modifications to the definition of voting power to allow companies to fix the voting power attributed to a class of shares in all circumstances, commencing 1 July 2007.

Companies whose shares have unfixed rights to dividends and capital distributions

shares that are treated as debt interests for tax purposes eg certain redeemable preference shares (proposed s 167-15 of the ITAA 1997). If a company cannot disregard secondary share classes as outlined above, then the proposed new rules allow the ordinary shares and preference shares to be deemed to have fixed dividend and capital distribution rights relative to their market values (proposed ss 167-25(2) and (3) of the ITAA 1997). ä

Proposed modification to the definition of voting power The exposure draft contains a proposal to modify the COT so that, if the shares of a company have voting rights that vary depending on the circumstances, the voting power of those shares is tested solely by reference to the maximum number of votes that could be cast on a poll: if the election of the company’s directors is determined by the casting of votes attached to shares – on the election of a director of the company; or ä otherwise – on the adoption or amendment of the company’s constitution (proposed s 167-80 of the ITAA 1997). The proposed changes to the COT to provide a simpler and fairer treatment of different classes of shares is welcomed, but the continuing delay in the enactment of these rules is a cause for frustration. In any case, the issue of different classes of shares will not always prevent a company from passing the COT. The terms of each class of shares issued by a company should be carefully examined to ascertain whether the current COT can be passed. Failing that, companies will need to hope that the Coalition Government will adopt the proposed new rules discussed above, as well as the retrospective application dates. ä

Under the proposed amendments, if a company fails the COT it may reconsider the test after disregarding: ä

secondary share classes, such as preference shares (proposed s 167-20 of the ITAA 1997), but only if: − the market value of each of the secondary class of shares does not exceed 10% of the total market value of the company’s shares (proposed s 167-20(c) of the ITAA 1997); and − the aggregated market value of all secondary classes of shares does not exceed 25% of the total market value of all of the company’s shares (proposed s 167-20(d) of the ITAA 1997); and

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By Clive Bird, Director-Tax Moore Stephens Tel: (03) 8635 1958 Email: cbird@moorestephens.com.au

Tax-In-Action Tax-In-Action examines practical tax issues that arise in real-life scenarios.

Amendment periods â&#x20AC;&#x201C; is your time up? Whether or not a taxpayer has paid the correct amount of tax, there comes a time where their income tax return for a particular income year should be considered final unless they have deliberately sought to evade their tax responsibilities. Section 170 of the ITAA 1936 provides the Tax Office with the power to amend an assessment. This power is subject to time limits which apply regardless of whether the amendment is sought by the Tax Office or by the taxpayer and regardless of whether the proposed amendment increases or decreases the tax payable by the taxpayer. These time limits fall into three categories: 1. A 2-year amendment period that applies to most individuals and small business entities (ie entities that carry on a business and satisfy the $2m aggregated turnover test).

2. A 4-year amendment period that applies to large business taxpayers, taxpayers with complex affairs, certain high-risk taxpayers and where the Tax Office is relying on an anti-avoidance provision. 3. An unlimited amendment period that applies in the event of fraud or evasion. The applicable amendment periods are considered in further detail below:

Eligibility for the 2-year amendment period Individuals The Commissioner cannot amend the assessment of an individual taxpayer beyond 2 years after the day on which the Commissioner gave a notice of the assessment, unless the individual:

a. carries on a business and is not a small business entity for that year; or b. is a partner in a partnership that carries on a business that is not a small business entity for that year; or c. is acting in the capacity of a trustee of a trust estate in that year; or d. is a beneficiary of a trust estate in that year, except where the trust is a small business entity or the trustee of the trust (in their capacity as trustee) is a full self-assessment taxpayer for that year; or e. or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of obtaining a scheme benefit in relation to income tax from the scheme for that year; or f. is excluded from the 2-year period by regulation (item 1 of s 170(1)).

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Meaning of beneficiary

ä is a partner in a partnership that carries

The meaning of “beneficiary of a trust estate” in the context of s 170 was determined by the Federal Court in Yazbek v FCT [2013] FCA 39, where it was held that the word beneficiary in this context is its commonly accepted meaning which includes a person who is an object of a discretionary trust. This is the case even where the object has not received any income or other benefit in a given year. Remarkably, this means that in certain cases an individual may not be subject to the 2-year amendment time limit simply because they are capable of benefitting under a discretionary trust.

on a business that is not a small business entity for that year; ä is a beneficiary of another trust estate in that year, except where the trust is a small business entity or the trustee of the trust (in their capacity as trustee) is a full self-assessment taxpayer for that year; ä or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the trust obtaining a scheme benefit in relation to income tax from the scheme for that year; or ä is excluded from the 2-year period by regulation (item 3 of s 170(1)).

Companies

It should be noted that the definition of assessment (see below) is extended to cover the ascertainment that a taxpayer has no taxable income. Accordingly, even when a trust has no taxable income, the trustee will be subject to the same period of amendment as assessments with a positive liability.

The Commissioner cannot amend the assessment of a company that is a small business entity for the year of income of that assessment beyond 2 years after the day on which the Commissioner gave notice of the assessment, unless the company: a. is a partner in a partnership that carries on a business that is not a small business entity for that year; b. is acting in the capacity of a trustee of a trust estate in that year; c. is a beneficiary of a trust estate in that year, except where the trust is a small business entity or the trustee of the trust (in their capacity as trustee) is a full self-assessment taxpayer for that year; d. or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the company obtaining a scheme benefit in relation to income tax from the scheme for that year; or e. is excluded from the 2-year period by regulation (item 2 of s 170(1)). It is worth noting that s 166A of the ITAA 1936 deems that the Commissioner is taken to have given notice of an assessment to a company on the day on which the return is lodged. Trustees The Commissioner cannot amend the assessment of a trustee of a trust estate that is a small business entity beyond 2 years after the day on which the Commissioner gave notice of the assessment, unless the trustee:

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| December 2013 – January 2014

Extensions to the amendment period The default amendment periods discussed above are extended in 3 cases: ä where a taxpayer applies for an

amendment before the end of the amendment period (s 170(5)); ä where a taxpayer applies for a private ruling before the end of the amendment period and the Commissioner makes a ruling in response to the application (s 170(6)); and ä where the Commissioner has started to examine a taxpayer’s affairs but has not completed that examination by the end of the amendment period, the period can be extended in 2 cases: − by Federal Court order where it is satisfied that the failure to complete the examination was due to the taxpayer’s behaviour; and − by the consent of the taxpayer (s 170(7)).

Subsequent amendments

Taxpayers and their advisers should carefully consider the rules in the event of a Tax Office risk review or audit to put a stop to any action that falls outside the relevant permissible amendment period.

The 4-year amendment period A taxpayer that is not eligible for the standard 2-year amendment period will be subject to a 4-year amendment period, unless the unlimited amendment period is applicable (see below). Generally, non-small business entities, however structured, and individuals with complex financial affairs, will fall into the 4-year amendment period (item 4 of s 170(1)).

Unlimited amendment period The Tax Office can amend an assessment at any time if it is of the opinion that there has been fraud or evasion. The Tax Office also has an unlimited period to give effect to a decision on a review or appeal, or as a result of an objection made by the taxpayer, or pending a review or appeal (items 5 and 6 of s 170(1)).

An assessment that has been previously amended generally cannot be amended again if the limitation period for the original assessment has ended (s 170(2)). However, in the following circumstances, a refreshed amendment period applies: a. if the Tax Office amends an earlier (original or amended) assessment about an item in a way that reduces the taxpayer’s liability and, in doing so, the Tax Office accepts a statement by the taxpayer, the Tax Office may amend the amended assessment about that particular item to increase the taxpayer’s liability; and b. if the Tax Office amends an earlier (original or amended) assessment about an item in a way that increases the taxpayer’s liability, or reduces the taxpayer’s liability without accepting a statement by the taxpayer, the Tax Office may amend the amended assessment about that item to reduce, or further reduce, the taxpayer’s liability (s 170(3)). The refreshed amendment period in either case is generally equal in duration to that which applied to the original assessment; though, in cases involving fraud or evasion, the refreshed amendment period is limited to 4 years (s 170(3)(a) and (b)).

Consideration of applicable amendment periods.

Definition of assessment An assessment is the ascertainment of taxable income and the tax payable on that amount. The definition is extended to cover the ascertainment that a taxpayer has no taxable income. It also covers the case where the Commissioner ascertains that there is a taxable income but no tax is payable, such as where tax offsets reduce the tax payable to nil. The ascertainment of the amount of a tax loss is not an assessment. Consequently, the deductibility of a tax loss will be determined in the year that the taxpayer has income against which to offset the loss. The current amendment period limitations provide taxpayers with much-needed certainty, capping exposure to the risk of increased liabilities and mitigating potential penalty and interest consequences of errors made in the course of preparing a tax return in good faith. Taxpayers and their advisers should carefully consider the rules in the event of a Tax Office risk review or audit to put a stop to any action that falls outside the relevant permissible amendment period.

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By Clive Bird, Director-Tax Moore Stephens Tel: (03) 8635 1958 Email: cbird@moorestephens.com.au

Thinking of subscribing? To celebrate our inaugural Tax & Accounting Excellence Awards special issue, we are offering great deals on our online and print subscriptions of inTax Magazine. Contact your account manager or call Customer Care on 1300 304 195 to find out more. Use any QR scanner app to see our Tax and Accounting Excellence Awards video

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Seminars The inTAX Seminars Directory is a nationwide list of tax-related seminars and courses for the month. It is by no means an exhaustive listing and is open to all organisations running courses. If you are interested in finding out more about how to appear in the inTAX Seminars Directory, please contact Lisa Lynch on (02) 8587 7643.

Date

Time

Topic

Organiser/Contact

Venue

CPE/CPD

Cost

National 19-Feb

1:00pm AEST

19-Feb to 21-Feb 25-Feb

8:30am-5:30pm 12:00pm AEST

26-Feb

1:00pm AEST

26-Feb

12:30pm AEST

Hot Tax Topics – GST going concerns concerns 2014 Financial Services Taxation Conference FBT & Salary Packaging Series: Session 1 – Salary Packaging Hot Tax Topics – Family Trust Elections Elections Online Tax Update

ICAA 1300 137 322 The Tax Institute 02 8223 0077 ICAA 1300 137 322 ICAA 1300 137 322 The Tax Institute 02 8223 0077

LiveOne online training

1.5

$124(M), $140(NM)

InterContinental Sanctuary Cove Resort Queensland LiveOne online training

12.8

$1,595(M), $1,895(NM)

$165(M), $287(NM)

LiveOne online training

1.5

$124(M), $140(NM)

Online

$80(M), $110(NM)

CPA Australia 1300 857 705 ICAA 1300 137 322 ICAA 1300 137 322 FBT Solutions 02 8079 2924 NTAA 1800 808 105 ICAA 1300 137 322 The Tax Institute 02 8223 0040 NTAA 1800 808 105

CPA Australia Level 3, 111 Harrington St, Sydney ICAA Level 1, 33 Erskine St, Sydney ICAA Level 1, 33 Erskine St, Sydney Hilton, Sydney

$136(M), $148(NM)

1.5

$140(M), $168(NM)

1.5

$140(M), $168(NM)

6.5 6.5

$550 (by 26/1), $660 (after 26/1) $529(M), $629(NM)

$625(M), $750(NM)

$395(M), $470(NM)

6.5

$529(M), $629(NM)

CPA Australia 1300 857 705 CPA Australia 1300 857 705 ICAA 1300 137 322 ICAA 1300 137 322 ICAA 1300 137 322 IPA 03 8665 3150 IPA 03 8665 3150 NTAA 1800 808 105

Hemisphere Conference Centre 488 South Rd, Moorabbin John Scott Meeting House La Trobe University, Bundoora Manning City Council 699 Doncaster Rd, Doncaster ICAA Level 3, 600 Bourke St, Melbourne ICAA Level 3, 600 Bourke St, Melbourne IPA Training Centre Level 6, 555 Lonsdale St, Melbourne IPA Training Centre Level 6, 555 Lonsdale St, Melbourne

$136(M), $148(NM)

1.5

$140(M), $168(NM)

$625(M), $750(NM)

$240(M), $288(NM)

$110(M), $135(NM)

$289(M), $325(NM)

6.5

$529(M), $629(NM)

New South Wales 10-Feb

3:00pm-5:00pm

11-Feb

8:00am-9:30am

12-Feb

8:00am-9:30am

19-Feb

9:00am-4:45pm

Topic 1: Crossing the border – international tax implications Essential Tax Update 2014 – Sydney Essential Tax Update 2014 – Sydney Preparing Your 2014 FBT Return Seminar

21-Feb

9:00am-5:00pm

FBT 2014

23-Feb

9:00am-4:30pm

27-Feb

8:30am-1:00pm

FBT and Salary Packaging Workshop – Sydney SME Property Masterclass

28-Feb

9:00am-5:00pm

FBT 2014

4-Feb

5:30pm-7:30pm

11-Feb

5:30pm-7:30pm

13-Feb

8:00am-9:30am

19-Feb

9:00am-4:30pm

20-Feb

8:00am-10:00am

20-Feb

4:00pm-6:00pm

Topic 1: Crossing the border – international tax implications Topic 1: Crossing the border – international tax implications Essential Tax Update 2014 – Doncaster FBT and Salary Packaging Workshop – Melbourne Essential Tax Update 2014 – Melbourne CGT and Property

24-Feb

9:00am-12:00pm

26-Feb

9:00am-5:00pm

Doltone House, Jones Bay Wharf, Sydney ICAA Level 1, 33 Erskine St, Sydney Sofitel Sydney Wentworth 61 Phillip St, Sydney Rosehill Racecourse

Victoria

20 inTAX MAGAZINE

Tax & Business Structures Overview FBT 2014

| December 2013 – January 2014

Crown Towers, Melbourne

Date

Time

Topic

Organiser/Contact

Venue

CPE/CPD

ICAA 1300 137 322 ICAA 1300 137 322 NTAA 1800 808 105 CPA 1300 857 705

ICAA Level 32, 345 Queen St, Brisbane The University Club Bond University, Robina Hilton, Brisbane

FBT and Salary Packaging Workshop – Perth Advanced Taxation Strategies for Superannuation Tax Update – Tax Changes

Cost

Queensland 14-Feb

9:00am-4:30pm

19-Feb

9:00am-11:00am

24-Feb

9:00am-5:00pm

FBT and Salary Packaging Workshop – Brisbane Essential Tax Update 2014 – Gold Coast FBT 2014

27-Feb

3:00pm-5:00pm

Topic 2: Insurance and tax

$625(M), $750(NM)

$240(M), $288(NM)

6.5

$529(M), $629(NM)

CPA Australia Level 29, 10 Eagle St, Brisbane

$136(M), $148(NM)

ICAA 1300 137 322 IPA 08 9474 1755 IPA 08 9474 1755

ICAA Level 11, 2 Mill St, Perth IPA Training Room Suite 9, 100 Mill Point Rd, South Perth IPA Training Room Suite 9, 100 Mill Point Rd, South Perth

$625(M), $750(NM)

$244(M), $304(NM)

3.5

$244(M), $304(NM)

IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255 IPA 08 8227 2255

IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide IPA Training Centre 60 Hindmarsh Square, Adelaide

3.5

$245(M), $265(NM)

$419(M), $449(NM)

3.5

$245(M), $265(NM)

1.5

$150(M), $165(NM)

$110(M), $121(NM)

1.5

$150(M), $165(NM)

$419(M), $449(NM)

NTAA 1800 808 105 ICAA 1300 137 322

Hyatt Hotel, Canberra

6.5

$529(M), $629(NM)

$240(M), $288(NM)

Western Australia 12-Feb

9:00am-4:30pm

12-Feb

9:00am-12:00pm

25-Feb

8:30am-12:00pm

Sout So uth h Australia South 4-Feb

9:00am-12:30pm

Avoid Breaching Workplace Rights

6-Feb

9:00am-5:00pm

SMSF Advanced Audit

11-Feb

9:00am-5:00pm

FBT and Salary Packaging

12-Feb

9:00am-5:00pm

Xero – Accounting and Payroll

13-Feb

9:00am-12:30pm

GST and BAS

13-Feb

1:00pm-2:30pm

19-Feb

4:30pm-5:30pm

Travel & Allowances, Entertainment and Home Office Expenses Powers of the ATO

20-Feb

4:30pm-6:00pm

SMSF Syndication and Fundraising

26-Feb

9:00am-11:00am

Structures for Charities

27-Feb

9:00am-5:00pm

SMSF Exam Prep

Australian Capital Terri Territory rito tory ry 19-Feb

9:00am-5:00pm

FBT 2014

19-Feb

8:00am-10:00am

Essential Tax Update 2014 – Canberra

ICAA L 10, 60 Marcus Clarke St, Canberra

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| December 2013 – January 2014

Tax Q&A

The following questions were recently submitted to Thomson Reuters Tax Q&A. Thomson Reuters Tax Q&A is an issues based online product. It uses actual scenarios confronted in practice to help you understand how developments affect your client’s tax position. New Q&As are added online and the answers are updated to take into account tax changes that impact on the issues raised. It therefore provides an up-to-date database of solutions to actual tax issues facing tax advisers in practice. To obtain more information, or to subscribe, simply contact your nearest Thomson Reuters representative or call 1300 304 195.

Tax Q&A is a regular inTAX feature. Editorial staff are on standby for any questions relating to taxation.

End of lease and capital works – depreciation and CGT issues Q. Our client enters into a property lease and spends a substantial amount on improvements. The cost of the improvements is deducted under Div 43 of the ITAA 1997 at a rate of 2.5%. The lease is not renewed upon expiry and our client relocates to another property. Can our client write off the full cost of the improvements, less any depreciation already deducted?

A. When the capital works are disposed of, there is no balancing adjustment under Div 43 (there is only a balancing adjustment if the capital works are destroyed). This means that the undeducted Div 43 amount (ie the 22 inTAX MAGAZINE

| December 2013 – January 2014

difference between the full cost of the improvements and the total Div 43 deductions already claimed) cannot be written off. CGT event C2 happens on the expiry of the lease: s 104-25 of the ITAA 1997. There is a “capital gain” if the capital proceeds from the ending of the lease are more than the asset’s cost base. A “capital loss” is made if those capital proceeds are less than the asset’s reduced cost base. Note that the market value substitution rule (where no capital proceeds are received) does not apply where CGT event C2 happens on the expiry of a CGT asset – such as in the case outlined in your question: s 116-30(3)(a). Your client

should make a capital loss if they receive no capital proceeds on the expiry of the lease. If, however, your client receives an amount from the landlord for capital improvements effected by your client, the payment is treated as capital proceeds from CGT event C2. Deductible incidental costs and deductible costs of ownership (eg Div 43 deductions) do not form part of the cost base of an asset, nor of the reduced cost base of an asset: ss 110-45 and 110-55. In other words, the cost base or reduced cost base of the CGT asset is reduced to the extent that your client has deducted the Div 43 capital works expenditure. This will effectively increase the amount of any capital gain or reduce the amount of any capital loss.

GST implications concerning forfeited deposit on business sale Q. Our client entered into an agreement to sell his business (primarily goodwill). The deposit was $15,000. The contract was contingent on the purchaser undergoing external training to become a men’s hairdresser. Before settlement, the purchaser became ill and decided not to continue with the purchase, thus forfeiting his deposit. What are the GST implications concerning a forfeited deposit?

A. Division 99 of the GST Act applies where a deposit is held as security for the performance of an obligation. It applies to contracts where the recipient pays a deposit to secure the supplier’s obligations under the contract (while the supplier secures the recipient’s obligations to complete the contract and pay the contracted purchase price). Relevantly, the deposit will be treated as consideration for a supply where it is forfeited due to a failure to perform the obligation (ie in this case – where the purchaser decides not to proceed with the purchase): s 99-5(1)(a). It is fair to state that a fundamental component of a security deposit for Div 99 purposes is that it must be forfeitable. This can only be ascertained from the relevant contract. In other words, it is necessary

for your client to look at the terms of the relevant contract to see if the arrangement falls within the ambit of Div 99. If it is determined that the arrangement is subject to Div 99, it is then necessary to look at whether the supply for which the forfeited deposit is consideration constitutes a taxable supply. This requires an analysis of the underlying supply, ie the supply to which the deposit was referable had it gone ahead. For example, if the supply of the business would have been subject to the going concern concession and would not have been liable to GST, then the forfeited deposit would not be subject to GST under Div 99. However, if the supply would not have been GST-free or input taxed, then your client will be liable to GST on the supply. Again, it is necessary to examine the terms of the contract to determine this. Even if Div 99 does not apply, then it is arguable that your client will be liable to GST under the normal rules. Your client is securing the purchaser’s obligation to complete the contract and pay the contracted purchase price. By releasing the purchaser from this obligation, your client is making a supply: see s 9-10(2)(g)(i). It receives consideration for supply, in the form of the $15,000 forfeited deposit.

If payable, the amount of GST is 1/11th of the deposit amount, ie $1,364 (rounded up). Both these areas are discussed at length in Thomson Reuters’ Australian GST Handbook 2013-14, also available online (see in particular [35 200]).

– continued from page 3 Rate or base change? The debate on whether a rate or base change is required can be traced to the political process that made the GST’s implementation possible on 1 July 2000. The GST system originally proposed by the Howard Government was supported by various justifications that were sold to the Australian electorate in the lead-up to the 1998 election. The GST’s purpose was to simplify the tax system and improve the efficiency of indirect taxation by replacing the wholesale sales tax (including its varying rates) and various other inefficient state and territory taxes. The GST was also meant to secure a long-term and stable revenue flow for the States and Territories. However, the GST that Australia got was not the one that the Howard Government took to the election. With the Democrats holding sway over the GST’s passage through the Senate, John Howard remarked

at that time that some of the compromises demanded were beyond what the government could contemplate without fundamentally altering their tax reform package. When the government narrowed the base of the GST to appease the Democrats and secure the passage of the GST, the States and Territories responded by delaying the repeal of many of the taxes that the GST was meant to replace. In the long-run, the narrower GST base appears to be placing pressure on the ability of state and territory governments to balance their books and deliver services. Most notably, the Western Australian Liberal Premier, Colin Barnett, recently said revenues flowing to the States and Territories from the GST aren’t growing fast enough to fund basic services like health and education and urged the Federal Government to raise the rate of GST to 12.5%. His comments follow the downgrading of Western Australia’s credit rating by global credit

ratings agency Standard & Poors. The Premier’s focus on a rate increase reflected a general feeling that it would be harder to broaden the GST base. The prevailing preference for a GST rate increase over a base broadening appears to be an endorsement for the concessions originally demanded by the Democrats. The exemptions they built into the GST may have reduced its revenues and increased a significant level of complexity, but the changes significantly reduced the otherwise regressive nature of a broad base GST. By exempting things like food and education, low income earners were provided with a degree of shelter from the impact of the new tax. With time, Australians have come to appreciate the resulting progressivity imbedded in the GST system. Therefore, if governments are to increase the revenue take of the GST, the focus is likely to be on a rate increase and a tinkering of the base only so far as the progressive nature of the GST is not affected.

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| December 2013 – January 2014