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Media release 2003/30
Tax Commissioner Michael Carmody today announced some changes to the Tax Office's position on certain employee benefit arrangements.
The announcement follows recent Federal Court decisions that confirmed both controlling interest superannuation and employee benefit trust schemes are not tax effective.
While often categorised together as employee benefit arrangements, controlling interest superannuation arrangements and employee benefit trusts have many differences in their design.
Employee benefit arrangements were promoted heavily in the mid to late 1990s.
Controlling interest superannuation arrangements
In the recent Federal Court Prebble case, the Court followed the Full Federal Court's decision in the Harris case and denied deductions for a controlling interest superannuation scheme.
While the deductions were disallowed, the Court directed that a penalty should not be payable because the taxpayer's claim was reasonably arguable.
The Tax Office accepts that decision and will waive penalties imposed in other controlling interest superannuation schemes provided a genuine contribution was made to a superannuation fund.
Mr Carmody said that in the interest of providing an opportunity to clear up these cases, the Tax Office will reduce the general interest charge (GIC) to a commercial rate of 4.72% in those cases where a contribution was made to a superannuation fund before 19 May 1999, which was the date the Tax Office announced that these schemes did not work. The GIC is currently 11.84%.
Employee benefit trust arrangements
In the only case decided to date (Essenbourne), the Federal Court upheld the Tax Office's decision to disallow a deduction in an employee benefit trust arrangement. In other words, the Court confirmed that the scheme did not work.
The Court held that an income tax deduction was not allowable for an amount contributed by a company to an employee incentive trust because the payment was simply a distribution of the company's profits to the three principals of the company.
However, the Court disagreed with the Tax Office's view that fringe benefits tax should apply, but given the scheme was rendered ineffective by denying deductions, the Tax Office did not appeal to the Full Federal Court.
However, the Tax Office will look to testing its views on fringe benefits tax and the application of the anti-avoidance provisions to these types of arrangements in future court cases.
As most employee benefit trust schemes are similar to the Essenbourne arrangement, the Tax Office will be disallowing objections against income tax assessments.
The Tax Office will offer reduced penalties for those who agree to settle but the full general interest charge will still apply.
More information
The Commissioner made his announcement today in his speech to tax professionals at the ICAA NAB Gala Luncheon Address in Melbourne.
Further information on employee benefit arrangements can be found in a new fact sheet in the Important Issues section found on the home page at www.ato.gov.au.
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