NTLG: 24 March 2004 | Legal database

National Tax Liaison Group

Minutes of 24 March 2004 meeting

Venue

Executive Conference Room, 5th Floor, West Tower

Tax Office, 2 Constitution Ave, Canberra.

Attendees
Michael Carmody (Chair)	Tax Office	Gil Levy	TIA
Michael D'Ascenzo	Tax Office	Johanna Lowry	ICAA
Michael Dirkis	TIA	David Marks	LCA
Bob Duncan	ATMA	Peter McDonald	TA
Peter Dowling	CPA Australia	Peter McGinty	NTAA
Frank Drenth	CTA	Ali Noroozi	ICAA
Paul Drum	CPA Australia	Frank O'Loughlin	LCA
Neil Earle	TIA	Gavan Ord	NIA
Deidre Gerathy	Treasury	Ross Seller	LCA
Jennie Granger	Tax Office	Tony Stolarek	ICAA

Apologies
Robert Warnock	NTAA
Guest Speakers
Rona Mellor	Tax Office
Secretariat
Doreen Blevins	Tax Office
John Lindell	Tax Office

Professional bodies represented at the NTLG

Association of Taxation and Management Accountants	ATMA
Corporate Tax Association	CTA
CPA Australia	CPA Australia
Institute of Chartered Accountants in Australia	ICAA
Law Council of Australia	LCA
National Institute of Accountants	NIA
National Tax and Accountants Association	NTAA
Taxation Institute of Australia	TIA
Taxpayers Australia	TA

Summary of action items

Action item NTLG0403/1: Tax Office to advise NTLG of progress in relation to sign off for revised Compensation Guidelines, including wider dissemination following endorsement.

Action item NTLG0403/2: The Tax Office to explore the possibility of providing professional bodies with the chapters of theAccess and Information Gathering Manual for comment progressively.

Action item NTLG0403/3: The Tax Office to provide its response at the next meeting to agenda item 7 - profits on pre-completion contracts, raised by professional bodies.

Action item NTLG0403/4: The Tax Office to consider issues around access to documents used by company boards to assess tax risks, with a view to providing guidance to professional bodies and affected taxpayers prior to June 2004 .

Action item NTLG0403/5: Professional bodies to raise the specifics of their issues in relation to the arguments in Integrated Insurance Planning Pty Ltd with the Losses and CGT Subcommittee.

Action item NTLG0403/6: The Tax Office to consider further the issues associated with the issue of Law Administration Practice Statement PS LA 2003/13 and its impact on those taxpayers who have already lodged 2003 income year tax returns and report to the next meeting.

Action item NTLG0403/7: The Tax Office to seek counsel's advice on providing information to former directors of companies where the directors are being held personally liable for defaulted PAYG withholding obligations.

Action item NTLG0403/8: Professional bodies to provide the Tax Office with additional information giving specific details of their concerns with the draft practice statement dealing with the form of objections, referring particularly to the requirement for statements made in the objection to be true and correct.

Action item NTLG0403/9: An update on whether Treasury is able to provide the NTLG with a list of announced measures not yet enacted in law to be provided to the next meeting.

Action item NTLG0312/12: The Tax Office to report to the NTLG on progress of work preparing guidance material in relation to division 7A and shareholder loan agreements.

Action item NTLG0312/18: The Tax Office to provide its views on when debts become statute barred when finalised.

Action item NTLG0403/10: Professional bodies to provide details of any examples where the Tax Office is not following Taxation Ruling IT 2582 in relation to funds borrowed to pay income tax.

Action item NTLG0403/11: The Tax Office to report to the next NTLG meeting on progress of the review of IT 2582 .

Last Modified: Friday, 2 July 2010

Agenda items

1. Introductions

2. Rules of professional conduct

3. Access and Information Gathering Manual

4. Service trust project

5. Division 7A loans

6. Scope of 251L ITAA

7. Profit on pre-completion contracts

8. Section 45B

9. Forex rules

Sections within Agenda items

10. Companies and tax

11. Death benefit ETP

12. Agency development loans

13. Cost basis of valuing trading stock

14. Directors' penalty liabilities 15. Notices of objection

16. Business activity statements

17. Small business CGT relief

18. NTLG work program

19. Other business

1. Introductions

Meeting discussion

The Commissioner welcomed Ali Noroozi to the NTLG in his new role as Tax Counsel for the ICAA and Doreen Blevins in her new role as Director PALU and noted that this would be Gil Levy's last meeting as President of the TIA.

Professional bodies also commented positively on the outcomes of Tax Office's work with professional bodies relating to family trust elections.

Minutes from the 3 December 2003 meeting:

A number of minor amendments were suggested for the minutes of the 3 December 2003 NTLG meeting which have been incorporated in the final version, along with the following areas in relation to specific agenda items:

Agenda item 6: Issues concerning ATO Interpretive Decisions (ATO IDs) (3 December 2003 meeting): The Commissioner agreed to follow up on ideas on access to ATO IDs through portals, for example, Tax Agent Portal and Business Portal.

Agenda item 21: Compensation Guidelines (3 December 2003 meeting): The Commissioner noted the Tax Office executive had not met to discuss the compensation guidelines sign off, but expected to do very soon.

Action item NTLG0403/1: Tax Office to advise NTLG of progress in relation to sign off for revised Compensation Guidelines, including wider dissemination following endorsement.

2. Rules of professional conduct

Under the rules of professional conduct (for example, in Victoria), where a party has appointed a lawyer to act for him or her, then the lawyer appointed to act for the other party cannot communicate directly with the first lawyer's client. If applicable to the Tax Office legal practice, these rules would mean that if a lawyer was engaged by a taxpayer to lodge a notice of objection and the notice of objection was referred to the Tax Office Legal Practice Section, then officers in that section could only communicate with the taxpayer's lawyer in relation to an objection and could not communicate directly with the taxpayer

Would the Tax Office please advise whether legal practice officers are bound by rules of professional conduct in each State or Territory?

Response:

As a Commonwealth agency, the Tax Office is bound by the Legal Services Directions issued by the Attorney-General under section 55ZF of the Judiciary Act 1903. In that context, the Tax Office acknowledges that, consistent with its model litigant obligations, it is required to act with the highest professional standards in the conduct of litigation. As a general rule, this would extend to observing the convention of not knowingly communicating directly with a legal practitioner's client.

In exceptional circumstances, it may be necessary to communicate directly with a taxpayer who is represented by a legal practitioner. For example, if a legal practitioner fails to respond within a reasonable time. Alternatively, a client may contact the Tax Office directly. In such cases, the Tax Office acknowledges that the client would be advised of Tax Office legal officers' ethical responsibility to communicate through their legal representative. If the client insisted on continuing to deal directly with the tax officer, as a matter of professional courtesy the legal practitioner would generally be advised of the direct contact.

If a lawyer was engaged by a taxpayer to lodge a notice of objection, and the notice of objection was referred to the Tax Office Legal Services Branch, Legal Services Branch officers would be expected to act consistently with the obligations set out above.

Meeting discussion

No meeting discussion.

3. Access and Information Gathering Manual

At the 3 December 2003 meeting of the NTLG (agenda item 11), the Tax Office advised that its Access and Information Gathering Manual was being reviewed in its entirety in two stages, to be completed 30 June 2004 and 30 November 2004 respectively.

i. Would the Tax Office please provide an update on the progress being made under each stage of the review?

Response:

The review of the manual under stage one is still being undertaken and the Tax Office is consulting internally prior to a revised version being sent to members of the National Tax Liaison Group for their comment and consideration. The revised version will be sent to members prior to the meeting scheduled for 17 June 2004. Comments will be requested by 31 July 2004. Stage two of the review will commence upon the completion of stage one.

ii. What is the current status of the re-drafting of chapter eight of the manual, which has been the subject of comment and feedback from the relevant professional bodies?

Response:

The Tax Office is currently reviewing the comments made by five organisations on chapter eight of the manual. A report on the changes adopted and not adopted by the Tax Office will be provided for the meeting scheduled for 17 June 2004.

iii. The manual is not available on the Tax Office's website. Would the Tax Office please advise how taxpayers can access this manual during the review period? Will the Tax Office be putting the manual on its website, and if so, when?

Response:

Since the manual is under review, it is not proposed to put the manual on the Tax Office website at this stage. Once the manual is finalised, however, it will be placed on the website. During the review period, an electronic version of the current manual is available at no charge by writing to the Tax Office ( PALU – Access and Information Gathering Manual, PO Box 900, Civic Square 2608).

Meeting discussion

Professional bodies indicated a preference for being able to review the document on a per chapter basis; however, given the Tax Office's approach to the review, this may not be possible, particularly as parts of the review may not be completed sequentially.

The Tax Office will further explore the possibility of providing chapters progressively for comment.

Action item NTLG0403/2: The Tax Office to explore the possibility of providing professional bodies with the chapters of theAccess and Information Gathering Manual for comment progressively.

4. Service trust project

Could the Tax Office please report to the NTLG on the progress of its service trusts project, including a discussion on:

a. the results of the questionnaire which was sent to approximately 56 legal and accounting partnerships in June 2003

b. whether any particular issues of concern have been identified, for example as to aspects of service trust charges or structuring

c. how the Tax Office proposes to progress this project, for example will it be undertaking increased audit activity or other compliance reviews on service trusts and,

d. at the 3 December 2003 NTLG meeting, the Tax Office indicated that it would invite members of the NTLG to form a subgroup to consult with the Tax Office in relation to preparing a proposed public ruling on service trusts. Could the Tax Office please advise when this will occur?

The Tax Office is continuing to analyse the responses to the questionnaire sent to the legal and accounting firms. Based on the analysis to date, however, it appears common for service fees and charges to be calculated by applying fixed mark-ups to most if not all of the costs of the service entity without regard to the value of the services or benefits provided under the arrangement.

Looking forward, the Tax Office intends to employ a risk management approach to identify cases that would be suitable for audit or other compliance activities.

A public ruling on this area of the tax law is being prepared as a high priority. Invitations were sent on Friday 5 March 2004, to NTLG members requesting they nominate members for a proposed NTLG subgroup that will be consulted about the proposed public ruling on service trusts.

Meeting discussion

Professional bodies sought to clarify the role of the subgroup, hoping it would not deal just with the proposed ruling or technical content, but would create a continuing interaction between the Tax Office and professional bodies in relation to this issue. The Commissioner confirmed the Tax Office was looking for a continuing role with professional bodies around the service trust issue.

One of the professional bodies sought to have an additional member on the subgroup, however, the Commissioner's concern was that the group remain small to be more effective, suggesting to the professional bodies they nominate one additional practitioner member as a and the Office would then consider their inclusion.

5. Division 7A loans

The definition of "associate" for Division 7A purposes is to be found in section 318 of the ITAA 1936which, in the case of individual shareholder in a private company, extends to the trustee of a trust under which that individual is capable of benefiting. The concept of "benefiting under the trust" extends to an indirect benefit through other trusts, partnerships or companies.

There are concerns amongst practitioners that the very broad definition of "associate" in section 318 of the ITAA 1936, which does not impose any form of control as a prerequisite in the sense that one would ordinarily expect, is resulting in unintended consequences in the application of Division 7A . For example:

i. Say you have a situation where there are say 50 unrelated unit holders in a unit trust and the position is that one of those unit holders is a private company and, to assist in the short term financing of the unit trust, each of the unit holders agrees to advance say $10,000 by way of a loan at the commercial rate of interest to the unit trust. Then the $10,000 loan from the private company would be capable of being treated as an unfranked dividend in the unit trust (to the extent to which the private company had a distributable surplus).

On the basis that each of the 50 unit holders would be presently entitled to income of the unit trust, it would mean that each of the 50 unit holders would have to include $200 each as part of their income from the unit trust.

The treatment of the $10,000 loan from the private company as an unfranked dividend in the hands of the unit trust would follow from the fact that there would be distributions from the unit trust to the private company which could then be passed on to the shareholders in the private company so that, in terms of the definition of an "associate", the unit trust would fall within this concept because it would be a trust in which the shareholders in the private company would be capable of benefiting from indirectly (through the receipt of dividends from the private company).

If the private company in question was the only holder of units in the unit trust then such an outcome could be expected but where, as is the case in this example, the private company only holds 2% of the units in the unit trust, the result is the same. As well, one of its consequences is to subject the other unit holders to tax on what is in fact a loan from one unit holder to the unit trust.

ii. A necessary consequence of the broad definition of associate is that it would seem to apply where say a private company makes a deposit to some form of cash management account (which would be classified as a trust for tax purposes). As the shareholders in the private company will benefit from the deposit to the cash management account, Division 7A would apply to treat that deposit as a deemed dividend in the hands of the trustee of the cash management account.

Such a clearly unintended consequence may not follow if there is a distinction between a loan and a deposit. However, as the definition of a loan in section 109D(3) includes an advance of money, it is difficult to escape the conclusion that the deposit to a cash management account would be a loan by the depositor/private company to an associate of the shareholders.

iii. Would the Commissioner confirm that the tax consequences set out above follow from the legislative provisions?

iv. Would the Commissioner indicate whether there is some scope to avoid what is submitted to be clearly unintended consequences or, if no such scope is available, whether the Commissioner would support a submission to change the definition of an associate in section 318 in the case of a trustee of a trust to require the trustee to be under some form of control by the primary entity?

Response:

Scenario (i)

Assuming the unit trust is not a public unit trust:

Under the definition of associate in section 318 of the ITAA 1936 an associate of a natural person is the trustee of a trust where a natural person benefits under the trust. Assuming in scenario (i) a natural person is a shareholder of the private company, the unit trust (assuming it is not a public unit trust) would be an associate, as the shareholder is capable of benefiting indirectly under the trust through the interposed private company (see subsections 318(1) and (6) ).

It has the effect that a loan made by the private company to the unit trust is made to an associate of a shareholder. Consequently, the provisions in Division 7A may apply to deem the loan to the trust to be an unfranked dividend (see section 109D ). If so, it would have the consequences outlined in scenario (i).

It should be noted, however, that Division 7A would not apply if the loan is an excluded loan under subdivision D, for example, if the loan was made under a written agreement meeting the criteria outlined in section 109N and the trust making minimum yearly repayments as contemplated by section 109E .

If the unit trust is a public unit trust it is unlikely that the trust is an associate of the shareholder.

Scenario (ii)

If the cash management account is a trust and the private company is a beneficiary of that trust there is a potential for section 109D to apply. Whether the cash management account is a trust and the private company a beneficiary of that trust would depend upon the facts. For example, monies placed on deposit with a banking institution may give rise to nothing more than a debtor/creditor relationship (see Foley v. Hill (1848) 9 ER 1002 and Joachimson v. Swiss Bank Corporation [1921] All ER Rep 92).

Subdivision D also needs to be considered, however, to determine whether the loan is an excluded loan. Amendment

On the evidence available, the Tax Office is not convinced of any pressing need for amendment to the meaning of associate for Division 7A purposes. It is considered that a loan made in the circumstances outlined, particularly in a scenario (i) case, could as a minimum meet the criteria set out in section 109N Under either scenario there is also the possibility, depending on the facts, that the loan may be an excluded loan under another provision of subdivision D (for example, section 109M ).

It should also be noted the meaning of associate in section 318 is used in other parts of the tax law besides Division 7A and is the definition of associate that applies for ITAA 1997ITAA 1997 , parts of TAA 1953 and Schedule 1 to the TAA 1953 purposes.

Meeting discussion

No meeting discussion.

6. Scope of 251L ITAA

At the 2 September 2003 and 18 December 2003 NTLG meetings, the professional bodies emphasized the need for the Tax Office to express clear guidance on how it interprets section 251L ITAA 1936. Broadly, section 251L provides that only a registered tax agent or practicing lawyer can provide certain taxation services for a fee.

On 23 December 2003, the Commissioner of Taxation and the chairman of ASIC issued joint press releases indicating that the Tax Office and ASIC are working together to "consider what, if any, additional guidance might be issued to help financial advisers and tax agents comply with their obligations under the law". Mr Carmody states "there may be some circumstances where financial advisers providing tax advice may need to be registered as tax agents under the tax law".

The professional bodies note their disappointment at the apparent "downplaying" of the issue and the need for guidance on it. The fact that such controversy exists, particularly as regards financial planners giving tax advice, would in itself indicate a real need for clarification.

They also note that member and anecdotal feedback suggests widespread breaches of section 251L with incorrect or incomplete tax advice being provided by financial planners, financiers, real estate agents, bookkeepers and others, often resulting in serious financial damage to the client involved.

Section 251L has an important consumer protection function - the public quite reasonably expects that those who provide tax advice have the appropriate competency and integrity. Part VIIA ITAA 1936 (Registration of tax agents) provides the necessary regulation in that regard, and the Commissioner of Taxation is charged with administering and enforcing it.

Could the Tax Office please comment on:

a. What steps it is taking to issue guidance on its interpretation of the meaning and scope of section 251L ?

Response:

The Commissioner is currently finalising a draft tax determination on the scope of paragraph 251L(1)(b) of the Income Tax Assessment Act 1936 which deals with who can charge a fee for giving advice about taxation laws on behalf of a taxpayer. This work is in response to the joint press release in December 2003 from the Commissioner of Taxation and the chairman of ASIC.

b. What does the Tax Office regard its responsibilities to be as regards to promoting awareness about the scope and purpose of Income Tax Assessment Act 1936 section 251L , both to the general public and to those potentially breaching it?

Response:

One of the main Tax Office responsibilities in this area is to clarify the "intent" of the provisions in the taxation law which govern who can charge a fee for giving advice about taxation laws.

Having done that the Tax Office will develop an appropriate communication strategy.

c. What does the Tax Office regard its responsibilities to be as regards enforcement of Income Tax Assessment Act 1936 section 251L ?

Response:

The Commissioner follows the Compliance model when considering the appropriate response to possible breeches of Division 7 of Part VIIA of the Income Tax Assessment Act 1936 ( ITAA 1936ITAA 1936 ),

The exact nature of the application of this model will be determined once the clarification of the operation of section 251L is finalised.

Meeting discussion

Professional bodies made some initial comment on the pre draft release tax determination (TD) they received recently. These were:

· Tax Office view relies heavily on Income Tax Assessment Act 1936 s 251L(1)(e), seeming to lessen the weight of the previous parts (a) – (d)

· professional bodies do not believe the TD clarifies the present situation, for example, advice from a real estate agent about deductions available on the purchase of a rental property leads to those deductions being claimed in an income tax return

· the release of the Business Portal encourages business taxpayers to interact with the Office individually; however, they are likely to do that on the basis of advice from their tax agent.

The Commissioner noted advice the Tax Office received from the Australian Government Solicitor was that it was about representation to the Tax Office.

Professional bodies also noted the issue of protection under state laws may not be significant, as they first thought and that amounts claimed as tax agent fees may now need to be reconsidered in terms of whether on capital or revenue account.

The Commissioner advised the professional bodies he would like to resolve the matter quickly and sought their comments on the draft TD soon.

7. Profit on pre-completion contracts

For many years the methods for determining income derived from long term construction contracts has been covered by IT 2450. This is reasonably well understood. However, Taxation Ruling IT 2450 does not apply to the production and sale of trading stock. Subject to some important qualifications, in the main, the terms of IT 2450 accord with the principles in accounting standards AAS 11 and AASB 1009.

Since the publication of IT 2450, pre-completion contracts for the sale of real estate, sometimes called selling "off the plan", have become quite common. This might occur when, for instance, an apartment complex is being constructed and the developer sells off apartments before or as they are being built.

As a result of this development, the Urgent Issues Group (UIG) has issued abstract 53. Broadly, the UIG takes what it considers to be a substance over form approach. It considers that the profit from pre completion contracts should not be treated as profits from the sale of trading stock. Rather, such profits should be returned on a percentage of completion (in accordance with AASB 1009).

The result is that the disclosure of income is likely to be brought forward for accounting purposes. This appears to be at odds with IT 2450, which is said not to apply to the production and sale of trading stock, which such property would seem to be.

While it is recognised that the accounting treatment is not determinative of the tax treatment, it is often helpful in determining what provides a substantially correct reflection of a taxpayer's income for a period. Further, it is confusing for all concerned if the accounting and tax income recognition principles conflict markedly.

Given that IT 2450 does not deal specifically with pre-completion contracts and that the accounting treatment preferred in abstract 53 seems to be at odds with this ruling, would the Tax Office please advise how, as a matter of principle, the profit on pre completion contracts is to be returned?

Response:

The Tax Office is currently considering the "profits on pre-completion contracts" issue raised for the 24 March 2004 meeting.

Although a preliminary view on the timing of profits received on pre-completion contracts has been formed, further research and consultation within the Tax Office is required before a formal view can be published.

A formal Tax Office response will be provided for the next NTLG meeting.

Meeting discussion

Professional bodies accepted the response and asked it be included as an action item for the next meeting.

Action Item NTLG0403/3: The Tax Office to provide its response at the next meeting to agenda item 7 - profits on pre-completion contracts, raised by professional bodies.

8. Section 45B

The new debt/equity tests and their affect on "at-call loans" from shareholders and associates to companies.

At the NTLG meeting held on 26 March 2003 NTLG, the Tax Office indicated that in light of the announcement by the

Government extending the transitional period in which "at-call" loans might be treated as debt interests would be extended until 30 June 2004 , the Tax Office had no immediate expectation of applications for private rulings on this matter and would not be publishing any guidelines about the circumstances in which section 45B might apply to distributions connected with "at call" loans. Would the Tax Office please advise:

a. whether it has received any requests for private rulings, and if so, what has been the Tax Office's response; and

b. when will the Tax Office publish guidelines on this issue, given that 30 June 2004 is rapidly approaching?

Response:

Section 45B ITAA 1936 was amended by the New Business Tax System (Debt and Equity) Act 2001 to provide, for the purposes of that section, for a non-share distribution to an equity holder to be taken to be a distribution to the equity holder of share capital to the extent to which it is a non-share capital return.

Under the debt/equity rules in Division 974 of the ITAA 1997, an "at-call loan" made to a company by a related party will give rise to an equity interest in the company if the arrangement passes the equity test but fails the debt test under those rules. This could occur if there is no fixed term for repayment of the loan and the repayment is at the discretion of the company or an associate of the company. Consequently, the repayment of an "at-call loan" could be characterised as a non-share distribution to an equity holder for the purposes of section 45B .

Certain related party "at-call loans" are treated as debt interests under transitional rules that accompanied the Debt/Equity legislation.

On 16 December 2002, the Minister for Revenue and Assistant Treasurer, Senator the Hon. Helen Coonan, announced [by Press Release no. C131/02] that the transitional period in which "at-call loans" might be treated as debt interests would be extended until 30 June 2004. The Minister also said that the extension allowed for the operation of the measure to be reviewed in consultation with industry – particularly small business.

Although it cannot be confirmed that any applications have been received for private rulings about whether section 45B might apply to distributions associated with "at-call loans", no private rulings have been issued on this matter.

The announced review of the treatment of "at-call loans" has not yet been undertaken. Accordingly, there is nothing to warrant a departure from the position explained at the NTLG meeting held on 26 March 2003, that it would not seem to be appropriate to publish any guidelines before the outcome of that review is known.

The Tax Office has advised Treasury of the importance of the "at-call loans" issue and Treasury has acknowledged the priority status of this issue.

Meeting discussion

Professional bodies advised they were seeking guidance on the issues and in particular, a clear definition of "at-call loans", comparing this situation with that of the introduction of non-commercial loss and alienation measures.

The Commissioner noted the transition rules applied for another three months and advised the Tax Office would consult further with Treasury on the issue to come to an appropriate outcome in the circumstances.

9. Forex rules

Under the new foreign exchange gains and losses rules, which become law on 17 December 2003 but have retrospective operation from 1 July 2003, it is possible for a taxpayer to make an election in respect of certain qualifying foreign currency bank accounts to modify the application of the general realisation rule (the "limited balance account" exemption). Unless this election was made after 17 December 2003 but on or before 16 January 2004, a taxpayer cannot take advantage of this exemption in respect of his or her foreign currency account.

a. Would the Tax Office please confirm that an Australian resident with a UK bank account with a balance of £10, and who has not made an election for the limited balance account exemption to apply, will need to bring to account any gain or loss on every deposit or withdrawal?

b. What action will the Tax Office be taking in this area to ensure compliance with the new forex rules, particularly in the above "small balance account" type of situation?

Response:

To be discussed at the meeting.

Meeting discussion

The Commissioner advised that appropriate allocation of resources would mean that the focus of Tax Office attention was not on bank accounts with a £10 balance.

Professional bodies noted they had suggested during consultation to take a more "open ended" approach to the "sudden death" nature of election deadlines, however, were unsuccessful in achieving this outcome. Comment was also made there may be opportunity in stages three and four of the Taxation of Financial Arrangements legislation to come to modify these rules.

10. Companies and tax

Corporate governance

On 29 January 2004, the Commissioner of Taxation, Mr Michael Carmody, sent a letter to board members of various companies. At this stage, it is uncertain whether those companies were just listed companies or large private companies as well.

In addition, on 9 February 2004 Mr Jim Killaly, Deputy Commissioner, gave a presentation at the Australian Taxation Summit at the Grace Hotel in Sydney, where he talked about corporate governance issues.

The comments set out below are designed to point out some of the difficulties that have arisen from statements by the Commissioner and Deputy Commissioner.

It is always easy in extreme cases to make comments about how people should act in those circumstances, but it is less easy to make statements about how they should act in circumstances that are not quite so extreme.

It is unclear if the letter was intended for listed corporations, and also large non-listed corporations. Large non-listed corporations have a much more difficult position because of the more complex rules that apply to non-listed companies.

All large companies will have an audit that is a corporations act requirement, including disclosing a provision for tax, so that there is a second consideration of the anticipated tax result of the transaction when the auditors come in to check the correctness of the accounts.

There may be issues where the tax adviser is the same firm as the auditor, and these issues have been alive for some time in France (where we understand the auditor is required by law not to be the tax adviser), and more recently in the US ( Sarbanes-Oxley Act 2002 ; Although see James Tobin "What Sarbanes-Oxley means for corporate buyers of tax services" International Tax Review Dec-Jan 2004).

Generally speaking, it is our view that the requirements of directors of companies, whether they be public companies or private companies for tax purposes, are that they must act in good faith, for a proper purpose. (Romer J. Re City Equitable Life Insurance Co. (1925) 1 Ch 407 and for more detail on directors duties see Allan Myers Q.C. Corporate Governance and Directors Duties – Taxation Institute of Australia– Victorian Convention Papers Sept 2003).

Moreover from a taxation point of view, they must act with "reasonable care" (section 284-90 item 3 of Sch 1 to the TAA 1953 (formerly section 226G of the ITAA 1936 ); also see Taxation Ruling TR 94/4 ) in ensuring that their organisations comply with taxation laws and when they are considering transactions that have a significant effect upon their taxation position and, in the event that it transpires that there is a tax shortfall, to have taken positions that are at least "reasonably arguable" (section 284-15 of Schedule 1 to the TAA 1953 (formerly section 222C of the ITAA 1936 ); also see Taxation Ruling TR 94/5 ). The rules in relation to the required duty of care are clearly set out in the TAA 1953 (TAA) and have also been discussed in various cases, including Walstern (2003 ATC 5076), Prebble (2002 ATC 5045) and others (Cohen (2002) 44 ATR 443 at 450; North Ryde RSL (2002) 49 ATR 579 ; Krampel Newman 2003 ATC 4304; MLC Investments (2002) 51 ATR 283 ).

It is these standards of care that we believe that directors should be focusing upon, rather than being confused by other standards that these statements set out.

a. Would the Tax Office please confirm the types of companies that received the Commissioner's letter? What type of Tax Office follow-up will there be to the Commissioner's letter, particularly in relation a company receiving this letter?

b. In relation to the standard of care that is required of a company director, would the Tax Office please explain how the views expressed in the Commissioner's letter relate to the standard of care set out above?

Tax risk

The professional bodies note the letter issued by the Commissioner of Taxation in January 2004 to the chair people of various large companies, referring to their corporate governance obligations in relation to taxation matters, attached to the letter was a list of ten questions which the chairs and directors might ask themselves in relation to significant transactions.

The professional bodies are in agreement with directors and company officers properly assuming their corporate governance responsibilities, and assuring themselves that the company is appropriately managing its taxation risks.

The professional bodies note, however, that the obligations imposed by taxation laws are just a part of the wider set of obligations imposed by laws generally. Other examples include occupational health and safety laws, trade practices laws, workplace relations laws, corporate regulation laws and the list goes on.

A significant means by which companies, and those responsible for their administration, provide for compliance with the wide range of obligations that they have is to put in place systems of internal controls and checks and balances that ensure that matters are considered at appropriate levels within an organisation by people with appropriate expertise. Normal corporate process and risk management is to employ appropriately skilled personnel within a company to ensure corporate obligations are met and, from time to time, to supplement those resources with independent consultants and advisers. The mix between the two sources of expertise varies from company to company and from subject matter to subject matter.

The position of a company is not significantly different to that of the Tax Office itself. The Tax Office's central administrative organ (the Commissioner and Second Commissioners) does not personally vet every operational Tax Office decision. It, too, has a system of delegated responsibilities, checks and balances and at times it, too, seeks independent advice.

The professional bodies are concerned that the Tax Office appears to imply that companies that do not discuss their tax compliance obligations in detail at a board level, and that rely on independent professional advisers to assist them in their tax compliance obligations, are not taking their corporate governance responsibilities seriously.

Could the Tax Office please comment?

Response:

To be discussed at the meeting.

Meeting discussion

Professional body concerns were centred on where the Tax Office would be heading as a consequence of sending the letter to company boards. In particular, the application of penalties and the rate at which they might be applied could be based on whether the board had taken Tax Office advice as outlined in the letter. Professional bodies were of the view that company boards should be accountable for their actions but were responsible for running the business and this should not be affected by whether the advice of the Tax Office was heeded or not. There belief is that a company was no better or worse as a consequence of whether or not they used the approach outlined in the Tax Office letter.

The Commissioner agreed that the company was responsible for managing their own affairs. The purpose of the letter was to raise with company boards:

1 tax risks, among the significant risks they face

2 the board's role in managing these risks in the company.

The letter is not about application of penalties in an audit situation, it is about the broader governance issues facing company boards. The Commissioner noted an Ernst & Young survey showing that only approximately thirty percent of company boards managed tax risk in organisations and, of those, 70% said they did not do it well.

The Commissioner advised the letter is to draw to the attention of company boards some areas they may need to consider when they are looking at areas of risk.

Professional bodies also raised access to documents where a risk review had been undertaken as an area of potential concern. The Commissioner suggested these documents may be treated similarly to accountants' working papers; however, this would need to be considered further by the Tax Office. Professional bodies advised guidance would be useful to companies in the lead-up to June financial reporting.

Action item NTLG0403/4: The Tax Office to consider issues around access to documents used by company boards to assess tax risks, with a view to providing guidance to professional bodies and affected taxpayers prior to June 2004.

11. Death benefit ETP

The tax treatment of "death benefit eligible termination payments (ETP)" (as defined by section 27AAA of the Income Tax Assessment Act 1936) depends on two key factors:

1 the recipient of the payment; and

2 the pension Reasonable benefit limit (RBL) of the deceased.

If the recipient of the payment is a dependant, they will generally receive the payment tax free up to the pension RBL of the deceased. The pension RBL is $1,176,106 for the 2004 year, meaning that a dependant can receive a death benefit ETP up to this amount tax-free. Any excess would be taxed at the highest marginal rate.

Definition of dependant

The term "dependant" is defined in section 27A(1) of the ITAA 1936 . It specifically includes:

· a person who is or was the spouse of the deceased; and

· any minor children of the deceased (and in certain circumstances non-minor children).

The term "spouse" is also defined in section six of the ITAA 1936 . It includes another person who, "although not legally married to the person lives with the person on a bona fide domestic basis as the husband or wife of the person".

In ATO Interpretive Decision ATO ID 2002/211 it states that the definition of spouse does not include same sex couples.

Accordingly, if a death benefit ETP is paid to a spouse that was in a same sex relationship, that person would not be able to access the concessional tax treatment that would be available to a spouse of a heterosexual relationship. The payment to the same sex spouse would therefore be subject to tax by virtue of the fact that they were in a same sex relationship.

Payments may still be accessed tax-free by a person who was in a same sex relationship if they can demonstrate that they were financially dependent on the deceased. However, it can be difficult to prove financial dependence and in many cases such dependence will not be present. Same sex couples are, therefore, discriminated against in that they are not provided with the same tax concessions available to heterosexual couples.

a. Would the Tax Office please confirm that the only way a person who is in a same sex relationship can access funds in the above circumstances is if they can establish he/she was financially dependent on the deceased?

Response:

Access to the superannuation monies of the deceased by a surviving member of a same sex relationship will depend upon a number of factors including the terms of the superannuation fund trust deed, relevant State laws and meeting the conditions of release referred to in part six of the Superannuation Industry (Supervision) Regulations.

Although a same sex partner is not a "spouse" for the purposes of the definition of "dependant" in subsection 27A(1) of the Income Tax Assessment Act 1936, they may nevertheless be a dependant for the purposes of section 27AAA of that Act (which deals with death benefit ETPs). ATO Interpretive Decision ATO ID 2002/731 provides guidance on when this will be the case.

a. Would the Tax Office please advise:

i. How many applications have been received from taxpayers in the above circumstances who are trying to establish financial dependence?

Response:

The Tax Office does not have details of the number of cases in this category. There is no requirement for taxpayers to apply to the Commissioner before they can be treated as a dependant.

a. What a taxpayer has to establish to prove that he/she was financially dependant on the deceased in the above circumstances?

Response:

This is based on the facts of the case. ATO ID 2002/731 provides guidance on factors that the Commissioner will take into account when determining whether a person is financially dependant upon the deceased.

i. Of those taxpayers who have made this type of application, how many have been successful?

Response:

The Tax Office does not have details of the number of cases in this category.

i. Is the Tax Office aware of any proposal to review the operation of the law in this area as it impacts on same sex partners?

Response:

This is a matter of taxation policy. Treasury is the appropriate department with which to raise this matter.

Meeting discussion

Professional bodies recognised this issue is not one where the Tax Office could provide any administrative assistance as the design of the law is a matter for Government to decide.

12. Agency development loans

The Federal Court of Australia on 30 January 2004 handed down its decision in Integrated Insurance Planning Pty Ltd v. Commissioner of Taxation [2004] FCA 35. The case involved the taxation of insurance agent "agency development loans", which had been forgiven. In terms of the application of the capital gains tax provisions to the forgiveness, the Tax Office argued broadly as follows:

· the taxpayer had acquired a right being their rights to compel waiver of the loans assuming certain conditions were satisfied

· by implication those rights did not have a cost base

· when the insurer waived the loans, CGT event C2 applied to the taxpayer, and

· the capital proceeds attributable to CGT event E2 were determined under the market value substitution rules and equalled the amount forgiven.

The Tax Office issued a ruling on agency development loans in 2001 (Taxation Ruling TR 2001/9 ), which is a comprehensive ruling looking to the tax position of both the lender and borrower under such arrangements. The ruling was reasonably benign so far as the potential application of the capital gains tax provisions to the transaction were concerned generally and, in particular, did not at any point raise the contentions canvassed by Counsel for the Tax Office before the Court in the Integrated Insurance Planning Pty Ltd Case.

i. Would the Tax Office please advise whether it is correct as a matter of policy and administration that the Tax Office should issue a ruling on one basis and then raise quite unrelated technical arguments in subsequent court proceedings?

ii. Will the Tax Office be amending Taxation Ruling TR 2001/9 to take account of the decision in the Integrated Insurance Planning Pty Ltd Case, and if so, when will this be done?

Response:

The Tax Office's approach in TR 2001/9 is that the amount of an agency development (ADL) loan that is forgiven will generally be assessable to an agent under ordinary principles (refer paragraphs 46-52).

Paragraph 63 advises that:

To the extent that forgiveness of a performance based ADL gives rise to the derivation of ordinary income by the agent, any capital gain accruing to the agent from forgiveness will be reduced to zero pursuant to paragraph 118 20(2)(a) of the 1997 Act

That is, the ruling advises that whilst a capital gain may be made in relation to the forgiveness of a loan, that capital gain will be reduced to zero as a result of the forgiveness having been brought to account as income according to ordinary concepts.

That was how the Commissioner conducted the litigation in Integrated Insurance Planning Pty Ltd. He argued (and the court accepted) the amount of the loan forgiven was income according to ordinary concepts. He also argued there was a capital gain made in relation to the forgiveness, and the court accepted this. As the court had accepted this amount was income according to ordinary concepts, however, the effect of this finding was that the amount of the capital gain was reduced to zero.

It is not correct to say the Commissioner has issued a ruling on one basis and has adopted different arguments in litigation on this issue. The arguments are entirely consistent and there will be no amendment to the ruling.

[The following additional information is also provided following consultation with the professional bodies:

CGT events and restrictive covenants

Paragraphs 51 and 52 of Taxation Ruling TR 2001/9 read as follows:

51. It will be a question of fact whether or not the forgiven amount of an ADL represents consideration for the grant of restrictive covenant. We consider that the forgiven amount is received in consideration for the achievement of performance targets and has no relevant connection with any restrictive covenant provided by the agent.

52. However, if it can be established that, in substance, all or part of the forgiven amount represents capital proceeds received in respect of the grant of a restrictive covenant, forgiveness of the debt may constitute CGT event D1 (refer Taxation Ruling TR 95/3 ).

The taxpayer in Integrated Insurance Planning Pty Ltd did seek to argue that the payment was made in respect of the grant of a restrictive covenant, and was therefore not assessable. The court rejected this argument, and found that the payment represented income according to ordinary concepts.

The CGT events the court considered later related to the right to compel waiver of the loan pursuant to the agreement that gave the taxpayer the right to thus compel waiver. The court considered there was a capital gain in relation to this right, and made no comment in relation to restrictive covenants. As noted above, however, this capital gain was reduced to zero pursuant to paragraph 118-20(2)(a) .

It therefore remains the case that the entirety of the arguments the Commissioner presented in Integrated Insurance Planning Pty Ltd were consistent with the approach taken in TR 2001/9 . Again, no amendment to the ruling is necessary.]

Meeting discussion

Professional bodies noted the Tax Office argued Orica in this case but did not consider it to be on "all fours" with Orica, which they believed would be the only circumstance where the Tax Office would argue Orica in another case. They were concerned the obiter dictum comments made could give a new interpretation of debt forgiveness.

Second Commissioner D'Ascenzo gave professional bodies the opportunity to put the specifics of their views to the Tax Office through the Losses and CGT Subcommittee.

Action item NTLG0403/5: Professional bodies to raise the specifics of their issues in relation to the arguments in Integrated Insurance Planning Pty Ltd with the Losses and CGT Subcommittee.

Meeting discussion

Professional bodies noted the Tax Office argued Orica in this case but did not consider it to be on "all fours" with Orica, which they believed would be the only circumstance where the Tax Office would argue Orica in another case. They were concerned the obiter dictum comments made could give a new interpretation of debt forgiveness.

Second Commissioner D'Ascenzo gave professional bodies the opportunity to put the specifics of their views to the Tax Office through the Losses and CGT Subcommittee.

Action item NTLG0403/5: Professional bodies to raise the specifics of their issues in relation to the arguments in Integrated Insurance Planning Pty Ltd with the Losses and CGT Subcommittee.

13. Cost basis of valuing trading stock

In December 2003, the Tax Office released a practice statement advising that the Tax Office will apply general absorption costing principles for valuing trading stock on hand at cost for both the retail and wholesale industries in the 2004 and subsequent years (Law Administration Practice Statement PS LA 2003/13 : Income tax: the cost basis of valuing trading stock on hand for taxpayers in the retail and wholesale industries). PS LA 2003/13 also outlines the transitional arrangements that the Tax Office will follow to adjust retailers' and wholesalers' tax returns for the 2003 year to include the appropriate figure where cost has not been determined under the absorption costing method.

In deciding to apply the absorption costing method across the board in both the retail and wholesales industries, the Tax Office relies on a combination of case law (Phillip Morris Case and Kurts Development Case) and accounting standards (AASB 1019, IAS 2).

Would the Tax Office please advise:

a. Did the Tax Office consult with the retail and wholesale industries to determine whether and to what extent the absorption costing method was being used in those industries? And if so, what was the outcome of these consultations?

b. Given that the cases relied on by the Tax Office in PS LA 2003/13 are directed more at the wholesale rather than the retail industry, on what basis is the Tax Office applying the absorption costing method to the retail industry?

c. Bearing in mind that accounting standards are not necessarily determinative of the appropriate tax treatment, did the Tax Office verify whether the accounting standards referred to in PS LA 2003/13 are applied in practice in both the retail and wholesale industries?

Response:

Issues have been raised in relation to the application of Practice Statement PS LA 2003/13 on valuation of trading stock, by both the National Tax & Accountants' Association and the Australian Retailers Association. Officers from the Tax Office met with representatives of both bodies on Wednesday 3 March 2004. Based on discussions at this meeting the Tax Office will review the application of this practice statement and will continue to work with these bodies and to consult with other community representatives. The Tax Office will assess what if any changes may be necessary to clarify the operation of the practice statement. In the interim a minute will issue to staff instructing that any adjustments based on the application of the practice statement will need prior approval from the team currently reviewing the practice statement.

The following information in relation to the development of this practice statement is provided in response to the specific issues raised.

a. The Tax Office entered into an extensive consultation process with the Australian Retailers' Association (ARA) and several of its members in the large and small business segments to determine the extent to which the absorption costing method was being used. The ARA also advised that the matter had been referred and discussed by the ARA Tax Committee. The Tax Office also held separate discussions with other retailers, independent of the ARA consultation process.

The discussions highlighted the fact that, when valuing trading stock at cost, retailers were using valuations ranging from cost price to cost price plus some direct costs to full absorption costing. There was a clear need to clarify the issue.

After further consultation the Tax Office deemed that full absorption costing was the correct method for valuing trading stock at cost for the following principal reasons:

There should be consistency of method to be used for all retailers:

· the decided tax cases and accounting standards advocate the principle of full absorption costing

· for cost of compliance purposes it was preferrable for ARA members if taxation requirements were to be aligned to the accounting standards in order that retailers were only required to prepare one set of accounts in line with one of the stated objectives of the Ralph Review.

a. While the Philip Morris case (manufacturer) and the Kurts Development case (land developer) dealt with specific circumstances in the manufacturing and land developing industries the cases considered the application of the trading stock provisions, an issue which covers a significant number of industries.

Both decisions were consistent in the view that valuing trading stock at cost meant the actual cost of the trading stock plus any further costs incurred, both direct and indirect, in getting the trading stock into its then present condition and location. The absorption costing method was considered to be the correct valuation method for trading stock in both cases.

As the courts have endorsed the use of the full absorption costing method for taxation purposes, the Tax Office considers that this is the correct method to be applied when considering the valuation of trading stock at cost across all industries required to value trading stock.

a. The Australian Accounting Standards Board (AASB) was consulted to verify the application of Accounting Standard AASB 1019. The chairman and technical director of AASB 1019 were both consulted and their view was that AASB 1019 should be interpreted to mean that inventories (trading stock) should be valued, for accounting purposes, according to the principles of full absorption costing. This would include all direct and indirect costs in bringing the inventories to their present location and condition. It should be noted that this is the advice given to statutory auditors by the AASB.

In practice, the application of AASB 1019 by statutory auditors does appears to vary significantly, however, this should not compromise the interpretation and correct application of the accounting standard as directed by the AASB.

Meeting discussion

Professional bodies asked if the Tax Office was expecting taxpayers to amend their 2003 income tax returns now the practice statement has been released and, if they do, how will the Tax Office approach penalties and GIC.

Second Commissioner D'Ascenzo noted current litigation in this area, advising the Tax Office would not act until the matter is resolved in the courts. He did suggest, however, it was unlikely culpability penalty would be applied to an amendment, but issues around GIC would need to be considered further.

The Tax Office agreed to look at the issues around amendments to income tax returns as a result of the release of PS LA 2003/13 .

Action item NTLG0403/6: The Tax Office to consider further the issues associated with the issue of PS LA 2003/13 and its impact on those taxpayers who have already lodged 2003 income year tax returns and report to the next meeting.

Secrecy provisions

Directors of companies, which have defaulted in their PAYG withholding tax obligations, can be held to be personally liable for the companies' liabilities. In some cases those directors may no longer be directors of the defaulting companies at the time they are served with the relevant notices and indeed the relationship between those former directors and the continuing directors might be such that the continuing directors are not prepared to divulge information to the former directors as whether the company has made any contribution or may have agreed to pay the PAYG withholding tax amounts.

Recent incidences have been reported where the former directors have sought details from the Tax Office as to how much their liability would be and, in particular, details as to whether the company may have entered into an agreement to pay the outstanding amount to the Tax Office but these former directors have been told the secrecy provisions prevent the Tax Office from disclosing this information to the former directors.

Given that the secrecy provisions governing the collection of income tax (section 3C(3) of the Taxation Administration Act 1953) provide an exception to the divulging of the information in cases where it necessary to do so for the purposes of carrying into effect the provisions of a taxation law, will the Tax Office accept that this exemption should be applied in cases such as this so that at least the former directors know where they stand in relation to the extent of their liability for unpaid PAYG Withholding Tax amounts of companies with which they are no longer involved?

Response:

The Tax Office will respond to the former director's request for information about the origin and extent of their liability. This can include provision of information about the size and date of any payments that were received from other sources and which have, therefore, reduced the extent of the penalty. Where the Tax Office expects to recover the liability as a result of a payment arrangement or some form of recovery action against a person or entity who shares a parallel liability, a former director may be advised the Tax Office does not plan to proceed with recovery action against him or her at this point in time.

Beyond this, it would need to be demonstrated that the release of the information is necessary for the purposes of administering the provisions of taxation law. Provision of specific details of an arrangement with the company or other directors to pay the debt

would not be considered necessary in the sense envisaged by section 3C(3) of the Taxation Administration Act 1953.

Meeting discussion

Professional bodies disagreed with the second paragraph of the response suggesting that in fairness and equity a former director should know what is happening in a case in which they are involved because they will share the burden of financial responsibility.

The Commissioner advised the Tax Office needs to be satisfied that providing the information to the former director makes a difference to their capacity to represent themselves. He agreed to seek counsel's advice on this aspect and report back to the NTLG.

Defences

Although a director (including a former director) can be held liable to pay a penalty equal to the shortfall in any PAYG withholding tax amounts owing by the company to the Tax Office, there are defences available to those directors or former directors.

Would the Tax Office outline its attitude to whether available defences are appropriately considered before proceeding with legal action?

Response:

The Tax Office does take into account the available defences before commencing legal action and whether the facts indicate that a valid defence is available.

Paragraph 14.4.5 of the ATO Receivables Policy provides some guidance for staff who are contemplating recovery action in respect of a director's penalty:

14.4.5 to the extent possible, action to recover will be taken against both the company and the directors concurrently. In this regard, before continuing action against directors personally, the Commissioner will:-

· evaluate the alleged defences of those directors, taking into consideration all relevant documentation and evidence provided by the directors (it would be inappropriate to proceed against a director if it is decided that the director has a valid defence under sections 222AOJ, 222API and/or 222AQD and it would be highly unlikely that a court would make an order in the Commissioner's favour); and/or

· determine which director(s) to pursue. (There would be a number of factors to consider including the ability of the director to pay, the director's right to be indemnified by the company and other directors, the cost effectiveness of the action and similar issues).

Meeting discussion

No meeting discussion.

Company payment allocations

Where a company has (say) failed to remit PAYG withholding tax amounts and also has not paid its income tax liability and then:

· directors' liability notices are issued to former directors, and

· the company pays an undissected payment to the Tax Office.

Would the Tax Office outline its position as to how, and by whom, is the payment to be allocated? In particular, will the Tax

Office permit the former director to make the allocation?

Response:

A former director does not have any right to instruct the Tax Office as to how a payment, made by a company after his or her resignation, should be allocated.

An undissected payment to the Tax Office will be allocated in accordance with Chapter 7 of the ATO Receivables Policy:Allocation of Payments and Credits.

In line with the order of allocation outlined at paragraphs 7.6.1 and following, the Tax Office will allocate a payment towards a PAYG withholding obligation where there is a clear indication that the payment received has been made with this intention.

Where there is no clear instruction or obvious intention regarding allocation, the Tax Office will apply the payment to superannuation guarantee debts followed by PAYE and amounts due under the former legislation. If any amount remains available after this, it will then be applied to amounts outstanding and relating to Business activity statements according to the earliest due date.

Where the component tax debts have the same due date, then in the following order of allocation:

· net amount for GST

· fringe benefits instalments

· pay as you go withholding

and other identified amounts after this as outlined at paragraph 7.6.1.

Meeting discussion

No meeting discussion.

15. Notices of objection

It is standard practice of the Tax Office to issue letters advising taxpayers or their agents that notices of objection have been received and with those letters containing a statement that it is the Tax Office's obligation under the Taxpayers' Charter to determine those objections within 56 days (except where the Tax Office requires further information).

It is sometimes the case that these letters of acknowledgment do not issue until close to (an even in some cases after) the 56 day expiry period.

Would the Tax Office please advise whether it is aware of any problems involved in acknowledging receipt of objections?

Response:

It is usual practice for the Tax Office to acknowledge receipt of notices of objection. The form and timing, however, may differ depending on the circumstances of the case.

The Tax Office's overarching aim is to make the initial contact as meaningful as possible.

For instance, where the acknowledgement is by letter, in addition to recognising receipt, the letter carries details, including

contact number, of the officer assigned to the case. Sometimes acknowledgement will be done by telephone and similar information provided.

In other situations where a quick examination of the details of the case determines that further information is needed, it is considered more timely from the client's perspective, to combine acknowledgement with the request for this information.

Finally, where the objection is able to be resolved quickly the first contact may be the notice of decision.

These 'value add' processes cannot occur as quickly as an automatic response which may simply say the Tax Office has received the notice of objection, but not contain information that may give the client some comfort that it has been allocated to an officer capable of addressing the issue.

Recently the Tax Office has commenced a review of the processes surrounding the production of private rulings and objections with a view to improve the timeliness of responses to clients, building on the improvements to processes already made, especially to the former. The manner and timeliness of contact with clients, including tax agents, is an aspect of this review.

Meeting discussion

Professional bodies expanded discussion on the issue of objections to include the form of objections and content of those objections. They noted that while Taxation Administration Act provided that objections be in the approved form, the Tax Office had prepared a draft practice statement advising that any form is acceptable so long as it contains the necessary information. Professional bodies noted this included that statements made in the objection are true and correct.

Professional bodies noted that objection arguments are arguments of law presented as a range of arguments and may not necessarily be statements that are true and correct. They also expressed concern over action the Tax Office may have already taken prosecution action over statements made in taxpayer's objections.

Professional bodies sought to clarify:

· the Tax Office's requirements for statements made in taxpayer's objections

· attitude of the Tax Office to arguments presented in objections, that is, could a taxpayer be ultimately prosecuted over those statements

· the current status of the practice statement.

Professional bodies agreed to provide additional information giving specific details of their concerns with the draft practice statement and the Tax Office approach.

16. Business activity statements

There is a section on the BAS for the taxpayer to advise the Tax Office of the preparation and completion time for the BAS. Now that three years has expired, would the Tax Office provide a report on the statistics gathered from section, including an indication of:

i. Who is completing this section?

Response:

Of the respondents completing the section

Property/Business Services	23.09%
Construction	12.33%
Finance/Insurance	10.91%
Primary producers	9.63%
Retail	9.15%
Manufacturing	5.7%
Health/community Services	5.1%
ii. The average time taken to complete a BAS?
Response:
Quarterly activity statement	3.56 hours (quarter one 2003-04)
Monthly activity statement	1.97 hours (January 2004)

iii. The percentage of cases where taxpayers have not completed this section or provided this information to the Tax Office; and

Response:

77% do not complete this section (quarter one 2003-04) the trends emerging from this information?

iv. The trends emerging from this information?

Response:

· the time taken to complete quarterly activity statements is trending downwards.

· average time taken in quarter one 2001-02 was 3.81 hours compared with quarter one 2003-04 of 3.56 hours.

· of note, quarter one statements were not noted as taking any longer than other forms, even though clients needed to make an election on which option to use.

· less people are completing this label over time.

Meeting discussion

No meeting discussion.

17. Small business CGT relief

This matter has been raised at prior NTLG meetings, most recently at the meetings of 2 September 2003 (item 8) and 3 December 2003 (item 16). A new issue has arisen as a result of Senator Coonan's announcement of 16 October 2003.

Prior to the Senator's announcement taxpayers were amending their discretionary trust deeds to restrict the trustee's power to make distributions to certain beneficiaries so that the maximum net asset value test would be passed.

Generally the trustee's power to distribute income or capital was restricted so that the maximum amount of income or capital the trustee could distribute to a particular beneficiary was 39% of the trust's income or capital. The Tax Office indicated in its response to item 8(f) of the 2 September 2003 NTLG meeting that such amendments are unlikely to constitute a resettlement of the trust. Many new discretionary trusts that were established had similar restrictions in the trust deed.

As the control test for discretionary trusts is to be amended with effect from 21 September 1999, many taxpayers are wishing to amend their discretionary trust deeds again or, if it is a newly established discretionary trust, amend their new restricted discretionary trust deed so that it is no longer restricted. In particular they wish to amend the deed so that rather than the trustee being limited to distributing no more than 39% of the income or capital to a particular beneficiary the trustee can distribute as much income or capital as it wishes to such beneficiaries. Please note taxpayers are not wishing to add new beneficiaries to the trust.

If such an amendment were made would the Tax Office:

a. treat this as a trust resettlement for tax purposes?

b. apply Part IVA ?

Response:

Although each case would need to be considered on its merits, it would generally be expected the prospective removal of a cap on the level of distributions that can be made to particular beneficiaries of a discretionary trust, where the cap was imposed to enable the maximum net asset value test to be satisfied, will not cause a resettlement of the trust.

Decisions on Part IVA generally turn on the particular facts of a scheme, so that exact implications could only be identified on full examination of an actual case. In the circumstances referred to in the question and, in the absence of any other concerns with the arrangement, the proposed amendments are unlikely to constitute a scheme to which Part IVA would apply.

Meeting discussion

No meeting discussion.

18. NTLG work program

18.1. Action items from previous meeting

Action item NTLG0312/1 : Treasury to provide the NTLG with a list of announced measures not yet enacted in law.

Status: Treasury is still considering whether it will be possible to place some relevant material on the departmental website.

Meeting discussion

No further progress has been made.

Action item NTLG0403/9: An update on whether Treasury is able to provide the NTLG with a list of announced measures not yet enacted in law to be provided to the next meeting.

Action item NTLG0312/2: The Tax Office to initiate a subgroup of NTLG members to consult on preparation of proposed ruling regarding service trusts.

Status: An email issued to NTLG members asking for nominations to form a sub group of the NTLG to consult with the Tax Office on the proposed ruling on service trusts. Membership of the sub group is yet to be finalised.

Meeting discussion

Refer to discussion at agenda item 4 Tax Office service trust project .

Action item NTLG0312/3: The Technical Issues Management Subcommittee to put forward a proposal regarding use of the

Commissioner's general administration power to facilitate practical application of the law having regard to compliance costs.

Status: This proposal was discussed at the Technical Issues Management Subcommittee on 24 February 2004. The discussion recognised the fact that, under the current administrative arrangements, there are examples of the use of the Commissioner's general administration power.

Following the discussion, it was agreed the Tax Office would, in consultation with committee members, develop a paper for NTLG consideration which would cover different aspects including:

· design principles/criteria to enable consideration of issues

· approaches to identify, manage and prioritise issues which could be considered within the general administration power

· community consultation in relation to the delivery mechanisms to communicate the Commissioner's decisions. This work has already commenced.

Action item NTLG0312/4: The Tax Office to contact the NTLG members to initiate arrangements for the further development of access to ATO IDs.

Status: The Tax Office is about to commence external client consultation on the design of the Legal Database which is the system which provides access to ATO Interpretative Decisions. NTLG members' involvement in this process would be welcomed. Members should nominate their interest with Lyn Binns (02) 6216 1480 or lyn.bins@ato.gov.au.

Substantial improvements to the Legal Database search functionality have already been implemented and a new function to retrieve an ATO ID by reference number is now available.

For details of the proposed enhancements, subject to client feedback, please contact PALU .

Professional bodies also noted accounting standards covering expectations in relation to clients, however, Second Commissioner D'Ascenzo was concerned smaller practices will have difficulty keeping up and suggested professional associations with some assistance from the Tax Office, could provide some guidance in relation to what is good practice.

Action item NTLG0312/5: The Tax Office to provide the link to the public ruling topic list to NTLG members when available. Status: The link to the Public Rulings Program was provided to members.

Meeting discussion

No meeting discussion.

Action item NTLG0312/6: NTLG members to advise the Tax Office how often they require an update on the Public Ruling topic list.

Status: The professional bodies have not yet advised the Tax Office of their requirements.

Meeting discussion

No meeting discussion.

Action item NTLG0312/7: The Tax Office agreed to consider segmenting the document and distributing accordingly.

Status: The Tax Office is undertaking the review on a chapter basis. As chapter reviews may not be completed sequentially, they may not be able to be forwarded to the professional bodies for comment individually.

Meeting discussion

Refer to discussion at agenda item 3: Tax Office's Access and Information Gathering Manual.

Action item NTLG03012/8: The Tax Office to arrange for Erin Holland to contact Neil Earle to discuss debt collection. Status: A meeting has been arranged between Erin Holland (Deputy Commissioner, Operations) and Neil Earle (TIA).

Meeting discussion

No meeting discussion.

Action item NTLG0312/9: The Commissioner advised the Tax Office will include guidelines in the Deed of Settlement to deal with situations where interest on overpayments is to be paid or foregone.

Status: The Tax Office is currently examining the content of the model Deed to ensure that it adequately reflects relevant areas of the Code of Settlement Practice, including interest on overpayment. The revised model Deed is planned to be released by 30 June 2004 to allow appropriate consultation to occur.

Meeting discussion

No meeting discussion.

Action item NTLG0312/10: The Tax Office to confirm requirements for advice to taxpayers and how that advice will be provided.

Status: The usual practice is for the taxpayer and/or their agent to be advised, preferably by phone, once a pre-assessment review case has reached 14 days since lodgment of the return. Once action has commenced to finalise the case the taxpayer and/or their agent will only be contacted where additional information is required to complete the review. Again this contact would preferably be made by phone.

Meeting discussion

No meeting discussion.

Action item NTLG0312/11: The Tax Office will publicise its approach for handling unlegislated measures. Status: The "map" will be publicised as discussed at action item 15 .

The key to this work is the Tax Office's ability to give taxpayers certainty by communicating expectations in relation to their compliance with relevant measures. To date, this has generally been achieved by direct communication with taxpayers affected.

Meeting discussion

No meeting discussion.

Action item NTLG0312/12: Professional bodies sought to have the following action item raised from the 3 December meeting:

Status: Action item NTLG0312/12: The Tax Office to report to the NTLG on progress of work preparing guidance material in relation to Division 7A and shareholder loan agreements.

This action item will be reported at the 17 June 2004 NTLG meeting.

Meeting discussion

No meeting discussion.

Action item NTLG0312/13: The Tax Office will advise the professional associations what advice they can provide to tax agents who are dissatisfied with the contact they have with an auditor or relationship manager.

Status: Advice on a similar question was recently provided to the ATPF, a copy of which can be provided to members. A formal, publicised Tax Office complaints mechanism , over and above the relationship manager and audit programs, exists to deal with situations where an agent is dissatisfied with contact they have had with Tax Office staff.

Meeting discussion

No meeting discussion.

Action item NTLG0312/14: The professional bodies to provide information for inclusion in a revised NTLG Charter.

Status: Professional bodies have not yet provided their comments or additional information to PALU. This can be forwarded to PALU.

Meeting discussion

No meeting discussion.

Action item NTLG0312/15: The Tax Office to arrange placement of the process map onto the Tax Office website and provide the NTLG members with the direct link.

Status: The map represents an attachment to a larger document which summarises the legal framework within which the taxation laws are administered and provides an explanation (user guide) of the terminology/concepts used in the map. The purpose of the package is to explain the Tax Office's processes in considering the most suitable approach to be advised to taxpayers in relation to legislative measures which will have a retrospective application date once the enabling law is enacted.

Once the package is completed and 'communicated' within the Tax Office, the intention is to provide a direct link for external stakeholders.

Meeting discussion

No meeting discussion.

Action item NTLG0309/16: The professional bodies provide their view of aggressive tax planning, as opposed to tax planning. Status: The Tax Office has not yet received advice from the professional bodies. Any advice can be forwarded to PALU .

Meeting discussion

No meeting discussion.

Action item NTLG0309/17: The Tax Office to provide NTLG members with the outcomes of issues discussed at the Research Steering Committee meeting.

Status: NTLG members are advised that all professional bodies are represented on the Research Steering Committee (RSC). The Tax Office will be jointly undertaking a review of the RSC (with professional bodies) in relation to its future and reporting role to the ATPF. The ATPF will be advised of the outcomes of this review.

Meeting discussion

No meeting discussion.

Action item NTLG0312/18: Professional bodies sought to have the following action item raised from the 3 December meeting: Status: Action item NTLG0312/18: The Tax Office to provide its views on when debts become statute barred when finalised. This action item will be reported at the 17 June 2004 NTLG meeting.

Meeting discussion

No meeting discussion.

Action item NTLG0312/19: Tax Office (GST) to contact Michael Dirkis (TIA) to discuss the issues raised around denial of GST credits where the supplier is unregistered but the taxpayer is not aware of the supplier's status.

Status: The Tax Office has contacted Mr Dirkis to discuss the issues raised. The discussions are continuing.

Meeting discussion

No meeting discussion.

18.2. ATO / Tax Practitioner Forum (ATPF)

Meeting held on 27 February 2004 . Next meeting scheduled for 21 May 2004 .

Significant issues discussed:

· • Verification process – Members were concerned about the amount of time and types of documentation required for verification processes, particularly for activity statements. The Tax Office needs to be able to substantiate claims prior to refunds issuing and each case is treated depending on its related circumstances. The Tax Office agreed to publish some further guidelines for practitioners but noted there is always a changing pattern of risk assessment so the guidelines will be very broad. This issue will also become a standing item on the agenda.

· • Strategic framework – The ATPF agreed in principle to the proposed strategic framework with two amendments to include transparency and right of review. An implementation working group will be established to take the framework to the next step.

· • SMSF benchmark project – The Tax Office presented a summary of the findings on the SMSF benchmark project. There was discussion on sole purpose test, auditor independence, separation of assets and in house asset breaches. The Tax Office is trying hard to educate those involved in SMSF's and will be increasing active compliance in this area.

· • Information received by tax practitioners – This is one of the ICAA administrative bugbears the Tax Office is trying to resolve. The subject matter is very broad and cannot be resolved immediately. Further information and examples have been requested. This information will be provided to the Change Program Advisory Group for prioritisation and resolution. The use of Correspondence Preferencing (CP) system was also discussed. The Tax Office will review the CP system and identified problems to be worked through by the Access and Authority Working Group .

Other issues discussed included:

· update on the tax practitioner re-registration project and personal integrity (to be a standing item on the agenda)

· update on the accountant data matching project (to be a standing item on the agenda)

· key findings from the December 2003 tax agent perception of service survey (future survey results to be a standing item on the agenda)

· Payne's case and the proposed amendment to the law being the perceived opposite of what practitioners expected.

Meeting discussion

No meeting discussion.

18.3. Consolidations Subcommittee

Meetings: Members had a phone hook-up on 16 December 2003 The next meeting is planned for early April 2004.

Summary of significant issues discussed:

a. On 4 December 2003 the Minister issued a media release which was accompanied by a Commissioner of Taxation media release and position papers being published on the Treasury website. These were discussed in depth during the phone hook-up and members agreed that there is now sufficient certainty in the legislation to allow taxpayers contemplating entering consolidation to lodge returns.

b. Members from the ICAA, TIA and CPA organisations agreed to support a Tax Office initiative to jointly host workshop sessions for SMEs and their advisors. Four workshops have now been held in Sydney and Melbourne. More are scheduled for other cities plus Sydney and Melbourne again. More than 500 advisors have attended sessions so far. A DVD is being compiled to provide information to interested people who are not able to attend the workshops in the capital cities.

Other matters:

The composition of the subcommittee is being reviewed and each of the professional organisations represented on the subcommittee has been asked to nominate three members. A review of consultative arrangements is listed for discussion at our next meeting.

Meeting discussion

No meeting discussion.

18.4. Finance and Investment Subcommittee

Meetings: NTLG Finance and Investment Subcommittee met on 10 February 2004, next meeting planned for 10 August 2004. Forex Working Party meeting held on 18 February 2004, next meeting planned for 28 April 2004.

Summary of significant issues discussed:

Debt/equity and at-call loans

Under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997) certain at-call loans (loan that do not have a fixed term, are repayable on demand and do not pay a market rate of interest) would be classified as an equity interest rather than a debt interest.

The outcome of this would be that distributions would be frankable rather than deductible and the issuer would be required to maintain a non-share capital account. Division 974 contains a provision that allows at-call loans to continue to be treated as a debt interest until 31 December 2003.

On 16 December 2002, the Minister for Revenue and Assistant Treasurer issued a media release (C131/02) that would allow the debt treatment to continue in relation to at-call loans until 30 June 2004 and that the measure dealing with at-call loans would be reviewed in consultation with industry.

To date no consultation has taken place. The question of what is the progress of the review and whether a carve-out is proposed for small/medium enterprises has been raised in each of our two sub-committee meetings.

Treasury has been present at both meetings and has advised that they recognise this as a priority issue and subject to the decision by the Minister on the timing and the extent of any consultation, the plan is for the release of a discussion paper as soon as practicable.

CGT event D1 and RPS

The New Business Tax System (Debt and Equity) Act 2001 ("the Debt Equity Act") amended the operation of the capital gains tax provisions on introduction of the new debt equity rules. One of the amendments resulted in paragraph 104-35(5)(c) of the ITAA 1997 being amended to substitute the term "shares" for "equity interests". The consequences of this are that CGT event D1 would not arise in respect of equity interests issued or allotted. Legal form shares which might give rise to a debt interest (non-share equity interest) are excluded from the in paragraph 104-35(5)(c) exception. This would not preserve the former treatment of shares under paragraph 104-35(5)(c) . One potential interpretive solution canvassed, is that, because the debt/equity provisions have effect from 1 July 2001, then the amendment should relate to "equity interests" issued or allotted after that date. Support for this solution is sought from an analysis of the application provisions in Taxation Laws Amendment (Company Law Review) Act 1998 which appear to allow the provisions of the Income Tax Assessment Act 1936 which related to share premium account continue to apply, in their unamended form.

Our stated view has been that the debt/equity measures repealed the relevant former language of subsection 104-35 and replaced it with new language, and the old language cannot be considered to remain in operation. We believe the situation under the Taxation Laws Amendment (Company Law Review) Act 1998 ("the Company Law Review Act") is materially different. The form of the changes to the statutory language differs considerably from that in the Debt Equity Act, and there is no accompanying statement in the relevant explanatory memorandum that the previous law is to continue unaltered. For these reasons, we think that a legislative solution is required to achieve a proper policy outcome.

At our last meeting it was accepted that legislative solution would appear to be the appropriate outcome and we were in the process of sending Treasury a formal Tax Office minute recommending appropriate legislative amendment, with effect from 1 July 2001. Treasury has been aware of the issue and has it on its priority list. On 5 March 2004, the Tax Office's Revenue Analysis branch responded to a Treasury costing request confirming that any amendment "will correct the debt/equity legislation and prevent unintentional gains to the revenue". Since our last meeting another interpretive solution has been forwarded by the Law Council of Australia (LCA). We will be reviewing this proposal and if an interpretive solution cannot be found we will forward our minute to Treasury.

Franking deficit tax legislation

This issue is seeking from the Tax Office guidance on the application of the transitional provisions to the FDT offset rules introduced by Taxation Laws Amendment Bill (No.8) 2003 . It is stated that the explanatory memorandum to the bill inadequate. We have advised that we have published two fact sheets to explain the operation of the franking deficit tax offset rules (Simplified imputation system: Franking deficit tax offset; Simplified imputation system: Franking deficit tax offset for late balancers). We have also provided a direct contact to our centre to ensure that key priority matters, as and when identified, are dealt with by the appropriate interpretive products.

Foreign exchange (forex) gains and losses

There are various issues that fall within this sub-category. All the issues raised have been included in an issues register which sets out the issues that the Tax Office has been provided and will give consideration to once their priorities are established.

Some of the identified priorities include the administrative mechanics and technical issues associated with the functional currency rules, whether forex gains are statutory or ordinary income for PAYG purposes, bank accounts, character of a foreign currency hedge of non-assessable non-exempt income. Each of these issues is dealt with briefly under each of the sub-headings set out below.

Functional currency

Various issues are associated with the administration of functional currency including whether functional currency is effective to determine PAYG instalments and withholding obligations, can functional currency be used to calculate FBT and GST liabilities. These issues are currently being dealt with through the Forex Working Party and the Tax Office position on these matters will be reflected in the functional currency guide. Some of the interpretive issues being dealt with or have been referred for policy consideration are reflected in the issues register.

PAYG and Forex

Industry is seeking to determine whether the apparent past Tax Office practice of allowing forex gains to be treated as ordinary income rather than statutory income would be available under the newly enacted forex measures. Under the new measures, forex gains can be either statutory or ordinary income (this was much the same under the old law but for the apparent practice granted to treat the all forex gains as ordinary income). It is understood that this apparent practice was allowed to ensure that business would not have to change their systems to any significant extent and in recognition that the issue was one of timing (short term timing). The Tax Office members of the Forex Working Party are currently liaising with PAYG in an attempt to resolve the matter.

Forex bank accounts

The Tax Office is currently working on a number of issues dealing with forex bank accounts. Those issues are reflected in the issues register but principally concern whether pre-existing bank accounts fall under the new forex measures, whether bank accounts can be private or domestic in nature, whether the bank account elections designed as a compliance cost savings measure, need to be made by the beneficiary or custodian of a bank account – in the latter case one of the elections (the limited balance $250,000 election) might not be available. Once a Tax Office position is established it will be communicated via the appropriate interpretive product.

Hedges of non-assessable non-exempt income flows

The issue involves the hedging of foreign currency amounts that are non-assessable non-exempt income amounts and whether the hedge takes on a non-assessable non-exempt character. The Tax Office's preliminary view is that while case law suggests that the nature of the underlying transaction might assist in characterising a hedge as either on capital or revenue account, it does not appear to extend the characterisation to the type of income - either non-assessable non-exempt income, exempt income or otherwise. In addition, under the forex rules there is a legislative requirement that only those gains or losses that are made in gaining or producing non-assessable non-exempt income are treated as if they were of a non-assessable non-exempt nature. The Tax Office's preliminary view is that the non-assessable non-exempt income would still be produced regardless of the existence of the hedge.

Other matters:

Consolidation and Finance and Investment: interaction of issues

Due to the number of issues raised either at the consolidation NTLG Subcommittee and this subcommittee, external members have asked that consideration be given to establishing a joint working party involving members of the Consolidation and Finance and Investment Subcommittees.

Meeting discussion

No meeting discussion.

18.5. Fringe Benefits Tax Subcommittee

Meetings: 20 November 2003 and 19 February 2004 .

Summary of significant issues discussed at the November meeting:

A special meeting of the FBT sub-committee was held on 23 October 2003 to discuss the progress of issues arising from Taxation Determination TD 1999/D28. As a result of the meeting two submissions were received and forwarded to the Public Rulings Panel.

Problems identified by the ICAA and CPAA with the calculation of the general interest charge (GIC). The Tax Office advised that some system problems relating to the issues raised have been identified and work is in progress to design and implement changes. "Workarounds" have been put in place in the meantime to ensure that errors are eliminated. In the medium term, through its Change Program, the Tax Office will be significantly upgrading and enhancing its basic processing platform. FBT cases with 2002 year lodgment penalty issues will be reviewed on an individual basis and can be referred to GPO Box 999 Perth WA 6000.

Other issues clarified by the Tax Office at the meeting:

· Recipient's payments and car wash expense - what documents could satisfy the conditions of "documentary evidence" as defined in section 136(1) of the FBTAA where a car wash expense is less than $10 or a car wash operator does not provide receipts.

· Section 58Q FBTAA - Exempt benefits – Long service awards – whether contributions made by fellow employees/work colleagues should be taken into account where the employer has to have regard to the value of the benefit provided for the purposes of ascertaining whether the exemption in section 58Q can be relied on or not.

· the application of the exemption in 58F of the FBTAA for relocation transport expenses where the conditions set out in section 143A are satisfied.

FBT treatment post the appeal in Central Bayside Division of General Practice Ltd v Commission of State Revenue - suggestions that the Tax Office treatment of such bodies has been inconsistent. The Tax Office confirmed that pending the outcome of the further appeal against the Supreme Court decision, these bodies will continue to be accepted as charitable up to 31 March 2005. Members were invited to submit any cases where inconsistent treatment has been given.

Meeting discussion

No meeting discussion.

18.6. Losses and Capital Gains Tax Subcommittee

The subcommittee has not met since the last NTLG meeting. The next meeting is scheduled for Wednesday 9 June 2004 in Sydney.

Meeting discussion

No meeting discussion.

18.7. Superannuation Industry Liaison Group

The Superannuation Industry Liaison Group met on 4 December 2004 with the next meeting planned for 26 March 2004.

Summary of significant issues discussed:

· superannuation surcharge issues including assessments

· superannuation guarantee including quarterly requirements and voucher automation

· new policy matters including co-contributions – implementation and relationship with super guarantee.

Other matters:

SMSF compliance framework and the Tax Office are re-balancing of compliance strategies.

Meeting discussion

No meeting discussion.

18.8. GST Technical Subcommittee

The subcommittee met on 24 February 2004, with the next meeting planned for 18 May 2004.

Summary of significant issues discussed at February forum:

· Managed investment scheme and partnerships: Are managed investment schemes considered to be GST partnerships where income is pooled and received jointly and expenses are also pooled (shared jointly)?

· GST status of export of goods after 60 days: Members have requested that the Tax Office provide clearer guidelines and examples of when the Commissioner will exercise his discretion to extend the export of goods after 60 days under section 38-185 of the GST Act.

· WET credits: A previously issued ATO Interpretative Decision provided that a retailer who could not prove the amount of WET that was paid on wine that was exported would not be allowed a WET credit. Members ask the Tax Office to review this position and provide a credit of 7.5% of the purchase price in circumstances where the wine is exported and the amount of WET cannot be proved as the wine was purchased from an unregistered person. On analysis of this submission the Tax Office reviewed its position, allowing a 7.5% WET credit in these circumstances. New ATO IDs were released to reflect the new view.

· WET 2002/2 and the definition of "mead": Some entities produce mead in a way that does not meet the definition as provided in WET legislation. This results in these products becoming subject to the excise tax regime rather than WET.

· Goods and Services Tax Ruling GSTR 2003/13, Partnerships and input tax credits: Will an invoice with only one partner's name on it meet the tax invoice information requirements where all other things required by GST legislation are included on the invoice.

Other matters discussed in the February forum:

· members were provided an overview of the Tax Office Test Case Litigation Program

· members were advised the Tax Office is currently reviewing the content of published GST industry issue registers with a view to replacing it with another product. It is likely that the Tax Office will no longer update GST industry issue registers. Members were asked to provide feedback on this matter.

Members were advised of the introduction to Parliament of Taxation Laws Amendments (2004 Measures No. 1) Bill 2004 on 19 February 2004. This Bill amends the ITAA 1997ITAA 1997 to ensure that GST input tax credits are excluded from the cost base, reduced cost base and other relevant amounts used for the purposes of working out the amount of a capital gain or capital loss. For CGT events that happen between 1 July 2000 and before 20 February 2004, taxpayers who make a gain on the disposal of a CGT asset can include GST input tax credits in the fourth and fifth elements of the cost base of the asset. Similarly taxpayers who make a loss on the disposal of a CGT asset can include GST input tax credits in all elements of the reduced cost base of the asset.

Meeting discussion

No meeting discussion.

18.9. Technical Issues Management Subcommittee

The subcommittee met on 24 February 2004 , with the next meeting planned for 9 June 2004 . Summary of significant issues discussed:

Extra statutory concessions: Background information and examples were provided to committee members by the Tax Office regarding the situation in other countries including the UK where ESCs are formalised. The meeting discussion recognised the fact that in Australia, while there is no formal process, under the current administrative arrangements there are examples of the use of the Commissioner's general administration power.

The starting position is that the Parliament makes the law. The Commissioner can use his general power of administration to administer the law. In using the general administration powers there are various principles/criteria to be considered including:

· what is the intent of the legislation?

· is there avoidance involved?

· what are the compliance implications for both taxpayers and the Tax Office – does the proposed outcome reflect industry practice

· will it have an adverse effect on third parties? and,

· revenue implications – is the outcome proposed concessionary, or does it impose extra obligations?

· what "vehicle" should be used to communicate decisions – the formal UK system and our current practice statement approach were discussed.

Following the discussion, it was agreed that the Tax Office would, in consultation with committee members, develop a paper for NTLG consideration which would cover different aspects including:

· design principles/criteria to enable consideration of issues

· approaches to identify, manage and prioritise issues which could be considered within the general administration power

· community consultation in relation to the delivery mechanisms to communicate the Commissioner's decisions. This work has commenced.

Other matters:

· update on the family trust election issue. A "very useful" meeting of NTLG members was held on 20 February 2004. The Tax Office is working on a paper documenting options.

· update provided on the technical issues register.

Meeting discussion

No meeting discussion.

18.10. Transfer Pricing Subcommittee

The Transfer Pricing Subcommittee has not met since the last NTLG meeting.

Meeting discussion

No meeting discussion.

18.11. Indirect Tax Rulings Panel

During the period 1 December 2003 to 29 February 2004, the Indirect Taxes Rulings Panel has convened on two occasions. Meeting – 11-12 December 2003

At the meeting held on 11 and 12 December 2003, the panel considered and provided advice on:

· a proposed draft GST ruling on retirement villages

· an issues paper and proposed draft GST ruling on Division 132 of the GST Act

· an issues paper and proposed draft product grant and benefit ruling on forestry operations and,

· an issues paper and proposed draft product grant and benefit ruling on fishing operations. Meeting – 21 January 2004

At the meeting held on 21 January 2004, the panel considered and provided advice on:

· an issues paper on Division 11 of the GST Act and proposed changes to Goods and Services Tax Ruling GSTR 2000/22 (determining the extent of creditable purpose for providers of financial supplies).

The panel did not convene in February, however during the reporting period, the panel considered the following topics "out of session":

· a draft product grant and benefit ruling on agriculture

· a draft miscellaneous tax ruling on enterprise (proposed rewrite of MT 2000/1 )

· a proposed addendum to Goods and Services Tax Ruling GSTR 2003/5: vouchers

· a proposed GST ruling on reduced credit acquisitions and a related addendum to Goods and Services Tax Ruling GSTR 2002/2

· as GSTR 2004/1 together with an addendum to GSTR 2002/2 on 25 February 2004)

· a draft PGBR on fishing operations

· as PGBR 2004 /D1 on 25 February 2004)

· a GSTD on the waiver of tax invoice and adjustment notice requirements

· as GSTD 2004/1 on 3 March 2004)

· a proposed draft GST ruling on fuel cards

· a proposed GST ruling and three GST determinations on joint ventures

· a proposed draft GST ruling on retirement villages, and

· a proposed draft GST ruling on residential care and accommodation.

These proposed public rulings had previously been considered by the panel "in session". They were circulated out of session during the period to clarify with panel members that recommendations made in session had been captured.

Summary of significant issues discussed:

· consideration of a draft GST ruling on retirement villages

The panel examined several issues in relation to this topic, such as determining the correct GST treatment of supplies of independent living units and serviced apartments.

· consideration of an issues paper and draft GST ruling on Division 132 of the GST Act

The panel considered issues such as whether an item acquired for private or domestic purposes could nevertheless be sold in the course or furtherance of an enterprise and how Division 132 of the GST Act applies where there is no entitlement to input tax credits on acquisitions for reasons other than non-creditable purposes.

· consideration of an issues paper and draft PGBR on forestry operations

The panel discussed whether forestry activities need to be carried on in the course of the business of forestry to qualify for the fuel rebate, or whether activities carried out for environmental or conservationist purposes qualified as well.

· consideration of an issues paper and draft PGBR on fishing operations

The panel examined a number of questions in relation to this topic, including whether the rebate was restricted only to commercial fishing activities, or also extended to educational and scientific purposes. The panel also discussed how the rebate should be applied to operators who carry on other non-fishing activities at the same location.

The ruling issued in draft form on 25 February 2004 as PGBR 2004 /D1 .

· consideration of an issues paper on Division 11 and GSTR 2000/22

The panel considered whether or not GST Rulings GSTR 2000/22 and GSTR 2000/15 should be amended to clarify what methodology can be used in determining an entity's extent of creditable purpose. The panel agreed that the rulings could benefit from some refinements.

Meeting discussion

No meeting discussion.

18.12. International Tax Rulings Panel

International Tax Rulings Panel (ITRP) Meetings:

The scheduled December 2003 meeting was cancelled. The ITRP next met on 5 February 2004 in Sydney. The 24 March 2004

meeting was postponed to 31 March 2004 back to back with the 6 April 2004 meeting. Next meeting:

The next ITRP meeting will be held on 31 March – 1 April 2004 in Sydney. Summary of significant issues discussed (at meetings during period): February 2004 meeting.

Issue 1:

Final TR on Foreign Life Assurance Policies (Taxation Ruling TR 2003/D10 ) was discussed and cleared by the ITRP with some suggestions.

Issue 2:

Discussion of the proposed issue on the tax consequences of Royalty Withholding Tax Indemnifications. Other issues:

Progress report on various draft rulings and determinations.

Meeting discussion

No meeting discussion.

18.13. Public Rulings Panel

The Public Rulings Panel have met twice in 2004. The first panel meeting for the year was held on 3 and 4 February 2004 (referred to as the January panel). The other was held on 26 and 27 February 2004. The next meeting will be held in Sydney on 25 March 2004.

Summary of significant issues discussed: Issue 1:

The Consumer Loyalty Program issue in Taxation Determination TD 1999/D28 is now to be addressed in a Law Administration Practice Statement (LAPS). The LAPS directs that where a reward (other than a flight reward), received under a consumer loyalty program that results from business expenditure, that may be subject to income tax or fringe benefits tax should be referred to a senior technical leader for review. This issue has been before the public rulings panel on a number of occassions. The panel recommended at the last meeting that the team revise a number of the examples in the LAPS and present it to the Tax Office Executive.

Issue 2:

A taxation determination on Public Unit Trusts is being prepared to deal with the application of Division 6C. The question being answered is: "Is a trustee of a public unit trust 'investing in land for the purpose, or primarily for the purpose, of deriving rent' under section 102M of the Income Tax Assessment Act 1936 if a part of the 'rent' is payable only if an agreed level of economic performance is achieved by another entity?" The panel agreed with the outcome but suggested there was no one approach which can satisfy these arrangements. On this basis the relevant business line should formally advise Treasury and provide a costing of these arrangements. It was also recommended that the team prepare a law administration practice statement for Tax Office staff.

Issue 3:

Am I carrying on a business as a professional artist is a ruling that provides guidance on when a taxpayer is carrying on a business as a professional artist. The panel addressed this issue at the February panel meeting in light of the Hart and Stone decisions. In the case of Stone, regarding a professional athlete, the Full Federal Court gave weight to the lack of profit motive in concluding that no business was being carried on. At the time of the panel meeting Treasury had not been consulted although a copy of the draft ruling had been provided to the Department of Communication, Information Technology and the Arts. The team had also consulted extensively with various stakeholders, including art bodies. The panel recommended some changes and requested that the revised version of the ruling be circulated to panel members out of session.

Issue 4:

The panel discussed the question of whether a particular transfer constitutes a gift in the context of tax deductibility of gifts under Division 30 ITAA 1997 as well as whether a particular transfer to a non-profit organisation is "consideration for a supply" for GST purposes. Although there are a number of rulings and determinations which discuss particular arrangements and whether, in the opinion of the Tax Office they constitute gifts, it was felt that there was a need for the publication of a comprehensive explanation of the Tax Office view of what constitutes a gift. The panel made a number of recommendations in regard to the content of the ruling and asked that the team include reference to the original policy intent behind the gifts legislation.

Issue 5:

Residential rental properties was previously before the panel in December 2003. The team have produced a list showing the relevant division under which a deduction may be available for capital expenditure on assets associated with residential rental properties (either Div 40 (for depreciating assets) or Div 43 (for capital works) of the ITAA 1997ITAA 1997). The list is being published to provide clarity and certainty about the deductions that are available for certain expenditure in relation to rental properties. This list will be published in the Rental Property Guide and as such will be available to residential rental property owners, tax professionals, quantity surveyors and Tax Office staff. The panel addressed each item on the list individually and recommended that the discussion paper on this area of the law (accompanying the list which was written for panel purposes only), be published as a draft ruling.

Other matters:

The ANAO is currently undertaking a follow up review of its report on the rulings systems, including the public rulings panel processes. The secretariat of both the Public Rulings Panels and Indirect Taxes Panel have been working closely with the ANAO, providing material in regard to the timing and costing of public rulings as presented to the panel. The members of the Public Rulings Panel met with the ANAO representative at the February 2004 panel meeting where feedback was provided on timeliness, efficiency and effectiveness of rulings and the panel process.

Meeting discussion

No meeting discussion.

18.14. Test Case Litigation Panel

The Test Case Litigation Panel met on 2 December 2003. There has been no date set for the next meeting. Summary of significant issues discussed:

The Test Case Litigation Panel considered six applications for test case funding. The panel recommended that funding be declined in respect of all six applications, but that if two of the applicants provided further information, their submissions would be reconsidered. The chairperson of the panel accepted five of the six recommendations of the panel and the applicants have been informed of the decision. One application is still being considered and a decision has not yet been made.

Other matters:

The location of the secretariat and the chairperson of the panel has moved from Canberra to Sydney. The chairperson of the panel has changed from the Tax Office Solicitor to the Senior Tax Counsel, Strategic Litigation.

Meeting discussion

No meeting discussion.

19. Other business

Responses to items of Other Business will be provided at the meeting if available, else they will be provided as soon as practicably following the meeting.

19.1. Franking credits

Exempting companies cannot pay franked dividends. A company is an exempting company if it is owned 95% or greater by tax exempts or non residents. The exempting company provisions were introduced to stop trading in franking credits where the shareholders had "little or no use for franking credits".

The provisions to allow a rebate for franking credits received by endorsed charities and DGR's was introduced after the exempting provisions. The interaction between the two means that if a company is owned by an endorsed charity/charities/DGR it cannot pay franking credits and the charity is denied the rebate.

This appears to be an unintended result and is contrary to the policy of the legislation. Is an administrative solution possible to overcome this problem?

Meeting discussion

No meeting discussion.

19.2. Interest on monies borrowed to pay tax

In Taxation Ruling IT 2582 (Borrowings to pay tax/interest), the Tax Office took the general position that interest on funds borrowed by a business taxpayer to pay income tax was deductible as an expense incurred in carrying on a business and hence qualifies for deduction under the second limb of the former subsection 51(1) of the Income Tax Assessment Act 1936. Would the Tax Office:

i. Confirm that it's views expressed in IT 2582 continue to apply in respect of paragraph 8-1(1)(b) of the Income Tax Assessment Act 1997?

ii. Advise whether a sole trader, who carries on business that gains or produces assessable income, is entitled to a deduction for any interest incurred on borrowings used to pay a tax liability that has arisen from that business?

iii. Advise whether a taxpayer is entitled to a deduction for interest incurred on borrowings used to pay a capital gains tax liability arising from the disposal of a business asset?

Meeting discussion

Professional bodies suggested the Tax Office was apparently not following the IT 2582 . The Commissioner asked professional bodies to provide any details of examples where this has occurred for the Tax Office to follow up.

Action item NTLG0403/10: Professional bodies to provide details of any examples where the Tax Office is not following IT 2582 in relation to funds borrowed to pay income tax.

The Commissioner also advised the NTLG the Tax Office is reviewing some issues in relation to the ruling, with Second Commissioner D'Ascenzo noting it may no longer be appropriate for the Commissioner to rely on Begg's case [Begg v FC of T (1937) 4 ATD 257].

Action item NTLG0403/11: The Tax Office to report to the next NTLG meeting on progress of the review of IT 2582 .

Meeting discussion

Action item NTLG0403/10: Professional bodies to provide details of any examples where the Tax Office is not following IT 2582 in relation to funds borrowed to pay income tax.

Action item NTLG0403/11: The Tax Office to report to the next NTLG meeting on progress of the review of IT 2582 .

19.3. Tax havens

The 23 February 2004 paper entitled Tax havens and tax administration sets out the broad mechanisms by which the Tax Office identifies activities in tax haven (for example, AUSTRAC, section 25A schedules and so on). Given these data sources and associated analysis, it would be expected that any review correspondence would clearly identify the transactions of concern. However this does not appear to be the case with correspondence sent to taxpayer in early February 2004. One letter requested

details of tax haven transaction before the taxpayer was an Australian resident. Given the section 23r of ITAA 1936 states that income derived by a non-resident from sources outside Australia are exempt, the purpose of the letter is mystifying. Similarly, retirees in receipt of UK pensions paid via the Channel Islands have also received similar review letters.

Given that taxpayers incur additional costs arising from their tax advisors seeking clarification of such letters it is a concern that in light the Tax Office's policy of ensuring that its actions are more targeted such poorly targeted letters are still being sent.

i. Could the Tax Office advise of what steps (analysis) is being undertaken in identifying review "targets" (for example, is every AUSTRAC amount of $10,000 target?) before letters are sent?

ii. What internal controls have been put in place to ensure that only truly suspicious transactions are targeted?

iii. What processes are in place to ensure that letters sent identify clearly the information sought?

Meeting discussion

Professional bodies noted the letter issued by the Tax Office, advising that for tax haven transactions for at least one taxpayer, it focussed on a period of time where the taxpayer was not an Australian resident. Having contacted the Tax Office, they were not sure what was of interest to the Tax Office, and were also concerned that targeting was poor.

The Commissioner indicated the letters were sent on the basis of macro analysis of AUSTRAC data and in cases where there seemed to be no obvious reason for a particular transaction. He advised the Tax Office was continuing to refine the process and that, although it was not a perfect situation, there must have been a transaction that caused the letter to be sent to the taxpayer.

Next meeting

The next meeting of the NTLG will be on Thursday 17 June, 2004.

Note

NTLG agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

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