National Tax Liaison Group
MINUTES
FOR THE MEETING OF 3rd DECEMBER 2004
Venue:
Executive Conference Room, 5th Floor, West Tower,
Australian Taxation Office, 2 Constitution Ave, Canberra.
Meeting commenced at 9:30am
Attendees:
|
Steve Allan |
CPA Aust |
Deidre Gerathy |
Treasury |
|
Michael Carmody (Chair) |
Tax Office |
Jennie Granger |
Tax Office |
|
Julian Cheng |
ICAA |
David Marks |
LCA |
|
Michael D’Ascenzo |
Tax Office |
Stephanie Martin |
Tax Office |
|
James Deliyannis |
NTAA |
Peter McDonald |
TA |
|
John de Wijn |
TIA |
Rona Mellor |
Tax Office |
|
Michael Dirkis |
TIA |
Ali Noroozi |
ICAA |
|
Bob Duncan |
ATMA |
Frank O'Loughlin |
LCA |
|
Peter Dowling |
CPA Aust |
Gavan Ord |
NIA |
|
Frank Drenth |
CTA |
Ross Seller |
LCA |
|
Paul Drum |
CPA Aust |
Tony Stolarek |
ICAA |
|
Neil Earle |
TIA |
||
Apologies:
|
Robert Warnock |
NTAA |
||
Guest Speakers:
|
Rick Matthews |
Tax Office |
Peter Smith |
Tax Office |
|
Robyn Clayton |
Tax Office |
Secretariat:
|
Shirley Chee |
Tax Office |
Stephen Quinn |
Tax Office |
Please 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.
Agenda Summary
1 Introductions, apologies, confirmation of minutes of the 7th September 2004 meeting 2
2 Technical Issues Management Sub-committee Work Program 3
3 Private rulings 5
3.1 Review of complex private ruling process 5
3.2 Sanitisation of the private rulings system 7
4 Phillip’s Case and service trusts 9
5 Multiple Assessments 10
6 Sports’ management fees and the impact of Stone’s case 11
7 Deductibility of interest expenses 12
8 The Recoveries Trust Case 15
9 Employee Benefit Trusts and other outstanding scheme cases 18
10 Retirement Villages 20
11 Application of Part IVA to wash sales 21
12 ATO superannuation consultations 23
13 ATO delays in processing Superannuation Guarantee shortfall payments 25
14 Superannuation contributions for contractors 27
15 ATO review of self managed superannuation funds 28
16 Self Managed Superannuation Funds and the control test for Division 152 30
17 Controlling interest superannuation (‘CIS’) arrangements 32
18 Demerger provisions and SMEs 34
19 Draft practice statement on section 45B and demergers 36
20 ATO Access Guidelines 37
20.1 Access Guidelines review process 37
20.2 Accountants’ concession 38
21 FOREX 39
21.1 Treatment of forex gains and losses in tax returns lodged for the year ended 30 June 2004. Regulations not expected to be finalised until after lodgement of returns. 39
21.2 Treatment of forex gains and losses in tax returns lodged for the year ended 30 June 2004. Lack of guidance on the scope of the “personal or domestic” concession for foreign currency bank accounts operated by individual taxpayers. 41
21.3 Lack of education materials on how the TOFA Forex rules apply to a variety of foreign currency denominated transactions and financial products. 42
21.4 Lack of alignment between tax and accounting treatment of forex gains and losses should be revisited. 44
22 International Financial Reporting Standards 45
23 PSLA 2003/13 – valuation of trading stock by retailers 46
24 ATO Receivables Policy 49
24.1 50/50 Arrangements and Disputed Assessments 49
24.2 Alternative Assessments 51
25 ATO audit practices - GST 52
26 ATO correspondence and description of the sender 54
27 Update on s.251L 55
28 Dibb v Federal Commissioner of Taxation 56
29 NTLG work program and management issues 57
29.1 Report on action items 57
29.2 ATO Tax Practitioner Forum 64
29.3 Consolidations Subcommittee 66
29.4 Finance and Investment Subcommittee 67
29.5 Foreign Source Income Sub-committee 69
29.6 Fringe Benefits Tax Subcommittee 70
29.7 Losses and Capital Gains Tax Subcommittee 71
29.8 Superannuation Industry Liaison Group 73
29.9 GST Practitioners Industry Partnership forum 75
29.10 Technical Issues Management Subcommittee 76
29.11 Transfer Pricing Subcommittee 77
29.12 Indirect Tax Rulings Panel 78
29.13 International Tax Rulings Panel 82
29.14 Public Rulings Panel 85
29.15 Test Case Litigation Panel 88
30 Other Business 89
30.1 Update on Draft TD on Division 7A 89
30.2 Self-assessment and taxpayer choices (e.g., the small business CGT concessions) 90
30.3 Tax agent compliance with their own obligations 92
30.4 Treasury’s consultation arrangements over the Christmas/New Year period 93
30.5 In-house finance companies 94
31 Next meeting and close 95
Summary of Attachments
Attachment 1 : Practical compliance 96
Attachment 2 : Complex Rulings Review 107
Attachment 3: Treasury’s consultation arrangements over the Christmas/New Year period 108
Professional bodies represented at the NTLG
|
Association of Taxation and Management Accountants |
ATMA |
|
Corporate Tax Association |
CTA |
|
CPA Australia |
CPA Aust. |
|
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 NTLG0412/01: Tax Office to investigate whether ATO media releases should be added to the list of material that falls within the scope of section 37. 2
Action item NTLG0412/02: Members and Rona Mellor to organise a telephone hook-up to agree on the forward work program for TIMS. 3
Action Item NTLG0412/03: Draft ruling on Phillip’s service trust arrangements to be provided to members as soon as possible. 9
Action item NTLG0412/04: Members to review the revised Draft practice statement on section 45B and demergers when it is received and provide feedback to Ken Aird or at the next NTLG meeting. 36
Action item NTLG0412/05: Robyn Clayton to provide some appropriate words to accompany the tax agent personal obligations compliance figures for use by the professional associations in their publications. 92
AGENDA ITEMS
Agenda items are provided by the professional bodies and the Tax Office, including the many joint Tax Office/practitioner/taxpayer liaison forums operating across Australia. They are set out with the description of the item and the response from the Tax Office or the professional bodies.
[_Toc93890975] 1 Introductions, apologies, confirmation of minutes of the 7th September 2004 meeting
Meeting discussion
The Commissioner welcomed members.
Apology from Robert Warnock, NTAA, was noted.
Members pointed out some minor spelling errors in the minutes of the previous meeting. These have been corrected for the version to be published. Members also commented further on Agenda item 7: ATO/interdepartmental liaison. Members felt that the process does not work as well as it could at the moment and suggested a joint approach by the Tax Office and professional bodies would be better. The fixed trust issue was given as an example where members felt the current process has not worked.
Second Commissioner Michael D’Ascenzo advised that issues should be raised with Rona Mellor as stated in the minutes. Once issues are collected then a collaborative approach could be used to prioritise them and move forward. Rona suggested the TIMS issue template would be the appropriate way for members to forward issues.
The ICAA raised an issue regarding the minutes of the 17th of June NTLG meeting. They asked whether, at item 14 of the June meeting - Reliance on Commissioner’s interpretation of an indirect law, media releases could be added to the list of documents named as being within the scope of section 37 of the Taxation Administration Act 1953. The Commissioner agreed to an action item to investigate the ICAA’s suggestion.
[_Toc90442119] Action item NTLG0412/01: Tax Office to investigate whether ATO media releases should be added to the list of material that falls within the scope of section 37 of the Taxation Administration Act 1953.
1 [_Toc93890976] 2 Technical Issues Management Sub-committee Work Program
Technical Issues Management Sub-committee Work Program to be discussed and, if appropriate, endorsed by members.
Technical Issues Management Sub-committee Charter to be discussed and, if appropriate, endorsed by members.
Meeting Discussion
Rona Mellor FAC PMD gave a presentation on Practical Compliance ( Attachment 1 ) outlining the Tax Office approach to helping taxpayers to comply with their obligations in ways that reduce the cost of compliance to the community whilst still ensuring substantive compliance with the law. Rona spoke about the work the TIM sub-committee had already done and the two themes that have emerged from their discussions:
the need to recognise and align to community practices, and
the need to allow for flexible timing in procedural events (such as making elections and other choices).
Rona then presented members with the proposed forward work program for the TIM sub-committee and requested member sign-off on the items listed. Rona pointed out that suggested solutions were not included as the Tax Office did not want to be prescriptive. Rona also commented that in some cases there may be no administrative solution available to the Commissioner and these would need to be referred to Treasury for consideration of a law change.
Members requested some time to consider the list and suggested they would organise a telephone hook-up amongst themselves for early the following week and then a further hook-up with Rona on Friday the 10th of December to finalise the discussion. Rona agreed.
Members also commented that the practical compliance initiative was an excellent one on the part of the Tax Office and that with hindsight the law is not as well written or clearly expressed as possible.
Members commented that in cases where no administrative solution is available then all parties have to agree to escalate the issue to Treasury. The Commissioner replied that Treasury has to have carriage of legislative matters. Deidre Gerathy, Treasury, noted that it also depends on the priorities of the Government.
[_Toc90442120] Action item NTLG0412/02: Members and Rona Mellor to organise a telephone hook-up to agree on the forward work program for TIMS.
TIMS charter
Rona also handed to members a copy of the proposed TIMS charter for their consideration and sign-off. Rona informed members she saw an issue around the number of legislative proposals that involved “big P” policy changes and commented that it would look unusual for the Commissioner to be approaching Government on such proposals. The Commissioner commented the TIMS process was for clarification of law and to address anomalies in the law not to propose major policy change.
In conclusion Rona thanked all members of the TIM sub-committee for their efforts during the year.
[_Toc93890977] 3 Private rulings
[_Toc93890978] 3.1 Review of complex private ruling process
The professional bodies refer to the review of the complex private binding rulings process that was conducted by the ATO in October 2004. Would the ATO:
a) provide feedback on what changes have been, or will be, made to the process as a result of the consultation with the professional bodies and large corporates?
b) what is the timeframe for implementation?
Response
Following the Commissioner’s media release of 6 August a consultant was engaged to review the Tax Office’s performance in delivering complex private rulings.
The consultant’s report was finalised at the end of October and the recommendations are currently being considered.
Further details on the review will be provided at the NTLG meeting on 3 December.
Meeting Discussion
Rick Matthews DC OCTC and Peter Smith AC OCTC attended for this item. Rick provided members with a handout detailing the proposed new Tax Office process for dealing with complex private rulings requests ( Attachment 2) that he hopes to have in place by April 2005.
The proposed new process is based on a more collaborative approach to complex rulings that would see senior officers within the Tax Office involved from the start, working with taxpayers to clarify the ruling and manage the case to its conclusion. Involvement of senior Tax Officers would also improve the experience and authority of the decision makers, an area identified as being a problem through the consultation process.
Members questioned whether the new process would apply to all ruling requests. The Commissioner replied that at the moment it was to apply only to requests meeting the specified criteria eg, for prospective, time sensitive transactions of such significance it requires Board consideration. The Tax Office wanted to implement a process which could be in place relatively quickly and from which lessons could be learned for future possible expansion to other areas. Implementing the process in the area of complex rulings also complemented the Commissioner’s approach to corporate governance for large corporates.
Members also asked if a similar approach would be adopted for class and product ruling requests. Peter Smith replied that those areas were obvious candidates for extension of the proposed process but at the moment the Tax Office was looking to learn as much as possible from the current proposal before considering moving further.
Members were asked for their feedback on the criteria for case selection. They commented that some flexibility would be appreciated for example retrospective transactions. The Commissioner replied that the Tax Office has done that in urgent cases in the past. Second Commissioner Jennie Granger said that more flexibility may lead to an increase in the number of cases being received with time delays as a result.
Members asked how the Tax Office would advertise the new process. The Commissioner replied that the Tax Office will issue a statement but that the professional bodies could advertise through their own processes as well.
[_Toc93890979] 3.2 Sanitisation of the private rulings system
Part of the Private Binding Ruling (PBR) process involves the ATO providing a sanitised version of the PBR for the purposes of the PBR Register with rulees being given the opportunity to comment on the sanitised version. It would be fair to say that such rulees are really only concerned with ensuring that their names and details which could identify them are excluded.
In some cases it would seem that changes made by the ATO between the PBR and the sanitised version are aimed at possibly saving the ATO from more general embarrassment about the wording of a PBR. For example not all that long ago a rulee was provided with a PBR on the question of whether certain amounts of money received by the rulee from a fraudster was to be treated as interest on the monies that had been advanced by the rulee to the fraudster for investment purposes what the rulee regarded as simply his own money being returned to him in order to convince it to advance more money to the fraudster. The following passage appears in the PBR:
“Even if it is accepted that the mortgage documents were not valid, legal or enforceable mortgage documents as the mortgagors were non existent, there was a legally enforceable obligation for interest payments and the principal amount to be paid to you by the mortgagors.”
This passage was excluded from the sanitised version and the only possible conclusion that can be reached for its exclusion was the embarrassment factor attached to it.
a. Would the Commissioner explain the editing process associated with the PBRs?
Response
To improve the integrity and transparency of its advice processes, the Tax Office has, since 2001, published edited versions of written binding advice in the Register of Private Binding Rulings on the www.ato.gov.au website. Publication is designed to enable a ruling recipient to confirm it is an official ATO ruling. Prior to publication the advice must be edited to ensure that it does not contain information that would enable the identity of the taxpayer to be ascertained or would constitute a breach of confidence.
To assist case officers and authorising officers in preparing edited versions for publication, the Tax Office has issued Practice Statement PS LA 2001/7, also available on the above website. This practice statement provides guidance on the types of information that must be removed or altered to protect a taxpayer’s identity or confidential information. In particular, paragraph 11 of PS LA 2001/7 provides that officers must exercise reasonable care when editing so that an informed person in the industry, occupation or community could not ascertain the identity of the taxpayer or any other relevant entity. Consequently, the exercise of judgement by the case and authorising officers and an independent reviewer, is a key element of the editing process.
A copy of the proposed edited version is supplied with the written binding advice to the taxpayer. If the taxpayer has any concerns about the edited version, they have 28 days to provide comments. All edited versions, including those with which a taxpayer has concerns, are further reviewed by a specialist area within the Tax Office that has expertise in the editing process. Once that process is complete the edited version is published.
Turning to the specific example raised, an officer in the specialist area removed the paragraph cited. It was the judgement of the officer that this information in conjunction with other specific information may have enabled an informed person to identify the taxpayer.
While it is acknowledged that the paragraph could have been better expressed its removal was solely to protect the privacy of the ruling applicant. Tax Office policy is to err on the side of caution. Hence any information that could lead to the identification of the taxpayer, etc., is removed, even where the chance of this occurring is remote. Protection of the privacy of all parties involved is paramount.
Meeting Discussion
No discussion.
[_Toc93890980] 4 Phillip’s Case and service trusts
Would the ATO please provide an update on:
a. any ongoing consultations on this issue;
b. when the ATO will be releasing the anticipated draft Ruling for public comment;
c. whether the ATO will also be releasing any other documentation on this issue, (e.g., ATO
guidelines and fact sheets), and if so, what are the anticipated release dates for this Information; and
d. Whether the ATO accepts the Phillips’ case reasoning in the current (Part IVA) environment?
Response
Consultations were held in Sydney on 8 September 2004 and in Melbourne on 10 September 2004.
As indicated by the Commissioner in a letter to NTLG members dated 13 October 2004, the draft Ruling has been revised following the September consultations. A companion document designed to give practical guidance about what the Tax Office regards as acceptable arrangements, consistent with Phillips’ case, is also being prepared. The Tax Office will supply NTLG members with copies of these documents as soon as they are available to allow for further consultation, prior to their public release.
As the Commissioner’s letter made clear, it is not the Tax Office’s intention to seek to overturn the principles established in Phillips’ case. The Tax Office’s concern is that some of what it is seeing tips the scale beyond what was accepted in that case as explicable on commercial grounds.
Meeting Discussion
Members were concerned over the time taken so far and the continuing rumours in the market place. The Commissioner advised that the review had taken a little longer than expected as a significant look had been had at previous Tax Office statements. Second Commissioner D’Ascenzo advised that the Draft ruling is finalised but following feedback provided in the consultation process, the Tax Office is now working on an accompanying document giving practical guidance for taxpayers. Members asked for the ruling to be provided now and the accompanying material when it is finalised. The Commissioner agreed.
[_Toc90442121] Action Item NTLG0412/03: Draft ruling on Phillip’s service trust arrangements to be provided to members as soon as possible.
1 [_Toc93890981] 5 Multiple Assessments
At the September 2004 NTLG meeting, the ATO provided the professional bodies with a draft statement of its position on multiple assessments which it intended to make public.
The ATO is requested to provide an update on the status of this draft statement and in particular when we can expect the statement to be released publicly.
Response
The Tax Office draft statement discussed at the September NTLG is being incorporated into a Practice Statement on the issue of multiple assessments. A draft of the practice statement will be referred to members of the NTLG for feedback in January with a proposed issue date shortly afterwards.
Examples were requested of cases where the Tax Office would await the outcome of appeal or review of a determination under s.177F(1) before determining whether compensating adjustments should be made under s.177F(3). Work is progressing on the examples and they will be included in the draft practice statement.
PS LA 2000/10 on the Application of Part IVA is currently being revised and will incorporate material on compensating adjustments. The revision is also proposed to issue early in the New Year.
Meeting Discussion
No discussion.
1 [_Toc93890982] 6 Sports’ management fees and the impact of Stone’s case
Pending the outcome of the appeal to the High Court from the decision of the Full Federal Court in Stone v FCT (2003) 53 ATR 214, would the ATO please advise:
a. what are the Tax Office’s current views on the treatment of claims for deductions of sports’ management fees against the earnings of a sports person? Is the ATO currently disallowing claims for sports’ management fee deductions (whether in part on in whole), and if so, on what basis?
b. whether the ATO is reviewing or plans to review compliance levels in any particular class or groups of sporting activity?
Response
There were two important issues argued in the Stone case, one was whether or not the taxpayer was carrying on a business of sport, but equally important was whether the grants received from the government were income according to ordinary concepts because it was paid periodically, regularly and formed part of the taxpayer's gross receipts.
The case however did not deal with the deductibility of expenses. A decision in Stone will have no impact on a claim for sports’ management fees.
Payments to player managers cover a multitude of services, some of which are deductible whilst others are of a private or domestic nature and others capital in nature. A problem that has emerged is the lack of documentation which clearly describes the management service provided so that the Commissioner can determine an entitlement to a deduction.
The Tax Office is currently consulting with a representative of the major sporting associations on the issue of sports’ management fees and the deductibility of specific expenses. The Tax Office has also raised concerns about the lack of substantiation in regard to these payments.
Meeting Discussion
No discussion.
1 [_Toc93890983] 7 Deductibility of interest expenses
In the recent AAT Case [2004] AATA 815 (5 August 2004) it was found that certain interest expenses incurred by the taxpayer and claimed as deductions were not allowable on the basis that the co-mingling of funds made it impossible to trace the application of the borrowed funds.
The case argued by the ATO seems to depart from the reasonable apportionment approach that has been widely understood to be ATO practice in similar cases. For example see paragraph 15 of TR 2000/2. (reprinted below) that deals with deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities.
15. Where a taxpayer has a mixed purpose sub-account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis.
The Tax Office’s case in respect of the interest payments in contention was based on the more rigorous test in s50(a) of the ITAA 1936. This is seen as a change in approach by the ATO to these types of deductions. The implications of this AAT decision and the different ATO approach to mixed accounts has widespread adverse implications for taxpayers. Particularly, all taxpayers who operate bank accounts where they are used for both investment and/ or business purposes, as well as for private purposes now seem to be at risk.
Would the Commissioner please advise:
a. Has there been a change in policy re mixed bank accounts and tracing?
b. As a consequence of the AAT’s findings in this case can taxpayers and their advisers
expect a much more rigid approach to tracing by the ATO in the future?
c. If the Commissioner’s approach has changed, how will taxpayers be advised?
d. Why did the ATO argue s50(a)?
Response
The background to AAT Case [2004] AATA 815 is that there were a series of draw downs made by the taxpayer over a period of three years on a loan account where the loan was originally taken out for income producing purposes. The draw downs were for both income and non income producing purposes. The funds being withdrawn were mainly funds that had been deposited by the taxpayer that were over and above the required loan repayments.
The taxpayer deposited the drawn down funds into either her cheque/savings account or her VISA card account. Generally the drawn down funds were deposited into these account when the taxpayer had other private funds and became “co-mingled” with those other funds.
The taxpayer then made withdrawals from those accounts for various purposes, some of which were for private purposes and others which were argued to be income producing purposes.
The taxpayer claimed interest on the drawn down funds in her income tax returns.
As is clear from the AAT decision, the Commissioner did allow deductions for interest where it could be established that the drawn down funds were used for an income producing purpose.
The ten draw downs that were under consideration by the AAT were those where, after applying the principles in TR 2000/2, the Commissioner was not satisfied the funds were drawn down for an income producing purpose.
a. Has there been a change in policy re mixed bank accounts and tracing?
Response
AAT Case [2004] AATA 815 does not represent a change in the ATO policy as outlined in TR 2000/4, nor in relation to the tracing of funds through a mixed bank account. The Commissioner’s practice of adopting a reasonable apportionment of interest was applied in this case and will continue to be applied.
The basis of the decision was not the fact that the drawdowns had become co-mingled with other funds in her cheque/savings account. It was a decision based upon the Tribunal’s finding that, after considering all of the relevant facts, including the taxpayer’s statement in evidence
“an important purpose of drawing down the funds was to top up her cheque/savings account and her Visa account and that significant portions of the funds drawn down were applied for private purposes”.(paragraph 47)
the taxpayer was unable to demonstrate that she had used the drawn down funds for an income producing purpose.
Accordingly the Tribunal concluded at paragraph 49 of its judgment, that it could not be satisfied that any more deductions were allowable than those already allowed by the Commissioner.
b. As a consequence of the AAT’s findings in this case can taxpayers and their advisers expect a much more rigid approach to tracing by the ATO in the future?
Response
No. Provided that it can be demonstrated on a fair and reasonable basis that there is a connection between the redrawn funds and an income producing outgoing, a deduction will be allowed for the interest on the redrawn funds.
c. If the Commissioner’s approach has changed, how will taxpayers be advised?
Response
As the approach has not changed, it is not necessary to advise taxpayers of any change.
d. Why did the ATO argue s50 (a)?
Response
The Tax Office’s case was not based upon a more rigorous test of deductibility in section 50(a) of the ITAA 1936.
The reference to section 50(a) arises from the citing by Member Mowbray, at paragraph 43 of the judgement, of AAT Case, 13,135 (1998) 39 ATR 1105 which concerned a taxpayer who operated an overdraft account jointly with his wife which was used to meet both private (domestic) and income producing expenses.
In the citation from Case 13,135 used by Member Mowbray, the AAT Member Pascoe in turn cited the decision of the High Court in Palvestments Pty Ltd v FCT (1965) 112 CLR 661.
At paragraph 43 Mr Mowbray says
The tribunal found (at ATR 1110; ATC 205-206) [i.e. the AAT in case 13,135] that it was not possible to attribute any part of the interest incurred on the overdraft to any one item of expenditure during the year, particularly expenditure in relation to an investment property :
While the decision in Palvestments Pty Ltd v FCT (1965) 112 CLR 661; 9 AITR 691; was concerned with a more limited question of whether any part of overdraft interest related directly to income from dividends (s 50(a)) for the purpose of calculating a rebate under s 46, Menzies J (at CLR 664; AITR 639; ATD 529) questioned "how ... can it be said that any particular part of the interest paid upon the overdraft account during the year ... directly related to the dividends received in that year". In the same way I [i.e. Member Pascoe in AAT Case 13,135] must ask , in the circumstances such as an overdraft such as this, [i.e. the facts in AAT Case 13,135] how can it be said that any particular part of the interest on the applicant’s overdraft can be identified as relating to any particular expenditure made during the year?
The only relevance of the Case 13,135 is that it establishes that once funds are co-mingled in an account it becomes more difficult for the taxpayer to establish a connection between the source of the funds and their application.
Whilst it is more difficult, it is not impossible as is shown by AAT Case [2004] AATA 815. As stated in the general response above the Commissioner allowed deductions for interest on drawn down funds where it was shown that the funds were used for an income producing purpose. This was so even where the drawn down funds had been co-mingled with the taxpayer’s personal funds in her cheque/savings account.
Meeting Discussion
Members advised this item had been raised only to check whether the Tax Office position had changed. Members were satisfied with the response provided.
[_Toc89512184][_Toc93890984] 8 The Recoveries Trust Case
The professional bodies refer to the respondent Commissioner’s arguments in The Recoveries Trust v The Commissioner of Taxation [2004] AATA 1075 and seek the Commissioner’s clarification on the following issues:
a. Would the Commissioner now confirm his views (as argued in the Tribunal) that he has no power to make a public binding GST ruling (despite ss.37 & 63 TAA), and that (in any case) the Taxpayer must somehow demonstrate reliance upon a ruling to call s.37 TAA in aid?
Response
There is a debate within the profession about the way in which ss 37 and 63 of the Tax Administration Act work to bind the Commissioner to a view expressed in a public ruling. Some commentators infer that the qualifications in s37 ( the need to have an altered ruling and the need to prove 'reliance') mean that it is not possible to say that a GST public ruling is legally binding. The Tax Office is reviewing GSTR 1999/1 in order to make Tax Office views on these issues known.
The Tax Office view is that if someone can show that they relied upon a Ruling then the Commissioner considers himself legally bound. If the person has not relied upon a Ruling but acts consistent with it then the Commissioner considers himself administratively bound. However the debate seems to us to be academic. The Commissioner has said that he will consider himself administratively bound by his Rulings. Taxpayers have the benefit of administrative protection without those two qualifications expressed in s37 of the TAA.
b. What evidence, other than the mode of completion of a BAS, is thought to be required?
Response
It is a factual matter, however the result is the same (see (a)).
c. The AAT's decision states: "In these proceedings, the Commissioner has adopted the surprising and unusual course of maintaining that the ruling does not bind or, at least, is inapplicable… To have submissions for the Commissioner which contradict a ruling purporting to bind the Commissioner is not helpful.”
Would the Commissioner please advise whether he argued that the ruling, GSTR 2002/2:
(a) was not binding on him; and
(b) whether he made submissions which contradicted the ruling?.
(Could the Commissioner please answer these questions by reference to the relevant excerpts of the transcript of the hearing in that case.)
Response
The answer to both questions is No.
First, it is noted that the part of the decision quoted above suggests that the Tribunal suffered some uncertainty about the nature of the Commissioner's submissions on this point.
Secondly, In the Recoveries Trust matter there was doubt about the application of s37 of the TAA in the circumstances of that case (for example no evidence was led on the 'reliance' point) and we said that, although the relevant ruling may consequently not be legally binding, the Commissioner considered himself administratively bound. S37 was of no practical relevance in the case as the Commissioner acknowledged that he was administratively bound.
Tax Office submissions did not contradict the ruling. The Tax Office said merely that the ruling dealt with a different issue and was irrelevant.
Tax Office counsel distinguished an example in GSTR 2002/2 which dealt with the difference between a possible acquisition of shares (input taxed) from, on the other hand, an acquisition of other assets (taxable) by saying that the Recoveries Trust facts were quite different .
Tax Office counsel submitted that:
" …the due diligence services (in the Recoveries Trust situation) were all made in connection with the purchase of the debts and with nothing else. So the ruling is completely irrelevant. But as far as the notion of these rulings being binding on the Commissioner is concerned, the Commissioner has always treated his rulings as being administrative in the binding. That is, he will not depart from them unless they are shown to be purely wrong, but they are not legally binding." (p111 of transcript).
He also said:
"…(there is) a general law principle that an administrator would be held to a representation where the taxpayer had acted to his detriment and reliance on that representation. All s37 does is to give that some statutory force."(p111 of transcript).
d. Would the Commissioner please advise why he did not argue in The Recoveries Trust case that the more relevant supply to which the acquisitions relate (for the purposes of s11-15(2) of the GST Act) is the collection of the debts, and not the "acquisition supply" of the debts? The professional bodies are concerned that the arguments made by the Commissioner in this case draw on unnecessarily artificial relationships, particularly given that the same outcome could have been reached by a far more commercially realistic argument.
Response
Paragraph 11-15 (2)(a) of the GST legislation calls for a connection with a supply. It denies a creditable purpose where an acquisition relates to an input taxed supply. The Tax Office considers that the collection costs related to the acquisition supply of the debts which took place at the commencement of the transaction and the Tribunal agreed with this position. The collection of the debts is not a supply.
e. In an article in the Australian Financial Review which appeared shortly after the decision, Mr Tony Long, Assistant Commissioner, is quoted as describing The Recoveries Trust Case as a "quirky" case. Given this, why did the Commissioner approve test case funding when the central criteria for funding is "a legal decision which will serve as a rule for future similar cases"?
Response
The facts of the Recoveries Trust case are 'quirky', however the tax principles have potentially wide application. The case was about the meaning of the expression 'would be' in Division 11 and how it contributes to the concept of creditable purpose. There was a view in the profession that 'would be' meant that an acquisition could not post date a supply. The Tribunal supported the Commissioner's contention that the order in which acquisitions and supplies were made was not relevant. It was clearly appropriate to fund the case in those circumstances.
f. The AAT decided in The Recoveries Trust Case that costs incurred in deciding whether to make a supply (eg due diligence costs) will be subject to full input tax credit recovery. Does the Commissioner accept this principle?
Response
No, the Commissioner considers that the Tribunal has erred in its conclusion and is considering a cross appeal to the appeal which has been filed in the Federal Court.
The Tax Office is considering rewriting the example in the public ruling."
Meeting Discussion
The response to this item was handed out at the meeting.
After reading the response, members asked whether the Commissioner would be releasing a statement confirming the Tax Office views expressed in the response to part a. The Commissioner pointed out that the Tax Office is currently reviewing GSTR 1999/1 and when the updated Ruling issues he will consider issuing an accompanying media release.
[_Toc93890985] 9 Employee Benefit Trusts and other outstanding scheme cases
On 14 February 2002, the Commissioner announced a settlement offer for mass marketed tax scheme investors (Media Release Nat 2002/7). The Commissioner indicated that eligible schemes covered by this settlement announcement are the typical agricultural, entertainment, franchise and film schemes which were widely marketed and entered into in 1998-99 and earlier years, but specifically excluded employee benefit and other schemes.
The professional bodies are concerned that the ATO needs put in place a process to resolve all outstanding disputed scheme arrangements on a timely and equitable basis.
In this context, the professional bodies also remain concerned that the ATO does not treat employee benefit arrangements as mass marketed schemes, given the widespread nature of this particular problem and also given the extensive number of rulings and advance opinions given by the ATO indicating that such arrangements were acceptable.
The ATO is requested to provide an update on any proposals to make a general settlement offer in respect of employee benefit trust disputes and if there is no such proposal to give serious consideration to making a general settlement offer.
Response
This matter was considered in the context of the recent report by the Inspector-General of Taxation.
Following consideration of that report the following action is being taken.
v Participants in employee benefit arrangements (EBAs) will be able to make an application for remission of interest and penalties based on their individual circumstances. Guidelines outlining the circumstances that would lead to a remission have been prepared. Where the conditions for remission are satisfied, interest will generally be reduced to 4.72% for part, or in some cases all, of the period the debt is outstanding. Special arrangements, including for internal review of decisions, will be put in place to consider applications.
v Interest accruing prior to 19 January 2005 will be capped at 70 per cent of the primary tax for EBAs. The sheer size of the interest debt in some of these cases is presenting a barrier to finalising debts. Interest will continue to accrue at the normal rate (currently 12.44%) from 19 January 2005 if there is a debt remaining and there is no payment arrangement in place. Reduced interest may apply where appropriate payment arrangements are entered into.
Over the next few weeks the Tax Office will write to all EBA participants and their tax advisors to provide information on applying for remission of interest or penalties, how the interest cap works, and the arrangements available for clearing their debts.
Fact sheets and further information are available on the Tax Office website at www.ato.gov.au .
Meeting Discussion
Members were concerned about how the action outlined in the response would apply to those taxpayers that have already settled. The Commissioner advised they were similarly entitled to make an application based on their individual circumstances.
Members also considered that the Tax Office should take a practical approach and not apply the criteria in an overly restrictive manner.
[_Toc93890986] 10 Retirement Villages
Will the Commissioner make a general settlement offer on a “mass marketed scheme basis” to taxpayers affected by disputed retirement village arrangements, particularly in those instances where taxpayers have relied on ATO rulings?
Response
Taxation Ruling TR 94/24, which applied up to its withdrawal on 18 April 2000, required that the relevant expenditure be incurred. That is, the ruling cannot be relied on if the expenditure was not incurred for tax purposes.
This is the very matter in dispute in the current cases. It is not considered there are grounds for a general settlement offer of the kind proposed in the question.
Participants have been granted substantially reduced penalties for coming forward. A substantial remission of interest has also been granted having regard to delays attributable to Tax Office actions.
Following a recent review, participants retain their objection and review rights and the Tax Office has indicated a willingness to fund a test case.
Meeting Discussion
No discussion.
[_Toc93890987] 11 Application of Part IVA to wash sales
Can the tax office please provide background information as to why it applied Part IVA to the taxpayer’s circumstances in the recent Administrative Appeals Tribunal decision number WT 2002/81 handed down on 1 October 2004. On the face of it, it seems that the taxpayer merely sold shares in a related company to an associate for their market value to crystallise a capital loss. The Tax Office has previously indicated that it will not generally apply Part IVA to “wash sales”. Refer to IT 2643.
It is difficult to determine from the Tribunal’s reasons for decision as to why the Tax Office applied Part IVA in the circumstances. If a taxpayer, who owns shares which have significantly decreased in value, wishes to crystallise a capital loss by transferring those shares to a relative, will the Tax Office apply Part IVA to deny the capital loss obtained? Does it make a difference if the shares owned by the taxpayer are in a related company, such as a family company, or in an unrelated company, such as a company listed on the stock exchange?
Response
It should be noted that the applicant in WT 2002/81 has appealed from the Administrative Appeals Tribunal's decision to the Federal Court. Until the appeal is heard it would be inappropriate to offer more than general comments. .The Tribunal found the following facts:
· TI was a pre-existing trust for the benefit of the applicant and members of his family;
· on 11 June 1998 the applicant as trustee of T1 sold a parcel of shares for $800,000 making a capital gain of $787,375;
· on 12 June 1998 a second family trust T2 was settled with the applicant as trustee, and essentially the same beneficiaries as for T1;
· also on 12 June 1998 the applicant as trustee of T1 purported to transfer part of the trust estates shareholding in another company to himself as trustee of T2;
· T1 claimed a capital loss of $800,000 in relation to this transfer, and that loss was used to reduce T1's net capital gain for the year to zero.
The inference was drawn that the main purpose of the taxpayer in entering into and carrying out this scheme was to obtain a capital loss in a year of income in which, but for the scheme, no capital loss would have been obtained. It should also be noted that IT 2643 is concerned with a different situation, namely, the transfer of shares in a company in liquidation: it was not intended to provide general guidance on the application of Part IVA to “wash sales”. However, paragraph 3 of IT 2643 states that Part IVA can apply to “wash sales”, and paragraph 5 goes on to state that the actual application of Part IVA will depend on the facts of the particular case. That paragraph also states that the ATO does not accept that ‘… share arrangements between related parties such as family members are precluded from the possible application of Part IVA’. A similar approach to the application of Part IVA was adopted in TD 2004/13 when dealing with the declaration of trust over shares in a company in administration (see for example paragraph 9 of TD 2004/13). It is within this context that paragraph 6 of IT 2643 states that the transfer of the shares in a company in liquidation would not generally attract Part IVA provided certain conditions are satisfied.
Whether Part IVA would actually apply will depend on the particular facts of the case, and in this context the nature of the shares (whether in a related or unrelated company) may be a relevant factor.
Meeting Discussion
Members advised the response to this item was fine but referred to action item NTLG0409/02 regarding similar issues and asked that the action item be left as “Ongoing” to allow for further discussions at future meetings.
[_Toc93890988] 12 ATO superannuation consultations
With the Tax Office’s increased role in the monitoring of the administration of some superannuation funds, as well as the increased complexity of the taxation laws impacting on all superannuation funds, the professional bodies believe that it is important for the ATO to maintain proper consultation in this area. It is disappointing and a concern to note that the Tax Office’s Superannuation Technical Liaison Committee has only met twice during 2004. In addition, there appears to be an ATO Superannuation Lawyers Technical Liaison Committee, which also meets irregularly and has not reported to the NTLG. Given the importance of superannuation, would the ATO please provide:
a. an update on the status of its external superannuation consultations;
Response
The ATO is committed to proper consultation processes with industry in relation to the ongoing administration of the taxation laws which impact on superannuation funds and related parties.
The Tax Office currently convenes a number of forums through which it engages with the Superannuation industry. These include:
· Superannuation Industry Liaison Group, comprising of:
- Retirement Product Providers/Superannuation Lawyers Technical Liaison Committee
- Intermediaries Technical Liaison Committee
· Business Systems Working Group
· ATO Financial Services Industry Partnership
The forums generally meet on a quarterly basis, except where members have been unavailable or there have been insufficient agenda items or issues for discussion. The Superannuation Industry Liaison Group last met on
5 July 2004.
In addition to consultative forums, the Tax Office devotes significant resources to ensure our website and publications contain relevant information for the broader industry and other stakeholders within the superannuation system.
b. the Tax Office’s proposed superannuation consultations for 2005.
Response
The Tax Office is currently reviewing its formal consultation with the Superannuation industry to address overlaps of forum memberships and subject matter, especially across the Technical Liaison Committees. The review will seek to improve our liaison with the industry and deliver better outcomes for the organisation and our stakeholders.
The Superannuation Industry Liaison Committee and the ATO Financial Services Industry Partnership will continue to meet quarterly throughout 2005. The Tax Office will advise the NTLG in early 2005 of the proposed forward meeting dates.
In addition to the meetings above, there is a Regulators Forum involving APRA; ASIC; Treasury; ATO & FACS which meets quarterly and has a rotating chair. The last meeting was held in October (ASIC) and the Tax Office is chairing the next meeting to be conducted in January/February 2005.
Meeting Discussion
Members advised that the number of superannuation related items raised for this meeting (six) reflected their concerns with the Superannuation Industry Liaison Group (SILG). Members suggested the SILG needed to be more proactive in its approach to consultations with the professional bodies.
Members were otherwise satisfied with the responses provided to the six items.
The Commissioner advised members that discussions had already taken place with Mark Jackson, DC Superannuation. As a result, three levels of consultation were planned, encompassing the current SILG, a business systems working group (including software developers) and a technical issues group that would be a sub-committee of the NTLG.
Second Commissioner Jennie Granger also advised that Mark Jackson has been asked to attend the next ATO Tax Practitioners Forum (ATPF) to ensure that appropriate connections are made with that forum as well.
.[_Toc93890989] 13 ATO delays in processing Superannuation Guarantee shortfall payments
The Taxation Institute has been advised by the ATO that, due to ATO system errors, there have been significant delays in the ATO banking Superannuation Guarantee shortfall payments into the respective employees’ designated superannuation funds (e.g., delays of up to 6 months). The ATO has also advised that employees affected by these delays will have to make individual applications to the compensation area of the ATO in order to seek compensation resulting from the Tax Office’s withholding of superannuation entitlements.
a. Would the ATO please provide information about the extent of this processing problem
(e.g, number of cases, length of delay in time between the ATO receiving shortfall
payment and banking it into the employee’s fund account) and what steps have been taken to rectify the problem)?
Response
A new computer system was implemented last December to administer the new quarterly Super Guarantee legislation and to make direct payments to superannuation funds of employee entitlements. Problems with the system have caused delays in processing assessments and making payments to superannuation funds. Only a small minority of Australia's 9.6 million employees and 900,000 employers are affected. In May, core system functionality was reinstated and straightforward cases started progressing through the system. Where the employer had paid the shortfall amounts for these cases the Tax Office has endeavoured to transfer the employee entitlement to the employee’s superannuation fund account as quickly as possible, usually within 28 days. The Tax Office is continuing to rectify the problems and manage the accumulated workload as quickly as possible. The system is now working correctly, although some cases continue to be delayed by errors in the information held. This will be rectified progressively by February 2005.
b. As the ATO has acknowledged that the delay in processing these shortfall payments is the Tax Office’s responsibility, would the ATO please advise why they are not providing compensation automatically to each person affected, rather than requiring them to make individual application for compensation?
Response
The Tax Office is ensuring that any employees and employers affected by the system delays will not be financially disadvantaged. This is being done through our commitment to put individuals back into the same financial position as if the delays had not occurred.
In doing this, the Tax Office will calculate and make compensation payments to all affected employees. Employees will not have to apply to obtain this compensation. These payments will be made once all accumulated workloads have been processed. Therefore, once all of our assessments are processed and employee entitlements transferred we can determine the identity of all affected employees and calculate any compensation that they are entitled to.
Full financial compensation will be paid to the employees' super accounts to cover interest foregone through delays in getting the money into the funds.
Employers affected by delays in the calculation and collection of the SG Charge will have the additional SG penalty reduced to ensure they will not be financially disadvantaged. In cases where the General Interest Charge (GIC) has been imposed, and there has been a delay in issuing their SG assessment due to SG processing difficulties, the Tax Office will reduce the GIC for the period of the delay.
Although we have this compensation payment in place any employee can lodge an individual application for compensation, if they wish do to so. We are currently processing all individual applications as they are received.
Please refer to the
§ Tax Office media release of July 2004 “Some employees affected by super processing difficulties” (Nat 04/057) http://atogovau/corporate/content.asp?doc=/content/mr2004057.htm and
§ The Fact Sheet “Superannuation guarantee (SG) system difficulties” Nat 11787-10.2004 ( http://atogovau/super/content.asp?doc=/content/51004.htm&pc=001/007/043/002&mnu=1887&mfp=001/007&st=&cy=1
Meeting Discussion
No discussion.
1 [_Toc93890990] 14 Superannuation contributions for contractors
With effect from 2002-2003, s 26-80 has the effect of limiting deductions for contributions to complying funds and RSAs to those which can be claimed under s 82AAC (eligible employees) and s 82AAT (those without employer support). Hence, there can be no s 8-1 deduction in respect of labour-only contractors - this was formerly the section under which deductions were sought in respect of persons other than "eligible employees".
Employers can have obligations under the Superannuation Guarantee legislation to make contributions for the benefit of subcontractors and others who fall within the extended definition of "employee" for SG purposes (s 12 of the SGAA). These can include not only common law employees but certain other categories of person, including those retained under labour hire arrangements, members of executive bodies of bodies corporate, members of parliament, artists, musicians and sportspersons. There is a concern that the definition of “employee” under s 82AAA would not be broad enough to encompass all contractors and other categories of person for whom a Superannuation Guarantee obligation would arise. The definition at s 82AAA refers to a person who is employed by a taxpayer and is engaged in producing assessable income of the taxpayer, or is a resident of Australia and is engaged in the business of the taxpayer. There is no guidance in the general dictionary definitions of the ITAA 1936 or the ITAA 1997 as to what is meant by “employed” or “employee”, and hence the common law definition of employee is presumed to apply in relation to s 82AAA. There is a body of case law determining who is an employee under common law. This is summarised, for example, in Draft Superannuation Guarantee Ruling SGR 2004/D1 at paragraphs 23 to 55, and is unlikely to extend to all the categories included under s 12 SGAA.
a. Would the ATO please advise whether or not contributions for the benefit of contractors, as required to avoid a charge under Superannuation Guarantee legislation, are deductible under s 82AAC (is the definition of “employee” under s 82AAA as interpreted by the ATO sufficiently broad enough to encompass all persons classed as “employees” under the expanded definition at s12 of the SGAA)?
Response
The Superannuation Guarantee legislation and the deductibility provisions in the income tax legislation are intended to interact to provide an outcome where deductions are allowable for contributions made to avoid the superannuation guarantee charge. Support for this intent is at paragraph 4.15 of the Explanatory Memorandum which introduced section 26-80 to the Income Tax Assessment Act 1997.
Denying deductions for payments arising from the extended definitions of employer and employee in the superannuation guarantee legislation would result in an unintended outcome and place an unfair burden on employers. Examples of payments would include payments under contracts for labour and payments to artists, musicians and sports persons.
The Tax Office is currently reviewing the situation. If the outcome noted in the Explanatory Memorandum cannot be achieved from the existing law, the matter will be raised with Treasury.
Meeting Discussion
No discussion.
1 [_Toc93890991] 15 ATO review of self managed superannuation funds
It has come to the attention of the professional bodies that the ATO is currently reviewing its self managed superannuation fund (SMSF) data base as part of its role in enforcing procedural compliance for these funds. The ATO is currently checking whether they have up to date data (e.g., current trustee details) for funds listed.
a. would the ATO please provide an update on this project;
Response
In October, the Tax Office commenced a project to improve the integrity of self managed superannuation fund information on our database. This project has currently been suspended.
As part of this project, the Tax Office has identified 29,000 funds where our data shows information gaps or inconsistencies. The trustees or tax agents of some of these funds were then contacted by phone to discuss and, if possible, rectify problems.
In order to minimise the impact on trustees and tax agents, we are currently working to identify other methods to obtain the information required.
Thus far, this project has proven valuable in helping to identify and address several misconceptions held by trustees / tax agents, including:
· the number of trustees / members SMSFs can have (being a maximum of four);
· the use of the income tax return to update trustee details (the return cannot be used to advise the Tax Office of a fund’s changed details, rather a hard copy or electronic change of details form must be submitted); and
· who can and cannot be a trustee.
The project has also been used to promote the use of www.abr.gov.au to update SMSF details (this functionality can be used by those tax agents who have digital certificates).
b. has the ATO encountered any difficulties in getting up-to-date data from funds and if so, what sort of difficulties; and
Response
A number of tax agents have raised certain concerns with respect to this project. Mostly, these have been in relation to timing (that is, that the project coincided with their own peak service period) and a lack of understanding that the income tax return could not be used to advise the Tax Office of a fund’s change of details.
In response to these issues, the project has been postponed until the peak service period for tax agents ceases. In addition, specific communication about how to change a fund’s details has commenced. This includes:
· posting information to the Tax Office website
· recommending that information be included in the 2004/05 Taxpack
· delivering messages through various other Tax Office vehicles, including SuperUpdate and E-link, and
· conveying messages to the professional accounting, tax and superannuation associations.
We will consult more extensively with agent groups prior to the re-starting of the project.
c. has the ATO had to refer any SMSFs to ASIC as a result of this review?
Response
The initiative was intended as a cooperative project between tax agents / trustees and the Tax Office, rather than a penalty-imposing exercise. For this reason, the Tax Office’s preference for funds selected by this project is to work with trustees / tax agents to rectify problems.
In terms of referring cases, no SMSFs have yet been referred to ASIC from this project, although certain funds have been redirected to APRA for regulation. This has happened, for example, where a fund no longer meets the definition of a SMSF and cannot be restructured.
Meeting Discussion
No discussion.
[_Toc93890992] 16 Self Managed Superannuation Funds and the control test for Division 152
The ATO CGT Committee meeting minutes of 7 August 2002 and 12 November 2003 suggest trustees of self managed superannuation funds (‘SMSF’) do not ‘control’ the fund for the purposes of Division 152 relief under the Income Tax Assessment Act 1997 (Cth). The minutes from 12 November 2003 state, at item 8.2, that the control of a superannuation fund is effectively sourced in the regulatory regime (ie, the prudential requirements and regulations) and that the trustees of the SMSF do not control the fund for the purposes of Subdivision 152-A (in particular, s 152-30).
Accordingly, in the Tax Office’s view, an SMSF holding an active, eg, business real property, will not be able to take advantage of the small business concessions in Division 152 as the property will not be regarded as an active asset.
However, the ATO has indicated in a number of interpretative decisions that there are instances where an SMSF is able to make a family trust election (‘FTE’) or interposed entity election (‘IEE’) in order to claim trust losses. In particular:
ID 2002/746: trustee of a unit trust that had made an FTE was liable to pay family trust distribution tax (‘FTDT’) on a distribution to an SMSF that had not made an IEE to be a part of the test individual’s family group.
ID 2002/748: trustee of an SMSF was liable for FTDT on the distribution of income and capital to a person outside the family group where the SMSF had made an IEE.
Therefore, the trustees of an SMSF must be able to satisfy the family control test for the purpose of making an FTE or IEE in s 272-87 ITAA 1936 Schedule 2F.
It appears to be that many tax practitioners’ view is that the regulatory regime does not have sufficient control of an SMSF to constitute ‘control’. The trustees of an SMSF, rather, have control as it is ultimately the trustees who decide whether to comply with the current superannuation regime, notwithstanding the tax consequences.
Would the ATO clarify whether it intends to maintain its position that the regulatory regime relating to superannuation funds, and not the trustee of the SMSF, controls the trust for Division 152 and / or the FTE rules?
Response
For an asset of a complying superannuation fund (such as business real property) to be an active asset some commonality of control would be necessary between the fund and other entity using the asset in its business.
The Tax Office's view on the control of a complying superannuation fund for Division 152 purposes is as set out in ATO Interpretative Decision ATO ID 2004/147. The Tax Office considers the trustee of a complying superannuation fund does not control the fund under paragraph 152-30(2)(a) of the ITAA 1997 as the trustee does not beneficially own, or have the right to acquire beneficial ownership of, interests in the fund carrying the right to receive distributions of income or capital. As the required control, and hence connection, between the entities is not present, the fund's asset cannot be an active asset.
The Tax Office has not considered the position as to how the control rules might apply in relation to non-complying superannuation funds.
The family control test in the trust loss provisions is not the same as the control test in Division 152 (small business CGT provisions). The ATO IDs referred to do not discuss in what circumstances a complying superannuation fund might pass the family control test and the Tax Office is further considering that issue.
Meeting Discussion
The above response was handed out at the meeting.
No meeting discussion.
.[_Toc93890993] 17 Controlling interest superannuation (‘CIS’) arrangements
The leave to appeal to the High Court from the Full Federal Court’s decision in Prebble v Commissioner of Taxation [2003] FCAFC (Prebble) 165 was only denied recently (8 October 2004). There are taxpayers who waited for the outcome of this appeal process and who now have no access to the settlement arrangements that the Commissioner offered to taxpayers with similar controlling interest superannuation arrangements (offer of settlement expired 22 August 2003).
a. Will the Commissioner consider entering into settlement arrangements with those taxpayers who waited for the outcome of the Prebble Case on similar settlement terms to those entered into previously by the ATO in CIS cases?
Additional information:
We wish to bring to the attention of the NTLG inconsistencies in the administration and settlement arrangements for CIS arrangements by the ATO.
Broadly, the ATO accepted settlement offers for CIS arrangements up until 22 August 2003. Many CIS arrangements settled with the ATO were made on the condition that contributions would be non-deductible. The general interest charge was still payable, but generally penalties were reduced to 10% depending on the nature of the arrangement.
Some advisers recommended to their clients to wait until the outcome of the appeal to the High Court from the Prebble v Commissioner of Taxation [2003] FCAFC 165 (‘Prebble’) decision from the judgement of the Full Court of the Federal Court before entering settlement arrangements with the ATO. However, because of the delay in this appeal, the settlement availability period lapsed.
The ATO, nonetheless, are maintaining their position that they will not accept settlement offers after 22 August 2003, given that special leave to the High Court has been denied (8 October 2004) from the Full Federal Court’s decision in Prebble. This is particularly harsh for some taxpayers as the FBT assessment grosses up the benefit by the FBT rate.
Taxpayers who rightly waited for the outcome of the Prebble decision to determine the outcome of the normal court process are now unduly penalised compared with those who settled under the prior settlement arrangements.
It is strongly recommended that the ATO should be more flexible in its approach to settlements, particularly given its inconsistent stance in the past in relation to CIS arrangements and other settlement arrangements. Given that the Prebble appeal has only been recently finally resolved, this should be reviewed and an extension offered to settle on a similar basis to that prior to 22 August 2003 for say another six months.
Response
On 14 March 2003 the Commissioner announced that he would remit penalties to zero and reduce the general interest charge to 4.72% in controlling interest superannuation arrangements where a genuine contribution was made prior to 19 May 1999. The 4.72% continues to apply until 60 days after notification of the Tax Office’s position, after which date the statutory rate would apply in accordance with normal Tax Office policy.
Participants were not required to give up their objection and review rights to benefit from these remissions.
It cannot therefore be said that participants who “waited for the outcome of the Prebble decision to determine the outcome of the normal court process are now unduly penalised compared to those who settled under the prior settlement arrangements.”
Participants who are yet to pay will be entitled to the repayment arrangements announced in response to the recent Inspector-General of Taxation’s report, i.e., a repayment arrangement for a period of up to twelve months (longer if special circumstances apply) with payment through direct debit will result in GIC being remitted to 6.28%.
Participants are entitled to seek further remission based on individual circumstances. However, the fact that a participant decided to await the outcome of appeal processes before paying the tax debt would not, of itself, be grounds for remission.
Meeting Discussion
No discussion.
1 [_Toc93890994] 18 Demerger provisions and SMEs
The demerger provisions offer SMEs the opportunity to reorganise in a significant number of commercial circumstances including the following -
Succession planning
Asset protection
Marital settlements
Restructuring
Introduction of new equity holders including management
Group simplification
Facilitating a financing or re-financing.
Would the ATO confirm that:
a. as a matter of policy the demerger concessions are available to SMEs’ and
b. if the de-merger provisions facilitate such commercial outcomes without generating a material long term tax benefit, s. 45B would not operate to negate these commercial benefits?
Response
Demerger is defined in Division 125 of the 1997 Act as a mechanical process of restructuring a corporate group that delivers at least 80% of ownership interests in a member of the group to the owners of the group’s head entity.
Demerger applies to corporate groups generally. Division 125 makes no distinction between listed and unlisted (SME) corporate groups in regard to the availability of tax relief.
The express object of Division 125, as per section 125-5, is “to facilitate the demerging of entities by ensuring that capital gains tax considerations are not an impediment to restructuring a business”.
“Business” in that context is asterisked and thus relies on the meaning provided by section 995-1 which defines “business” to include any profession, trade, employment, vocation or calling.
To complete the removal of tax impediments to restructuring a business, sections 6 and 44 of the 1936 Act were amended to enable what would otherwise be assessable dividends from the transfer of ownership interests to the head entity’s owners to be received by them as non-assessable income. Section 45B was coincidentally amended as an integrity measure to demerger tax relief from the assessment of dividend income.
Section 45B is structured as an anti-avoidance provision that turns on a test of objective purpose. The test determines whether, under the demerger, the ownership interests or a part thereof are provided to the head entity’s owners for a more than incidental purpose (on the part of any party to the demerger) of enabling them to obtain a tax benefit. The tax benefit is that part of the ownership interest which, but for the demerger relief, would be received as an assessable dividend.
To the extent that the requisite purpose is present, tax relief is not available to the head entity’s owners.
The purpose test is conducted by reference to the “relevant circumstances” of the demerger which can include the circumstances of both the company group and its owners.
In carrying out the test, the Commissioner must consider all the relevant circumstances - including commercial circumstances put forward, both subjective and objective, and the likely commercial effects of the restructure – and weigh those against the tax benefits conferred.
The Commissioner acknowledges that there are a variety of commercial circumstances which might be advanced as a purpose for restructuring the business of a corporate group. However, for the purposes of section 45B it is not enough to simply put them forward. It is incumbent on the company to demonstrate in each case the relevance of their circumstances to the business restructure and it is incumbent on the Commissioner to test that relevance in a practical and business-like manner
Meeting Discussion
Members suggested that this and the following item 19 “merged” together. They felt that the final paragraph of this response warranted development of a protocol setting out the issues, questions and documents relevant to the restructuring of a corporate group in order to streamline the proposed practice statement on section 45B and demergers.
.[_Toc93890995] 19 Draft practice statement on section 45B and demergers
The professional bodies welcome the opportunity to comment on this draft practice statement. Would the ATO please provide an update on:
a. the Tax Office’s response to the various submissions that were made;
b. the approach that the ATO expects to adopt in the final practice statement; and
c. the expected timeframe for release of the final practice statement.
Response
The draft practice statement was released to members of the NTLG for comment. Some written comments were received in October and some, for which extensions of time were granted, received more recently. All of the comments received, including those provided directly to Ken Aird in several phone calls, are being considered and the draft practice statement reviewed accordingly. At this stage, it is expected that the practice statement will be finalised before the end of the calendar year.
Meeting Discussion
Members advised they have been contacted by Ken Aird and it was proposed that all members review the revised Draft practice statement once it is issued.
[_Toc90358378][_Toc90442122] Action item NTLG0412/04: Members to review the revised Draft practice statement on section 45B and demergers when it is received and provide feedback to Ken Aird or at the next NTLG meeting.
[_Toc93890996] 20 ATO Access Guidelines
[_Toc93890997] 20.1 Access Guidelines review process
Former Chapter 8 of the Tax Office’s Access Guidelines has now been split into Chapter 6 – Legal Professional Privilege and Chapter 7 – Accountants’ Concession.
Would the ATO please advise of the procedure for providing feedback or lodging submissions on these new chapters, i.e. what is the due date for comments and to whom should those comments be directed to?
Response
The Tax Office General Counsel is currently arranging for the revised chapters of the Access Guidelines to be posted on the Tax Office website. This has taken longer than expected, but the components related specifically to legal professional privilege and the accountants’ concession have been completed.
A mechanism for commentary and feedback on access issues is being made available direct from the website. Rather than establish a linear process of draft reviews and consultations, the Tax Office will be keeping this electronic resource up to date on a regular basis, especially when new judicial authority is handed down. In this regard the material dealing with matters affected by the Full Federal Court's recent decision in the JMA case is currently being updated.
Meeting Discussion
Members commented there was a lot of heat in this issue due to the length of time now taken by the Tax Office in carrying out the review. To illustrate their point, excerpts from NTLG Minutes dating back to December 2002 were provided to the Commissioner. Members also advised they have particular concerns over chapters 6 and 7 (provided at the last NTLG meeting).
The Commissioner informed members that the reviewed Chapters 6 and 7 were now available on the Tax Office’s web-site, under What’s New, and an on-line feedback submission tool had been provided.
Whilst members appreciated the on-line feedback mechanism, they also asked that feedback be accepted via the more usual written submission process. Members also requested firm deadlines for the feedback process.
The Commissioner said he intended to speak to the project manager after the meeting to ensure members’ feedback was passed on and that firm timelines were agreed.
[_Toc93890998] 20.2 Accountants’ concession
In particular, we recommend the adoption of a dominant purpose test for the Accountants’ Concession in relation to access to restricted source documents and papers prepared by professional accounting advisers for the purpose of representing a taxpayer in legal proceedings. Currently a sole purpose test has been adopted for these purposes:
Section 2.2 of Chapter 7 discusses the nature of a restricted source document and reads:
“Advisings and advice papers prepared by an external professional accounting advisor solely for the purpose of advising a client on matters associated with taxation would fall within the key concept contained in part 2.1 above [i.e. source documents] where they are prepared in connection with the conception, implementation and completion of the transaction or arrangement. For example, advice given to a taxpayer on how to structure or record a transaction or arrangement, and which is acted upon, forms an integral part of what has actually occurred.”
Section 7 of Chapter 7 discusses access to papers prepared for the purpose of appeal to the AAT or Courts. The Access Guidelines here state that:
“ATO officers will not seek access to any papers prepared by professional accounting advisors solely for the purpose of representing a taxpayer in legal proceedings (including an objection, appeal or review) under a taxation law.”
We note that Legal Professional Privilege only imposes a dominant purpose test. Adopting a dominant purpose test in relation to the Accountants’ Concession would therefore provide consistency.
Response
The current guidelines have provided certainty of operation for all parties. Before considering a move to a less certain dominant test the Tax Office would want to consider submissions evidencing practical difficulties in maintaining the present position.
Meeting Discussion
Members thought the suggested process was a good one and stated that their submissions on the Accountant’s concession were nearly finalised. Members again requested clear deadlines for their submissions.
1 [_Toc93890999] 21 FOREX
The professional bodies remain concerned at the problems facing tax practitioners during the implementation phase of the TOFA (forex) rules, which apply from 1 July 2003.
We have identified below four practical issues and the recommended action on the part of the ATO that we believe is required.
[_Toc93891000] 21.1 Treatment of forex gains and losses in tax returns lodged for the year ended 30 June 2004. Regulations not expected to be finalised until after lodgement of returns.
The ATO policy on anticipating announced but unlegislated tax measures does not assist tax practitioners who cannot pre-empt many of the proposals announced by the Minister for Revenue on 5 August 2004, e.g. weighted average cost methodology, due to the paucity of guidance contained in the announcement.
Many clients are simply refusing to address the requirements in Division 775 until regulations (which are expected to alleviate many of the compliance concerns) are released. The result is that most 2004 tax returns will not be prepared in accordance with the requirements of Division 775, and will need to be amended.
We believe that there needs to be an ATO statement that no penalties or GIC will apply to amended returns where the amendment relates to forex regulations. We also request the ATO to consider whether “catch-up” adjustments for incorrect forex could be made in the 2005 tax return, rather than re-opening 2004 assessments (or supporting a legislative proposal to this effect).
Response
The Commissioner’s general practice in administering retrospective changes is to apply the existing law until proposed changes to the law are enacted. The Commissioner cannot make payments to taxpayers where there is no legal appropriation to do so. This would be ultra vires and contrary to the provisions of the Financial Management and Accountability Act 1997 (FMA Act) and the Constitution which prohibit the Commissioner from intentionally making payments without lawful authority.
It is only in very limited situations that the Commissioner will, in the context of Australia’s self assessment system, rely on his power to accept returns as lodged and advise taxpayers that they may meet their obligations by anticipating the effects of a proposed change to the law. Any decision by the Commissioner to advise taxpayers that they may meet their obligations in such a manner is not taken lightly. In particular, the decision needs to be defensible having regard to the requirements of the FMA Act.
The foreign exchange (forex) measures contained within Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) broadly require that forex gains and losses be brought to tax when realised. While Division 775 of the ITAA 1997 prescribes the method by which such gains and losses are to be calculated, it allows for regulations to be made prescribing alternative methods of calculation. On 5 August 2004 the Minister for Revenue and Assistant Treasurer announced various changes to the forex measures (‘the forex changes’), including regulations that would allow a weighted average cost to be used in the calculation of forex gains and losses. [This announcement (number 002 of 2004) can be viewed on the Minister for Revenue and Assistant Treasurer's website.]
Nothing in the proposed forex changes would remove the basic requirement that forex gains and losses be brought to tax when realised.
Similarly, the decision taken by the Commissioner (through the Policy Implementation Forum) that taxpayers be allowed to anticipate the proposed forex changes when meeting their obligations under the forex provisions, is not a decision to remove those obligations altogether. To do so would be ultra vires and contrary to the provisions of the FMA Act and the Constitution.
The Commissioner has provided guidance, advising that where taxpayers act reasonably in anticipating the forex changes, there will be no tax shortfall penalty and, if they then actively seek to amend their return or activity statement within a reasonable time of the changes becoming law, GIC attributable to the amendment will be remitted to nil. [For further information of the Tax Office’s administrative treatment of the proposed forex changes, see Administrative treatment of retrospective legislation.]
In light of the obligations imposed by the forex measures, it is not considered that taxpayers altogether failing to include forex gains or losses in anticipation of the proposed changes will have acted reasonably.
Meeting Discussion
Members said these issues were raised because they believe that, due to systems not being in place, exchange rates and other outstanding issues, taxpayers are not able to correctly account for foreign gains and losses in their income tax returns for this year. The returns lodged may therefore not be in agreement with the strict letter of the law.
Second Commissioner Michael D’Ascenzo referred members to the Minutes of the previous NTLG meeting where, at Item 18, the Tax Office position on administration of announced but unenacted legislation is outlined. As noted the policy applies also to secondary legislation. In this context the minutes specifically refer to the foreign exchange rate regulations. Decisions are on the ATO Website.
Members felt the latest draft regulations were not covered by the Tax Office material currently published. The Commissioner asked Rona Mellor to work through the issue with members.
1.1 [_Toc93891001] 21.2 Treatment of forex gains and losses in tax returns lodged for the year ended 30 June 2004. Lack of guidance on the scope of the “personal or domestic” concession for foreign currency bank accounts operated by individual taxpayers.
The ATO has been grappling with ways to administer the legislation, and has held consultations with external parties. But the lack of any published practical framework for claiming the private and domestic exclusion for such bank accounts impacts on the preparation of Form I tax returns (particularly expatriate employees).
We suggest the ATO publish guidelines which provide a practical approach to bank accounts, whereby the predominant nature of the bank account is accepted as the main requirement for practitioners to consider when advising their clients on the scope of the exclusion.
Response
The Tax Office’s Finance and Investment Centre of Expertise is actively considering the application of the ‘private or domestic’ exclusion to bank accounts, with a view to providing guidance in suitable interpretative products. The exclusion is not always ‘concessional’: it excludes certain private or domestic gains from assessability, but private or domestic losses are also excluded from deductibility. The Centre is consulting with interested parties through the Forex Working Party of the Finance and Investment Subcommittee of the National Tax Liaison Group, and has met outside of that forum with other interested tax professionals. The Centre is awaiting responses from those external parties on the matters that it has presented to them for comment before developing guidance material.
However, any approach that is adopted will have to be permitted under the legislation as enacted. Approaches that are not allowed by legislation are clearly problematic: for example, taxpayers are not bound to follow such approaches, no matter how practical they might appear from a particular perspective. Quite apart from the legislative difficulties inherent in any such approaches, the practical administrative difficulties are emphasised in a regime where gains are assessable and losses are deductible.
Meeting Discussion
No discussion.
[_Toc93891002] 21.3 Lack of education materials on how the TOFA Forex rules apply to a variety of foreign currency denominated transactions and financial products.
The ATO has released a variety of fact sheets, Interpretative Decisions and draft Tax Determinations, but there has been no coordinated, comprehensive approach similar to that adopted with the implementation of the consolidation regime, e.g. a relatively “open” consultative process, Consolidation Reference Manual and Consolidation Workbooks.
We recommend that the ATO and interested external representatives on TOFA Forex adopt an implementation strategy akin to that used with the consolidation legislations, and in particular develop a manual and educational materials which explain how the new Forex regime applies to a range of transactions and financial products.
Response
Since mid-2003, and following the introduction of the new forex regime, the Tax Office has maintained a consistent implementation strategy with regard to the explanation and public dissemination of materials relating to the forex measures.
The Tax Office has placed a large amount of information relating to the operation of the forex measures on our website. Taxpayers have also been made aware of developments in the forex measures through that site.
The Tax Office has concentrated on regular consultation with a wide range of industry bodies through the Forex Working Party of the NTLG Finance and Investment Subcommittee to identify and address significant forex issues. The issues identified in that process have been listed on an Issues Register, and are being systematically addressed with due regard to the priority that external members have attached to particular issues. The Tax Office has also distributed a considerable number of draft fact sheets and interpretative material to Working Party participants for comment. An open and regular approach has been adopted that is consistent with the Tax Office’s usual consultative practice.
The Tax Office intends to publish a number of relevant draft Taxation Rulings and Taxation Determinations for general comment. Again, the topics to be addressed have been identified in consultation with the business and adviser community through the Forex Working Party. Rulings and Determinations provide taxpayers with a level of certainty that is not available where matters are addressed in a general handbook.
The Tax Office believes that these actions evidence a coordinated, comprehensive and open approach to addressing issues.
The Tax Office considers that a strategy similar to that adopted for the Consolidation measures has not been necessary or appropriate in the implementation of the forex measures. The proposed forex measures aim to address a number of uncertainties and anomalies which exist because of the previous taxation treatment of foreign currency gains and losses, and introduce a broad range of measures designed to ease compliance. On the other hand, the Consolidation measures introduced a conceptually different and new regime.
Meeting Discussion
Members commented that the forex rules were, in their view, also a “conceptually different and new regime”.
1.1 [_Toc93891003] 21.4 Lack of alignment between tax and accounting treatment of forex gains and losses should be revisited.
Although a policy issue, Treasury has indicated that TOFA Stages 3 and 4 may be based on accounting methodology. The Minister for Revenue’s 5 August 2004 press release also envisages that accounting concepts relating to exchange rate conversions will be acceptable, and this will be reflected in regulations.
Most business clients cannot fathom why, in the drafting of Division 775, the opportunity was not taken to more closely align tax and accounting treatment rather than the over-engineered approach actually adopted, with tax and accounting timing differences created by the use of “tax recognition times” in determining the tax forex gain or loss).
We recommend that the ATO:
(i) relay to Treasury the practical problems being encountered in complying with Division 775; and
(ii) add its voice to calls for a review of Division 775, supporting a re-design which aligns tax and accounting treatment.
Response
The matters raised are questions of policy that should be directed to Treasury. The Tax Office has not received any substantial submissions that would inevitably lead it to agree with the propositions suggested.
Meeting Discussion
No discussion.
[_Toc93891004] 22 International Financial Reporting Standards
Reporting entities will be adopting IFRS for reporting periods commencing on or after 1 January 2005 and, as previously raised with the ATO, there is a need for the ATO to at least make announcements on their approach to some of the tax implications of IFRS such as the thin capitalisation issues. Administrative action will be critical in many cases to ameliorate some of those taxation implications, given that any legislative fixes are likely to take some time to be developed and passed through Parliament. We would appreciate an update on the following:
a. any announcements that will be made and any administrative action that is being, or will be, undertaken by the ATO?
b. what the ATO is doing to educate taxpayers on the tax implications arising from IFRS?
Response
The following announcement was made in the November 2004 Large Business Online Bulletin which was posted on the tax office website and sent to subscribers. In summary the announcement stated:
· The establishment of an IFRS sub-committee of the NTLG and role of the sub-committee. The first sub-committee meeting is to be held on 2 December 04.
· The ATO is working closely with Treasury and AASB, ASIC and APRA in relation to IFRS implementation.
· Several priority issues to date have been identified by professional bodies and industry organisations during the consultation process with the ATO regarding impacts of IFRS on income tax.
The ATO is taking steps to identify, escalate and manage priority issues arising from IFRS. We will be working closely with Treasury and members of NTLG IFRS sub-committee to develop co-designed solutions and ensure easier, cheaper, more personalised experience for clients complying with tax, superannuation and other transfer obligations arising from adoption of IFRS for financial reporting.
We will also be asking taxpayers which have made IFRS disclosures in their accounts to ASX under AASB 1047 to identify tax impacts including impacts on PAYG instalments from 1 January 2005.
b. What the ATO is doing to educate taxpayers on the tax implications arising from IFRS?
The ATO recognises the need to develop a communication strategy for taxpayers to manage the issues arising from IFRS for taxation, superannuation and other transfer obligations. Once all the major IFRS issues have been identified and solutions developed we plan to undertake a number of activities on educating taxpayers which include:
· maintaining an updated ATO web page on IFRS-Tax Impacts;
· skilling call centre, field and technical staff;
· developing fact sheets and publications for taxpayers;
· issuing media releases as required;
· working with associations to make IFRS-Tax presentations.
We will be working closely with NTLG IFRS sub-committee to develop our approaches.
Meeting Discussion
No discussion.[_Toc93891005] 23 PSLA 2003/13 – valuation of trading stock by retailers
The ATO has issued 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, which deals with the absorption of post-production costs into trading stock held by retailers.
This issue relates to income tax returns that are currently being prepared and potentially has a very broad application. It is understood that the practice statement was the subject of some form of consultation with the Australian Retailers Association (“ARA”) but there are a number of concerns for retailers that are not ARA members and taxpayers such as manufacturer-retailers and distributor-retailers and their tax agents, who were not involved in the consultative process.
a. We would like to know why this matter was not the subject of a tax ruling with the usual review processes?
Response
The issue was considered by the ATO Rulings Panel and the ATO view on the issue was confirmed, however, it was decided that the matter was best treated by way of a Practice Statement which was ultimately published as PS LA 2003/13 in December 2003. Following recent representations it has been decided to convert the Practice Statement into a Public Ruling and it is likely to be issued as a draft early in year 2005.
The ATO guidance to manufacturers in relation to the absorption of costs into their trading stock followed the Phillips Morris case and was in taxation ruling IT 2350. For the mining sector, the principles of absorption of costs into trading stock were contained in Taxation Ruling TR 98/2, which states at paragraph 115 that “[s]elling and distribution expenses, incurred after the trading stock becomes a saleable product, do not have to be absorbed”. There is no reason to confine this approach to the mining industry. The approach in relation to retailers of new motors cars was contained in a draft ruling, which was finalised as TD 94/93 and TD 94/94.
The draft minutes of the NTLG March 2004 meeting noted the views of the ARA as:
“(F)or cost of compliance purposes it was preferable 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.”
Paragraph 6 of the practice statement states:
“On the basis that cost reflects accounting principles and concepts, tax officers should accept that incidental costs of a minor nature which may be time-consuming to record, and which would not result in material differences in the value of trading stock, need not be absorbed in calculating the value of trading stock on hand. For example, the cost of moving stock from the on-site storage location to the display setting need not be included.”
The Commissioner will be aware that AASB 1019, while it refers to retailers, has minimal guidance in relation to the absorption of costs into finished goods after they have been finished and its discussion on the absorption of costs is mostly geared to the costs of production.
b. Given that paragraph 4 of the practice statement states that ATO officers “should accept a taxpayer’s calculation of the cost of trading stock on hand for the purposes of section 70-45 where the cost is determined in accordance with the absorption costing principles as enunciated in Accounting Standard AASB 1019”, will the ATO accept an unqualified audit opinion (in relation to an affected taxpayer) as indicating an acceptable minimum absorption of costs?
Response
As a practical and workable guide for taxation purposes it is accepted that where the cost of trading stock is determined in accordance with AASB 1019 (with an unqualified opinion from the external auditor that AASB 1019 applies) it will be accepted that the taxpayer has correctly calculated the cost of trading stock on hand for the purposes of section 70-45 of the 1997 Act.
An unqualified audit opinion will be accepted for this purpose if the audit report states that in the opinion of the auditor the financial report is in accordance with the Corporations Act 2001, including giving a true and fair view of the financial position of the entity for the particular period and of its performance for the period ended on that date; and complying with Accounting Standards in Australia and other mandatory financial reporting requirements in Australia.
The acceptance is on the basis of the audit having been conducted in accordance with the principle of full absorption costing as espoused in AASB 1019. If relevant costs have not been included by the statutory auditors the Tax Office would expect that such costs should be included for taxation purposes. As a cost of compliance measure any adjustment based on a reasonable estimate would be accepted.
Absorption of costs by manufacturers is covered in taxation ruling IT 2350, which does not require manufacturers to absorb post-production costs such as storage (refer paragraph 13). The practice statement would therefore have no application in relation to manufacturers that are also retailers of their products. If it is intended to change the practice in relation to such manufacturer-retailers, the ATO needs to ensure that the practice statement is properly resolved in a rulings process.
c. Can the ATO confirm that the practice statement will not apply to a manufacturer and is covered by IT 2350, where the manufacturer is also a retailer?
Response
Where the manufacturer is also a retailer the principle of absorption costing would dictate that the costs associated with any move to a retail outlet should be added to the cost of the trading stock. However, if the manufacturer-retailer sells trading stock from the same location where the manufactured product is completed there would be no need to allocate further costs to the trading stock which is consistent with both IT 2350 and PS LA 2003/13.
In the NTLG draft minutes of 24 March 2004, the following was noted:
“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.”
d. If the practice statement is to be prescriptive for taxpayers, the ATO should clarify the precise penalty and GIC exposure of taxpayers that do not adopt the specific approach in the practice statement for the 2004 year of income.
Response
PS LA 2003/13 issued in December 2003 and was originally intended to apply to the year ended 30 June 2003 (or the relevant substituted accounting period) and beyond. Following representations the year of application was amended to the year ended 30 June 2004 (or the relevant substituted accounting period). The Practice Statement has been in the public arena for close to 12 months and it would be expected that submissions for reduction of penalty and GIC would be treated on a case by case basis, in accordance with usual ATO policy.
Meeting Discussion
The response to this item was handed out at the meeting.
Members indicated that the accounting profession views this as an accounting standards issue and consequently the review of accounting standards may resolve the issue for the Tax Office.
Members suggested a minor wording change to part b of the Tax Office response and this has been accepted and incorporated in these Draft minutes.
[_Toc93891006] 24 ATO Receivables Policy
[_Toc93891007] 24.1 50/50 Arrangements and Disputed Assessments
Paragraph 28.4.4 of the ATO Receivables Policy states that the Commissioner may allow a taxpayer to minimise exposure to the imposition of additional charges for GIC when pursuing an objection and that the Commissioner will generally favourably consider 50/50 arrangements upon a written request being received from a taxpayer who agrees to pay all undisputed debts and a minimum of 50% of the “disputed tax”. Letters acknowledging receipt of objections generally refer to the availability of such arrangements by again using the phrase “disputed tax”.
Rather peculiarly the phrase “disputed tax” is not defined in the Glossary part of the Policy although the phrases “tax debt” and “tax-related liability” are defined. While in some cases the letters of acknowledgment of receipt of objections do seek to define what the phrase “disputed tax” means (i.e. by say referring to the primary tax only) in most cases no explanation is provided.
Apparently the ATO takes the view that in the case of objections lodged by participants in Employee Benefit Arrangements (possibly other types of arrangements) the phrase “disputed tax” means primary tax, penalties and GIC which is imposed on the notice of assessment in dispute. There is of course no mention in the Policy itself as indicating that the phrase “disputed tax” is capable of having more than one meaning depending upon the dispute involved.
It is considered that the Policy should be applied in the same way to all taxpayers and that the Policy needs to be clarified as to what the phrase “disputed tax” actually means.
What is the Commissioner’s view on this issue and if his view is that the Policy can vary from taxpayer to taxpayer then has he given thought to this flexibility being explained in the Policy itself?
Response
The Tax Office agrees that its policy in relation to disputed debts should be consistently applied to all disputed debts while considering taxpayers' individual circumstances.
"Disputed tax", "disputed debt" and "disputed liability" are terms currently used in an interchangeable manner throughout the ATO Receivables Policy chapter entitled "Recovering disputed debts".
Paragraph 28.6.1 of that chapter defines "disputed debt" as:
"a term used for convenience to describe a tax-related liability, which is the subject of an objection, a review or an appeal. The term tax is also used to generally describe a tax-related liability to which Part IVC of the Taxation Administration Act 1953 applies. Disputed debt also includes any other disputed component of an assessment such as General Interest Charge (GIC) which is imposed in the assessment as an incorrect return penalty (section 170AA of the Income Tax Assessment Act 1936 ) and should not be confused with GIC imposed for late payment."
The amount in dispute is generally the amount specified in the assessment or amended assessment, including primary tax, interest and penalty. The Tax Office takes the view that the concessional rate of interest applies if a taxpayer pays 50% of the amount in dispute. In some individual cases taxpayers have paid 50% of the primary tax, with the concessional rate applied to the balance of primary tax payable . In these cases full interest applies to the other components of the assessment.
The Tax Office will re-examine its definition in Chapter 28 of the ATO Receivables Policy and clarify those definitions as required. It will also clarify the payments required for a taxpayer to qualify for a 50/50 arrangement.
Meeting Discussion
No discussion.
[_Toc93891008] 24.2 Alternative Assessments
Where the ATO issues alterative assessments to possibly different taxpayers in respect of the same arrangement (i.e. FBT assessment for the trustee of a trust which made contributions under a Employee Benefit Arrangement and section 97 assessments to the beneficiaries of the trust reflecting the disallowance of the tax deductions originally claimed by the trustee), then it seems that the taxpayers involved have to make a decision in relation to which one or more of them might enter into a 50/50 arrangement (i.e. pay 50% of the “disputed tax” with GIC then only accruing at 50% of the general GIC rate on the unpaid balance).
If say the trustee enters into such an arrangement in relation to the disputed FBT assessments but ultimately the matter is resolved on the basis that the FBT assessments are not payable but the section 97 assessments are payable, then of course the beneficiaries would not have had the benefit of the reduced GIC as they would not have entered into a 50/50 arrangement.
a. In such cases would the Commissioner be prepared to treat payment of 50% of the “disputed tax” by the trustee of the trust as having been made by one or more of the beneficiaries (obviously this would require the consent of all concerned but it is likely to happen).
b. Alternatively would the Commissioner accept that the benefit of a 50/50 arrangement would be available where the various disputed amounts are aggregated as between the different taxpayers and a total of 50% of the “disputed tax” is paid by all of the taxpayers on some form of pro rata basis?
Response
The Commissioner's approach in these circumstances is outlined at paragraphs 28.4.13 - 28.4.15 in the chapter entitled "Recovering disputed debts" of the ATO Receivables Policy. The policy outlines that where the Commissioner has issued two assessments relating to the same transaction against different taxpayers, the payment by one of those entities of 50% of the disputed tax relating to the transaction may provide GIC benefits to all entities which have been assessed in relation to that transaction. The amount of the GIC benefit that the other entities receive would be limited to a maximum of:
· the amount of GIC that would be remitted as a result of the payment if the payment had been made by the entity itself; plus
· an amount equal to the GIC remitted on the paying entity's debt as a result of its 50/50 arrangement.
This approach is modified when beneficiaries of a discretionary trust or similar entity are involved in relation to the transaction. In order for the GIC benefits to apply in this case either one of the following would need to occur:
· the trustee pays 50% of the tax in dispute in relation to the transaction; or
· all the assessed beneficiaries of the trust pay 50% of their disputed tax relating to the transaction.
Accordingly, where the Commissioner is prepared to enter into a 50/50 arrangement, both positions outlined at a. and b. in the above question would be acceptable.
Meeting Discussion
No discussion.[_Toc93891009] 25 ATO audit practices - GST
It has come to the attention of the professional bodies that in a GST Audit environment additional penalties have been levied as a result of taxpayers seeking legal or other advice. The rationale reported as having been given by the ATO is that seeking advice was a delay tactic warranting penalty.
ATO comment is sought on whether ATO policy is to penalise taxpayers further for seeking advice in a system that is based on self assessment of liability under what are not simple laws.
Response
It is Tax Office policy not to treat the seeking of legal or professional advice as lack of cooperation or delay that might be regarded as an aggravating circumstance that would increase the level of any shortfall penalty. This is assuming that the taxpayer does not unreasonably delay in seeking the advice and the professional does not unreasonably delay in providing the advice to the taxpayer.
This approach is in accordance with the Taxpayers’ Charter and the ATO Access and Information Gathering Manual and is based on the Commissioner’s view that taxpayers are entitled to professional advice. The relevant extracts from these documents are:
Taxpayers’ Charter
Reasonable time and opportunity to consult your adviser
If we contact you in relation to a substantial matter - for example, to conduct an interview or to obtain access to your information as part of an audit of your tax affairs - we’ll advise you that you may have a representative present at any time.
If you need to consult with your representative, we’ll give you reasonable time and opportunity to do so.
There may be situations where urgent access action is appropriate. For example, there may be a reasonable belief that the existence or integrity of documents or information is under threat.
Urgent access requires the approval of a senior tax officer. We’ll still give you reasonable time and opportunity to consult your representative after the urgent access.
ATO Access and Information Gathering Manual
Consultation
We will provide you with an opportunity to consult with your accounting or legal advisers.
All GST compliance areas were canvassed and have indicated that they follow the Tax Office policy.
Nevertheless, the Tax Office will take steps to reinforce with GST staff the policy that, in normal circumstances, the seeking of legal or professional advice as lack of cooperation is not to be treated as a delay that might be regarded as an aggravating circumstance that would increase the level of any shortfall penalty.
If members are aware of cases where this policy has not been followed, they should raise the individual matters with John Higham, Senior Assistant Deputy Commissioner, GST
Meeting Discussion
No discussion.
.[_Toc93891010] 26 ATO correspondence and description of the sender
The title “Deputy Commissioner – Serious Non-Compliance” is quite a frightening one and any taxpayer who received a letter signed by that particular Deputy Commissioner using this description is likely to feel particularly anxious. As well he or she will probably feel as though he or she has been somehow prejudged.
It is very difficult for tax agents to act for taxpayers who could not, on any reasonable basis, be regarded as being involved in any criminal or quasi-criminal activities to explain to their clients why their clients have received a letter from that particular Deputy Commissioner. In one particular case such a letter has issued to a taxpayer where all the ATO wants to know is more about the taxpayer’s claims for donations to an Australian museum.
Could the Commissioner explain the decision making processes which are undertaken when writing to taxpayers and deciding whose name and description should be used as the sender and whether it is thought that the description of the sender has some particular benefit for the ATO?
Response
Currently, Tax Office staff have a range of instructional material that describes the method by which signature blocks are to be constructed ie Correspondence Guidelines, ATOField and a Practice Statement. There is some inconsistency in relation to how Business Line descriptors are applied in the signature blocks of the various Deputy Commissioners in these instructional materials. The Tax Office recognises these inconsistencies and work is being undertaken with a view to standardising the issue for automatically and manually issued correspondence and notices. Effectively, there is no necessity to describe the Business Line that the Deputy Commissioner has responsibility for in signature blocks. Letters issuing from the Serious Non-Compliance Business Line will cease to include Serious Non-Compliance as the Business Line in the signature block of the Deputy Commissioner.
Meeting Discussion
No discussion.
1 [_Toc93891011] 27 Update on s.251L
Could the Tax Office provide an update on the draft Taxation Determination on s.251L?
Response
The Tax Office has issued for public comment draft Taxation Determination TD 2004/D22. This draft TD provides appropriate guidance on the Tax Office’s view of the operation of the current taxation law, specifically paragraph 251L(1)(b) of the Income Tax Assessment Act 1936, regarding the charging of a fee for the provision of tax advice. This draft TD was prepared following extensive consultation with representatives of the accounting, law, tax and financial planning professional bodies, the Treasury and the Australian Securities and Investments Commission, and reflects legal advice obtained from the Australian Government Solicitor.
Submissions have been received from various practitioner groups, firms, organisations and individuals and this feedback, and any relevant issues raised, is being fully considered prior to a final version being settled and released. The final TD is expected to issue early in 2005.
Meeting Discussion
Members advised they were satisfied with the process so far but thought that consumer protection issues still existed.
[_Toc93891012] 28 Dibb v Federal Commissioner of Taxation
Would the ATO please advise whether it will be reviewing Taxation Ruling TR 94/12 (Income tax: approved early retirement scheme and bona fide redundancy payments) in light of the discussion of the meaning of “bona fide redundancy” in the Full Federal Court’s decision in Dibb v Federal Commissioner of Taxation [2004] FCAFC 126?
Response
The Tax Office is still considering the judgment in the Dibb case and accordingly is unable to comment at this time
Meeting Discussion
No discussion.
.[_Toc81996418][_Toc93891013] 29 NTLG work program and management issues
[_Toc81996419][_Toc93891014] 29.1 Report on action items
Action Item NTLG0409/1: PALU to contact Michael Dirkis prior to the next meeting to discuss NTLG agenda processes.
Status: On-going
PALU has contacted Michael Dirkis. Processes being discussed for 2005 meetings.
Meeting Discussion
No discussion.
Action Item NTLG0409/2: Michael Dirkis, TIA, to provide additional information to Kevin Fitzpatrick for further investigation of the matters raised at Agenda Item 24.2 of the June NTLG meeting (Unrealised losses and wash sales).
Status: Ongoing
The information provided by the TIA was insufficient to allow a Part IVA analysis to be undertaken. However, there is a recent Administrative Appeals Tribunal decision (WT 2002/81) that provides guidance on the application of Part IVA to the types of situations raised by the TIA. The taxpayer has appealed the AAT's decision to the Federal Court, and the future outcome of the case will provide additional guidance for NTLG members.
Meeting Discussion
Status changed to Ongoing. The TIA is still interested in further discussions on this issue. Refer also to Agenda item 11.
Action item NTLG0409/3 : The Tax Office to provide more advice on application of penalties and GIC in relation to Consolidation. The relevant Tax Office contact is Second Commissioner Greg Farr.
Status: Ongoing
A draft ATO Practice Statement outlining the policy and approaches to be adopted by the Tax Office when considering remission of the General Interest Charge and penalties where a consolidated group seeks to amend its 2002-3 or later income tax assessments, was issued on 5 November 2004 to the members of the NTLG Consolidation sub-committee. The Practice Statement also provides that, for each year where consolidation laws are enacted which effect the 2002-3 or other returns already lodged, taxpayers need lodge only one amendment. This amendment should be lodged at the same time as the return for the relevant year. Sub-committee members were asked to provide comments (to Murray Hawkins or Gary B Scanlan) by November 22 2004.'
Meeting Discussion
Status changed to Ongoing until all comments have been received.
Action Item NTLG0409/4: PALU to liaise with members on implementing a suitable issues log process for the NTLG.
Status: On-going
A number of members have nominated to work with PALU on this process. Further discussions are to take place with a view to implementing an issues log for 2005 onwards.
Meeting Discussion
No discussion.
Action item NTLG0409/5: Rona Mellor to liaise with Tax Office counsel and the NTLG to formulate general guidelines in relation to confidentiality agreements, where required in Tax Office consultation processes.
Status: On-going
Action on this item is underway. PMD is in the process of gathering information on confidentiality agreements within the ATO including examples of agreements and circumstances of when they are used. This information will be used to assist in the formulation of general guidelines on the use of confidentiality agreements which will be done in conjunction with Tax Office Counsel. If any practitioners are interested in this issue and would like to contribute to the development of these guidelines, please register your interest with Donna Hill, PALU.
Proposed guidelines on the use of confidentiality agreements in the ATO will be available to the NTLG for discussion at the March 05 meeting.
Meeting Discussion
No discussion.
Action item NTLG0409/6: Tax Office processes for proof of identity for solicitors to be reviewed in light of current experience and wider consultation.
Status: Complete
The Tax Office seeks to clarify the response previously given for the agenda item on Solicitors and Proof of Identity at the 7th September 2004 meeting following comments received from members.
Tax Office procedures for the authorisation of a legal practitioner to act on behalf of a taxpayer aim to ensure a consistent approach that is sufficiently flexible to cater for the legal practitioner’s particular circumstances while allowing the Commissioner to be satisfied of their authority to act.
Below are the main ways which a legal practitioner can notify the Tax Office of their authority to act on behalf of a taxpayer. They provide for differing levels of urgency in seeking taxpayer information.
(1) Written authorisations
The ‘Notice of appointment of legal practitioner as agent' form on the Tax Office website can be completed by the legal practitioner and their client and then faxed to the Tax Office on (02) 9374 1360. The authorisation will be processed by the close of business of the next working day and the legal practitioner will be contacted to advise the authority has been recorded on Tax Office systems. The practitioner may then contact the relevant Tax Office area and ask for information in line with what the taxpayer has authorised.
(2) Verbal authorisations
Where the matter is more urgent, a verbal declaration of authority can be given by the taxpayer. This could be where the taxpayer is actually present with or in conference with the legal practitioner and provides the Tax Office with the authority and then passes the phone to the legal practitioner to make the relevant enquiries. If the taxpayer is not with the legal practitioner, they can ring the Tax Office and provide the necessary verbal authority. The details will be recorded on the Tax Office systems and then the legal practitioner can contact the Tax Office and seek information consistent with the authorisation provided. In both these circumstances a 'Notice of appointment of legal practitioner as agent' form must be received by the Tax Office within 28 days (from the date verbal authority was given) to confirm the legal practitioner as an authorised representative.
(3) Urgent matters
If there is an urgent legal matter, the legal practitioner should contact the case officer indicated on the relevant legal documentation (summons, writ, claim form or other demand issued to the taxpayer by the Tax Office). Where the legal documentation is evident on the taxpayer’s records, the case officer will take this as authority to answer the immediate questions the legal practitioner has. The legal practitioner should follow-up the initial contact by providing an actual authorisation from the taxpayer, preferably by faxing through the 'Notice of appointment of legal practitioner as agent' form.
Meeting Discussion
No discussion.
Action Item NTLG0409/7: Kevin Fitzpatrick to arrange for the preparation of a draft practice statement on when the Tax Office would wait for the outcome of a review or appeal before determining whether to apply compensating adjustments.
Status: On-going
Refer to Agenda Item 5.
Meeting Discussion
No discussion.
Action Item NTLG0409/8: The Tax Office to investigate whether there is any scope to provide relief to taxpayers who may have misinterpreted the recent changes to Division 7A announced in the 2004/2005 federal budget.
Status: Ongoing
Refer to agenda item 30.1
Meeting Discussion
Members pointed out the issue here was different to the issue addressed at agenda item 30.1. Rona Mellor advised all issues were being addressed through the review of the draft practice statement. Further updates are to be provided at future meetings.
Action item NTLG 0409/9 : Tony Stolarek, ICAA and Peter Allen, LCA to liaise with David McDonald and the Finance and Investment sub-committee to progress the issue of Division 6C and meaning of ‘eligible investment business’ further.
Status: Ongoing
Members yet to contact David McDonald.
Meeting Discussion
Tony Stolarek, ICAA, advised he had been in contact with David McDonald.
Action item NTLG 0409/10: Members to contact Peter Byrne if they have examples where the Tax Office has not provided feedback on suggestions for changes to draft rulings offered by the professional bodies.
Status: Ongoing
The ICAA forwarded a spreadsheet on 16 November of when they have provided comments on approximately 70 draft public rulings and don’t have a record of responses.
A progress sheet will be provided at the Meeting. As formal responses to submissions are only sent after the final ruling issues the explanation for no response on 13 draft rulings is that they have not been finalised. There are also a large number of Consolidation Determinations that have finalised recently where there has been ongoing consultation with the NTLG Consolidations Subcommittee and where the most appropriate way to respond is still being considered. There are instances where Tax Office responses has been provided via email and others where responses are still in preparation.
Meeting Discussion
Peter Byrne, AC Public Rulings Branch OCTC, attended and provided members with a copy of the ICAA spreadsheet with the Tax Office update on responses included. Peter indicated that often the Tax Office response was emailed direct to the person who referred the comments rather than issued to a specific mailing list. Peter also advised that most comments received had been replied to and the majority that had not were related to consolidation. These were being grouped by the Tax Office into like issues, for a combined response.
The ICAA said they would take the list away and respond to Peter on any outstanding matters.
Action item NTLG0409/11: Peter Byrne to arrange for compendium to be provided to NTLG members as a matter of routine.
Status: Ongoing
A sample of Compendiums will be provided at the NTLG meeting - further editing is being undertaken to enable distribution to the NTLG.
Meeting Discussion
Peter Byrne provided two edited compendiums to members at the meeting. He advised that OCTC were currently working on a further compendium for release to members.
Action item NTLG0409/12: Kevin Fitzpatrick to contact Ross Seller regarding the issues raised in regards to retirement villages and TR2002/14.
Status: Ongoing
Response to original agenda item (Item 27.1 – September 2004) provided to Ross Seller. Awaiting further comments, if any, from Ross.
Meeting Discussion
No discussion.
Action item NTLG0409/13: Kevin Fitpatrick to contact David Williams to discuss in further detail the issues raised regarding commercial debt forgiveness and the British Mexican Petroleum case.
Status: Completed
The issue has been developed on behalf of the Tax Office by Tom Rengers, Tax Counsel. Discussions have taken place with David Williams and Joe Lombardo on behalf of the Taxation Institute of Australia. In response to concerns about the level of awareness about the issue it was agreed that the Tax Office would present a paper at the TIA’s NSW Annual Intensive Retreat held on 4-6 November 2004. No issue has been raised with the Tax Office about the paper and therefore it is considered there is no further action required.
Meeting Discussion
No discussion.
Action item NTLG0409/14: Members to provide feedback to Stephen Goggs on the reviewed chapters of the ATO Access Manual.
Status: Ongoing
Refer to agenda item 20.1
Meeting Discussion
No discussion.
[_Toc93891015] 29.2 ATO Tax Practitioner Forum
Meeting held on 19 November 2004. Minutes in progress.
Significant issues discussed
1. Overview of Compliance Program for the small business segment
A general overview of the SME compliance program focussing on the risks that most concern the Tax Office and the strategies being used to address those risks was presented. There key areas are checking basic tax obligations are being met such as registration, lodgment, payment and claiming refunds along with analysis and follow up of information provided to ensure the correct tax liability has been calculated. There will be an increased use of risk profiling and measuring tax performance against economic performance.
A new working group will be established to build on the Tax Office understanding of the SME segment and the role tax agents have in advising SMEs, codesign compliance approaches to manage existing and emerging risks and codesign support required by tax agents that advise SMEs.
An overview of the Tax Office compliance strategy for employer obligations was made outlining:
• what tax obligations will be covered – PAYGW, FBT, Super Guarantee
• how cases will be selected for review based on unexplained differences in reporting and expectations
• types of compliance activities taking place – field visits, desk and phone reviews
Information was provided on micro business compliance activities including:
• continued emphasis on help and education
• focus on cash economy industries such as restaurants, taxi and barter
• record keeping practices
• checking on GST and income tax refunds.
2. Strategic Framework for the Tax Office relationship with tax agents
The Tax Office endorsed document was presented to the ATPF. The ATPF engaged in robust discussion with many concerns raised around the document intent and outcomes. Interested members and the professional associations were invited to join the implementation working group to further investigate ATPF concerns.
Other issues discussed included:
• Access to Tax Office services for legal practitioners and recognition of client/solicitor/Tax Office relationship
• Identification of additional ‘bugbears’ for investigation by the Tax Office following the latest ICAA survey
• Practical assistance for small business lodging annual activity statements.
Meeting Discussion
Members were concerned that the Strategic Framework for the Tax Office relationship with tax agents was being discussed at too low a level. They advised that practitioner members involved in the discussions appeared to focus mainly on the rewards they were going to get. Members wanted professional bodies to be more involved in the discussions and asked if they could be given a copy of the document. Robyn Clayton, AC TPG, commented the document had been changed slightly after the last ATPF but was happy to distribute it to members for discussion. The Commissioner advised he was looking to finalise the framework soon and that a meeting is scheduled for early February 2005 to do so. The Commissioner further advised he would be happy for members to bring the issue to the next NTLG if the February meeting did not resolve their concerns.
[_Toc93891016] 29.3 Consolidations Subcommittee
Meeting : 9 November 2004
Next meeting : February 2005
Minutes : 23 September minutes are now on the web under the Consolidation homepage
Summary of significant issues discussed
· Sub Committee members were provided with an overall summary on the implementation of Consolidation. Generally it was considered:
o the bulk of the law is now in place, but minor parts are still to come;
o the ATO has provided significant guidance with the recent release of rulings and supporting advisory materials;
o unenacted law has affected the timing and the number of groups entering consolidation;
o compliance activities are highlighting both errors on entry to consolidation as well as genuine compliance risks especially around asset valuations;
o ATO systems are ready to handle consolidated returns;
o Level of skilling around consolidation is increasing both internally and externally;
o The highest risk areas are still considered to be in the SB/SME markets.
· The ATO has now been notified of 1800 consolidated groups comprising nearly 18,000 entities. This is expected to significantly increase during the coming lodgment period.
· Phase one of the plan to issue public rulings dealing with assets, liabilities, single entity principle, CGT interactions, capital injections and accrued profits is now complete with in excess of 60 rulings being recently issued. We are now moving to phase two and draft rulings were recently issued on goodwill issues.
· New working groups have recently met to consider issues around losses, exits and multiple entry consolidations (MECs).
· A Practice Statement was recently issued on Division 40 shortcuts and dealing with over-depreciated assets on entry to consolidation.
· The ATO is compiling a single package of materials that will assist people who are required to prepare a consolidated return for the first time.
· Tax Office training materials are now available for use by externals.
Other matters
The Tax Office has recently responded to a joint letter from all organisations represented on the Consolidation Sub Committee about extending the period for making irrevocable elections beyond 31 December 2004. In our response we stated that the Commissioner had no administrative power to extend this deadline beyond what was in the legislation. [_Toc93891017] 29.4 Finance and Investment Subcommittee
Meetings:
· The last Finance & Investment NTLG Sub-committee meeting was held on 11 August 2004 (a copy of that report was previously provided).
· The Forex Working Party met on 14 September 2004
Next meeting:
· The next Finance & Investment NTLG Sub-committee meeting is scheduled for February 2005
· The next Forex Working Party meeting is scheduled for February 2005.
Minutes:
· Minutes for the Finance & Investment NTLG Sub-committee are available in their final form on the following Tax Office web link:
· http://atogovau/taxprofessionals/pathway.asp?pc=001/005/036/002/004&mfp=001/005&mnu=9395#001_005_036_002_004
· The Forex Working Party minutes have been finalised and are due to be published shortly.
Summary of Significant Issues Discussed (during period since the last report)
Issue 1: Forex and Pay-as-You-Go (PAYG)
The issue concerning the netting off of forex gains and losses for PAYG purposes was raised at the most recent NTLG meeting. The members were advised that the NTLG has decided to refer this matter to the Technical Issues Management Subcommittee (TIMS). The next TIMS meeting is scheduled for the 19th of November 2004. The issue concerning imposition of the General Interest Charge (GIC) that follows on from this matter may also be reviewed as part of a wider process. This latter issue will need to be escalated.
Action
· Advise the forex working party of the outcomes from the TIMS meeting of 19 November.
· GIC to be dealt with as part of the wider review of GIC being undertaken by operations.
Issue 2: Count back Method vs. First-In-First-Out (FIFO) Method
The Tax Office agreed that on the analysis carried out to date the count back method gives the same results as FIFO which is prescribed in the legislation. The CTA advised that some taxpayers may wish to use this method (on compliance cost grounds) even though the recently proposed amendments and PIF decision alleviate some of the issues. It was suggested that the Tax Office resolve this issue by letting Tax Office field staff know that where taxpayers are using the count back method instead of the FIFO method and that both produce the same result.
Action
If count back is considered to give the same results then the Tax Office will consider what communciation methods are appropriate.
Issue 3: Application of Division 775 to redeemable preference shares that are debt interest under Division 974
The issue concerns whether redemption of a redeemable preference share (RPS) that is characterised as a debt interest would give rise to a forex event under Division 775 – ie, does a redeemable preference share give rise to an obligation and if so what are the consequences.
Action:
Working party members were advised that there is little difference between the concept of ‘obligation’ to pay under Division 775 and the liability to pay under Division 16E of the Income Tax Assessment Act 1936 (ITAA 1936). A view was advanced that a RPS is not a ‘security’ for Division 16E of the ITAA 1936 because the Explanatory Memorandum states that shares are specifically excluded. Section 26BB ITAA 1936 which deals with traditional securities, would also not apply as a share in the legal form is not considered a security.
It is understood that the professional bodies may seek a change in the policy from government on this matter, given the recent proposed changes to the interest withholding tax exemption being extended to widely distributed RPS’ that are a debt interest.
Issue 4: Forex: Private and domestic bank accounts
The issue involves how to interpret the private and domestic exemption in the forex measures in relation to bank accounts. It was generally agreed that the options advanced by the Tax Office set out practical approaches to interpreting the law as it stands (eg, look at the purpose of the borrowing, as in the case of Hunter Douglas v FCT 83 ATC 4562 or see a bank account solely as a commercial transaction not having a private character). Broader issues arise in relation to mixed purpose bank accounts –eg, compliance cost.
Action
A meeting between representatives of the big 4 accounting firms, other interested parties and the Tax Office was held on the 20th October 2004. The purpose of this meeting was to:
discuss the approaches advanced by the ATO in relation to the application of the forex provisions in respect of foreign currency denominated bank accounts, and
to act as a platform to raise any related or flow-on CGT issues.
The externals agreed to provide the ATO with considered views in relation to these issues, and following receipt of such the ATO will consider its position.[_Toc93891018] 29.5 Foreign Source Income Sub-committee
Meetings:
The meeting of the Foreign Source Income Sub-committee was held 10 November. Minutes of that meeting are yet to be cleared. These minutes will be provided to members at the March 2005 meeting of the NTLG.
[_Toc93891019] 29.6 Fringe Benefits Tax Subcommittee
Meetings: 19 August 2004 and 18 November 2004
Minutes: Minutes of the 19 August 2004 meeting were released on 29 September 2004.
Summary of Significant Issues discussed at the August 2004 meeting:
Consumer Loyalty Program TD 1999/D28
Members were advised that this carry forward item is finalised with the issue of Law Administration Practice Statement PS LA 2004/4 (GA), addendum to Taxation Ruling TR 1999/6 and the withdrawal of draft Taxation Ruling TD 1999/D28. The practice statement sets out the limited circumstances where arrangements involving consumer loyalty rewards may be reviewed by the Tax Office.
The ‘otherwise deductible rule’ and the non-commercial loss rules in Division 35 of ITAA 1977
The Tax Office clarified the interaction of Division 35 and FBTAA. In particular the circumstances in which an individual taxpayer, in the capacity as an employee, could enter into an effective salary sacrifice and have an employer pay for the expenses of their business activity.
Other issues clarified by the Tax Office at the meeting included:
Section 58GA of the FBTAA – FBT exemption for car parking fringe benefits provided by small business employers - how the income test threshold of $10 million is applied.
Car parking fringe benefits and the meaning of ‘provider’ in section 39A of the FBTAA.
Expense payment fringe benefit and the operation of Section 20 of the FBTAA to interest rental subsidies.
Taxable value of car fringe benefits (statutory formula); recipients payment – payments that would not meet the definition of ‘car expense’ nor would the payments be a payment to the employer in consideration for the use of the car.
Exempt benefits – laptop computers and the operation of Section 58X of the FBTAA.
Update on FBT compliance activities
Stock appreciation rights and the inconsistencies in Class Ruling 2001/76 and ATO ID 2002/645. The Tax Office acknowledged that the inconsistencies, perceived or otherwise, in Class Ruling 2001/76 and ATO ID requires review and agreed to keep members informed as to the progress of the review.
[_Toc93891020] 29.7 Losses and Capital Gains Tax Subcommittee
Meetings
10 November 2004, in Melbourne.
Next meeting
Scheduled to be held Wednesday 8 June 2005, in Sydney.
Minutes
Draft minutes for the meeting held 9 June 2004 issued 6 October. The minutes were approved in substance at the 10 November meeting, and are in the process of being published.
Summary of Significant Issues Discussed
Progress of consolidation/CGT interaction issues, including where draft TDs have issued (CTC Des Maloney attended for this session). Pre-CGT factor issues were raised, and it was noted that a meeting was to be held at the Treasury (involving external representatives) on 24 November to examine the issues. Contract straddle scenarios were briefly discussed, as was the interaction between the tax cost setting and recoupment rules, where work is ongoing.
The CGT implications of the decision in Hart. The subcommittee was advised that the issues were with tax counsel who advised that a view might be reached within the next few weeks. One matter for consideration was the compensating adjustment provisions of Part IVA. The CGT implications in Hart may also be affected by the current review of the ‘can deduct/have deducted’ cost base rules.
The Tax Office response to the decision in Sherlinc has not yet been published. A draft practice statement has been prepared which is going through approval processes. It is currently with the business lines. Professional bodies also raised an issue of whether the small business rollover can be claimed once the replacement asset is acquired, where the gain has previously been returned.
Professional bodies noted the different CGT outcomes under employee share schemes, and more generally, where a right is forfeited as opposed to expiring. Treasury explained the policy rationale (market value substitution capital proceeds generally apply where the action/inaction of the taxpayer causes the loss of the right – such as in forfeiture; the expiry of the right does not trigger the market value substitution rule because the asset essentially loses its value through the effluxion of time). An issue was also raised about the absence of relief for trustee capital gains on shares where employee rights are exercised and no election under the employee share provisions is made at the time the rights are acquired.
A report was given on the working party (comprising Tax Office and professional body representatives) considering the fixed entitlement rules for trust losses and other provisions. The subcommittee was advised that a review of what had been represented as ‘fixed trusts’ indicated that many were not ‘fixed’ because of the presence of defeasance conditions. Trustees for those trusts should therefore give consideration to family trust elections. The Tax Office is in the process of preparing material for issue on these matters, possibly including a practice statement (subject to approvals being met).
CGT compliance and where the onus should lie (eg. whether an asset is a pre-CGT asset or not). Unnecessary complexity of the small business CGT provisions was raised, and also whether the tests could be made easier by focusing on the amount of gain to be relieved rather than the size of the entity making it. It was recognised that these were policy issues. Treasury indicated that submissions on how the small business provisions might be simplified should be sent to the Revenue Minister, with a copy provided to Treasury if the professional body making the submission wished to do so. Treasury noted that it wanted (but always subject to Government approval) to consult where possible on proposed or draft legislation and suggested that it would generally be desirable to involve the subcommittee members as the starting point for consultation. Professional body representatives supported this proposal.
Other matters
In discussion, the professional bodies raised the issue of the status of Tax Office IDs and rulings. In particular there was concern that, if the Tax Office had expressed its view of the operation of the law for a particular situation, taxpayers held some expectation that was all the Tax Office had to say on a particular situation. This generated disquiet when, for example, the Integrated Insurance Planning case was litigated on a CGT basis (ie in addition to the ordinary income arguments) which was not addressed in the agency development loans ruling (TR 2001/9). The subcommittee is to take this issue up with the Assistant Commissioner for the Rulings Unit.
1.1 [_Toc93891021] 29.8 Superannuation Industry Liaison Group
Meetings:
26 March 2004
15 June 2004
13 September 2004
Next meeting:
30 November 2004
Minutes:
September minutes and action items were emailed to the SILG members 28 October.
March and June meeting action items and minutes emailed to SILG members 16 April 2004 and 9 July 2004 respectively
Summary of Significant Issues Discussed (during period since the last report)
Issue 1:
Co-Contributions Processing Update
An update was provided on the ATO’s implementation of the co-contributions measure.
Issue 2:
SMSF Approved Auditors
Approved auditor update, including anticipated timeframe for mailout and submission methods for Auditor Contravention Report
Other matters:
SG Systems Update and General SPR update
Responsibilities in SPR – Who is responsible for what?
General SPR Issues
New Measures Update
Market Linked Income Streams
Choice
Administrative Decisions Update
Employer Expenses
Other Issues – Business Real Property Draft Circular
FBT Rules as they apply to transfer of Business Real Property
[_Toc93891022] 29.9 GST Practitioners Industry Partnership forum
Meetings: Wednesday 1 September 2004
Next meeting: Tuesday 16 November 2004
Minutes: The minutes from the September forum will be published late November
Summary of Significant Issues Discussed to be discussed in the 1 September Forum
There are no significant issues for discussion at the November meeting.
29.10 [_Toc93891023] Technical Issues Management Subcommittee
The TIMS met on Tuesday, 23 November. It is not anticipated that minutes will be available for the December NTLG. TIMS will report at the March 05 meeting.
[_Toc93891024] 29.11 Transfer Pricing Subcommittee
Meetings: 17 November, 2004
Next meeting: March, 2005
Minutes: Minutes from 05/08/2004 were cleared at the 17/11 meeting and will soon be posted to the ato.gov website.
Summary of Significant Issues Discussed (during period since the last report)
Issue 1: Interaction of Customs Duty with Transfer Pricing (ie when a transfer pricing audit adjustment is made a refund of overpaid customs duty may be required to even the ledger).
An update was provided on the progress of this issue. This issue has been accepted as a priority technical issue (PTI) and will be discussed at the February International Tax Rulings Panel meeting to see if it should be entered into the Rulings program.
Further meetings with the Australian Customs Service (ACS) have also been held. They advise that they are prepared to consider issuing a formal ruling to a taxpayer which has concluded an APA with the ATO, to confirm that the APA outcomes are also acceptable for customs valuation purposes. They have invited any taxpayer (within certain industry groups) which has concluded an APA to approach them.
Issue 2: Transfer Pricing Compliance program
NTLG-TP members were provided with an update on developments in the transfer pricing compliance program. This comprises of targets in the Compliance booklet on risk assessments, audits and APAs. This compliance program is being conducted in the Large and SME markets.
Members were provided with information on how these compliance activities would be conducted and which areas the ATO would be focusing on.
Other matters:
Nil
[_Toc93891025] 29.12 Indirect Tax Rulings Panel
For the period 1 September 2004 to 30 November 2004.
Meetings and Meeting Outcomes
During the period 1 September 2004 to 30 November 2004, the Indirect Taxes Rulings Panel has convened on three occasions.
[_Toc87681673]Meeting – 2-3 September 2004
At the meeting held on 2-3 September 2004, the Panel considered and provided advice on:
A GST Ruling on Assumption of Liabilities;
A draft GST Determination on Breakfast Bars;
A GST Ruling on Spread Betting;
A draft Ruling, draft Addendum and draft Practice Statement on the GST Margin Scheme;
A draft Practice Statement on Bare Trusts.
Meeting outcomes:
The outcomes of this meeting have been distributed.
[_Toc87681674]Meeting – 23-24 September 2004
At the meeting held on 23-24 September 2004, the Panel considered and provided advice on:
A proposed rewrite of GSTR 2000/15;
A GST Ruling on Division 132;
A proposed rewrite of GSTR 2000/36;
A GST Ruling on section 38-190(3), in particular the application of paragraph 9-25(5)(a) and subsection 38-190(3) to certain global supplies and telecommunication supplies.
Meeting outcomes:
The outcomes of this meeting have been distributed.
[_Toc87681675]Meeting – 21-22 October 2004
At the meeting held on 21-22 October 2004, the Panel considered and provided advice on:
A GST Ruling on Book Entries;
A draft GST Ruling on Effective Use and Enjoyment;
An Addendum and Consolidated GST Ruling on the GST Margin Scheme;
A Superannuation Determination on whether a self-managed superannuation fund is able to provide a defined benefit pension;
A proposed rewrite of WET Ruling 2000/2.
Meeting outcomes:
The outcomes of this meeting have been prepared and are awaiting clearance.
[_Toc87681676]Forthcoming Meeting – 18 November 2004
The next meeting of the Panel is due to be held on 18 November in Melbourne.
[_Toc87681677]‘Out of session’ consideration
During the reporting period, the Indirect Taxes Rulings Panel considered the following topics ‘out of session’:
A proposed GST Ruling on Fuel Cards;
A proposed draft GST Ruling on Financial Spread Betting and Contracts for Difference;
A proposed draft GST Ruling on Security Deposits;
A proposed draft GST Determination on the attribution of GST under Division 99;
Two proposed GST Determinations on Recipient-Created Tax Invoices;
A proposed Product Grant and Benefit Ruling on Forestry.
All of these issues had previously been considered by the Panel ‘in session’.
[_Toc87681678]Summary of significant issues discussed (at meetings during the period)
[_Toc87681679]Issue 1
Consideration of a GST Ruling on Assumption of Liabilities
The Panel examined a range of issues, including the proper treatment of annual leave entitlements, the handling of adjustment events under Division 19, and the clarification of the phrase ‘ongoing contractual arrangements’.
Issue 2
Consideration of a GST Ruling on Spread Betting
The primary issue for the Panel was whether the distinction between financial spread betting and spread betting on sports was sufficiently made in the draft. The Panel also agreed to re-examine the draft out of session.
[_Toc87681680]Issue 3
Consideration of a draft Ruling, Addendum and draft Practice Statement on the GST Margin Scheme
The Panel discussed the application of Division 75 in broad terms, considering questions such as the correct time for a taxpayer to elect to use the margin scheme, whether it was possible for a taxpayer to subsequently alter their election, and the proper interpretation of the phrase ‘improvements on the land’.
Issue 4
Consideration of a GST Ruling on Division 132
The Panel examined the proper function of Division 132, including issues such as whether Division 132 applies to supplies of things used in making non-financial input taxed supplies, and whether the thing sold must have been principally utilised in carrying on the enterprise to be considered a taxable supply.
Issue 5
Consideration of a GST Ruling on the application of subsection 38-190(3) to certain global supplies and telecommunication supplies
The major questions for the Panel in relation to this topic were how to treat supplies of global audit services and mobile phone ‘global roaming’ services for the purposes of the GST Act. The Panel also addressed the issue of whether the supply of data services alters the analysis.
Issue 6
Consideration of a GST Ruling on Book Entries
The primary question for the Panel to consider was the proper date for the application of a transaction made by way of book entry. The Panel also agreed on the appropriate treatment of supplies made between associated entities by way of book entry.
Issue 7
Consideration of a draft GST Ruling on Effective Use and Enjoyment
The Panel discussed the question of where ‘effective use and enjoyment’ of a supply takes place, in the context both of individuals and non-individual entities such as corporations and trusts.
Issue 8
Consideration of a proposed rewrite of WET Ruling 2000/2
The changes proposed in the rewrite were mainly concerned with the new legislation for Producer Rebates. The Panel was content with the draft as it stood, with some minor recommendations as to wording and expression. The rewritten Ruling will issue as a final.
[_Toc93891026] 29.13 International Tax Rulings Panel
[For the period of Sept 04 to Nov 04 inclusive as at 15 Nov 04]
Meetings:
During this period, the ITRP convened three meetings. It met on 9 Sept 04, 7 Oct 04 and 4 Nov 04 all in Canberra.
Next meeting:
The next ITRP meeting will be held for two days on 1-2 Dec 04 in Canberra.
Minutes:
The Minutes of the Aug 04, Sept 04 and Oct 04 meetings were endorsed by the Panel in their subsequent meetings respectively. The draft Minutes of the Nov 04 meeting has been prepared and will be tabled for Panel’s endorsement in its Dec 04 meeting.
Summary of Significant Issues Discussed (at meetings during period)
9 Sept 04 meeting
|
1. Final TR on CM&C |
The Panel endorsed the final ruling subject to some changes. [Final ruling (TR 2004/15) since issued on 20 Oct 04] |
|
2. Draft TD on the application of s.23AG to ADF personnel |
The Panel endorsed the draft determination subject to some changes. The draft determination to issue as soon as practicable. [Waiting for further information from the ADF] |
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3. Draft TR on GSA |
The Panel endorsed the draft ruling subject to some changes. The rulings team to notify the Treasury before the release of the draft ruling. [The draft ruling (TR 2004/D22) scheduled for release on 24 Nov 04]
|
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4. Draft TR on Japanese Exchange Teachers (JET) |
The Panel endorsed the draft ruling in principle. The rulings team to carry out further research on ‘basket shopping’ issues in treaty interpretation and re-table the draft to the Panel in the next Panel meeting. The rulings team to liaise with the Japanese competent authority. |
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5. Draft TR on NZ Trusts |
The Panel endorsed the draft ruling in principle. The rulings team to circulate the amended draft out of session for Panel’s final endorsement prior to release. The rulings team to send a copy of the draft ruling to the NZ revenue office when released. [The draft ruling (TR 2004/D24) scheduled for release on 24 Nov 04] |
7 Oct 04 meeting
|
1. Draft TR on JET |
The rulings team tabled the researched material on ‘basket shopping’ issues for discussion. The team to amend the draft as discussed by the Panel and to continue liaising with the Japanese competent authority. Release of draft ruling to be postponed due to expected delay in response time. Review of TD2004/24 and IT2577 in the meantime. |
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2. Draft TR on branch lending for Multinational Financial Institutions |
To amend the draft ruling as discussed by the Panel and recirculate it out of session for Panel’s endorsement prior to release. |
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3. Draft TR on shipping and the operation of s.129 |
To amend the draft ruling as discussed by the Panel and re-table it to the Panel for further discussion. Need to get more information on shipping practice from the industry. |
4 Nov 04 meeting
|
1. Final TR on s.6AB(1) – Foreign Income |
The exclusion of net capital gains from foreign income was discussed. Once reconsidered the issue, the rulings team needs to prepare the final ruling for release as discussed by the Panel. |
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2. Final TR on s.6AB(3) – Attribution of Personal Services Income |
Final ruling endorsed by the Panel with minor suggestions. The rulings team to amend the ruling as discussed by the Panel but it must be released together with s.6AB(1) ruling when it is ready for release. |
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3. Draft TD on s.23AG(2) - Any |
Draft determination was endorsed. To be released soon. |
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4. Draft TD on s.23AG(2) - Only |
Draft determination was endorsed. To be released soon. |
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5. Public comments on TR2004/D16 (Def of FI) |
The Panel was briefed on the summary of public comments received on TR2004/D16. The draft of final ruling will be tabled for Panel’s discussion in the Dec 04 meeting. |
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6. Draft TR on Lloyd’s |
The rulings team briefed the Panel on its background and issues. The team needs to write to the UK authority to clarify some technical issues. The team will also analyse subsidiary issues in the meantime. The Panel agreed to invite an industry expert to the next meeting when the amended draft ruling will be re-tabled. The current draft milestone date needs to be re-scheduled. |
[_Toc93891027] 29.14 Public Rulings Panel
For the period 1 September 2004 to 30 November 2004.
Meetings:
The public rulings panel met on 22 September, 30 September and 1 October, and 1 November 2004.
Meeting 22 September
Several draft determinations on Consolidations: Accrued Profits were considered at the 22 September 2004 panel meeting. The panel discussed the external responses to the seven draft taxation determinations on Accrued Profits.
Minutes:
All minutes from the 22 September public rulings panel have been finalised and distributed.
Meeting 30 September and 1 October
Six issues were considered at the 30 September-1 October public rulings panel: Debt/Equity and Contingent Obligation, a discussion of recent case law and TR 2000/8: investment schemes, Phillips Trust, Residential Rental Properties, Shares for Assets, and Interest on borrowings to pay income tax.
Minutes:
All minutes from the 30 September and 1 October public rulings panel have been finalised and distributed.
Meeting 1 November
Four issues were considered at the 1 November public rulings panel: Fringe Benefits Tax and the living-away-from-home allowance, Professional Artists, Government Payments (rental properties and energy efficient appliances), and Assessability of Australian Government payments to business including bounties, subsidies and grants.
Minutes
The minutes from the 1 November public rulings panel are in draft form, awaiting finalisation and distribution.
Forthcoming meeting:
The next panel meeting will be held on Thursday 25 and Friday 26 November and will be held in Canberra.
‘Out of session’ consideration
During the reporting period, the Public Rulings Panel considered the following topics ‘out of session’:
A proposed taxation ruling electronic record keeping;
A proposed taxation ruling on tax deductible gifts;
Proposed taxation rulings on the consolidation issues of asset and liability;
A proposed taxation ruling on lease surrender;
A proposed taxation ruling dealing with a recent case on alienation of personal services income;
A proposed miscellaneous taxation ruling on petroleum resource rent; and
Proposed taxation determinations on superannuation re-contribution.
Summary of Significant Issues Discussed (during period since the last report)
Issue 1:
The Panel considered two related draft taxation determinations that have recently been developed in relation to the Debt/Equity measures in Division 974 of the Income Tax Assessment Act 1997.
Issue 2:
The Panel considered the impact of the decisions of FCT v Cooke [2004] FCAFC 75; and FCT v Sleight [2004] FCAFC on the Commissioner’s view in TR 2000/8: investment schemes and whether amendment was required to the ruling. Further investigation will be undertaken regarding these issues.
Issue 3:
The Panel considered the draft taxation ruling on Phillips arrangements which deals with the operation of section 8-1 of the Income Tax Assessment Act 1997 and Part IVA of the Income Tax Assessment Act 1936 in relation to service arrangements between associated entities. The ruling will be reconsidered by the NTLG and the Panel along with a booklet on the issues.
Issue 4:
The Panel considered the Residential Rental Properties issue which deals with capital allowance deductions for items in, or associated with, residential rental properties and the categorisation of these items as capital works or depreciating assets. In particular, the Panel discussed the concepts of plant, articles and machinery.
Issue 5:
The Share Issues and Deductibility ruling deals with the tax consequences for companies issuing shares for assets. This issue was previously considered on 2 August 2004. The panel continued its discussion on several court decisions and the policy intent behind the provisions in light of the new draft. Further discussion will occur out of session.
Issue 6:
The panel discussed the issue of interest on borrowings to pay income tax. A public ruling has not yet been drafted. Clarification was sought from the panel as to the deductibility of interest incurred on moneys borrowed to pay income tax liabilities. A chronology of this issue was considered (1921 to present).
Issue 7:
Prior to the panel meeting, a presentation was delivered by external representatives of the Australian Contracts Professions Management Association. The Panel considered a draft taxation ruling and two draft taxation determinations on fringe benefits tax and the living-away-from-home allowance. The draft taxation ruling discusses the objective test to determine whether an allowance is a living-away-from-home allowance under subsection 30(1) of the Fringe Benefits Tax Assessment Act 1986.
Issue 8:
The Panel considered the final taxation ruling on whether a professional artist is carrying on a business. The ruling included changes suggested in the comments made by respondents and some other amendments.
Issue 9:
The Panel considered a draft taxation determination on whether a government payment received by a rental property owner to offset the cost of an energy efficient appliance should be included in assessable income as an assessable recoupment under subsection 20-20(3) of the Income Tax Assessment Act 1997. Subdivision 20-A of the Income Tax Assessment Act 1997 applies where a taxpayer has received an amount as recoupment of a loss or outgoing. The effect of Subdivision 20-A is to include the recoupment amount in the taxpayer’s assessable income to the extent the loss or outgoing has been deducted.
Issue 10:
The Panel considered a draft ruling which explains the income tax treatment of government industry payments received by Australian resident entities carrying on a business or intending to carry on a business. The ruling does not apply to those exempt entities specified in section 11-15 of the Income Tax Assessment Act 1997. The panel will consider the ruling further, along with the draft ruling dealing with the capital nature of the payments.
[_Toc93891028] 29.15 Test Case Litigation Panel
Meetings:
The Test Case Litigation Panel met on 1 September 2004.
Next meeting:
The next meeting of the Test Case Litigation Panel will be:
Date: 3 December 2004
Time: 9:00 am
Venue: Large Conference Room, Level 6 100 Market Street Sydney NSW 2000
Status of Minutes:
In-Confidence. The Minutes reflect individual consideration of applications made by taxpayers, they are not suitable for tabling at the NTLG.
Summary of Significant Issues Discussed (during period since the last report)
In the September Panel, six applications for Test Case funding were considered. The Panel recommended funding in respect of one of those applications. The underlying issue of that application may be resolved in a review of a Taxation Ruling.
Other matters: N/A
[_Toc93891029] 30 Other Business
Responses to items of ‘Other Business’ will be provided at the meeting if available, otherwise they will be provided as soon as practicable following the meeting.
[_Toc93891030] 30.1 Update on Draft TD on Division 7A
Could the Tax Office provide an update on issue of draft TD on Division 7A and statute barred loans and accompanying practice statement. Could the response also include when are they likely to issue?
Response
The draft Taxation Determination is currently being redrafted, taking into account feedback received from NTLG members. A practice statement to accompany the Taxation Determination is also currently being drafted. The anticipated issue date of these documents for comment by NTLG members is 15 December 2004.
Meeting Discussion
Members asked if all draft tax rulings and determinations and practice statements would be made available as confidential drafts to professional bodies before being made public. The Commissioner advised he preferred not to do so in every case as he felt it added an extra step that was not always required, particularly as the purpose of issuing draft rulings and determinations was to provide for feedback, including from professional bodies.
[_Toc93891031] 30.2 Self-assessment and taxpayer choices (e.g., the small business CGT concessions)
The method by which a taxpayer makes a choice under the CGT provisions (particularly the small business concessions) is shown by the way the taxpayer’s tax return is prepared (see section 103-25(2)).
Where the taxpayer only becomes aware of the fact that he or she may have been entitled to claim one or more of the small business concessions after his or her tax return has been prepared and lodged, it is understood that there is a view within the ATO that such a taxpayer will not be eligible to have his or her assessment amended to allow the concessions because, as concessions were not originally claimed, the taxpayer is taken to have chosen not to have claimed the concessions and therefore cannot reverse that choice or election.
a. Is this understanding of the Tax Office’s position correct and, if so, has the ATO considered making representations to have the law amended so that taxpayers in such situations cannot be precluded from ever being entitled to the concessions simply because there was a mistake in the preparation of their return in the first place?
Response
The understanding of the Tax Office position in the situation outlined above is not correct. A taxpayer who did not consider the small business concessions and accordingly included a capital gain in their income tax return has not made a choice and can later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain. The taxpayer may need to seek further time from the Commissioner to make the choice.
Tax Office products confirm this view.
Certain Tax Office products also state that if a taxpayer has decided not to choose any small business concessions, the taxpayer has made a choice which cannot later be changed. This is no longer the Tax Office view and these products will be amended to reflect the current view that a decision not to choose a concession is not a choice. In such a situation a choice can later be made at any time during the period available to the taxpayer to make a choice, or within further time as the Commissioner allows.
b. More generally how does the ATO understand the interaction between the choice process under self-assessment and the amendment provisions under the ITAA 1936?
Response
There are a number of provisions under the ITAA 1936, and the ITAA 1997 which involve choices and elections. The manner in which these elections are invoked or made varies, as does whether and the manner in which they can be revoked. As a general position a choice or election, once made, cannot be revoked unless revocation is specifically provided for under legislation.
This variation in invocation and revocation of choices and elections means that there is not a ‘general ATO understanding’ of the interaction between the choice process under self assessment and the amendment provisions under the ITAA 1936 – the application of the amendment provisions will vary according to the circumstances of the choice the taxpayer made.
Meeting Discussion
No discussion.
[_Toc93891032] 30.3 Tax agent compliance with their own obligations
Meeting Discussion
Robyn Clayton, AC TPG, provided members with a one page handout detailing recent Tax Office analysis of the level of compliance amongst tax agents with requirements to lodge their own income tax returns and activity statements and pay any debts due. The handout also provided a comparison of tax agents’ behaviour with the behaviour of other professional groups. Robyn advised members the Tax Office is looking to the professional associations for assistance on how to address the problem areas.
Members requested and were given permission to publish the figures in their journals. Members asked for the Tax Office to provide some context setting words for inclusion when they publish the figures.
[_Toc90442123] Action item NTLG0412/05: Robyn Clayton to provide some appropriate words to accompany the tax agent personal obligations compliance figures for use by the professional associations in their publications.
[_Toc93891033] 30.4 Treasury’s consultation arrangements over the Christmas/New Year period
Meeting Discussion
Deidre Gerathy, Treasury, provided members with a schedule of possible upcoming Treasury consultations over the Christmas/New Year period (Attachment 3). Treasury are attempting to minimise consultations over the holiday period but Government timelines may necessitate some processes be scheduled during this time.
[_Toc93891034] 30.5 In-house finance companies
Meeting Discussion
Members raised an issue regarding comments made by the Commissioner in his speech at the September IQPC regarding in-house finance companies. Members wondered what they were to make of the Commissioner’s comments and were they intended as a preliminary taxpayer alert.
The Commissioner advised his statements were not to suggest the Tax Office was questioning all in-house finance arrangements. His statements were intended to highlight some issues the Tax Office had identified in recent cases where on the evidence available to date, and looked at objectively, the true character of the arrangements was open to question. The Commissioner indicated that he expected to be in a position to provide more detailed comments of the characteristics that might cause concern.
Members indicated they would like to discuss this matter further at the next meeting.
[_Toc93891035] 31 Next meeting and close
The next meeting is scheduled for Tuesday the 15th of March 2005, commencing at 9.30am.
Meeting Discussion
The date of the final meeting for next year was changed from Monday the 12th of December to Thursday the 8th of December.
The Commissioner noted this was the final meeting for Ross Seller, LCA, and thanked him for his contribution to the NTLG.
[tims][_Toc102981202]Attachment 1 : Practical compliance
[Complex][_Toc102981203]Attachment 2 : Complex Rulings Review
Key Recommendation
· A new collaborative approach to the handling of complex requests is required involving changes for taxpayers as well as the ATO.
Principles of a New Approach
• In order to accelerate the complex private rulings process key principles are:
• Centralised point of reference in Office of Chief Tax Counsel that is responsible for marshalling resources and taking remedial action to ensure cases are not delayed
• Alignment of Taxpayer and Tax Office priorities – performance managed by elapsed time as well as Charter
• Front-end engagement of all expertise to avoid sequential processing
• Taxpayers and Tax Office working together to clarify the ruling
The New Process
• Key elements of the proposed new process for handling urgent and complex cases include:
• Notifying the ATO of a ruling request as soon as it is seriously contemplated
• Assigning senior case managers, experienced in the process, when notified of a pending ruling request
• Requiring a pre-lodgment engagement process to assist the applicant to clarify their requirements, provide a full brief with their initial request and identify all ATO officers that need to have input to the ruling
• Justifying the need for any more information from clients
• Ensuring effective project management that engages all expertise before or at the time the ruling request is lodged
• Confirming the facts that are ruled on
• Proposed criteria for ruling requests entering the new process are:
• The transaction is prospective and time sensitive
• The transaction is of such significance it requires Board consideration
• The transaction is heavily dependent on the tax outcome
• The ruling requires interpretation of complex laws and facts
• The request provides a draft ruling and a ‘full brief’ (i.e. all relevant information provided, issues clarified, precedents identified, position for and against fully argued, rationale for urgency and key timeframes)
• These criteria will need to be refined in the light of experience with the new process[Treasury][_Toc102981204]Attachment 3: Treasury’s consultation arrangements over the Christmas/New Year period
We will endeavour to minimise consultations over the Christmas/New Year period. However, there may be some instances where consultation processes cannot be avoided due to the Government’s legislative timeframes.
Specific consultations which we are presently aware of that we may not be able to avoid undertaking consultation on include:
RITA: there is likely to be consultation with some RITA working groups on draft legislation during December or January. We are liaising with the working groups to determine suitable times.
Black hole expenditures: A discussion paper may be sent out in mid January with responses due by late February.
TOFA related matters: We understand that some taxpayer representatives are keen to discuss these soon.
Review of the provision of pensions in small superannuation funds: A discussion paper may be sent out in December with a response due in February.
Regulations to clarify meaning of ‘interdependency relationships’: Draft regulations may be exposed for public comment during this period. The regulations are designed to assist trustees in determining if a person is entitled to the payment of a superannuation death benefit under the broader definition of dependent as defined in superannuation law. The superannuation industry is keen to have this matter clarified as soon as practicable.
If any urgent matters arise unexpectedly over the holiday period we will discuss timing with the relevant stakeholders and endeavour to accommodate their concerns as much as possible.
The Treasury
December 2004
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