NTLG minutes - 5 September 2006

QC: 19137 Content revised: No Abstract revised: No

Abstract:

Issues discussed: Tax practitioner research results, Change Program update, Tax Office litigation strategies and sub-committee reports.

Meeting details

Venue

Executive Conference Room
5th Floor, West Tower
Australian Taxation Office
2 Constitution Avenue, Canberra

(commencing at 9.30am)

Attendees

Steve Allan	CPA Aust	Tony Greco	TA
Julian Cheng	ICAA	Andrew Mills	TIA
Murray Crowe	Tax Office	Peter McGinty	NTAA
Michael D'Ascenzo (Chair)	Tax Office	Peter Moltoni	TIA
Michelle de Niese	CTA	Ali Noroozi	ICAA
Michael Dirkis	TIA	Andrew O'Bryan	CPA Aust
Frank Drenth	CTA	Frank O'Loughlin	LCA
Paul Drum	CPA Aust	Gavan Ord	NIA
Bob Duncan	ATMA	Tony Pagone	LCA
Kevin Fitzpatrick	Tax Office	Shane Reardon	Tax Office
Mark Friezer	LCA	Jonathan Rollings	Treasury
Jennie Granger	Tax Office	Tony Stolarek	ICAA

Apologies

Karen Anstis	Tax Office	Deidre Gerathy	Treasury
Steve Cane	NTAA	Peter Dowling	CPA Aust

Guest speakers

John Body	Amity Consulting	Mark Konza	Tax Office
Greg Dark	Tax Office	Alison Lendon	Tax Office
Tim Dyce	Tax Office	Bill Powell	Tax Office
Mark Francas	TNS Research

Secretariat

Stephen Quinn

Tax Office

Louise Jameson

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. The Commissioner of Taxation intends to instil a more open philosophy and process with the National Tax Liaison Group. As such, minutes of NTLG meetings will now be published well before the meeting date on which members accept or modify the minutes under normal meeting protocols. This version of the minutes is available for member associations to share more widely on the understanding that formal endorsement is yet to occur.

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	Details of item
NTLG0609/01	A copy of the research presentation will be provided to NTLG members. More detailed information regarding the research will be made available to members on request. Agenda item 2
NTLG0609/02	An indicative time line for the implementation of the recommendations in the Inspector-General of Taxation's report is to be developed. Agenda item 4
NTLG0609/03	NTLG members are invited to suggest issues to be considered for inclusion in the test case and public rulings programs. Agenda item 4
NTLG0609/04	The NTLG is to be briefed on the outcome of the consultation with the Corporate Consultative Committee in relation to the management of information gathering aspects of compliance activities. Agenda item 6
NTLG0609/05	Discussion regarding the Corporate HOTSA to occur at the December 2006 NTLG meeting with the Chief Knowledge Officer. Agenda item 7
NTLG0609/06	A progress report to be provided at the December NTLG meeting regarding the withdrawal of the GST practice statements. Agenda item 8
NTLG0609/07	Members are to be provided with details of issues from the GST sub-committee that are expected to be finalised. Agenda item 9
NTLG0609/08	Consolidation sub-committee chair is to provide a report at the December meeting. Agenda item 9
NTLG0609/09	A report on upcoming practice statements will be included as a standing agenda item for the June and December NTLG meetings. Agenda item 10
NTLG0609/10	A report on the GAAR panel is to be included as a standing agenda item (6 monthly, ie March and September meetings). Agenda item 11
NTLG0609/11	Second Commissioner Granger agreed to provide information at the next meeting on the number of current position papers where Part IVA is raised. Agenda item 11
NTLG0609/12	An update on the user testing of the ICP account screen designs to be provided at the December NTLG meeting. Agenda item 12
NTLG0609/13	A letter is to be forwarded to Treasury regarding a legislative change associated with the notice of assessment for trusts. Agenda item 14
NTLG0609/14	The issue associated with RoSA and trusts will be discussed out of session with the TIA. Agenda item 14
NTLG0609/15	A copy of the draft fact sheet regarding the tax consequences of incorporation is to be forwarded to NTLG members for feedback via email. Agenda item 16
NTLG0609/16	An update will be provided to the NTLG once feedback on the fact sheet has been considered. Agenda item 16
NTLG0609/17	The Secretariat will contact the TIA to discuss the issue associated with substituted accounting periods. Agenda item 19
NTLG0609/18	A progress report on the simplified superannuation proposals is to be provided to the NTLG at the December meeting. Agenda item 23

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.

1.1 Introductions, apologies, confirmation of minutes of 21 June 2006 meeting

1.1 Opening comments and introductions

The Commissioner opened the meeting at 9.30 am and welcomed all members.

He noted that this was to be Julian Cheng's last meeting, and thanked him for his contributions during his membership of the NTLG.

He also noted Rona Mellor's promotion to the Department of Human Services and thanked her for her contribution to the Tax Office and the NTLG.

1.2 New members were welcomed

Andrew O'Bryan (CPA Australia)

Jonathan Rollings, Treasury in Deidre Gerathy's absence

1.3 Apologies were accepted from

Peter Dowling (CPA Australia)

Deidre Gerathy Treasury

Alison Lendon Tax Office

Karen Anstis Tax Office (in attendance for Item 2 only)

1.4 Minutes of the previous meeting

The minutes of the previous meeting, 21 June 2006 are to incorporate the pre-meeting comments provided by Michael Dirkis.

Other changes suggested were to Item 1 - to incorporate processes for escalation of issues from the sub-committees to the peak NTLG meeting into the procedural instructions which accompany the practice statement. This was accepted by the Commissioner.

Action item 0603/03 - to be amended to reflect that there is no onus on practitioners to report non-compliance of their clients. The Commissioner accepted this.

1.2 Tax Practitioner research results

This is a facilitated workshop to understand the results of three research programs and to co-design responses.

The research projects are:

¦ Biannual tracking of tax agent perceptions of service and usage of channels

¦ Tax Agent Portal and technology survey, and

¦ Tax agent communication survey

Process
Mark Francas of TNS Research will attend the meeting to provide a summary of key research results from the three surveys. Results will be presented in the context of trends for tax agents.

Mr John Body of Amity Consulting has been engaged to facilitate the workshop.

The objectives of this session are to:

¦ Discuss the key findings, and

¦ Identify how to best use the research results to influence the next steps.

Meeting discussion
Mark Francas (TNS Research) provided a summary of the key findings of four research projects with tax agents to members. The research projects included the 2005 State of the Industry Research, the 2006 Tax agent communication survey, 2006 Tax Agent Portal and technology survey and the Biannual tracking survey - Wave 13, March 2006.

An objective of the session was to obtain members' feedback and reactions to the findings prior to a wider public release, and determine outcomes as to the next steps and how best to utilise the information.

A discussion of the research results occurred, with comparisons between earlier research.

Five key themes emerged.

1. Changes in work practices

Survey results showed a decrease in tax agent workloads. This had been a major pressure point in 2003. Satisfaction levels have significantly increased, but there is room for further improvement at the 'very satisfied' level.

Tax agents have reported a significant increase in the use of the portal and are seeing greater efficiencies and savings as a result.

Full details of the research reports will be made available to NTLG members on request, including copies of the early research to enable comparison of results.

2. Future of the profession

Levels of reported optimism have significantly increased and the future outlook regarding the profession was considered to be positive.

Overall figures regarding the future intentions of the profession, such as those planning to leave or retire, appear to have remained fairly constant. Professional association membership and tax agent registrations tend to support a more positive outlook for the profession. There is a need to continue to build understanding of the dynamics within the profession and how they are likely to manifest over the next few years. These trends will continue to be monitored in future research, which will be co-designed with the tax profession.

The most significant issues for the tax profession and the Tax Office focussed on complexity of the tax legislation and continual changes in the legislation.

3. Communication

It was noted that the use of the portal as the most frequent means of interaction with the Tax Office has increased markedly. Use of the portal and telephone are significantly above that of other communication channels. Interest in email as a channel is increasing. The portal and phone are used more for administrative issues while the phone is also used for technical issues. The portal is seen as a key factor in the turnaround of satisfaction and perceptions of Tax Office service. It was agreed that future development of the portal, including what features are needed, would be co-designed with the tax profession.

The overall demand for phone service had not dropped, but there were changes in what agents are calling about. The nature of calls has become more sophisticated. This could be due to the information that is available via other mechanisms and that many agents/callers are better informed before they call. They may want to verify the information or the application of it to their specific situation. It was suggested that the Tax Office undertake further analysis and research on the nature of telephone queries, and the different needs of callers from tax practices. This analysis would enable a better understanding of expectations. It was suggested that the analysis may also inform the development of facts sheets to meet specific information needs.

There is a need for the Tax Office to manage the interaction between the portal and phones, particularly when temporary problems with the portal may be experienced, impacting on how the office manages the channels. It was also noted however that around 25% of tax agent phone enquiries related to information that could have been found on the portal. This suggests the provision of more training on portal use.

Written correspondence was briefly discussed, and the Commissioner asked if the uncertainty in using letters was associated with a lack of confidence in the response or a lack of confidence that it would be directed to the correct area. Mark Francas suggested that it could be the latter.

The ATPF Advice Working Group is co-designing the products and services associated with the provision of advice for the tax profession. Consultations have revealed that tax agents want to be more self-reliant in accessing technical information. Information from the Simulation Centre testing showed that agents phone the Tax Office while simultaneously researching the website. If they find the information on the website first, the call is terminated. A comment regarding the limitations of the website search engine was made, and members were advised that the whole of the website is being reviewed, including the search engine. Further research is needed to explore needs for technical advice and services.

4. Improvements made by the Tax Office

Significant improvements in the overall satisfaction with Tax Office service was noted, with a corresponding drop in those not satisfied. Increased satisfaction with telephony service has been constant over several waves of research. Wait time on the phones has improved steadily. It was noted that if the office encounters platform problems and outages, satisfaction levels can be expected to drop.

Savings gained by tax practices associated with portal usage are positively regarded.

Another area of improvement noted was the perception that it is now easier to deal with the tax system.

5. Areas for further improvement

The consistency of technical information was identified for improvement, particularly where there was interaction with more than one Tax Office staff member. Factors that influence this may include the type of question that is asked, and whether the call is escalated, and who calls from within the tax agent practice. It was noted that the professional associations often experienced similar issues with phone calls where different information may be provided during separate phone calls on the same matter.

Some research questions were introduced in wave 12 to provide benchmark figures in the lead up to the implementation of the Client Relationship Management (CRM) system. To date, the research is not showing that tax agents are able to clearly identify staff awareness of linkages to previous telephone contact with the office.

The surveys indicated that a number of respondents felt that they either didn't have the opportunity to provide feedback, or that it wasn't acted upon when provided. It was noted that there are a number of mechanisms available for making suggestions and providing feedback, and consideration may be given to improving access and knowledge of these mechanisms.

The Commissioner asked whether there may be some confusion regarding the distinction between the structure of the tax law and the administration of the law.

A topic for future discussion, supported by the Commissioner, concerned the future of Technical Issues Management Sub-committee (TIMS) and links with the Board of Taxation recommendations.

Members indicated that there is a need to develop a deeper understanding of some areas and of the need to understand issues and their drivers.

Action item NTLG0609/01
A copy of the research presentation will be provided to NTLG members. More detailed information regarding the research will be made available to members on request.

Post meeting update
Planning is underway for the next round of the State of the Industry research. Professional associations participated in the co-design of the qualitative phase of the research in late October 2006.

A research project has been commissioned, and is being co-designed in conjunction with the ATPF Advice Working Group and representatives of the professional associations. Results are expected by the first quarter 2007.

1.3 Compliance perceptions

The Australian Financial Review (24 July 2006) reported that the Deputy Commissioner, Jim Killaly, was of the view that:

'…the Tax Office was forced to do formal interviews of senior corporate executives because 'rarely, if ever' did company records contain the full story. The impression I get is that much is deliberately not recorded or it is recorded in circumstances claimed to be covered by legal professional privilege.'

Taxpayers generally exhibit high levels of voluntary compliance in the face of a complex and uncertain tax regime. The professional bodies are concerned that this comment from the Deputy Commissioner is not helpful, particularly as the Tax Office needs to be seen as encouraging, reinforcing and supporting voluntary compliance.

In light of the serious implications underlying the Deputy Commissioner's statement, the professional bodies would like to discuss with the Commissioner the circumstances underlying this statement and the implications of the Deputy Commissioner's statement for the Tax Office's approach to compliance and the implementation of its compliance program.

Response
For discussion at the meeting.

Meeting discussion
Second Commissioner Granger commented that the news article referred to above followed a February 2006 speech 'Analysing recent developments in large business compliance' that in itself reflected a more balanced view. The follow up media focus was on a much narrower scope of the direct findings of the audit program. As such, the comments in the article lacked the broader context. There was general acknowledgement that there is little control over how information is presented by the press.

It was suggested by a member that there can be a gap between the information recorded by a company and what a Tax Office auditor expects to see. Auditors may want to see the complete documented evidence to substantiate a position, however there may be some things that that are quite obvious (for example an acquisition) and not 'written down', but not as an attempt to hide things. Members sought that appropriate messages be filtered through all levels within the office.

Overall, while there are some concerns regarding compliance behaviours, it was agreed that the messages regarding compliance are positive and there are opportunities to work together on issues that were discussed at the recent Large Market Business symposium.

1.4 Tax Office litigation strategies

In his submission to the Joint Committee of Public Accounts and Audit (JCPA) inquiry into a range of taxation issues within Australia, the Inspector-General of Taxation, David Vos, is reported as welcoming the Commissioner's emphasis on values as a foundation for the Tax Office's administration, whilst noting his concerns that the Tax Office not behave in ways that could undermine confidence in its ability to be fair, transparent and act in accordance with the rule of law. In relation to his concerns about Tax Office behaviour, Mr Vos cited the Tax Office's reluctance to apply the principle established in Essenbourne's Case.

As certainty in interpretation and application of the tax law is an important element in successful voluntary compliance, in light of the Inspector-General's concerns the professional bodies would like to discuss the Tax Office's current litigation policy and strategies and how, in particular, the Tax Office applies principles established by the courts and tribunals.

Response
For discussion at the meeting.

The Tax Office has responded in detail to the Inspector-General's report regarding the Review of Tax Office Management of Part IVC litigation. The response is included in the report which is available via this link .

Meeting discussion
Agenda items 4 (Tax Office litigation strategies) and 5 (Test Case program) were discussed together.

Members were provided with a summary document containing the key recommendations from the Inspector-General's report and the Tax Office responses.

While there is no specified time frame for the implementation of the agreed recommendations, it is intended to implement the recommendations as soon as is practicable. The Tax Office intends to issue an overarching practice statement on the management of litigation which will include guidelines for a model litigant. The practice statement is currently being developed and will be circulated for comment prior to finalisation. Members welcomed this approach. It is expected that the draft practice statement will be circulated by early December 2006.

There was some discussion regarding the test case funding program. Members were advised that the Tax Office accepts applications from taxpayers for test case funding where an issue has created uncertainty or contention around aspects of the tax law that require clarification. Acting Second Commissioner Fitzpatrick stated that the purpose of the program is to clarify the law in respect of issues of significance or issues impacting on a wide spectrum of taxpayers. Mr Fitzpatrick also advised that funding guidelines were being developed with the Attorney General's Department for funding taxpayer costs in appeals by the Commissioner against court and AAT decisions.

Mr Fitzpatrick commented that he would like to improve communication of Tax Office views about the implications of court and AAT decisions, particularly those that are not in favour of the Commissioner. A member commented that a 'case authority alert' would be beneficial. It was also suggested that the Tax Office needs to make comments on decisions more easily accessible on the website. It was agreed to review this.

The Commissioner indicated that there is a link between the public rulings and the test case programs, and invited input from NTLG members regarding suitable issues for inclusion on the test case and public rulings programs.

There was also some discussion about the Tax Office's approach to the FBT decision in the Essenbourne case where the taxpayer's claim for deduction was disallowed. Acting Second Commissioner Fitzpatrick noted that it was very rare for the Tax Office not to follow a final court decision. Mr Fitzpatrick explained why the Tax Office could not have appealed against the FBT decisions in Essenbourne and other similar cases. He went on to state that the Tax Office was looking to have the FBT issue considered by the Full Federal Court. He added that this was expected to happen in the Indooroopilly Children's Services (Qld) Pty Ltd case which the Commissioner has appealed to the Full Federal Court. Members accepted the explanation.

Action item NTLG0609/02
An indicative time line for the implementation of the recommendations in the Inspector-General of Taxation's report is to be developed.

Action item NTLG0609/03
NTLG members are invited to suggest issues to be considered for inclusion in the test case and public rulings programs.

Post meeting update
A new communication product, Decision Impact Statements, has been released on the Tax Office website as of 5 October 2006. These statements will inform the community on the implications of recent Court and Tribunal decisions dating from 1 July 2006 onwards.

1.5 Test case program

The professional bodies note that the Inspector-General of Taxation, Treasury and presumably the Tax Office have or will be issuing various releases in relation to changes to the test case program, how the Tax Office makes decisions to challenge court decisions, centralisation of litigation operations and risk-management techniques.

The professional bodies support the operation of a test case program which is designed to enable important issues to be reviewed judicially, so as to reduce uncertainty and risk.

Could the Tax Office outline the actions proposed by it in relation to its approach to litigation and its approach to operation of the test case program.

Response
For discussion at the meeting.

Meeting discussion
This agenda item was included in the discussion on agenda item 4. Please refer to agenda item 4 meeting notes.

1.6 Information gathering processes

Some large corporates have been reporting an increasing number of information requests from the Tax Office in relation to their customers. The requests are generally GST related, consisting primarily of invoices and purchase dates. These requests are becoming increasingly labour intensive as the number of customers and the volume of information required increases.

There is a concern there may be a perception that because large companies are generally better organised and have more robust record keeping processes than some of their customers, they are a better target for information collection when those customers are being monitored or investigated by the Tax Office.

This pattern of conduct not only raises some obvious relationship issues for large corporates as suppliers, but also places undue pressure on their already limited tax resources.

Are there any protocols around taxpayer information gathering which focus specifically on the compliance burden imposed on one taxpayer in relation to the Tax Office's examination of the affairs of another taxpayer?

If so, what are they and how well are they operating?

Response
For discussion at the meeting.

Meeting discussion
It was acknowledged that the Tax Office will often require additional information as part of the audit process, however, it was thought that sometimes the burden on a third party of providing information is not always fully considered. It was asked if it could be considered whether the additional information was really required, and if so, could it be reasonably obtained directly from the taxpayer.

A member specifically mentioned that requests for information often end with 'any other relevant information' which is very subjective in the eyes of either the sender or the receiver. It was noted by the Tax Office that discussions were being held with auditors to ensure to increase the specificity of what is needed and why it is needed. In some cases taxpayers have come back on this basis with ideas on other information that might better suit the purpose.

The Commissioner commented that he agreed with the sentiment of the query and stated that he is looking to get compliance costs down for all concerned.

Second Commissioner Granger commented that the co-design work on information gathering protocols resulting from the Large Market Business symposium will present an opportunity to streamline the information gathering process.

Consultation with the Corporate Consultative Committee (CCC), including the Corporate Tax Association, is to occur in relation to the management of information gathering aspects of compliance activities and the NTLG will be briefed on the outcomes.

Action item NTLG0609/04
The NTLG is to be briefed on the outcome of the consultation with the Corporate Consultative Committee in relation to the management of information gathering aspects of compliance activities.

1.7 Corporate Health of the System Assessment (HOTSA) presentation

For discussion at the meeting

A summary document will be provided at the meeting.

Meeting discussion
Deputy Commissioner Shane Reardon provided a brief overview of the corporate risk management process. He outlined the hierarchy of responsibilities, from staff at all levels through the strategic risk processes and treatment strategies which are overseen by the Tax Office Executive.

Members were provided with a summary document. The Chief Knowledge Officer, Philip Hind will attend the December NTLG meeting to discuss the document and explain the process more fully.

An environmental scan assists to establish the context leading to the various HOTSAs, such as the revenue product HOTSA, the market HOTSAs and the compliance HOTSA. The Compliance HOTSA gives rise to the annual Compliance Program. A key activity for the next 12 months was to evaluate the effectiveness of our treatments. The HOTSA processes have mitigated some of the organisational risks.

It is expected that the summary document will be included in the Annual Report.

The rating of the dials in the report was discussed. The broken arrow referred to the previous year's rating while the solid arrow indicated the current rating. The ratings are the collective view of the Tax Office executive and the Chief Knowledge Officer based on a number of qualitative processes and extensive organisational information and comment. A specific risk matrix contributes to the process. The process is still maturing.

NTLG members were invited to contact Shane Reardon or Murray Crowe for background information or to provide feedback if desired.

A further discussion will occur at the December meeting.

Action item NTLG0609/05
Discussion regarding the Corporate HOTSA to occur at the December 2006 NTLG meeting with the Chief Knowledge Officer.

Post Meeting Update
The summary document on the Health of Tax Administration was included in the Commissioner's 2005-06 Annual Report.

1.8 Withdrawal of practice statement on GST, sections 35 and 36 of the Tax Administration Act 1953

There are two parts to this agenda item with one response provided.

On 24 July 2006 the Tax Office advised that due to some uncertainty regarding several technical issues covered in the draft practice statements on section 35 and 36 of theTaxation Administration Act 1953, including pending litigation relevant to those issues, it has decided to withdraw them for the time being.

The draft practice statements in question were originally issued in response to concerns raised by industry and professional bodies about the apparent broad application and interpretation of section 35 by some tax officers. Copies of the draft practice statements were circulated for comment in July 2005. Submissions were subsequently sought, which were being considered in the context of the final version of the practice statements.

It is understood that in the interim period, internal guidance will be available to tax officers which broadly reflects the approach taken in the draft law administration practice statements. Industry and professional bodies are concerned about the process of withdrawing a draft practice statement on the basis of technical issues not yet litigated, particularly given the length of time it often takes for litigation to run its course.

8.1 Can the Tax Office explain why the litigation in question should prevent the issuing of public guidance material to tax officers?

8.2 How long does the Tax Office expect the draft practice statements to be delayed?

Response
Sections 35 and 36 of theTaxation Administration Act 1953 (TAA) dealt with the four year time limit on recovering unpaid indirect tax, and on claiming indirect tax refunds or credits. They have been re-enacted as sections 105-50 and 105-55 in schedule 1 to that Act as part of the recent Fuel Tax Credit Reforms.

Draft practice statements were developed outlining the Tax Office approach to the administration of those provisions, with input from NTLG members. However based on our legal advice we are not in a position to issue the practice statements at this time.

As an interim measure we have in place for staff internal guidelines and procedures to ensure consistency in the application of these provisions and we are exploring other mechanisms to communicate our position.

Meeting discussion
Senior Assistant Commissioner Tim Dyce attended the meeting for this and the following agenda item. The Corporate Tax Association expressed disappointment that the practice statements were being withdrawn and had concerns regarding the reasons for withdrawal and what information would be available to the public following the withdrawal.

Reasons for the withdrawal included pending litigation action as well as advice from Counsel regarding the interpretation of the law. The advice will assist in determining the most suitable product, either a practice statement or another product. The advice is expected later this month.

Members were advised that staff are advised to continue to operate on the basis of the withdrawn practice statement, and that delays due to litigation processes are not expected. Consultation will be dependent on the advice received from Counsel. The Commissioner requested that an update be provided on this matter at the December NTLG meeting.

Action item NTLG0609/06
A progress report is to be provided at the December NTLG meeting regarding the withdrawal of the GST practice statements.

1.9 NTLG sub-committee governance report

This is a standing agenda item which enables sub-committees to provide governance reports and have discussions associated with the NTLG sub-committees.

Tim Dyce, Senior Assistant Commissioner GST, chair of the Goods and Services Tax sub-committee will attend the meeting.

Meeting discussion
Senior Assistant Commissioner Tim Dyce attended the meeting to provide a report on the operations of the NTLG GST sub-committee.

A brief history of the sub-committee was provided. It was formed in 1999 and initially provided input to topics requiring public rulings and an issues log was maintained. The Tax Office published issues and responses on the website and the public could rely on the advice. Frequently asked questions were converted to GST advice products. GST advices are no longer produced, however the Tax Office will continue to stand by them until they are superseded. GST advice is now provided through the normal advice product range such as tax determinations or public rulings. The focus of the sub-committee now is more on strategic litigation and compliance issues with representatives from the Tax Counsel Network and the Centre of Expertises to cover the full range of issues. Treasury is not represented, although invited to in the past. They are being invited to attend meetings held in Canberra.

There are 17 live issues which are being resolved, with four of these being over two years old. Six issues are expected to be finalised this month with a further two to four issues expected to be finalised after. It was agreed that members would be provided with details of these issues following the meeting. Regular updates will be provided regarding the outstanding issues.

Project management processes have been implemented to assist with the management and resolution of issues at the sub-committee. A suggestion to include the author of public rulings to attend a meeting six to twelve months after the issue of a ruling in order to receive post implementation feedback was made and accepted. Five issues were finalised in the last six months of 2005, and 12 issues were finalised in the first six months of 2006.

There was a brief discussion regarding aged issues concerning partnerships and creditable purpose and agreement that it is appropriate that these be included on the public rulings program.

A brief discussion followed regarding the next sub-committee chair to attend the December meeting, both the Foreign Source Income Sub-committee and the Consolidation Sub-committee were mentioned. It was agreed that the Consolidation Sub-committee would provide a report. The Commissioner asked members to advise Murray Crowe as to the type of report wanted. It was suggested that the reports could include a summary of the areas dealt with previously, what issues have been dealt with in the preceding 12 months, and what issues are expected. The Commissioner would like to see an articulation of the burning issues for each sub-committee.

Shane Reardon indicated that improved processes were needed for all NTLG sub-committees and a process has been recently instituted which needs refining. This includes standardised reports and the publication of minutes.

Action item NTLG0609/07
Members are to be provided with details of issues from the GST Sub-committee that are expected to be finalised.

Action item NTLG0609/08
Consolidation Sub-committee chair is to provide a report at the December meeting.

1.10 Upcoming practice statements

The professional bodies welcome the Tax Office consultation in various forums about upcoming practice statements on strategic issues.

It would be useful to have a standing NTLG agenda item focussed on upcoming planned practice statements, in a single integrated listing, to enable the Tax Office and the professional bodies to consider informally the best communication and associated actions which will arise from those practice statements.

Response
The Tax Office's Law Administration Practice Statements are normally abbreviated as PS LAs.

PS LA 1998/1, the foundation PS LA, describes the three categories of PS LAs as:

¦ routine - covering issues of process or issues that are not sensitive in nature

¦ significant - covering issues where the Tax Office's administrative position is not yet settled or is changing, issues raised by the NTLG or issues that are otherwise sensitive; and

¦ general administration - covering an exercise of the Commissioner's general administrative powers in relation to a particular area of the law.

The Tax Office is currently redesigning the PS LA process to align it more closely with the public rulings process. The redesign will result in the PS LA program being available externally by the end of this calendar year.

As a preliminary guide, the following PS LAs are expected to issue within the next six months.

ID	Topic	Classification
1240	Administration of the administrative penalty for shortfall amounts resulting from a false and misleading statement and the shortfall interest charge and the general interest charge arising from certain adjustments required under the consolidation regime.	Routine
1267	Management of decisions of Courts and Tribunals	Significant
1289	GST-free exports - Extension of time for export	Significant
1291	Indirect tax disputes and declatory proceedings	Routine
1299	Australian international financial reporting standards - thin capitalisation transitional provision	Significant
1300	Provision of advice by the Tax Office	Significant
1534	Written binding advice - requests for further information, notification of assumptions and intended use of information from sources other than the applicant	Routine
1584	Publication of Tax Office written binding advice	Routine
1611	Guidelines for settlement of widely based tax disputes	Significant
1683	Making default assessments; section 167 of theIncome Tax Assessment Act 1936	Significant
1684	The use of the Commissioner's power to make default assessments of taxable income in respect of attributable foreign source income	Significant
1694	ATO Interpretative Decisions	Significant
1695	Precedential Tax Office view	Significant
1778	Referral of issues to Centres of Expertise	Significant
1819	ATO Receivables Policy	Significant

Note: The PS LA on Substituted Accounting Periods is not included in this list as the revision and planned external consultation may take the finalisation of the practice statement outside this six month timeframe.

See also agenda item 19 on Substituted Accounting Period policy.

Meeting discussion
The consultation process for practice statements was queried and whether it should be standardised.

The consultative process depends on the extent of change that the practice statement delivers. That is, a question of judgement which examines the significance of the issue. Some of the practice statements are for internal use only to provide guidance on how to administer the law rather than the interpretation of the law. There are instances where it is borderline as to whether the product should be a practice statement or a public ruling.

The consultative process is being developed and member's suggestions are welcomed.

It was mentioned that the ATO Receivables Policy has been approved as a practice statement and will be issued shortly. Feedback is invited and will contribute to further iterations of the policy.

It was agreed that this should be a standing item along with the review of public rulings on the NTLG agenda. This will be included as a standing agenda item for the June and December NTLG meetings in conjunction with the Public Rulings program update.

Action item NTLG0609/09
A report on upcoming practice statements will be included as a standing agenda item for the June and December NTLG meetings.

Post meeting update
The ATO Receivables policy has issued as a practice statement. A copy was forwarded to NTLG members on 12 September 2006. Feedback can be forwarded to OPS Policy and Practice ATO Receivables Policy .

1.11 GAAR Panel report

Would the Tax Office advise the NTLG as to the workings of the General Anti-Avoidance Rules (GAAR) Panel in a general way including:

¦ the volume of matters considered;

¦ the proportion of matters in which taxpayers have been represented at the panel;

¦ the proportions of total matters considered where:

¦ the panel recommends that an anti avoidance rule be applied;

¦ the panel recommends that an anti avoidance rule not be applied; and

¦ whether the proportions in three above are materially different in cases where taxpayers are represented compared with cases where taxpayers are not represented?

This item relates to an action item from the NTLG meeting of March 2005, issues log number 0503/3 refers.

Response
The membership of the GAAR Panel at 30 June 2006 was:

¦ Peter Walmsley (Chair);

¦ Andrew England;

¦ Stephanie Martin;

¦ Ray Conwell (external member);

¦ Tony Pane (external member); and

¦ David Williams (external member).

Kevin Fitzpatrick was chair of the panel until December 2005 and other members of the panel during 2005-06 were:

¦ Des Maloney;

¦ Jim Momsen (external member); and

¦ Bob Deutsch (external member).

The panel met eleven times during 2005-06 considering a total of 19 issues, three of which were considered twice during the year.

Four of the meetings (December, March, May and June) were two day meetings; the remainder were one day meetings.

In accordance with the processes set out in Practice Statement PS LA 2005/24, taxpayers attended panel meetings and gave presentations to the panel on nine occasions. On a further three occasions invitations extended to taxpayers to attend a panel meeting were declined.

Examples of the types of arrangements considered by the panel during the year included:

¦ CGT reduction arrangements of the type discussed in Taxation Determination TD 2003/3

¦ arrangements involving capital raisings by corporates

¦ financing arrangements offered to taxpayers to facilitate investment in particular commercial ventures

¦ corporate restructuring having the effect of allowing pre-existing capital losses to be offset against capital gains derived by the group in circumstances where the losses could not otherwise have been offset against the gains, and

¦ arrangements having the effect of generating foreign tax credits.

The nature of the advice given by the panel in relation to the matters considered by it during the year varied.

In the majority of matters the panel advised that the relevant GAAR would apply. In five of these cases the panel's advice was that it was possible that the relevant arrangement did not work under the substantive provisions; in one of the cases, the panel suggested the relevant arrangement might be characterised as a sham.

Of the remaining matters, in two cases the panel advised that the evidence gathered did not establish the application of Part IVA of theIncome Tax Assessment Act 1936 (ITAA 1936) and in another case the panel advised that section 177EA of Part IVA (ITAA 1936) did not have application. In a further two cases, the panel's view was that resolution of the cases would turn not on the operation of Part IVA but on the application of the substantive provisions.

In a few matters the panel advised the audit team that further evidence needed to be obtained before the panel could provide final advice concerning the application of Part IVA to the relevant matter. In some instances, the panel concluded that further evidence needed to be gathered before the correct counterfactual could be identified. In other cases, the panel concluded that further evidence was needed before a conclusion could be reached as to whether or not the dominant purpose test was satisfied.

As a general observation, the panel has found the process of allowing taxpayers to attend panel meetings and address the panel very helpful in assisting the panel to formulate advice on matters considered by the panel. This has particularly been the case where the relevant submissions have explained with clarity the taxpayer's position on each of the elements of Part IVA. In certain instances consideration of the taxpayer's submission assisted the panel to reach the conclusion that Part IVA did not have application and formulate its advice to the audit team accordingly. In other instances the panel concluded that the taxpayer's submission exposed issues on which further work needed to be undertaken by the audit team before the panel would be in a position to provide advice on the application of Part IVA.

Meeting discussion
Acting Second Commissioner Fitzpatrick commented that the report represented an attempt to provide useful information to the NTLG while maintaining the privacy of the taxpayers involved. The process of allowing taxpayers to appear before the panel seems to be working well. It appears to be effective and contributes to the decision making process although it may add time to the process.

The Commissioner asked for this report to be a standing agenda item.

The professional associations thought that the number of issues referred to the panel during the year (19) was low, but Mr Fitzpatrick commented that this number was considered to be typical for a year. The Commissioner commented that the number of cases considered by the Panel does not indicate a wholesale use of Part IVA by the Tax Office, and Second Commissioner Granger agreed to provide an estimate at the next meeting of the percentage of audit cases for the 2005-2006 year where Part IVA was raised.

An explanation of the GAAR Panel process was provided by Mr Fitzpatrick. Practice statement PS LA 2005/24 explains the process.

Concern was expressed by some members that tax officers were present while the panel discussed a case but taxpayers and advisers were not. Mr Fitzpatrick explained that the panel was an advisory body for the Tax Office and it was important that tax officers had the benefit of listening to the panel's discussions about the application of the GAAR. It was agreed to ask the panel chair to clarify the procedures for taxpayers when they attend panel meetings.

Second Commissioner Fitzpatrick commented on the recent meetings regarding Part IVA with a delegation from the United Kingdom. The delegation commented that it was surprised by the openness of the Tax Office's processes for considering the application of Part IVA.

Action item NTLG0609/10
A report on the GAAR Panel is to be included as a standing agenda item (6 monthly, for example March and September meetings).

Action item NTLG0609/11
Second Commissioner Granger agreed to provide an estimate at the next meeting of the percentage of audit cases for the 2005-2006 year where Part IVA was raised.

1.12 Change Program update

An update on the Change Program will be provided at the meeting.

Meeting discussion
Program Leader Greg Dark and Assistant Commissioner Bill Powell attended the meeting to provide an update on the Change Program.

Greg Dark provided an update on the rollout of Release 2(R2) which is almost completed, and should be finalised by Christmas 2006. As expected there were system issues that needed to be fixed for the R2 release to work to its' full potential. The Work Management System (electronic capture and distribution of letters we receive) is almost at full volume after some initial teething problems. Some issues associated with messaging through the portal are being resolved, and the Tax Office should be able to initiate outbound messages shortly, although there are some technical issues to be resolved.

Bill Powell provided an explanation of the account structure, and showed members views of the screens used internally for client accounting. These views have been well received in user testing. Currently three systems are used for processing activity statements which will be reduced to one, the Integrated Core Processing (ICP) system under the Change Program.

ICP will bring together debits and credits for the different roles and periods. The transaction system was explained. An explanation of how the transaction system worked was provided. With the navigation map, the search fields are only available internally but all others are available internally and externally.

The account structure in the ICP view was explained to members. User testing of these screens is underway, and a report will be provided at the December NTLG meeting.

The Commissioner commented that while there were hiccups he was generally pleased with the rollout and mentioned that the rollout is the fifth largest for Siebel. Improvements should be seen in some of the Tax Office processes following implementation. As a number of government agencies are involved in change program type processes, there is an emerging risk regarding the pool of information technology talent.

Action item NTLG0609/12
An update on the user testing of the ICP account screen designs to be provided at the December NTLG meeting.

1.13 Resettlement of trusts

Could the Tax Office provide an update on the progress of formalising its view expressed in Resettlement of Trust Statement of Principles in the form of a Public Ruling. While this is a topic within the bailiwick of the new Trust Consultation Group, some feedback at NTLG level would be of assistance.

Response
Comments regarding this issue are provided below as extracts from the draft minutes of 21 June 2006, item 10.2 and the Trust Consultation Group report of the meeting of 7 August 2006.

Extract from draft NTLG minutes of 21 June 2006, item 10.2

Meeting discussion (NTLG meeting of 21 June 2006)
Due to time constraints, this item was not discussed at the meeting, however this post meeting response has been provided for inclusion in the draft minutes.

There is no current plan to convert the Creation of a new trust - Statement of Principles August 2001 into a public ruling. This was considered several years ago. At that time legitimate concerns were raised about converting the product to a public ruling because the statement deals essentially with matters of trust law rather than matters of specific tax law, and more significantly because regard in particular cases would be needed to relevant indicia, the relevant terms of the trust, and all the surrounding facts (including the intentions of the settlor etc). There is therefore a need to consider these matters on a case by case basis having regard to the particular facts. The Statement does not come to a definitive answer as would generally be the case for rulings. Taxpayers that required certainty as to our view of the law's application to their particular circumstances could request a private rulings. We have also issued class rulings in some cases.

The statement is a source of guidance for tax officers on the sort of matters that should be taken into account in considering the application of the tax law to particular facts. The statement also explains to taxpayers the Tax Office's approach to this matter and outlines the sort of matters we look at. Taxpayers are able to look at their circumstances in the light of these factors to determine their characterisation of a proposed or actual transaction, and their level of risk that the Tax Office may take a different view. Class rulings have been published on particular matters. The Tax Office is maintaining a watching brief on resettlement issues and some clarification may be achieved through pending litigation, and a case already heard, awaiting judgment.

We recognise that our business lines have received some feedback that the existing statement is too general, and that more detail is wanted in relation to particular circumstances, and more examples. The Tax Office, through the Trust Consultation group, has also discussed the possibility of amplifying the statement to deal with certain resettlement issues arising from the removal of perpetuity clauses to address AIFRS issues. Also discussed has been the opportunity to make the statement easier for practitioners and taxpayers to access electronically, and we will look into that.

It is proposed to discuss the current status of the statement, and its content, with the consultative group at its next meeting in August.

Extract from NTLG Trust Consultation Group report of 7 August 2006 meeting (the full report is at item 22.18 of this agenda).

Trust deed amendments arising from AIFRS and the Statement of Principles on the Creation of New Trust (Trust Resettlements)

¦ The Tax Office now have a number of trust deeds and amendments to look at and are considering what form advice on the AIFRS issues should take. A submission by the ICAA was appreciated.

¦ The forum members expressed a preference for all AIFRS issues to be dealt with in one product, though this could be cross-referenced to other documents.

¦ The Tax Office said it had no plans to convert the Statement of Principles on trust resettlements into a Ruling, and indicated that it could not rule on trust issues in isolation. The forum raised concerns with the content of the existing Statement. It does not, for example, deal with investment industry changes. Industry also needs to have greater clarity. The Tax Office invited submissions and forum members agreed to provide examples to the Tax Office.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

1.14 Review of self assessment and trusts

There are four parts to this agenda item, representing the questions raised.

Under the modifications to section 170 of theIncome Tax Assessment Act 1936 (ITAA 1936) the period for amendment is determined from the day the Commissioner gives the taxpayer notice of the assessment.

14.1 In respect of trusts what is the form of that notice where (i) the trustee has fully distributed the income, or (ii) the trust is in losses?

14.2 Where a minor beneficiary is distributed an amount less than the taxable limit (eg $416) in what form will the trustee get notice of the nil assessment under section 98(1) of the ITAA 1936?

Response
Under existing practices, a notice of assessment is not issued to a trustee unless there is a positive amount of tax to which the trustee is to be assessed. This means that for the various types of trustee assessment provided for in Division 6 of the ITAA 1936, where no tax is payable for the year of income, no period of review would commence under current legislative arrangements.

A trustee may be liable to be assessed where the presently entitled beneficiary is under a legal disability (section 98) or in some other situations (for example non-resident beneficiaries), or where there is income to which no beneficiary is presently entitled (sections 99 or 99A). So, a trustee may face multiple, but technically separate assessments for a year of income, derived from the lodgment of a single tax return.

Issuing notices for the full range of non-taxable circumstances for each trustee would create significant administrative difficulties for the Commissioner, as there are over 450,000 non-taxable trusts. Compliance costs would also be increased as the Tax Office does not currently collect the required information to identify the range of nil assessments for which the trustee may potentially be liable. A redesign of the trust return form would be required to capture this information to facilitate the generation of the required assessment notices.

The Tax Office is currently considering options in how to best provide trustees with a period of review. The Tax Office has consulted with various professional bodies (CPA, TIA and ICAA) regarding an administrative solution. However, the professional bodies advised their strong preference for a legislative solution to give effect to the ROSA principles.

The professional bodies indicated that an interim administrative solution may be acceptable. This would involve a binding undertaking by the Commissioner not to issue an original assessment (of a positive amount) to the trustee beyond the usual review period, except where there has been fraud or evasion. This would give comfort to trustees wanting certainty for a particular income year. It would ensure fairness and equity of treatment for trustees with nil liability or loss returns.

While we are working through these options, the Tax Office has adopted an administrative practice not to issue an original assessment (of a positive amount) to the trustee beyond the usual review period, except where there has been fraud or evasion. For these purposes, the usual review period would be 4 years from the date of lodgment of the trust return, unless the trust has elected into the STS when a 2 year review period would commence from the date of lodgment of the trust return

14.3 Where a taxpayer is not required to lodge due to a low income, is the effect of the non-lodgement that the taxpayer's affairs remain open indefinitely until a return is lodged and there is an ascertainment that there is no taxable income and that no tax is payable?

Response
Yes. The period of review or amendment period commences on the day a notice of assessment is given by the Commissioner to a taxpayer.

Note
Lodgment rules are designed such that taxpayers in this category (for example pensioners) would generally remain outside the system of tax return lodgment and assessment. A period of review has no practical relevance.

14.4 In respect of a minor beneficiary, whose only income is a distribution of an amount less than the taxable limit (for example $416), does the trustee's notice of the nil assessment under s98(1) of the ITAA 1936 trigger determination of the period of amendment or must the minor beneficiary lodge a return?

Response
The beneficiary would need to lodge a return to trigger their own period of review.

In respect of trustee's notice of the nil assessment, refer to the response provided at 14.1 and 14.2 above.

Meeting discussion
The discussion of this agenda item revolved around the issuing of notices of assessment to trusts or trustees to 'get the clock ticking' in terms of review periods under the Review of Self Assessment recommendations. Without the notice of assessment, the assessments remain open and subject to review.

The TIA noted the responses at 14.1 and 14.2 of the agenda, however, a legislative change would be the most logical step. Second Commissioner Fitzpatrick agreed to write to Treasury.

Members were of the view that the response at 14.4 was not practical. There was some discussion regarding current issues with the quality of trust returns that increase the complexity. Assistant Commissioner Murray Crowe agreed to discuss the issue out of session with the TIA.

Members agreed that this was an issue for Treasury to consider. Jonathan Rollings was to provide the NTLG feedback to Treasury.

The Commissioner commented that the overall objective was to reduce the cost of compliance and to make it easier for taxpayers.

Action item NTLG0609/13
A minute is to be forwarded to Treasury regarding a legislative change associated with the notice of assessment for trusts.

Action item NTLG0609/14
Murray Crowe to discuss the issue out of session with the TIA.

Post meeting update
Action item NTLG0609/13
The minute was forwarded on 5 October 2006.

1.15 Foreign superannuation funds

The definition of 'foreign superannuation fund' in subsection 6(1) of theIncome Tax Assessment Act 1936 appears to defeat the purpose of the income tax and withholding tax exemptions for such funds in paragraphs 23(jb) and 128B(3)(a) respectively, particularly the latter.

A 'foreign superannuation fund' is defined in subsection 6(1), inter alia, as a 'superannuation or retirement fund... not being a fund for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction, or in respect of which a rebate of tax has been allowed or is allowable'. This requirement appears to be very difficult to satisfy. If an offshore fund invests in an interest bearing investment in Australia, nearly all the payers of interest will be seeking a deduction for the interest payments to the fund. Unless the fund lends to private or domestic use borrowers, a fund cannot satisfy the definition of a 'foreign superannuation fund' and would therefore be precluded from accessing the income tax and withholding tax exemptions.

ATO IDs 2001/320 and 334 state that the income tax and withholding exemptions are available provided a foreign superannuation fund has no connection with Australia other than by virtue of having some or all of its funds invested in Australian interest and / or dividend bearing investments.

The Tax Office website also has A guide to assist foreign superannuation funds in preparing a valid private ruling application . The guide contains suggested wording for such applications. For the 'Opinion with reasons' section of the private ruling application, the suggested wording is:

'In accordance with the documentation supplied, the trust deed and fund rules in particular show that the XYZ Pension Fund has been established as a genuine pension, superannuation and/or retirement fund solely providing superannuation benefits for non-residents of Australia. It has been set up and maintained outside of Australia by non-residents of Australia. Furthermore, no contributions to the XYZ Pension Fund are capable of being claimed as a rebate or deduction under any section of the ITAA 1936 or ITAA 1997. The trustee of the XYZ Pension Fund is exempt from income tax in the country of residence.'

The above passage appears to suggest that the exemptions are available provided no 'contributions' (as opposed to interest or dividends) are capable of being claimed as a rebate or deduction.

If the definition of 'foreign superannuation fund' in subsection 6(1) is taken at face value, then it would appear that the income tax and withholding tax exemptions in paragraphs 23(ja) and 128B(3)(a) would never be available whenever deductible interest was paid to an offshore fund. Our view is that the definition in subsection 6(1) was intended to prohibit contributions being made that would give rise to deductions or rebates (in respect of payers in Australia).

We request the Tax Office's views on these issues.

Response
The Commissioner has stated his view on the availability of these exemptions in ATO IDs 2001/320 and 334. The exemptions are available where the connection to Australia is only that of investment. It is implicit in that answer that it is not our view that deductible interest affects the availability of the exemption.

We agree with the position in the question that the intent behind the definition was directed at contributions and have adopted a view that supports that intention.

A question that arises is whether the existing products are sufficiently robust. In practice we are not aware of any current cases that involve this issue.

We are therefore not aware of any need to publish a taxation determination or other product on this question. The NTLG may wish to supply their views on this question.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

1.16 Incorporation of professional practices

There are two parts to this agenda item.

16.1 Could the Tax Office provide the professional bodies with a progress report regarding its activities in relation to the incorporation of professional practices?

16.2 Will the Tax Office be seeking input from the professional bodies?

Response
A report will be provided at the meeting. Deputy Commissioner Small Business Mark Konza will be present at the meeting to discuss the report.

Meeting discussion
Deputy Commissioner Mark Konza attended the meeting for this item and provided an update.

He provided a progress report on two streams of work, one which covers the incorporation of legal practices and the consideration of issues raised by the Law Council of Australia and the Law Institute of Victoria. Work is continuing with these bodies clarifying issues associated with incorporation. The Tax Office will be contacting each Law Society and the Law Council to consult on these issues and after that all NTLG members will be able to provide input to the Tax Office consideration of these issues.

The second work stream relates to a more general interest in the tax consequences of incorporation from members of the community considering incorporation to access the Commonwealth's Workplace Relations Act. A fact sheet for the general public is in an early draft form, and will be distributed to NTLG members for comment. An email letterbox will be provided for the provision of feedback and to facilitate discussion.

Deputy Commissioner Konza offered to provide a further update to the NTLG once feedback on the fact sheet has been considered.

Action item NTLG0609/15
A copy of the draft fact sheet regarding the tax consequences of incorporation is to be forwarded to NTLG members for feedback via email.

Action item NTLG0609/16
A further update will be provided to the NTLG on the fact sheet once feedback has been considered.

Post meeting update
The draft fact sheet on incorporation of professional practices was forwarded to NTLG members on 22 September for feedback by 27 October 2006.

1.17 Delays in issuing clearances for liquidation of companies

There are three parts to this agenda item, representing the questions raised.

Where corporate groups plan members' voluntary liquidations of particular subsidiaries in their groups and the liquidators seek Tax Office tax clearance pursuant toTax Administration Act 1953 section 260-45 prior to the liquidation, it continues to be quite common for the Tax Office clearance to be delayed, which slows down the achievement of savings in time, cost and compliance effort which are sought from liquidations.

Response
General comment

The Tax Office recognises the importance of effective processes being in place when dealing with insolvency matters and is giving priority to this.

In May 2006 a new Director commenced employment with the Tax Office specifically to manage the Insolvency focus area. Anne Wardell has had extensive experience in the insolvency field and one of her first roles was to undertake a full review of our insolvency processes. As part of this review Anne has been engaging with external stakeholders including attending the National IPAA/ATO forum and the recent ITSA Congress.

Clearances were identified as one area where we need to undertake a full review of our processes and procedures to not only improve the response time to clearance requests but also to ensure that we identify the appropriate essential source information we require.

This review has commenced and is expected to be completed in the next three months. We will provide an update at the November meeting.

As part of the Tax Office's commitment to co-design, input from NTLG members is welcome. Anne Wardell can be contacted by email .

17.1 Can the Tax Office please explain the processes within the Tax Office that are involved in the issue of clearance for liquidation of a company?

Response
These processes are currently being reviewed.

For the Tax Office to issue a notice (clearance) pursuant to section 260-45 of theTaxation Administration Act 1953 (TAA 1953), certain checks need to be undertaken. These checks include (as identified in Chapter 31, paragraphs 31.3.2 and 31.4.2, of the ATO Receivables Policy):

¦ establishing any unpaid tax-related liabilities (both due and not yet due), and

¦ establishing any outstanding returns (for example activity statements and income tax returns).

Whilst members' voluntary liquidations are not technically defined as insolvent, the Commissioner is still required to determine all factors before issuing the clearance.

Subsidiary members of a consolidated group that enter into a members' voluntary liquidation requires addition checks to the clearance process. This is due to the joint and several provisions of section 721-15 of theIncome Tax Assessment Act 1997 (ITAA 1997), and thus the checks relating to income tax mentioned in paragraph 1 need to be performed on the consolidated group's head company. This process can be quite lengthy where the group has many subsidiaries.

Before issuing a clearance to a member of a subsidiary, the Commissioner must be satisfied that any unpaid group related liabilities and/or outstanding lodgments obligations of the head company of the consolidated group can be fulfilled by either to head company or its subsidiary members.

The Insolvency Teams are responsible for the issuing of clearances for any insolvent estate. Part of the procedure requires the operator to check with other areas within the Tax Office.

17.2 Can the Tax Office produce guidance identifying what information can be provided by corporate groups to expedite Tax Office clearance?

Response
Our current clearance review will clarify the information required to expedite the Tax Office clearance processes.

To ensure that the Tax Office can action a clearance request in the shortest possible timeframe, outstanding lodgment issues (for the subsidiary member) need to be addressed.

However there are other aspects that relate to the consolidations status of the entity that may hinder the issuing of a clearance, these include:

¦ audit activity on the head company

¦ unpaid group liability

¦ outstanding group related lodgement.

While these issues remain unresolved the Tax Office may not be in a position to issue a clearance.

17.3 Do Tax Office monitoring processes track the time taken between lodgment of a request for a Tax Office clearance and the issue of the final Tax Office approval?

Response
We identified that we did not have a monitoring process in place.

Due to the complex nature of the issuing of clearances where subsidiary members of consolidated groups are involved, we have initiated a register that tracks the progress of all clearance requests for consolidated-related entities.

The insolvency teams run fortnightly reports to monitor the progress of any checks made to other areas.

The register, coupled with the introduction of new case management software (to be released in the near future), should significantly reduce the issue around the delayed response from the Tax Office when issuing clearances.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

1.18 Integration of consolidation exit arrangements into other Tax Office systems

There are two parts to this agenda item, with one response.

Many corporate groups seek commercial benefits from tax consolidation by taking the opportunity to streamline their corporate structures by deregistration of companies and vesting of trusts which are within consolidated groups. This opportunity for corporate streamlining, consistent with the policy of the legislation, is to achieve savings in time, internal and external costs by eliminating unnecessary entities.

Where company groups lodge consolidation exit forms, particularly in relation to deregistered entities and trusts which are vested, it appears that Tax Office administrative IT systems continue to issue requests for lodgement of returns, for payment of income tax instalments and other such requests for a very long time after lodgement of the consolidation exit form, in some cases for over 12 months after the lodgment of the exit form.

Could the Tax Office please advise:

18.1 Is there a project underway to enable a simplified processing and updating of Tax Office records from the time a consolidation exit form is lodged?

18.2 What actions can be undertaken by corporate groups in relation to lodgment of their exit forms which will prevent the issue of various unnecessary Tax Office communications?

Response
Whilst there is no specific project underway to enable simplified processing and updating of Tax Office records the Tax Office believes that appropriate procedures are in place to handle an occurrence of an entity entering or exiting a consolidated group.

In respect of an entity exiting a consolidated group, procedures are designed to look at the history of the exiting member prior to them joining the consolidated group and to apply the latest known instalment rate to their new operations. The system specifications are to generate new schedules and it reactivates the individual entity's income tax record.

Where the head company advises the Tax Office via a NAT 6782 of the exit of a subsidiary member and denotes on that form that the subsidiary member has been deregistered, procedures are in place to cease the issue of forms and notices.

Where this advice is provided in a timely fashion, the generation of forms and notices can be stopped promptly. Typically the Tax Office is advised on average up to six to eight weeks after deregistration and in some cases, between six months and twelve months after deregistration, resulting in forms and notices continuing to be issued in the intervening period.

Legislation requires the head company to notify of the exit of a member within 28 days and to minimise inconvenience for the group and the tax agent, deregistration should be advised at the same time.

Head companies which are deregistered are required to lodge income tax returns to the date of deregistration.

While many of the system changes arising from notification of exiting subsidiary members are manually generated at present, we are working with the Change Program with a view to automating where possible.

Members are invited to provide details of any cases to the NTLG secretariat to enable further analysis to be conducted as to why forms are continuing to be sent in specific instances.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

1.19 Substituted accounting period policy

The Australian Stock Exchange (ASX) requires listed companies to file their annual accounts within two months of their year end. Most Australian companies are 30 June year ends because the Tax Office will not let them change their tax year end and it is impractical and costly for the company to have different financial and tax year ends.

Due to the increasing amount of work and reduction in the number of available auditors the ASX has had to extend the deadline for filing, (two years running now) by a further month.

If this issue is not already being addressed by the Tax Office, could the Tax Office consider allowing listed public companies to be granted substituted accounting periods (SAPs) without having to point to foreign parents?

This would enable the companies to be spread through the year and ease the bottleneck at 30 June.

Response
In relation to the specific question of the difficulties that listed companies are having in finding auditors and reporting to the ASX, the Tax Office would be interested in hearing representation on this matter to enable this to be considered as part of the development of the Practice Statement on substitute accounting periods. The impact on all other entities that are required to be audited would also need to be considered. The practice statement, being prepared to replace IT 2360, seeks to identify the key principles on which leave to adopt a SAP will be granted and the factors that would demonstrate the requisite business need. The practice statement is also considering issues around effective administration of SAPs. Any new issues around business reasons for adopting accounting periods other than 30 June should be forwarded to Bill Bartley by email so they can be addressed in the practice statement.

The Tax Office undertakes to keep the NTLG informed of progress on the rewrite and to engage in consultation before finalising the practice statement.

The revision and planned external consultation of the practice statement may take the finalisation of the practice statement outside the six month timeframe.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted. The TIA will be contacted to discuss this issue further.

Action item NTLG0609/17
The NTLG secretariat will contact the TIA regarding the issue.

Post meeting update
The practice statement is being reviewed prior to consultation with NTLG members in late October 2006.

1.20 Taxation Ruling 2006/4 Trust loss provisions

At paragraph 182 of TR 2006/4 the Commissioner draws attention to section 272-60 of Schedule 2F of theIncome Tax Assessment Act 1936 pointing out that it applies to the transfer of property to an entity to the extent that the entity has not given consideration. This appears in support of the proposition in paragraph 181 that the transfer of property by (the trustee of) a trust in respect of which a family trust election has been made to (the trustee of) a trust in respect of which no family trust election has been made may attract family trust distribution tax.

On the analysis there will be a distribution whenever a retiring trustee transfers trust property to a new trustee. Section 272-45 is drafted to exclude this result (by its limitation to a transfer to person in the person's capacity as a beneficiary), but subsection 272-60(1) does not contain that exclusion. As the Commissioner notes, the exclusion from section 272-45 allows subsection 272-60(1) to apply in these circumstances.

Apart from, possibly, an indemnity for trust liabilities, the new trustee will not ordinarily give consideration to the retiring trustee, particularly not in return for the value of the property transferred.

On this basis if the new trustee is not the subject of an interposed entity election, even if, as the Commissioner puts it in paragraph 181, the new trust has (or trustee) made a family trust election, family trust distribution tax will be payable in respect of the transfer of property to the new trustee that being a subsection 272-60(1) distribution to that trustee for no relevant consideration.

A purposive reading of subsection 272-60(1) would, perhaps but not necessarily contrary to the Commissioner's reading in paragraph 181, imply that a distribution refers to a beneficial transfer of property and not one merely to a new trustee.

Can the Commissioner clarify his views on the section as expressed in paragraphs 181 and 182 in light of the above?

Response
Taxation Ruling TR 2006/4 considers the meaning of 'the beneficiaries and terms of both trusts are the same' for the purposes of specific CGT events.

Paragraphs 181 and 182 of the ruling provide that, if the original trust has made a family trust or interposed entity election but the new trust has not, then, in addition to the CGT consequences, the original trust may be liable for family trust distribution tax if the transfer of the asset is a distribution, noting that distribution is defined broadly in section 272-60 of Schedule 2F of the ITAA 1936. The ruling deals with the situation where there is property transferred between two separate tax entities. The trust loss provisions are discussed in this context.

By contrast, the scenario raised in the question concerns a single trust which has a change in trustee. A change of trustee does not by itself result in a termination of the trust and the creation of a new trust.

Section 990-100 of the ITAA 1997 makes it clear that it is the 'trust' that is the entity' i.e. not the trustee. However, a 'trust' is not a legal person - a trustee is. As a right or obligation cannot be conferred or imposed on an entity that is not a legal person, some rights and obligations are imposed not on the entity but on the trustee(s) appointed for the trust/entity. There is no creation of a new trust or any relevant change in the entity if all that happens is that a new trustee(s) of an existing trust entity is appointed with a consequential transfer in the legal title of the property of the trust from the old to the new trustee(s).

TheCreation of a new trust - Statement of Principles August 2001 (SOP) also makes it clear in 5.4 'Changes of Trustee', that a change of trustee does not by itself result in the termination of the trust. Further, in 5.5 under the heading 'Procedural changes' the SOP also states that changes that are merely procedural will not by themselves amount to the creation of a new trust and distinguishes between those changes and changes which fundamentally redefine the relationship between the trustee and beneficiaries in respect of the trust property. The mere appointment of a new trustee does not fundamentally redefine the relationship between the trustee and the beneficiaries.

Consequently, in the scenario under consideration, there is no new trust created and no transfer of property from the entity (that is, the trust) for the purposes of subsection 272-60(1). Under the current law, the existing family trust election would remain in place; no new election could be made; and no family trust distribution tax would be payable.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

The Law Council of Australia advised that they were keen to have the response available to their members as soon as possible.

The Commissioner advised that the responses would be available on the website that would be accessible for tax/legal practitioners.

1.21 Section 100A

Recently decided cases (for exampleIdlecroft Pty. Ltd. v FCT [2005] FCAFC 141 andRaftland v FCT [2006] FCA 109) concerning section 100A have articulated a very wide and literal interpretation of the provisions of section 100A and have discredited arguments made seeking to restrict those provisions. In this they advance the approach of the Full Federal Court inFCT v Prestige Motors Pty. Ltd. (1998) 82 FCR 195.

A possible consequence of this interpretations appears that making a beneficiary presently entitled to a share of net income on 30 June but not paying that income to the beneficiary at that time will fall within the purview of section 100A unless excluded under subsection 100A (13) as an agreement (as defined) entered into in the course of ordinary family or commercial dealing.

Given that immediate payment of trust entitlements are likely to be the exception rather than the rule in most cases (the distribution in most cases being credited rather than paid) this places considerable importance on the Commissioner's views about agreements made in the course of ordinary family or commercial dealing. Questions that arise are:

How wide is the family for this purpose?

Does the family include objects of benevolence who are not relatives?

Response
Questions have been put, in the context of subsection 100A(13) of theIncome Tax Assessment Act 1936 (ITAA 1936) as to what is meant by 'ordinary family [or commercial] dealings' when considering how wide a family is considered to be and whether the term 'family' includes objects of benevolence who are not relatives. The decision of the Federal Court inRaftland v. FCT is currently on appeal to the Full Federal Court. When the decision of that court is handed down, the Commissioner will be in a position to address the consequences of the decision for the interpretation of section 100A. The following preliminary comments are offered on the issues raised through the NTLG.

At the outset, it is important to note that section 100A is an anti-avoidance provision of the taxation law. Accordingly, its provisions must be interpreted, and, if necessary, applied in that context.

The Tax Office will not be seeking to limit the meaning of 'ordinary family or commercial dealings' as used in the context of section 100A. However the Commissioner will need to have recourse to all of the surrounding facts and circumstances of a transaction to determine if, on an objective view of the facts that may be available to the Tax Office, it would be reasonable for the Commissioner to form the view as to whether or not a particular arrangement or transaction is one that could satisfy the necessary requirements of subsection 100A(13) of being an agreement, arrangement or understanding that was entered into in the course of ordinary family [or commercial] dealings.

Whether or not a distribution, once declared, is immediately paid to the intended beneficiaries is only one of the factors that needs to be considered but, by itself, does not define the arrangement as being one to which section 100A applies.

Meeting discussion
There was no discussion of this item at the meeting. The response is noted.

The Law Council of Australia advised that they were keen to have the response available to their members as soon as possible.

The Commissioner advised that the responses would be available on the website that would be accessible for tax/legal practitioners.

1.22 Matters referred to sub-committees, NTLG work program and management of issues

Meeting discussion
Issues log item NTLG 0606/04
Feedback is requested from members regarding the draft document which questions the correctness of Taxation Ruling IT 2582.

Second Commissioner Fitzpatrick thanked members for their feedback and advised that the Tax Office is not going to change its position regarding the ruling. Members agreed that this issues log item may be regarded as completed.

Issues Log items NTLG0606/09, NTLG0606/10 and NTLG0606/11
Deputy Commissioner Mark Konza provided an update on issues log item NTLG 0606/09, NTLG0606/10 and NTLG0606/11 relating to service trust issues. Clarification of some of the terms in the booklet is continuing, and consideration is being given to the establishment of a frequently asked questions (FAQ) page, where questions and responses will be posted.

The Australian Bureau of Statistics definition of 'rural' is being used to define the application of the rural general medical practitioner rates. As agreed originally with the AMA, medical practitioner examples do not apply to specialists. An approach has been made by a tax agent on behalf of a chemist client, and consultation is underway regarding the definition of profit and the 30% test of defined profits. Information on each of these will be included on the website.

Additional feedback was welcomed as the service trust website is monitored and all queries are reviewed.

A handout - Service Arrangements booklet summary was provided to members prior to the conclusion of the meeting and forwarded via email on 22 September 2006.

Issues log item NTLG0606/02 - Promoter Penalty Co-Design sub-committee update
There was a brief discussion regarding the Promoter Penalty Co-Design sub-committee. The work is progressing well, and draft practice statement was discussed. It was queried if the draft practice statement should be tabled at the December NTLG meeting or if it could be reviewed out of session. The Commissioner is happy to take advice from the sub-committee, and suggested that it could be progressed out of session. It was queried if there should be an external committee similar to the GAAR Panel to advise on promoter penalty issues. The Commissioner advised this was a matter for the sub-committee to consider and advise.

1.22.1 Report on action items arising from the June 2006 NTLG meeting

Action item NTLG0606/01
Agenda item 1 - Agenda structure

A list of co-design topics for discussion at future NTLG meetings to be developed. Murray Crowe to contact members.

Status
Ongoing. The list of topics is being developed. The Tax Practitioner research and GAAR panel topics are on the agenda for the 5 September 2006 meeting.

Action item NTLG0606/02
Agenda item 3 - Promoter penalties

The Promoter Penalty Co-design sub-committee is to provide an update following the July meeting.

Status
Completed. The Promoter Penalty Co-design sub-committee will provide regular reports to the NTLG. A report of the July 2006 meeting is included in the agenda of 5 September 2006 at item 22.19. A report is scheduled for inclusion in the NTLG agenda for December 2006.

Action item NTLG0606/03
Agenda item 4 - Rulings program

Members are to provide out of session feedback regarding priorities of the rulings program topics.

Status
Ongoing. No feedback has been received to date. Members are again invited to provide feedback on priorities.

Action item NTLG0606/04
Agenda item 4 - Rulings program

Feedback is requested from members regarding the draft document which questions the correctness of Taxation Ruling IT 2582.

Status
Ongoing. Feedback has been received from the professional bodies. The general thrust of the feedback is disagreement with the views expressed in the draft document. Plans are underway to provide NTLG members with an update.

Action item NTLG0606/05
Agenda item 5 - Taxpayers' Charter

Alison Lendon is to provide a proposal regarding the use of the results of our various research and surveys.

Status
Completed. The Taxpayers' Charter research was placed on the website ato.gov.au on 20 July 2006. The research was introduced by a Commissioner's Online Update which set the scene for the research, provided an overview of the findings and a commitment to addressing the main areas of concern. Projects on improving written communication products and improving the office's ability to provide technical advice to tax practitioners have commenced.

It is proposed to provide regular reports on Tax Office corporate research to NTLG and ATPF meetings. Recent tax practitioner research results are to be discussed at the 5 September 2006 meeting.

Action item NTLG0606/06
Agenda item 6 - Compliance Program, KPMG report

A schedule for the progressive implementation of the KPMG recommendations is to be developed and provided to the NTLG.

Status
Ongoing. The KPMG Report was released in June 2006. The Recommendations and the initial Tax Office response were published as part of the release and are available on ato.gov.au.

Interim progress report
The Report made contained 11 recommendations of which:

¦ Recommendation 1, 2, 3, 4, 7, - related to internal quality assurance and have been implemented.

¦ Recommendation 5 regarding the consistency in reporting of GIC/SIC has been implemented through the release of a new Practice Statement on GIC/SIC with effect from 1 July 2006 and will be the subject of ongoing governance.

¦ Recommendations 6 and related to clearer descriptions in the publication of the Compliance Program and the Annual Report. The Compliance program reflects these recommendations and further improvements will be made to the Annual Report in due course.

¦ Recommendations 8 and 9 relate to the definition and use of liabilities and collections data. It is being finalised as part of preparations for the Annual Report.

¦ Recommendation 11 relates to detailed 'menu' for the definitions of 'active compliance' to ensure reporting consistency and is being finalised as part of preparations for the Annual Report.

Action item NTLG0606/07
Agenda item 6 - Compliance Program, KMPG report

Feedback is to be sought from NTLG members regarding the settlement code. This item to be included on the agenda for the September NTLG meeting.

Status
Ongoing. The Tax Office wrote to NTLG members 27 July 2006 and requested feedback on this item. Feedback was due 31 August 2006. At the request of NTLG members, the response date has been extended to 7 September 2006. This item is not included on the September 2006 agenda as a result.

Action item NTLG0606/08
Agenda item 7 - Burges report

Initiative 8 audit callovers; consideration to be given to the inclusion of external representatives in audit callovers.

Status
Completed. The biannual case callovers are a part of our governance arrangements for the whole program of active compliance work and, as such, have a strong focus on internal case management arrangements and general trends in work practices.

Callover discussions are primarily concerned with ensuring sound case planning and management including drawing together appropriate resources to work on the case. Discussion of the technical issues and risks in the case is limited to the extent necessary to provide appropriate context for the guidance the panel will provide on broader case management.

At a practical level, callovers are conducted on a site by site basis to maximise the value of each site visit and discussions are held with each team on a number of their current cases. The discussion on each case varies in length and sometimes multiple cases are discussed concurrently to explore work practice issues and other trends. This, in combination with other variable circumstances arising on the day, would make it difficult to provide taxpayers with an exact time for attending and may limit the benefits of the discussion with the team due to constraints on discussing other cases in a taxpayer's presence. Further, there would be limited if any benefits for taxpayers in attending the callover discussions as they are not a forum where decisions are taken on the technical issues and risks in specific cases.

From a technical perspective, it is noted that through the large market initiatives, additional opportunities are now provided for taxpayers to present information and submissions on particular risks or issues before a decision is made in particular cases.

Action item NTLG0606/09
Agenda item 9 - Service trust booklet discussion

An update on the work with the Law Institute of Victoria is to be provided at the September NTLG meeting.

Status
Ongoing. An update will be provided at the NTLG meeting of 5 September 2006.

Action item NTLG0606/10
Agenda item 9 - Service trust booklet discussion

Members were invited to forward issues associated with the application of the trust booklet that require clarification.

Status
Ongoing. Feedback has been received. A meeting was held on 22 August to prioritise the issues and determine the way forward. An update will be provided at the NTLG meeting of 5 September 2006.

Action item NTLG0606/11
Agenda item 9 - Service trust booklet discussion

The issue of fact sheets or one page advice regarding the application of the service trust booklet to be considered.

Status
Ongoing. An update will be provided at the NTLG meeting of 5 September 2006

Action item NTLG0606/12
Agenda item 12 - Change Program update

An explanation to be provided to tax agents regarding restricted access to certain clients' information through the Tax Agent Portal due to security issues.

Status
Ongoing. Where information is assessed as having a status of above 'in confidence' by reference to the classification information contained in the Australian Government Protective Security Manual (by which the Tax Office is bound), we can not display the information over the internet via the portal.

The Tax Office is actively reviewing the classification of all records in this category and many have been re-classified to "in confidence".

At present Tax Office staff are recorded at a higher security level due to constraints within the current system and this will be addressed in the Core Processing release in January 2008.

The Change Program initiatives do not otherwise affect this situation.

Action item NTLG0606/13
Agenda item 13 - International Financial Reporting Standards

An indicative time line for the progression of issues is to be developed.

Status
Ongoing. An indicative time line is being developed and will be submitted at the November IFRS sub-committee meeting. The highest priority issue identified is Share Capital Tainting.

Action item NTLG0606/14
Agenda item 14 - Consolidation issues

The Consolidation sub-committee is to develop an indicative time line for the progress of issues.

Status
Completed. An indicative timeline for the progress of issues has been distributed to the Consolidation sub-committee members

Action item NTLG0606/15
Agenda item 21 - Foreign hybrid limited partnerships

A report is to be provided at the next NTLG meeting.

Status
Ongoing. This matter has been referred to the Foreign Source Income sub-committee.

1.22.2 NTLG issues log (ongoing action items)

A copy of the NTLG issues log for September 2006 will be sent to members prior to the September meeting.

NTLG sub-committee and panel reports

Proposed changes to two NTLG panels.

Changes to the International Tax Rulings Panel and the Public Rulings Panel are proposed. During 2006-07, the International Tax Rulings panel will be folded into the Public Rulings Panel. This initiative will provide the Commissioner with greater flexibility and continuity in the management and development of public rulings on both income and international tax matters.

The public rulings website on www.ato.gov.au is being updated to reflect the new arrangements.

1.22.3 ATO Tax Practitioner Forum

Meetings
A meeting was held in Melbourne on 4 August 2006.

Next meeting
The next ATO Tax Practitioner Forum (ATPF) meeting is to be held on Friday 10 November 2006 in Sydney.

Minutes
Minutes of the 19 May 2006 meeting were accepted at the 4 August 2006 ATPF meeting, subject to an amendment to be made to agenda item 9. These minutes will be published on ato.gov.au shortly. Draft minutes from the 4 August 2006 ATPF meeting are being prepared now.

Summary of significant issues discussed:

Issue 1: Tax Office Relationship Managers

A discussion was held on the Relationship Manager Program. A list was provided outlining what you can and can not expect from the program. The Tax Office is undertaking a review of the Relationship Manager Program to co-design the process with the tax profession with the objective of having an efficient and effective regionalised approach to better service the needs of tax agents.

Issue 2: Tax Office Change Program

A discussion was held with members and an outcome was the establishment of a register to record, track and provide feedback on any proposed Change Program fix issues submitted by the consultative forums.

Issue 3: Interim findings of the review of forums

An update on the review of forums was provided at the ATPF meeting. A paper outlining what has been achieved to date and future plans for the review will be included as an attachment to the ATPF minutes.

Issue 4: Tax Office approach to bookkeepers - Bookkeeping strategy

Discussion on a Tax Office proposal regarding a multi-dimensional approach on how to work with bookkeepers to improve the Tax Office level of engagement with bookkeepers and professional standards in the industry. Significant level of concern expressed by members resulting in agreement to further consult with stakeholders.

Issue 5: Tax Office contact with tax agents on client and debt matters

The general consensus was that agents preferred to be contacted on all client matters. The Tax Office will investigate the possibility of allowing tax agents the ability to nominate their preference to have all Tax Office contact with clients directed to them, or some contacts directly to the client, if the agent prefers.

Issue 6: ICAA bugbear survey

An explanation was provided on how the survey results are obtained and some suggestions were raised about how to improve future surveys. The Tax Office is to identify any systemic issues arising from the current bugbear survey that still need to be addressed and explore solutions through the various working groups.

Other matters:

¦ Superannuation issue update

¦ Electronic forms

¦ Provision of advice to tax agents

¦ Tax Office processes around a change in Tax Office policy

ATPF sub-committee governance
The ATPF Advice Working Group was recently established as part of the Tax Office's commitment to improving the office's ability to provide technical advice to tax practitioners. The advice working group's priority is to improve the experience that tax agents and their staff have when dealing with us and to make it easier for them to help their clients comply with their tax obligations.

The working group will co-design a framework that will enable practitioners to be self-reliant so that they can obtain the answers to non-complex issues within their practices. The working group will also co-design a Tax Office model that will enable the resolution of more complex issues via a seamless escalation process that respects the needs of tax practitioners.

The advice working group is an administrative group that will meet to exchange candid views between tax practitioners, recognised professional association representatives and the Tax Office. The advice working group will initially meet for 12 months with review and possible extension to 18 months.

Members of the advice working group will be encouraged to participate constructively in full and frank discussions on the various topics, and to make recommendations on particular products, services and administrative approaches. The Tax Office will consider all input from members in the development of the advice process, but ultimate decision making will rest with the Tax Office utilising standard Tax Office procedures.

The first meeting of the advice working group was held on 17 July 2006.

1.22.4 Consolidation sub-committee

Meetings
The last meeting was on 8 June 2006.

Next meeting
The next meeting will be on 22 November 2006.

Minutes
The minutes of the 25 November 2005 meeting were approved at the meeting of 8 June 2006 and have been published.

Draft Minutes of the 8 June 2006 meeting have been distributed to members.

Summary of significant issues discussed at meeting held on 8 June 2006:

Issue 1: The same business test and consolidated groups.

Members expressed disagreement with the position taken in the draft ruling in relation to whether section 165-212E of theIncome Tax Assessment Act 1997 (ITAA 1997) involves the new business and new transactions test. There was also disagreement on whether intra group transactions are relevant to the same business test. A draft of the ruling will be distributed before the ruling is finalised.

Issue 2: Liquidation.

A progress report on Draft Taxation Determinations TD 2006/D1 and 2006/D2 was given.

Issue 3: What is an 'error' for the purpose of applying section 705-315 and CGT event L6.

Two discussion papers were issued in relation to Subdivision 705-E of the ITAA 1997. There was broad agreement with the views expressed in the papers. The Tax Office is to consider how to communicate the view expressed in the papers.

Issue 4: Does CGT event L5 apply where a consolidated group acquires another consolidated group where subdivision 705-C of the ITAA 19997applies.

This issue has been finalised by the release of TD 2006/38. There was broad agreement with the view expressed in the Taxation Determination.

Issue 5: Does CGT event L5 apply when an eligible tier-a (ET-1) company that is wholly-owned by the top company of a multiple entry consolidated (MEC) group leaves the group and Subdivision 719-K of the ITAA 1997 applies to set the cost for the pooled membership interests in the ET-1.

Two discussion papers were issued. There was broad agreement with the view expressed in the first paper. The Tax Office is to consider how to communicate the view expressed in the paper.

Members expressed no interpretative disagreement with the second paper but said that an inappropriate economic outcome was produced and asked that Treasury note the outcome.

Issue 6: Guidance on the continued application of the over-depreciation adjustment under section 705-50 of the ITAA 1997, specifically where a subsidiary member exits one consolidated group and joins another consolidated group

The Tax Office proposed to members that the matter should be advanced by discussions between the Corporate Tax Association (CTA) on behalf of members, Treasury and the Tax Office. Members agreed with this proposal. A meeting was subsequently held between the CTA, Treasury and the Tax Office. Treasury is considering the CTA's views. The Tax Office proposes to wait for Treasury to form a view

Issue 7: Over-depreciation shortcuts where an adjustment under Step 1C and Step 2C can arise - revised example.

Revised Consolidation Reference Manual (CRM) example C2-4-640 was distributed to the sub-committee. Members were invited to provide comment on the revision prior to it being incorporated into the CRM. The Tax Office will incorporate the example in the CRM.

Issue 8: Application of section 45B of the ITAA 1936 to MEC groups.

There was broad agreement with the view expressed by the Tax Office. The Tax Office will finalise this issue by inserting material into the CRM.

Issue 9: ACA treatment of owned and acquired doubtful debts.

Members expressed no interpretative disagreement but said that an inappropriate economic outcome was produced and asked that Treasury note the outcome. The Tax Office will finalise this issue by inserting material into the CRM.

Issue 10: Does subdivision 705-C of the ITAA 1997 apply where a non-consolidated Australian resident company acquires a consolidated group.

A paper was distributed expressing the view that Subdivision 705-C does not apply where a stand-alone entity acquires a consolidated group. Members questioned whether this was appropriate in policy terms. The Tax Office is to consider how to communicate the view expressed in the paper.

Issue 11: The timing of a change in beneficial ownership under sections 703-30 and 703-33 of the ITAA 1997.

The Tax Office discussed its preliminary views on this issue. The Tax Office intends to issue an interpretative product (probably finalising the current draft TD) and will consider the need for the issue of an administrative product that ensures that rules apply appropriately in a practical sense.

Issue 12: Synergistic goodwill.

A paper was distributed exploring the possible view that synergistic goodwill may not be legal goodwill and therefore not an asset for the purposes of Part 3-90, such view being inconsistent with the view of synergistic goodwill previously expressed in Taxation Ruling TR 2005/17. There was no interpretative disagreement with the possible view raised by the Tax Office. The Tax Office is to consider TR 2005/17.

Issue 13: Section 713-130 of the ITAA 1997 - discussion of recent Tax Office decision

The Tax Office updated the sub-committee on the issue. Members did not prioritise this issue.

Issue 14: Special conversion events - discussion of recent Tax Office decision

The Tax Office advised of its recent decision that special conversion events were not seamless. An ATO ID was shortly to issue. Treasury advised that it was aware of the issue.

Issue 15: IFRS issues register issues transferred to Consolidation issues register

1. Recognition of liabilities on exit of a subsidiary member of a consolidated group that were not recognised when that subsidiary member joined the group and the impact on entities on exit from consolidation where additional liabilities are recognised;

2. AIFRS will change the basis for recognition and measurement of liabilities and new liabilities may also be recognised. Does this result in a capital gain or loss under CGT event L7 when the ACA is reconstructed?

These issues, previously on the IFRS issue register have now been moved to the consolidation issues register. Prioritisation of the outstanding IFRS-Consolidation interaction issues will be done out of session via phone hook up. (This hook up has been held.)

Other matters:

There were updates from LB&I, Operations and Treasury. Members expressed their joint view as to priority issues for June-December 2006. A member asked that issue 10.27 and 10.28 (merger in consolidation) be referred to the NTLG as not having been resolved in the sub-committee. The chair agreed to do so. A discussion paper in relation to this issue has been distributed to members. It is proposed to discuss this issue with members at a workshop on 20 September 2006.

In accordance with action item NTLG0606/14 of the NTLG, an indicative timeline for the progress of issues has been distributed to members.

1.22.5 Finance and Investment sub-committee

Meetings
The last NTLG Finance and Investment Sub-committee meeting was held on 8 August 2006.

The last Forex working party meeting was held on 4 May 2006.

Next meeting
The next NTLG Finance and Investment sub-committee meeting is scheduled to be held in February 2007.

No further Forex working party meetings are scheduled to be held unless specifically required (see item 4 - report of June 2006).

Minutes
The minutes of the NTLG Finance and Investment sub-committee meeting held on 8 August 2006 are currently being prepared and will be published when finalised and cleared.

The minutes were published to the web on 19 September 2006.

Summary of significant issues discussed (during period since the last report)

A full account of all the issues discussed at the 4 May 2006 Forex working party meeting was provided in the previous report. The following represents issues discussed at the 8 August 2006 NTLG Finance and Investment sub-committee meeting.

Issue 1: Treasury update

A question was asked concerning progress with the regulations for issuers that have debt containing solvency clauses enabling a company to indefinitely defer the repayment of debt.

Response
Treasury noted that the drafting of the 'Lower Tier 2' regulation concerning the effect of a 'solvency clause' in certain term subordinated notes had moved up in priority. However, TOFA Stages 3 and 4 were still a major priority. Subject to Government decision, it was expected that the draft regulation would be released for confidential consultation.

Several members had requested an update on Section 128F of theIncome Tax Assessment Act 1936 (ITAA 1936).

Response
With regard to Sections 128F and 128 FA of the ITAA 1936, Treasury confirmed that they have recently been undertaking confidential consultations and were unable to comment further at this stage.

It was noted that an ATO ID 2006/195 issued 26 July 2006 may have gone some of the way towards providing guidance on this issue.

Issue 2: Calculation of delta and derivatives embedded in shares

The Tax Office has recently taken the view (when responding to a ruling request) that a redemption right embedded in the terms of a preference share constituted a separate position in relation to the preference share and therefore it was necessary to calculate the delta of the embedded redemption right in calculating the net delta of a shareholder in relation to that preference share.

It was submitted by a member that such an interpretation is not only incorrect, but could not have been intended by the holding period rules and the issue should be clarified as soon as possible, as it could potentially result in uncertainty for holders of shares which have rights embedded in their terms. It was suggested such clarification can take the form of a public statement by the Tax Office (for example in a ruling or determination etc) to the effect that, in fact, it has reached the view that a redemption or other right embedded in the terms of a preference share does not constitute a separate position in relation to the preference share, for the purposes of calculating the net delta of a shareholder in relation to the preference share. If this is not possible then the law should be amended to make this clear.

Response
In the ordinary case, the Tax Office does not take the view that a redemption right embedded in the terms of a preference share constitutes a separate position in relation to the preference share. Therefore an embedded option held by the issuer as part of the ordinary terms of issue of a redeemable preference share is not a separate position which affects the net position of the holder of that share.

However, different considerations arise if a share is issued in circumstances where a third party has an option in relation to the share. Irrespective of whether or not the third party option is 'embedded' in the terms of issue of the share, this situation is different from one where an embedded option is held by the issuer. The effect of the third party option is to expose the shareholder to risks, or provide protection from risks, which may be unrelated to the risks and opportunities inherent in the particular issuer. In these circumstances, the third party option may constitute a separate position.

Discussion
Members expressed some concern with this response, both from a policy and a procedural perspective. The Tax Office was receptive to some of the views being put forward and asked if members were prepared to put forward further submissions on the topic. The Tax Office will then consider the best way to resolve this issue having regard to other competing technical priorities.

Issue 3: 'Trading activity' category of offshore banking activity

Clarification and confirmation of the views of the Tax Office are sought on the scope and application of the term 'trading activity' for offshore banking units (OBU) purposes in the context of acquisitions and disposals of revenue assets by authorised deposit taking institutions (ADIs), that are declared to be an OBU (or by entities that are members of a tax consolidated group of which such an ADI is the head entity).

The particular kinds of revenue assets in question are securities, shares or units in non-resident entities.

Response
The Tax Office considers that trading activity under the OBU provisions is not restricted to trading in securities which would be considered to be trading stock. This should be read to extend the accepted activity to trading in items on revenue account which were acquired by the OBU for trading purposes.

Although there is no specific Tax Determination on this point some assistance can be gained by referring to published Tax Office views on futures contracts.

Taxation Determination TD 93/205, states that these are eligible contracts and that trading with an offshore person in such an eligible contract is an OB activity under sub-section 121D(4) of the ITAA 1936.

This is a separate issue to whether a futures contract is trading stock. Taxation Ruling IT 2228: 'Income Tax: Futures Transactions' at paragraph 29 states that a futures contract is in fact not trading stock.

The issue as to whether the OBU is involved in trading activity is considered with reference to whether the OBU is a trader and trading with another person as defined in section 121ED of the ITAA 1936. This should be distinguished from the issue of whether the contracts involved are trading stock. As above the case law concerning banks and trading activities suggests that trading activity should therefore not be restricted to those involving trading stock.

In view of the above the Tax Office does not believe that a Tax Determination is required as a matter of urgency on this point.

Discussion
Members discussed the scope of the word 'trading'. It was agreed 'trading' was broader than just trading stock. It was suggested that in this context the term would also cover the buying and selling of revenue assets. The Tax Office thought that this would not necessarily be the case. However the Tax Office encouraged interested members to put forward further submissions on the topic. The Tax Office will then consider the best way to resolve this issue having regard to other competing technical priorities.

Issue 4: Issues register for this sub-committee

The Chair noted the suggestion by members of the creation of an issues register for the sub-committee similar to that already in use in other NTLG sub-committees.

The Chair supported the creation of an issues register for the sub-committee to assist with the recording and tracking of issues which all members of the sub-committee - both external and Tax Office - consider to be of a high priority.

The Chair was mindful, however, of the terms of reference of the sub-committee which restricts issues discussed to those which have a broad operational significance across the finance and investment market segment. The Chair was also mindful of the fact that it is the Tax Office which takes responsibility for the organisation of the sub-committee and the progress of most issues. On this basis the Chair suggested a process to be used to determine what issues are placed upon the register.

Discussion
Members discussed the proposed register as suggested by the Chair. There was general agreement regarding the need to effectively prioritise items dealt with by the sub-committee. It was asked if the type of rigour being proposed for the issues register also applied to the agenda items suggested by members. The Chair advised that it would not but would still require members to provide sufficient detail regarding the scope and impact of items in order to determine if they should be dealt with at NTLG sub-committee level.

It was decided that the Secretariat of the sub-committee would facilitate members to discuss priorities by acting as a central co-ordination point for suggested issues.

Issue 5: Foreign currency denominated loan

On 5 April 2006, the Commissioner issued Taxation Determination TD 2006/11 dealing with the forex realisation events which happen as a result of the novation of foreign currency denominated debts. TD 2006/11 provides that novation will result in a forex realisation event four happening for the borrower.

Members had requested that the Tax Office expand on TD 2006/11 to clarify how the forex loss or gain is calculated on novation. They are particularly concerned with the calculation of a forex realisation gain or loss on novation for a borrower when one lender (the original lender) novates its rights to another (the new lender) and no payment is made by the borrower in respect of the novation. In such a situation what is the 'amount you paid in respect of the event happening' [per paragraphs 775-55(3)(a) and 775-55(5)(a) of theIncome Tax Assessment Act 1997 (ITAA 1997)]?

Response
In these circumstances the amount the borrower pays 'in respect of the event happening' is the Australian dollar (AUD) equivalent of the value of the right acquired by the new lender. Subsection 775-55(6) of the ITAA 1997 provides that an 'amount paid in respect of the event happening can include a non-cash benefit'. The term 'non-cash benefit' is defined in subsection 995-1 of the ITAA 1997 as 'property or services in any form except money'. Upon novation, the borrower's obligation to the original lender is extinguished. At the same time, the new lender acquires the right to be paid the amount owing by the borrower. It is that right that is the 'non-cash benefit' provided by the borrower.

Discussion
Some members considered that this outcome might be a hard result for the borrower. Treasury thought that some evidence would be needed as to how often this situation actually occurs. Members were invited to email Treasury with details of how prevalent this scenario was.

Issue 6: Hire purchase and Division 974

Guidance was sought from the Tax Office on whether all hire purchase arrangements would be classified as 'debt' arrangements for the purpose of Division 974 of the ITAA 1997. The classification of such an arrangement would impact on:

¦ the deductibility of the interest component of repayments made under the hire purchase arrangement; and

¦ the 'debt deduction' definition and the impact of hire purchase arrangements for thin capitalisation purposes.

A specific example was provided to the meeting.

Response
It is not possible to make a determination that all hire purchase arrangements would be classified as 'debt interests' for the purpose of Division 974 of the ITAA 1997. Whether a particular hire purchase arrangement to which Division 240 of the ITAA 1997 applies would be classified as a 'debt interest' for the purpose of Division 974 of the ITAA 1997 depends on all the facts and circumstances of that particular arrangement and possibly whether the arrangement is part of a related scheme.

More generally this NTLG sub-committee is not an appropriate forum to deal with specific arrangements where the taxation treatment of that arrangement is highly sensitive to the precise facts. These types of issues are better resolved through the private ruling process and such a ruling request should be made by anyone seeking a view on their specific arrangements.

Discussion
The Chair provided the group with an explanation of why it would not be possible to provide suitable guidance either on the issue generally, or in respect of specific example provided. It was suggested by some members that the real issue was how the residual value should be treated under the debt/equity rules. The Chair stated that if the question was suitably reworded and resubmitted it would be considered.

Issue 7: Forex gains/losses on redeemable preference shares

Could the Tax Office please provide an update on its view as to whether/when the redemption of foreign currency denominated redeemable preference shares (RPS) will give rise to forex realisation event two (for the holder) and forex realisation event four (for the issuer). At least where the RPS are debt interests, such that there will be, by definition, an effectively non-contingent obligation to repay the face value, there should be relevant rights/obligations for the purposes of the forex rules, particularly given that subsections 775-135(2) and 775-140(2) of the ITAA 1997 include contingent rights and obligations within the scope of Division 775 of the ITAA 1997.

Response
This issue was discussed at the meeting of the Forex Working Party of the NTLG Finance and Investment Sub-committee on 14 September 2004.

At the meeting in September 2004, the Tax Office indicated that it would be unlikely to issue any public product that distinguished the treatment of RPS under Division 775 of the ITAA 1997 on the basis of their classification as 'debt interests' or 'equity interests'. The Tax Office has not advanced its consideration of the issue beyond what was put to that meeting.

The minutes of that meeting record that Treasury noted at that meeting that the policy intent of the forex legislation was not to include ordinary shares (which may be assumed to be 'equity interests') within the scope of the provisions.

Whether or not Forex Realisation Events two and four apply (and how those events apply) on the redemption of RPS does not seem to turn on the classification - by Division 974 of the ITAA 1997 - of the RPS as either debt interests or equity interests: the result under Division 775 appears to be unaffected by the operation of Division 974 of the ITAA 1997. Division 775 of the ITAA 1997 does not explicitly refer to 'debt interests', 'equity interests', or redeemable preference shares.

If Division 775 of the ITAA 1997 applies on the redemption of particular RPS, the consequences will be determined by the application of the law to the terms and conditions of the particular agreement between the parties.

The item raises broader policy issues that are the responsibility of Treasury:

¦ whether the forex provisions should always apply to 'debt interests' in any form; and

¦ whether the forex provisions should ever apply to 'equity interests' in any form.

Issue 8: Debt/equity discussion day update

On 9 November 2005, the Tax Office held a debt equity discussion day to discuss a range of debt equity matters. This meeting was extremely well attended by tax professionals and industry bodies and the focus of the meeting was to enable discussion of those debt equity issues considered to be of highest priority by both the Tax Office and the finance industry.

At the meeting, participants agreed upon four high priority debt equity issues. These included:

¦ clarification of the meaning of 'effectively non-contingent obligation'

¦ the application of the related schemes

¦ outstanding technical issues concerning the application of the debt equity rules to related party 'at call' loans; and

¦ the application of section 974-80 of the ITAA 1997.

Clarification as to the meaning of effectively non-contingent obligation (ENCO)
At the discussion day, the Tax Office advised that this was the highest priority debt equity matter. The Tax Office has written to tax professionals and industry bodies on a number of occasions seeking examples of standard terms that could impact on whether there is an ENCO.

An attendee at the meeting has provided us with a copy of information sent to Treasury in relation to the development of the Lower Tier 2 capital regulation. This information relates to subordinated instruments. However, in light of the Government announcement to introduce regulations to clarify the law in respect of Lower Tier 2 subordinated instruments, the Tax Office does not think it appropriate to prepare any interpretative products based upon this documentation at this time.

Another representative has provided the Tax Office with a substantial amount of information to assist with providing guidance on the meaning of ENCO and the application of the related schemes discussion paper. This information was provided at the end of April. The Tax Office appreciates the provision of this information and thanks the relevant representative for their significant contribution. We are currently considering these documents.

As a result of the difficulties faced in obtaining examples of standard clauses that are currently causing practical problems and consequently the difficulty in developing a position on such clauses the Tax Office has decided to prepare a discussion paper outlining our views as to what constitutes an ENCO.

Should any industry body or professional association wish to provide information for consideration in support of the development of this paper, please send to the Secretariat of this sub-committee.

Clarification of the 'related schemes' provisions.
At the discussion day, the Tax Office considered that there was a need to clarify the application of the related scheme provisions.

Accordingly, the Tax Office undertook to prepare a discussion paper and sought sanitised transactions in order to assist in the development of a Tax Office view on this issue.

Our work on this discussion paper is well advanced. The paper will require input from a number of people within the Tax Office and accordingly we are unable as yet to provide a release date.

Resolving additional technical issues for those taxpayers not subject to the small business carve out who have sought to ensure their 'at call' loans satisfy the debt test
Upon the enactment of a carve out for those entities with a GST annual turnover of less than $20 million, the Tax Office prepared a guide to 'at call' loans (the guide) which outlined the operation of the carve-out and dealt with many of the technical issues.

However, at the discussion day, some representatives sought further guidance for those entities that fell outside the $20m carve out. In particular, whether the facility agreements they have entered into were appropriate to satisfy the debt test.

Interested representatives have provided sample clauses and the Tax Office is currently examining these agreements. The guide will be amended as necessary to reflect any views reached. However, as many of the issues raised concern the application of the related scheme provisions to facility agreements it is proposed that these will be addressed in a separate section of the discussion paper.

We are currently drafting responses to these 'at call' loans/related schemes issues for inclusion into the guide and the discussion paper as appropriate.

Application of section 974-80 of the ITAA 1997
During the debt equity discussion day, the Tax Office committed to publishing a Taxation Determination on this issue. This has now been upgraded to a Taxation Ruling.

The current preliminary Tax Office view is that the provision does not contain a Commissioner's discretion or an apportionment rule.

On 31 July, the Tax Office met with the Australian Bankers Association to discuss the scope and technical issues associated with this ruling.

At this time, should the Tax Office proceed with a Taxation Ruling on this issue we hope to have a draft Taxation Ruling published towards the end of the year.

Issue 9: Redeemable preference shares and share capital tainting

Concern was raised that the redemption of preference shares will now result in the application of the share capital tainting provisions, which apply to transfers that occur after 25 May 2006.

A redemption of preference shares is governed by section 254K of theCorporations Act 2001, which states:

'A company may only redeem redeemable preference shares:

a) if the shares are fully paid-up; and

b) out of profits or the proceeds of a new issue of shares made for the purpose of the redemption.'

ASIC practice note PN 68 provides commentary of what is 'legally' required by an entity when preference shares are redeemed out of profits. Whilst the PN deals with AASB 1033, the PN makes it clear that it is ASIC's view that an amount of profit needs to be transferred to share capital, and then share capital is redeemed by way of a distribution of cash.

The share capital tainting provisions generally operate when an amount is transferred to a company's share capital account from another of the company's accounts, if the company was an Australian resident immediately before the time of the transfer (section 197-5 of the ITAA 1997). Furthermore, once the share capital account becomes tainted, the account is not treated as share capital for the purpose of subsections 6(1) and 44(1B) of the ITAA 1936. Accordingly, a distribution out of share capital can be treated as a dividend under section 44 of the ITAA 1936. Furthermore, the operation of section 46M of the ITAA 1936 in conjunction with section 202-45 of the ITAA 1997 would result in the distribution being unfrankable.

On a review of the legal transaction required under section 254K of theCorporations Act 2001, it would appear that ASIC require an amount of profit to be transferred to share capital, and then the amount of share capital to be distributed to the shareholder. Technically this would appear to result in a share capital tainting under section 197-5 of the ITAA 1997 (journal 1), and a distribution of an unfranked dividend (journal 2).

If the Tax Office holds the view that a redemption of preference shares out of profits results in share capital tainting and a distribution of an unfranked dividend, members are of the view that this would be an inappropriate outcome.

Response
A redemption of preference shares is governed by section 254K of theCorporations Act 2001, which states:

'A company may only redeem redeemable preference shares:

a) if the shares are fully-paid up; and

b) out of profits or the proceeds of a new issue of shares made for the purpose of the redemption.'

ASIC practice note PN 68 provides commentary of what is 'legally' required by an entity when preference shares are redeemed out of profits. The PN considers that, where all or part of the redemption is met out of profits, subsection 254K(b) requires an additional entry in the nature of a transfer from retained profits in order to preserve the capital of the company and protect creditors. The PN provides that the following accounting entries would be required for a redemption out of profits (assuming the redemption is satisfied by cash):

DR Profit and loss appropriation

CR Share capital (equity)

DR Share capital redeemable preference shares (liability)

CR Cash

This approach involves the transfer of an amount from a company's retained profits account to its share capital account. Section 197-5 of the ITAA 1997 provides that the share capital tainting rules apply to a transfer to a company's share capital account from another of the company's accounts. Further, section 197-50 of the ITAA 1997 provides that a company's share capital account becomes tainted when such a transfer takes place. Therefore a RPS redemption which is accounted in the manner described above would taint a company's share account.

It should be noted that a similar conclusion with respect to tainting would have been reached on the above transaction if the previous share capital tainting provisions of section 160ARDM of the ITAA 1936 were considered.

Discussion
Some members considered this to be an inappropriate outcome. Others commented that as it was the accounting rules which brought about the adverse taxation outcome perhaps the fault lay there. The question was whether the outcome was sufficiently capricious to warrant any kind of policy intervention. The Treasury representative said that he would pass these concerns on to relevant colleagues.

1.22.6 Foreign Source Income sub-committee

Meetings
No NTLG Foreign Source Income (FSI) sub-committee meetings occurred during the period since the last report.

Next meeting
It was agreed at a previous meeting to rotate each meeting between Sydney, Canberra and Melbourne. With this in mind, and taking into consideration the availability of members, the next meeting has been set for Thursday 7 September 2006 in the Sydney Tax Office.

Minutes
The minutes from the last meeting issued in draft form to members on 4 August 2006 and confirmation for these will be sought at the September 2006 meeting.

Summary of significant issues discussed:

The significant issues from the draft minutes of the meeting are summarised below.

FSI SC item 8.3: Whether Part IV Income Tax Assessment Act 1936 (ITAA 1936) applies to Thin Capitalisation (issue raised by ICAA)

This issue was raised at a previous NTLG FSI sub-committee meeting and has also been raised at the National Tax Liasion Group level. The draft FSI sub-committee minutes contain a hyperlink to the Tax Office's response via the NTLG's draft minutes.

FSI SC item 9: Conduit Foreign Dividend (agenda item contributed by Investment and Financial Services Association - IFSA)

Can the Tax Office confirm its position with regards to the following?

'A conduit foreign dividend paid by an Australian company to a managed fund would retain its character and would therefore flow through the managed fund and not be subject to dividend withholding tax when distributed by the managed fund to a non-resident investor.'

Ms Allen presented a response to sub-committee members and also referred them to the Tax Office's website material.

FSI SC item 10: Non-resident investors in Australian Managed Funds (agenda item contributed by IFSA)

Can the Tax Office confirm its position with regards to the following?

'Section 3(11) of theInternational Tax Agreements Act 1953 and equivalent provisions in double tax treaties, for example Article 7(9) of the Australia/US DTA, do not apply to deem non-resident investors in Australian managed funds to carry on business in Australia through a permanent establishment in Australia. This issue is particularly relevant for the application of subdivision 768-H of the ITAA 1997 and the 2005 Budget measure regarding Capital Gains Tax and non-residents. The clear policy intention is that the non-resident investors are not deemed to have a permanent establishment in Australia and this seems to be Treasury's assumption in the drafting of subdivision 768-H and the consultations on the 2005 Budget measure.'

Lengthy discussion took place which resulted in further information being sought by IFSA.

FSI SC item 11: Operation of section 457 (ITAA 1936) and deemed disposal of assets (agenda item contributed by IFSA)

'Section 457 (ITAA 1936) as amended from 1 July 2004, will include in the assessable income of an attributable taxpayer of a controlled foreign company (CFC) which changes residence from an unlisted to a listed country the amount that would be the CFC's distributable profits at the residence-change time if the CFC's income included an amount that the CFC would have derived had the CFC disposed of all of its tainted assets immediately before the residence-change time for a consideration equal to their market value.

Does the Tax Office agree with that view, and if so, does the sub-committee agree that it is appropriate to request that the issue be escalated through the TIMS process as the current law does not reflect the correct policy outcome?'

The ICAA will prepare and circulate a draft TIMS tempate.

FSI SC item 12: Application of foreign hybrid rules and Division 6C (ITAA 1936) trading trust rules (agenda item contributed by ICAA)

'Can the Tax Office comment on their view as to whether a public unit trust which holds a portfolio investment in a limited liability company or limited partnership, in respect of which an election has been made to treat that entity as a foreign hybrid, is a trading trust under section 102N (ITAA 1936) where that entity does not meet the eligible investment business exemption.

Can the Tax Office advise whether this issue will be dealt with by the Tax Office together with the several other outstanding matters regarding the interpretation of new Division 830 (ITAA 1997)?'

The item has been referred to the Finance & Investment sub-committee of the NTLG.

FSI SC item 13: Impact of Division 775 (ITAA 1997) on the new tax exemption of temporary residents for Foreign Source Income (FSI) (agenda item contributed by ICAA)

'The matter concerns the impact of Division 775 (ITAA 1997), (the so-called forex rules) on the new tax exemption for temporary residents for foreign source income. We have asked the Tax Office, through the Forex working party to provide its preliminary view on this matter and asked that it be added to the Forex issues register.'

Mr Wentworth from the Forex working party contributed the Forex working party minutes response to committee members.

FSI SC Issue 14: Foreign income exemption for temporary residents (agenda item contributed by ICAA).

'The Tax Treaty between the UK and Australia discusses (inter alia) the taxation of pension income paid from one jurisdiction to a tax resident of the other (Article 17). In essence the country in which the recipient of the pension is tax resident has the right to tax the income, albeit subject to deductions for the Undeducted Purchase Price (UPP) of the pension where the individual is tax resident in Australia.'

Can the Tax Office clarify what these provisions mean where the recipient of pension income from the UK is a 'temporary resident' of Australia (for example a Retirement visa holder, subclass number 410)? Is it the case that such income will not be assessable in Australia from 1 July 2006, but will be taxable in the UK? Can a taxpayer choose to have the pension income taxed in Australia, with a claim made for the UPP of the pension? Will the Tax Office continue to stamp UK Revenue form FD2 following 1 July 2006?

Will the Tax Office be advising the UK Revenue of the changes to Australian law regarding the taxation of 'temporary residents' from 1 July 2006?

Mr Pearce, Mr Torrisi and M. Walker addressed the sub-committee with regards to this item. The sub-committee draft minutes draw members' attention to relevant ATO IDs and Tax Office website FAQs that have been released since the meeting.

FSI SC item 15: Joint investment in Foreign Investment Funds (FIF) by super funds and tax exempt bodies (agenda item contributed by ICAA)

'Complying superannuation funds (CSFs) are exempt from the FIF attribution rules in respect of their direct and certain indirect foreign investments.

Would the FSI sub-committee agree that the current drafting of the provision limits the availability of the FIF exemption to CSFs which is inconsistent with the policy outcome sought to be achieved? In view of the fact that there should be no net loss to consolidated revenue, is it appropriate for the FSI sub-committee to request that Treasury review the operation of the exemption so that it is expanded to permit joint investment by CSFs and tax exempt bodies and so reflect the stated intention of the exemption in those circumstances?'

Mr Collins advised sub-committee members that the Tax Office was satisfied with the provisions and would not issue any more advice on the topic. If changes were sought it was suggested to members that they could write to the Minister for Revenue and Assistant Treasurer.

FSI SC (6 September 2005) item 7: Operation of paragraph 830-10(1)(b), ITAA97.

For a foreign limited partnership to be a foreign hybrid limited partnership, one of the requirements is that foreign tax is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year: section 830-10(1)(b).

This item was listed as NTLG 0606/15 at the last meeting - a report is to be provided to the next NTLG meeting. The report will be provided in the meantime to the next FSI sub-committee meeting (7 September 2006).

Other matters:

Following the practice at previous meetings the next meeting will cover the following:

¦ a summary of the FSI 'high traffic' issues will be presented

¦ progress of Review of International Tax Agreements (RITA) measures became law since the last meeting will be discussed

¦ selected rulings and determinations released in draft form will be brought to the attention of members.

1.22.7 Fringe Benefits Tax Sub-committee

Meetings
Meetings were held on 18 May 2006 and 17 August 2006.

Next meeting
The next meeting is scheduled for 16 November 2006.

Minutes
Minutes of the 18 May 2006 were released and published on 7 July 2006.

Summary of significant issues discussed at the May meeting

Issue 1: Joint submission on compliance issues

A concern was raised as to what will be done to address the remaining issues contained in the Cost of Compliance submission that were either not addressed in the taskforce report or announced in the budget.

The Tax Office reminded members that the Cost of Compliance submission was submitted to the, then, Assistant Treasurer and Minister for Revenue in August 2004. The Tax Office is not able to comment further on the joint submission and members were informed that they should liaise with the Treasury in the first instance. The ICAA agreed, on behalf of members, to contact the Treasury to obtain an update to the submission.

Issue 2: Government's interim response to a number of recommendations of theReport of the Taskforce on Reducing the Regulatory Burdens on Business.

The Tax Office noted that in relation to the recommendations of the taskforce, there are specific recommendations in relation to 'road tolls' and 'irregular' and 'infrequent'. The Tax Office indicated it is proposing to prepare a fact sheet on 'road tolls'. The draft fact sheet will be available to members for discussion at the next meeting of the sub-committee. In reviewing the existing guidelines on minor benefits and considering the announcement that the threshold test will increase with effect from 1 April 2007, the Tax Office indicated that it will consider whether a public ruling on 'minor benefits' should be undertaken.

Other matters

¦ Employee contributions by journal entries

¦ Exemption for personal digital assistants

¦ Living away from home allowances

¦ Work related travel

¦ Reimbursement of holiday accommodation at a major population centre provided to employees in remote areas

¦ What is a major population centre for the purposes of determining whether a benefit is an excluded fringe benefit

¦ Rental subsidy provided to employees in remote areas where lease is not in the employee's name

¦ Accommodation for accompanying spouse

¦ Travel insurance when travelling on business

¦ Benefit provided to a deceased employee

¦ Review of stakeholder forums

1.22.8 NTLG GST sub-committee

Meetings
15 August 2006

Next meeting
22 November 2006

Minutes
Draft minutes of the meeting on 24 May 2006 have been accepted by members and are to be published shortly.

Summary of significant issues discussed

Residential premises: This issue relates to the retrospective amendments to theA New Tax System (Goods and Services Tax) Act 1999 (GST Act) following the decision inMarana Holdings Pty Ltd v. FCT (2004) 55 ATR 161; 2004 ATC 5068. A workshop on implementation issues was held on 4 August 2006. The participants were drawn from the NTLG GST Sub-committee and the Tax Office Property and Construction Industry Partnership. Implementation issues were further discussed at the 15 August 2006 sub-committee meeting.

Review opportunities and transitional contracts. Discussion of the implications of the Full Federal Court decisions inColes Supermarkets Pty Ltd v Westley Nominees Pty Ltd [2005] FCA 839 andCommissioner of Taxation v DB Rreef Funds Management Limited [2006] FCA 89: The decisions impact on the Tax Office view on when a review opportunity occurs that renders contracts spanning 1 July 2000 subject to GST. The Commissioner is presently seeking leave to appeal the decision in DB Rreef.

GST, Super Guarantee and Contractors. This issue relates to the GST implications of SGD 2006/2 , which is about superannuation guarantee implications of 'salary' sacrifice by independent contractors. A Tax Office response has been provided, based on ATO ID 2002/22 , to the effect that the superannuation guarantee is calculated on a GST exclusive basis.

Proposed practice statements on the application of the four year time limit for claiming GST debts and refunds. Discussion of the need to temporarily withdraw the practice statements, and how Tax Office practice in administering the provisions should be communicated subsequent on this decision.

Practice statement PS LA 2006/8 on remission of General Interest Charge. Discussion of application of the practice statement to GST.

Other matters:

The meeting discussed the role, charter and operation of the GST sub-committee. Members' views on improvements to the operation of the committee have been sought and a draft charter will be circulated out of session.

1.22.9 International Financial Reporting Standards sub-committee

Meetings
The last meeting of the NTLG - IFRS sub-committee was held on 4 August 2006.

Next meeting
Scheduled for mid November 2006

The following items were discussed as part of the agenda:

¦ Treasury update (delivered by Tony Regan - Treasury)

¦ update on consolidation IFRS issues

¦ update on trust project - IFRS issues

¦ other IFRS technical issues including trading stock and share capital tainting

¦ thin capitalisation practice statement

¦ risk reviews and compliance planning, and

¦ future of this forum.

The meeting was attended by 25 externals and four Tax Office staff and it ran from 10.00am until 1:30pm.

There were two items of discussion arising from the NTLG meeting. These were the issue of a practice statement on thin capitalisation and the preparation of further guidance materials on share capital tainting. Both these issues were fully discussed.

It was agreed that the Tax Office would undertake to obtain any final clearances on the Thin capitalisation Practice Statement and have it approved and issued by the end of August 2006. Although there was some discussion on the tests that entities would be required to undertake in order to ensure that they have met the policy intent of the legislation, it was agreed that the current draft of the Practice Statement did provide sufficient guidance and there was no further need for consultation.

Share capital tainting issues occupied much of the meeting. The external members thought that the legislation and the explanatory memorandum (EM) did not provide sufficient and overt guidance on the accounting transactions that could lead to a share capital account being tainted. It was put forward by members that advisers who had access to reasonable information and support would be aware of changes and would apply the correct accounting treatment to avoid inadvertently tainting share capital accounts but advisors to companies outside the top 600 would not have the same level of awareness. The Tax Office agreed to discuss this issue further and if it was considered a necessary product to work with a group of the members to design an appropriate product. An internal meeting has been held since the NTLG sub-committee meeting and LB&I and TCN have agreed to formulate a list of the issues and to develop a PTI.

Other matters:

Members were happy about progress on other IFRS issues.

1.22.10 Losses and capital gains tax sub-committee

Meetings
A meeting was held on Wednesday 7 June 2006, in Sydney.

Next meeting
Wednesday 15 November 2006, in Melbourne.

Minutes
Draft minutes for the meeting held 16 November 2005 were confirmed at the 7 June 2006 meeting. They are published on the Tax Office web site and on the intranet. The draft minutes of the June 2006 meeting have been distributed and it is expected that they will be available on the Tax Office web site and on the intranet in the week commencing 14 August.

Summary of significant issues updated and discussed at the 7 June 2006 meeting

¦ An update was provided on action items from the 16 November 2005 meeting:

¦  

– capital proceeds where liabilities assumed on a sale of business and perceived inconsistencies with GST has been escalated and TCN and the Centre are scoping the issue to determine the nature and content of a proposed Tax Office view product;

– interpretation of section 102-25 has been withdrawn from the rulings programme as legislative amendment is under active consideration as a way of clarifying the provision;

– implication of insurance held by trustees - Draft TD 2006/D36 published 21 June 2006;

– the decision in the Dick Smith Electronics case is being considered with a view to preparation of Tax Office view product and the external representatives were invited to provide details of common commercial scenarios.

¦ A compliance update on the Individuals; SME and Micro as well as large market segments was provided by LB&I.

¦ Treasury provided an update on progress of the CGT small business concessions announced in the Budget and distributed material to the external representatives for circulation to their members.

¦ Discussion of issues raised by professional body representatives:

¦  

– demerger relief, preference shares and meaning of 'demerger subsidiary': it was agreed that some difficulties can arise but that the adjusting instruments rule in section 125-75 may assist in satisfying the proportionate ownership test

– buy-sell agreements and trauma life insurance on another person and when the right acquired: The Tax Office view is that the right is acquired when the triggering event in the policy occurs

– water rights: an update was provided on agenda item 9.2 of the Losses & CGT sub-committee meeting of 12 November 2003 and the CGT consequences including cost base on disposal was discussed. A list of available Tax Office material - including hypertext links - and views on specific issues were provided to the meeting and included in the draft minutes. [The list was also circulated electronically to sub-committee members shortly after meeting for circulation as deemed appropriate.]

– meaning of liability and Division 124-G: the Tax Office view is that liability takes its legal meaning and extends to legally enforceable debts, but does not extend to contingent liabilities. This approach is consistent with ATO ID 2004/206

– TD 2006/22 - Disaster relief money received from charities - It was considered that the CGT analysis applicable is that as disaster relief moneys received are gifts CGT Events C2 and H2 will not happen.

¦ An update on the CGT project team's work and the associated NTLG trust consultative group was provided.

¦ An update was given on progress of major losses and CGT issues, rulings and practice statements and a list of issues distributed.

Other matters:

The meeting was advised that the Tax Office's stakeholder relations unit has been conducting a review of all stakeholder consultative forums and has received a large and divergent number of comments from professional body representatives on these forums on a range of topics. Members of the sub-committee were invited to provide input to the review via the bodies they represent.

1.22.11 Superannuation technical sub-committee

Meetings
No meeting was held for the period.

Next meeting
Tuesday 12 September 2006

Work program
Action items from the sub-committee meeting are being progressed. Preparation is underway for the 12 September meeting.

1.22.12 Technical issues management sub-committee

Meetings
The meeting scheduled for August was postponed.

Next meeting
The next meeting is scheduled for 8 November 2006.

1.22.13 Transfer pricing sub-committee

Meetings
No meeting was held during the period.

Next meeting
Tuesday 10 October 2006.

Work program
Advance pricing arrangement (APA) program.

Discussions on the program are ongoing, however no major changes have been earmarked.

Statistics in the APA annual report indicate that cycle times have reduced considerably in 2005-06 in comparison to previous years.

The interaction of customs duty and transfer pricing adjustments:

Discussions are ongoing between the parties involved regarding a draft taxation ruling.

1.22.14 Indirect tax rulings panel

Meetings
Between 1 June 2006 and 11 August 2006, the Indirect taxes rulings panel met on two occasions.

Next meeting
The next meeting is scheduled for 24 and 25 August 2006 in Brisbane. The minutes are not available at this time.

June indirect taxes panel meeting

The June Panel meeting was held on 22 and 23 June 2006 in Melbourne and considered the following topics:

¦ GST: in the application of item three in the table in subsection 38-190(1) of theA New Tax System (Goods and Services Tax) Act 1999 to a supply, when does `effective use or enjoyment` of the supply `take place outside Australia`?

¦ GST: Appropriations

¦ GST: Financial supply facilitators

Meeting outcomes
The meeting outcomes are in draft form.

July indirect taxes panel meeting

The July panel meeting was held on 20 July 2006 in Melbourne and considered the following topics:

¦ GST: Determining creditable purpose

Meeting outcomes
The meeting outcomes are in draft form.

Out of session consideration
During the period, the following matters were considered out of session:

¦ GST: Supplies

¦ GST: Appropriations

¦ Fuel tax: Meaning of acquire, manufacture in and import into, Australia

Significant issues considered by the panel in the report period

Topic 1: GST: in the application of item three in the table in subsection 38-190(1) of theA New Tax System (Goods and Services Tax) Act 1999 to a supply, when does `effective use or enjoyment` of the supply `take place outside Australia`?

The panel considered the submissions that were made in relation to the published draft ruling and made suggestions for the progression of the draft ruling towards a final ruling.

Topic 2: GST: Appropriations:

The panel considered the submissions that were made in relation to the published draft ruling and made suggestions for the progression of the draft ruling towards a final ruling.

Topic 3: GST: Financial supply facilitators (issue paper)

The panel considered an issue paper on a possible addendum to GSTR 2004/1: Goods and services tax: reduced credit acquisitions.

Topic 4: GST: Meaning of creditable purpose

The panel considered the meaning of creditable purpose under Division 11 of the GST Act, including whether the approach of a 'sufficient connection' test was adequately described.

1.22.15 International tax rulings panel

Meetings
During this period, the international tax rulings panel (ITRP) convened one meeting (on 8 and 9 June 2006 in Sydney). One meeting scheduled for 10 August 2006 was cancelled.

Next meeting
This is the final report from the ITRP. This panel has been amalgamated with the public rulings panel. The public rulings panel will next meet on 31 August and 1 September 2006.

Summary of significant issues discussed (during period since the last report)

Issue 1: Availability of 23AJ exemptions where either a partnership or trust is interposed between a resident company and a foreign company paying the dividend.

The authoring team is to develop the reasoning of the Tax Determinations (TDs)particularly in relation to dividend, limited partnerships and trust issues. The TDs are to be developed further in relation to treatment of 'beneficial ownership'.

Issue 2: McDermott issues paper.

This paper was concerned with the lease of barges within Australian waters and the imposition of royalty withholding tax. There is concern from outside parties that the courts interpretation of 'use' and 'by' or and under contract will expose passive leased to withholding taxes and other taxes. Authoring team to consult within the Tax Office regarding finance leasing. Two TDs to be developed from this issue.

Issues 3: IWT and cross border inter-branch funds transfers within resident ADIs

The panel discussed further comments from the ABA and considered the treaties paper supplied by officers from the International CoE. Discussion of this ruling focussed on use of the effectiveness of some examples and suggested that examples should be provided of a PE borrowing funds. Some language within the ruling needed some tightening. The panel felt that there was no need for TR 2005/11 to be revised or reviewed.

Draft ruling has been issued to the panel out of session for final comments. Comments close 9 August 2006.

Issue 4: Foreign resident withholding tax and construction contracts with foreign residents.

Representatives of the CTA, APPEA, and Mineral Councils of Australia and KPMG presented their submission regarding the ruling to the panel meeting. The panel discussion centred upon the impact of the regulations within the income tax Acts and their relationship between works in and outside of Australia and related activities within Australia. The authoring team is undertaking further development of the ruling.

Other matters:

Rewrite of TR 1999/8 - international transfer pricing: the effects of determinations made under Division 13 of Part III, including consequential adjustments under section 136AF: comments to the panel out of session by 7 July 2006. Ruling to proceed to publication.

1.22.16 Public rulings panel

Meetings
The public rulings panel met on 25 and 26 May, 29 and 30 June and 27 and 28 July 2006.

Next meeting
The next meetings are set for 31 August and 1 September 2006 in Sydney and 28 and 29 September 2006 in Melbourne.

Summary of significant issues discussed

Panel meeting 25 and 26 May 2006 in Sydney

Non commercial business losses - Commissioner's discretion (ID 1414)
The panel discussed:

¦ general principles of carrying on a business

¦ commercial viability and lead times

¦ defining special circumstances, and

¦ the application of the Commissioner's discretion.

Consolidation - special conversion events (ID 1679)
The panel discusses the legal and policy aspects of the conversion of a consolidated group to a multiple entry consolidated (MEC) group.

Consolidation and goodwill (ID 1005)
The panel discussed:

¦ broad aspects of goodwill and synergistic goodwill

¦ the consequences of an entity leaving a consolidated group, and

¦ the new accounting standards and goodwill.

Consequences of convertible notes that turn into ordinary shares (Division 974) (ID 1223, 525)
The panel discussed the policy and legal consequences of these types of instrument. An alternative view based on an example in the Explanatory Memorandum that accompanies the legislation was also discussed.

Forex realisation gains made from hedging contracts and non assessable, non exempt income (ID 1334,1387)
The panel discussed an apparent difference between the legal outcome and the policy intent of the provisions, particularly for approved deposit taking institutions.

Panel meeting 29 and 30 June 2006 in Melbourne

Special income for superannuation funds (ID 1037) (released on 2 August as a final TR 2006/7)
The panel discussed:

¦ the nature of transactions, income and the treatment of franking credits

¦ the application of the Commissioner's discretion and self assessment

¦ non arms-length dealings, and

¦ the expectations and entitlements of beneficiaries in discretionary trusts.

Trust losses - fixed entitlement - vested and indefeasible interest (position paper) (ID 1760)
The panel discussed:

¦ new accounting standards

¦ relevant case law

¦ implications if there are changes to a trust deed, and

¦ the issue and redemption of units in a trust.

Consolidation - revenue assets (position paper) (ID 1770)
The panel discussed the various alternatives and asked the authoring team to prepare a draft taxation determination for further consideration.

Consolidation - interest on funds borrowed by a consolidated group. (ID 1000 & 1001) (released on 26 July 2006 as finals TD 2006/47 and TD 2006/48)
The two determinations TD 2005/D29 and TD 2005/D30 were discussed. The panel made some recommendations, primarily about the structure of the determinations.

Consolidation - foreign currency denominated trade receivable - tax cost setting amount. (ID 660)
This determination was released as TD 2004/D80. The panel discussed:

¦ the view taken in the ruling

¦ the alternative view, and

¦ the Government announcement that the legislation will be amended.

Panel meeting 27 and 28 July 2006 in Melbourne

Consolidation - time of day (ID 999)
This determination was released as TD 2005/D37. The panel discussed:

¦ when a group is capable of consolidating

¦ case law discussing time of day and when it is relevant

¦ the allocable cost amount (ACA) calculation, and

¦ the structure of the ruling.

Consolidation - CGT event L6. (ID 1808)
The panel discussed three determinations on CGT event L6. The panel discussed the nature of errors and compliance costs.

Sale and leaseback (ID 1195)
This determination was released as TR 2006/D5. The panel discussed the application of Division 240 to the lease of goods and also the application of the anti avoidance provisions in Part IVA. This ruling is being finalised.

Non commercial business losses - Commissioner's discretion. (ID 1414)
The panel discussed:

¦ the nature of the Commissioner's discretion

¦ the definition of special circumstances, and

¦ the reasonableness of the taxpayers respose to potential special circumstances - potential mitigation measures.

1.22.17 Test case litigation panel

Meetings
The test case litigation panel met on Monday 31 July 2006.

Next meeting
25 September 2006 at 9:30am in the large conference room, Level 6, 100 Market Street, Sydney, NSW 2000

Ten applications were considered for funding by the panel at the last meeting. An additional application was granted funding prior to the panel meeting.

Application 1
The application concerned the validity of assessments of superannuation contributions surcharge made under the respective assessment and imposition acts. The application contended the legislation to be invalid as it applies to the applicant as it impermissibly interferes with the discharge of a state's constitutional functions.

The panel determined that as the case involved a constitutional issue it was of importance and noted its prior decision to provide funding in relation to an earlier application involving the identical issue but with different facts. The panel recommended funding be offered.

The Chair agreed with the panel that funding be granted

Application 2
The application concerned the deductibility of a non-employer sponsored superannuation contribution. The application considered the interpretation and application of the 'eligible person' test in section 82AAS(2) and the 10% rule contained in section 82AAS(3) of theIncome Tax Assessment Act 1936 (the ITAA 1936) together with testing the decision of the Administrative Appeals Tribunal inDamien Norris v. Commissioner of Taxation [2002] AATA 749 (the Norris decision).

The panel considered there were problems with the statutory construction method taken by the tribunal in the Norris decision. However, the panel were concerned that on the facts of the case a court would take all means necessary to find for the taxpayer. This could result in the court avoiding the Norris decision and ultimately the issues sought to be tested. In spite of this the panel considered there was a contentious issue contained in the judgment which required judicial clarification. The panel recommended that funding be offered in the circumstances.

The Chair agreed with the panel that funding be granted.

Application 3
The application concerned a request for registration as a Deductible Gift Recipient pursuant to section 30-20 of theIncome Tax Assessment Act 1997 (the ITAA 1997) as an authority or institution falling within Item 1.1.6 as 'a charitable institution whose principle activity is the prevention or the control of disease in human beings.'

The application considered the interpretation of Item 1.1.6 of the ITAA 1997 together with the definition of 'disease' and 'injury' for the purposes of the section.

The panel considered that the tribunal's decision at first instance was well grounded and appeared to be correctly decided. The panel thought the legislation was uncomplicated and that the applicable ruling, TR 2004/8 Income tax and fringe benefits tax: health promotion charities, was plain. The panel thought there was insufficient contention in the ruling to warrant funding. The panel recommended funding be declined.

The Chair agreed with the panel that funding be declined.

Application 4
An application for funding was received to test when expenditure in relation to a retirement village and hostel was 'incurred'. A related issue in the application was whether the expenditure which would normally be considered capital was to be treated on revenue account in accordance with Taxation Ruling TR 94/24: Income Tax: taxation amounts received by retirement village owners from incoming residents.

The panel noted the Commissioner had provided an undertaking to fund a test case in relation to retirement villages and that two other cases were currently being reviewed for this purpose though the current application was not one of them.

The panel noted that the retirement village in question included hostel accommodation and accordingly fell outside the scope of the specific issues that the Commissioner wishes to test under the ruling. The panel considered that based on the facts, the application wouldn't raise the issues of clarification sought by the ruling. Having regard to the normal test case funding criteria, the panel was of the view that the case would turn on the application of existing principle to the facts of the case. The panel considered that on the issue of 'incurred' itself there were already many judicial determinations on point including the recent decision of the High Court of Australia inCommissioner of Taxation v. CityLink Melbourne Limited [2006] HCA 35. The panel considered that a decision did not have a wide public interest. The panel recommended that funding be declined.

The Chair agreed with the panel that funding be declined.

Application 5
An application was received for funding to test the question of whether the vendor upon entering into a contract for sale of land makes a supply to the purchaser within the meaning of section 9-10A New Tax System (Goods & Services Tax) Act 1999 (the GST Act) beyond the supply of real property. Related questions in the application concerned whether a forfeited deposit was to be treated as consideration for a supply or liquidated damages and whether Division 99 of the GST Act applies to forfeited deposits made in relation to contracts for the sale of land.

The panel noted that the application had been granted test case funding at first instance and recommended that funding be offered for the subsequent appeal.

The Chair agreed with the panel that funding be granted.

Application 6
The application concerned two issues. The first issue concerned time limits within which the Commissioner can issue amended assessments in circumstances where there has been a later finding of fraud and evasion together with a consent decision of the Tribunal. The second issue tested whether there had been fraud or evasion in the particular circumstances of the case.

The panel considered that the application lacked sufficient merit to warrant test case funding and thought that the case would entail the application of existing principles to the facts of the case. The panel recommended that funding be declined.

The Chair agreed with the panel that funding be declined.

Application 7
An application was received which sought to test the deductibility of expenses incurred in travelling between home and work. A related issue reviewed the interpretation of 'a reasonably arguable position'.

The panel considered that the case did not warrant test case funding. The case involved an application of existing principles to the particular facts and considered that the area of law was well settled. The panel recommended that funding be declined.

The Chair agreed with the panel that funding be declined.

Application 8
An application for funding was received to test the operation and effect of the requirements of paragraph 5 ofA New Tax System (Goods & Services Tax)Margin Scheme Valuation Requirements Determination No.2 (2000) (Determination No.2) in relation to valuations obtained for the purposes of determining the margin pursuant to paragraph 75-10(3)(b) of the GST Act.

In particular, the matter considered whether a valuation could be a complying valuation when the valuer failed to have regard to off the plan sales contracts entered into prior to the valuation, whether valuations were binding on the Commissioner and whether the Commissioner was entitled to challenge valuations.

The panel had regard to a number of cases currently in litigation involving the margin scheme and valuations obtained for the purposes of the margin scheme. The panel considered both applications (8 and 9) together as both dealt with the margin scheme and valuations. The panel noted that application 8 was well advanced in comparison with other cases and application 9. Further, Application 8 dealt with the additional issue of whether different units in the same development could be valued using different methods

It was the panel's decision that the issues arising from the margin scheme and valuations obtained were of importance to a number or taxpayers and required clarification. The panel recommended that funding be offered.

The Chair agreed with the panel that funding be granted.

Application 9
An application for funding was received to test the operation and effect of the requirements of paragraph 5 ofA New Tax System (Goods & Services Tax) Margin Scheme Valuation Requirements Determination No.2 (2000) (Determination No.2) in relation to valuations obtained for the purposes of determining the margin pursuant to paragraph 75-10(3)(b) of the GST Act.

As noted above the panel considered that Application 8 was more suitable for test case funding in the circumstances. Accordingly, the panel recommended that test case funding be declined.

The Chair agreed with the panel that funding be declined.

Application 10
The panel was asked to considered whether in principle funding should be granted for a case or cases to be selected that would test the principles outlined in taxation ruling TR 2006/4, Income tax: capital gains: meaning of the words 'the beneficiaries and terms of both trusts are the same' in paragraphs 104-55(5)(b) and 104-60(5)(b) of the ITAA 1997.

The panel considered that the two points of contention in the ruling centred on the stance that appointors and family trust elections are considered to be terms of a trust and must be identical.

The panel acknowledged that the ruling had been a source of contention in the industry for some time and would impact on a large number of taxpayers. The panel recommended that in principle funding be offered for a case or cases to be selected to test the ruling.

The Chair agreed with the panel that in principle funding be granted.

Application 11
The application concerned the issue of shares in an employee share plan and whether the particular circumstances concerning their issue gives rise to a fringe benefit under theFringe Benefits Tax Assessment Act 1986. The application tested the decision inEssenbourne Pty Ltd v. Commissioner of Taxation [2002] FCA 1577 in relation to the identification of particular employees.

A decision to grant funding in relation to the application was made prior to the panel meeting. The panel considered the case and supported the Commissioner's decision to fund the appeal to the Full Federal Court.

1.22.18 Trust Consultation Group

Meetings
One meeting on 7 August 2006 was held for the period July to 1 September 2006.

Next meeting
No date was set for the next meeting. The group meets on an 'as need' basis.

Minutes
Minutes for the meeting held 16 May 2006 were confirmed at the 7 August 2006 meeting.

Summary of significant issues discussed at the 7 August 2006 meeting

Proposed draft charter for trust consultation group

The purpose of charters for external forums was discussed. Mr Davies (Tax Office) noted that, in relation to the proposed draft charter:

¦ the forum is an advisory and consultative one - decision-making on interpretative issues still follows normal Tax Office processes but decisions, and reasons for decisions, will be discussed with the group and feedback will be taken into account,

¦ the draft charter says the trust consultation group is to have a fixed term ending when issues outlined in the charter are resolved - this was raised for discussion with the group. The group suggested that the charter be expanded to cover other significant trust issues as they arose, but that issues be prioritised and have clear timelines for delivery. Mr Davies undertook to raise this with Second Commissioner Fitzpatrick.

¦ minutes will not be published on the web but they will be provided to all members of the group including Treasury, and

¦ Treasury has been invited to attend group meetings and the charter is to be updated to reflect their membership of the group.

Absolute entitlement

¦ Forum members said that a final ruling for TR 2004/D25 would provide needed certainty; but should be finalised only on condition that taxpayers would not be disadvantaged if they restructured to fit within the terms of it (for example to avoid difficulties with multiple beneficiaries and non-fungible assets).

¦ If this could not be achieved members felt that the ruling should not be finalised but that Treasury should again be made aware of the consequences to the investment fund industry of the view expressed in the draft ruling. (The Tax Office confirmed that these consequences had been brought to Treasury's attention).

¦ The Tax Office indicated that it did not consider that unit holders could be absolutely entitled to CGT assets and that the unit was the relevant asset. Such was suggested by the statutory scheme of the CGT provisions, and even if that was not the case, many unit trust deeds had provisions denying a beneficiary's rights to any particular trust assets. Forum members thought that such a clause would determine the matter in any case.

¦ The Tax Office provided an update of public rulings panel deliberations on the effect of the trustee's indemnity and absolute entitlement. Further discussions are taking place with the panel.

Trust loss rules: meaning of fixed entitlement

¦ Mrs Roff Senior Tax Counsel of the Tax Office provided the group with an overview of the public rulings panel initial deliberations on the issue.

¦ She said that the public rulings panel had been consulted about the range of possible interpretations of 'fixed entitlement' in Schedule 2F. The panel's preliminary thinking was that the vested and indefeasible interest requirement appears to present difficulties in relation to modern unit trusts, although an exercise of the discretion (albeit involving compliance and administration costs) may provide outcomes broadly acceptable to industry for some of the more regulated unit trusts. Subject to the terms of particular deeds, the discretion may not offer relief in relation to many smaller unit trusts. The group indicated that use of the discretion was not, in any case, viable in the long term.

¦ Mrs Roff stressed that the Tax Office is yet to develop a formal view on 'fixed entitlement' and that the next step would be to prepare a draft ruling for consideration by the panel together with a draft practice statement about the discretion. Further submissions from the group on the issue would be welcome.

¦ Treasury has been briefed on the issues.

Trust deed amendments arising from AIFRS and the Statement of Principles on the Creation of New Trust (Trust Resettlements)

¦ The Tax Office now have a number of trust deeds and amendments to look at and are considering what form advice on the AIFRS issues should take. A submission by the ICAA was appreciated.

¦ The forum members expressed a preference for all AIFRS issues to be dealt with in one product, though this could be cross-referenced to other documents.

¦ The Tax Office said it had no plans to convert the Statement of Principles on trust resettlements into a ruling, and indicated that it could not rule on trust issues in isolation. The forum raised concerns with the content of the existing statement. It does not, for example, deal with investment industry changes. Industry also needs to have greater clarity. The Tax Office invited submissions and forum members agreed to provide examples to the Tax Office.

Implications of the Full Federal Court decision FCT v Pearson [2006] DCAFC 111

¦ The case and its implications were briefly discussed.

¦ The forum members said that they were not surprised at the outcome and that CFGUT was an old style unit trust with discretionary provisions mostly used in family settlements. However, the reasoning as to the non-application of sub-section 95A(2) in that case was thought not to be clear. The implications of not distributing income also had to be considered in respect of the AIFRS matter where the deed was changed to give a trustee a power not to distribute.

Meaning of 'vested and indefeasible interest' in the context of the anti-franking credit trading rules

¦ Mr Magee (Tax Office) presented a paper and the issues were broadly discussed.

¦ A key point was whether an interest in the corpus comprising shares required there to be an interest in respect of those particular shares.

¦ Members considered that the legislation requires only that a vested and indefeasible interest in the corpus be established - not an interest in any particular shares. For these purposes, corpus was said to mean the assets of the trust net of liabilities.

¦ The issues would be raised for the consideration of the public rulings panel.

Other matters:

None

1.22.19 Promoter penalty co-design sub-committee

Meetings
The inaugural meeting of the sub-committee was held on 15 May 2006 in Canberra.

A report on the 15 May 2006 meeting was provided by the Chair, Stephanie Martin, First Assistant Commissioner, at the NTLG's June 2006 meeting.

A teleconference was held on 26 June 2006.

A meeting was held on 18 July 2006 in Sydney

A teleconference to discuss the Draft Law Administration Practice Statement on theAdministration of Division 290 of the Tax Administration Act 1953:Promotion and Implementation of schemes (promoter penalty provisions) was held on 2 August 2006.

Next meeting
31 August 2006 in Melbourne

Minutes
Draft minutes for the 15 May 2006 meeting were issued on 14 July 2006, for approval at the meeting of 18 July 2006. The Minutes were finalised on 28 July and are to be published to the Tax Office's NTLG website at the promoter penalty co-design sub-committee page.

Draft minutes of the 18 July 2006 meeting were issued on 2 August 2006 for approval at the proposed meeting of 31 August 2006.

Summary of significant issues discussed at meeting of 18 July 2006

1)

Review and endorsement of the sub-committee charter. The charter was endorsed by the sub-committee. The charter is to be published to the Tax Office's NTLG website at the promoter penalty co-design sub-committee page.

2)

The sub-committee is currently co-designing a Draft Law Administration Practice Statement on theAdministration of Division 290 of the Tax Administration Act 1953: Promotion and Implementation of schemes (promoter penalty provisions). The sub-committee members were provided with a draft of the practice statement for discussion at the meeting. The draft is a work in progress and many of the comments reflect this.

The main areas of discussion were as follows:

¦ that the context of the provisions (viz used in aggressive tax planning cases and therefore not used routinely) should be more clearly emphasised

¦ use of examples to address the more difficult aspects of the application of the provisions

¦ development of a 'safe harbour' position for advisers

¦ employer/employee relationship more clearly addressed; including more guidance around what constitutes 'due diligence' and the position where there is a 'rogue employee' promoting tax exploitation schemes

¦ position on the application of the provisions to partnerships

¦ inclusion of a discussion on the 'reasonably arguable position' concept

¦ inclusion of mitigating factors, for example what factors the Tax Office would put to the Federal Court in its submission on the level of penalty to be applied;

¦ the appropriate oversighting and governance arrangements for the application of the provisions by the Tax Office, and

¦ status of the draft practice statement and whether it could be circulated to members of the professional associations for comment. It was agreed that the current draft was too incomplete to be circulated and it would be necessary for the draft to have addressed the issues in the provisions before it could be circulated.

A further draft was prepared to incorporate these suggestions and address other matters and was forwarded to sub-committee members for discussion at a teleconference on 2 August 2006.

Other matters:

None.

1.23 Other business

Superannuation update

Meeting discussion
Deputy Commissioner Raelene Vivian attended the meeting to brief members on the changes announced by the Treasurer at a press conference held earlier on the day (5 September) regarding new arrangements for the Simplified Superannuation proposals.

A copy of the joint press release was provided to all members, and full details of the superannuation changes can be found at www.simplersuper.treasury.gov.au .

Other changes mentioned included a focus on the lost members register and the role of auditors.

A number of the existing consultative groups will be utilised to address issues.

Deputy Commissioner Raelene Vivian will provide a progress report at the December NTLG meeting.

Action item NTLG0609/18
A progress report on the simplified superannuation proposals is to be provided at the December NTLG meeting.

1.24 Next meeting and close

The next meeting is scheduled for Wednesday 6 December 2006, commencing at 9.30am.