In a significant development, the AAT have held that an unpaid present entitlement owing to a corporate beneficiary is not a loan for the purposes of Division 7A, which is in direct conflict to the ATO view. In other developments, the ATO have finalised the taxation ruling on vacant land holding costs, and released a draft ruling on self-education expenses.
LEGISLATION UPDATE
Small Business & Other Measures
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 has introduced into the lower house to implement a number of previously-announced measures, including:
– $20,000 instant asset write off for small businesses (aggregated annual turnover > $10m): includes cost of eligible depreciating assets installed ready for use between 1 July 2023 and 30 June 2024, second element costs and general small business pool. (Refer Federal Budget Bulletin).
– Small business energy incentive for small & medium business (aggregated annual turnover < $50m): bonus deduction of 20% of the cost of eligible assets or improvements that support electrification or more efficient energy use. (Refer July 2023 Tax Bulletin).
– Changes to the Non-Arm’s Length Expense (NALE) rules: Refer below
NALE changes
Changes are to be introduced to deal with the current issue that, if an SMSF incurs a general expense (not related to gaining income from a particular asset) that is not on arm’s length terms, all of the income derived by the fund could be non-arm’s length income (NALI) and taxable at 45%. Examples of general expenses include accountant and audit fees; administrative costs; trustee fees; costs of compliance.
The amount of income that can be taxed as NALI will be twice the difference between the arms’ length expense amount and the amount the entity did incur. The current rules will still apply, to other, specific, expenses, with the full amount of income that relates to the expense being taxed as NALI.
The changes will apply from 1 July 2019.
PWC response & Tax Practitioner Board review measures
Draft legislation has been introduced to implement a number of previously announced measures in response to the PWC matter and to implement further recommendation from the review of the TPB review.
– Treasury Laws Amendment (Measures for Consultation) Bill 2023: PWC Response – Promoter Penalty Laws Reform: Implements changes to the promoter penalty regime (refer Tax Bulletin – August 2023). The changes include broadening the meaning of a promoter to include where any ‘benefit’ is received in respect of the marketing or encouragement of a tax exploitation scheme. This may include where an entity has received an indirect benefit such as increasing their client base.
– Treasury Laws Amendment (Measures for Consultation) Bill 2023: PWC Response – Information Sharing: Changes the secrecy rules and ability of Treasury, the ATO and the TPB to disclose information.
– Treasury Laws Amendment (Measures for Consultation) Bill 2023: Tax Practitioners Board: Changes include extending the timeframe the TPB has to complete investigations into tax practitioners; create a new option to publish the findings of an investigation on the Register rather than pursuing administrative sanctions or civil penalties; enable a wider range of information on decisions and outcomes to be published on the Register and remove time limits on how long information appears.
– Treasury Laws Amendment (Measures for Consultation) Bill 2023: Extending tax whistleblower protections: Extends tax whistleblower protections to whistleblowers disclosing alleged misconduct to the TPB and authorises the ATO and the TPB to share information they receive.
RULINGS, COMPLIANCE GUIDELINES & ALERTS
Tax Determination TD 2023/5—Control test
The final TD has been issued relating to the ATO discretion to determine that an entity does not ‘control’ a company or unit trust if it holds an interest between 40% and 50%. This is relevant in determining whether entities are ‘connected’ for the purpose of the small business CGT concessions and whether they are a small business entity more broadly. The final TD has not changed from the draft (July 2023 Tax Bulletin).
Tax Ruling TR 2023/3—Vacant land deductions
The ATO has at last issued final guidance on the application of the vacant land rules which can deny a deduction for outgoings relating to holding land (holding costs) on which there is no substantial and permanent structure available for use. Key points include:
– A structure must generally be significant in size or value, have an independent purpose from the land and be fixed and enduring.
– Existing premises are not available for use if deemed unsafe to occupy. Residential premises constructed or substantially renovated after purchase must be lawfully able to be occupied.
– The costs of finance to repair, renovate or construct a structure is not a holding cost. Only finance costs related to the acquisition of the land itself are therefore potentially subject to the rules.
– Land held by a developer for future development would be considered ‘available for use’. If held in a SPV (that is not a company) consideration will need to be given to whether it carries on business.
– If a holding cost relates to land generally that is held under multiple titles, a substantial and permanent structure only needs to exists somewhere on the area to which the outgoing relates. Under the draft each title needed to be considered separately in all cases.
– The ATO will take a practical approach to the rules in certain scenarios, such as where there are brief periods where residential premises cannot practically be made available for lease, and where vacant land is leased at arm’s length to another entity and the a reasonable assessment that the land is used in carrying on a business has been made, having regard to the factors outlined in the ruling.
TR 2022/4 – Section 100A: reimbursement agreements
An addendum has been issued to TR 2022/4 to reflect the decisions in the Guardian and Bblood decisions. These changes clarify that advisers may be a party to a reimbursement agreement and explain when a beneficiary may need to be a party to a reimbursement agreement.
PCG 2018/4—Legal liability of a legal personal representative (LPR) of a deceased person
A draft update to PCG 2018/4 proposes changes to provide greater certainty to LPRs of the deceased in distributing estate assets and proposes uplifting the market value of the estate assets threshold to be
considered less complex from $5m to $10m (this enable LPRs to finalise those estates without concern that they may have to fund a liability of the deceased from their own assets.)
TR 2023/D1—Deductibility of self-education expenses
Draft Taxation Ruling TR 2023/D1 sets out the ATO view on when self-education expenses incurred by an individual are deductible under the general deduction provision. The key principles are that:
– the individual’s current income-earning activities are based on exercise of a skill or specific knowledge, and the expense is to maintain or improve that knowledge; or
– the expense leads to, or is likely to lead to, an increase in income from their current income-earning activities in the future.
Extensive examples are provided. The ruling replaces TR 98/9, and should be read in conjunction with TR 2020/1 which explains how the general deduction provision applies for work expenses generally.
CASE LAW UPDATE
Bendel v CofT— Unpaid present entitlement held not to be a Division 7A loan
The AAT has held that the unpaid present entitlement (UPE) of a beneficiary of a trust was not a ’loan’ within the meaning of section 109D of Division 7A. The beneficiary’s interest in the income of the trust was an equitable obligation on the trustee, and not property owned by the beneficiary, and so no separate trust was created. In applying the loan definition to the beneficiary’s rights, the inclusion of specific provisions (now subdivision EA) to ensure that UPEs are subject to Division 7A provided crucial context. He therefore concluded the definition does not extend to the rights in equity created when entitlements to trust income are created but not satisfied.
This is a significant decision as it directly conflicts with the ATO current views in TD 2022/11. As such, we would expect to see this decision appealed by the Commissioner.
Key point: This view would enable a trust to distribute income to a company, and leave this unpaid, without Division 7A applying, as long as the trust does make loans to related trusts or individuals.
Michael John Hayes Trading v FC of T—Dividend stripping
The Commissioner has lost another case at the AAT, this one dealing with the issue of ‘dividend stripping’. A dividend stripping scheme, traditionally, is where an entity purchases shares in a company with accumulated profits, pays the vendor shareholders a capital sum to reflect these profit, and then draws off the profits via a dividend.
In this case, a reorganisation of the Hayes Group involved ‘Trading Trusts’ being formed which were treated as companies for certain tax purposes only. The Group operating companies issued Z class shares to the trusts and immediately paid fully franked dividends of $8m on which no additional tax was payable. The underlying funds were provided to Group individuals to refinance Division 7A loans or lend back into the Group. The AAT held the dividend stripping rules did not apply as the original shareholders did not receive any capital amounts, and the sole or dominant purpose was not to avoid tax. The underlying profits remained within the corporate group and so were not removed from the income tax system.
Point to note: The taxpayer was able to evidence that the restructure was for asset protection and succession planning. The ATO did not seek to apply Part IVA and any Division 7A benefits were not raised.
ATO UPDATES
Technology Investment Boost: The ATO has outlined a ‘rule of thumb’ on its website that a good indicator of eligibility of expenditure for the technology investment boost is to consider if the small business would have incurred the expense if it didn’t operate digitally. It has also has clarified that expenditure can include ongoing subscription costs, for example “your clients’ ongoing subscription to an accounting software platform for their business would qualify”.
Rental property owners: The ATO has issued a reminder to take care when reporting rental income in the tax return, and that it will use data-matching to address tax risks. Areas of focus include apportionment of interest, repairs and maintenance, and in relation to short-term rentals .
ATO UPDATES
For further information on any of these updates, or for general assistance, please get in touch.
The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin
