During July, changes to the Code of Professional Conduct were introduced, however the start date has been postponed due to industry response. Further, the ATO have released a draft determination on the application of Section 99B to non-resident trusts.
LEGISLATION UPDATE
Tax Agent Services—Code of Professional Conduct
A legislative instrument has been issued, Tax Agent Services (Code of Professional Conduct) Determination 2024, mandating new obligations for tax practitioners’ Code of Professional Conduct. The government has announced it will extend the original application date of 1 August 2024 to 1 January 2025, for firms with more than 100 employees, and to 1 July 2025 for those with less than 100 employees. However, firms must continue to take genuine steps towards compliance during this period.
The additional obligations cover the areas of honesty and integrity; independence; confidentiality; competence; and quality management systems. They include an obligation to keep clients informed of all relevant matters, including matters that could significantly influence their decision to engage the tax practitioner’s services; and also an obligation to notify the ATO if an incorrect statement has been made in a lodgment. The TPB has stated it will issue guidance and an awareness campaign on the new rules.
Four year amendment period for certain taxpayers
Treasury has released exposure draft legislation to extend the current 2-year amendment period to 4 years for income tax returns of small and medium businesses, being entities with aggregated turnover of up to $50m. The Commissioner will be able to amend an assessment within 4 years after an assessment notice is issued, upon the taxpayer's request. It does not impact the 2-year amendment period for the Commissioner to amend returns that are not at the taxpayer’s request.
The 4-year amendment period is proposed to apply to assessments for income years starting on or after 1 July 2024 that are issued after the beginning of the first quarter after the amendments are enacted.
TAX RULINGS, DETERMINATIONS & COMPLIANCE GUIDELINES
Section 99B— Payments by non-resident trusts
The ATO has issued Draft TD 2024/D2 and PCG 2024/D1 setting out its compliance approach to section 99B of the ITAA 1936, which can apply where property of a non-resident trust (or property accumulated while it was a non-resident) is paid to or applied for the benefit of a resident beneficiary. This could arise, for example, when a non-resident migrates to Australia with an interest in a non-resident trust, or if a resident is a beneficiary of a non-resident deceased estate.
These amounts are generally included in a beneficiary’s assessable income (if not previously taxed) subject to several exceptions. An amount paid out of trust corpus is excluded unless it is attributable to amounts that, if derived by “a taxpayer being a resident”, would have been included in assessable income. This hypothetical resident taxpayer cannot be assumed to have any other characteristics and so concessions that are only available to specific classes of resident (such as the CGT discount) are not taken into account. However, a pre-CGT capital gain could be excluded as it would not have been included in the assessable income of a hypothetical taxpayer.
The test requires tracing through to determine the source of the amount. If an exception applies, the onus is on the beneficiary to provide the ATO with information and documentation evidencing satisfaction of the exception. The draft guideline sets out examples of documentation.
An arrangement will be considered low risk of ATO review if it meets the various criteria outlined in the guideline. For a deceased estate, these include that the total value of trust property received does not exceed A$2 million and is received within 24 months of death.
CASE LAW UPDATE
Kilgour v FCT— Market Valuation
The taxpayers were the beneficiaries of trusts which sold their shares in a company to News Corp for $31m. The taxpayers submitted that the vendors did not deal with News Corp at arm’s length as the share value was significantly less than the proceeds, and the greater price was paid due to ‘internal championing’ on their behalf by News Corp Australia. The Federal Court held that the parties were acting at arms’ length as the outcome of their dealing was a matter of real bargaining. The decision to purchase the shares was a Head Office decision, and there was neither collusion with any of the vendors, nor a mere rubber-stamping. The evidence revealed the parties formed their own views as to what the shares were worth and the higher sum paid was due to the purchaser seeing synergistic value in the shares.
However, even if market value substitution did apply, this special value was part of the market value of a purchase of all the shares and that beneficial potentiality always existed in relation to this type of purchaser in a hypothetical market. The amount paid was therefore ‘market value’. The judge found that the ATO valuation guidelines incorrectly state that “market value does not reflect attributes of an asset that are of value to a specific owner or purchaser that are not available to other buyers in the market”.
Key point: The decision reinforces the difficulty in arguing that the value of an asset for small business CGT purposes is less than the actual capital proceeds. The taxpayers have appealed the decision.
Appeal—Dividend stripping
The taxpayers have applied to the High Court for special leave to appeal against the decision in the Michael John Hayes Trading case. This case considered whether dividends paid as part of a family group restructure were part of a dividend stripping scheme.
OTHER UPDATES
GST Health & Food Products —Self review guide
The ATO has issued a checklist for small to medium businesses and guide for medium to large businesses on self-reviewing GST classification of food and health products. Theses provide step-by-step guidance on self-reviewing the GST classification of their supplies and assessing the robustness of their business systems, processes and controls in relation to GST classification.
Division 7A education campaign
The ATO has released another Division 7A webinar answering frequently asked questions, including an overview of fundamentals that taxpayers constantly get wrong. At present, the ATO are seeing cases where shareholders draw funds from a company, place them into their mortgage offset account, repay them before lodgment day, and then reborrow. This approach can be caught by section 109R and the repayments ignored. In contrast, repayments made by offsetting against dividend or salary entitlements are counted as repayments, even if an amount is subsequently reborrowed.
The ATO also confirmed that, if the decision in Bendel’s case confirms that a UPE is a loan under Division 7A, it does not propose to re-open pre–December 2009 UPEs and bring them into Division 7A.
CONTACT US
Please contact us if you have any questions in relation to issues raised in this tax bulletin, or any other matters.
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.
