During August, tax reform was on the agenda at the Economic reform roundtable; Pepsico was successful in the High Court; and the ATO released guidance on the denial of deductions for GIC and SIC. 

LEGISLATION UPDATE

Economic reform roundtable—Tax Reform

Day 3 of this month’s Economic reform roundtable was focussed on budget sustainability and tax reform. The Treasurer stated that there is no need for another tax review, but the government would move on formulating reforms to be guided by the principles of intergenerational equity; incentivising business sentiment; and a simpler, more sustainable tax system. Treasury and the Productivity Commission will be tasked with policy development in these areas in the months ahead.

He also stated there was “a lot of conceptual support for road user charging” but the details, including the type of charge and what vehicles would be included, were still to be determined. State treasurers will   discuss the concept when they meet this week.

CASE LAW UPDATE

Appeals update

The taxpayer has appealed the decision in SEPL to the Full Federal Court. The Federal Court held that the provision of luxury cars to beneficiaries of a trust, who were also directors of the trustee company, was a fringe benefit as the benefits were provided in respect of their employment.

The High Court has refused the taxpayer’s application for special leave to appeal against the decision in Ausnet Services Ltd. The case considered the interposition of a holding company above multiple subsidiaries and the application of the ‘ Division 615’ rollover. The decision has potential implications for the ATO view of restructures which contain back-to-back rollovers (refer next page).

Goldenville Family Trust—Timing of trustee resolutions

This case concerned a dispute with the ATO as to whether trust distribution resolutions were made before 30 June. The accountant for the Trust provided evidence that he prepared distribution resolutions at the time of preparing the accounts and tax returns. The Taxpayer contended that these resolutions were ‘memorialising’ an earlier decision of the trustee.

The ART found that the sole director of the corporate trustee, Mrs H relied on her husband, Mr H, to make her decisions. There was no evidence of Mrs H agreeing with Mr H as to the distribution of income to be made and Mr and Mrs H did not know the amounts to be distributed until the accountant had prepared its financial statements. The ART wasn’t convinced that the trustee had made the relevant decisions by 30 June and held that the trust resolutions were invalid.

Key points: Trust resolution decisions must be made before 30 June each year to be effective for tax purposes. While formal documents can potentially be prepared after year-end, these must record decisions  made before year-end. It would be preferable for there to be evidence of such a decision, such as emails or meeting notes between the trustee and their adviser.

FCT v Pepsico & Anor – Meaning of royalty

The High Court has held that no part of payments made by Schweppes Australia to an Australian subsidiary in the Pepsico Group for beverage concentrate was a royalty. The ATO contended that the payments included consideration for a licence to use the Pepsico IP, and that they were paid or credited to the non-resident parent entity (thereby subject to withholding tax).

Key point: The definition of royalty is very broad. When buying goods from offshore suppliers, commercial agreements should be clear as to what is being acquired. If an agreement includes an IP component, then the ATO may seek to argue that part of the payment is a royalty.

RULINGS & DETERMINATIONS

TD 2025/5—Division 7A anti-financing rule

The Commissioner has finalised its guidance on disregarding certain payments under the section 109R anti-refinancing rule (refer Tax Bulletin – March 2025). Section 109R is intended to prevent shareholders or their associates from avoiding the operation of Division 7A by repaying a loan or making a minimum yearly repayment with another loan from the same company. TD 2025/5 looks at circumstances where the repaying entity is taken to have obtained a loan from the company indirectly (under the interposed entity rules). The ATO may also consider the application of Part IVA to arrangements whereby loans are refinanced for the purposes of obtaining a tax benefit.

OTHER UPDATES

Rental property co-ownership and loans

The ATO has issued a fact sheet for tax agents outlining when their clients need to apportion interest expenses for a rental property. Included in the fact sheet is a discussion of the scenario where a lender requires a property owner to have another person named on their loan where that person has no other association with the rental property. In this case, the parties can make a separate legally enforceable written agreement witnessed by a justice of the peace. The agreement could state the property owner is 100% liable for the loan repayments, interest and expenses.

Key point: In the absence of a written agreement there is a risk that the ATO will disallow a deduction for a share of interest expenses attributable to the other holder of the loan.

Non-deductibility of GIC and SIC

The ATO has issued guidance on the legislative amendments denying deductions for General Interest Charge (GIC) and Shortfall Interest Charge (SIC). The guidance also includes a number of examples of when GIC and SIC are incurred and whether deductible.

General interest charge:

• GIC is not incurred until a notice of assessment (NOA) is served triggering the liability to pay (even if there is an earlier statutory due date). If a liability is not triggered by assessment (e.g family trust distribution tax) this date is based on when the liability arises at law.
• For an amended assessment of income tax, the due date for payment of any associated liability is 21 days after the notice of amended assessment (NOAA) is given. GIC is incurred only after this due date for payment has passed.
• GIC accruing on Running Balance Account deficit debts is incurred at the end of each day.

Shortfall interest charge:

• SIC is incurred when the NOAA is 'given’. This is the date it is issued if electronic (via online services for agents)  or when it would be delivered in the ordinary course if by post.
• Any SIC associated with NOAAs amended assessment issued on or after 1 July 2025 will not be deductible.

CONTACT US

For further information on any of these updates, or for general assistance, please contact our Directors, Jacci Mandersloot or Natalie Claughton.

The informatino contained in this bulletin is intended to provide general infomration only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayer's specific circumstances.