February 2007 Newsletter
February 2007 Newsletter.pdf (149.6k)
| Author | : | Ambry Legal |
| Publication | : | Client Newsletter |
| Category | : | Back Copies of Client Newsletters |
| Date | : | 21 Feb 2007 |
Dear Reader,
Welcome to the February edition of our client newsletter. We hope you had an enjoyable summer break and are looking forward to the year ahead. Normally, for us, it’s quiet over summer but this January and February we have gained three new members of staff, prepared our next seminar series and spent quite a bit of time coming to grips with several changes to the tax laws!
The new additions to our team are Bram Basavanand, who joins us as a second year tax solicitor, and Svetlana Grech and Andrea Vosti who have signed up for their articled clerkship. We also have a senior state taxes lawyer joining us in a couple of months.
In this edition, we look at the following topics:
· The recent Full Federal Court decision in Cajkusic v Commissioner of Taxation reinforces the need to understand your trust deed
· UPDATE — ATO gives notice to taxpayers to review transactions relating to residential premises for the purpose of GST
· UPDATE — Proposed amendments to the small business CGT concessions have been introduced into Federal Parliament
· Tax cuts for state taxes of stamp duty and payroll tax
· Who is the correct entity to register for GST in a managed investment scheme?
· GST ruling - Communal facilities test for retirement villages
As a reminder, previous issues of the newsletter are available on our website at www.ambrylegal.com.au.
AMBRY ANSWERS SEMINARS ARE ON AGAIN!
Our Ambry Answers seminars are a fantastic way to consolidate your knowledge on existing and developing commercial and taxation issues, and are also a good way of building up your CPD points for the year.
Our TRUST LAW UPDATE series will focus on:
· Understanding client trust deeds — in particular, examining several significant decisions handed down in 2006.
· Drafting effective trust distributions resolutions workshop — bring your problems with you!
· Family trust and interposed entity elections — 2004 FTE amnesty — a high priority.
· Service trusts — old news but why argue with the Commissioner when we will show a new business model for professional firms.
Seminars will be held throughout March and April in the following locations:
14 March 2007 — Melbourne 29 March 2007 — Ivanhoe
22 March 2007 — Dandenong 18 April 2007 — Bendigo
22 March 2007 — Moorabbin 19 April 2007 — Ballarat
29 March 2007 — Essendon 19 April 2007 — Geelong
Final times and venues to be advised. Cost: $95 first person, $65 second person and $50 for subsequent participants, students and articled clerks.
Please check our website for more details or alternatively, telephone or email Lexley Larter on (03) 8602 6800 for venue, payment and CPD details.
THE IMPORTANCE OF READING YOUR TRUST DEED — FULL FEDERAL COURT DECISION
The recent decision of the Full Federal Court in Cajkusic v Commissioner of Taxation has highlighted the importance of reading your trust deed and knowing its terms. This case was an appeal from the Administrative Appeals Tribunal by Mr and Mrs Cajkusic and their son (‘taxpayers’) in respect of applications made by them for the review of objection decisions made by the Commissioner of Taxation in relation to their assessments for the 1997 and 1998 financial years. The taxpayers were employees of Intex Coatings Pty Ltd, trustee of the Cajkusic Family Trust.
In the 1997 and 1998 financial years, the Family Trust claimed deductions for the contributions to and implementation costs of an employee benefit trust arrangement in the amount of $205,425 and $197,125 in respective years. The Commissioner issues FBT assessments on Intex Coatings in respect of these amounts, and Intex consequently went into liquidation in 2001.
In April 2003 the Commissioner used Part IVA of the Income Tax Assessment Act 1936 (‘Act’) to cancel the benefit of the deductions claimed by the Family Trust, and subsequently issued amended assessments to each of the taxpayers under section 97 of the Act to increase their taxable income by the amount of the deduction claimed by the Family Trust in each year. The trust deed of the Family Trust gave Intex Coatings the discretion about what amounts were to be included in the calculation of trust income and to determine that this income was taxable income of the trust for the purposes of section 95 of the Act.
The case before the Tribunal focused on whether contributions made to the employee benefit trust were deductible. However, the appeal before the Federal Court considered what constituted the distributable income of the Family Trust under section 97 of the Act.
The taxpayers’ argued that, in order for taxpayers to be assessed on any income from the Family Trust:
1. the Family Trust must have distributable income pursuant to section 97 of the 1936 Act, for the year ended 30 June 1998 and there was no such income
2. the taxpayers must be presently entitled to a share of that income and Intex’s right of indemnity precluded any of the taxpayers having any entitlement to the income of the Family Trust for the 1998 year
3. there must be net income within the meaning of section 95 of the Act, there was no dispute as to this requirement.
The Commissioner argued that:
1. the taxpayers objections did not contain sufficient grounds to give the Tribunal jurisdiction to hear the taxpayers’ case
2. income for section 97 purposes cannot be governed by the terms of the trust deed as it would be possible, via the terms of the deed to ‘define your way out of what the Income Tax Assessment Act provides’
3. because the contributions to the employee benefit trust ultimately ended up in the hands of the taxpayers, the provisions of section 101 of the Act were triggered so that the taxpayers were deemed to be presently entitled to the amounts paid or applied for their benefit.
The Court's findings
The Court's decision covered several issues, namely the following was held:
1. Appeal relating to section 97
The taxpayers' were able to make an argument in relation to section 97 of the Act as the Commissioner should have been aware of this issue in light of information provided to them by the taxpayer.
2. Nature of income
The Tribunal erred by finding that the Family Trust's distributable income and the Family Trust's section 95 income would be the same if the deductions were disallowed. This would only occur if the trust deed mandated that this was the case, however the trust deed of the Family Trust only provided Intex Coatings with a discretion as to the treatment of receipts and payments, but this was not exercised.
Furthermore, the Court rejected the Commissioner's argument that the section 97 income could not be governed by the terms of the trust deed because it would allow a taxpayer to define their way out of the provisions of the Act. The Court emphasised the importance of understanding the terms of the trust deed in deciding the distributable income of the trust.
In adopting the proportional approach of reconciling distributable trust income and taxable income pursuant to section 95, the Court found that in the relevant income year there was no profit that could be properly distributable and therefore used against the loss of $54,838 in the accounts of the Unit Trust from the previous year. Subsequently, the tax liability for section 95 fell on the Trustee rather than the taxpayers.
3. Section 101 of Act
The Court held that the reference to ‘income of a trust estate’ in section 101 had the same meaning as section 97 income, that is, distributable net income. Even where the trust deed allows for the Trustee to exercise discretion to apply income for the benefit of specified beneficiaries, there must be distributable income which is the subject of the discretion.
The taxpayers appeal was allowed, and the Court held that:
(a) the order made by the tribunal in relation to the 1998 be set aside;
(a) the objection decisions in relation to the 1998 year be set aside; and
(b) the Commissioner decide the taxpayers objections in accordance with the Court’s reasons.
There is no substitute for reading and understanding a trust deed. A deed is paramount in determining the distributable income of a trust. It takes precedence over any accounting principles or industry norms. Unless there is distributable trust income, a beneficiary cannot have a present entitlement to that income, and the taxable income of the trust (if any) will be assessed to the trustee. In the present case the taxpayers avoided the assessment of tax resulting from the disallowance of the claims relating to the employee benefit trust because there was no distributable trust income, and presumably the trustee will avoid the payment of any tax assessed to it as it has entered into voluntary liquidation.
UPDATE — THE GST TREATMENT OF RESIDENTIAL PREMISES
Recent amendments to the A New Tax System (Goods and Services Tax) Act 1999 (Cth) address the interpretation of residential property and commercial property for the purposes of GST.
In general, commercial property is treated as a taxable supply and subject to GST. Residential property is an input tax supply and consequently no GST is payable in respect to the sale of such property. The recent amendments define property at the intersection of these two categories, such as motels, hotels, strata units and serviced apartments, will be treated as residential premises, remaining input taxed.
As this amendment will apply retrospectively from 1 July 2000, the ATO has advised taxpayers affected by this amendment to review relevant transactions over the past four years and make any necessary revisions, treating unpaid GST amounts as follows:
1. Where a taxpayer’s activity statement is revised on or before 28 February 2007 as a consequence of the new law, no tax shortfall penalties or general interest charge (GIC) attributable to the shortfall will apply up until 28 February 2007.
Where a tax shortfall amount remains unpaid after 28 February 2007, GIC will accrue at the normal rate from that date.
2. Where a taxpayer’s activity statement is revised after 28 February 2007 as a consequence of the new law, will incur the GIC accruing from 27 July 2006. No tax shortfall penalty will be payable.
Click here for further information.
UPDATE — FEDERAL BILL PROPOSES AMENDMENTS TO THE SMALL BUSINESS CGT CONCESSIONS
The long awaited amendments to the small business CGT concessions proposed in the 2006 Federal Budget were introduced into Federal Parliament on 7 December 2006. The Tax Laws Amendment (2006 Measures No. 7) Bill was read for a second time, however debate on the Bill was adjourned until the 6 February 2007.
Where a small business is operated through a company or trust, the active participation of an individual is tested for the purpose of accessing the small business concessions. The amendment replaces the controlling individual 50 per cent test with a significant individual 20 per cent test which establishes the participation percentage of an individual for this purpose.
Once enacted, many changes in the Bill will apply retrospectively from 1 July 2006. Other amendments are yet to be announced.
Click here to view a copy of the Bill or Second Reading Speech.
Click here for a copy of a paper that we have written that summarises the changes.
2007 WELCOMES STATE TAX CUTS
With effect from 1 January 2007, the Victorian government has introduced three changes to the state tax legislation that promise to benefit many Victorians (see the State Taxation Legislation Amendment (Housing Affordability) Act 2006 (Vic) (‘Act’)):
· a stamp duty concession on all purchases of principal places of residence (‘residence’) up to the value of $500,000
· the extension of the First Home Bonus to 30 June 2009
· an early reduction in the pay-roll tax.
The stamp duty concession
The stamp duty concession applies to the purchase of residences up to the value of $500,000. The table below (adopted form the General Information Bulletin (Dec 06 GEN 3/06) issued by the State Revenue Office of Victoria) provides a summary of concessions afforded by the Act:
Dutiable value of the PPR Reduced rate
of duty Original rate
of duty Difference
> $115,000
to $400,000 $2,560 plus 5% of amount > $115,000
$2,560 plus 6% of amount > $115,000 Rate reduction
of 1%
> $400,000
to $500,000 $16,810 plus 6% of amount > $400,000 Duty reduction of $2,850
The main requirement for concession eligibility is that the purchaser (or one of the purchasers, if there is more than one) occupies the property continuously for at least 12 months, commencing within the 12 months period of becoming entitled to possession.
The extension of the First Home Bonus
If you are a first home buyer who is eligible for the $7,000 First Home Owner Grant, and the value of the property you are acquiring does not exceed $500,000, you will also be eligible for the $3,000 First Home Bonus.
The Act has extended the availability of the First Home Bonus from 1 July 2007 to 30 June 2009. A higher $5,000 Bonus for contracts to purchase or build new residential premises (as defined in section 40.75 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)) has also been introduced.
Although a purchaser may be eligible for both the stamp duty concession and the First Home Bonus, they can only receive one. The purchaser will be required to elect in writing, by statutory declaration, which benefit they would like to receive. If a purchaser fails to make an election, the default benefit is the First Home Bonus, which is worth more in most cases.
The pay-roll tax rate reduction
Payroll tax was reduced to 5.15% on 1 July 2006. The second reduction to 5.05% under the Pay-Roll Tax Act 1971 (Vic) was scheduled to take effect from 1 July 2007. However, the new legislation has brought the second payroll tax cut forward with effect from 1 January 2007. The payroll tax rate will be cut for a third time to 5.00% with effect from 1 July 2008.
REGISTRATION OF RESPONSIBLE ENTITLES OF MANAGED INVESTMENT SCHEMES FOR GST PURPOSES
Registration for GST may be available for the responsible entities of managed investment schemes (‘MIS’) in light of a recent ATO interpretative decision, ID 2007/7.
The Commissioner considered whether the responsible entity of a MIS could be registered for the purpose of GST. The MIS was conducted in a commercial manner via a public company as the responsible entity, which through a collective of trusts facilitated its operations in a single trust account.
For GST purposes 'entity' can mean a trust with the trustee as the appropriate party. In this case, the MIS under consideration provided investors with individual investment portfolios with a variety of investment profiles to invest in, each comprising wholesale and listed investments. The responsible entity undertook the daily management of investments on behalf of investors, in individual trust relationships under an overall trust structure where the custodian holds the legal title and investors have absolute and beneficial entitlement. Investors’ funds were processed through a single trust account, and the responsible entity provided consolidated reporting on investors’ investment portfolios.
An entity may be registered for GST if it carries on an enterprise (whether or not the turnover threshold is met) pursuant to section 23-10 of the A New Tax System (Goods and Services) Act 1999 (Cth) (‘GST Act’).
The Commissioner considered the definition of enterprise in section 9-20(1)(a) of the GST Act as ‘essentially any act or series of acts that an entity chooses to do’ done in the form of a business. The definition of ‘enterprise’ includes the phrase ‘in the form of’, and the term may be extended to cover the situation where the entity carries out activities that ‘have the appearance or characteristics of business activities’. In this regard, the responsible entity undertook activities such as exercising its investment discretions, managing the pooled monies and related activities which are of a commercial nature and so are ‘in the form of a business’.
The Commissioner concluded, in this instance, that the responsible entity is the correct body to register for GST, because of the transactional and administrative functions it performs, and is entitled to be registered for GST pursuant to section 23-10 of the GST Act.
TAX OFFICE RULING CLARIFIES COMMUNAL FACILITIES TEST FOR RETIREMENT VILLAGES
The Tax Office has issued a ruling which clarifies when retirement village premises have communal facilities, and therefore may be able to apply some GST-free provisions.
The ruling applies from 1 July 2000, and provides the Tax Commissioner’s view on one of the requirements in the definition of ‘retirement village’. The ruling does not deal with the other requirements of the definition.
Some supplies made to residents of charitable ‘retirement villages’ and to residents of serviced apartments in ‘retirement villages’ may be GST-free, where the definition of ‘retirement village’ and other relevant requirements are met.
If a village operated by a charity does not satisfy the requirements of the ‘retirement village’ definition, the charity should consider the application of section 38-250, which also allows for the GST-free treatment of supplies made by charities for nominal consideration.
Communal facilities in a retirement village are those that are intended and capable of group use by the residents for recreational, sporting, social, religious, or other similar uses that enhance a sense of community among the residents. This is determined objectively having regard to the primary function or purpose of the facilities as evidenced by their physical characteristics.
Examples include a library, a dining room, a recreation room, a chapel, an equipped gymnasium, and outdoor recreational and leisure facilities such as a tennis court, a swimming pool or a barbeque area. However, pathways, gardens, driveways and landscaping are not ordinarily communal facilities in the ‘retirement village’ context.
The ruling says ‘retirement village’ residential premises include communal facilities when:
• the communal facilities are physical, and
• the communal facilities are within, attached to or connected to the residential building(s), or constructed on the surrounding land that actually or substantially contributes to the enjoyment of the building(s) or to the fulfilment of its purposes as a residence (although communal facilities need not themselves be residential premises).
The ruling further explains that:
• facilities that are for the resident’s own use in their individual units or apartments are not communal facilities
• services are not communal facilities as they are not physical
• villages need only include one communal facility
• the residents do not need to have exclusive use of the communal facility
• the residents do not have to actually use the communal facilities provided the facilities are in existence and are made available for their use, and
• offsite facilities do not satisfy the 'communal facilities requirement'.
More information
Click for a full copy of GSTR 2007/1, Goods and services tax: when retirement village premises include communal facilities for use by the residents of the premises.
AND FINALLY …
If you would like to discuss any of the items in the newsletter, please contact Jo Lindsay. Additionally, we respect your privacy and will immediately remove your contact details from our database if requested. (See the first page of the newsletter for contact details.)
Regards,
Ambry Legal, Melbourne
21 February 2007
