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| APRIL NEWSLETTER |
| April Newsletter |
Home Loan
Schemes Ruling
The Tax Office has released a draft ruling on the deductibility of interest and other costs associated with home loan unit trust arrangements.
In this scenario, the taxpayer typically borrows funds to subscribe to units in a trust. The trust uses those funds to purchase a residential property, which it then leases for market value to the taxpayer, who uses it as their main residence. The taxpayer then claims an interest deduction on borrowings used to acquire the units and the trustee claims deductions for property expenses.
The draft ruling concludes that interest deductions are not available, as they are incurred for a private purpose. The ruling also states that the anti-avoidance rules would deny all deductions, including those of the trustee, as the sole and dominant purpose of the arrangement is to obtain a tax deduction for interest and other deductions in relation to a property that was essentially acquired for private purposes.
We will keep you informed of further developments.
Tax Value Method
A third version of draft legislation for the ?tax value method? (also known as TVM or ?option no. 2?) has been released by the Board of Taxation for further consultation. The Board has advised that the proposed start date of 1 July 2002 is unlikely to be met.
TVM bases tax liability on net cash flows and changes in the net values of assets rather than on taxable income.
While the latest draft includes core income tax provisions, along with capital gains tax and the Simplified Tax System, certain important areas remain undrafted. We will advise you of any developments.
Consolidations ? Clean Slate Rule Review
The controversial clean slate rule in the draft tax consoli-dation legislation appears likely to be withdrawn and replaced with a rule with less extreme implications for the head company.
The clean slate rule was an important feature of the recently released exposure draft legislation concerning the proposed consolidation rules.
This rule meant that the financial history of an entity before it joined the consoli-dated group was not considered to have carried over to the head company post-consolidation.
The clean slate rule potentially resulted in the head company being denied a deduction for borrowing costs, bad debts, prepayments, certain repairs and various other deductions.
We will keep you informed of further developments.
Unfranked Dividend Rebate 12-month Rule
The Government has announced that the inter-corporate dividend rebate for unfranked dividends will only be available for companies that have been members of the same wholly owned group for 12 months prior to the payment of the relevant dividend, applicable retro-spectively from 1 July 2000.
Under the previous rule the companies must have been grouped for the whole of the income year in which the dividend was paid.
The Government claims that this will align eligibility for the rebate with the tax treatment of wholly owned groups under the proposed consolidation rules.
Not Carrying On
A Business
A taxpayer was not carrying on a business of palm tree cultivation the AAT has ruled, despite the taxpayer?s evidence that the land was purchased for that purpose.
The trees were not planted in accordance with industry practices and the potential returns were minor relative to the original cost of the land. In addition, when applying for the rezoning of the land, the taxpayer had claimed that the land was acquired for private redevelopment.
Accordingly, the tribunal held the activities were not carried on in a ?business-like? manner and were more consistent with the conduct of a private redevelopment.
Tax Office
Takes Unusual Step
In our last edition, we discussed a recent interpretative decision in which the Tax Office decided that contributions made by an employer to an employee?s social club did not constitute a fringe benefit.
The Tax Office has since taken the unusual step of with-drawing this interpretative decision, without comment. Its policy on this issue is perhaps being reviewed.
We will advise of any developments.
Tax Office
Under Review
The ?government watchdog?, the Australian National Audit Office, has outlined its possible audit targets within the Tax Office for the current income year. These will include the following areas:
? the implementation of GST;
? GST fraud prevention and control;
? ATO tax agent liaison arrangements;
? management of non-residents? withholding tax; and
? R&D tax concession arrangements.
It is anticipated that extra Tax Office activity in these areas may result.
Scrip Loans Alert
The Tax Office has issued a Taxpayer Alert concerning arrangements where a taxpayer enters into a scrip loan and purchases an option from the lender over the same number of shares.
The main features of these schemes include:
? the borrower receives a franked dividend but does not have other typical ownership entitlements such as the right to vote and to participate in the company?s capital;
? the borrower pays the lender a transaction fee which approximates the value of the cash dividend; and
? this fee is then claimed as a deduction against the dividend income leaving the franking credit (in part) to offset against other income.
The Tax Office?s concerns include the taxpayer?s entitle-ments to franking credits (i.e. 45 day holding day rule), eligibility of deductions and the application of Part IVA.
Linked Bonds Warning
Taxpayers entering into linked bond arrangements should do so carefully.
The Tax Office has warned investors that a range of linked bond type financial products are still being marketed, despite its warning on 15 June 1999 that interest deductions claimed for such products would be disallowed.
The relevant bonds combine a fixed interest income component and the possibility of a bonus return, linked to a nominated equity or index. The main features of the bonds are:
? investors typically borrow 100% of the face value of the bond and pre-pay interest (most of which typically is also borrowed), claiming a significant up-front tax deduction;
? the investor returns the fixed interest income on maturity (usually in the following year resulting in the tax deferral); and
? due to the degree of movement required in the linked share or index, there is little, if any, prospect of worthwhile commercial gain.
26th-March-2002 |
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