| CLIENT ALERT** |
| Newsletter, February, 2001 |
(** Publication of the Centre for Professional Development)
DRAFT CONSOLIDATION RULES
The Government has released exposure draft legislation concerning the proposed consolidation rules. Although the rules are intended to apply from I July 2001, it is not clear when this draft will be introduced to Parliament.
It is proposed that a consolidated group would lodge a single tax return, pool losses, franking credits and foreign tax credits and ignore inter-entity transactions within the consolidated group.
Broadly, a consolidated group will consist of a head entity (typically a resident company or discretionary trust) and all its 100% owned subsidiaries.
A discretionary trust will only be consolidated where all its beneficiaries are members of the consolidated group.
When an entity joins a consolidated group, its assets are deemed to have been acquired by the head entity.
The deemed cost to the head entity is broadly the cost of the membership interest in the entity, plus its liabilities, pro rated across all of the subsidiary's assets. This rule is subject to some specific modifications.
When an entity leaves the group (i.e. if membership interests are sold), the head entity's cost base for the subsidiary will broadly equal the cost of the subsidiary's assets, less its liabilities. A gain or loss on disposal of the membership interest will arise to the extent that the sale value of the membership interests are greater or less than this deemed cost base. All tax losses, franking credits and foreign tax credits attributed to the consolidated group will remain with the group.
Complex rules govern the transfer of losses to a group by a new member, and the rate at which such losses can be utilised by the group.
Although consolidation is optional, once a head entity elects to consolidate, all eligible subsidiaries must be grouped.
Entities which do not consolidate will typically not be entitled to the inter-corporate dividend rebate, loss transfers or CGT rollover relief.
SIMPLIFIED TAX SYSTEM
The Government has introduced a bill to Parliament concerning the proposed simplified tax system {STS). This is an alternate method of calculating taxable income for qualifying small businesses. As readers may be aware this was previously released as exposure draft legislation. The differences between the bill as introduced and the exposure draft include:
to qualify, small businesses and related entities must have, amongst other things, depreciating assets (excluding buildings) of less than $3 million {previously $2 million);
changes in the value of trading stock do not have to be accounted for on a cash basis {existing valuation rules apply); and
grouping tests to qualify for the STS have been relaxed.
The bill also introduces a new 12 month prepayment rule (replacing the current 13 month rule) applicable to STS taxpayers. It also applies to individual taxpayers incurring deductible non-business expenditure.
The new 12 month rule allows an immediate deduction for prepayments where:
.the service period relating to the prepayment does not exceed 12 months; and
.the service period ends in the next income year.
Other taxpayers will be required to apportion prepay - ments over the relevant service period, subject to certain transitional rules.
Rules denying prepayment deductions concerning tax schemes will continue to apply.
The changes apply to assessments for income years commencing from I July 2001.
PROPOSED CAPITAL ALLOWANCES RULES
The Government has released exposure draft legislation for a uniform capital allowances regime for most assets (excluding land and trading stock). It is proposed that the majority of these new rules will take effect from July 1, 2001.
It provides a set of general rules for calculating deductions for the notional decline in value of most depreciating assets. Pooling will continue to apply for certain expenditure, including software and low value items.
There are also special rules for farmers and miners. The draft provides periodic write-offs for various black hole expenditures, including feasibility studies, site preparation, capital raising, certain intellectual property, and business restructure and takeover costs, but not for goodwill. We will provide further details once a bill has been introduced to Parliament.
BUSINESS ACTIVITY STATEMENT (BAS) NEWS
The Government has announced that it will be consulting with various business and tax industry representatives concerning simplification of the BAS. We will advise of any developments.
Meanwhile the Tax Office has announced that BAS reviews to date have focused on credit claims, particularly for sales tax imbedded in stock on hand on 1 July 2000. It claims that the focus of these reviews is to assist businesses in implementing the GST and other elements of the New Tax System. Penalties have not been typically applied. However, the Tax Office is particularly watchful for input tax credit fraud.
ULTIMATE BENEFICIARY (UB) STATEMENTS
The Tax Office has announced that trustees who lodged a UB Statement for the 1999 income tax year do not have to lodge one for the 2000 or subsequent income years, provided they do not have a UB non-disclosure tax liability in the relevant year.
This concession is of limited value only as trustees will still need to trace distributions to determine whether they have any liability for UB non- disclosure tax.
Currently, trustees who distribute to another trust are required to lodge a UB statement identifying the ultimate beneficiaries of that distribution. A failure to do so results in UB non-disclosure tax.
INTEREST DEDUCTIONS
The Administrative Appeals Tribunal (AAT) has held that a taxpayer was entitled to a deduction for interest incurred after the cessation of a business, but only before the loan was refinanced. This case followed a recent Full Federal Court decision.
It was held that the original occasion of the interest was a loan agreement entered into by the taxpayer so that the taxpayer could carry on a business.
However, once that loan was refinanced after cessation of the business, it was found there was insufficient connection between the business activity and the interest payable on the refinanced loan. Consequently the interest was not deductible.
PRIVATE COMPANY LOANS
The benchmark interest rate for determining minimum repayments for the year ending 30 June 2001 under the private company loan rules is 7.8%. If minimum repayments are not met, a deemed dividend arises.
20th-April-2001 |
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