| OCTOBER NEWSLETTER |
| October Newsletter |
Loan Decision Creates Interest
The Court has recently ruled that interest is tax deductible after a business has ceased operation and the business loan is refinanced.
The Court overruled a previous decision and found that interest paid on a business loan was tax deductible not only after the business ceased, but also after a subsequent refinancing of the original loan.
In this case, the taxpayer operated a business in partnership with her husband until her husband?s death.
The taxpayer continued to repay the partnership loan after the business had ceased, and the loan was subsequently refinanced. She claimed tax deductions for all interest payments made on both loans.
The Court found that there was still sufficient nexus between the interest tax deduction and the obligation to repay the principal and the interest incurred whilst operating the business.
An important point was that the taxpayer refinanced to secure a lower interest rate, and would have otherwise struggled to repay the original loan.
This case contrasts with earlier decisions in which interest on loans refinanced in similar cir-cumstances was considered non-deductible after the refinancing.
50% CGT Discount
Investors with a fixed interest in a trust should take note of a new Bill recently introduced to Parliament.
The Bill provides that from
1 July 2001, capital gains tax (CGT) cost base adjustments will no longer arise where CGT discount amounts or amounts relating to the small business 15-year exemption are distributed to the holder of a fixed interest in a trust.
Importantly, distributions of 50% active asset concession amounts through a fixed trust will continue to result in cost base adjustments. Distribution of tax free amounts associated with building allowance claims will also result in a cost base adjustment from 1 July 2001.
The Bill also introduces a concession applicable from
21 September 1999 (when the 50% discount commenced) to 30 June 2001, for those investing through a chain of trusts.
Broadly, cost base adjustments are not required for payments of the 50% CGT discount to another trust in respect of a unit or a fixed interest.
Bonuses Not Deductible Until Paid
Employee bonuses accrued at year end are not tax deductible to the employer until paid the following year, the Court has found.
The key facts of the case were as follows:
? bonuses were paid to employees at the discretion of the company;
? bonus estimates were accrued monthly but not settled until the following year;
? employees were not advised whether they would receive a bonus until the following financial year;
? no employee had a legal entitlement to be paid a bonus, though there was a clear expectation, under-standing and commitment, and bonuses were a significant component of remuneration; and
? bonuses were actually paid in the following year.
The Court held that even though there was a commercial certainty that an amount would be paid, this was distinct from a legal liability to pay. In addition, it was also ruled that the deduction was not available at year end, because at that stage, the amount was incapable of being calculated.
PSI Shake-up
Personal services income (PSI) rules have been shaken up following the introduction of a new Bill into Parliament and the issue of two new rulings.
These rules ensure an indi-vidual is taxed on all their PSI (whether derived personally or via an interposed entity) unless they are carrying on a personal services business (PSB).
Proposed Amendments
Broadly, the Bill is in accord with the proposals already announced, as outlined in our August edition. Briefly, the proposed amendments cover:
? any income of agents received from a principal, which will be deemed to be derived from the customers of the principal on a look through basis, provided certain tests are satisfied. Therefore, agents deriving less than 80% of their income from one source may satisfy the unrelated clients test; and
? individuals and entities may self-assess whether they conduct a PSB against the results test (this is based on common law independent contractor tests).
PSI Ruling
The Tax Office has issued a ruling on the meaning of PSI, which is broadly income that is a reward for personal efforts or skill, whether derived person-ally or by an interposed entity.
The ruling suggests that in determining whether income is PSI will depend on the exercise of practical judgement as to whether the value of the individual?s input exceeds that of other inputs, such as the efforts of other workers, the use of equipment and so on.
PSB Ruling
The Tax Office has also finalised its ruling on the meaning of PSB, and consid-ers the application of the four personal services business tests (the results test, unrelated clients test, employment test and business premises test).
An important proposed change in the latest ruling is the focus on the results test as the main test to be satisfied.
Taxpayers may pass this test even if more than 80% of their PSI comes from the one source.
The ruling does not however rule out applying the general anti-avoidance provisions where a taxpayer passes the relevant tests, and engages in income splitting.
It is not clear when these provisions might be applied. We will keep you informed of developments in this area.
Renouncing Trust Interest
A Tax Office Draft Determi-nation has highlighted the CGT consequences of a beneficiary renouncing their interest in a discretionary trust. An interest is renounced, for example, when a beneficiary abandons or refuses to accept their interest or entitlements.
The Draft Determination provides that beneficiaries with no interest in the trust before the exercise of any discretion by the trustee (say, to distribute income or capital), are unlikely to make a capital gain on renunciation.
However, a capital gain may arise where an interest is renounced after the trustee has exercised their discretion in favour of a beneficiary, or where a beneficiary has a default interest. In such cases, the interest will have a value.
Renunciation will result in a disposal of the interest for no consideration, but the CGT provisions could deem market value consideration, resulting in a capital gain.
It may be argued that the Draft Determination takes a rather technical position, which could produce potentially harsh and inequitable outcomes.
Super Choice Rules Blocked
The Senate recently blocked a Bill, which if enacted, would require employers to provide employees with a choice of superannuation funds. The original provisions were introduced to Parliament in December 1997 and seem no closer to being passed.
25th-September-2001 |
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