| November Newsletter |
| November Newsletter |
Beneficiary Assessed on Property Development Profit
A beneficiary could be assessed on a trust?s property develop-ment profits that had been treated by the trustee as a pre-CGT gain, the Full Federal Court has ruled.
The trust acquired land adjacent to a property develop-ment it was undertaking. It made a gain on sale of the land, which was allocated to a capital profits reserve. It did not include the gain in the trust?s net income. Under the trust deed, the trustee had the power to treat such gains as either capital or income for account-ing purposes.
Two issues arose in this case: firstly, whether the gain on sale was net income of the trust (rather than a pre-CGT gain), and secondly, whether the beneficiary was entitled to that income.
The Court held that the gain was clearly ordinary income of the trust through its ?deal making business?.
It followed that the taxpayer was presently entitled to the income as the trustee had resolved to distribute the balance of the trust?s net income to the taxpayer.
The Court did not decide on what the position would be if the trustee had exercised a power under the deed to treat the gain as capital (as was claimed by the taxpayer).
It did note very briefly, however, that definitions of income and capital under a trust deed ?would not bind revenue authorities?.
Unit Trust Rollover
The Treasurer has announced CGT rollover relief where a fixed trust transfers assets to a company with the same underlying ownership.
Previously, rollover relief was only available where the assets were transferred to a company wholly owned by the relevant unit trust.
Relief will only apply where the trust ceases to exist after the transfer.
It is not clear whether similar relief will apply to prevent assessable balancing charges arising on transfer of depreciable assets.
This measure appears similar to one proposed under the now withdrawn entity tax proposals, and like the former proposal, it is proposed that it apply from 11 November 1999. Unlike the previous proposal, however, no stamp duty relief has been proposed.
We will advise of any further developments.
Deductibility of Travel Expenses
The Government has ann-ounced it intends to introduce amendments to ensure that expenses incurred by taxpayers in travelling between two places of unrelated income earning activity are to become deductible.
This is consistent with the Tax Office?s previous approach, which was considered quest-ionable in light of Payne?s case decided earlier this year.
Interest on Limited Recourse Loans Deductible
Interest payable by a share trader on limited recourse loans is deductible, the Court has held.
A taxpayer claimed $1.27 million in interest deductions on a number of loans, under which the lender?s right to recover the principal was limited to the shares acquired by the taxpayer.
The interest rate payable on the loans was approximately 18%.
The Commissioner disallowed a deduction for interest of $353,000, which was regarded as a capital protection fee.
It was argued that this component had been paid to obtain an enduring advantage, namely the limited recourse rights, which protected the taxpayer from a loss.
The Court held the sole purpose of the loans was to raise working capital for the taxpayer?s business.
It considered the transaction could not be artificially considered as having a number of purposes when, as a matter of commercial substance, there was but one.
Ultimate Beneficiary Statements
Trustees of closely held trusts who fail to lodge a UB statement when required to will be subject to ultimate beneficiary non-disclosure tax (UBNDT).
The Tax Office recently issued a practice statement which pro-vides that for 2001 and later income years, lodgement of a UB statement is required where:
? the trustee has UBNDT liability for the income year; or
? the Commissioner requests a UB Statement.
If UBNDT is payable by the trustee, a general interest charge will begin accruing 60 days after the original due date, subject to the Commissioner?s discretion to remit.
The concession is of limited value as trustees will still have to trace distributions to and obtain tax file numbers from ultimate beneficiaries to deter-mine whether they are liable for UBNDT.
Tax Free Compensation
The law covering personal injury compensation claims is set for Government amend-ment. Under proposed changes applicable from 26 September 2001, lump sum compensation payments received could be structured to allow the payment of tax-free annuities.
Awards received on claims against employers will not be eligible for the concession.
Bicycle Couriers Employees
The High Court has set aside a New South Wales Court of Appeal decision, and held that a bicycle courier was an employee rather than an independent contractor.
Relevant factors included the nature of the engagement, work practices and remuneration conditions imposed by the hiring party, the small capital outlay required by the couriers, the requirement to wear a particular uniform, the method of job allocation and the fact that training was provided.
This case throws some doubt on an earlier decision concern-ing the same employer where couriers were held not to be employees for superannuation purposes.
Superannuation Fund Investments in New Coles Myer Discount Card Shares
New Coles Myer shareholders are only entitled to a discount card if they buy new Coles Myer discount card shares, rather than ordinary Coles Myer shares.
The Tax Office and APRA have indicated that super-annuation funds that invest in the new Coles Myer discount card shares may fail the sole purpose test, which may cause them to lose tax concessions applicable to complying super-annuation funds.
Formerly, the discount entitle-ment was considered to be only an incidental benefit of share ownership. However, under new arrangements, a reduced return on investment results from the higher-priced discount card shares, so the benefit is no longer considered incidental.
Superannuation funds holding shares subject to the former arrangements are not impacted.
29th-October-2001 |
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