| MARCH NEWSLETTER |
| March Newsletter |
New Draft Consolidation Rules
New exposure draft legislation concerning the proposed consolidation rules has been released by the Federal Government. The rules are proposed to apply from 1 July 2002, although groups will not have to decide whether or not to consolidate until lodgement of their 2003 year tax returns.
Briefly, it is proposed that a consolidated group will lodge a single tax return, will pool losses, franking credits and foreign tax credits and will ignore transactions within the consolidated group.
A consolidated group will consist of a head company and all of its 100% Australian-owned subsidiaries. Unlike in the previous draft, trusts will not be eligible to be the head company. They may, however, form part of the consolidated group provided that all trust interests are beneficially owned by members of the group.
When an entity joins a consolidated group, the head company is deemed to acquire the subsidiary's assets.
The deemed cost to the head company is (broadly) the cost of the membership interest in the subsidiary, plus its lia-bilities, pro-rated across all its assets. This rule is subject to some specific modifications.
When an entity leaves the group (i.e. membership interests are sold by the group) the head company?s cost base will (broadly) equal the cost base for the subsidiary?s net assets. A gain or loss on disposal of the membership interest may then arise under existing capital gains tax (CGT) rules. All tax losses, franking credits and foreign tax credits attributed to the con-solidated group will remain within the group. Complex rules apply regarding the transfer of losses to a group by new members, and the rate at which such losses can be utilised by the group. Although consolidation is optional, once a head company elects to consolidate, all eligible subsidiaries must be grouped.
Entities that do not consolidate will typically not be entitled to the intercorporate dividend re-bate, intra-group CGT rollover, tax loss transfers, excess foreign tax credit transfers or thin capitalisation grouping relief.
An important feature of the new proposal is the introduction of the clean slate rule. This means that nothing that happened concerning an entity before it joined the consolidated group is considered to have happened to the head company after consolidation. This may result in the head company being denied a deduction for borrowing costs, bad debts, pre-payments, certain repairs and various other deductions. A similar rule applies on leaving a group.
We will keep you informed of further developments.
Tax Office Focus on Transfer Pricing
Transfer pricing for small to medium enterprises will be the subject of increased focus by the Tax Office.
The Tax Office announced that it will commence a review in March 2002 of approximately 40 small business taxpayers with related party international dealings in the wholesale and distribution industry.
It also intends to hold an information session for small business taxpayers who may be subject to a transfer pricing review over the next couple of years.
Casino Denied
?Rent? Deduction
The Full Federal Court has looked beyond a contract between a casino operator and the Queensland Government to determine the true nature of an outgoing.
The Full Court held that the casino operator was not entitled to a deduction for ?special rent? included in the contract. According to supporting documentation, the amount was paid to obtain exclusive operation rights within a certain area and therefore to secure an enduring benefit. Accordingly, the payment was capital and non-deductible.
An appeal against the decision has been lodged.
Excellent Salary Sacrifice Opportunity
An excellent salary packaging opportunity exists following a recent announcement. At a National Tax Liaison Group FBT Subcommittee meeting, the Tax Office confirmed that private meal entertainment expenses reimbursed to employees of public benevolent institutions (other than hospitals) will not be taken into account when calculating the $30,000 exemption limit.
This treatment may also apply to entertainment facility leasing expenses reimbursed by employers; however, this is yet to be fully considered by the Tax Office.
Employer Social
Club Contributions
A recent interpretative decision has highlighted an opportunity for employers to provide funds to an employee social club without attracting fringe benefits tax.
The Tax Office decided that contributions made by an employer to an employee social club did not constitute a fringe benefit because the benefits were provided to the social club, and the social club was not an associate of the employees, nor an associate or arranger of the employer. While the point was not considered in the decision, it is arguable that the position may be different if the employer directs the use to which the funds are put. In either case, it is likely that the payment would be deductible by the employer.
Amendment and Renegotiation of DTAs
A protocol was signed recently amending the Australia/Canada double tax agreement (DTA). Once it is in force, among other things:
? the maximum interest with-holding tax rate will reduce from 15% to 10%; and
? certain dividends in relation to 10% or greater share-holdings will be taxed at a maximum rate of 5%, instead of the current 15% rate.
Also, first round negotiations have been held in London to review the existing Australia/UK DTA. Further discussions are to be held in March 2002 to resolve outstanding issues.
We will keep you informed of any developments.
Trading Stock Decision
Housing units transferred by a trust to associated family members as part of a larger property development project are not trading stock of the trust, the AAT has ruled.
Specifically, the evidence in this case indicated that the housing units were never intended to be treated as trading stock. Accordingly, the value of the units was not included in the trust's taxable income on disposal.
Self Education Deductible
Most of the self education expenses incurred by a member of the RAAF for a management and leadership course are deductible, the AAT has ruled.
It found that four out of the five subjects were relevant and incidental to him performing his job better. No deduction was allowed for costs of a financial management subject, which was held to be purely personal in nature.
Share Value Shifting Determination
A final taxation determination concerning how the CGT share value shifting rules under the Income Tax Assessment Act 1936 apply to an arrangement that is neutral has been issued by the Tax Office.
A neutral arrangement occurs only where value shifts between different shares, but the overall value of all post-CGT shares of the shareholder does not change. Broadly, the taxpayer does not make a capital gain in these circumstances, although cost base adjustments may be required.
24th-February-2002 |
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