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| JUNE NEWSLETTER |
A Note of Caution on Loans from Trusts
A deemed dividend can arise when a trustee that has declared distributions to a company which remain unpaid makes a loan to a shareholder (or associate) in the company. In such cases, the dividend is unfrankable but the company?s franking account is debited regardless.
Over 12 months ago a submission was made to the Tax Office arguing that the rules should not apply if the loan by the trustee is to a company.
Although the loan is from a trust to a company, the legislation deems it to be a loan between two companies. Consequently, an inter-company exemption applies; the Tax Office has now issued a draft taxation determination confirming this.
Warning: Loans by trusts can be caught by the shareholder loan (deemed dividend) rules unless the ultimate borrower is a company.
Tax-effective Investment Schemes: Budplan
The Commissioner has had a victory in the Budplan tax-effective investment scheme test case, both in relation to the non-deductibility of costs incurred by investors and in relation to the application of the anti-avoidance rules.
The taxpayers in this case were investors in a syndicate established to carry out research and development (R&D) regarding tea tree oil products and to subsequently manufacture and sell the products developed.
The Federal Court held that the deductions were not permissible because the expenditure was only related to R&D and not to the subsequent manufacturing and selling.
The Federal Court also held that tax avoidance rules applied because the investment was structured so that each investor would end up with a cash surplus as a result of the tax deductions, even if the venture was a commercial failure.
This led the Federal Court to conclude that there was no ?commercial rationale? for participating in the scheme except for the deductibility of the outgoings.
Warning: Be wary of tax-effective investments that have poor commercial prospects.
Tax Treatment
of Trusts
The tax treatment of trusts has been an uncertain area over recent years, with speculation concerning tax avoidance through trusts and the introduction, and subsequent shelving, of complex entity tax rules (taxing trusts as companies).
The Business Coalition for Tax Reform (BCTR) has now released a Draft Submission to the Board of Taxation concerning the Taxation of Trusts. The submission concludes that:
? no convincing case has been made showing that a fundamental change in entity taxation would be an improvement; and
? no case has been made that a wholesale change to the tax treatment of trusts is justified on anti-avoidance grounds.
The BCTR suggests, however, that improvements can be made to the taxation of trusts and that certain avoidance opportunities should be appropriately addressed.
Outlook: Going by develop-ments to date, trusts will continue to be a very effective structure for business and investment, in appropriate circumstances. However, watch out for potential targeted avoidance rules.
Applications for Substituted Accounting Periods
At a recent meeting between the Tax Office and representatives of the various professional bodies concerning substituted accounting periods (SAPs), the Tax Office discussed a new administrative rule relating to the timing of applications for SAPs.
The new rule is that new SAP applications usually must be lodged at least 28 days prior to the SAP requested or prior to 30 June, whichever is earlier. For example, applications for 31 March and 30 September SAPs need to be lodged by
3 March and 2 June respectively.
Tip: Always lodge requests for substituted accounting periods at the first opportunity.
Win-win with Employee Shares
The employee share scheme rules in the Income Tax Assess-ment Act 1936 provide a useful planning opportunity. Where the necessary conditions are satisfied, an employer company can issue shares valued at up to $1,000 to each qualifying em-ployee and obtain a tax deduct-ion with no cash outgoing.
Provided certain conditions are satisfied, employees will also be exempt from tax on the first $1,000 of shares.
This arrangement can therefore be very effective for both the employer and employees if a company is looking to introduce employee share ownership.
Dividend Stripping
The Tax Office has released an interpretive decision identify-ing the types of schemes which in its view may involve dividend stripping.
In dividend stripping situations, a taxpayer acquires shares in a company with accumulated profits and strips the profits by dividend. The vendor of the shares receives a capital sum on sale of the shares.
Dividend rebates may not be available and anti-avoidance rules may apply.
Warning: Take great care when declaring significant dividends out of a recently acquired company.
Interest Deductible after Loan Refinanced
The Full Federal Court held in a recent case that interest paid on a business loan was deductible not only after the business ceased, but also after subsequent refinancing of the original loan.
This case contrasts with earlier cases in which interest on
loans refinanced in similar circumstances was considered non-deductible after the refinancing.
Taxation Institute Rejects TVM
The Taxation Institute has recommended that the Board of Taxation advise the Treasurer to halt any further work on the tax value method (TVM) of determining taxable income, describing it as fundamentally flawed.
Commonwealth Grants Assessable
The Tax Office has issued an interpretive decision confirm-ing that a Commonwealth grant was assessable income of the recipient. The grant was paid to a company that administers an industry support program and was payable over five years.
Tip: Keep in mind grants received when preparing annual tax returns.
22nd-May-2002 |
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