Tax Hot Spots 2011 WHAT S NEW IN 2010/ New guidelines released on popular expense claims...3

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1 WHAT S NEW IN 2010/ New guidelines released on popular expense claims ATO 'back flip' now limits deduction for car travel to visit a tax agent The ATO s traditional view in (withdrawn) ID 2001/ Claiming car travel to a tax agent under the ATO s revised view ID 2010/ Recent case denies deduction for transport of bulky equipment Brandon s case No deduction for transportation of bulky kit between home and barracks Brandon s case Legal expenses to recover lost earnings Deduction allowed for legal fees incurred to pursue a workers compensation claim ID 2010/ Reimbursing stolen trust fund money Case law on the deductibility of stolen monies under S.8-1 of the ITAA The ATO s decision in ID 2010/ New law clarifies interest deductions for capital protected borrowings What portion of interest expense paid for a CPB is attributable to capital protection? What is the proposed new benchmark rate? Summary table of applicable benchmark rates The government s proposed benchmark rate slashes interest deductions...15 Current issues with rental property deductions AAT denies deductions for management fees paid to a spouse Traps for the unwary Deductions disallowed for wages and superannuation paid to a spouse Brown s case No deduction for payments to spouse as no employment relationship France s case How do the decisions in Brown and France affect the deductibility of taxpayer payments to a spouse? Interest deductibility where co-owner rents property to another co-owner When are payments received from a co-owner considered to be assessable rental income?...23 National Tax & Accountants Association Ltd: March April 2011 i

2 2.2 In what circumstances might a co-owner's deduction be capped to the level of rental income derived?...24 Why salary packaging exempt work-related items is still worthwhile The FBT exemption for work-related items Providing multiple items with substantially identical functions to an employee in the same FBT year Tax savings and cashflow benefits for employees who package work-related items...27 New draft ATO guidelines on blackhole expenditure TR 2010/D Expenses incurred in relation to a business Expenses incurred pre-commencement of a business Expenses incurred for a former business Expenses incurred for a proposed or former business of another entity New ATO guidelines on when exceptions deny a deduction under S (2)...33 Division 7A developments the rules get tighter New interposed entity rules shut the door on tax planning to avoid deemed dividends Where a present entitlement is made through one or more interposed trusts new S.109XI Where loans or payments are made through one or more interposed entities new S.109XF and S.109XG ATO attacks scheme to access funds in a private company without attracting Div. 7A What are the features of the arrangements being reviewed by the ATO? What tax issues may arise under these arrangements?...41 ATO issues new guidelines on SMSFs and the borrowing concessions Can an SMSF refinance a pre-7 July 2010 loan under the new rules? ID 2010/ ATO confirms danger with borrowing to jointly acquire an asset ID 2010/ Summary of the facts in ID 2010/ Reasons for the ATO s decision that the borrowing prohibition in S.67 was breached Can a charge be granted to someone other than the lender? ID 2010/ The facts in ID 2010/ ii National Tax & Accountants Association Ltd: March April 2011

3 3.2 Reasons for the ATO s decision in ID 2010/ What outstanding or contentious issues remain in relation to SMSF borrowings?.46 High Court confirms historic win for study claims against Youth Allowance Taxpayer win paves the way for massive claims against Youth Allowance Background to the Commissioner s key arguments for disallowing the deduction against YA income The decision of the High Court What are the ATO and Government responses to the High Court decision? ATO to automatically amend 2007 to 2010 tax assessments of eligible YA recipients ATO releases DIS on Anstis case What can taxpayers now claim against Government education assistance payments?...53 The TPB release proposed professional indemnity insurance ( PII ) requirements When is an agent required to have PII cover that complies with TPB requirements? What are the TPB PII requirements? What are the TPB s minimum PII requirements?...57 NAVIGATING THE TRUST DISTRIBUTION MAZE FOR Trustee resolutions for Introduction Minors and the proportionate approach - using a formula clause Use of mop up or balance clauses What if an effective equalisation clause was used? Equalisation Clauses Do true equalisation clauses work? ATO Position Can we stream income in 2011? Effective trustee resolutions Current NTAA Corporate Discretionary Trust Deed What does it do? Sample resolutions...76 National Tax & Accountants Association Ltd: March April 2011 iii

4 NEW DEVELOPMENTS WITH BUCKET COMPANY DISTRIBUTIONS New developments with bucket company distributions Introduction What action should be taken for 30 June 2010 distributions to bucket companies? How can clients avoid a deemed dividend for bucket company distributions made in the 2010 income year? What action must be taken by 30 June 2011? Complying loan agreement v sub-trust which is the better approach? What options are available for working out the terms of the sub-trust arrangement? Detailed case study shows how each option impacts on the trust s cash flow Major trap with Subdivision EA where sub-trust arrangement is entered into Should the trust assets be rolled over to a company? What are the documentation requirements for setting up a sub-trust arrangement? What documents are necessary to put the sub-trust in place to avoid Division 7A?...97 ATO ATTACK ON PSI UNEARTHS MORE PROBLEMS String of recent cases prove problematic for contractors deriving PSI Introduction An overview of when the PSI rules apply Independent contractor versus employee Is the income personal services income? Does the individual or PSE qualify as a PSB? The results test under the microscope What is the results test? Avoid common errors when applying the results test The 80/20 and the unrelated clients tests Can contractors who obtain clients through a labour hire firm satisfy the unrelated clients test? Frequently asked questions iv National Tax & Accountants Association Ltd: March April 2011

5 5. Comparison table showing the taxation implications which arise for an employee, a contractor subject to the PSI rules, a PSB and a non-psi business SMSF DEVELOPMENTS SMSF Developments Introduction Changes to the deductibility of contributions Time limit increased for making deductible employer contributions on behalf of a former employee How the abolition of S.23AG affects claiming deductions for personal contributions What are the notice requirements for deducting personal contributions that are later withdrawn? Recent change to ATO discretion provides greater flexibility with excess contributions What are the changes to the ATO s discretion? Trap for employees with multiple employers ATO guideline on making minimum pension payments the risks when paying by cheque SIS rules relaxed for assets transferred as part of a relationship breakdown How were asset transfers treated under the old rules? New exception from 16 November 2010 for related party acquisitions on a relationship breakdown Amendments to in-house asset transitional rules ATO attacks schemes to avoid prohibition on SMSFs lending to related parties TA 2010/ What are the features of these arrangements? What superannuation issues may arise under these arrangements? What tax issues may arise under these arrangements? WHAT S NEW WITH CGT SMALL BUSINESS CONCESSIONS (SBCs) What s NEW with the CGT small business concessions Introduction Will an in-specie contribution of real property satisfy the retirement exemption? National Tax & Accountants Association Ltd: March April 2011 v

6 1.1 What are the contribution requirements for the purposes of applying the retirement exemption? Will the in-specie contribution breach the SIS Act? Amount and timing of an in-specie contribution What are the CGT consequences of making an in-specie contribution of real property? Problems with passing the stakeholder test where shares are jointly owned What is the position under the Corporations Act? What other options are available? Entities owned by family members may not always be connected for the CGT SBCs When are entities connected? CASH ECONOMY AND ATO BENCHMARKS What is the ATO approach to benchmarking? Introduction The three categories of benchmarks being used Performance benchmarks Cash sales benchmarks Input benchmarks Is the ATO position sustainable? Record keeping Supporting documentation Record keeping in the service industry Record keeping in the restaurant industry Record keeping in the retail industry What are a tax agent s obligations? Tightening office practice What should accompany the engagement letter? GST UPDATE GST Update Introduction vi National Tax & Accountants Association Ltd: March April 2011

7 1. Win for taxpayers in relation to sales of residential property Relevant legislation and case law for determining if premises are residential premises Recent case confirms residential property sold to a developer is input taxed Sunchen s case ATO attacks residential property scheme Arrangements under ATO review TA 2009/ Do the GST anti-avoidance rules apply? GSTR 2010/ What constitutes a valid tax invoice? What are the new rules that apply from 1 July 2010? What are the requirements for a document missing key information to be treated as a tax invoice? Checklist of the new information requirements for a document to be treated as a tax invoice (or an RCTI) Issuing a tax invoice to multiple recipients CGT VALUATIONS PUT UNDER THE MICROSCOPE CGT Valuations Put Under the Microscope What does market value mean for tax purposes? When does the Tax Act require the market value of an asset to be determined? NTAA Checklist Common transactions for which the CGT rules require the market value of an asset to be determined How is a valuation conducted? Who can undertake market valuations? Valuation processes for different types of assets What documentation must be kept in relation to a valuation? What is the ATO s compliance risk assessment process for market valuations? How to apportion consideration and cost under the CGT and GST rules? How is consideration apportioned when multiple assets are sold for an undissected lump sum for CGT purposes? Apportioning consideration on mixed supplies for GST purposes National Tax & Accountants Association Ltd: March April 2011 vii

8 4. Where do tax practitioners fit in when it comes to market valuation and apportionment for clients? Course of action to be undertaken by tax practitioners Related party loans Documentation is critical Do related party loans need to be documented? Does interest have to be charged? Documentation Notes viii National Tax & Accountants Association Ltd: March April 2011