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1 Level 5, 75 Miller Street, North Sydney NSW, 2060 Australia Phone: (02) Fax: (02) Website: ISSUE 5 NOVEMBER 2012 a u s t r a l i a n t a x a d v i s e r Luis Batalha, B. Comm., LLB (Hons 1, Sydney), Principal, batallion legal, Sydney in this issue Section 1 Professional Development... 1 LEGAL EXPENSES TAX TREATMENT Introduction General deductibility Revenue vs capital nature Specific deduction provisions Blackhole expenditure provision Conclusion... 6 Section 2 Professional Currency...6 BILLS & LEGISLATION Revenue asset and trading stock roll-overs Australia ratifies OECD Agreement GST Subcommittee minutes Part IVA exposure draft legislation... 7 ATO INTERPRETATIVE DECISIONS In-house residual benefits & private health insurance premiums & rebates GST and council rates GST and endorsed charitable institution nominal supplies Expense payment benefit recipients contribution... 9 CASES & DECISIONS GIC When incurred? Loss deferral ruling upheld Continued ARCHIVE SEARCHING? Use your username and password to log onto to search our archives and retrieve copies. need TO ASK AN ADVISER? Go to to connect. Please call customer support on if you have any difficulties. SUBSCRIBE TO THIS PUBLICATION Download Order Form. Select Item #42. Fax details to (61 2) Can we help? Call

2 Level 5, 75 Miller Street, North Sydney NSW, 2060 Australia Phone: (02) Fax: (02) Website: ISSUE 5 NOVEMBER 2012 a u s t r a l i a n t a x a d v i s e r Luis Batalha, B. Comm., LLB (Hons 1, Sydney), Principal, batallion legal, Sydney in this issue 5.17 Tax credit claim denied No remission of GST penalties Div 7A dividends ignored by commissioner Accountant not taxable on misappropriated funds Leased property sold as GST-free going concern Capital gain not exempt damages...15 RULINGS & DETERMINATIONS Trust resettlements & CGT final ruling issued Trust new income and proportionate approach...16 Section 3 Questions and Answers Remote area housing benefit or LAFHA? New LAFHA rules and transitional provisions FBT and home to work travel Spouse travel deductible? Carry back of company losses Restaurant business and FBT on employee benefits Special levies of rental property deductible? ARCHIVE SEARCHING? Use your username and password to log onto to search our archives and retrieve copies. need TO ASK AN ADVISER? Go to to connect. Please call customer support on if you have any difficulties. SUBSCRIBE TO THIS PUBLICATION Download Order Form. Select Item #42. Fax details to (61 2) Can we help? Call

3 Section 1 Professional Development LEGAL EXPENSES TAX TREATMENT 5.1 Introduction The question of whether legal expenses are deductible or otherwise claimable, for income tax purposes, arises in various contexts. The question confronts taxpayers and advisers alike, but is often difficult to resolve. General principles regarding the deductibility of legal expenses can be complex causing confusion and differences of interpretation. There is a fine line between instances in which legal expenses are deductible/claimable and instances in which they are not deductible/claimable. In this Adviser, we examine the issue of the deductibility of legal expenses, setting out various examples of when such expenses are deductible and when they are not deductible. While not necessarily resolving the difficulties, we hope to at least bring together commentary on the subject-matter. 5.2 General deductibility Under the general deduction provision in ITAA 1997 s 8-1, expenses are immediately tax deductible, if the following two conditions are met: 1. the expenses are incurred in gaining or producing the taxpayer s assessable income or are incurred in carrying on a business for such purposes; and 2. the expenses must not be capital, private or domestic nature. Gaining or producing assessable income For an expense to be incurred in gaining or producing assessable income, there must exist the required connection between the expense and the earning of assessable income. Expenses must be incidental or relevant to the production of assessable income to be deductible (Ronpibon Tin NL & Tong Kah Compound NL v FC of T (1949) 78 CLR 47). 5.3 Revenue vs capital nature In addition, for legal expenses to be immediately deductible they must not have a capital character. The broad distinction between capital and revenue expenses is found in Sun Newspaper Ltd v FC of T (1938) 61 CLR 337 and involves a consideration of three main factors: the nature of the advantage sought; the way it is used or enjoyed; the means adopted to get it. 1

4 Determining whether legal expenses are revenue or capital in character is commonly the most difficult question that arises in deciding whether expenses are deductible. Below are examples of deductible revenue expenses and non-deductible capital expenses. Examples of deductible legal expenses Below are examples of outright deductible legal expenses: expenses incurred in preventing competition or opposing an application by a competitor to extend a patent (Hallstroms Pty Ltd v FC of T [1946] HCA 34); expenses incurred in defending business methods (Magna Alloys & Research v FC of T [1980] FCA 150); costs relating to employment agreements, including their negotiation (Taxation Ruling TR 2000/5 and Spriggs v FC of T [2009] HCA 22); costs of amending a superannuation fund s deed (e.g. as result of regulatory changes) (Income Tax Ruling IT 2672); costs of defending an employee against corruption charges ((1953) 3 TBRD Case C85) or assault charges (Case 9/97 97 ATC 157) costs incurred by a newspaper in a defamation or libel action (Herald and Weekly Times Ltd v FC of T (1932) 48 CLR 113); costs of maintaining the amount of trust income to which a beneficiary was entitled under a will (Interpretative Decision ID 2004/214); costs incurred by a trustee company in defending the director of the trustee company (Interpretative Decision ID 2003/145); costs of trade mark or patent proceedings (Pech v FC of T 2001 ATC 2210 and (1963) 13 TBRD Case N78); costs of recovering a payment in lieu of a termination notice period (Romanin v FC of T 2008 ATC ; Interpretative Decision ID 2010/131); costs incurred by an employee in preventing defamatory statements (Interpretative Decision ID 2001/549); costs of misrepresentation action related to sale of goods (Reo Motors v FC of T (1931) 1 ATD 163); employer s legal costs in employee s personal injuries claim (5 TBRD Case E14); expenses of pursuing an assessable workers compensation claim (Interpretative Decision ID 2010/209) or legal entitlements under an employment agreement (Draft Ruling TR 2012/D2); 2

5 costs of a landlord in ejectment proceedings against a rent-defaulting tenant (15 TBRD Case Q49); costs of advise on whether goods could be sold interstate ((1950) 1 TBRD Case 50); costs of defending an action for wrongful dismissal brought by a former director (Case P16 82 ATC 67), but see Draft Taxation Ruling TR 2012/D2; costs incurred by a director in defending a defamation action brought against the board of directors by a dismissed executive (Case V ATC 737); cost of arbitration in a partnership dispute (Creer v FC of T 94 ATC 4454); costs of recovering potential interest lost on a misappropriated bank deposit (Case V ATC 767); costs of opposing a neighbourhood development that would cause damage to the taxpayer s business (Case W30 89 ATC 300); costs of an accountant/trustee in defending a charge of conspiring with the debtor of an insolvent estate to defraud the Commonwealth (Putnin v FC of T 91 ATC 4097); and expenses incurred by an employee in recovering wages paid by a dishonoured cheque (Taxation Determination TD 93/29) and travel and incidental expenses relating to a legal action to recover unpaid wages (Interpretative Decision ID 2004/659). Examples of non-deductible legal expenses Below are examples of non-deductible legal expenses, due primarily to their capital nature: costs incurred in buying property (e.g. realty or a business) or establishing a business; costs incurred in defending a takeover attempt related to either the structure of the business or its ownership (Income Tax Ruling IT 2656); certain expenses incurred by a trustee of a superannuation fund: costs of setting up fund; costs of new deed for existing fund; and costs of amending a deed to enlarge or significantly alter the scope of the trust s activities (Income Tax Ruling IT 2672); employee costs of defending workplace sexual harassment claim (Interpretative Decision ID 2002/664); expenses incurred by a director on an investigation where director did not receive any remuneration or dividends (Interpretative Decision ID 2003/801); costs of settling a contractual claim, with result that taxpayer could reorganise its trading structure and methods (Foley Bros v FC of T (1965) 13 ATD 562); 3

6 costs of defending the legal validity of a contract on the basis of which the viability of the taxpayer s business depended (PBL Marketing Pty Ltd v FC of T 85 ATC 4416); costs of defending a driving charge where the taxpayer s employment was conditional upon having a driver s licence (Case Q99 83 ATC 491); expenses of unsuccessfully opposing trustee s removal (3 TBRD Case C107); eviction costs where tenant s term has ended (5 TBRD Case E50; Case K7 78 ATC 78); costs of legal action for damage done to a rent-producing property (2 TBRD Case B3); costs of wrongful dismissal claim (Taxation Determination TD 93/29; Draft Taxation Ruling TR 2012/D2); costs of a company in defending winding-up action by a shareholder (14 TBRD Case P55) or director (8 TBRD Case H60); costs of resisting land resumption and disputing compensation amount (Pye v FC of T (1959) 12 ATD 118); costs paid by a solicitor suspended from practice to resume practice (Case V ATC 875); costs incurred in seeking registration as a tax agent (Case Y49 91 ATC 444); professional footballer s legal costs in obtaining a release from their home league (Kemp v FC of T 92 ATC 4542); costs incurred in preventing competitors from gaining approval to market competing products (Smithkline Beecham Laboratories (Australia) v FC of T 93 ATC 4629); costs incurred by the owner of a shopping centre in seeking to overturn the rezoning of nearby land that would have allowed a larger shopping centre to be built (Case 37/97 97 ATC 385); and costs of misrepresentation action related to the value of goodwill of the business sold by the taxpayer (Interpretative Decision ID 2010/91). 5.4 Specific deduction provisions Certain types of legal expenses are specifically deductible under special provisions in the income tax law. Applicable specific deduction provisions are considered below. These deduction provisions may apply to legal expenses, even where such expenses are capital or private or domestic in character. Borrowing expenses ITAA 1997 s provides for a deduction for certain borrowing expenses and ITAA 1997 s provides for a deduction for certain mortgage discharge expenses, to the extent that the borrowed moneys 4

7 are used to produce assessable income. The fact that an entity other than the taxpayer use the money for non-income-producing purposes is irrelevant, even if they do so at the taxpayer s direction. Mortgage costs Expenses incurred to discharge a mortgage provided as security for the repayment of money borrowed, or for the payment of the whole or part of the purchase price of property, are outright deductible, but only to the extent that the money or the property is used to derive assessable income (ITAA 1997 s 25-30). Lease expenses Certain lease expenses are specifically deductible. In particular, amounts paid for a failure to comply with a lease obligation to make repairs to premises that the taxpayer uses, or has used, for income-producing purposes are deductible under ITAA 1997 s Also, expenses incurred by a lessee or lessor of a business property for the preparation, registration or stamping of a lease, or an assignment or surrender of a lease, are deductible (ITAA 1997 s 25-20). Where the property is used only partly for income-producing purposes, the deduction is allowable to the extent of the income-producing use (e.g. Interpretative Decision ID 2012/36). Tax affair expenses Legal expenses incurred in managing the taxpayer s income tax affairs or complying with an obligation imposed by a Commonwealth law in relation to the income tax affairs of an entity are outright deductible in the income year incurred (ITAA 1997 s 25-5). 5.5 Blackhole expenditure provision If legal expenses are not immediately deductible under ITAA 1997 s 8-1 or caught by either the specific deduction provisions or the CGT provisions, then they may be covered by the 5-year write-off provision in ITAA 1997 s The provision applies to business capital expenditure which is not otherwise taken into account and which relates to a business that is, was or is proposed to be carried on for a taxable purpose, provided the deduction is not denied by some other provision. Examples of legal expenditure caught by ITAA 1997 s include: costs incurred in merging or demerging legal entities (Interpretative Decisions ID 2007/92 and ID 2007/109); and expenses relating to a settlement for a breach of contract in respect of a salesperson s failure to use reasonable endeavours to promote and extend sales of the plaintiff s product and making misrepresentations about sales and distribution channels (Interpretative Decision ID 2009/70). 5

8 5.6 Conclusion It is not easy to decide whether particular types of legal expenses are tax deductible or claimable. Ultimately, a consideration of various issues needs to be undertaken to determine the deductibility of legal expenses. This Adviser has sought to outline the main principles that need to be considered, as well as outlining various examples of the application of those principles. Hopefully, this will assist taxpayers and advisers alike in their analysis of the income tax treatment of legal expenses. Section 2 Professional Currency BILLS & LEGISLATION 5.7 Revenue asset and trading stock roll-overs The federal government has released exposure draft legislation on measures designed to broaden the instances in which an interest holder can defer their income tax implications as a result of a business restructure. Specifically, changes are proposed to amend the CGT roll-over provisions to: provide revenue asset and trading stock roll-overs where interest holders exchange units in a unit trust for shares in a company under ITAA 1997 Subdiv 124-H; enable non-consolidated taxpayers to also benefit from revenue asset and trading stock rollovers for exchanges of shares in a company for shares in another company (these roll-overs are currently only available to ownership arrangements involving consolidated groups under ITAA 1997 Subdiv 124-G); ensure that the revenue asset and trading stock roll-overs are only available if the replacement interests are of the same tax character as the interests exchanged under the restructure; and correct certain technical defects to the CGT roll-over provisions where a trust transfers a CGT asset to a company (under ITAA 1997 Subdiv 124-N) or to another trust (under ITAA 1997 Subdiv 126-G). The amendments will allow access to these CGT roll-overs even if the receiving entity holds rights that are used to facilitate the transfer of assets to that entity. 6

9 5.8 Australia ratifies OECD Agreement Australia has ratified the Convention on Mutual Administrative Assistance in Tax Matters. Jointly developed by the OECD and the Council of Europe, the Convention promotes international cooperation between revenue authorities to help enforce tax laws. It allows for the exchange of taxpayer information and for assistance in the recovery of taxes and service of documents. For Australia, the Convention takes effect on 1 December It will complement Australia s existing tax treaty and tax information exchange agreement networks. The Convention has been signed by 38 countries, including Australia. 5.9 GST Subcommittee minutes The ATO has released the minutes of the National Tax Liaison Group (NTLG) GST subcommittee meeting held on 13 June The matters discussed at the meeting included the following: the issue of the ATO accepting authorised specialist advisers to represent taxpayers; the ruling on tax invoices; the self-assessment regime; lease arrangements with government agencies; and GST Act Div 81 concerning supplies by government agencies Part IVA exposure draft legislation Exposure draft legislation and explanatory material amending ITAA 1936 Pt IVA has been released for public comment. The proposed changes focus on the definition of tax benefit. The changes will apply to arrangements entered into or commenced to be carried out from 16 November 2012 rather than from the original date of announcement. The changes are designed to target deficiencies in ITAA 1997 s 177C, and the way in which it interacts with other elements of ITAA 1936 Pt IVA, particularly ITAA 1936 s 177D, as revealed by recent decisions of the Full Federal Court. The changes should not affect the operation of the provisions in other respects. 7

10 The measures will: ensure ITAA 1936 Pt IVA operates as an integrated whole, by restoring the dominant purpose test in ITAA 1936 s 177D to its central role as the fulcrum or pivot around which the provisions operate, and ensure that ITAA 1936 s 177C is interpreted in an inter-relate way to ITAA 1936 s 177D; mean that when a conclusion that a tax benefit has been obtained depends upon a hypothetical reconstruction of what would have happened absent the scheme, the hypothesis focuses on other ways in which the taxpayer might reasonably be expected to have achieved the same non-tax effects as it achieved from and in connection with the scheme; and mean that, in considering alternatives to the scheme, the taxation implications of those alternatives is not examined. ATO INTERPRETATIVE DECISIONS 5.11 In-house residual benefits & private health insurance premiums & rebates Interpretative Decision ID 2012/85 - click here to view Interpretative Decision ID 2012/86 - click here to view In Interpretative Decisions ID 2012/85 and ID 2012/86, the ATO decided that in determining the taxable value of an in-house residual expense payment benefit under FBT Act s 22A(2), the lowest price at which an identical benefit is sold to a member of the public in terms of FBT Act s 48 should not reflect either a reduction in the premium or the rebate provided to the employee by the Commonwealth government under the Private Health Insurance Incentives Act 2007 (Cth). In determining the lowest price in terms of FBT Act s 48, both a reduction in the premium and the rebate provided to the employee constitute a recipients contribution and will not be included in the calculation GST and council rates In Interpretative Decision ID 2012/87, the ATO decided that the payment of local government general rates constitute the payment of an Australian tax under GST Act s 81-5(1). 8

11 5.13 GST and endorsed charitable institution nominal supplies In Interpretative Decision ID 2012/78, the ATO decided that an entity, an endorsed charitable institution, can include the consideration provided for acquiring capital items in calculating the cost of making a supply in a period under GST Act s (2)(b)(ii). Such an entity can include as the consideration provided for acquiring each capital item: an amount equivalent to the decline in value amount for the capital item for that period consistent with ITAA 1997 Div 40; or the consideration provided for the capital item in that period. In either case, an apportionment of the consideration provided is necessary if the capital item is not used solely for the making of the supplies in the period Expense payment benefit recipients contribution In Interpretative Decision ID 2012/88, the ATO decided that the payment by the employee of the remaining interest incurred on a loan is not a recipients contribution within FBT Act s 136(1) as the amount was not paid in respect of the provision of the expense payment fringe benefit. Facts An employee entered into a loan agreement with their employer. Under the terms of the loan agreement, the employee was granted a loan and was under an obligation to pay the interest and principal. Under the terms of an effective salary sacrifice arrangement, an amount of the employee s pre-tax salary was paid to a salary packaging service provider (the SPSP ) each pay. This amount was 50% of the interest the employee has incurred on the loan granted by the employer. The SPSP then deposited the amount directly into the employee s loan account with the employer. The making of the payment into the employee s loan account constituted the provision of an expense payment benefit within FBT Act s 20(a) and an expense payment fringe benefit as defined in FBT Act s 136(1). The employee paid the remaining 50% of the interest incurred on the loan to their employer from their after-tax salary. 9

12 Decision Broadly, in the case of an expense payment fringe benefit to which FBT Act s 20(a) applies, the taxable value (as worked out under Subdiv B of Div 5 of Pt III) is reduced by the amount of the recipients contribution. Relevantly, recipients contribution is defined in FBT Act s 136(1) as:...(b) in relation to an expense payment fringe benefit provided in respect of the employment of an employee of an employer, being a fringe benefit to which paragraph 20(a) applies the amount paid to the provider or to the employer by the recipient or by the employee in respect of the provision of the fringe benefit. In this case the employee paid 50% of the interest incurred on the loan to the employer from their after-tax salary and was provided with an expense payment fringe benefit in relation to the other 50% of the interest incurred. However, the question arises as to whether the amount paid to the employer by the employee was paid in respect of the provision of the expense payment fringe benefit. The expression in respect of is defined in FBT Act s 136(1) in the context of in respect of the employment of the employee to include by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. A number of Court decisions have considered the meaning of the phrase in respect of. In FC of T v Scully (2000) 201 CLR 148, consideration of the words in respect of highlighted the importance of the context in which the phrase appears and resulted in the requirement that there be some discernable rational link between the two subject matters. In J & G Knowles & Associates Pty Ltd v FC of T 2000 ATC 4151, the Court stated: The words in respect of have no fixed meaning. They are capable of having a very wide meaning denoting a relationship or connection between two things or subject matters. However, the words must, as with any other statutory expression, be given a meaning that depends on the context in which the words are found......it must be remembered that what must be established is whether there is a sufficient or material, rather than a, causal connection or relationship... Therefore, in the context of the meaning of recipients contribution in FBT Act s 136(1) as it applies in this case, there needs to be a sufficient or material connection between the payment of the remaining 50% of the interest by the employee to their employer and the provision of the expense payment fringe benefit to the employee. When the employee entered into the loan agreement with their employer they were under an obligation to pay the total amount of the interest (and the principal). The provision of the expense payment fringe 10

13 benefit under the terms of the salary sacrifice arrangement discharged the obligation of the employee to pay 50% of the interest incurred by them on the loan. The payment of the remaining interest by the employee from their after-tax salary related to the employee s obligation to pay the amount of interest not covered by the provision of the expense payment fringe benefit. The payment by the employee of the remaining interest incurred was therefore made in respect of the employee s obligation under the loan agreement and not in respect of the provision of the expense payment fringe benefit. Accordingly, the ATO decided that there was not a sufficient or material connection between the employee s payment of the remaining interest incurred and the provision of the expense payment fringe benefit. Hence, as the amount was not paid in respect of the provision of the expense payment fringe benefit, it was not a recipients contribution within FBT Act s 136(1). CASES & DECISIONS 5.15 GIC When incurred? In Nash v FC of T [2012] AATA 719 (17 October 2012), the AAT held that the general interest charge (GIC) imposed under former ITAA 1936 s 204(3) was deductible in the income year to which it was referable, rather than in the income year in which the respective GIC notices were issued to N Loss deferral ruling upheld In Case 7/2012 [2012] AATA 695 (21 September 2012), the AAT denied T s bid to offset losses from breeding activities against other income after he did not convince the Commissioner to use his discretion to waive the application of the non-commercial loss rules. The AAT held that it could not redefine a scheme identified in a private ruling to take into account additional facts. Facts T applied to the Commissioner to make a determination under ITAA 1997 s 35-55(1) to waive the loss deferral rule in ITAA 1997 s T sought the waiver of the rule in ITAA 1997 s 35-10(2) which would allow him to offset losses from breeding activities against his main source of income as a professional individual in 2009/10. The Commissioner refused to make the determination and issued his decision in the form of a private ruling. 11

14 AAT decision The AAT agreed with the Commissioner that making the decision in the form of a ruling was appropriate. There was no other provision entitling T to the manner of exercise of the Commissioner s discretion in ITAA 1997 s 35-55(1). The AAT proceeded on the basis that the decision was a private ruling. The AAT agreed with the Commissioner s objection decision to refuse to make the determination under ITAA 1997 s 35-55(1). The ruling made sense having regard to the statement of facts to which it applied Tax credit claim denied In Young v DFC of T [2012] FCA 1098 (10 October 2012), the Federal Court dismissed Y s claim for credits of tax withheld from salary and wages paid to him in 2003/04 due to insufficient evidence. Facts Y was a director and 50% shareholder in P Co since In 2005, P Co was wound up. In his 2003/04 tax return, Y returned salary and wages of $363,999 together with a claim of credit for tax withheld from those salary and wages of $159,859. The Commissioner disallowed Y s claim to the credit. The Commissioner s position was that P Co had not remitted any amounts allegedly withheld from the salary and wages paid to Y. The Commissioner also argued that no satisfactory documents had been provided to show that tax was actually withheld. Federal Court decision The Federal Court found for the Commissioner, holding that there was insufficient evidence to show that tax had in fact been withheld from Y s wages and salary. There was a lack of evidence as to the terms of any employment contract between Y and P Co and also books of account or wage records of P Co. Y was also unable to submit evidence of payslips or other records given to him when the salary or wages was paid which showed his gross entitlement No remission of GST penalties In Subloo s Investments Pty Ltd & Ors v FC of T [2012] AATA 703 (11 October 2012), the AAT held that remission of GST penalties was not justified for penalties imposed on several taxpayers who failed to report apartment sales, but claimed ITCs on those sales. 12

15 Facts SI was the general partner and the individual applicants, Mr and Ms S, the limited partners of a limited partnership. The partnership was formed to construct and sell residential apartments. Construction work on the apartments started in 2006 but it was not until 2009 that the first sale of an apartment happened. SI did not report any apartment sales in its BASs but claimed ITCs on the sales. This meant that the partnership received refunds rather than accounting for net GST amounts payable in the relevant BAS periods. AAT decision The AAT held that a remission of penalties was unwarranted in this case. The AAT noted that while the particular project was an unusual one and was outside the usual business expertise of the taxpayers, Ms S was a qualified accountant with some years experience. She, more than most, would have been well aware of the need to account for GST and the desirability of contacting the Commissioner if there were difficulties experienced in doing so. Mr and Ms S, over a period of almost 2 years, chose not to account for considerable GST and chose not to contact the Commissioner to explain the difficulties they might have been experiencing. They accepted that they intentionally disregarded the provisions of the legislation and did so a number of times. The AAT thus did not consider the outcome in the case was harsh in the particular circumstances of the [taxpayers] Div 7A dividends ignored by commissioner In Case 8/2012 [2012] AATA 755 (1 November 2012), the AAT exercised the discretion in ITAA 1936 s 109RB to ignore Div 7A dividends assessed to T in 2005/06 and 2006/07. The discretion, however, did not apply to amounts transferred in 2004/05 as they were not loans. Facts T was a shareholder and director of B Co. B Co transferred monies to T in 2003/04 to 2006/07 which T claimed were loans from B Co to fund certain renovation expenses. The Commissioner treated all amounts as assessable unfranked dividends, as follows: the 2005 amounts were assessed under ITAA 1936 s 109C. They were recorded in the accounts as trade creditors (rather than as loans). Further, the purported loan agreement was entered into in June 2006, after relevant 2005 returns were lodged, and; the 2006 and 2007 amounts were accepted as loans and assessed under ITAA 1936 s 109D as they were not properly documented. 13

16 AAT decision The AAT upheld the 2005 assessment to include a Div 7A deemed dividend, but exercised the discretion in ITAA 1936 s 109RB to ignore Div 7A dividends for 2005/06 and 2006/07. The AAT was not convinced that the 2005 amounts were paid to T as loans. Firstly, B Co s financial accounts reflected the payments as being in respect of trade creditors rather than as a loan to T. In addition, it was surprising that, at the very least, the loan agreement had not been entered into before the lodgment of the relevant tax returns. Accordingly, there was no room for the exercise of the ITAA 1936 s 109RB discretion in 2004/05. However, the relevant penalty was reduced from 50% (recklessness) to 25% (failure to take reasonable care), noting in particular the complex nature of Div 7A and that even experienced tax agents struggle with it Accountant not taxable on misappropriated funds In Case 9/2012 AATA 770 (6 November 2012), the AAT held that an employee of a tax firm was not assessable on client funds improperly paid into his personal bank account by his employer, as he was not beneficially entitled to them. Facts In 2000/01 to 2004/05, T was employed by an accounting firm. During this time, reasonably regular deposits were made into his bank account. For at least part of the period, he also derived rental income from rental properties he owned. AAT decision The AAT held that T was not assessable on the client funds paid into in his bank account. While T was unable to account for all the moneys that were deposited into his bank account, the AAT accepted that he was not beneficially entitled to the moneys and, thus, should not be assessed on them Leased property sold as GST-free going concern In SDI Group Pty Ltd v FC of T [2012] AATA 763 (2 November 2012), the AAT held that the sale of a commercial property owned by S was GST-free as a supply of a going concern. The AAT noted that the condition that the parties agree in writing that the supply is of a going concern could be met by a combination of documents. 14

17 Facts S leased the property for a 12-month period. Once the lease ended in 1 April 2009, the tenant was on a month to month tenancy and continued to pay rent at the same rate. On December 2009, S entered into a contract to sell the property with settlement to occur on 31 July It was stated that the sale of the property would be subject to the lease and the particulars of sale did not include GST. However, the contract did not make reference to the sale of the property as being the supply of a going concern. The parties settled on 20 December 2010 on the basis that there was the supply of a going concern. AAT decision The AAT held that the parties intended that when the contract was entered into that the sale of the property was the supply of a going concern and that there was sufficient evidence of that. In particular, the requirement for the agreement to be in writing was met by a combination of the contract of sale, the tax invoice and a goods statutory declaration exchanged at settlement indicating that it was the sale of a going concern Capital gain not exempt damages In Daniels v FC of T AATA 792 (14 November 2012), the AAT held that monies received by D were in respect of the sale of shares in a foreign company and liable to CGT. The AAT rejected D s argument that the monies were exempt compensation payments. Facts The Commissioner audited D and determined that his 2006/07 tax return should be amended to include a capital gain of $129,131. A 50% penalty was also imposed. The Commissioner argued that the capital resulted from the disposal of shares in the foreign company. D submitted that the gain was an exempt compensation payment made to D and his father by the foreign company for damages to reputation (ITAA 1997 s ). AAT decision The AAT held that the Commissioner was correct in deciding that the source of the gain was the disposal of shares in the foreign company during 2006/07. The AAT noted that there were inconsistencies in D s statements and no independent evidence to support D s claim that the gain was an exempt damages payment. Thus, D failed to show that his 2006/07 amended assessment was excessive. 15

18 RULINGS & DETERMINATIONS 5.23 Trust resettlements & CGT final ruling issued In our July 2012 Tax Adviser, the ATO s new view on trust resettlements and CGT was discussed, based on Draft Taxation Determination TD 2012/D4. The ATO has now issued its final view on the matter in Taxation Determination TD 2012/21. As in its draft view, the Commissioner has determined that CGT events E1 or E2 do not happen if the terms of a trust deed are changed pursuant to a valid exercise of a power contained within the trust s constituent document or varied with Court approval. Neither CGT event E1 nor CGT event E2 happens, unless the amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust. The Commissioner accepts that the Full Federal Court decision in FC of T v Clark 2011 ATC means that the approach formerly set out in his Creation of a new trust Statement of Principles (Statement) on so-called resettlements is not sustainable. Thus, the Statement was withdrawn on 20 April However, if the views in its new determination are less favourable to a taxpayer than those in the Statement, then the determination will not apply to changes to the terms of a trust pursuant to a valid exercise of a power contained within the trust s constituent document made before 20 April Trust new income and proportionate approach In Taxation Determination TD 2012/22, the Commissioner states that a beneficiary s share of net income is worked out by reference to the proportion of the income of the trust to which the beneficiary is presently entitled, for the purposes of ITAA 1936 s 97(1)(a). To determine the share of a trust s net income to be included in a beneficiary s assessable income under ITAA 1936 s 97(1)(a), the beneficiary must: calculate how much of the income of the trust they are (or are taken to be) presently entitled to, as a percentage share of that income; and apply that percentage to the trust s net income. This approach is commonly known as the proportionate approach. 16

19 If in 2010/11 or a later income year, a trust has made a capital gain or received a franked distribution to which no beneficiary is specifically entitled, the proportionate approach may also be relevant to applying ITAA 1997 Subdiv 115-C and 207-B. However, how the proportionate approach applies will depend on the facts and circumstances of each case, including the terms of the trust and, where relevant, any resolutions made by the trustee to appoint the trust s income. Section 3 Questions and Answers 5.25 Remote area housing benefit or LAFHA? Date Published 12 October 2012 Subject Remote area housing benefit or LAFHA Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Accounting Question We are a plumbing company currently tendering for a job with a construction company for the installation of all facets of plumbing services on a Greenfield Site which is a new coal mine being established at Boggabri, NSW. Due to the remoteness of this site, not only from our office, but also the geographical location does not support many people, accommodation has been provided to workers via a camp situation, comprising a centralised accommodation, amenities and food hall arrangement for $177 per night per employee (similar to what is done for the mines in WA). We will be paying for this directly to the provider, not to the employee. This Greenfield Site is covered by a Union Enterprise Agreement. It has no provision for the LAFHA in the document, but does refer to Camp Accommodation, indicating that where this is not available, the employer has to provide alternative accommodation for all employees. No monetary values are stated in this agreement. Our employees are normally covered by our own Enterprise Agreement read in conjunction with the Award being the Plumbing and Fire Sprinklers Award 2010, which covers the provision of the LAFHA, but as indicated before, the Greenfield site take precedence over our documents. My questions are as follows: 1. Are these amounts in excess of what the ATO deems to be reasonable? 2. Are these amounts going to be subject to FBT? 3. Are these amounts required to be listed on the employee s payslip or PAYG payment summary, even though we are not paying these amounts to the employees, ie the amounts are paid directly to the builder or the accommodation provider? 17

20 4. Are these amounts reportable wages for payroll tax purposes? 5. Are these amounts reportable wages for workers compensation purposes? We are trying to build up a labour rate covering these amounts or on-costs in order to complete our tender. Answer No FBT applies here as the benefits constitute remote area housing benefits (FBT Act s 58ZC). The towns you have identified are in remote areas of Australia - click here to view Fringe benefits tax - remote areas. Thus, the question of reasonableness does not arise. Moreover, the benefits are not reportable in the PAYG payment summary of the employees, as they constitute exempt benefits from FBT (FBT Act ss 5E, 135P and 136(1)). Neither are the benefits included in the premiums for workers compensation purposes (due to the exempt status from FBT) or in the calculation of the employer s NSW payroll tax liability (Payroll Tax Act 2007 (NSW) s 14(1)) New LAFHA rules and transitional provisions Date Published 9 October 2012 Subject New LAFHA rules & transitional provisions Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Accounting Question I understand that the changes to the LAFHA concessional arrangements were given Royal Assent on 28 September I do not find the transitional rules discussed by the ATO on 2 October 2012 regarding the changes to the tax treatment of the LAFHA and benefits to be clear, please would you assist in applying the new interim rules to my specific cases? I am particularly confused by the ATO document regarding the phrase is not limited to the living-awayfrom-home allowance concessions for 12 months until the earlier of 1 July 2014 or the date of material variation in the employment arrangements. Please would you advise on the below scenarios? All employees are not permanent residents and are on 457 temporary visas. They are located in either Sydney or Melbourne in rental accommodation. Occasionally the employees may transfer to the other city on a permanent basis during their employment in Australia. The LAFHA accommodation component only was previously claimed, the permanent residence being the country of origin of the employee and declarations were provided. 18

21 My questions are as follows: 1. Does the tax concession for the rental component of a LAFHA discontinue from 1 October 2012 for all of these 457 temporary visa employees. If it discontinues, is it because they do not have a normal residence in Australia from which they are living away from? If the LAFHA (normal residence is in a foreign country) continues at what date does it end? If the LAFHA continues and the employee is relocated to Sydney or Melbourne I understand that the LAFHA will discontinue immediately upon the employee s employment arrangements changing. Is this correct? 2. If the employee commenced after 8 May 2012 should they have received the tax concession for the rental component of the LAFHA until 1 October 2012 and then it is discontinued? If the employee should not ever have received the tax concession could you please provide a reference in support of your comments. Answer Our response to your queries is as follows: 1. If the employee individual on a 457 temporary visa does not maintain a home in Australia, then the eligibility for the LAFHA concessions will just end on 30 September 2012 (FBT Act new s 31C). However, if the employee individual maintains a home in Australia (e.g. rented accommodation which is always available to the individual), then the 12 month period will only start from 1 July 2014 (see transitional provisions in Tax Laws Amendment (2012 Measures No. 4) Bill 2012 Pt 3 clause 27). Where the individual s employment arrangements change after 8 May 2012, then the LAFHA concessions will cease immediately upon the variation being made to the employment arrangements. 2. If the employee commenced on after 8 May 2012, then between that date and 30 September 2012, they may have been entitled to the LAFHA concessions. The new measures only applied from 1 October FBT and home to work travel Date Published 12 October 2012 Subject FBT & home to work travel Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Universities Question We are going to employ a teacher from the USA for two weeks who will be a non-resident of Australia, for Australian tax purposes. The teacher will fly from the USA to Australia to teach for this short-term engagement and then fly back to the USA. In addition to the teacher s salary, if we reimburse the teacher for airfare and accommodation expenses is this a tax deductible travel reimbursement and therefore not subject to FBT? 19

22 Or, is this strictly considered home to work travel and non-deductible and thus a reimbursement of this type is subject to FBT? Answer Usually, an expense payment benefit arises, where the otherwise deductible rule does not have the effect of reducing the taxable value of the benefit to nil (FBT Act ss 20 and 24). The otherwise deductible rule will have the effect of reducing the benefit to nil, where, if the expense had been incurred by the employee themselves a one-off deduction would have been available (ITAA 1997 s 8-1). On the facts, despite the long distance travelled by the employee (ie from their home in the USA to their work place in Australia) it may be that the individual is merely travelling to work, rather than on work (Interpretative Decision ID 2001/80; Case V111, 88 ATC 712 and Income Tax Ruling IT 2543). The travel and accommodation expenses may thus have been private and non-deductible had they been incurred by the employee themselves. The individual is living in the USA and given the relatively short length of their stay in Australia, may not actually be living away from their home while in Australia. A minimum of 21 days is generally required for the individual to be considered to be living away from their home (Miscellaneous Tax Ruling MT 2030, paragraph 45). FBT may therefore apply to the reimbursement of both the airfare and the accommodation expenses on the facts. Moreover, the exemption for relocation transport may not actually be available, due to the relative short stay of the employee in Australia (FBT Act ss 58F, 143F and Interpretative Decision ID 2004/293). A relocation does not actually take place in the circumstances. The suggestion to engage the individual as an independent contractor, however, may assist in preventing FBT from applying (FBT Act s 136(1)) Spouse travel deductible? Date Published 9 October 2012 Subject Spouse travel deductible? Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Accounting Question Are business related travel expenses deductible for employees partners (e.g. airfares, accommodation and food)? Answer No deduction would seem to be available for the cost of the travelling partner, due to its private or domestic character (ITAA 1997 ss 8-1 and 26-30; Income Tax Ruling IT 2566, paragraph 3). While one partner may be on business, the other partner simply chooses to accompany the other partner (ie a domestic purpose). 20

23 However, a deduction may be allowed where the relative: performs substantial duties in the capacity of an employee, and would have accompanied the taxpayer despite the personal relationship (ITAA 1997 s 26-30) Carry back of company losses Date Published 5 October 2012 Subject Carry back of company losses Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Commerce Question In the 2011/12 Federal Budget, the Treasurer announced that businesses would be able to carry back current year losses to previous profitable financial years. This is of interest to the company I work for. Has this change to the tax legislation been approved by the federal government and/or received Royal Assent? Can the government remove this concession at a later date? The current government made a number of concessions in the 2010/11 Federal Budget (such as reducing the company tax rate to 29%) that were taken away in the subsequent budget. Without certainty on the carry back of losses the tax planning process for the company I work for is much more difficult. Answer Draft legislation for consultation on the carry back of losses proposals was only released in late August Moreover, the process for consultation on the draft legislation only finished on 19 September Thus, final legislation is still on the pipeline. However, until enacted, there is a possibility that the measures may not become law. The risk of the law not passing though exists in respect of all proposed legislation. For now, you just have to treat the law as applying, from 1 July 2012, hoping that the ATO will soon release an administrative treatment with respect to the measures pending the finalisation of the law. To date, however, the ATO has issued no such treatment. 21

24 5.30 Restaurant business and FBT on employee benefits Date Published 2 October 2012 Subject Restaurant business & FBT on employee benefits Adviser Luis Batalha B Com, LLB (Hons I) Library Name Q&A Library Firm batallion legal Source Industry Commerce Question Often in the context of a small business take away or restaurant business, two benefits will be provided to employees, as follows: Meals cooked at the restaurant s own kitchen will be provided to employees while they are working. It is my understanding that this is tax deductible under ITAA 1997 s However, is this is subject to FBT? What if the director owns the house, rather than the trading company, and lives in the house. In addition, some employee relatives live with the director for no rent. As the director is an associate of the employer (company), is this subject to FBT even if that house is in the director s name and not subject to deduction for income tax? Answer No FBT applies to the provision of basic food at the premises of the employer (FBT Act s 41). Moreover, an income tax deduction would seem to be available for the food (ITAA 1997 s 8-1; Taxation Ruling TR 97/17, paragraphs 27 and 41). If the director owns the house himself, then it is difficult to see how a benefit is being provided (FBT Act s 136(1)). Thus, neither FBT, nor income tax consequences, would seem to arise from the provision of a house by a director to the director themselves and/or for instance the director s family (ITAA 1936 ss 109C and 109CA). 22