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1 August 2012 Monthly Tax Update Period ending 26 July charteredaccountants.com.au Chartered Accountants Monthly Tax Update for Public Practice Period ending 26 July 2012 Presented by: Institute Tax Training Specialists

2 This package covers developments for the period 5 July to 26 July 2012 Disclaimer This paper represents the opinion of the author(s) and not necessarily those of the Institute of Chartered Accountants in Australia (the Institute) or its members. The contents are for general information only. They are not intended as professional advice - for that you should consult a Chartered Accountant or other suitably qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information in these papers. Items indicated as having first appeared in Reuters Thomson Weekly Tax Bulletin or Reuters Thomson Latest Tax News are copyright Reuters Thomson and may not be further reproduced or communicated. Copyright 2012 The Institute of Chartered Accountants in Australia 2

3 Session Outline Legislation Income Deductions CGT Indirect tax Taxation of superannuation Tax administration Tax reform. LEGISLATION... 7 Bills receive Royal Assent 15 Draft charities legislation referred to committee 17 Mature age worker offset phase out: draft legislation 20 INCOME AAT Case [2012] AATA 449, Re Armirthalingam v FCT 21 Tax tables for ETPs instrument made 22 August v FCT [2012] FCA AAT Case [2012] AATA 439, Re Fayle v FCT 25 PSI rules: ATO view on Russell case 26 Taxpayer Alert: private company dividends: TA 2012/4 27 AAT Case [2012] AATA 428, Re Elliott v FCT 29 NZ citizens with special visas: temporary residents: TD 2012/18 31 FCT v Rawson Finances Pty Ltd [2012] FCA MRRT tax return 2013 further time to lodge 34 DEDUCTIONS AAT Case [2012] AATA 404, Re Sanctuary Lakes Pty Ltd v FCT 35 Kelly v FCT (No 2) [2012] FCA Messenger Press Proprietary Limited & Ors v FCT [2012] FCA Bad debts: related party financing discussion paper 39 Copyright 2012 The Institute of Chartered Accountants in Australia 3

4 Limited recourse debt clarification discussion paper 41 Loss carry-back for businesses discussion paper 44 Italian earthquakes declared a disaster for tax purposes 47 CGT CGT scrip-for-scrip roll-over proposals paper released 49 INDIRECT TAXES AAT Case [2012] AATA 473, Re Campbell v FCT 53 AAT Case [2012] AATA 440, Re Baini v FCT 54 AAT Case [2012] AATA 409, re A.P. Group Limited v FCT 56 AAT Case [2012] AATA 407; AAT Case [2012] AATA Requirements for a tax invoice for GST purposes: GSTR 2012/D3 61 Yacoub v FCT [2012] FCA GST regulations amended: GST and government agencies 67 ATO ID: GST and preference shares 68 GST: care and accommodation in retirement villages: GSTR 2012/3 69 GST classification and excise: PS LA 2012/2 72 TAXATION OF SUPERANNUATION Super fund deductions for disability insurance premiums: TR 2012/6 75 AAT Case [2012] AATA 424, Re Bornstein v FCT 78 SMSF auditor registration draft legislation 80 SMSF ban on related party off-market transfers deferred 83 AAT Case [2012] AATA 451, Re Walsh v FCT 85 AAT Case [2012] AATA 452, Re Wilson v FCT 85 AAT Case [2012] AATA 453, Re Bridge v FCT 85 TAX ADMINISTRATION ATO releases its Compliance Program 87 Extended ATO compliance focus areas 98 ATO data-matching program: social security payments 100 LVR (WA) Pty Ltd & Anor v AAT and FCT [2012] FCAFC AAT Case [2012] AATA 386, RACV Sales and Marketing Pty Ltd v Innovation Australia 104 Tax regs amended: information exchange countries 106 FCT's discretion to retain refunds: draft PS LA Eligibility changes to conservation tillage offset 110 Copyright 2012 The Institute of Chartered Accountants in Australia 4

5 Collection Point Pty Ltd v FCT [2012] FCA Agents should update PI cover details - TPB 113 ATO Decision Impact Statements: costs decisions 114 ATO writes to charities re refund of franking credits 116 AUSTRAC report: money laundering, tax and super fraud 117 Binetter v DCT (No 3) [2012] FCA When a non-share equity interest is issued through a PE: TD 2012/ Public unit trusts in a stapled group and connected entities: TR 2012/D5 122 ATO IDs: Division 7A; CGT; deductions 124 Appeals update: Greenhatch 125 TAX REFORM Australia/Canada DTA to be updated 127 Copyright 2012 The Institute of Chartered Accountants in Australia 5

6 Copyright 2012 The Institute of Chartered Accountants in Australia 6

7 LEGISLATION Legislation Progress of legislation recent activity Bill Introduction to House Latest Activity Date of Latest Activity Fairer Private Health Insurance Incentives Bill July 2011 Received Royal Assent as Act No 26 of April 2012 Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill July 2011 Received Royal Assent as Act No 27 of April 2012 Fairer Private Health Insurance Incentives (Medicare Levy Surcharge Fringe Benefits) Bill July 2011 Received Royal Assent as Act No 28 of April 2012 Carbon Tax Bills (18 Bills) 13 September 2011 Received Royal Assent 4 December 2011 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill November 2011 Received Royal Assent as Act 23 of March 2012 Petroleum Resource Rent Tax Bills 2 November 2011 Received Royal Assent 29 March 2012 Superannuation Guarantee (Administration) Amendment Bill November 2011 Received Royal Assent as Act 22 of March 2012 MRRT Bills (5 Bills) 2 November 2011 ReceivedRoyal Assent 29 March 2012 Superannuation Legislation Amendment (MySuper core Provisions) Bill November 2011 Before Reps 22 March 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 7

8 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Tax Laws Amendment (2011 Measures No 9) Bill November 2011 Received Royal Assent as Act 12 of March 2012 Corporations Amendment (Future of Financial Advice ) Bill November 2011 Received Royal Assent as Act 67 of June 2012 Corporations Amendment (Further Future of Financial Advice Measures) Bill November 2011 Received Royal Assent as Act 68 of June 2012 Superannuation Legislation Amendment (Trustee Obligations and Prudential standards) Bill February 2012 Before Senate 23 May 2012 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Indirect Tax Laws Amendment (Assessment) Bill February 2012 Received Royal Assent as Act 39 of April 2012 Tax and Superannuation Laws Amendment (2012 Measures No1) Bill March 2012 Received Royal Assent as Act 75 of June 2012 Shipping reform and tax incentive Bills (5 Bills) 22 March 2012 Received Royal Assent 21 June 2012 Paid Parental Leave and Other Legislation Amendment (Dad and Partner Pay and Other Measures) Bill March 2012 Before Reps 8 May 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 8

9 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Tax Laws Amendment (2012 Measures No 1) Bill March 2012 Received Royal Assent as Act 71 of June 2012 Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No 1) May 2012 Before Reps 24 May 2012 Tax Laws Amendment (Income Tax Rates) Bill May 2012 Received Royal Assent as Act 60 of June 2012 Tax Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill May 2012 Received Royal Assent as Act 86 of June 2012 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Tax Laws Amendment (2012 Measures No 2) Bill May 2012 Received Royal Assent as Act 99 of June 2012 Pay As You Go Withholding Non Compliance Tax Bill May 2012 Received Royal Assent as Act 95 of June 2012 Tax Laws Amendment (2012 Measures No 3) Bill May 2012 Received Royal Assent as Act 58 of June 2012 Superannuation Legislation Amendments (stronger Super) Bill 2012 Superannuation Supervisory Levy Imposition Amendment Bill May 2012 Received Royal Assent as Act 91 of May 2012 Received Royal Assent as Act 92 of June June 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 9

10 Legislation Progress of legislation - continued Bill Introduction to House Latest Activity Date of Latest Activity Tax Laws Amendment (Managed Investment Trust Withholding Tax) Bill June 2012 Received Royal Assent as Act 97 of June 2012 Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill June 2012 Received Royal Assent as Act 96 of June 2012 Tax Laws Amendment (Investment Manager Regime) Bill June 2012 Before Reps 21 June 2012 Tax Laws Amendment (2012 Measures No 4) Bill June 2012 Before Reps 28 June 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 10

11 Progress of Legislation Bill Introduction to the House Latest Activity Date of latest Activity Fairer Private Health Insurance Incentives Bill 2011 Fairer Private Health Insurance Incentives (Medicare Levy Surcharge) Bill 2011 Fairer Private Health Insurance Incentives (Medicare Levy Surcharge - Fringe Benefits) Bill July 2011 Received Royal Assent as Act No 26 of July 2011 Received Royal Assent as Act No 27 of July 2011 Received Royal Assent as Act No 28 of April April April 2012 Carbon Tax Bills (18 Bills) 13 September 2011 Received Royal Assent 4 December 2011 Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Bill November 2011 Received Royal Assent as Act 23 of March 2012 Petroleum Resource Rent Tax Bills 2 November 2011 Received Royal Assent 29 March 2012 Superannuation Guarantee (Administration) Amendment Bill November 2011 Received Royal Assent as Act 22 of March 2012 MRRT Bills (5 Bills) 2 November 2011 Received Royal Assent 29 March 2012 Superannuation Legislation Amendment (MySuper core Provisions) Bill November 2011 Before Reps 22 March 2012 Tax Laws Amendment (2011 Measures No 9) Bill 2011 Corporations Amendment (Future of Financial Advice) Bill 2012 Corporations Amendment (Further Future of Financial Advice Measures) Bill November 2011 Received Royal Assent as Act 12 of November 2011 Received Royal Assent as Act 67 of November 2011 Received Royal Assent as Act 68 of March June June 2012 Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill February 2012 Before Senate 23 May 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 11

12 Bill Introduction to the House Latest Activity Date of latest Activity Indirect Tax Laws Amendment (Assessment) Bill 2012 Tax and Superannuation Laws Amendment (2012 Measures No 1) Bill February 2012 Received Royal Assent as Act 39 of March 2012 Received Royal Assent as Act 75 of April June 2012 Shipping reform and tax incentive Bills (5 Bills) Paid Parental Leave and Other Legislation Amendment (Dad and Partner Pay and Other Measures) Bill March 2012 Received Royal Assent 21 June March 2012 Before Reps 8 May 2012 Tax Laws Amendment (2012 Measures No 1) Bill March 2012 Received Royal Assent as Act 71 of June 2012 Tax Laws Amendment (Cross- Border Transfer Pricing) Bill (No 1) May 2012 Before Reps 24 May 2012 Tax Laws Amendment (Income Tax Rates) Bill 2012 Tax Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2012 Tax Laws Amendment (2012 Measures No 2) Bill 2012 Pay As You Go Withholding Non Compliance Tax Bill 2012 Tax Laws Amendment (2012 Measures No 3) Bill 2012 Superannuation Legislation Amendment (Stronger Super) Bill 2012 Superannuation Supervisory Levy Imposition Amendment Bill 2012 Tax Laws Amendment (Managed Investment Trust Withholding Tax) Bill May 2012 Received Royal Assent as Act 60 of May 2012 Received Royal Assent as Act 86 of May 2012 Received Royal Assent as Act 99 of May 2012 Received Royal Assent as Act 95 of May 2012 Received Royal Assent as Act 58 of May 2012 Received Royal Assent as Act 91 of May 2012 Received Royal Assent as Act 92 of June 2012 Received Royal Assent as Act 97 of June June June June June June June June 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 12

13 Bill Introduction to the House Latest Activity Date of latest Activity Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill June 2012 Received Royal Assent as Act 96 of June 2012 Tax Laws Amendment (Investment Manager Regime) Bill 2012 Tax Laws Amendment (2012 Measures No 4) Bill June 2012 Before Reps 21 June June 2012 Before Reps 28 June 2012 Last Updated: 29 June 2012 Copyright 2012 The Institute of Chartered Accountants in Australia 13

14 Legislation Bills receive Royal Assent Tax Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Act 2012 Received Royal Assent on 28 June 2012 as Act No 86 of 2012 Superannuation Legislation Amendment (Stronger Super) Act 2012 and Superannuation Supervisory Levy Imposition Amendment Act 2012 Received Royal Assent on 28 June 2012 as Act Nos 91 and 92, respectively, of Legislation Bills receive Royal Assent con d Clean Energy (Excise Tariff Legislation Amendment) Act 2012, Clean Energy Legislation Amendment Act 2012 and Clean Energy (Custom Tariff Amendment) Act 2012 Received Royal Assent on 28 June 2012 as Act Nos 81, 84, and 85, respectively, of 2012 Income Tax (Managed Investment Trust Withholding Tax) Amendment Act 2012 and Tax Laws Amendment (Managed Investment Trust Withholding Tax) Act 2012 Received Royal Assent on 29 June 2012 as Act Nos 96 and 97, respectively, of 2012 Doubles the withholding tax rate on MITs from 1 July Copyright 2012 The Institute of Chartered Accountants in Australia 14

15 Legislation Bills receive Royal Assent con d Tax Laws Amendment (2012 Measures No 2) Act 2012 and Pay As You Go Withholding Non-compliance Tax Act 2012 Received Royal Assent on 29 June 2012 as Act Nos 99 and 95, respectively, of 2012 Extends director penalty regime, modifies consolidation tax cost setting rules, amends TOFA consolidation interaction provisions Social Security and Other Legislation Amendment (2012 Budget and Other Measures) Act 2012 Received Royal Assent on 29 June 2012 as Act No 98 of Bills receive Royal Assent The following Bills received Royal Assent on 28 June 2012: The Tax Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2012 passed all stages without amendment and received Royal Assent on 28 June 2012 as Act No 86 of The Bill will increase the Medicare levy low-income thresholds for individuals and families for the income year, as announced in the Federal Budget. The Superannuation Legislation Amendment (Stronger Super) Bill 2012 and Superannuation Supervisory Levy Imposition Amendment Bill 2012 passed all stages without amendment and received Royal Assent on 28 June 2012 as Act Nos 91 and 92, respectively, of The Bills give effect to the government's SuperStream reforms to enhance the "back office" administration of superannuation eg re data and payment standards, a new administrative penalty regime, and a new SuperStream supervisory levy to be levied on APRA-regulated superannuation funds from 1 July 2012 until 30 June The Clean Energy (Excise Tariff Legislation Amendment) Bill 2012, Clean Energy Legislation Amendment Bill 2012, and Clean Energy (Customs Tariff Amendment) Bill 2012 all received Royal Assent on 28 June 2012 as Act Nos 81, 84 and 85, respectively, of They are part of a package of Bills that provide that, from 1 July 2012, Compressed Natural Gas (CNG) used for non-transport purposes will not be subject to the effective carbon price through the fuel tax system so that it may be covered by the carbon pricing mechanism. The other Bill in the package, the Clean Energy Finance Corporation Bill 2012, also passed all stages without amendment and awaits Assent. This Bill will establish the Clean Energy Finance Corporation. The following Bills received Royal Assent on 29 June 2012: Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill Act No 96 of 2012; Tax Laws Amendment (Managed Investment Trust Withholding Tax) Bill Act No 97 of This Bill and the above Bill double the withholding tax rate on MITs to 15% with effect from 1 July 2012; Copyright 2012 The Institute of Chartered Accountants in Australia 15

16 Tax Laws Amendment (2012 Measures No 2) Bill Act No 99 of 2012; Pay As You Go Withholding Non-compliance Tax Bill Act No 95 of This Bill and the above No 2 Bill: o o o Amend the TAA to: (i) extend the director penalty regime to make directors personally liable for their company's unpaid superannuation guarantee amounts; (ii) ensure that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported three months after the due date; and (iii) in some instances, make directors and their associates liable to PAYG withholding non compliance tax (effectively reducing credit entitlements) where the company has failed to pay amounts withheld to the FCT. Date of effect: the amendments commenced on Royal Assent ie on 29 June 2012; Amend the ITAA 1997 to modify the consolidation tax cost setting and rights to future income rules so that the tax outcomes for consolidated groups are more consistent with the tax outcomes that arise when assets are acquired outside the consolidation regime. The changes affecting a corporate acquisition will depend on the time when the acquisition took place. Different changes apply to acquisitions that took place before 12 May 2010 (when the law was passed), after 30 March 2011 (when the Board of Taxation was asked to review the rules) and the intervening period. Date of effect: The changes affecting a corporate acquisition will depend on the time when the acquisition took place. That is, different changes apply to, broadly, acquisitions before 12 May 2010, after 30 March 2011 and the intervening period. For corporate acquisitions that, broadly, took place before 12 May 2010, the changes prevent the retrospective operation of unintended effects of, and perceived weaknesses in, amendments to the law that were made in 2010; Amend section of the ITAA 1997 to ensure that, for consolidated groups applying Division 230 of the ITAA 1997 in relation to their financial arrangements, the head company is deemed to have received an amount for assuming an accounting liability that is, or is part of, a financial arrangement as part of a joining/consolidation event. This amount is deemed to be the accounting liability's accounting value at the joining time. Date of effect: The TOFA consolidation interaction and TOFA transitional amendments commence from the commencement of the TOFA Act (ie 26 March 2009). The TOFA consolidation interaction provisions apply from taxpayers' first TOFA applicable income year. The TOFA transitional amendments apply from their commencement; Social Security and Other Legislation Amendment (2012 Budget and Other Measures) Bill Act No 98 of This Bill provides that, from 1 January 2013, FTB Part A will no longer be available for young people aged 18 or over unless they are in full-time secondary study; 05/07/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 16

17 Legislation Draft charities legislation referred to committee Government has announced it has referred draft Australian Charities and Not-for-profits Commission legislation to the House of Reps Standing Committee on Economics Government will consider any recommendations by the committee and introduce legislation later in the year Government also outlined key changes to Bills following consultation including: Registration and deregistration Governance standards Penalties. Draft charities legislation referred to committee On 6 July 2012, the government announced that it had referred what is effectively now revised draft Australian Charities and Not-for-profits Commission (ACNC) legislation (the Draft Australian Charities and Not-for-profits Commission Bill 2012 and the Draft Australian Charities and Not-forprofits Commission (Consequential and Transitional) Bill 2012 that were released in December 2011) to the House of Representatives Standing Committee on Economics, for inquiry over the Winter Parliamentary break (Parliament resumes on 14 August 2012). Submissions to the Committee are due by 20 July details are on the Committee's website. The government will then consider any recommendations the Committee makes, before introducing the legislation later in the year, ahead of the ACNC's 1 October 2012 start date. Initially, only charities (including PBIs) will be regulated by the ACNC. However, the legislation establishes a regulatory framework that can be extended to all NFP entities in the future. The financial reporting framework and governance standards, including the external conduct standards, will commence on 1 July Consequential amendments will also be required to other Acts. These are expected to be technical machinery amendments, and will be drafted prior to the formal introduction of the ACNC Bills. Key changes to the Bills The Assistant Treasurer also outlined the key changes to the Bills following the consultation that took place in December 2011 and May The changes cover, for example, registration and deregistration, governance standards, information gathering powers, enforcement powers, and penalties. The key changes to the draft Bills since the December 2011 Exposure Draft include: Registration: o The circumstances under which entities are entitled to registration have been clarified. The categories of types and sub-types have also been clarified, so that they only apply in respect of charities. These categories may be expanded later to include other not-for-profit entities. Copyright 2012 The Institute of Chartered Accountants in Australia 17

18 o The provisions governing entitlement to registration have been clarified, including by noting that the determination of "charitable purpose" is to be undertaken in accordance with the existing traditional common law meaning of the term. Deregistration - The ACNC Commissioner will only be able to revoke registration if the Commissioner is satisfied that certain circumstances are present, having considered a number of factors. These factors require the Commissioner to balance different considerations to ensure that any decision to revoke an entity's registration is proportional and appropriate in all circumstances. The factors include consideration, wherever possible, of other options to help promote compliance, such as education, before an entity's registration is revoked. Also, the circumstances in which the Commissioner may revoke registration have been narrowed, eg where a liquidator or trustee in bankruptcy has been appointed, rather than upon insolvency. ACN Register - The information that will be placed on the ACN register has been clarified and expanded. For example, the Commissioner must publish the details of any enforcement action taken under the legislation, a summary of why such action was taken, and a summary of the details of any resolution or response to the matter. Governance standards - In May 2012, the government announced that it would consult further on the governance standards and progress these standards through regulations. As part of this process, the standards are expected to be refined to minimise duplication. The governance standards will apply from 1 July Reporting: o o o o o In May 2012, the government announced that it would consult further on the financial reporting requirements applying to registered entities, and progress these requirements through regulations. The first financial report will relate to the financial year, and will need to be lodged by 31 December The first annual information statement will relate to the financial year, and will need to be lodged by 31 December The thresholds for reporting have been revised, so that they are based solely on revenue and exclude consideration of DGR status. Registered entities may apply to the ACNC Commissioner to report on the basis of a Substituted Accounting Period (SAP), and certain entities that currently report under an Australian law on the basis of an existing SAP will have their SAP grandfathered upon notifying the ACNC. The Commissioner may approve a new type of reporting, referred to as "joint" and "collective" reporting, which will enable entities to report along certain lines of activity, rather than on an entity-by-entity basis. There are a number of factors the Commissioner must consider before deciding whether to allow a particular group of entities to report in this way. The category of individuals that can conduct a review has been significantly expanded to allow any member of a professional accounting body with the relevant designation of that body to conduct a review. The category of auditors has also been expanded from registered company auditors, to also include audit firms and authorised audit companies. Information gathering and monitoring powers - The scope of, and use of, information collected under the ACNC's information gathering and monitoring powers have been clarified. The scope of information that the ACNC can gather includes information relevant to determining whether a registered entity is complying with regulatory responsibilities, and whether information a registered entity has given the ACNC is accurate and correct. Enforcement powers - The application and use of the ACNC's enforcement powers have been clarified. In particular, the statutory thresholds have been made clearer, more objective and consistent across the powers. Copyright 2012 The Institute of Chartered Accountants in Australia 18

19 Secrecy framework - Disclosure provisions in the secrecy framework have been altered for clarification and limited to circumstances where there was potential for disclosure of personal information. In particular, the "disclosure to increase public transparency and accountability of the sector" has been limited, so that it now only applies for the purpose of disclosing information onto the ACN Register. Review and appeals - The review and appeals framework was not part of the Exposure Draft Bill in December However, as per the fact sheet that was released with the exposure draft materials, the review and appeal framework in the ACNC Bills was largely modelled on the existing review and appeal provisions in Pt IVC of the Taxation Administration Act As foreshadowed in the fact sheet and supported by feedback from the consultation, the review and appeal framework was drafted to allow entities to make a joint application where they seek to have a decision of the ACNC Commissioner reviewed at the same time as a related decision of another government agency or department. Penalties - Several penalty provisions have been lowered to provide greater consistency with similar offences and ensure they are set at an appropriate level. "Basic Religious Charities" exemption - A targeted exemption from the governance standards and financial reporting requirements has been provided to "Basic Religious Charities", as defined in the draft legislation. It is proposed that a "basic religious charity" will be an entity that meets all of the following requirements: (i) it is a registered entity; (ii) it is registered as the type (charity and as the subtype) entity with a purpose that is the advancement of religion; and (iii) it is not entitled to be registered as any other subtype. An entity will not be a basic religious charity if: (i) it is a body corporate that is registered under the Corporations Act 2001; (ii) it is a corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006; (iii) the entity is incorporated under a State or Territory Incorporated Associations Act. An entity will also not be a basic religious charity if it is a DGR itself, or if it operates a fund which is a DGR. Source: Assistant Treasurer's press release No 065, 6 July /07/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 19

20 Legislation Mature age worker offset phase out: draft legislation Government has released draft legislation proposing to phase out the mature age worker offset from 1 July 2012 for taxpayers born on or after 1 July 1957 It is proposed the offset would be maintained for taxpayers who are aged 55 years or older in Comments due by 17 August Mature age worker offset phase out: draft legislation As part of the Budget, the government announced that it would phase out the mature age worker tax offset from 1 July 2012 for taxpayers born on or after 1 July Access to the tax offset would be maintained for taxpayers who are aged 55 years or older in Treasury has released draft legislation proposing to implement the measure. The draft legislation proposes to amend sections , and of the ITAA 1997 to restrict the tax offset to those taxpayers born on or before 30 June The changes would apply to assessments for the income year and later income years. According to the government, the current tax offset is a "high cost method of facilitating mature age workforce anticipation". In the Budget, the government said it would help older Australian who wish to continue in the workforce by providing a Jobs Bonus of $1,000 to $10,000 for employers who recruit and retain a worker aged 50 or over for three months. It said the changes would implement a recommendation of the 2010 Henry Tax System Review. Submissions Comments are due by 17 August 2012 and can be sent to: General Manager, Personal and Retirement Income Division, The Treasury, Langton Crescent, PARKES ACT personaltaxconsultation@treasury.gov.au. Enquiries can be directed to André Moore on tel: (02) /06/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 20

21 INCOME Income Taxpayer fails to show assessments excessive AAT Case [2012] AATA 449, Re Armirthalingam v FCT AAT has found a taxpayer failed to satisfy the burden of proving that amended assessments issued to him for 2000 to 2002 years were excessive Assessments were made on basis the taxpayer had understated his income for the relevant period and incorrectly claimed motor vehicle expenses AAT also found it was appropriate to maintain the 50% shortfall penalty imposed. Taxpayer fails to show assessments excessive AAT Case [2012] AATA 449, Re Armirthalingam v FCT The AAT has found that a taxpayer has failed to satisfy the burden of proving that amended assessments issued to him for the 2000 to 2002 years were excessive. The assessments were made on the basis that the taxpayer had understated his income by some $190,000, $243,000 and $169,000 in each of those years, and that he had incorrectly claimed motor vehicle expenses due to an improperly kept logbook. The taxpayer claimed that the understatement of his income was due to gambling receipts and that the termination of his employment had meant that he could not obtain his original log book for the purposes of the motor vehicle expense claims. Among other things, he claimed that he spent a lot of time gambling at a casino during the relevant years and estimated that he had won about $100,000 during the years from 1996 to 2001, and that in 2002 had lost approximately $50,000. However, in finding that the taxpayer had not established the burden of proving that the assessments were excessive, the AAT first stated that merely establishing on the balance of probabilities that the FCT has made an error cannot satisfy the taxpayer's burden of proof, and that there was no obligation on the part of the FCT to put forward material establishing a particular view. It then generally found that the taxpayer had not demonstrated there was any flaw in either the T- Account Method or the Player Rating Transaction Reports obtained from the casino that the FCT had relied on. The AAT also had issue with certain aspects of the taxpayer's evidence, especially in relation to motor vehicle expenses. Copyright 2012 The Institute of Chartered Accountants in Australia 21

22 Finally, the AAT found that it was appropriate to maintain the 50% shortfall penalties imposed by the FCT for recklessness essentially on the basis of agreeing that the taxpayer had made a statement that was false or misleading in a material particular and that the shortfall had arisen from his recklessness as to the operation of, or failure to take reasonable care to comply with, a taxation law. AAT Case [2012] AATA 449, Re Armirthalingam and FCT, AAT, Ref Nos 2009/ , Forgie DP, 17 July /06/2012 Income Tax tables for ETPs instrument made Taxation Administration Act 1953 Tax table for employment termination payments has been registered It makes publicly available the employment termination payment withholding schedule for working out amounts required to the withheld from an entity It commenced 1 July Tax tables for ETPs instrument made The Taxation Administration Act Tax table for employment termination payments was registered on the Federal Register of Legislative Instruments on 29 June It commenced on 1 July 2012 and makes publicly available the employment termination payment withholding schedule, which the FCT is empowered to make pursuant to section of Schedule 1 to the TAA, specifying the amounts, formulas and procedures to be used for working out the amount required to be withheld by an entity from employment termination payments in accordance with the PAYG withholding system. 05/07/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 22

23 Income Income received by beneficiaries income not capital August v FCT [2012] FCA 682 Federal Court has dismissed two taxpayers appeals and held income they received as beneficiaries of trusts was income according to ordinary concepts and not capital It concerned properties acquired by various trusts Court said the properties were acquired by the trusts for profit making purposes rather than for long term investment purposes Taxpayers have appealed to the Full Federal Court. Income received by beneficiaries income not capital August v FCT [2012] FCA 682 In a lengthy judgment, the Federal Court has dismissed husband and wife taxpayers' appeals and held that income they received as beneficiaries of a number of trusts was income according to ordinary concepts and not income of a capital nature: August v FCT [2012] FCA 682 (Federal Court, Nicholas J, 28 June 2012; Corrigendum dated 3 July 2012). Background This was a factually complex case resulting in a detailed judgment. The taxpayers were beneficiaries of a number of trusts of which Toorak Management Pty Limited (Toorak) was the trustee. They acquired properties in the Canberra suburb of Melba which they subsequently leased. They also acquired several properties in a joint venture arrangement with others in Mitchell and Hume in the ACT. The Melba and Hume properties, and one at Mitchell, were later sold. The taxpayers had appealed against the FCT's decision refusing to uphold objections to income tax assessments issued to each of them in respect of the 2006 and 2007 financial years. The appeals gave rise to two main issues: Whether profit derived by Toorak as a result of the sale of property (shops) at Melba in the ACT was income according to ordinary concepts or income of a capital nature. The FCT assessed the taxpayers on the basis that the profit was income according to ordinary concepts. The taxpayers contended that the property was acquired by Toorak as a long term investment, and that the profit arising as a result of the sale of the property was of a capital nature; Copyright 2012 The Institute of Chartered Accountants in Australia 23

24 Whether profit made by a company called Dimensional Developments Pty Limited (Dimensional Developments), formed to act as manger of a joint venture that was established as trustee for Toorak and another trust, upon a sale of land at Hume was income according to ordinary concepts or income of a capital nature. Again, the FCT assessed the taxpayers on the basis that the profit was income according to ordinary concepts. The taxpayers maintained that the property at Hume was acquired as a long term investment and that the profit arising as a result of the sale was of a capital nature. Pursuant to section 97 of the ITAA 1936, the taxpayers' assessable incomes for the relevant income years included a share of the net income of each trust. Decision After considering at length the evidence and issues involved, as well as a number of cases (eg Westfield v FCT (1991) 21 ATR 1398, FCT v Myer Emporium Ltd (1987) 18 ATR 693, Steinberg v FCT (1975) 5 ATR 565, FCT v Cooling (1990) 21 ATR 13), the Federal Court said it was not satisfied that the Melba shops were acquired as long term investments. Rather, after reviewing the circumstances of the case and the husband's evidence as to his intentions regarding the properties, the Court considered it more likely than not that they were acquired by Toorak as part of a profitmaking scheme with the principal intention that they be developed, tenanted and sold for a profit. Similarly, the Court said it was not satisfied that the Hume property was acquired as a long term investment. Rather, its view was that Hume was acquired for profit-making purposes. In particular, the Court said it was satisfied that the Hume property was acquired so that the land could be developed and sold for a profit, or developed, leased and sold for a profit. Either way, the Court said the purpose to make a profit from the sale of the Hume property, which it was satisfied existed at the time of acquisition, "was a substantial one". Appeals update The taxpayers have appealed to the Full Federal Court. 05/07/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 24

25 Income PSI: taxpayer cannot re-litigate matter AAT Case [2012] AATA 439, Re Fayle v FCT AAT has exercised its powers to summarily dismiss an application by a taxpayer who sought to argue that he was carrying on a personal services business It did so on the basis that taxpayer was seeking to relitigate a matter that had previously been decided against him. PSI: taxpayer cannot re-litigate matter AAT Case [2012] AATA 439, Re Fayle v FCT The AAT has exercised its powers under section 33(1) of the Administrative Appeals Tribunal Act 1975 to summarily dismiss an application of the taxpayer who sought to argue that he was carrying on a personal service business in respect of horticultural consultancy service provided by his family company to a related company. It did so essentially on the basis that the taxpayer was seeking to relitigate a matter that had previously been decided against him in AAT Case [2009] AATA 906. In that case, the AAT determined that the income derived by the family company was personal services income of the taxpayer and, therefore, should have been included in his assessable income. In doing so it found that the company was not a personal service business as no personal service business determination was in place and that it neither satisfied the "results" test or the 80% "unrelated clients" test. That being so it also found that it was unnecessary to consider the employment test and the business premises test which the taxpayer had not raised. Before the AAT in the current matter, the taxpayer sought to argue that he satisfied the "business premises" test. However, in refusing to entertain the taxpayer's application the AAT accepted the FCT's claim that the taxpayer was seeking to re-litigate issues that have already been determined against him. It did so on the basis that the taxpayer had been "unsuccessful in the earlier proceedings in demonstrating that the FCT's assessments were excessive". Moreover, the AAT found that having had the opportunity to put his whole case forward at that time - including the application of the business premises test - and having not done so, he was in effect estopped from doing so now. Copyright 2012 The Institute of Chartered Accountants in Australia 25

26 In short, the AAT concluded that it would not be appropriate to now allow the taxpayer to again litigate the question whether the amended assessments were excessive when he did not avail himself of the opportunity to do so in the earlier proceedings by all arguments available to him (including the business premises test) - especially as the original matter was adjourned at his request to enable him to mount a separate matter of allowable deductions. AAT Case [2012] AATA 439, Re Fayle and FCT, AAT, Ref No 2012/ , Hack SC, 12 July /07/2012 Income PSI rules: ATO view on Russell case ATO has issued a Decision Impact Statement on Russell v FCT (2011) 79 ATR 315 In that case the Full Federal Court unanimously dismissed taxpayer s appeal and confirmed there was no bar to the PSI rules applying to attribute personal services income to an Australian resident from a non-resident NZ company ATO outlined whether: An overseas registered company is a personal services entity A partnership carried on enterprises and is entitled to input tax credits. PSI rules: ATO view on Russell case The ATO has released a Decision Impact Statement on the Full Federal Court's decision in Russell v FCT (2011) 79 ATR 315. In that decision, the Full Federal Court unanimously dismissed the taxpayer's appeal and confirmed there was no bar to the PSI rules applying to attribute personal services income to an Australian resident from a company that was a non-resident in New Zealand. It also dismissed the taxpayer's claim that the Australia-New Zealand DTA should apply to relieve the taxpayer of "double taxation" that arose from the income being taxed both in New Zealand and in Australia on the grounds that no double taxation in fact arose in the circumstances. On the issue of whether there were partnership input tax credits for expenses in relation to an accountancy practice enterprise and a naturist retreat enterprise, the Court held that the partnership: (i) was not carrying on an accountancy practice and was not entitled to input tax credits (unanimously); and (ii) was carrying on the enterprise of naturist retreat and was entitled to input tax credits (by majority). The High Court had refused an application for special leave to appeal by the taxpayer. Copyright 2012 The Institute of Chartered Accountants in Australia 26

27 In relation to the PSI matter, the ATO said the ITAA 1997 does not bring to tax the profits of a New Zealand company, but taxes, as statutory income, the personal services income of the individual. It said the facts of the case "were unusual and it is not expected a factual scenario of like kind will often arise". In relation to the partnership input tax credit matter, the ATO said it was "open on the facts to find that the partnership was carrying on a forestry enterprise and naturist retreat enterprise". Income Taxpayer Alert: private company dividends Taxpayer Alert TA 2012/4 ATO has warned taxpayers of arrangements where accumulated profits of private companies are distributed substantially tax-free to entities associated with ordinary shareholders of the private company ATO said it considers the arrangements may be a scheme by the way of, or in the nature of, or have substantially the effect of, dividend stripping under section 177E of the ITAA 1997 It also said Pt IVA may apply to the arrangements. 05/07/2012 Taxpayer Alert: private company dividends: TA 2012/4 Taxpayer Alert TA 2012/4 The ATO has issued Taxpayer Alert TA 2012/4 warning taxpayers of arrangements where accumulated profits of a private company are distributed substantially tax-free to an entity associated with the ordinary shareholders of the private company. Broadly, the ATO said the arrangements the Alert applies to have the following (or substantially similar) features: A private company has accumulated significant profits which are subject to income tax at the company tax rate; The company's ordinary shares are held by one or more individuals who may also be the company's directors; A tax intermediary then recommends the private company create a new class of shares which has some or all of the following characteristics: o o o o A right to receive a dividend distribution at the discretion of the company's directors; A lack of any voting rights or rights to participate in surplus assets of the company upon its winding up; A right by the company to redeem the new shares within four years of the issue date; and/or A right by the company to abolish dividend entitlements on new shares within four years of the share's issue date. Copyright 2012 The Institute of Chartered Accountants in Australia 27

28 The new shares are then issued at nominal consideration to another entity or entities which are closely associated with the ordinary shareholders in the company; Significant profits of the company are then distributed as a dividend to the entity or entities, in most instances with franking credits attached; A series of transactions is then entered into as a means to transfer the economic benefits of all or some of the dividends to the control of the ordinary shareholders of the private company with a purpose of securing a better tax outcome; In some cases, the transactions may be delayed for some time (ie planned to spread over a four year period) and/or involve the use of promissory notes and/or "round robin" bank facilities; In certain arrangements the dividend received by the entity or entities may be: o o o o Lent to the ordinary shareholders or their associates; Distributed to a trust, or individual that has carried forward tax losses, which may result in no tax being paid and may generate a refund of franking credits; Distributed through a series of trusts and companies and ultimately end up in the hands of, or the control of the ordinary shareholders, and/or their family in a manner which attracts no or minimal additional tax; or Distributed to a non-resident that is not subject to any Australian tax, the non-resident then lends a comparable amount back to the private company. The ordinary shareholders and their advisers may indicate that there is a commercial rationale for the arrangement such as asset protection. The ATO said a taxing event may generate a capital gain under CGT event K8 for the ordinary shareholders of the private company by virtue of the direct value shifting rules in Division 725 of the ITAA It said the arrangements may also be a scheme by way of, or in the nature of, or have substantially the effect of, dividend stripping under section 177E of the ITAA In addition, the ATO said the arrangements may be a scheme to which Part IVA may apply. Any entities involved with the arrangements may be a promoter of a tax scheme for the purposes of Division 290 of Schedule 1 to the TAA, and where the entity involved is also a tax practitioner, they will be referred to the Tax Practitioners Board under the Tax Agent Services Act 2009, the ATO said. 12/07/2012 Copyright 2012 The Institute of Chartered Accountants in Australia 28

29 Income Amended assessments unlawful AAT Case [2012] AATA 428, Re Elliott v FCT AAT has held amended assessments issued to a taxpayer outside of the standard two year amendment period to include foreign employment income were unlawful AAT was of the view there was no obvious reason why FCT needed a four year period to amend taxpayer s assessments in circumstances where he was aware of taxpayer s receipt of foreign income prior to expiration of the two year period. Amended assessments unlawful AAT Case [2012] AATA 428, Re Elliott v FCT The AAT has held that amended assessments issued to a taxpayer outside of the standard two year amendment period to include foreign employment income were unlawful: AAT Case [2012] AATA 428, Re Elliott and FCT (AAT, Ref Nos: 2011/3225 & 2011/3226, Fice SM, 9 July 2012). Background The matter concerned the 2006 and 2007 income tax returns of the taxpayer, a pilot, who had disclosed exempt foreign employment income for both years. The FCT issued assessments for the subject years on 21 May 2007 and 28 April 2008, respectively and then in May 2010, issued amended assessments to include foreign employment income in place of previous claims for exempt employment income. The amended assessments followed the Federal Court's decision in Overseas Aircrew Basing Ltd v FCT (2009) 74 ATR 850, which held the income derived by aircrew from the services they provided to OABL was not exempt from tax under section 23AG of the ITAA The taxpayer's employer was related to OABL. The taxpayer objected to the amended assessments, submitting they were not authorised under section 170 of the ITAA 1936, should have allowed a dependant spouse rebate for both years, and should have eliminated, reduced or remitted the Medicare levy and Medicare levy surcharge imposed. Before the AAT, the FCT relied on item 5 of the table in regulation 20 of the Income Tax Regulations 1936, which extends the standard two year period to amend assessments under section 170(1)(f) to four years. At issue was whether the taxpayer had "not identified income (ordinary or statutory) from one or more foreign transactions" when lodging his income tax returns for the 2006 and 2007 income years (as required by regulation 20, item 5(a)). When lodging his returns, the taxpayer entered his foreign employment income under the Label "Exempt foreign employment income" and not under the Label "Assessable foreign source income" (except for a very small amount for the 2006 year). Copyright 2012 The Institute of Chartered Accountants in Australia 29