Talking Tax – Issue 15

This week we’re talking tax about..

Case law

Federal Commissioner of Taxation v Devuba Pty Ltd [2015] FCAFC 168

The Full Federal Court decided in favour of the taxpayer that the capital gains tax (CGT) small business concessions applied to reduce a capital gain that arose from the sale of shares. The Court also clarified the application of the small business CGT concession rules in section 152 of the Income Tax Assessment Act 1997.

The taxpayer, Devuba Pty Ltd (Devuba) sold 45% of its shareholding in Primacy Underwriting Agency Pty Ltd (Primacy). The share sale caused Devuba to make a capital gain of over $4 million. Devuba contended that a number of CGT concessions for small businesses applied with the effect that the capital gain was reduced to nil.

The Commissioner of Taxation (Commissioner) argued that the CGT small business concessions did not apply in this case. The AAT found for the taxpayer and the Commissioner appealed to the Federal Court.

The key issue in dispute was whether the CGT concession stakeholders in Primacy held a small business participation percentage (SBPP) in Devuba of at least 90%. A CGT concession stakeholder is an individual or their spouse who holds at least a 20% SBPP in the company. A SBPP includes not only the percentage voting power held in the company but the percentage of dividends that the company may pay to a particular person.

The issued shares in Devuba included one share to an individual, one to a trust and one ‘dividend access share’ to an individual which did not have any voting rights but gave an entitlement to dividends only when determined by the directors. Devuba argued that the CGT concession stakeholders were the two individual shareholders and together they had a 95% SBPP, which was greater than the required threshold.

The Commissioner argued that the directors had a discretion to pay a dividend on the dividend access share to the exclusion of all ordinary shareholders such that the ordinary shareholders may not obtain a dividend and therefore their SBPP interest is nil. The question for the Full Federal Court was whether Devuba’s Articles of Association operated to give the dividend access shareholder a right to dividends to the exclusion of ordinary shareholders.

The Full Federal Court dismissed the Commissioner’s appeal, finding that if Devuba was to declare a dividend just before the sale of Primacy, it would have been to the ordinary shareholders not the dividend access shareholder. No determination had been made at the time of the CGT event that would allow a dividend to be paid to the dividend access shareholder. As such, the SBPP was not reduced to nil and the small business concession was available to reduce Devuba’s capital gain.

This case shows the importance of carefully considering the details of each transaction before applying the small business CGT concession provisions. If you need assistance with a CGT rollover or concession, please contact one of our experienced tax lawyers.

Legislation and government policy

Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015

Yesterday, the Government agreed to implement two additional measures in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 which have been put forward by the Greens.

The measures include:

• Requiring multinational corporations with global revenue of $1billion or more to prepare general purpose financial statements rather than special purpose financial statements; and
• Abolishing the current exemption from the tax reporting regime so that private companies with more than $200 million of revenue can have their tax affairs reported by the ATO.

These new measures operate to further increase tax transparency among large multinational corporations as part of the larger push to target global tax avoidance and profit shifting.

Changes to superannuation guarantee measures

On 1 December 2015, the Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 was discussed in the House of Representatives. The bill includes reforms to the superannuation guarantee (SG) charge making it more consistent with the SG contribution regime. In particular, the reforms will:

• Align the base for calculating SG charge with the SG contributions.
• Change the period in which nominal interest is charge for unpaid or late SG contributions to the period in which they are outstanding.
• Remove the SG penalty and replace it with the tax administrative penalty provisions.

If employers do not correctly make SG contributions on behalf of their employees, they will be liable for the SG charge. Currently SG contributions are paid on a base of ordinary time earnings (OTE) and SG charge is paid on a base of salary and wages. OTE is a subset of salary and wages such that the current law imposes the SG charge on a broader range of remuneration than the SG contributions. For example, overtime remuneration will be included in salary and wages but not OTE. The new law will align the two such that both SG contributions and SG charges are imposed on OTE only.

Currently, when an employer is imposed with an SG charge it will include a component of nominal interest of 10%. This amount is charged in the period from the start of the relevant quarter that the employer should have made the SG contribution until the day that the SG charge is payable. The new rules will impose the interest from 29 days after the end of the quarter in which the employer should have made the SG contribution until the day before the SG charge is payable. This aligns with the actual period in which there was a SG shortfall because the SG contribution does not need to be paid until 28 days after the end of the quarter.

Changes to Farm Management Deposit scheme

Treasury has released draft legislation that amends the income tax treatment of farm management deposits (FMDs).

FMDs are a risk-management tool used by farmers to help them manage uncertain income streams, which might occur due to natural disasters, climate or the market. The FMD scheme provides concessional treatment to eligible individuals who set aside income from high-income years to be drawn on in low-income years. The funds are not taxed until they are withdrawn.

The draft legislation proposes the following changes:

• The maximum amount an individual can hold in an FMD will double from $400,000 to $800,000.
• Exceptions will be provided for drawing on FMDs in severe drought conditions.
• Participants in the FMD scheme will be able to use the FMD balance as an offset against business debts or loans to reduce interest payable.

If the Bill is passed, the amendments will apply from 1 July 2016. Submissions are open until 15 December 2015. If enacted, these amendments will give farmers greater flexibility to protect their income in severe conditions.

Tax and Superannuation Amendment Bill receives royal assent

The Tax and Superannuation Amendment Laws Amendment (2015 Measures No. 5) Bill 2015 received royal assent on 30 November 2015.

Issue 14 of Talking Tax discussed the amendments made in this Act in more detail. You can access Issue 14 here.

Association of Superannuation Funds of Australia (ASFA) Conference

ASFA held a conference on 27 November 2015 where Treasurer, Scott Morrison, explained that a number of superannuation tax concessions were being considered in an effort to ensure that all Australians could secure an adequate retirement income.

The Treasurer noted that determining what is ‘adequate’ for each individual is largely dependent on their personal circumstances. A key consideration which was highlighted was the importance of adding flexibility to the superannuation caps to account for modern working patterns and reducing discrimination. For example, this could allow women with children to make catch-up contributions in excess of the current caps to counteract a broken working pattern which may occur if maternity leave is taken.

The Treasurer made it clear that superannuation should not be seen or used as a mechanism for wealthy individuals to build excessive wealth in a tax-concessional environment.

AFSA also released a discussion paper at the Conference, discussing the future role of superannuation funds with aged care. The paper revealed the widespread difficulty that individuals are having in their dealings with the aged care system and the potential for superannuation funds to meet the considerable demand for financial advice, educational tools and materials on aged care.

ATO updates

GST and third party motor vehicle incentive payments

The ATO has introduced A New Tax System (Goods and Services Tax) (Particular Attribution Rules for Certain Motor Vehicle Incentive Payments Made to Motor Vehicle Dealers) Legislative Instrument 2015 which overrides section 29-5 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) in respect of the attribution of GST payable on taxable supplies of motor vehicles by dealers.

Generally, under section 29-5 of the GST Act, GST is payable in the tax period in which the consideration is received or an invoice is issued, whichever is earlier. This legislative instrument amends section 29-5 in relation to third party motor vehicle incentive payments.

A third party motor vehicle incentive payment is consideration provided by a motor vehicle manufacturer, distributor or importer, to the dealer. It is in addition to the consideration provided by the end customer who purchases the motor vehicle. The dealership is liable for GST on both the incentive payment and the price paid by the customer.

Broadly, this instrument applies where:

• a third party motor vehicle incentive payment is received by a dealer, or an invoice is issued for the payment;
• the motor vehicle has not yet been sold to the customer;
• the total consideration that the customer will pay for the motor vehicle is unknown; and
• the supply of the motor vehicle will be a taxable supply.

The result is that the GST payable is deferred until the tax period in which the total consideration for the sale of the motor vehicle to the customer is known.

The instrument has effect from 1 January 2015. The amendments will make it easier for motor vehicle dealers to calculate their GST liability by deferring the payment time until a point when the price is known and GST can accurately be quantified.

This article was written with the assistance of  Tim Hutton, Law Graduate.