Talking Tax – Issue 76

ATO updates

LCG 2017/1 – Non-commutable defined benefit income streams

On 28 April 2017 the Commissioner of Taxation finalised and released the Law Companion Guideline LCG 2017/1. This LCG clarifies how the defined benefit income cap applies to superannuation income stream pensions or annuities that are paid from life expectancy or market-linked products that are non-commutable.

The draft guideline states that capped defined benefit income streams cannot, of themselves, result in an excess transfer balance for an individual. Instead, certain amounts are included in assessable income and adjustments are made to the availability of tax offsets.

TD 2017/11 – Bank account interest assessable to beneficial owner

The Commissioner has released Taxation Determination TD 2017/11, which considers who should be assessed to interest on bank accounts. The Commissioner has confirmed that for income tax purposes, interest income on a bank account is assessable to the person or persons who beneficially own the money in the account.

This determination also states that:

• where the bank account is jointly held, the interest will be apportioned according to the proportionate beneficial interest of each owner. Equal ownership interests will be presumed unless evidence to the contrary is provided and
• where a parent operates an account on behalf of a child who beneficially owns the account, the interest is assessable to the child. Lodgement of a trust tax return is not necessary.

Wine and grape industry research and development promoters targeted

The ATO has released a statement that it is currently targeting promoters who are incorrectly telling growers and producers that the money they pay towards the compulsory Wine Grapes Levy can be claimed under the R&D Tax Incentive in order to secure an R&D tax offset.

While the levy can usually be claimed by a wine producer as an ordinary business deduction against their assessable income, the ATO has made it clear that these payments cannot be used when calculating a refundable or non-refundable R&D tax offset for the producer. Improper application for the R&D Tax Incentive in this fashion can have consequences for taxpayers and for promoters of these schemes.

The ATO has further stated that where growers or producers have inadvertently entered into such a scheme, or have relied on advice they obtained in good faith, the ATO will not seek to unfairly penalise them. However, early engagement with the ATO is crucial. Contact us immediately if you believe you may be have entered into such an arrangement.

Taxation Commissioner’s term extended

On 27 April 2017 the Federal Treasurer announced that Chris Jordan AO was reappointed as Commissioner of Taxation and Ramez Katf was appointed as Second Commissioner of Taxation. Mr Jordan will now remain as Commissioner of Taxation until 29 February 2024. His term as Commissioner was previously due to conclude at the end of 2019.

The Treasurer has stated that Mr Katf will maintain his role as Chief Information Officer and that as Second Commissioner he will continue to focus on modernising the revenue collection system.

Legislation and government policy

New integrity measures for the tax consolidation regime

On 28 April 2017 Treasury released the draft Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 following two post-implementation reviews of the tax consolidation regime provided to the Government in June 2012 and April 2013. This draft legislation comprises five broad measures that relate to:

• Acquired liabilities
• Securitised assets
• Anti-churning measures
• Interactions with the Taxation of Financial Arrangements (TOFA) provisions and
• Interactions with value shifting.

Acquired liabilities

This measure removes the double benefit (or a double detriment) which can arise in respect of certain deductible liabilities held by a joining entity, that is acquired by a consolidated group. It achieves this by making the amount included in the entry allocable cost amount for the liabilities assessable (or deductible) over a period of time.

Securitised assets

The securitised assets measure removes anomalies that arise when an entity that has securitised assets joins or leaves a tax consolidated group. It achieves this by modifying the tax cost setting rules to disregard liabilities relating to the securitised assets.

Anti-churning measures

This measure prevents the tax costs of a joining entity’s assets from being uplifted in certain circumstances, where no tax is payable by a foreign resident owner when they cease to hold membership interests in the joining entity. This is achieved by switching off the entry tax cost setting rules when there has been no change in the majority economic ownership of the joining entity for a period of at least 12 months before the joining time.

Interactions with the TOFA provisions

This measure clarifies the operation of the TOFA provisions by setting a tax value for an intra-group asset or liability that is, or is part of, a Division 230 financial arrangement when the asset or liability emerges from a consolidated group because a subsidiary member leaves the group.

Interactions with value shifting

This measure removes anomalies that arise when an entity leaves a consolidated group and at the date of departure, holds an asset that corresponds to a liability owed to it by the group. Anomalies may arise as the value of the asset taken into account for tax cost setting purposes is not always appropriate. This measure ensures that the amount taken into account under the exit tax cost setting rules for the asset is aligned with the tax cost setting amount for the corresponding asset of the leaving entity.

Draft limited recourse borrowing legislation released

On 27 April 2017 the Treasury released the Treasury Laws Amendment (2017 Measures No. 2) Bill 2017, which seeks to amend the transfer balance cap and total superannuation balance rules that were enacted through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016.

These changes have been put forward as part of a package of amendments to address concerns that have been raised in the implementation of the Government’s superannuation reform tax package. The amendments seek to ensure that:

• the transfer balance cap rules apply appropriately where there is a repayment of a limited recourse borrowing arrangement that transfers value from accumulation interests into retirement phase interests and
• where a fund has limited recourse borrowing arrangements in place, the total value of its assets is properly accounted for in working out individual members’ total superannuation balances.

The commencement date for these amendments is not yet known.

PRRT review final report

On 28 April 2017 the Federal Government released the Final Report of the Petroleum Resource Rent Tax Review, following a consultation period in which interested parties could make submissions regarding the current framework. This review was conducted to assess the design and operation of the Petroleum Resource Rent Tax (PRRT), crude oil excise and associated Commonwealth royalties.

An additional consultation period will be run until the end of August, and Treasury shall have until the end of September to report back to Government. Due to the fact that substantial investment has been made into the Australian petroleum sector in recent years on the basis of long-standing taxation arrangements, the Report has split its recommendations into two parts:

What the changes should apply to	Recommendations
New projects (as defined by the PRRT legislation)	The design of the PRRT should be updated so that it’s more appropriate to the current Australian oil and gas industry. This includes: changing the arrangement for the uplift rates for all deductible expenditures ensuring that classes of expenditure with the highest uplifts are deducted first, having regard to how deductions can compound in large, long-life projects examining the rules for the transferability of deductions between projects in a company to ensure they produce a consistent set of outcomes and examining the gas transfer pricing arrangements to identify possible changes that would achieve greater simplicity and transparency, ease of compliance, and fair treatment of the economic rent from each stage of an integrated petroleum operation.
All existing and new projects	There need to be changes to improve the integrity, efficiency and administration of the PRRT. Recommendations in this respect include: There should be an extension of the integrity measures in place regarding the ‘starting base’ amount of additional deductible expenditure. Any upcoming changes to decommissioning requirements for projects in Commonwealth waters, should consider potential PRRT revenue impacts. The PRRT legislation should be amended to recognise partial closing down expenditure as a legitimate general project expense. PRRT taxpayers are required to lodge annual returns after they start holding an interest in an exploration permit, retention lease or production licence rather than having to wait until they receive assessable receipts from the project. The Commissioner should be given the power to treat a new project as a continuation of an earlier project where it would be reasonable to do so. The Commissioner should be given the discretion to recognise multiple projects within a single production licence area, where they are genuinely separate and independent. The option for entities within a wholly owned group to have all the interests of the group in an onshore project taken together and reported as a single PRRT return (without affecting the project-based nature of the tax) should be extended to offshore projects. Taxpayers should be able to adopt a substituted accounting period for PRRT to align with their choice of a substituted accounting period for income tax. Taxpayers operating with a Multiple Entry Consolidated group should be able to make a functional currency choice for PRRT purposes that aligns with the functional currency choice it makes for income tax purposes. The Commissioner should be given the power to administratively exempt projects from lodging PRRT returns where they are clearly unlikely to pay PRRT in the foreseeable future. PRRT anti-avoidance rules should be amended in line with the 2013 amendments to the income tax rules.

*The report makes no recommendations with respect to the crude oil excise or Commonwealth royalty schemes.

Wine Equalisation Tax reform

On 5 April 2017 the Federal Government released the draft Treasury Laws Amendment (Measures 4 for a later sitting) Bill 2017: Wine Equalisation Tax to implement changes announced in December 2016. The Bill makes a number of amendments to the existing Wine Equalisation Tax (WET) regime including:

• The WET rebate will be limited to wine for which:
  • producers maintain ownership throughout the wine-making process
  • 85% of the final product originated from source product that was owned by the producer and
  • producers have branded and packaged for retail sale
• A stronger link between entitlement to the WET producer rebate and WET being paid will be created
• Integrity changes to the WET credit rules
• A further reduction of the WET producer rebate cap from $500,000 to $350,000 form 1 July 2018
• Wine products containing between 700mL and 850mL of wine per litre will now be subject to excise and excise equivalent customs duty rather than WET
• The associated producers rule will be tightened and
• The earlier producer rebate rule will be repealed.

Victorian 2017-18 Budget

On 2 May 2017 the Victorian Government released their 2017-18 Budget. The following key announcements were made.

Land transfer duty

• For contracts entered into from 1 July 2017, eligible first home buyers will pay no stamp duty on purchases valued up to $600,000. A concession will apply on a sliding scale for purchases valued between $600,000 and $750,000. This will provide stamp duty relief of up to $31,000 on individual purchases.
• Additionally, for contracts entered into from 1 July 2017, the off-the-plan concession for new properties will be re-targeted to buyers that qualify for the first home buyer or principal place of residence stamp duty concession.
• From 1 July 2017, the stamp duty concession currently available on transfers of property between spouses will be removed. Existing stamp duty exemptions applying to transfers of a principal place of residence between spouses, and transfers of property following a relationship breakdown, will remain.

Land tax

• Effective from the 2017 calendar year, properties that are left unoccupied for six months or more in a calendar year, will be subject to a tax of 1% of the property’s capital improved value.
• From 2019 the current biennial property valuation process for the calculation of land tax will be centralised within the Valuer-General Victoria and undertaken annually, aligning with practice in other Australian jurisdictions.

Motor vehicle registration duty

• From 1 July 2017, the motor vehicle registration duty charged in respect of new passenger vehicles will increase from $6.40 per $200 of the dutiable value of the vehicle, to $8.40 per $200. This is an increase of 1% on the price of new vehicles.

Payroll tax

• From 1 July 2018 the current payroll-tax free threshold of $575,000 for 2016-17 will be increased to $650,000.
• From 1 July 2017, a lower payroll tax rate of 3.65% will apply to businesses with payrolls that comprise at least 85% regional employees.
• The threshold under which businesses can opt to make annual payroll tax payments, rather than monthly payments, will increase from annual payroll tax liabilities of $10,000 to $40,000.

Insurance taxes

• From 1 July 2017, insurance duty applicable to policies insuring agricultural products against damage from floods, fire and other accidental provisions will be abolished.

Northern Territory 2017-18 Budget

On 2 May 2017 the Northern Territory Government released their 2017-18 Budget. The following key announcements were made.

Land transfer duty

• From 1 July 2017 a new stamp duty rate of 5.75% will apply to conveyances where the unencumbered value of the property or the consideration payable is $3,000,000 or more but less than $5,000,000.
• From 1 July 2017 a new stamp duty rate of 5.95% will apply to conveyances where the unencumbered value of the property or the consideration payable is $5,000,000 or more.
• The introduction of the Senior, Pensioner and Carer Concession, which provides a stamp duty discount of up to $10,000 for the purchase of a home valued up to $750,000 or vacant land valued up to $385,000.
• The introduction of the Principal Place of Residence Rebate, which provides a $7,000 stamp duty rebate to non-first home buyers who purchase or build a new home.

Motor vehicle registration duty

• From 1 July 2017 there will be an increase in motor vehicle registration fees for light vehicles.