Thinking | 22 February 2018
Talking Tax – Issue 108
Taxation Ruling TR 2018/2 – Income tax: record keeping and access - electronic records
This Ruling explains the Commissioner of Taxation’s view on record keeping in electronic form for the purposes of section 262A of the Income Tax Assessment Act 1936 (ITAA 1936). This Ruling discusses how taxpayers must retain and, when required, provide access to electronic records, including encrypted records, records created from e-commerce and records stored in the cloud. It applies to individuals and companies carrying on a business.
This Ruling is a consolidation of previous guidance materials issued by the Commissioner. As a result of its issue, Taxation Ruling TR 2005/9 and Taxation Determination 2002/16 have been withdrawn.
Law Companion Guidelines to be recast as Law Companion Rulings
The ATO has recently renamed its Law Companion Guidelines as Law Companion Rulings. No substantive changes have been made to the guidance materials as a result of this change and the documents will retain the status of public rulings. The purpose of these documents is to give the Commissioner of Taxation’s view on how a recently enacted law applies, with the intention of providing clarity and certainty around the Commissioner’s interpretation of the new legislation.
All online access to the former Law Companion Guidelines will no longer be accessible and links to these pages will not work. You will instead need to find the equivalent Law Companion Ruling.
Legislation and government policy
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018
On 9 May 2017, the Federal Government announced that it would modify Australia's foreign resident capital gain tax (CGT) regime to apply the principal asset test on an associate inclusive basis from the date of the announcement. This change is designed to improve the integrity of the regime by ensuring that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in taxable Australian real property (TARP).
The Government has recently released exposure draft legislation Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018 (Draft Bill) which seeks to implement this measure. The Draft Bill clarifies that the principal asset test will be applied on an associate inclusive basis for the purpose of determining whether an entity’s underlying value is principally derived from TARP.
Under the Draft Bill, if the entity being tested holds a membership interest in another entity, the membership interest is treated as if it were two assets; a TARP asset and a non-TARP asset. However, the market value of the TARP asset is taken to be $Nil if the aggregated participation interests held by the holding entity and its associates in the other entity is less than 10%.
Prior to this amendment, the market value of the TARP asset was taken to be $Nil if the entity's direct participation interest, or the holding entity's total participation interest in the other entity, was less than 10%.
Proposed amendments to the consolidation regime
Recently introduced to the House of Representatives, the Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 (Bill) seeks to amend the Income Tax Assessment Act 1997 (ITAA 1997) to make a number of amendments to the income tax consolidation regime.
The Bill, as currently drafted, proposes to make the following amendments:
- Deductible liabilities measure - A double benefit can arise in respect of certain liabilities held by an entity that joins a consolidated group. This will be removed.
- Deferred tax liabilities measure - Deferred tax liabilities will be disregarded for the purposes of entry and exit tax cost setting rules, with the intention of simplifying their operation.
- Securitised assets measure - Anomalies can arise when an entity joins or leaves a consolidated group, where the entity has securitised an asset. These will be removed.
- Churning measure - Where a capital gain or capital loss made by a foreign resident owner when it ceases to hold membership interests in the joining entity is disregarded in certain circumstances, this measure will switch off the entry tax cost setting rules for the joining entity.
- Taxation of Financial Arrangements (TOFA) measure - This measure will clarify the operation of the TOFA provisions when an intra-group asset or liability that is, or is part of, a Division 230 ITAA 1997 financial arrangement emerges from a consolidated group because a subsidiary member leaves the group.
- Value shifting measure - Anomalies can arise when an entity leaves a consolidated group holding an asset that corresponds to a liability owed to it by the old group. These will be removed.
MAAL to be extended to foreign trusts and partnerships
The Federal Government has released exposure draft legislation Treasury Laws Amendment (Measures for a later sitting) Bill 2018: MAAL (Draft Bill) to extend the application of the Multinational Anti-Avoidance Law (MAAL). The proposed changes are intended to capture the use of foreign trusts and partnerships in corporate structures that may otherwise allow multinational entities to avoid having a taxable presence in Australia.
Currently, the supplies and income of Australian entities controlled by foreign entities are generally not relevant when determining if a foreign entity satisfies the conditions for the MAAL to apply. The Draft Bill will provide that for the purposes of section 177DA of the ITAA 1936:
- supplies made by a trust or partnership to an Australian customer can be treated as being made by a foreign entity to the customer and
- income the trusts or partnerships receive from these supplies is treated as being received by a foreign entity if the trust or partnership, provided certain criteria are met.
Once enacted, the proposed changes would take effect from 1 January 2016.
Tax treatment of bare trusts: Board of Taxation report makes eight recommendations for change
The Board of Taxation (Board) has now released its report Review of the Tax Treatment of Bare Trusts and Similar Arrangements. This report is the product of a self-initiated review into the tax arrangements applying to bare trusts and similar arrangements, which was completed in June 2017.
The Board said it considered the current practice of disregarding or looking through these trusts for income tax purposes and whether legislative change is necessary. According to the Board, the practice appears not to be supported by Division 6 of Pt III of the Income Tax Assessment Act 1936 (ITAA 1936) for most types of bare trusts and is only maintained by an ongoing administrative approach from the Commissioner. The Board noted that this approach may change as a result of developments in the law, including court decisions.
The Board made a total of eight recommendations. Significantly, it has recommended that it is appropriate to legislate to provide a look-through approach for bare trusts and similar arrangements for certain income tax purposes. The Board has recommended that a characteristics-based approach be taken in determining what constitutes a bare trust and has stated that where the terms of the trust are in substance equivalent to direct ownership of the assets by the beneficiary, the tax consequences should be analogous.
The Federal Government has indicated that it will look to progress the recommendations to streamline arrangements for bare trusts as part of the regulatory reform program. Treasury will now undertake further consultation on the scope of potential changes.
Government response to tax deductibility inquiry
The Federal Government has provided a response to the report prepared by the House of Representatives Standing Committee on Economics (Committee), following its inquiry into the simplification of the personal and company income tax system.
The Committee was asked to examine some options to simplify the personal and company income tax system, with a particular focus on options to broaden the base of these taxes in order to fund reductions in marginal rates. A particular focus of the Committee was the deductibility of expenditure of individuals in earning assessable income and the deductibility of interest incurred by businesses in deriving their business income.
A summary of the Committee’s recommendations, and the Government’s responses, is provided below:
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