Thinking | 29 October 2018
Talking Tax – Issue 139
Greater guidance for reporting approved SMSF auditors
On 18 October 2018, the ATO released Practice Statement PS LA 2018/1, which provides guidance to ATO staff on the Commissioner’s power to refer matters concerning approved SMSF auditors to ASIC.
Generally, an ATO staff member may refer a matter to ASIC if he or she is of the opinion that an approved SMSF auditor is not fit and proper or has failed to perform the duties required by law.
Legislation and government policy
No vacancy: Government denies deduction for losses or outgoings incurred in relation to vacant land
On 15 October 2018, the Federal Government introduced exposure draft legislation (Treasury Laws Amendment (Measures for a later sitting) Bill 2018: Limiting deductions for vacant land) to improve the integrity of the tax system by denying certain deductions for expenses associated with holding vacant land. The exposure draft Bill amends the Income Tax Assessment Act 1997 (Cth) to deny deductions for losses or outgoings incurred to the extent they relate to a taxpayer holding vacant land.
However, the proposed amendments do not apply to any losses or outgoings relating to holding vacant land to the extent that:
- they are necessarily incurred by the entity holding the land in the course of carrying on a business in order to earn assessable income; or
- an affiliate, spouse or child of the taxpayer, or an entity that is connected with the taxpayer or of which the taxpayer is an affiliate, is carrying on a business on the vacant land.
The proposed amendments do not apply to corporate tax entities, managed investment trusts, public unit trusts and unit trusts.
The proposed amendments are intended to apply to losses and outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.
Public consultation on the exposure draft legislation will close on 31 October 2018.
We note the following matters have been explained in the Explanatory Materials for the Bill.
Land is considered vacant if there is no building or other structure on the land that is substantial and permanent and in use or ready for use. In this context, land does not have to refer to the whole of the land on a property title but could refer to just part of the land.
Holding cost of vacant land incurred in carrying on a business
Unless the proposed amendments apply to the costs of holding land, the proposed amendments do not deny deductions to the holder or the costs of holding that land to the extent they are incurred in the carrying on of a business by the taxpayer or certain entities related to the taxpayer. For example, the amendments will not apply to a property developer that holds land for the purposes of carrying on a business.
The proposed amendments also apply separately to any costs incurred by the lessee in relation to their interest in the land as the lessee is also considered to hold the land under the terms of the lease.
Land treated as vacant until residential premises exist on the land
Under the proposed amendments, a special rule applies to land that contains residential premises within the meaning of the GST Act. Such structures are disregarded and the land is treated as remaining vacant for the purposes of these amendments until the residential premises are:
- able to be occupied under the law; and
- leased, hired or licensed or available for lease, hire or licence.
This means a taxpayer cannot deduct the costs of holding land containing residential premises until the taxpayer is actively seeking to derive income from the property.
Denied deductions for cost base expenses included in the cost base
Losses and outgoings that are not deductible in an income year as a result of the proposed amendments are not able to be deducted in later years. However, they may be included in the cost base of the asset for CGT purposes, resulting in a corresponding reduction in any capital gain when a CGT event happens.
Third tranche of the CCIV bill
On 15 October 2018, the Government released the third tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 (CCIV Bill) (Cth) for public consultation. The Corporate Collective Investment Vehicle (CCIV)is an investment vehicle with a corporate structure, with the additional consumer protection of a depositary for retail funds who are responsible for the oversight of administrative functions.
The CCIV Bill will insert a new chapter into the Corporations Act 2001 to create and regulate the CCIV. The third tranche of the CCIV Bill covers:
- the independence requirement for the depositary whose responsibility it is to safeguard the fund’s assets and oversee some of the fund’s activities;
- arrangements and reconstructions, receivership and winding up;
- deregistration of sub-funds and CCIVs;
- takeovers, compulsory acquisitions and buy-outs, and disclosure requirements; and
- other consequential amendments to the Asia Region Funds Passport, the ASIC Act and the Personal Property and Securities Act 2009.
Please click here for more information on the CCIV, prepared by Hall & Wilcox’s Financial Services team.
Changes to concessional loans between tax exempt entities
On 12 October 2018, the Government released exposure draft legislation (Treasury Laws Amendment (Measures for a later sitting) Bill 2018: Tax Treatment of Concessional Loans Involving Tax Exempt Entities) to remedy the impact of unintended tax deductions that arise in respect of repayments made to principals in certain circumstances.
The deductions currently arise due to the interaction between the taxation of financial arrangement (TOFA) rules and the rules dealing with deemed market values for tax exempt entities that later become taxable entities. The draft legislation proposes to amend the Income Tax Assessment Act 1936 (Cth) to:
- specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and
- modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.
The proposed amendments are intended to apply where a relevant taxpayer becomes a non-tax exempt entity after 8 May 2018.
Submissions can be made during the consultation period up until 2 November 2018.
When a tax exempt entity is transferred to the private sector, for the purpose of applying the TOFA provisions to an asset or a liability that is a Division 230 financial arrangement that is entered into on concessional terms, the market value of the relevant asset (including an asset that corresponds to a liability) is taken to be the amount that the holder provided in relation to starting to have the asset:
- reduced by repayments of principal made before the transition time and the amount of any impairment; and
- increased by the amount of the cumulative amortisation (worked out using the effective interest method) of any difference between the initial amount and the amount payable on the maturity of the asset.
This market value is used to determine the amount of the financial benefits to the taxpayer that the transition is taken to have received or provided in relation to the Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.
Black Economy Task Force
On 18 October 2018, the House of Representatives passed the Treasury Laws Amendment (Black Economy Taskforce Measures No 2) Bill 2018 (Bill). The Bill proposes:
- to amend the Income Tax Assessment Act 1997 by denying an income tax deduction for certain payments if associated withholding obligations have not been complied with;
- to amend the Taxation Administration Act 1953 by requiring entities with ABNs providing “road freight”, “IT”, or “security, investigation or surveillance” services to report to the ATO information about transactions in which other entities are engaged to undertake those services on their behalf; and
- to, along with the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, amend the relevant Excise Acts to establish a framework to make excise duty on tobacco due and payable at time of manufacture.
Treasury Laws Amendment Bill
On 18 October 2018, the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (Bill) was passed by the House of Representatives. The Bill contains a number of technical amendments to the Attribution Managed Investment Trusts (AMIT) regime which are designed to address the various teething issues that have been raised in respect of the operation of the regime.
The Bill seeks the following outcomes in relation to the AMIT regime:
- MITs with a single unitholder will be eligible as an AMIT if the only member is a specified widely-held entity.
- The list of eligible investors in MITs will be extended to include the Future Fund Board of Guardians and its wholly owned entities.
Calculating rounding adjustments
- For the purposes of calculating rounding adjustments and trustee shortfall tax for discount capital gains purposes, the determined trust component and the determined member component will be calculated on the discount amount.
Net amount of adjustments to give rise to CGT event E10
- Where a member of an AMIT receives non-assessable distributions from the AMIT and the cost base of the membership interest cannot be reduced to nil (as it was already nil), the net amount of adjustments will give rise to a capital gain under CGT event E10.
CGT amounts included in non-assessable payments
- In calculating a fund payment of a MIT or AMIT, capital losses from non-taxable Australian property which have been applied against capital gains from taxable Australian property will be added back.
TFN withholding rules
- Amounts which have already been subject to TFN withholding will not be subject to the TFN withholding rules for AMITs;
- Trustees will be able to recover TFN withholding amounts from an investor (including setting off that amount against payments due to the investor).
Franking credits for former public trading trusts and corporate unit trusts
- Former public trading trusts and corporate unit trusts will now be permitted to distribute franking credits to beneficiaries until 30 June 2019, provided that the distribution is paid out of income derived on or before 1 July 2016.
Election into the AMIT regime for MITs with substituted accounting periods
- MITs with substituted accounting periods will be able to elect into the AMIT regime for the 2016-17 income year and later income years.
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