Talking Tax – Issue 203

By Michael Parker, Todd Bromwich and Olivia Gray

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In this edition of Talking Tax, we discuss the ‘natural love and affection’ exception to the commercial debt forgiveness rules, whether expenditure incurred setting up an employment share scheme is deductible and the remade Public Ancillary Fund Guidelines.

We also provide a round up of our latest publications including on the recent cases of CFMMEU, Jamsek and Guardian AIT.

ATO updates

TD 2022/1 – can a company exhibit natural love and affection?

Under the Commercial Debt Forgiveness rules contained in Division 245 of the Income Tax Assessment Act 1997 (Cth) (1997 Act), the net forgiven amount of commercial debts which have been forgiven are to be set off against the debtor’s tax losses, net capital losses, deductions and cost bases of their capital gains tax assets, subject to certain exceptions. In Taxation Determination TD 2022/1 (TD 2022/1) the Commissioner takes the view that for the ‘natural love and affection’ exception to apply, the creditor must be a natural person.

In taking this view, the Commissioner states that the context of the relevant provision requires a direct causal nexus between the forgiveness and the natural love and affection, and the natural love and affection must arise in consequence of ordinary human interaction.

However, conversely, the Commissioner accepts that the debtor is not required to be a natural person. For example, the Commissioner accepts a parent may forgive the debt of a company 100% owned by their child due to love and affection felt toward them.

The Commissioner is taking a very fine distinction in TD 2022/1, which may or may not be supported by the language of the provision and the context in which it appears.

TD 2022/D2 – income tax: deductibility of expenses incurred in establishing and administering an ’employee share scheme’

In this draft Taxation Determination TD 2022/D2, the Commissioner takes the view that expenses incurred by an employer company in establishing an employee share scheme (ESS) are not deductible under section 8-1 of the 1997 Act, as they are capital in nature.

In taking this view, the Commissioner notes that:

• these costs are one-off expenses;
• the ESS forms part of the business structure; and
• the ESS has an ‘enduring benefit’ to the business structure of the company.

The Commissioner accepts that these establishment costs are a business capital expense and may be deducted over five years under section 40-880 of the 1997 Act.

The Commissioner also accepts that ongoing expenses associated with the administration of an ESS, including brokerage fees, audit fees, bank charges, making new offers to employees under an existing ESS and other ongoing administrative expenses, are deductible under section 8-1.

Given an ESS is essentially a form of employee remuneration and a cost of employment, the Commissioner’s draft position is somewhat controversial. It is difficult to distinguish setting up an ESS from other HR and payroll functions. For instance, will the Commissioner contend that making adjustments to payroll systems in order to comply with Single Touch Payroll is a non-deductible expense?

Legislation and government policy

Taxation Administration (Public Ancillary Fund) Guidelines 2022

The Taxation Administration (Public Ancillary Fund) Guidelines 2022 (Guidelines) came into effect on 18 February 2022. They replaced the Public Ancillary Fund Guidelines 2011, which were due to sunset. The Guidelines provide the ‘minimum standards’ for the operation of Public Ancillary Funds.

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The changes have been described as ‘mostly technical’. The key changes include:

• a public ancillary fund must be established and maintained, under a will or an instrument of trust, as a valid trust under common law, State law, Territory law, Commonwealth law or foreign law (s 9);
• public and private ancillary funds that are dissatisfied with the Commissioner’s decision to reject an application for a lower minimum annual distribution rate may object to the decision (s 15(10) and Schedule 1);
• a trustee of a public ancillary fund who fails to regularly invite the public to contribute to the fund may be liable for a penalty (s 24);
• provision of guidance on the transition from the 2011 Guidelines to the 2022 Guidelines (s 29); and
• provision of a COVID-19 transitional rule for carrying forward credits for distributions exceeding the minimum distribution for the financial years 2019-20 and 2020-21 (s 30).

Case law

The recent High Court cases of Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek) provide guidance on determining whether a worker is an employee or independent contractor.

The cases indicate that the nature of the relationship is determined by the written contract between the parties. If there is a comprehensive employment agreement in place this should determine the nature of the relationship.

Our detailed written update on the judgments can be found in our earlier article, ‘Employee or independent contractor: the High Court decides‘.

Recent publications

• ‘ATO targeting independent contractor arrangements‘: in this article, we discuss the importance of correctly classifying workers as employees or independent contractors and the definition of ’employee’ under the Superannuation Guarantee (Administration) Act 1992 (SGAA).
• ‘Virdis and Moffet: a reminder that superannuation guarantee obligations apply to a broad range of ‘contractor’ relationships‘: we discuss the cases of Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 and The Trustee for Virdis Family Trust t/a Richard Heating Pty Lt v Commissioner of Taxation (Taxation) [2022] AATA 3. These cases illustrate that businesses engaging with contractors should ensure they are complying with their obligation to pay the superannuation guarantee contributions for all persons captured by this broader definition of ’employee’.
• ‘TD 2022/D1 – Is this the Commissioner’s answer to the lack of targeted amendments to Division 7A?‘: we discuss draft Taxation Determination TD 2022/D1. This draft taxation determination sets out circumstances where an unpaid present entitlement to trust income will amount to the provision of ‘financial accommodation’ and hence a loan for the purposes of Division 7A of the Income Tax Assessment Act 1936 (Cth) (1936 Act).
• ‘Section 100A guidance: highway to the danger (red) zone‘: we discuss the Commissioner’s recent guidance on the application and scope of section 100A of the 1936 Act and how the ATO intends to apply compliance resources.
• ‘Long awaited guidance on s 100A, but read with caution!‘: we discuss the recent Federal Court decision of Guardian AIT Pty ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 and its impact on the interpretation of section 100A of the 1936 Act.