Talking Tax – Issue 203

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.