Talking Tax – Issue 31

Case law

High Court finds trustee had power to apply trust capital or income

On 6 April 2016, the High Court, by a 3:2 majority, dismissed an appeal from the NSW Court of Appeal regarding the exercise of powers under a trust deed by the Trustee. This is relevant to taxpayers due to the importance of trustee powers in the application of trust assets and income and the tax consequences of these actions.

In this case, a corporate Trustee had resolved to make a final distribution of trust monies to the beneficiaries of the trust. The trust assets, being shares in a company, were not sold and this amount was not paid to the beneficiaries. Instead, a non-current liability for the same amount was created and then executed as a charge in favour of the beneficiaries, to be paid upon demand, creating a debtor/creditor relationship. The beneficiaries died before they requested this payment be made, with their interest in the shares under the trust bequeathed to the Appellants and the residuary estate left to other parties. The appellants sought to have the distribution declared void or of no effect.

The High Court held that the trust deed allows the Trustee to ‘advance…and apply’ trust capital or income as they see fit and, notwithstanding the fact that there was no change in any payment or change in ownership, this was a valid exercise of that power. The High Court stated that actions of the Trustee had therefore created an immediate and unconditional obligation on the Trustee, to pay the amount in question to the beneficiaries. The appeal was dismissed and the High Court upheld the order that the Trustee pay this amount to the estate of the beneficiaries.

ATO updates

Education campaign for employee and contractor obligations

The ATO is currently running a campaign aimed at educating businesses in the supermarket, car retailing, bakery and computer system design industries. The ATO has found that businesses in these industries struggle to understand their tax and superannuation obligations. Following this campaign, the ATO will be undertaking audits of employers who do not meet their obligations.

The specific focus areas of this campaign will be:

• Superannuation;
• PAYG withholding; and
• Fringe benefits tax.

ATO settlement offer runs out 30 April

The ATO is currently reviewing managed partnership arrangements that are being used by individuals and trusts to access the lower corporate tax rate without paying additional top-up tax amounts. The ATO has advised that managed partnership arrangements do not escape the application of Division 7A of the Income Tax Assessment Act 1936.

If you have implemented one of these arrangements, you may be eligible for a settlement offer. Application for a settlement offer will prevent an audit of the managed partnership arrangement for previous years. The ATO has stated that settlement will reduce a taxpayer’s potential liabilities through the remission of a majority of penalties and applying available franking credits. Payment plans will also be available.

This settlement offer ends on 30 April 2016, so contact one of our tax professionals immediately if you are involved in a managed partnership arrangement.

Draft ruling regarding deductibility of website expenditure

The ATO has recently issued the draft taxation ruling TR 2016/D1 regarding the deductibility of expenditure for a commercial website. This ruling outlines a number of broad principles to be applied when determining how this expenditure is to be treated. Research and development costs are not directly referenced in this draft, so these claims should not be impacted.

Expenditure will generally be deductible where it relates to piecemeal or routine modifications, resulting in minor enhancements to the website.

On the other hand, the expense will be capital in nature and therefore non-deductible where it results in a change or improvement to the profit-yielding structure of the business. This will be seen where there is enhanced functionality of a website or the creation of a significant or material structural advantage to a business. Where the expense is capital in nature, it may be deemed ‘in-house software’ and be treated as a depreciating asset of the business. Expenditure falling outside these main areas may be caught by the capital gains tax or black-hole expenditure provisions.

As this is an area that is subject to increasing rates of change, we expect to see more developments in the near future.

Legislation and government policy

More flexibility for intangible asset depreciation rules

The federal Government has released a schedule to the draft legislation Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016, regarding the intangible asset depreciation rules. The aim of these changes is to align the treatment of tangible and intangible depreciating assets and allow them to be depreciated over the period of time they actually provide economic benefits.

Under the current law, taxpayers must apply the effective life provided by statute in determining the period over which an intangible asset may be depreciated. These draft provisions seek to give taxpayers the choice to self-assess the effective life of certain intangible assets or continue to apply the statutory effective life.

If passed, these changes will apply to intangible assets that a taxpayer acquires on or after 1 July 2016. The old provisions will continue to apply to assets held before this date. Submissions in relation to this draft legislation are due by 22 April 2016.