Talking Tax – Issue 41

Case Law

Sham bank borrowings decision confirmed - Millar v FCT [2015] FCA 1104

The Full Federal Court has by majority upheld the Federal Court decision in Millar & Anor v FC of T 2015 ATC 20-531 which affirmed amended assessments issued to a taxpaying couple relating to certain bank deposits and sham borrowings. The Federal Court decision was discussed in detail in Talking Tax - Issue 9.

The taxpayers purchased an apartment in Queensland in 2000 for $1.1 million. The taxpayers financed the purchase with a loan of $600,000 from an Australian bank and a loan of $600,000 from the Hua Wang Bank Berhad (HWBB) which was obtained through Vanda Gould (Mr G), a Sydney accountant and financial advisor. A condition of the loan from HWBB was that an equivalent amount be deposited in HWBB. The taxpayers transferred $600,000 from their superannuation fund to HWBB.

Following an audit, the Commissioner determined that the taxpayers avoided tax by entering into a sham transaction and that their intention was to improperly access superannuation funds to purchase the property. As such, any interest deductions should be disallowed. The taxpayers objected and when the objection was disallowed, sought review claiming they were entering into a normal borrowing arrangement that was legally binding.

However, in order to disprove the sham position, the taxpayers needed to establish that they had entered into a legally effective loan with HWBB and not merely that they believed Mr G had done so by accepting the arrangement he had put to them. The taxpayers’ evidence failed to satisfy the Full Court.

The decision provides a useful summary of the various judicial pronouncements on what constitutes a "sham".

ATO Updates

Small business rules

The ATO has updated its website with further information regarding some of the small business rules. The key points from the updates are summarised below.

Instant asset write-off – simplified depreciation rules

Small businesses with an aggregated annual turnover of less than $2 million can choose to use the simplified depreciation rules.

Under these rules small businesses can:

• immediately deduct the business portion of most assets costing less than $20,000 purchased between 7:30pm on 12 May 2015 and 30 June 2017
• pool most other depreciating assets that cost $20,000 or more in a small business asset pool and claim the following:
  • a 15% deduction in the first year
  • a 30% deduction each year after the first year
  • write-off the balance of their small business pool at the end of an income year if the balance- before applying any other deprecating deduction- is less than $20,000.

A deduction can be claimed through your tax return, in the year the asset was first used or installed ready for use.

Deductions for professional expenses for start-ups

From 1 July 2015 small businesses may be entitled to a range of deductions when starting up a new business including professional, legal and accounting advice and government fees and charges.

Small business restructure roll-over

From 1 July 2016, as part of a genuine restructure, small businesses' active assets can be transferred from one entity to another, without incurring an income tax liability.

This rollover applies to certain active capital gains tax (CGT) assets, trading stock, revenue assets or depreciating assets.

It should be noted that the transaction must meet the test of being a genuine restructure. See out article: 'The Small Business Restructure Roll-over- it may be three years at sea before you reach a safe harbour'.

Fringe benefit tax changes for work-related devices

From 1 April 2016, if small businesses provide multiple work-related portable electronic devices with similar functions, computer software, protective clothing, briefcases or tools of trade to their employees, they are not liable to pay fringe benefits tax (FBT).

Small business income tax offset

From the 2015-16 income year, a tax offset is available to an individual on the portion of their income that is from:

• net small business income from sole trading activities
• a share of net small business income from a partnership or trust, less any deductions attributable to your share.

Company tax cut for small business

The rate at which small businesses are taxed has been reduced from 30% to 28.5% for income years commencing on or after 1 July 2015.

This rate also applies to unit trusts and public trading trusts. However, the corporate tax rate will remain at 30% for all other companies that are not small business entities (a small business entity is one with an aggregated turnover less than $2 million).

Please note that the maximum franking credit that can be allocated to a frankable distribution remains unchanged at 30%, including small business eligible for the 28.5% tax rate.

New Division 7A benchmark interest rate

The ATO has released Tax Determination TD 2016/11 outlining the new benchmark interest rate for the 2016-17 income year, for the purpose of Division 7A of Part III of the Income Tax Assessment Act 1936, is 5.40%.

The benchmark interest rate is relevant for any private companies who have a loan (or deemed loan) to a shareholder. There is a risk that a loan from a private company to a shareholder will be deemed a dividend for tax purposes if the interest rate is below the benchmark interest rate of 5.40% for the 2016-17 income year.

If you are concerned about the application of Division 7A to any loans from your private company to its shareholders, please contact one of our tax lawyers for assistance.

Goods and Services Tax Determination 2016/2: Can division 142 of the A New Tax System (Goods and Services Tax) Act 1999 prevent refunds of increasing adjustments under section 19-50 of the GST Act?

The ATO has issued GST Determination GSTD 2016/2, which aims to prevent windfall gains by disallowing the refund of increasing adjustments under Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Where an entity's assessed net amount takes into account an increasing adjustment under section 19-50 of the GST Act, and some or all of that increasing adjustment is later found to have been incorrectly taken into account in calculating the assessed net amount, then Division 142 may apply to prevent a refund of the excess GST. For Division 142 to prevent a refund of an adjustment amount, the following requirements must be satisfied:

• the adjustment amount is an amount of excess GST
• the adjustment amount has been passed on by a supplier to a recipient
• the supplier has not reimbursed the adjustment amount to the recipient.

Local file – high level design now available for Country-by-Country reporting

Australia is one of 44 countries that has already signed up for the exchange of Country-by-Country (CbC) reporting standards. CbC reporting is part of the international measures aimed at combating tax avoidance through comprehensive exchanges of information between countries

As part of the CbC reporting, it is essential for multinational entitles with an annual global income of A$1 billion to provide the Local File to the ATO for income years commencing on or after 1 January 2016. The Local File requires multinationals to report details regarding their international related party dealings, revenues, profits, and taxes paid by jurisdiction. The intention of the Local File is to gather a global picture of how multinationals operate so the ATO can better assess transfer pricing risks.

The Local File design released by the ATO:

• Outlines the ATO’s approach to the information requirements in Annex II of the OECD guidance.
• Identifies the information required to be provided by entities completing the short form Local File and the ordinary Local File.
• Ensures Australia meets its commitments under OECD Action 13, while minimising overlap with existing reporting requirements (for example with disclosures in the international dealings schedule).

Further details on the Local File design, including a list of the specific questions the entity will need to answer, can be found on the ATO website.

Legislation and government policy - 2016/17 South Australian State Budget

The South Australian State Budget was handed down on 7 July 2016 with a number of tax measures that affect stamp duty and land tax.

Stamp Duty

The existing stamp duty concession for off-the-plan apartments which was due to expire on 30 June 2016 will be extended for a further 12 months. The whole of the state, rather than just the metropolitan area, will be eligible for eligible contracts entered into between 20 June 2016 and 30 June 2017.

Where a purchaser acquires property from two or more independent arm's length vendors, the value of these properties will not be aggregated to determine the total stamp duty liability.

All trustees that hold eligible land as trustee of an eligible trust qualify for the stamp duty exemption for conveyance of land to a body established for charitable or religious purposes from 1 July 2016.

From 1 July 2016, duty on all goods will be removed whether they are part of an arrangement that includes a dutiable land transaction or a landholder transaction.

A taxpayer is only required to pay 50% of the primary tax in dispute before an appeal can be lodged, as opposed to 50% of the whole amount of tax assessed inclusive of interest and penalty tax.

Land Tax

The principal place of residence land tax exemption is available for up to two land tax years where the residence is unoccupied due to being substantially renovated or rebuilt.

The land tax exemption for sporting and racing associations for land used for sporting and racing purposes will extend to all non-residential non-vacant land owned by the associations, including those not used for such purposes (clubrooms or other facilities).

The scope of the land tax exemption for charitable associations will be expanded to ensure that owners of land held on behalf of charitable purpose trusts qualify for the exemption, notwithstanding that the owner's constituent documents do not limit the owner's operations to charitable purposes. All that will be required is that the trust for which the owner holds the land be established for charitable purposes.

The land tax changes are proposed to be effective from 30 June 2016.

Wagering Tax

A wagering tax of 15% will be introduced on net wagering revenue received from persons located in South Australia by all Australian-based wagering operations (from 1 July 2016).

A tax free threshold of $150,000 net wagering revenue per year will apply for all operators.

Payroll Tax

The small business payroll rebate generally available to employers with taxable payrolls less than or equal to $1.2 million, will be extended for a further four years to 2019-20.

If you have any questions about the impact of the South Australian budget on your business, please contact one of our state tax experts.