Talking Tax – Issue 53

Legislation and Government policy

Parliament to discuss cuts to the corporate tax rate

Parliament commenced its Spring sittings on Monday 10 October 2016 with discussion of the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (Bill) scheduled to occur this week.

This Bill amends:

  • The Income Tax Rates Act 1986 to reduce the corporate tax rate for small businesses with an aggregated turnover of less than $10 million to 27.5% for the 2016-17 year. This will be progressively extended to all corporate tax entities, then reduced as follows:
Income year Annual aggregated turnover threshold Corporate tax rate
2017-18 $25 million 27.5%
2018-19 $50 million 27.5%
2019-20 $100 million 27.5%
2020-21 $250 million 27.5%
2021-22 $500 million 27.5%
2022-23 $1 billion 27.5%
2023-24 All 27.5%
2024-25 All 27%
2025-26 All 26%
2026-27 All 25%
  • The Income Tax Assessment Act 1997 (ITAA 1997) to increase the small business income tax offset to 16% of the total net income of a small business (or an individual’s share of the net income of a small business) total net income; and enables small businesses with an aggregated turnover of less than $5 million to access the offset. These amendments provide small businesses that do not pay the corporate tax rate with a benefit that is broadly equivalent to the company tax rate cuts.
  • ITAA 1997 to enable small business with an aggregated turnover of less than $10 million to access most small business tax concessions, but importantly, not the small business CGT concessions (where a $2 million cap will continue to apply).

Draft debt-equity legislation released

On 5 October 2016, the Government released draft legislation (Tax and Superannuation Laws Amendment (Debt and Equity Scheme Integrity Rules) Bill ) to implement changes to the debt-equity tax rules in Division 974 of the ITAA 1997. The legislation aims to reduce the uncertainty of the current rules and the associated compliance costs.

Specifically, the draft legation considers the circumstances in which multiple schemes should be aggregated and considered as a single scheme for the purpose of the debt-equity rules. Broadly, the aim is to only aggregate multiple schemes to a single scheme where doing so is consistent with the economic substance of the scheme, taking into account two tests:

  • The interdependence test - whether the pricing, terms and conditions of the schemes are interdependent such that it may impact their classification as either debt or equity.
  • The design test - whether the schemes were intended to ‘produce their combined economic effect’ as opposed to a link that is either accidental or without intent.

The draft legislation will provide specific examples to assist taxpayers in applying these tests and determining whether multiple schemes should be aggregated before applying the debt-equity test.

Treasury is accepting submissions on the draft legislation until 21 November 2016.

ATO updates

Early engagement for private advice

The ATO has extended its service of early engagement for advice to all business types.

The early advice service provides businesses with the earliest opportunity to engage with the ATO to seek advice on complex tax and superannuation transactions, with the aim of allowing early clarification and identification of possible issues before commencing a transaction.

Taxpayers can engage with the ATO by phone or by submitting written request. The ATO aims to respond in the first instance within two working days. The response will consider timeframes and critical dates, respective roles and responsibilities and possible future actions such as an application for a ruling.

The extension of this service to all business types is a positive step in strengthening the dialogue between taxpayers and the ATO and achieving timely and cost effective resolution of issues.

Case law

Federal Commissioner of Taxation v Financial Synergy Holdings Pty Ltd (M46/2016)

The High Court has refused a special leave application by the Commissioner to appeal against the Full Federal Court’s decision in Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation [2016] FCAFC 31.

The case involved the timing of acquisition of certain pre-CGT assets for the purpose of ascertaining their cost base. The assets had since become part of a consolidated group.

The assets had previously been considered ‘pre-CGT assets’ in the hands of the transferor and were deemed to be acquired before 20 September 1985 under the relevant CGT roll-over provisions (s122-70(3) of ITAA 1997). While there is not usually any need to determine the cost base of a pre-CGT asset because the loss or gain is exempt from CGT, the taxpayer had to ‘push down’ its cost base on acquiring the assets for tax consolidation purposes.

The taxpayer used the normal cost base provisions in (s110-25(2)(b) of ITAA 1997) to determine the value of the asset at the time of acquisition. However, the Commissioner argued that the assets should be valued at the deemed time of acquisition.

The Full Federal Court had held in favour of the taxpayer that the ‘time of acquisition’ was not the ‘deemed time’ under the tax consolidation rules, but rather the actual time that the taxpayer acquired the assets.

ZDCW v Federal Commissioner of Taxation [2016] AATA 788

The Administrative Appeals Tribunal of Australia (ATAA) has held that a former CEO suffering from Parkinson’s disease would not suffer serious hardship in being required to settle a $130,000 tax liability arising as a result of income generated from an income protection policy.

The Tribunal considered the taxpayer’s financial affairs and found that he was not in financial distress and held that the liability would not bring about dire health consequences claimed by the taxpayer.

The Tribunal relied on the non-exhaustive list of factors set out in Practice Statement Law Administration PS LA 2011/17 which gives guidance as to the exercise of the discretion to grant debt relief. Specifically, the following factors were determinative:

  • the applicant has, questionably or otherwise, disposed of funds or assets without making proper provision to meet tax liability
  • the person has used available funds to discharge debts due to other private creditors in preference to debts due to the ATO
  • the applicant has a poor compliance history
  • the applicant is unable to demonstrate that they have made provision for future debts.

This case provides relevant guidance on the application of PS LA 2011/17 and the factors that should be considered before making an application for debt relief.

ERIC Insurance Limited v Chief Commissioner of State Revenue [2016] NSWCATAD 217

The case confirms a line of authority that supports the pro rata allocation of the total policy sum over the term of the policy, such that duty is charged on the amount attributable to each year.


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