Thinking | 10 March 2017
Talking Tax – Issue 68
Treasury Laws Amendment (2017 Measures No. 1) Bill
The Treasury Laws Amendment (2017 Measures No. 1) Bill (Bill) has been introduced to allow investors who used an interposed trust to invest in early stage investment companies (ESIC) and early stage venture capital limited partnerships (ESVCLP) to access the concessional capital gains tax (CGT) treatment available to other investors. The amendments give effect to the original intent of the legislation as part of the National Innovation and Science Agenda.
The Bill also makes amendments to the Australian Securities and Investments Commission Act 2001 (Cth) to permit ASIC to more readily share information with the Commissioner of Taxation.
The current law applies so that where an investor indirectly invests in an ESIC or ESVCLP through an interposed trust, CGT event E4 would apply to claw back any disregarded capital gains that are later distributed through the trust. Specifically, CGT event E4 operates to reduce the cost base of the investor’s interest in the trust by the non-assessable portion of the distribution (and creates a capital gain where the cost base is reduced below zero).
The amendments will modify CGT event E4 to exclude ESIC and ESVCLP tax concessions to ensure that the relevant tax concessions can be utilised by investors who use a trust structure to make their investment.
However, the amendments only extend to payments made to an investor through a trust with a direct interest in an ESIC, not a trust with an indirect interest in an ESIC. In other words, where the investor receives a distribution from a trust which is a beneficiary of another trust that holds an interest in an ESIC, only the trust holding the direct interest in the ESIC will get the benefit of the amendments, not the ultimate investor. The Government has indicated it will consider extending the amendments to indirect interests held through another vehicle at a later date.
The ESVCLP amendments will apply from 1 July 2016 and the ESIC amendments will apply from 1 July 2017.
For further information on how the amendments may impact you or for assistance with the application of the ESIC or ESVCLP rules, please contact one of our tax lawyers.
Practical compliance guideline (PCG) 2017/2
The Australian Taxation Office (ATO) has released a practical compliance guideline on Simplified Transfer Pricing Record Keeping Options which minimises the record keeping burden required by certain taxpayers under Subdivision 284-E of Schedule 1 to the Taxation Administration Act 1953. There are eight simplified record keeping options that are available to companies, trusts and partnerships that meet the self-assessed eligibility criteria.
PCG 2017/2 provides taxpayers who meet the ‘eligibility criteria’ with:
- guidance on their record-keeping requirements and
- an indication of the types of transactions or activities it believes are low risk in international related party dealings.
The eight simplification options include those applicable to small taxpayers, distributors, intra-group services, low-level inbound loans, materiality, management and administration services, technical services and low-level outbound loans.
An entity that satisfies the eligibility criteria can apply the relevant simplified record keeping options to their international related party dealings. The eligibility criteria differ for each option, and entities must self-assess whether they satisfy the criteria and keep contemporaneous documentation to support their eligibility.
PCG 2017/2 provides detailed examples of each of the eight record keeping options. If a taxpayer chooses to apply the simplification options, the ATO will not allocate resources to review the covered transactions/arrangements but may review the eligibility to use that option.
The PCG is effective from either 1 July 2013 or 1 July 2015, depending on the type of simplification option. The election to make use of the simplification options is made through a disclosure in the International Dealings Schedule.
This PCG is a positive development for entities with low-risk international related party dealings that may now have the ability to reduce their compliance burden in relation to maintaining the requisite transfer pricing records.
RGGW and Commissioner of Taxation  AATA 238
In the recent decision of RGGW and Commissioner of Taxation, the AAT has affirmed the Commissioner of Taxation’s (Commissioner) objection decisions in relation to tax assessments and set aside the objections in part in relation to the administrative penalty.
RGGW (Taxpayer) was a partner in a shopping centre property development partnership (Partnership) which was placed into administration. The Taxpayer claimed that its share of the tax losses of the Partnership exceeded $25 million. The Taxpayer lodged tax returns for the 1996 to 2003 income years that declared a positive taxable income but reduced its liability to nil based on the tax losses from the partnership. The Commissioner disallowed the tax losses and imposed an administrative penalty of 75% for intentional disregard with a 20% uplift, which was then reduced by 80% for voluntary disclosure.
The Taxpayer objected to the assessments and appealed to the AAT when the objections were disallowed.
The AAT considered the imposition of the administrative penalty as well as three other main issues, being:
- whether the tax losses were available to the Taxpayer through the continuity of ownership test
- whether the tax losses were available to the Taxpayer through the same business test and
- whether, if the losses were available, the Taxpayer had established the quantum of its entitlement.
Continuity of ownership test
The AAT considered the three different continuity of ownership tests that applied over the relevant years, being:
- for the 1996 and 1997 years, the test in section 80A of the Income Tax Assessment Act 1936 (Cth) (ITAA36)
- for the 1998 and 1999 years, the test in section 165-12 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) and
- for the 2000 to 2003 years, the test in section 165-12 of the ITAA97.
The Tribunal held that the continuity of ownership tests were not satisfied. This view was formed on the basis that there was insufficient evidence to prove the necessary beneficial ownership to satisfy the tests.
This shows the importance of taxpayers maintaining contemporaneous evidence to ensure they can support a tax position adopted in the event of a dispute with the Commissioner.
Same business test
On the basis that the continuity of ownership test failed, the Taxpayer had to rely on the same business test. For the tax losses to be claimed based on the same business test, the Taxpayer must have been carrying on the same business as it carried on immediately prior to:
- a change in beneficial ownership for the 1996 and 1997 years (in accordance with section 80E of the ITAA36) and
- the relevant ‘test time’, the timing of which was not considered by the Tribunal, for the 1998 – 2003 years (section 165-13 of the ITAA97).
The Tribunal found that the Taxpayer did not satisfy this test on either formulation. The Taxpayer’s business activities did not demonstrate the requisite consistency, and varied in the relevant years from being non-operational, property development, and investment in unit trusts.
The Tribunal did not assess the quantum of the Taxpayer’s claim as it was not entitled to the claim the tax losses.
The Tribunal found that the shortfall amounts did not arise from the intentional disregard of the tax law by the Taxpayer but rather that there had been recklessness. The penalty was reduced from 75% to 50%.
Announcement on stamp duty reforms
Premier Mr Daniel Andrews and The Treasurer Mr Tim Pallas have announced the following stamp duty and first home buyer reforms, which will make significant changes to the current Victorian regime:
- Stamp duty will be abolished for first home buyers for purchases below $600,000. Those buying a home valued between $600,000 and $750,000 will also be eligible for a concession, applied on a sliding scale. The exemptions will apply to both new and established homes.
- The off-the-plan stamp duty concessions will be abolished for investment properties. This concession will now only be available for those intending to live in the property.
- A Vacant Residential Property Tax will be introduced to address the number of properties being left empty across inner and middle suburbs of Melbourne. Owners who unreasonably leave these properties vacant will be subject to tax at 1%, multiplied by the capital improved value of the taxable property. For example, if the property has a capital improved value of $500,000, the amount of tax payable will be $5,000. There will be a number of exemptions, for example in relation to holiday homes, deceased estates and Victorians temporarily overseas.
- To assist first home buyers to purchase a home, a new $50m pilot scheme HomesVic, to be introduced in January 2018, will allow purchasers to co-purchase a home with the Victorian Government, who will take an equity share of up to 25% in these properties. It will apply to both new and existing homes. Eligible applicants will include couples earning up to $95,000 and singles earning up to $75,000 per annum. Buyers will need a 5% deposit. When the properties are sold, HomesVic will recover its share of the equity.
- The Government will also contribute $5m to a national community sector shared equity scheme Buy Assist. It will deliver an additional 100 shared equity homes and provide assistance low to medium-income households purchase a property.
- The Government will give first home buyers priority in government-led urban renewal developments, with at least 10% of all properties allocated to first time buyers. This will be used for the first time in relation to the Arden Development which is proposed to home over 15,000 people.
Please contact the Hall & Wilcox stamp duty team for further information.