Developments to watch in 2013-14
December 1, 2013
In addition to the Budget measures, there are other measures (legislated or proposed) which will or may affect the taxation landscape in the future. Some of these measures are outlined below.
NATIONAL DISABILITY SCHEME – MEDICARE LEVY AND OTHER RATES INCREASED
The Medicare levy will increase to 2% as from the 2014-15 income year to help fund the National Disability Insurance Scheme. Various other tax rates will rise by 0.5% as a result.
The following tax rates will rise from 46.5% to 47% (as from 2014-15):
- excess non-concessional contributions tax;
- excess untaxed roll-over amounts tax;
- tax on no-TFN contributions income;
- TFN withholding tax (ESS);
- family trust distribution tax;
- trustee beneficiary non-disclosure tax;
- first home savers accounts misuse tax.
The excess concessional contributions tax rate will rise from 31.5% to 32% (as from 2014-15).
The FBT rate will rise from 46.5% to 47% as from the 2014-15 FBT year (ie the year commencing on 1 April 2014).
The Government proposes to introduce a $2,000 cap on tax deduction claims for work-related self-education expenses per person from 1 July 2014. Taxpayers will be able to claim a tax deduction of up to $2,000 of education expenses in an income year.
The Government will retain the current treatment that employers are not liable to FBT for education and training they provide to their employees, unless an employee salary sacrifices to obtain these benefits.
CGT SMALL BUSINESS CONCESSIONS
Legislation (not enacted as at 7 June 2013) will ensure that the small business connected entity test will apply on the basis of who owns the relevant interests in an entity, rather than who benefits from the interests.
If an entity (first entity) directly controls a second entity, and that second entity also controls a third entity, the first entity will be taken to control the third entity. The indirect control test is designed to “look through” business structures that include interposed entities.
In addition, just after a beneficiary becomes absolutely entitled to an asset of a trust (disregarding any legal disability), the asset will be treated as an asset of the absolutely entitled beneficiary (and not an asset of the trustee) for the purpose of the CGT and connected entity provisions. In conjunction with treating any acts done by the trustee as being done by the absolutely entitled beneficiary, everything that happens to the asset will be taken into account in working out any CGT consequences of the asset in the hands of the beneficiary.
However, CGT events E1 and E2 will not happen if a taxpayer creates a trust over an asset or transfers an asset to an existing trust, as long as the taxpayer is absolutely entitled to the asset as against the trustee.
Taxpayers will be able to choose to apply these measures to CGT events that happen during the 2008-09 income year and later income years – they will apply automatically once the enabling legislation is enacted.
STRENGTHENING PT IVA
The general anti-avoidance provisions in Pt IVA of the ITAA 1936 are to be amended to target perceived deficiencies in the operation of the “tax benefit” concept and the way it interacts with other elements of Pt IVA, especially the “dominant purpose” test.
In particular, the amendments (not legislated as at 7 June 2013) seek to reinforce the view that:
· the 2 limbs of the “tax benefit” element of Pt IVA (ie the “would have” and “might reasonably be expected to have” limbs) are alternative tests; and
· in deciding whether an alternative to the scheme is reasonable, regard is had both to the substance of the scheme and to the non-tax results or consequences for the taxpayer that the scheme achieved. In making that decision, the tax consequences of any alternatives will be ignored.
The amendments also require that the application of Pt IVA start with a consideration of whether a person participated in the scheme for the sole or dominant purpose of securing for a taxpayer a particular tax benefit in connection with the scheme. This emphasises the dominant purpose test as the “fulcrum” or “pivot” around which Pt IVA operates.
The amendments apply in relation to schemes that were entered into, or that were commenced to be carried out, on or after 16 November 2012.
A number of further reforms of the superannuation system were announced in April 2013. These include capping tax-free pension earnings at $100,000, a $35,000 concessional contributions cap (not indexed) (from 1 July 2013 for people aged 60 and over and from 1 July 2014 for people aged 50-59) and granting deferred lifetime annuities the same concessional tax treatment that superannuation assets supporting income streams receive (from 1 July 2014). For further details, see page 70.
FRINGE BENEFIT ISSUES
The concessional FBT treatment for in-house expense payment, property and residual fringe benefits (exempting the first $1,000 of the aggregate of the taxable values of such benefits) will be removed where accessed by way of salary packaging (to be implemented by legislation not passed as at 7 June 2013). The changes will generally apply to benefits provided on or after 22 October 2012. However, if the salary packaging arrangement was in place before 22 October 2012, the $1,000 reduction will be available for benefits provided before the earlier of 1 April 2014 and the first material variation (if any) in the arrangement.
On 24 October 2012, the Government released a policy options paper for reforms to the taxation of trusts. The paper is available on the Treasury website.
The options paper considers 2 possible models for taxing trust income:
- the economic benefits model – broadly, this model would assess beneficiaries on taxable amounts distributed or allocated to them, with the trustee assessed on any remaining taxable income; and
- the proportionate assessment model – broadly, this model would assess beneficiaries on a proportionate share of the trust’s taxable income equal to their proportionate share of the “trust profit” of the relevant class. As currently occurs, present entitlement would be used as the basis for attributing the trust profit or class amounts to beneficiaries.
The options paper sets out certain core features that any new model for taxing trust income should have. These features recognise trusts as primarily flow-through vehicles, and attempt to balance the needs of taxpayers for certainty and flexibility within the broad policy parameters that apply to the taxation of trust income.
The options paper also canvasses 2 issues that will affect the scope of new arrangements for taxing trust income.
- Scope of re-written rules – should any new model for taxing trust income be treated as an exclusive code, ie should trust income and distributions be taxed under one Division exclusively? If not, to what extent should trust distributions otherwise be taken into account for tax purposes?
- Bare trusts – should bare trust type arrangements be excluded from the new model for taxing trusts? If so, could they be ignored or “looked through” for income tax (including CGT) and GST purposes?
The Board of Taxation released 2 reports on the consolidation regime on Budget day [14 May 2013]. The reports – Post-Implementation Review into Certain Aspects of the Consolidation Regime and Post-Implementation Review of Certain Aspects of the Consolidation Tax Cost Setting Process – are available on the Board’s website. The Government also released its response to the recommendations made in those reports. Recommendations which the Government agreed to or accepted in principle include the following:
- give formal recognition to the primacy of the business acquisition approach in relation to the treatment of assets transferred to a consolidated group, retain the “entry history rule” (but as an exception to the business acquisition approach) – but without changes per se to the operation of the consolidation rules and the current treatment of assets or liabilities;
- the “ending/creation” model be applied to ensure that the tax costs of intra-group assets (apart from membership interests) acquired or disposed of by consolidated groups, whether directly or indirectly, are appropriately recognised (subject to some exceptions);
- the integrity rules should be designed to address any double benefit which arises when an encumbered asset, whose market value has been reduced due to the intra-group creation of the rights over the asset, is sold by a consolidated group;
- the effect of the single entity rule should be extended to a transaction between a consolidated group and a shareholder of the head company, a liquidator appointed to a member of the group or a third party that is an associate of the group;
- issues relating to the determination of a trust’s net income that is assessed to each beneficiary and/or trustee when the trust is a member of the consolidated group for part of an income year be considered as part of the rewrite of the trust income tax provisions;
- a trustee of a trust that is a member of a consolidated group be treated as a member of the same consolidated group as the trust (and that a change in trustee will not result in a trust joining or leaving);
- there should be no change to the foreign hybrid rules (subject to monitoring of integrity risks);
- the Government should continue to monitor the interaction between Australia’s double tax agreements and the consolidation rules;
- the income tax law be amended so that adjustments relating to deferred tax liabilities in the entry and exit tax cost setting rules are removed from those rules;
- the income tax law be amended so that the adjustment which applies if the head company’s accounting value of a liability is different from the joining entity’s accounting value of the liability is removed from the entry cost setting process;
- the income tax law be amended so that, in principle, where an anomalous outcome arises because an asset is recognised under the tax cost setting rules and a related liability is not an accounting liability, the related liability should be recognised for tax cost setting purposes to the extent that it is necessary to address the anomaly;
- no changes be made to the tax cost setting rules in relation to the treatment of goodwill of a joining entity (and the related 2012 changes be monitored before any further changes are made to the tax cost setting rules in relation to goodwill); and
- the Government should continue to monitor situations where a head company of a consolidated group that is owned by a foreign resident leaves the group.
Recommendations which the Government said it would consider further include:
- the income tax law be amended to rectify the duplication of capital gains and losses made on the disposal of rolled over assets when a subsidiary member that is not an eligible tier-1 entity leaves an MEC group;
- the ongoing simplified rules should be available for wholly-owned corporate groups that have an aggregated turnover of less than $50m in the prior income year;
- a simplified formation rules election should be available for eligible groups to form a consolidated group (subject to satisfying defined requirements);
- the Government should investigate whether rules should be introduced to enable small to medium sized corporate groups to apply a “stick approach” to long-term majority owned subsidiaries when they become wholly-owned by a consolidated group after the formation time;
- given the unsuitability of the consolidation regime for groups with less than $2m aggregated turnover, the Government should consider whether alternative tax grouping rules should be introduced for such groups; and
- further consideration be given to how systematic rules relating to the interaction of the CGT roll-over rules and the consolidation regime could be implemented.