NEWSLETTER

RECENT TAX DEVELOPMENTS

Antonopoulos and Commissioner of Taxation (2011) AATA 431 Making the Superannuation Contribution Caps Fairer Decision Impact Statement - Commissioner of Taxation V Trail Bros Steel & Plastics Pty Ltd $15 Tax Levy to Fund Disability Insurance Draft Goods and Services Tax Determination -GSTD 2011/D1 Cases -Greenhatch and Commissioner of Taxation (2011) AATA 479 R&D Tax Incentive All Set to Support Australian Businesses More Buildings Go Green under Expanded Green Building Fund GST Rise Should Be Considered... This concerns our Kiwi Cousins Qantas Airways Ltd V Commissioner of Taxation (2011) FCAFC 113 (6 Sept, 2011) Small Business to Get Cash Flow Benefit ATO Interpretative Decision -ATO ID 2011/62 Income Tax - Employee Share Scheme Director Solely Remunerated By Issue Of Options Watch Out For Fraudulent Payment Summaries ATO Interpretive Decision -ATO ID 2011/59 - Housing Fringe Benefits: House Damaged In Natural Disaster Tax Smart Questions and Answers

Leighs Corner
WHETHER EXPANDING, HIRING STAFF OR STARTING A CHAIN OF BUSINESSES OR FRANCHISES, YOU NEED TO HAVE A SHARP BUSINESS PLAN! Enterprise Bargaining Are There Any Advantages in Workplace Specific Agreements?

BONUS ISSUE

TAX EFFECTIVE SHARES AND PROPERTY INVESTMENT

MANY AUSTRALIANS INCLUDING MUM AND DAD INVESTORS NOW HAVE SHARE AND PROPERTY INVESTMENTS. MORE THAN EVER WE NEED TO BE ON ALERT TO ENSURE THAT WE DO EVERYTHING POSSIBLE TO COMPLY WITHIN THE LAW. THIS EDITION IS DESIGNED TO GIVE OUR SUBSCRIBERS INVALUABLE TIPS ON WEALTH ACCUMULATION AND INVESTMENT MANAGEMENT...

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CONTENTS

NEWSLETTER

RECENT TAX DEVELOPMENTS

Antonopoulos and Commissioner of Taxation (2011) AATA 431 Making the Superannuation Contribution Caps Fairer Decision Impact Statement - Commissioner of Taxation V Trail Bros Steel & Plastics Pty Ltd $15 Tax Levy to Fund Disability Insurance Draft Goods and Services Tax Determination - GSTD 2011/D1 Greenhatch and Commissioner of Taxation (2011) AATA 479 R&D Tax Incentive All Set to Support Australian Businesses More Buildings Go Green under Expanded Green Building Fund GST Rise Should Be Considered (This concerns our Kiwi Cousins) Qantas Airways Limited V C of T (2011) FCAFC 113 (6 September, 2011) Small Business to Get Cash Flow Benefit ATO Interpretative Decision - ATO ID 2011/62 Income Tax - Employee Share Scheme Director Solely Remunerated By Issue of Options Watch Out For Fraudulent Payment Summaries ATO Interpretive Decision -ATO ID 2011/59 Fringe Benefits Tax - Housing Fringe Benefits: House Damaged In Natural Disaster Tax Smart Questions and Answers 2 2 2 2 3 3 4 4 5 5 6 6 7 7 8

Leighs Corner
Enterprise Bargaining Are There Any Advantages in Workplace Specific Agreements? 11

BONUS ISSUE

TAX EFFECTIVE SHARES AND PROPERTY INVESTMENT

Read on to receive invaluable tips on wealth accumulation and investment management Some of Whats New in 2011 The GST Change of Use Adjustment Rules relevant to property developers Increasing ATO Focus On Property Developers Important GST Cases

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ANTONOPOULOS AND COMMISSIONER OF TAXATION (2011) AATA 431

Here the AAT has affirmed the Commissioners objection decision concerning beneficiaries of a discretionary trust not being presently entitled to distributions of trust income, meaning certain deductions claimed by them were not allowable. The first applicant was a builder and was sole director and shareholder in Antbuilt Pty Ltd (Antbuilt). The second applicant was the wife. Both were potential beneficiaries of the Antbuilt Trust (the Trust). In the 2006 and 2007 years the taxpayer claimed tax deductions that fell into two broad categories: Interest on funds borrowed by the applicants and then advanced to Antbuilt, in its capacity as trustee of the Trust, for use as working capital of the business, and Funds borrowed to purchase two residential properties that were made available to the Trust for use as residential accommodation for subcontractors working in its building and construction business.

to have the excess concessional contributions refunded to them. The excess contributions tax is designed to ensure that individuals adhere to the superannuation contributions caps, and is part of ensuring the substantial tax concessions for superannuation are sustainable and fair. The Government takes the view that while the high rate of excess contribution tax is important to encourage compliance with the contribution caps, individuals who breach their concessional contribution caps for the first time should be given a second chance. As an example, Brendan made an excess concessional contribution of $10,000 for 2012-13. His taxable income for the year is $60,000. Brendan takes the refund option and so pays $3,400 income tax (where $10,000 is taxed at Brendans marginal tax rate of 34 per cent including Medicare levy). In comparison, under the excess contributions tax regime, Brendan would have paid effectively $4,650. Excess contributions tax is incurred where an individual exceeds their concessional contributions cap. Concessional contributions include compulsory superannuation guarantee payments, salary sacrifice contributions, and other deductible contributions. Excess concessional contributions are taxed at 31.5 per cent, in addition to 15 per cent tax when contributions are made to the fund.

The taxpayers contended that the expenses were allowable under s8-1 of the Income Tax Assessment Act 1997 as they were incurred in gaining or producing assessable income in the relevant years as trust distributions received. The key issue being - whether resolutions made by the Trust had the effect that the applicants became presently entitled to trust distributions. After reviewing the trust deed and trustees resolutions, the AAT concluded that the applicants did not become presently entitled to income from the Trust until later resolutions were made as although the trustee was bound to honour its promise in the early resolutions, it promised to give due consideration to making trust distributions when it came to exercise its discretion in the future. An alternative submission that the first applicant was the default beneficiary of the Trust was rejected by the AAT. The administrative penalty imposed of 25% was affirmed as appropriate in the circumstances.

DECISION IMPACT STATEMENT

Commissioner of Taxation V Trail Bros Steel & Plastics Pty Ltd This Decision outlined the ATO view of this case which concerned whether Part IVA of the Income Tax Assessment Act 1936 applied to a scheme to overcome law changes that limited employer deductibility for superannuation contributions for employees to age-based limits. A really interesting decision outlining the ATO view on key elements of IVA of the ITAA. Part IVA is the anti avoidance provision of the Tax Act. For Part IVA to apply there must be a scheme entered into for the sole or dominant purpose of obtaining a tax benefit. We encourage readers who have Part IVA issues to read the entire decision as it gives an excellent summary.

MAKING THE SUPERANNUATION CONTRIBUTION CAPS FAIRER

People who make excess concessional contributions to their superannuation may benefit from changes contained in a consultation paper released on 17th August, 2011 by the Assistant Treasurer and Minister for Financial Services and Superannuation. Individuals who breach their concessional contributions caps by up to $10,000 for the first time will be given the option

$15 TAX LEVY TO FUND DISABILITY INSURANCE

Australians would pay an average $15 a week to fund a national disability insurance scheme under a new proposal released on 29th August, 2011. Like the 1.5 per cent Medicare levy, the suggested 1.3% levy would be paid by all taxpayers with incomes more than

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$18,488. A couple with two children in a single-income household of $40,000 would pay $3 a week; on $75,000 they would pay $19; and $30 on $120,000. The call for a levy is contrary to the productivity recommendation that a national disability insurance scheme be funded out of general revenue. Think tank Per Capita takes the view that it is unlikely sufficient funds would be allocated from general revenue given the many demands on the budget. The proposed levy would be set by an independent commission to cover the expected liabilities. The government would have scope to change the level of support and care it wished to provide but would give three years notice. The levy would raise $6.6 billion a year in addition to the $6.2 billion already provided by state and federal governments to help about 360,000 Australians under 65 who have permanent, severe or profound disability. It would provide them with access to care, therapy, equipment, home and vehicle alterations, and respite. The Productivity Commissions report, currently being considered by the federal government estimates that $6.5 billion would be required, but its scheme excluded the small group injured in medical accidents, criminal assaults and falls that are covered in the alternative proposal.

A farming business is defined in subsection 38-475(2). Specifically, an entity carries on a farming business if it carries on a business of one of the classes of farming listed under paragraphs (a) to (d) in subsection 38-475(2). If an entity carries on a business consisting of one of the classes of farming, the entity will be carrying on an enterprise that is a farming business. This is because paragraph 9-20(1)(a) provides that an enterprise is an activity or series of activities done in the form of a business. Carrying on an enterprise is defined in section 195-1 to include anything done in the course of the commencement or termination of the enterprise. Accordingly, carrying on a farming business includes all the routine farming activities carried out on the land together with any other activities related to commencing, conducting and terminating the farming business. The routine farming activities refer to the physical activities undertaken on the land relevant to the classes of farming in subsection 38-475(2). In the course of selling land on which a farming business has been carried on, the seller may cease the routine farming activities in anticipation of the sale. The cessation of these farming activities does not necessarily result in the cessation of the farming business being carried on, on the land. It may be something done in the course of terminating the farming business; accordingly the farming business may still be carried on. An enterprise terminates when the activities related to the enterprise cease. Ordinarily, this occurs when all the enterprise assets are disposed of, or converted to another purpose or use, and all the obligations of the enterprise are satisfied, for example, the finalisation of accounts, preparation of activity statements, payment of creditors and the cancellation of business registrations.

DRAFT GOODS AND SERVICES TAX DETERMINATION- GSTD 2011/D1

GSTD 2011/D1 determines that a farming business can be carried on for the purposes of paragraph 38-480(a) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where there has been an absence of routine farming activities by the supplier for a period of time in anticipation of a sale. Whether a farming business continues to be carried on is a question of fact and degree depending on the circumstances of each particular case. Under section 38-480, the supply of a freehold interest in, or the lease by an Australian government agency of or the longterm lease of, land is GST-free if: a) The land is land on which a farming business has been carried on for at least the period of five years preceding the supply; and b) The recipient of the supply intends that a farming business be carried on, on the land. The definite article the in the expression the period of five years indicates that the period in which a farming business must be carried on, on the land, is a continuous period of five years immediately before the supply of the land. This is distinct from the expression a period of five years preceding the supply which may refer to any period of five years before the supply of the land.

CASES
Greenhatch and Commissioner of Taxation (2011) AATA 479

On 8th August, 2011 the AAT held that for the purposes of section 115-215 of the Income Tax Assessment Act 1997 (ITAA 1997) the amount assessed to the taxpayer as a presently entitled beneficiary under section 97 of the ITAA 1936 was wholly attributable to the capital gain of the trust estate. The taxpayer was presently entitled to a discounted capital gain made by a trust, and had claimed a deduction for a contribution to a personal superannuation fund. The taxpayers assessable income was from salary or wages (contrary to subsection 290-160(2) of the ITAA 1997). However, the key issue was section 115-215 of the ITAA 1997. The trust amount for the purposes of section 115-215 of the ITAA 1997 was $112,340 i.e. the taxayers share of the net income of the trust and both parties agreed on this and that section 115-215(3)(b) of the ITAA 1997 applied to include in the taxpayers assessable income a capital gain equal to twice the part (if any) of the trust amount that is attributable to the trust gain. In the taxpayers view, this meant that $224,680

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was to be included in his assessable income (and accordingly, his income from salary and wages was less than 10% of his total assessable income, and he would be entitled to a deduction for his superannuation contribution). However the Commissioners position was the taxpayers share or proportion of the income of the trust (comprising of both the capital gain and the other ordinary income) as would be determined under section 97 of the ITAA 1936 that was the amount attributable to the trust gain for the purposes of section 115-215(3)(b), i.e. 18.76% of the trust amount (and accordingly, even when this amount was doubled, the taxpayers income from salary and wages was greater than 10% of his total assessable income, and a deduction for his superannuation contribution would be denied). In a win for the taxpayer, the AAT decided that section 115215 of the ITAA 1997 does not operate on a proportionate basis in the same way that section 97 of the ITAA 1936 operates. The AAT also confirmed, contrary to the submission of the Commissioner, that the capital gain made by the trust retained its character as a capital gain in the hands of the beneficiary.

The Tax Incentive effectively doubles the support for small firms to 15 cents in the dollar and increases support for all other firms by a third, to 10 cents in the dollar, Senator Carr added. The R&D Tax Incentive starts retrospectively from 1 July 2011. To register for an information session or for more information on the R&D Tax Incentive, visit AusIndustry.gov.au. Senator Carr also said that the R&D Tax Incentive complements the Governments Clean Energy Future initiative. Together, they will provide significant support for innovative firms to invest in research, development and commercialisation of clean technology products and services.

MORE BUILDINGS GO GREEN UNDER EXPANDED GREEN BUILDING FUND

Shopping centres, hotels and office block owners are finding it easier to upgrade and reduce greenhouse gas emissions thanks to the Gillard Labor Governments Green Building Fund and Tax Breaks for Green Buildings Program. Announcing $35.2 million in funding to green-up 90 buildings nationally, Innovation Minister Senator Kim Carr said Australias commercial buildings generate significant greenhouse gas emissions every year. The Government and building owners must work together to improve our buildings and create a richer, fairer and greener Australia, Senator Carr said. The buildings that will be transformed include hotels, shopping centres and office blocks. We expect the upgrades to reduce the buildings greenhouse gas emissions by an estimated 118,000 tonnes a year. The fit-outs the companies will undertake may include new state-of-the-art heating and air conditioning systems, smart room controllers (for hotel guest rooms), energy efficient lighting systems and building energy management systems. These improvements will significantly reduce energy, saving the environment and saving money for the business owner. The Green Building Fund began in 2008 and was expanded in 2010 to include existing hotels and shopping centres. This expansion saw the Innovation Department receive a 32 per cent increase in applications to the fund an unprecedented 261 applications were received for this round of funding. The high number of applications received shows the commitment of Australian building owners to make changes and help fight climate change, Senator Carr said. The Green Building Fund has now generated total expected emission savings of almost 300,000 tonnes per year. A list of Round 7 grant offers is available. For more information, visit www.ausindustry.gov.au. The Fund complements the Governments Clean Energy

R&D TAX INCENTIVE ALL SET TO SUPPORT AUSTRALIAN BUSINESSES

Information sessions held across Australia in September and October, will help businesses learn how to access and best use the new R&D Tax Incentive to drive the development of new ideas, products and processes. Encouraging people to attend, Innovation Minister Senator Kim Carr, said the R&D Tax Incentive, as the program will be now known, will support and reward the creativity of Australian businesses. According to Senator Carr: We are a clever country. We have renamed the tax credit an incentive because that is what it is an incentive for our creative firms and individuals to invest in new ideas, products and services. This is a huge opportunity for Australian firms. The new incentive is designed so more firms can access government support. It will provide assistance to innovating companies when they need it most. The new incentive will support more firms and it is important that people who may not have considered applying for assistance under the old system understand it is there to help them. That is why AusIndustry, together with the Australian Taxation Office, will be conducting information sessions around the country in September and October to ensure firms are aware of the support available under the program.

The R&D Tax Incentive has more generous benefits and a clearer definition of research and development activities.

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Future initiative (www.cleanenergyfuture.gov.au), which is supporting jobs and providing incentives for Australians to invest in clean energy and energy efficiency. This investment will help the Australian economy remain competitive as countries around the globe move to reduce carbon pollution. From 1 July 2012, eligible businesses that invest in improving the energy efficiency of their existing buildings will be able to apply for a tax break through the $1 billion Tax Breaks for Green Buildings Program.

Current budget projections have income tax takings climbing almost $55 billion by 2014-15, an increase that dwarfs almost every other tax people talk about. It completely dwarfs the $6 billion per annum mineral tax and the $8 billion carbon tax. For a person on $60,000, their average tax rate will go from 20 to 22 per cent, squeezing household disposable income. And then in another two years we will start ratcheting up the superannuation guarantee, taking some more from household income.

GST RISE SHOULD BE CONSIDERED

This Concerns Our Kiwi Cousins.. While we look forward to Wallabies triumph, Chapter 14 of our recent annual publication deals with tax reform. In it we compare our tax reform experience with New Zealands. They can certainly teach us a thing or two on tax reform. There the debate has taken place with more emphasis on the national interest and education, less on political opportunism; Their GST was introduced on 1 August, 1986, fourteen years ahead of ours; It is a pure GST without the exemptions we have to deal with largely a result of political horsetrading on legislation in the Senate; On inception, their GST, like ours was 10%. This increased to 12.5% on 1st July, 1989 and then 15% effective 1st August, 2010. This is once again topical. Professor Greg Smith told a recent Tax Institute forum: The goods and services tax will have to climb above 10 per cent eventually and there will be no way of avoiding the topic at the October tax summit. Professor Smith one of the architects of the Henry Review, said the review had sidestepped a ban in its terms of reference on proposing changes to the GST by recommending instead an alternative to the GST which was the GST without invoices . Quoted in the Sydney Morning Herald, Professor Smith did not mince his words. The idea that the GST rate could not be lifted beyond 10 per cent without the agreement of all Australian governments was rubbish . No law can constrain a future government. Its a basic principle of Western democracy, well established. You just pass a law saying notwithstanding the law that says all states must agree to a change, the rate is now 15 per cent.

The income tax will grow $55 billion while the GST grows only $12 billion. We will see the tax system swing from consumption to income taxes before our very eyes. The SMH continued: We couldnt agree more with Professor Smith when he says a higher GST is needed to take pressure off income tax and refund state responsibilities such as schools and hospitals, it would require a selling job of which governments no longer seemed capable. This was our contention when discussing tax reform. In the last federal election both sides of politics fell over themselves ruling out an increase in the GST. Forget about the national interest lets just get elected! It is worth noting the average rate of GST/VAT internationally stands at 15% and when it is properly explained Australians usually dont have a problem with a user pays tax as long as other taxes reduce as a consequence. We acknowledge Peter Martins very good article.

QANTAS AIRWAYS LIMITED V COMMISSIONER OF TAXATION (2011) FCAFC 113 (6 SEPTEMBER, 2011)
This full Federal Court decision may allow a business to apply for a GST refund in circumstances where customers have prepaid for services they dont use. The case concerned whether or not GST was payable for Qantas (and Jetstar) flights booked and paid for by customers who did not show up for the flight or cancelled the booking. Here the Full Federal Court held that because supply of a service was not made for GST purposes, Qantas was not required to pay GST to the ATO. As Qantas had already paid the GST, there was now the possibility of claiming a refund. Obviously there are ramifications for other industries where the purchase price is paid up front by customers, such as accommodation providers, tour operators, boat cruise charterers and hospitality companies who provide services for weddings, functions and seminars. At this stage, we dont know whether Commissioner of Taxation will appeal the decision to the High Court. However,

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it should be noted the High Court will only agree to hear tax matters on appeal from the Full Federal Court in exceptional cases. As such there is a good chance that the Full Federal Courts decision will stand. Note that the Qantas decision applies in situations where the customer has paid the total price upfront, as opposed to where they have simply paid a deposit which is then forfeited. Specific rules in the GST law generally state that in certain circumstances, a refund of the GST amount must firstly be made back to the customer before the supplier can claim the refund back from the Commissioner but the Court was not required to consider this issue. Uncertainty remains as to the precise application of the refund rules, meaning that the ATO may interpret the rules in such a way as to deny a refund claim. Where a GST refund potentially applies, taxpayers are usually able to go back four years to make a claim and this could result in some substantial refunds. In these circumstances you should seek specialist advice on how the Qantas decision applies to your specific circumstances.

quickly (at a rate of 30 per cent instead of 5 per cent), and will help to reduce compliance costs. Consistent with recommendation 6 of the Australias Future Tax System Review, the package also includes legislation to abolish the entrepreneurs tax offset in order to deliver more effective assistance to Australian small businesses. This package builds on the Governments already strong commitment to small businesses and is in addition to our planned cut in the company tax rate from 30 to 29 per cent from the 2012-13 income year, Senator Sherry said. Lowering the company tax rate will go some way to helping Australias 720,000 incorporated small businesses explore opportunities to expand and grow. The Government has already provided cash flow assistance to small business and other eligible taxpayers through reduced Pay As You Go income tax instalments for the 201112 income year.

ATO INTERPRETATIVE DECISION - ATO ID 2011/62 INCOME TAX

Income Tax: Employee Share Scheme Director Solely Remunerated By Issue of Options This decision is that a director of a listed company who was remunerated only by way of the issue of options is not entitled to the deferral concession under former Division 13A of Part III (Division 13A) of the Income Tax Assessment Act 1936 (ITAA 1936) An Australian listed public company issued options to acquire shares in the company to a director of the company as a reward and incentive for their services. The options were issued prior to 1 July 2009 and were rights provided under an employee share scheme within the meaning of former Division 13A of the ITAA 1936. The director did not pay anything for the options. The options entitled the director, on payment of an exercise price, to acquire a corresponding number of shares in the company. Neither the director nor any associated entity received, or was entitled to receive, any other remuneration for the directors services. The director was at all relevant times an Australian resident within the meaning of subsection 6(1) of the ITAA 1936. Neither former section 26AAC of the ITAA 1936, nor Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) applies in relation to the receipt of the options. Former Division 13A of the ITAA 1936 provides for the taxation treatment of shares and rights acquired prior to 1

SMALL BUSINESS TO GET CASH FLOW BENEFIT

Australias 2.7 million small businesses will benefit from a package of tax law amendments that will improve cash flow and reduce compliance costs by simplifying the small business depreciation rules. On 13th September, 2011 the Assistant Treasurer, Bill Shorten, and Minister for Small Business, Senator Nick Sherry, today released for public consultation exposure draft legislation and explanatory materials for the amendments. From the 2012-13 income year this package will allow small businesses to: Immediately write-off assets valued at under $6,500 (up from $1,000 presently), such as photocopiers, laptops, fridges and desks Immediately write-off up to $5,000 for motor vehicles acquired from the 2012-13 income year, with the remainder to be written-off at a rate of 15 per cent in the first year and 30 per cent in following years

Write-off of other assets in a single depreciation pool at a rate of 30 per cent (15 per cent in the first year). The increase to the instant asset write-off threshold from $1,000 to $6,500 will allow small businesses to claim an immediate deduction for assets costing less than $6,500, rather than having to depreciate them over time. The simplified depreciation pooling arrangements will also allow small businesses to depreciate some assets more

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July 2009 under employee share schemes. Taxpayers were eligible to have the assessment in relation to the discount from rights deferred until a later year of income provided the rights were qualifying rights within the meaning of the former section 139CD of the ITAA 1936. One of the conditions in former section 139CD of the ITAA 1936 for rights to be qualifying is that the company is the employer of the taxpayer or a holding company of the employer of the taxpayer. Employer is relevantly defined by former subsection 139GA(3) of the ITAA 1936 to be a person who pays, or is liable to pay, work and income support related withholding payments and benefits. Work and income support related withholding payments and benefits are in turn relevantly defined in subsection 6(1) of the ITAA 1936 to include: Payments from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 (other than section 12-55) to the Tax Administration Act 1953 (TAA); and Certain non-cash benefits in relation to which an amount must be paid to the Commissioner under Division 14 in Schedule 1 to the TAA. As the directors only remuneration from the company was in the form of options provided under an employee share scheme, no payment was made to the Director from which an amount must be withheld under a provision of Subdivision 12-B in Schedule 1 to the TAA. The options granted to the director are rights acquired under an employee share scheme within the meaning of former Division 13A of the ITAA 1936. While they are noncash benefits, former paragraph 14-5(3)(d) of Division 14 in Schedule 1 to the TAA (as applicable at the time the director received the options) specifically excludes such employee share scheme benefits from the operation of that Division. Thus the company was not, at the time the options were provided, the employer of the taxpayer or a holding company of the employer of the taxpayer. Accordingly, the rights acquired by the director are not qualifying rights. As the rights are not qualifying rights, the director is not eligible for the deferral concession under former Division 13A of the ITAA 1936. The discount is assessable in the year of income in which the rights were acquired.

income tax returns between July and September, as they may be approached to unknowingly lodge fraudulent income tax returns on behalf of clients using false payment summaries. These payment summaries are often realistic copies of a genuine payment summary or other employment documentation, with legitimate details such as: Tax file number (TFN) Payer name and matching Australian Business Number (ABN). From information the ATO received for the 2009-10 income year, some things that might indicate a client is providing fraudulent information are that: They are a new client lodging between July and September Provision of handwritten documents The tax withheld amount listed on the payment summary is excessive in comparison to the income reported The return has simple deduction claims and, in some cases, may include spouse offsets and/or education tax rebates Deductions may not seem to align with the occupation code or are higher than would normally be expected for the occupation listed There are some numerical similarities or rounded figures where a number of new clients are claiming the same employer details. The ATO is also aware that some clients may use forged proof of identity documents such as an Australian drivers licence or foreign passport.

ATO INTERPRETIVE DECISION - ATO ID 2011/59 FRINGE BENEFITS TAX

Housing Fringe Benefits: House Damaged In Natural Disaster This decision is that a house substantially damaged by a natural disaster but remains habitable, may be deemed to be a different unit of accommodation in accordance with subsection 26(5) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) During an FBT year an employee is provided with a housing fringe benefit, as defined by subsection 136(1) of the FBTAA, by their employer. The housing fringe benefit is provided to the employee during the FBT year in respect of a two-storey house.

WATCH OUT FOR FRAUDULENT PAYMENT SUMMARIES

Tax Agents are being warned to watch out for fraudulent Payment Summaries with an increase in the lodgement of

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The two-story house is a unit of accommodation as defined in subsection 136(1) of the FBTAA. Part-way through the FBT year the ground level of the house is substantially damaged by a flood. Only the upper level of the house remains habitable for the balance of the FBT year. After the date of the flood the market value of the right to occupy the house has decreased by 10% or more. Subsection 26(5) of the FBTAA applies where there has been a material alteration to a unit of accommodation that has the effect of substantially altering (that is, by 10% or more) the market value of the right to occupy the unit of accommodation. Where this occurs subsection 26(5) deems the unit of accommodation to be treated as a new unit of accommodation. There is deemed to be a new housing right granted in the same circumstances as the original housing right and the value of the right to occupy the unit of accommodation is from the date of the change, reestablished by reference to the adjusted market value of that right. Subsection 26(6) of the FBTAA states, for the purposes of subsection 26(5), a material alteration to a unit of accommodation includes additions or improvements or other work carried out, any damage, or any addition of facilities or removal of facilities from the unit of accommodation. For the purposes of subsection 26(5) of the FBTAA, the flood damage to the ground level of the two-storey house is a material alteration to the unit of accommodation. Further, the flood damage has substantially reduced the market value of the right to occupy the unit of accommodation by 10% or more and as such subsection 26(5) of the FBTAA applies. Accordingly, where a house has been materially altered by a natural disaster it can be deemed to be a different unit of accommodation after the natural disaster, in accordance with subsection 26(5) of the FBTAA.

for a company car is able to claim car costs in their personal tax for costs incurred in running a second privately owned vehicle for work? The employee is a marketer and spends much time on the road. The employee is provided with an additional car allowance for the second car. The car provided under novated lease is used mainly by the spouse for private purposes. Answer On basis the employer pays the correct FBT for the car being used by the wife, the employee can claim a tax deduction for expenses incurred in earning assessable income. The employee is not compelled to use the vehicle that is salary sacrificed. Question I am a long term subscriber to Tax Smart and for the first time here is a tax question. My wife and I are 69 and still employed in our own company. Our SMSF owns two residential properties suitable for redevelopment to dual occupancy. The properties are wholly owned by the fund and development costs can be comfortably provided by the fund. No borrowing required. 1. Do super rules permit us to redevelop these properties? 2. If so, can we do so when retired and our fund is in pension mode? Answer 1. A SMSF can not engage in business activities but on the basis this is one off there should not be a problem. 2. This really hinges on the investment strategy All SMSFs . should consider their investment strategy (a requirement under the S.I.S Legislation Section 52.2) before making an investment decision. The following should be considered: risk, return, diversification of fund assets, liquidity, composition of fund members and years to retirement.

TAX SMART QUESTIONS AND ANSWERS

Question I was recently told that nobody other than a quantity surveyor is qualified to estimate the construction cost of a building for the purpose of claiming a building cost depreciation deduction. Does it mean that if I dont get a quantity surveyor to do an estimation I will not be able to claim such deduction at all? Answer That is correct. Estimates by taxpayers are not acceptable. On occasion, builders can prepare a schedule of actual costs on completion of a dwelling and this is also acceptable. Question Can you advise if an employee provided with a novated lease

As long as these matters have been properly considered with satisfactory answers and are properly minuted, then it will be possible to do the development. Question Please can you advise me what the maximum salary sacrifice super an employee can sacrifice in one year? Also if they pay into their spouses super, is this part of the maximum or is it over and above the capped amount? Answer An employer must pay statutory superannuation (currently 9%) for an employee. The limit for salary sacrifice will generally be $25,000 minus the amount paid in statutory superannuation (SG). For persons who have turned 50, the limit for salary sacrifice will be $50,000 minus the amount already paid by the employer in statutory superannuation. It is proposed from 1 July 2012 that the $50,000 limit will only apply to those persons 50

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years or over if they have a total superannuation balance of less than $500,000. Be very careful not to make excess contributions. Question Please advise if the allowance mentioned below is to be taxed weekly or if it is a non-taxable item. I confirm that you will commence working at Pt Augusta at the same rate of pay with an additional $200 per week living away from home allowance. J is in the process of finding suitable accommodation for you and G is organising the vehicle for you. Five week maximum we anticipate N will be away. Answer As it falls within the acceptable limit (see our annual publication) this LAFH allowance will not be taxable to the employee. Question I am required to pay district allowance to our employees of $0.44 cents an hour up to $16.60 per week. Currently I apply that amount within their hourly rate (they are all casuals) which means it appears as a lump sum with wages and salary on their PAYG and pay slips. Is this correct or should I be applying it separately so that it comes up in a different box? Answer I would simply add it to their hourly rate. Question 1. Does the construction cost of a house for this purpose exclude builders profit? I.e. can the construction cost be the amount the customer signed off for with the building company and if not how can the construction cost be established? 2. 3. We understand a quantity surveyor or other qualified person is required to provide cost in circumstances where a property has been acquired and the original costs are not available. In the instance where the person has coordinated the construction of the house themselves i.e. not left the construction of the house with a building company to complete, would the construction cost be the collective sum of all sub contractors engaged e.g. concrete slab contractor, bricklayer, roofing contractors, electrical, plumbing, plasterers etc?

Can you advise how to calculate the taxable gain/loss on sale of a motor vehicle that is over the luxury car limit? The car was purchased for $92,305 and the luxury car tax limit for the cost value was $57,009 when purchased. Its taxable book value was $31,109 when it was sold for $40,000. Answer As we do not have dates, a percentage for business use, or the depreciation method we cannot do the sums. Where the cost of the vehicle exceeds the depreciation cost limit for the income year it was first used, the balancing adjustment is equal to:Termination Value x [(car limit in year of first use + amounts included in the second element of the cars cost) divided by total cost of the car ignoring the car limit]. Question We have a staff member who wants to purchase a new vehicle, whether it be outright purchase or via novated lease. He is questioning the impact of trading in his personal vehicle on a vehicle either purchased outright or via novated lease, and whether this trade in amount will impact on the calculation of FBT. Does the value of the trade in reduce the cost price of the car for the statutory method or reduce the amount of the lease payments, depreciation and notional interest under the operating cost method? Can the trade in value be considered a post tax contribution? He also wants to know the FBT implications of either choice, especially with regards to the changes to the statutory percentage to a flat rate of 20%. Answer We would refer you to Taxation Ruling TR 2011/3 which states clearly where an employee provides a trade-in vehicle to a car dealer who sells a car to either the employer or lessor, the expenditure incurred by the purchaser is the purchase price, reflecting the value of the trade-in amount that was allowed under the contract of sale. Questions We have moved to new premises and spent about $500,000 for interior design and fit-out for the new office. This is a capital expenditure and will be amortised over a period of years. Contractors invoices were paid by progress billing and all invoices were paid except for a small retention which will be paid after defects liability period. What depreciation rate are we going to use and over how many years can we amortise the asset? Answer It depends on whether you are a Small Business Entity and the nature of the expenditure. Office Fit-out is a general term.

Answers 1. The builders profit is not excluded; the relevant cost is the cost to the purchaser not the builder. 2. Correct, a quantity surveyor must be used. 3. Yes, but be careful to follow the ATO guidelines on what are eligible items and expenditures. Question We are a subscriber to your newsletter and have a tax question for you.

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Structural improvements fall within the definition of the capital allowance (deductible at 2.5%) and we suggest some of the expenditure may come under this term. Plant and equipment items are basically items that can be easily removed from the property as opposed to items that are permanently fixed to the structure of the building. Plant items also include items that are mechanically or electronically operated, even though they can be fixed to the structure of the building. Plant and equipment items include (but are not limited to): Hot water systems Carpets Blinds Ovens Cooktops Rangehoods Garage door motors Door closers Freestanding furniture Air Conditioning

The building write-off allowance is based on historical building costs and includes such items as the bricks, mortar, walls, flooring, wiring etc.

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Leighs Corner...
Whether expanding, hiring staff or starting a chain of businesses or franchises, you need to have a sharp business plan. The new and ever-changing laws relating to employment issues such as Human Resources and Industrial Relations make it extremely complicated and often expensive for employers and organisations. Over the months to follow Leighs Corner will be an incredibly informative read with plenty to look forward to...
This Edition Discusses: Enterprise Bargaining Are There Any Advantages in Workplace Specific Agreements? Workplace specific agreements have been used in the past to increase flexibility and productivity at workplaces by either recognising existing flexible working practices or introducing new innovations or operational procedures aimed at maximising employee outputs and meeting changing business circumstances. Some existing Australian Workplace Agreements (AWAs) and Certified Agreements made under the previous Work Choices legislation are still in existence and they are governed by transitional arrangements until their expiry. With the introduction of the Fair Work Act 2009 there are no provisions for making new AWAs and all Enterprise Agreements must now pass the Better off Overall Test or BOOT. There are three types of agreements available under the Fair Work Act 2009: 1. Single enterprise agreements 2. Multi-enterprise agreements 3. Greenfield agreements which may be single or multi. Single enterprise agreements are suited to one or two single interest employers, their employees and a union or unions and can be made where the majority of employees vote to accept the agreement. Under certain circumstances single enterprise agreements can apply to franchises and where other employers have agreed to negotiate together to make an enterprise agreement. Multi enterprise agreements are available where two or more employers seek to have an enterprise agreement but cannot establish a single interest. For a multi- enterprise agreement to be made the majority of employees at each employer involved in the agreement must vote to accept the agreement. Greenfield agreements only apply where a new business or genuine new enterprise is in the process of being set up and no employees have been employed to date. The key advantage of a Greenfields agreement is that an employer can set conditions for the future employees without seeking approval. These agreements can be single or multi agreements but must be made with the union or unions who have the relevant coverage over the enterprise. With the exception of Greenfield agreements there is no requirement to make agreements involving unions but there are processes and procedures which must be followed to ensure that the agreement meets the requirements of the Fair Work Act 2009.

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Some of these include: 1. 2. 3. 4. 5. 6. Notification of employee rights Appointment of Bargaining Agents Good faith bargaining Pre approval process Flexibility Clause Approval by FWA

Other Options All Modern Awards contain a Flexibility Clause usually found in clause 7 Award Flexibility of the award which allows for an employer to negotiate individual or collective flexible arrangements with individuals or groups of employees. These individual flexibility agreements or IFAs must meet the following criteria but do not need formal approval by a third party: Identify the terms of the award that are to be varied and why the employee is better off (BOOT). Must not contain any unlawful terms Must be genuinely agreed by the parties May be terminated by either party by giving not more than 28 days notice Must be in writing and signed by all parties to the agreement Employees party to the agreement to be given a copy of the agreement within 14 days of the agreement being reached.

IFAs can cover: Arrangements for when work is performed Overtime rates Penalty rates Allowances Leave loading

The real question relating to the possible application of any of the above options is how would the application of one of these types of agreements improve your business and/or employee output? Before commencing any enterprise bargaining option it is essential to know what you want to achieve and what it will cost. A comprehensive cost benefit analysis and review of existing and preferred workplace practices is required to ensure that there are real and measurable gains in productivity and efficiency achieved by the process otherwise any increase in wages and/or conditions as a result of the negotiations may be in excess of these gains. Entering into a bargaining process without costing and a clear negotiating strategy generally delivers a negative outcome but if the proper preparation is done workplace specific agreements can provide the following benefits: 1. 2. 3. 4. 5. 6. Allow for workplace practices to keep pace with industry and economic changes Improve productivity and efficiency Motivate employees Introduce Key Performance Targets linked to productivity outputs and additional reward systems Attain a competitive edge in your market niche Foster a workplace environment of cooperation and continuous improvement

The bottom line is that there are numerous options available to employers to negotiate and implement workplace specific productivity improvements and if you seek the right advice and do the requisite planning and costing the outcomes can have a positive effect on many layers of the business not just financial. Leigh Bernhardt FAHRI, PCArb, MIAMA, JP (Qual) Qld

If you wish to contact Leigh in relation to any of the matters raised in this and future articles please contact us at: info@taxsmart.net.au and well promptly forward your request onto Leigh. (Please mark the subject line of your email Leighs Queries).

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BONUS ISSUE
TAX EFFECTIVE SHARES AND PROPERTY INVESTMENT TAX EFFECTIVE SHARES AND PROPERTY INVESTMENT WHATS NEW IN 2011?

The GST Change of Use Adjustment Rules Relevant to Property Developers Increasing ATO Focus on Property Developers Important GST Cases - Vidler Meaning of Residential Premises - Sunchen Meaning of Residential Premises - Gloxinia Sale of Residential Units - Corymbia Corporation Application of Margin Scheme - Shiprock Sale Contracts and GST Clauses - Cyonara SnowFox Pty Ltd - Aurora Developments Pty Ltd

Taxation Determination TD2011/21: Investments made by Trustees and Capital Gains Taxation Determination TD 2011/22: Part IVA and Schemes to convert assessable income into non assessable, non exempt dividends Draft Taxation Determination TD 2011/D8: IVA and Capitalisation of Interest GST Ruling 2011/1: Goods and Services Tax: Development Lease and Disposal of A Retirement Village Tenanted Under A Loan-Lease Arrangement

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GST CHANGE OF USE ADJUSTMENT RULES RELEVANT TO PROPERTY DEVELOPERS

An adjustment is a change that increases or decreased your net GST liability for a reporting period. There are two types of adjustments: Increasing adjustments these increase your net GST liability for a reporting period Decreasing adjustments these decrease your net GST liability for a reporting period

INCREASING ATO FOCUS ON PROPERTY DEVELOPERS

In the year ending 30 June 2012, the ATO is using more ways of detecting goods and services tax (GST) avoidance on property sales, including property data matching from the Office of State Revenue and Land Titles Data. The ATO is also using data matching and analysis to ensure property developers are correctly reporting GST on property sales. Property developers who try to avoid declaring GST on the sale of property are more likely than ever to be contacted by the ATO. The ATO has increased their focus on property developers who intentionally avoid their GST obligations, or claim GST credits on properties they purchase and avoid lodging an activity statement after they later sell them. In a recent case, a property developer purchased rural farmland and subdivided it into residential lots for the purpose of sale. Through the data matching activities, the ATO identified over 100 sales that were made by the same developer. The main issues in this case were: Omitted GST income of approximately $1 million Default assessments (due to non-lodgement) of $5 million Overstated GST credits of $200,000.

You may need to make an adjustment on your June activity statement in relation to GST credits you have previously claimed if you use your property differently from the way you originally planned for example, if you have rented a residential premises that you planned to sell. You would nee to make an adjustment in these circumstances as the GST credits you have previously claimed in relation to the construction or development of the residential premises you may have been too much based on your actual use. You will also have an adjustment if you originally planned to rent but have sold residential premises that form part of your business or enterprise.
Information you need to work out change in use Adjustments

To be able to calculate change in use adjustments, you will need certain information including: When you made your business The GST-exclusive market value of each of your purchases What GST credits you claimed when you made the purchases The tax period in which you claimed the GST credits on your purchases Any previous adjustments you have made relating to the purchases Any details of you holding or marketing the property for sale (for example the listing agreement with your real estate agent or advertising material) A reasonable estimation of the selling price (if the property has not sold) What you have used the residential property for, including the period for which you have rented the premises or used the premises for private purposes The amount of any rent you received (if they have been rented) The date when you sold the property, and the amount you sold it for.

The developer was found to have not reported the property sales and the ATO charged the highest penalty applicable, amounting to approximately $4.5 million. Every property transaction may have a tax consequence you need to report.

VIDLER V FCT: RESIDENTIAL PROPERTY: VACANT LAND AND GST A TAP IS NOT ENOUGH
The ATO has just released its Decision Impact Statement concerning the Full Federal Court decision in Vidler V FCT (2010) FCAFC 59. In Vidler V FCT the central issue was whether land that is zoned for residential use but which contains no shelter or basic living facilities is residential premises as that term is defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The key issue was whether it came within paragraph (b) of the definition - land or a building that...is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. The taxpayer had bought and subsequently sold two blocks

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of land. Each block was zoned residential, did not contain any buildings or living facilities and was either connected to, or had access at the boundary of the property to, utilities such as sewerage, water, gas or electricity. The appellant had treated each sale as an input taxed sale of residential premises under subsection 40-65(1) of the GST Act. The court accepted the ATOs argument that the mere existence of a tap in the middle of a block of land does not transform the land into residential premises for the purposes of the GST Act. According to the ATO vacant land of itself can never have sufficient physical characteristics to mark it out as being able to be, or intended to be, occupied as a residence or for residential accommodation. Be very careful; treating sales of vacant land as an input taxed sale of residential premises could have serious consequences.

finding in favour of the Commissioner, the Court held that the GST status of a property sale should be determined objectively by looking at the physical characteristics of the property at the time it is sold. The decision provides clarity on how the GST provisions dealing with residential premises should be applied in practice. Notwithstanding, there will continue to be issues in terms of distinguishing between residential premises and other types of property for GST purposes. In 2006 Sunchen purchased a residential property consisting of a single storey house with a carport. At the time it was acquired, the property was occupied by a tenant pursuant to a residential tenancy agreement. The price was stated to be inclusive of GST. The property also had a development approval, the benefit of which was assigned to Sunchen by the vendor. Sunchen argued that it intended to develop the property and claimed an input tax credit equal to one eleventh of the purchase price on the basis that the development approval and Sunchens intention to proceed with the development meant that the property was not residential premises to be used predominately for residential accommodation. The vendor had treated the sale as an input taxed supply of residential premises which was not subject to GST. The Commissioner disallowed the credit claimed by Sunchen on the basis that the sale of the property to Sunchen was not a taxable supply. At issue was the interpretation of section 40-65(1) of the GST Act. Section 40-65(1) provides that: A sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation) . The taxpayer contended that the words to be used meant that weight should be given to the subjective intentions of the purchaser in determining the classification of the property i.e. that as it had acquired the development rights to the property, this evidenced that the property was not intended to be used for residential accommodation and the supply by the vendor was therefore not input taxed but instead was a taxable supply. However, the Commissioner successfully argued that the words to be used required the classification of a property to be determined objectively by reference to the physical characteristics of the property as at the date of acquisition and not the subjective intentions of the purchaser. In this case, the physical characteristics the property at the time of its sale to Sunchen demonstrated that it was to be used predominantly for residential accommodation (regardless of the term of occupation) and as such was input taxed. Here the Court recognised that adopting the subjective

CORYMBIA CORPORATION PTY LTD V COMMISSIONER OF TAXATION (2010) AATA 401

Here a property developer, following the sale of 98 lots, sought to claim the margin scheme under Division 75 of the GST Act in respect of the sale of the lots on the basis that it reduced its GST liability. Initially the ATO did not allow the application of the margin scheme. Crucially the contracts for the sale of the lots did not include any agreement with respect to the margin scheme which is a requirement. For the margin scheme to apply under section 75-5 of the GST Act, the parties to a contract must record an agreement that the margin scheme will apply in writing. The Commissioner may allow the taxpayer extra time to secure a written agreement after the sale is completed, but the Commissioner does not have the discretion to waive the requirement to obtain an agreement in writing. Importantly, the AAT held that the taxpayers evidence from an accountant and two solicitors that indicated that the parties would have agreed that the margin scheme would apply if the matter had been raised at the time of sale was not enough. This case reinforces the need for proper consideration to be given, prior to a contract being signed, as to whether the parties wish to avail themselves of the margin scheme.

SUNCHEN PTY LTD V COMMISSIONER OF TAXATION (2010) FCA 21

The Full Federal Court has provided more certainty to taxpayers in determining whether GST is payable on supplies of residential premises. At issue in that case was the interpretation of the provisions in the GST legislation that determine when a sale of real property should be classified as a supply of residential premises. In

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intentions of the purchaser as part of the classification process would make the provisions unworkable. The decision is consistent with the way in which the ATO has been applying the relevant legislative provisions in practice. However, there will still be situations where the focus on the physical characteristics of a property will present its own challenges to taxpayers in determining the correct GST treatment. For instance, a residential property may be used over time for a number of different activities, such as an office, storage and even as a residence. It may be difficult to ascertain at any particular time the physical attributes that existed. As always, developers and vendors of real property should be very careful in determining the GST status of their property transactions.

A detailed discussion of the case is beyond the scope of this publication. However, it clearly points to the need to take specialist advice when dealing with land contracts. Do not ever assume it is a standard contract.

CYONARA SNOWFOX PTY LTD AND COMMISSIONER OF TAXATION (2011) AATA 124
In this case the AAT affirmed the Commissioners decision on all of the substantive issues in the case concerning the proper GST treatment of property transactions. The two main issues determined was the operation of the margin scheme, and whether one sale was a GST-free going concern. The sales of five separate parcels of land in Yeerongpilly, Queensland were considered. The taxpayer had been audited and a notice of assessment was issued concerning a number of errors: Omitted and understated GST on supplies of land treated as taxable under the margin scheme Omitted GST on the supply of a property (commercial premises) that the applicant treated as going concern.

COMMISSIONER OF TAXATION V GLOXINIA INVESTMENTS LTD ATF GLOXINIA UNIT TRUST

The issue in dispute in this matter was whether the home units will have previously been the subject of a long term lease and no longer be new residential premises pursuant to s40-75(1)(a) of the A New Tax Systems (Goods and Services Tax) Act 1999 (GST Act), when Gloxinia sells them to third parties by assigning the individual strata lot leases. The majority of the Full Federal Court (Kenny and Middleton J) held that when the strata lot leases are granted to Gloxinia, there is a grant or assignment of real property, which effects a supply, pursuant to s9-10 of the GST Act, by way of a longterm lease of each of the home units that is the subject of a lot in the Strata Leasehold Plan. Having found that the grant of the strata lot leases involves the making of a supply of each of the home units to Gloxinia, the majority held that the home units, when sold by Gloxinia, will have previously been the subject of a long term lease and will no longer be new residential premises pursuant to s40-75(1)(a) of the GST Act. The Court concluded that, pursuant to s40-65 of the GST Act, the sale of the home units by Gloxinia to third parties would be input taxed supplies of residential premises. However, it is noted that the Assistant Treasurer issued a press release Clarifying GST Rules Around Residential Property on 27 January, 2011 announcing that the Government will move to amend the GST Act in the light of this decision to ensure that the Act achieves the intended policy outcomes for the GST treatment of residential premises.

The applicant argued that prior to 17 March 2005, a taxpayer was entitled to make a choice to apply the margin scheme after the date of supply, and up to the time of proceedings in the Tribunal. The applicant also pointed to PSLA 2005/2 in which the Commissioner states that he has a power or discretion to allow an entity to choose to apply the margin scheme after the supply has been made. The Commissioner contended that the margin scheme could not now be applied because, even before the March 2005 amendment, the supplier must have chosen to apply the margin scheme at or before the time it made the supply, i.e. prior to settlement. The Tribunal agreed that the legislative scheme suggested that the taxpayers choice must have been made by no later than the time of supply. The Tribunal noted that the scheme of the GST Act makes it plain that liability to GST is not dependent on the issue of an assessment; liability arises on the due date for payment by operation of s33-3 or s33-5 of the GST Act. Regarding the supply of a going concern issue, the applicant argued that it was carrying on an enterprise of leasing property, which it carried on until the day of supply, and that it supplied all things necessary for the continued operation of that enterprise. The Commissioner argued that the applicant had failed to establish, as a matter of fact, that these criteria had been met. The Tribunal agreed with the Commissioner, finding that the evidence indicated the applicants previous leases of the premises had terminated prior to the sale.

A F C HOLDINGS PTY LTD V SHIPROCK HOLDINGS PTY LTD (2010) NSWSC 985
The Supreme Court has held that the purchase price in a contract for the sale of land was GST exclusive because of a special condition in the contract.

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AURORA DEVELOPMENTS PTY LTD V COMMISSIONER OF TAXATION (2011) FCA 232 15 AUGUST 2011
This involved a Test Case Funding decision; the Federal Court (Greenwood J) found in favour of the Commissioner, holding that the taxpayer, Aurora Developments Pty Ltd (Aurora), made a taxable supply of land and associated contractual obligations to complete works, not the supply of a GST-free going concern. In October 2003, Aurora entered into a contract with three entities controlled by Australand (the buyer). The contract was described as a Contract for Houses and Land, comprising an area of approximately 10 hectares plus adjoining land for a consideration of $28.2 million. Aurora and the buyer acknowledged and agreed that the sale of the Enterprise effected pursuant to this Contract constitutes the supply of a Going Concern that is GST Free. The Enterprise contemplated by the contract was defined to mean the enterprise of the development of the Land and the assets of that enterprise, including the Land, the Development Material and all other items, books, plans, approvals and all ancillary materials. The Commissioner assessed Aurora for GST on the sale together with a shortfall penalty. He contended that having regard to the terms of the contract and the evidence, the relevant enterprise under the contract concluded some time prior to the settlement date of 2 July 2004 and therefore Aurora was not carrying on the relevant enterprise at the day of supply. The Court found that the proper construction of the contract having regard to its text, the surrounding circumstances known to the parties and the purpose and object of the transaction was that it did not effect a sale of an enterprise consisting of a development characterised by all the Development Material under the contract i.e. an Adult Community development (the project enterprise). Rather, at the time of contract, Aurora had abandoned the project enterprise and the sale of the land was the final form of Auroras expression of its decision to withdraw from the staged project enterprise. By the date of contract, the seller was no longer engaged in the development of the land as characterised by all the Development Material under the contract i.e. an Adult Community development project. Rather, the sale of the land was an abandonment of that project enterprise in favour of an outright disposal of the land on particular terms.

GSTR 2011/1: DEVELOPMENT, LEASE AND DISPOSAL OF A RETIREMENT VILLAGE TENANTED UNDER A LOANLEASE ARRANGEMENT: 27 AUGUST 2011
This ruling outlines the ATOs view of the GST consequences for entities in the retirement village industry that develop, sell or purchase retirement villages that are tenanted under loan-lease arrangements and sold for the first time as new residential premises. The ruling applies to arrangements with these features: An entity (the vendor) acquires land and other things to develop a retirement village; The vendor enters into residence contracts with incoming village residents in relation to a residential unit in the village. The unit is or is intended to be occupied as a residence or for residential accommodation;

An ingoing contribution amount is paid by the incoming resident to the vendor for the right (in the form of an extended lease or licence) to live in the village; The ingoing contribution is in the form of an interest- free loan. The vendor is contractually obliged to repay the amount in full when the lease or licence terminates; The vendor later disposes of all or part of the village by way of sale or long-term lease as a taxable supply (or as a GST-free going concern) to another entity (purchaser) as new residential premises. Pursuant to the sale arrangement, the purchaser will repay any ingoing contribution amounts outstanding at the time of sale.

According to the ruling, the vendor is effectively relieved of its obligation to repay the ingoing contributions received from residents and this repayment benefit forms part of the consideration for the vendors supply of the village to the purchaser. As the vendor will have made a mixture of taxable, GST-free and/or input taxed supplies, the ruling also addresses the determination by the vendor of the extent of its creditable purpose for its village development acquisitions. The ruling includes a formula for this purpose that is based on the value of the economic benefits reasonably expected to be obtained by the vendor. The economic benefits are said to include the benefit to the vendor of having access to the ingoing contributions, interest-free. The ruling also covers potential GST implications for the purchaser of a retirement village. The rulings analysis of the GST implications for entities developing, selling or purchasing retirement villages under

TAXATION DETERMINATION TD 2011/22

TD 2011/22 released in August 2011 determines that Part IVA of the Income Tax Assessment Act 1936 can apply to a scheme designed to convert otherwise assessable interest income into non-assessable non-exempt dividends. Be very cautious about entering into such arrangements.

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loan-lease arrangements differs from the Commissioners administrative practice prior to the ruling being issued. The ruling effectively results in a less favourable GST outcome for the entities covered by it. To address this, the ruling indicates that transitional administrative relief may be available to taxpayers who were commercially committed to the development of a retirement village before the ruling was issued on 27 April 2011. For our Queensland subscribers the State Government is seeking feedback with an emphasis on the provisions which deal with the closure of retirement villages. The Office of Fair Trading has prepared a discussion paper to highlight the issues faced by residents and scheme operators when a retirement village closes. Scheme operators should take note of the discussion points surrounding the following issues: Closing a retirement village scheme and pre-contractual disclosure Timeframes involved in closing a retirement village scheme Financial considerations for closing a retirement village scheme

the loan. In recent years borrowing costs have become a focus of ATO audit activity due to the number of incorrect claims being made. These include: Borrowing costs totally more than $100 are incorrectly claimed in full in the year incurred In this case, the deduction must be spread over five years or the term of the loan, whichever is less. Apportionment problems In particular, borrowing costs are often claimed in full where a loan is used to purchase a rental property and is also partly used for private purposes. In this case, only so much of the borrowing costs that relate to that part of the loan used to acquire the rental property are deductible.

Stamp duty on the property title transfer is incorrectly claimed as a deduction Stamp duty on the transfer of the property title is not a borrowing cost. Instead, it forms part of the second element of the propertys cost base for CGT purposes.

Significant legislative changes are likely.

HOBBY FARM TAX LOOPHOLE CLOSED

Late in 2009 there was a change regarding so called hobby farms. The new non-commercial losses rules will prohibit individuals with an adjusted taxable income of over $250,000 from applying losses from non-commercial business activities against their other income, unless they have applied to the Commissioner of Taxation and the Commissioner has assessed the activity as genuinely commercial. If the Commissioner does not exercise their discretion, the losses are quarantined and can only be applied against future assessable income from that activity. The existing rules, however, continue where individuals have an adjusted taxable income under $250,000. Under the existing rules, individuals may apply losses against their other income where one of four tests is met. The current four tests focus on the business activitys prior year profits, its revenue and the assets such as real estate and equipment that are involved in carrying on the business.

BORROWING COSTS
Borrowing costs include those expenses directly incurred to borrow money and other costs the lender requires the borrower to incur for loan approval. Examples of borrowing costs include: The cost of obtaining a valuation for loan approval Stamp duty charged on the mortgage Title search fees Loan application or establishment fees Mortgage broker fees Legal or other costs incurred for preparing and filing mortgage documents Mortgage insurance (i.e. where the amount borrowed exceeds a certain percentage of the purchase price of the property) Guarantee fees

Borrowing costs are deductible over the term of the loan or 5 years which ever is shorter. In the event the loan is paid out early, the balance of the borrowing costs are fully deductible in the income year of repayment. Where the total deductible borrowing costs are $100 or less, they are fully deductible in the income year in which they are incurred. Where a loan is obtained part way through an income year, the deduction for the first year must be apportioned according to the number of days in the year the taxpayer had

THE FAMILY HOME AND ESTATE PLANNING

For most Australians estate planning means dealing with their home. To maintain the benefit of the main residence exemption and not incur unexpected capital gains upon inheriting a property it is important to grasp the CGT

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rules relating to ownership, death and the main residence exemption. Joint or Common Tenancy Warwick and Jo-Anne currently own their main residence, which they purchased in 1983 as joint tenants. They are considering whether it would be more advantageous from an estate planning perspective to hold the property as tenants in common. From a CGT perspective no distinction is made regardless of whether an asset is held through a joint tenancy in common. Individuals who hold a property as joint tenants are treated as each owning a separate CGT asset constituted by an equal interest in the asset and as holding that interest as a tenant in common. On the grounds that the conversion from one to another does not give rise to a change of beneficial ownership for CGT purposes, the transfer does not have any CGT implications. Granting Life Tenancy Now assume that Warwick owns 100% of the property and grants Jo-Anne a life tenancy after he passes away. Provided the property is not sold during the period of the life tenancy, no CGT implications arise from the life tenancy alone. If the property is sold during this period any capital gain or loss will be ignored provided the property has been Jo-Annes main residence from the time of Warwicks death to the time of disposal. The tax implication of the life tenancy upon Jo-Annes death to the ultimate beneficiary, their son Ian, is that Ian is treated as having acquired the property on the day Warwick died, not when Jo-Anne died. As a result, the property is converted into a post-CGT asset at the time of Warwicks death. As the property was a pre-CGT asset to Warwick, the first element of the cost base of the property to Ian is the market value of the property on the day of his fathers death. Should Ian decide to sell the family home shortly after JoAnnes death he is deemed to have acquired the property on the day of Warwicks death for the purpose of applying the 50% CGT discount. Main Residence If the property is not Warwicks main residence at the time of his death, there are no direct CGT implications for Ian at that time. However, if the property is later sold by Ian, the resulting capital gain or loss is ignored provided that from the time of Warwicks death to the time of disposal the property was the main residence of one or more of the following individuals: The spouse of the deceased An individual who had a right to occupy the dwelling under the deceaseds will (Jo-Anne) The ultimate beneficiary (Ian)

Ian while Jo-Anne was residing in it. New Home If the property had been acquired by Warwick in 1988 instead of 1983 and was thus a post-CGT asset in Warwicks hands, Ian is treated as having acquired the property at the time Warwick died. For the purpose of the 12-month rule relating to the 50% CGT discount the relevant acquisition date is the date Warwick acquired the property. In this scenario, the first element of the cost base of the property to Ian is the propertys market value on the day of Warwicks death provided the following conditions are satisfied: The property was Warwicks main residence before he died The property was not used for income-producing purposes at that time. If these conditions are not satisfied, the first element of the cost base of the property to Ian is the cost base of the property to his father at the time of death.

For the purpose of the main residence exemption, any capital gain or loss arising from a disposal of the property is ignored provided the disposal occurs within 2 years of Warwicks death.

THE FOUR YEAR CONSTRUCTION RULE EXTENDING THE MAIN RESIDENCE EXEMPTION
When a taxpayer builds a new home on land, or repairs or renovates and existing house, the main residence exemption will usually only apply from the date the completed dwelling becomes the taxpayers main residence. It then follows when the house is eventually sold, only a partial main residence exemption will apply. In this case, the taxable portion of any capital gain is calculated under s.118-185. However, there is relief under s.118-150 which allows a taxpayer to choose to treat the completed dwelling and the land as their main residence for a period of up to 4 years before it actually becomes the taxpayers main residence. The taxpayer then applies the main residence exemption to the whole property during the period the dwelling is being constructed, repaired or renovated, for a period of up to 4 years. This choice can only be made when the following conditions are met: The completed dwelling becomes the taxpayers main residence as soon as practicable after it is completed; and The dwelling continues to be the taxpayers main residence for at least 3 months. Once the choice is made to apply s.118-150, no other

So long as the property remains Jo-Annes main residence subsequent to Warwicks death, based on the above, there would be no capital gain if the property were to be sold by

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dwelling can generally be the taxpayers main residence during the same period. The 4 year exemption under s.118-150 may be a very useful planning tool in maximising the main residence exemption for taxpayers who build a new home or repair or renovate an existing house that will become the taxpayers home. When applying this concession, a distinction should be made between the following common categories of taxpayers: Those taxpayers who buy land and then either build a new home or repair or renovate an existing house on the land, before moving in; Those taxpayers who buy an existing house which is then occupied (e.g. by tenants) before either a new home is built or the existing house is repaired or renovated; and Those taxpayers who demolish their existing main residence to build a new home. The following case study may be helpful: Purchase of Vacant Land to Build New Home Tony acquired a block of land on 1 April 2000 and built a new house which was completed on 12 September 2002. Tony moved into the house on 15 September 2002 and lived there until the house was sold on 15 March 2009. The sale generated a capital gain of $180,000. Tonys new house will be considered his main residence from the time he moved into it until it was sold (i.e. from 15 September 2002 to 15 March 2009). If Tony chooses to apply s.118-150, his house will also be considered his main residence from the time the land was acquired until it became his main residence (i.e. from 1 April 2000 to 14 September 2002). If a dwelling is occupied by tenants for a period of time before it is re-built, repaired or renovated, the main residence exemption will not apply for this period refer to ATO ID 2003/810. Where an existing house is demolished to build a new home there are a number of scenarios and valuable guidance is contained in ATO IDs 2003/322, 2003/466 and 2006/185.

types of farming were attempted and found unprofitable over an extensive period. Due to the unprofitability of the farming business the taxpayer rezoned and subdivided the land. Roads were constructed, underground power was installed and trees were planted. Little of the subdivision work was planned by the taxpayer who relied on town planners, engineers, contractors and consultants to design, plan and sell the allotments. The taxpayer had not conducted any other activities relating to property development. Holding the profit derived from the subdivision was only a mere realisation, the ATO cited the following reasons: Unprofitability of land the sale of the subdivided land was triggered by the lands unprofitability; Initial purpose not land development the initial purpose of purchasing land was farming; Land was farmed the land was used for farming purposes for a long period of time before subdivision; Taxpayer outsourced subdivision the taxpayer only performed a small part of the subdivision. The taxpayer relied on town planners, engineers, contractors and consultants to design, plan and sell the allotments; and Taxpayer was not a developer the taxpayer had no other business relating to property development.

ATO IDs 2001/55 and 2002/483 contain valuable guidance.

MAXIMISING DEPRECIATION CLAIMS ON RENTAL PROPERTIES

From 1 July, 2001 the immediate deduction for depreciating assets costing $300 or less has been restricted to assets in use to produce assessable income from activities that do not amount to carrying on a business. This of course includes rental properties. So when applying the $300 immediate write-off we should consider owned rental property assets. Here each joint owners interest in the asset is effectively treated as a separate asset for depreciation purposes under S. 40-35. This means where the cost of a joint owners interest in an asset is not more than $300, an immediate write-off can be claimed by the joint owner under S. 40-82(2) (if all other conditions are met), even if the overall cost of the asset exceeds $300. For example, if a rental property is jointly owned by two or more persons, an asset costing up to $600 where the property is owned by two people may be written-off in the year of purchase under S. 40-80(2). Therefore, the $300 immediate write-off concession will generate better initial cash flow benefits for jointly owned properties compared with rental properties which have only

ENCROACHING SUBURBIA AND FARMLAND

ATO Finds Sale of Farm Land a Mere Realisation ID 2002/700 With encroaching suburbia particularly in regional towns this may be very relevant. Here the ATO considered whether the sale of farm land was assessable income under s.6-5. In the 1970s the taxpayer purchased farming land. Several

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the one owner. Many tax accountants miss this concession. An asset in a jointly owned property that has an overall cost of more than $300 - but no more than $300 for each individual joint owner will mean the asset can still be written-off in the year of purchase providing the other conditions in S. 40-80(2) are met. In comparison, the same asset in a rental property that is owned by one person must be depreciated over the assets effective life (subject to the low-value pool method of depreciation see below). In similar fashion to the $300 write off, the advantages of allocating jointly owned assets to a low-value pool are often overlooked where properties held in joint names. Under the low-value pool rules (refer to S. 40-425 to S. 40-460), a landlord can generally choose to depreciate the following two categories of assets as part of a low-value pool: a low-cost asset this is an asset acquired during the current year, costing less than $1,000 (except an asset that is eligible for the $300 immediate write-off concession noted above); and a low-value asset this includes an existing asset already written down to less than $1,000 under the diminishing value (DV) method.

2.

depreciated for one day in the income year which would result in a negligible tax deduction. Clearly for low-cost assets that are acquired towards the end of the income year; there are significant cash flow benefits of depreciating these assets as part of a low-value pool rather than depreciating them separately over their effective life in the first income year (i.e. the year of purchase). Depreciation for pooled assets after first year In general, depreciation claims for an asset (in its earlier years) will be greater in a low-value pool (compared with depreciating the same asset over its effective life), where the asset has an effective life of more than 4 years. Invariably this is usually the case with rental property fixtures, fittings and furnishings.

Joint owners of a rental property can gain greater access to the potential cash flow benefits of using a low-value pool. This is because the low-value pool rules are applied to each joint owners interest in the asset, and not to the asset as a whole. This means if the cost of a joint owners interest in an asset is less than $1,000, the joint owners interest will qualify as a low-cost asset and can be allocated to a low-value pool even if the overall cost of the asset is more than $1,000. For example, if a rental property is jointly owned by two individuals, an asset costing up to less than $2,000 could be depreciated as part of a low-value pool. Joint owners of a rental property will therefore have a greater number of assets that are eligible to be depreciated as part of a low-value pool compared with taxpayers who own a rental property solely in their name. Consequently, the potential cash flow benefits of using a low-value pool will generally be greater in respect of a jointly owned rental property, compared with a rental property that is owned only by one person. Be mindful however, that depreciation is only one expense and there may well be sound overall tax reasons for having the negatively geared property in the name of only one high income earning spouse. The above two examples are included to maximize claims in the event the property is held in point names.

In a low-value pool, all assets are usually depreciated using a DV rate of 37.5%. The only exception is for low-cost assets which are depreciated using a DV rate of 8.75% (i.e. half the full rate of 37.5%) in their first year. Once a choice has been made to set up a low-value pool, all low-cost assets acquired in that year and in later income years must be allocated to the pool. However, its possible to allocate low-value assets at the taxpayers discretion under S. 40-430.

CASH FLOW BENEFITS FOR JOINTLY OWNED ASSETS IN A LOW-VALUE POOL

There are two cash flow benefits arising when depreciating a rental property asset as part of low-value pool, compared with depreciating the same asset over its effective life, as follows: 1. Depreciation for low-cost asset in first year in the first year (i.e. the year of purchase), low-cost assets are depreciated at a flat DV rate of 18.75% for the full year, regardless of when the asset is purchased during the year there is no requirement to apportion the assets depreciating claim on a day in the year basis. This means a low-cost asset can be purchased on the last day of an income year and still be depreciated at 18.75% for that income year. However, if the same asset was being depreciated over its effective life and not as part of a low-value pool it could only be effectively

MAIN USE TO DERIVE RENT

Rental property owners have had the problem of satisfying the active asset test in order to access the CGT small business concessions. A property is an active asset when it is used in the course of carrying on a business. However a property is excluded if its main use is to derive rent (unless it is leased to a related entity which is carrying on a business). No Leasing The key determinant in your propertys main use to derive rent is whether to user of your property has the right to exclusive possession. If for example, your property is

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being leased under a lease agreement granting exclusive possession, the payments will most likely be rent and the property will not qualify as an active asset. However, if the arrangement allows the person only to enter and use the property for certain purposes (e.g. holiday apartments, commercial storage), the propertys main use will not be viewed as deriving rental income. In this case, a landlordtenant relationship does not technically exist and the owners will be considered to maintain possession of the property. This concession is often overlooked because, many payments that are not rent in the relevant technical sense are nonetheless termed rent. For example, Storage Now Pty Ltd carries on a business providing domestic and commercial storage space for periods ranging from one week to several years. Storage Now provides a cleaning service, office facilities and a 24hour security service. The company also provides trailers, trucks, trolleys and boxes for sale or hire. Storage now enters into a storage agreement with storage users for the right to enter and use the storage facilities, but a lease as such does not exist. The storage facilities will be treated as active assets and the owners of Storage Now will be eligible for the small business CGT concession on the sale of the property. Mixed-Use Property Rental properties that have mixed - uses may also be eligible for the small business CGT concessions. For example a property may be used partly for business and partly to derive rent. To determine whether the property satisfies the active asset test, things such as how the property areas are used and the levels of income derived from different uses of the property are relevant. Even if more than half the property by area is used to generate rent, it is possible the CGT concessions may apply to the whole property. For example, Alison uses 40% of her property to run a restaurant and rents out 60% of her property to an unrelated third party who runs a publishing business. The income derived from the restaurant business is 75% of the total income (i.e. business plus rentals) derived from the use of the property. Although not a majority, a substantial area of the property is used to carry on a business. Also, the business part of the property derives most of the income for Alison. According to the ATO rulings, it would not view Alisons property as having a main use of deriving rent. In this case, the property would not be excluded from being viewed as an active asset and Alison would be able to access the small business CGT concessions.

purposes of Division 129 of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act), when it actively markets new residential premises for sale whilst also using the new residential premises for making input taxed supplies of residential rent? The Decision: Yes, the entity does apply the new residential premises for a creditable purpose to some extent, for the purposes of Division 129 of the GST Act, when it actively markets new residential premises for sale whilst also using the new residential premises for making input taxed supplies of residential rent. The Relevant Facts: The entity is carrying on an enterprise of property development and is registered for goods and services tax (GST). The entity constructs new residential premises as part of its property development enterprise with the sole intention of selling those premises on completion. The entity is entitled to input tax credits for acquisitions related to the construction of the premises in accordance with Division 11 of the GST Act. The entity lists the completed premises for sale with a real estate agent. The premises are widely advertised at a price that is comparable to prices being sought by other entities for similar premises on the market. Despite the entitys effort to sell the premises, after a period of time the premises remain unsold. The entity commences renting the premises to a residential tenant to assist with meeting the holding costs of the premises. The supply of the premises to the residential tenant by way of rental is an input taxed supply under section 40-35 of the GST Act. While the premises are being rented the entity continues to market the premises for sale. The premises remain listed with a real estate agent. The premises continue to be widely advertised and prospective buyers continue to inspect the premises. The premises remain unsold at the end of the first adjustment period under Division 129 of the GST Act for acquisitions related to the construction of the premises. The entity is continuing to rent the premises while marketing the premises for sale. The reasons for decision are contained in ID 2008/114: ID 2008/114 represents a change in view by the ATO. Formerly the ATO required GST to be paid back on construction costs when developers changed their intention from selling to holding because of market conditions.

ATO ID 2008/114
ATO ID 2008/114 has given hope to struggling builders and developers in a very tough market. The Issue considered was: Does the entity, a property developer, apply new residential premises for a creditable purpose to any extent, for the

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This year, developers have been forced to rethink their plans due to the slow property market and tight rental conditions. Industry figures had claimed the ATOs tough initial stance was adding thousands of dollars to the burden of already cash-strapped builders and potentially exacerbated the housing crisis.

carry on an enterprise of selling residential premises and marketing of the property for sale; and The calculation of the amount of input tax credits that can be claimed should be performed in accordance with the reasonable methodologies set out in GSTR 2009/4.

Investment in Residential Property Saving On GST The leasing of residential premises is input taxed under the GST law unless the premises have the character of commercial residential premises. It follows that a lessor of residential premises would not be entitled to obtain an input tax credit for an acquisition made in respect of residential premises, whereas the lessor of commercial residential premises would generally be (subject to the long-term accommodation exception), entitled to obtain input tax credits for such expenses. If an investor acquires residential premises which are leased to another entity that leases similar premises from other owners and provides such premises to the general public for short-term accommodation, then the initial lease should be structured so as to impose an obligation upon the lessee entity to bear all costs associated with the maintenance and management of the premises and accept a lower rent. In essence, structure the lease in the same way as commercial leases operate such leases impose an obligation upon the lessee to bear the costs of all expenses associated with the maintenance of the premises.

RECENT DEVELOPMENTS
Developers Claiming GST Credits on Construction Costs The ATO has released GSTR 2009/4: New residential premises and adjustments for change in creditable purpose. The ruling provided relief for property developers providing them with the opportunity to claim a portion of input tax credits on construction costs while renting out new residential premises so long as the properties were being held for sale. However, the recent AAT Case, GXCX and Commissioner of Taxation (GXCX), highlights that developers need to be very careful when applying this approach. In GXCX, the taxpayer developed approximately 91 apartments in 2000 and 2001. The apartments were marketed for sale before and during construction. In December 2001, when the development was completed, 22 apartments remained unsold and were rented. A further 10 apartments were then sold in 2008 and 2009. The taxpayer claimed input tax credits on the full construction costs. The issue which was the subject of the Tribunal decision was whether they were required to make an adjustment under Division 129 of the GST Act when they made the decision to rent out the 22 unsold apartments. The AAT took the view the 22 unsold apartments were not available for sale and that there were no overt acts demonstrating the fact that the apartments were available for sale and the evidence of the directors, demonstrates that the intention was not to sell in the short term. The intention to sell was predicated upon the market reaching a level where the capital growth could be realised. The AAT held that the construction of section 12-55 of the GST Act requires an analysis of the present application of the premises. They concluded the application of the premises during the period in question was entirely for the non-creditable purpose of leasing, and that the mere intention to sell the properties at some time in the future, without more, did not amount to an application of the premises for a creditable purpose. An increasing adjustment therefore was required. Developers intending to claim input tax credits should be mindful of the following: The residential premises are held for sale as described in GSTR 2009/4. Factors that will assist in demonstrating that the premises are held for sale include business plans, finance documents supporting the planned sale, past activities of the entity that demonstrate they

TAX SMART SELLING: PROPERTY

The message is clear and simple: get professional tax advice this could save you thousands of dollars. After the event, it is usually too late for opportunities to generate tax savings. If at all possible a desired outcome is to generate tax savings by increasing the taxable capital gain on the sale of a property and simultaneously create revenue deductions. The after tax benefit of deductions for an individual (at 46.5%) more than offset the additional tax burden arising from an increased gain (at 23.25%). In other cases, the same strategy used by a company allows capital gains to be generated for use against capital losses with a corresponding decrease in taxable income. Standard Sale Example Toby has owned his factory and the surrounding property since 2003. He acquired the property (including the factory) for $3.2 million. By 2007, Tobys business has outgrown the factory, which he sells to a property developer who intends to know down the factory and build town houses for resale. Since acquiring the factory Toby has claimed $200,000 in capital works deductions. Toby sells the property to the property developer outright for $4 million, the $1,000,000 capital gain (on a $3.2 million cost base, reduced by the $200,000 Division 43 deductions clawed back) will give rise to a net tax liability of $232,500 (after applying the CGT 50% discount).

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DIY Sale Alternatively, assume Toby sells the property to the property developer under a contract stipulating that the vendor will demolish the factory. The sale price is adjusted by $100,000 to reflect the additional cost to Toby demolishing the factory. At this point the factory has residual undeducted construction expenditure of $600,000. In this scenario, the tax outcome is far more advantageous for Toby. Under the capital works tax amortization provisions, Toby is able to claim $600,000 revenue deduction in respect of the undeducted construction expenditure. This produces a tax saving of $279,000 (at the 46.5% tax rate). From a capital gains tax perspective, the capital works deduction gives rises to a costs base adjustment for the property sold. Under the CGT rules, as the property was first acquired by Toby after 13 May 1997, the cost base is reduced by the $200,000 in capital works deductions claimed by Toby in the past and the $600,000 capital works deduction on demolition of the factory. As a result, the cost base is reduced to $2.4 million. Tobys cost base for the property is increased to reflect the demolition costs he has incurred in demolishing the factory (say $100,000), bringing the cost base of the property to $2,500,000. With capital proceeds of $4,100,000 on the sale of the property, Tobys total taxable capital gain under this alternative is $1,600,000 resulting in tax on the capital gain of $372,000 (after applying the 50% capital gains discount). Taking into account the capital works deduction (giving rise to a tax saving of $279,000), Tobys net tax liability is $93,000. This represents a tax saving of $139,500 (being $232,500 - $93,000) compared to the scenario in which Toby sells the property without first demolishing the factory. Pre 13 May 1997 Property Had the property been acquired before 13 May 1997, the benefit derived by Toby in this scenario would have been further increased. For properties acquired prior to this date, the cost base reduction to reflect Division 43 capital works deductions, are required above, would not have been necessary under the CGT rules. This would have resulted in a higher cost base and a smaller taxable capital gain. Interest Deductions after a Rental Property Has Been Sold In a property market under stress this issue is becoming more common. Sale proceeds of a rental property will usually be applied against any outstanding loan. In the event a property is sold for less than the outstanding loan balance there will be a shortfall amount. The issue that then arises is whether a tax deduction can still be claimed for interest incurred on the loan shortfall amount.

The decisions in FCT v Brown (1999) FCA 721 (Brown) and FCT v Jones (2002) FCA 204 (Jones) clearly indicate that a taxpayer should be entitled to a tax deduction for interest on a loan shortfall amount arising from the sale of an income producing asset. Taxation Ruling TR 2004/4 sets out the Commissioners view following those decisions. It should be noted that although Brown and Jones both dealt with taxpayers carrying on a business, the courts and the ATO have indicated that the same principles can equally apply to non-business taxpayers (TD 95/27) including rental property owners. Based on these decisions the below factors must be considered before making a claim for interest on a loan shortfall. If the entire proceeds from the propertys disposal are applied to the loan then the interest will continue to be deductible. In the event there is a legal entitlement to pay the loan early and the taxpayer has sufficient assets to repay the loan, then this could affect the deductibility of interest subsequent to the sale of the rental property.

Where a fixed term loan is refinanced at a lower rate after the rental property is sold this generally would not affect the deductibility of interest. The length of time elapsing since the sale of the rental property should not be an issue as long as the taxpayer does not have the capacity to repay the loan. For example in Guest v FCT FCA 193 interest deductions were allowed for 10 years after the business had ceased.

TAX TIP INCREASING YOUR COST BASE ON FORMER PRINCIPAL PLACE OF RESIDENCE
Increasing Your Cost Base You can obtain uplift in the cost base of your house by having it deemed to have been acquired at market value on the day your home is first rented out. Interpretative Decision ATO ID 2004/950 specifies the following conditions must be satisfied: 1. The home is rented out for more than 6 years (and no other property is treated as a main residence); 2. The home has been rented out after 20 August 1996; and 3. The full main residence exemption would have been available if the house was sold just before it was rented out.

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To determine the market value of the house for CGT purposes, a person has the option of (Taxation Determination TD 10): 1. Obtaining a valuation from a qualified valuer; or 2. Calculating their own valuation based on reasonably objective and supportable data. Generally, if significant amounts are involved, it will be prudent to obtain a valuation from a qualified valuer, particularly if there is also any doubt about the market value of the property. Example 1 Susan purchased a property in Melbourne in 1995 for $300,000 and occupied it as her main residence for 5 years. In 2000, she moved to Sydney for work and rented out her house. A qualified valuer values the market value of her house to be $650,000 at that time. In 2007 Susan decides to stay in Sydney and sells her house for $1,350,000 (i.e.7 years after it is first rented out). Capital Gains Tax Implications Given that Susan meets all the above requirements, she can be deemed to have acquired her Melbourne home for its market value at $650,000 in 2000 (the date that the property was first used for income producing purposes). When Susan sells the apartment, the capital gain (or loss) is calculated as follows: Amount received: Less: Market value cost base of house in 2000 Capital gain (loss) The taxable capital gain is then worked out as: Capital gain (or loss) x = $700,000 x 365 2,555 = $100,000 Non-main residence days Days of ownership $1,350,000 $ 650,000 $ 700,000

CO-OWNERSHIP OF RENTAL PROPERTY

The way that rental income and expenses are divided between co-owners varies depending on whether the coowners are joint tenants or tenants in common or there is a partnership carrying on a rental property business. Co-Owners of an Investment Property Not In Business A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities. Dividing Income and Expenses According To Legal Interest Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. If they are: Joint tenants, they each hold an equal interest in the property; Tenants in common, they may hold unequal interests in the property for example, one may hold a 20% interest and the other an 80% interest. Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise. Example: Joint Tenants Mr and Mrs Hitchman are joint tenants in an investment rental property. Their activity is insufficient for them to be characterized as carrying on a rental property business. In the relevant year, Mrs Hitchman phones the Tax Office and asks if she can claim 80% of the rental loss. Mrs Hitchman says she is earning $67,000 a year, and Mr Hitchman is earning $31,000. Therefore, it would be better if she claimed most of the rental loss, as she would save more tax. Mrs Hitchman thought it was fair that she claimed a bigger loss because most of the expenses were paid out of her wages. Under a partnership agreement drawn up by the Hitchmans, Mrs Hitchman is supposed to claim 80% of any rental loss. Mrs Hitchman was told that where two people are joint tenants in a rental property, the net rental loss must be shared in line with their legal interest in the property. Therefore, the Hitchmans must each include half of the total income and expenses in their tax returns. Any agreement that the Hitchmans might draw up to divide the income and expenses in proportions other than equal

Susan can then apply the 50% CGT discount (given that she has also held the property for more than 12 months). The capital gain on the sale of the Melbourne home will only be $50,000. A Great Tax Outcome The reason Susan pays negligible tax of $23,250 on her profit of $700,000 is that she can BOTH revalue her house at 2000 (when she first rented it out) AND still partially claim the main residence exemption.

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shares has no effect for income tax purposes. Therefore, even is Mrs Hitchman paid most of the bills associated with the rental property, she would not be able to claim more of the rental property deductions than Mr Hitchman. Example: Tenants in Common In the preceding example, if the Hitchmans held their property interest as tenants in common in equal shares, Mrs Hitchman would still be able to claim only 50% of the total property deductions. However, if Mrs Hitchmans legal interest was 75% and Mr Hitchmans legal interest was 25%, Mrs Hitchman would have to include 75% of the income and expenses on her tax return and Mr Hitchman would have to include 25% of the income and expenses on his tax return. Note: Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that persons interest in the rental property does not need to be divided between all of the co-owners. If you do not know whether you hold your legal interest as a joint tenant or a tenant in common, read the Title Deed for the rental property. Non-Commercial Rental If you let a property or part of a property at less than normal commercial rates, this may limit the amount of deductions you can claim. Renting To a Family Member This issue arises frequently and the following example provides guidance: Mr and Mrs Hitchman were charging their previous Queensland tenants the normal commercial rate of rent - $180.00 per week. They allowed their son, Tim, to live in the property at a nominal rent of $40. per week. Tim lived in the property for four weeks. When he moved out, the Hitchmans advertised for tenants. Although Tim was paying rent to the Hitchmans, the arrangement was not based on normal commercial rates. As a result, the Hitchmans could not claim a deduction for the total rental property expenses for the period Tim was living in the property. Generally, a deduction can be claimed for rental property expenses up to the amount of rental income received from this type of non-commercial arrangement. Assuming that during the four weeks of Tims residence, the Hitchmans incurred rental expenses of more than $160, these deductions would be limited to $160 in total, that is, $40 x 4 weeks. If Tim had been living in the house rent free, the Hitchmans

would not have been able to claim any deductions for the time he was living in the property. Claiming Prepaid Expenses for 30 June 2010 If you prepay a rental property expense, such as insurance of interest on money borrowed, that covers a period of 12 months or less AND the period ends on or before 30 June 2010, you can claim an immediate deduction. A prepayment that does not meet their criteria AND is $1,000 or more may have to be spread over two or more years. This is also the case if you carry on your rental activity as a business and have not elected to be taxed under the simplified tax system for small businesses. Common Mistakes: Avoid these common mistakes when making claims or preparing schedules for your accountant: Incorrectly claiming the cost of the land as a capital works deduction, that is, as part of the cost of constructing or renovating the rental property. Incorrectly claiming the cost of improvements such as remodeling bathrooms or kitchens or adding a deck or pergola as repairs. These are capital improvements and should be claimed as capital works deductions. Overstating claims for deductions on the interest on the loan taken out to purchase, renovate or maintain the property. A loan may be taken out for both income- producing and private purposes, such as to purchase motor vehicles or other goods or services. The interest on this private portion of the loan is not deductible and should not be claimed. Incorrectly claiming the full cost of an inspection visit when it is combined with another private purpose, such as a holiday. In such cases, you can only claim that portion of the travel costs that relate directly to the property inspection.

Claiming deductions for properties which are not genuinely available for rent. Incorrectly claiming deductions when properties are only available for rent for part of the year. If a holiday home or unit is used by you, your friends or your relatives free of charge for part of the year, you are not entitled to a deduction for costs incurred during those periods.

Claiming deductions for items incorrectly classified as depreciating assets. If you financed the purchase of your rental property using a split loan facility, you cannot claim a deduction for the extra capitalized interest expense imposed under that facility.

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CHECKLIST FOR EXPENSES FOR WHICH YOU MAY CLAIM AN IMMEDIATE DEDUCTION
Expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include: Advertising for tenants Bank charges Body corporate fees and charges Cleaning Council rates Electricity and gas Gardening and lawn mowing In-house audio / video service charges Insurance: > Building > Contents > Public liability Interest on loans Land tax Lease document expenses > Preparation > Registration > Stamp duty Legal expenses Mortgage discharge expenses Pest control Property agents fees and commission Quantity surveyors fees Accounting fees Repairs and maintenance Secretarial and bookkeeping fees Security patrol fees Servicing costs for example, servicing a water heater Stationery and postage Telephone calls and rental Tax-related expenses Travel and car expenses > Rent collection > Inspection of property > Maintenance of property

to build a rental property or to finance renovations to a property you intend to rent out, the interest on the loan will be deductible from the time you took the loan out. However, if your intention changes, for example, you decide to use the property for private purposes and you no longer intend to use it to produce rent or other income you cannot claim the interest after your intention changes. While the property is rented, or available for rent, you may also claim interest charged on loans taken out: To purchase depreciating assets; For repairs; or For renovations. Banks and other lending institutions offer a range of financial products which can be used to acquire a rental property. Many of these products permit flexible repayment and redraw facilities. As a consequence, a loan might be obtained to purchase both a rental property and a private car. In cases of this type, the interest on the loan must be apportioned into deductible and non-deductible parts according to the amounts borrowed for the rental property and for private purposes. If you have a loan account that has a fluctuating balance due to a variety of deposits and withdrawals and it is used for both private purposes and for rental property purposes, you must keep accurate records to enable you to calculate the interest that applies to the rental property portion of the loan; that is, you must separate the interest that related to the rental property from any interest that relates to the private use of the funds. If you have difficulty calculating your deduction for interest, contact your recognised tax adviser or the Tax Office. Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is so whether or not the loan for the new home is secured against the former home.

Water charges

INTEREST ON LOANS
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or available for rental, in the income year for which you claim a deduction. If you start to use the property for private purposes, you cannot claim any interest expenses you incur after you start using the property for private purposes. Similarly, if you take out a loan to purchase land on which

CAPITAL ALLOWANCE AND DECLINE IN VALUE

Capital expenditure incurred in constructing buildings and structural improvements may be tax deductible at either 2.5% or 4% of the eligible construction expenditure, depending on when construction commenced and how the building is used. The deduction generally commences from the time the building is used to produce income. Ideally, upon purchasing a property you should be given a copy of the construction

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expenditure costing. In practice, this often is not available. In these circumstances, obtain a report prepared by a Quantity Surveyor, (Q.S.), which can then be used to determine the amount of your claim. Note that the Q.S. will also separately identify fixture, fittings and furnishings eligible for much higher decline in value depreciated claims. Any costs paid to the Q.S. in relation to the reports preparation are tax deductible. Often Q.S. reports cost between $400 and $500, but usually this proves to be money well spent as thousands of dollars of tax is saved.

CAPITALISATION OF INTEREST
In Hart v Federal Commissioner of Taxation (2002) it was held that compound interest, as with ordinary interest, derives its character from the use of the original borrowings. In this case the compound interest was incurred on funds borrowed, under the split loan facility, to acquire property B which was used solely for income producing purposes. As such, the compound interest was incurred in earning assessable income and is an allowable deduction under section 8-1 of the ITAA 1997. However, we stress the Commissioner will apply his discretion under Part IVA of the ITAA 1936 to disallow the deduction. A full and detailed explanation of the reasons for the application of Part IVA may be found in Taxation Ruling TR 98/22. We consider that the ATO holds a similar view on split lines of credit where the circumstances are similar to the above scenario in ID 2006/297. However, we would stress that no two cases are the same and some interesting rulings are contained in the Register of Binding Financial Rulings on the ATOs website www.ato.gov.au. We would point out the ATO appears to be increasing its focus in this area. On 29 June, 2011 the ATO released a draft taxation determination which deals with the question: does a taxpayers purpose of paying their home loan off sooner mean that Part IVA ITAA 1936 cannot apply to an investment loan interest payment arrangement of the type described in this determination?: draft Taxation Determination TD 2011/D8. The answer is no, a taxpayers purpose of paying their home loan off sooner does not mean that Part IVA cannot apply to an investment loan interest payment arrangement of the type described in paragraph 3 of the draft determination.

NEGATIVE GEARING
Negative gearing may be explained as paying more interest and other outgoings than you receive in income from your investment. There are other (non cash outgoings) such as depreciation that are also tax deductible. At first negative gearing may seem unwise, but the following example may make the position clearer in the context of our current tax rules. Geared investments (shares, rental property or units trusts financed by borrowings) provide a tax deduction if the interest and other costs of the investment exceed the income earned. This is called negative gearing. If you purchase a house as an investment for $300,000 and borrow the entire amount at 7.5% pa interest, your annual interest repayments would total $22,500. You rent the house out for $350 per week, giving you an annual rental income of $18,200. The cost of rates, home maintenance, insurance, agents fees and so on, total $6,000. The total tax deductions for this investment amount to $34,500 ($22,500 in interest, $6,000 in running costs and $6,000 in depreciation), but income is only $18,200. The shortfall of $16,300 is wholly tax deductible it is deducted from your gross income in assessing your taxable income. This is a considerable tax saving while you hold the investment. The investment, however, is making capital gains and you should eventually have a 50% CGT discount when the building is sold. If the investment property keeps pace with inflation, the running expenses are fully covered by the capital increase, but you have a tax deduction for the expenses.

SELLING THE MAIN RESIDENCE

In 1991, Tony and Alison purchased a luxury house in Surfers Paradise In 2007, their children left home and the empty nesters are struggling with upkeep of the house and adjacent tennis court. An option is to sell off the tennis court. If this occurs they have been advised capital gains tax will be payable. Lets consider the following: 1. Tony and Alison decide to demolish the existing house,

SALARY INCOME & PAYG

If you have purchased a negatively geared investment you may have your PAYG deductions reduced to allow for the losses being incurred. You can request the ATO to provide a PAYG variation certificate to give to your employer for reduced PAYG deductions. Alternatively, you will receive the refund of the additional tax paid on lodgement of your income tax return.

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subdivide the land into 2 titles, construct a new smaller house on each title, and sell both houses.

and retain and live in the other. Income Tax Could Tony and Alison argue that they didnt purchase family residence for resale at profit and have lived in the dwelling for 16 years? Further that the main reason for redeveloping was to scale down, living in a smaller, low maintenance dwelling and to achieve this they had to sell part of their existing property. As such any gain would be on capital account. However, the ATO could take the view that Tony and Alison have obtained Council approval, created 2 separate titles, built new houses, with there activities resulting in any profit on sale being assessable and not arising from a mere realisation of assets. CGT Tony and Alison are not entitled to main residence exemption on the sale of the separate house. Consider also TD 2000/14 (If you buy land and dwelling A, live in dwelling A, subdivide into 2 blocks and build dwelling B, and then sell dwellings A and B, is main residence exemption available for both dwellings?). GST MT 2006/1 doesnt provide a clear answer as to whether Tony and Alison are carrying on an enterprise, and therefore required to register as none of the examples given in the ruling match their circumstances. They may consider seeking a Private Ruling from the A.T.O. Our third scenario is that Tony and Alison construct a dwelling on the tennis court, move into that new house for 6 months and rent out the old house. They then sell the new house before moving back into the old house. Income Tax As per above, are Tony and Alison just realizing their family home in the most advantageous way or do their activities amount to a business venture: McCurry (1998). CGT Can Tony and Alison claim main residence exemption for gain on sale of new house? That is, can Tony and Alison choose that the new house is their main residence if they only live there 6 months before selling? The following provides guidance: TD 51 (What factors are taken into account in determining whether or not a dwelling is a taxpayers main residence?), see below TD 92/135 (Is the main residence exemption relevant when the proceeds of sale of a dwelling are treated as income under ordinary concepts?).

Income Tax Are Tony and Alison merely realizing their family home in most advantageous way or do their activities amount to a business venture: McCurry (1998). Although they are selling the property they have held for over 16 years, it could be argued they are doing far more simply then selling the family home in most profitable manner. At first sight, MT 2006/1, which deals with entitlements to an ABN, supports the argument that this is a business-type venture. MT 2006/1 contains the example of Prakash and Indira, who have lived in the same house on a large block of land for a number of years. Prakash and Indira have decided to move out from the area and, to maximise sale proceeds, demolish their house, subdivide land into 2 blocks and a build new house on each block (which they sell). MT 2006/1 tales the position that Prakash and Indira are entitled to an ABN in respect of the subdivision on the basis their activities go beyond minimal activities needed to sell subdivided land. We should consider whether MT 2006/1 (in essence a GST ruling) is relevant for income tax purposes? If income tax applies, Tony and Alisons assessable income would include: Sale proceeds (value of blocks in 2006 + demolition costs + building costs + agents fees). CGT If the transaction is on capital account, are Tony and Alison entitled to benefit of main residence exemption? In respect of which dwelling? Tony and Alison do not appear to have used either dwelling as their main residence. Does (should) the position change if Tony and Alison move back into 1 of the units before the sale? Is their use of the dwelling merely transitory? GST Per MT 2006/1, the ATO is likely to take position that Tony and Alison carrying on enterprise, and therefore required to register for GST. Our second scenario is that alternatively, Tony and Alison dont wish to move out of the area but do want to scale down. They demolish the existing house, subdividing the land into 2 titles to build new houses one each title, then sell 1 house

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TAX SMART FINANCING STRATEGIES

1. Maximise the percentage borrowing against your rental property (if you have equity in your residential home, the bank will often be flexible). 2. Repay your residential loan as quickly as you can (use all your excess cash to repay this loan). 3. 4. 5. 6. 7. Consider asking the bank if you can defer repayments on your rental property loan as long as possible. Note it is best to have some separate levels of minimum repayment in respect of both your residential loan and your rental property loan. If permitted, increase your rental property borrowings to pay for all the costs related to your rental property. Maintain a separate (flexible) overdraft facility to cover all the costs of your rental property, such as repairs, agents fees, capital improvements, advertising, council rates, land tax etc. Use an interest offset deposit account as your everyday account (i.e. your wages can be paid into this account), with the interest otherwise payable on the deposit account reducing the interest payable on your residential loan. Consider the possibility of intra-marriage transfers. For example, if you are looking to rent out your longstanding jointly owned residence and purchase a new home, consider transferring your old residence wholly into the name of one spouse (who would borrow to make the acquisition). The new residence could perhaps be acquired by the other spouse. Stamp duty costs will have to be considered. You will put yourself in a difficult position if you mistakenly increase your rental property loan for a private purpose and then, on discovering your mistake try to refinance this cost. It is vital to get your borrowings and repayments right the first time.

tax saving, but which comes at a real commercial cost, such as payment of a higher interest rate or other charges;

4. Do not enter an arrangement with a bank which provides unusual terms such as an indefinite deferral of repayment on one part of the borrowing. 5. Do not redraw amounts for private purposes from your rental property loan as this will mix the purposes and reduce the deductible element. However, we would stress that no two cases are the same and some interesting rulings are contained in the Register of Binding Financial Rulings on the ATOs website www.ato.gov. au

SMSFS MAKING LOANS

It is important for funds to keep in mind that high returns general equate with high risk and hence funds should obtain independent advice on investment decisions where possible. The funds investment strategy should also be referenced and the reasons for making the loans clearly documented.

PROPERTY DEVELOPMENT
6 (A) Are Sale Proceeds Capital or Income? There can be significant benefits in a profit or gain being taxed as capital, rather than income. If property has been acquired prior to 20 September 1985, a capital gain will not be assessable. For property acquired after 19 September 1985, the availability of the CGT discount and in some cases the CGT small business concessions can result in significantly less tax being payable than if the gain is taxed as ordinary income. The distinction between a property developer and an investor in the property market is crucial but often is a difficult one to make. The taxation consequences can be significant. It a taxpayer is a property developer, the land is generally held as trading stock and the costs incurred in developing the property are deductible to the taxpayer when the property is sold. Proceeds of any sale are treated as ordinary income generated from the business of property development. As discussed, where a person merely holds property for rental and/or investment purposes, the development costs are capital in nature and, when the property is ultimately sold, the gain or loss is also capital in nature. This means that the capital gains tax (CGT) discount and/or the small business CGT concessions may be available to the taxpayer, resulting in a very different tax outcome. In a recent case the Administrative Appeals Tribunal considered whether the taxpayer was a property developer or investor, in order to determine the assessability of a partnership distribution. In this case, the taxpayer (a company) went into partnership with another company

Ineffective Strategies 1. Do not use two separate loans which are completely linked in terms of having just the one joint credit limit and one joint minimum monthly repayment. Ensure that there are separate limits and separate repayment levels for each loan. Avoid a facility offered by a bank or other financial institution which promotes the tax savings in its marketing materials.

2. Avoid a split loan borrowing facility (i.e. one loan with two notional sub-accounts for separate borrowing purposes). This is unacceptable to the ATO. 3. Do not enter an arrangement which provides you with a

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and purchased two properties in NSW for the purpose of developing and building units. The cost of the land and of the development was financed by way of short-term debt and, on the admission of the taxpayer, it was established that any rental income received on the units (once built) would not have been enough to cover the interest repayments on the debt. The partnership sold the units and returned an amount of income to each of the partners. In the taxpayers 2003 income tax return, the gross distribution from the partnership was disclosed as ordinary income. The taxpayer then objected to the assessment on the basis that the income was not ordinary income, but a capital gain to which the small businesses CGT 50% discount should be applied. Clearly as an afterthought the taxpayer was seeking access to the CGT concessions. The Commissioner disallowed the objection, claiming that the taxpayer was a property developer and, therefore, the amount represented ordinary income. The Tribunal upheld the Commissioners decision, holding that the taxpayer was in fact carrying on a business in relation to the purchase, development and sale of the property. The taxpayer was unable to discharge the onus of proving that the property was purchased for the purposes of developing the units for rental purposes. The Tribunal looked to the accounts of the partnership, which showed that the land was held as trading stock. It also considered the financing of the developments and the fact that the interest payments could not be met with rental income alone. The Tribunal agreed that the statements made by the taxpayer that it intended to hold the land for investment following the development, was completely inconsistent with the way the project was initiated, the way in which the project preceded and the way in which the units were sold . When making that crucial determination whether a taxpayer is a property developer or an investor, the Commissioner and the courts have consistently looked to the intention of the taxpayer from the beginning of the venture. In this case, even though the taxpayer was a property investor in relation to other projects, the partnership venture was judged entirely on its own merits. The treatment of the assets in the partnership and the method of project finance are factors that the Tribunal relied on and, therefore, readers involved in such ventures should carefully weigh up these factors when determining how to treat their investments. Mere Realisation of Asset Not Income Note under the Australian tax system it has long been accepted that proceeds from the mere realization of a capital asset do not give rise to income according to ordinary concepts. It has also been held by the courts that there is a mere realization even if the activity is carried out in an advantageous manner and in an enterprising way so as to secure the best price. This may even involve the taxpayer seeking out and

acting on the advice of an expert or undertaking certain work to enable the land to be sold to its best advantage. If this sounds too rosy, it probably is, given a number of cases have fallen either side of the line. In Antlers Pty Ltd v FCT (1997), the Federal Court held that the relevant lot had been acquired by the taxpayer for the purpose of profit-making by sale since, from the outset, the lot had enormous subdivision potential. The profit was thus assessable as income, rather than as capital gain. Isolated Transactions: Taxation Ruling TR 92/3 TR 92/3 is significant because the treatment of profits as assessable income can result from low scale developments. In McCurry v FCT (1998), the Federal Court held that the profit made by 2 brothers on the purchase of land, the construction of 3 townhouses and the subsequent sale thereof, was a business operation or commercial transaction for the purpose of profit-making. The profit was therefore assessable as ordinary income, rather than as a capital gain. In Taxation Ruling TR 92/3, the ATO sets out the following factors which may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction: The nature of the entity undertaking the operation or transaction; The nature and scale of other activities undertaken by the taxpayer; The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; The nature, scale and complexity of the operation or transaction; The manner in which the operation or transaction was entered into or carried out; The nature of any connection between the relevant taxpayer and any other party to the operation or transaction; If the transaction involves the acquisition and disposal of property, the nature of that property; and The timing of the transaction or the various steps in the transaction. Although the above factors provide guidance, the Commissioner and taxpayers will often disagree as to how they should be applied in any given situation. In particular, there may well be arguments about whether the taxpayer

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has taken more steps than are necessary to effect a mere realization . What is clear is the need for specialist advice before embarking on any course of action. Is An Entity Carrying On A Business For G.S.T. Purposes? G.S.T. Registration is required for taxpayers carrying on a business. For those accidental developers considerable care needs to be taken. Indeed, this is an issue that a lot of people will face. Although it is possible to argue that G.S.T. Registration is not necessary due to realisation of a capital asset, the position is far from clear. The A.T.O. may pursue the argument that the accidental developers activities are in the form of an adventure or concern in the nature of trade. Note that the A.T.O. can come in with the benefit of hindsight and form the view that an entity was carrying on a business for G.S.T. purposes. This can result in unsuspecting taxpayers suddenly having a large G.S.T. liability to deal with. Under the G.S.T. Act, one of the requirements of a taxable supply is that the supply is made in course or furtherance of an enterprise. Note that in the course or furtherance of an enterprise is not defined in the G.S.T. Act. However, the term enterprise has a wide definition as an activity or series of activities done: In the form of a business; In the form of an adventure or concern in the nature of trade see isolated transactions below. Other items included in the definition are not relevant to this discussion. For guidance on what is considered to be an enterprise, see MT 2006/1 mentioned below. Case StudyCarrying on Business Mere or Realisation of an Asset In 1983 Lloyd and Poppy purchased Aminya a 90 hectare , beef cattle farm near Tweed Heads. In 2007, after farming for 24 years, Lloyd and Poppy decide to wind back their farming activities and provide for their retirement by subdividing a portion of Aminya into a number of blocks intending to sell them to weekend farmers. Aminya has made losses for several years and Lloyd and Poppys superannuation is inadequate. (a) Lloyd and Poppy subdivide 2-hectares into 10 half- acre blocks. Seeking local council approval, they engage a contractor to construct a road, build storm water works, and connect water, sewerage and electricity. They sell the blocks for $120,000 each through a real estate agent. Lets consider the income tax and GST implications. Income Tax Are Lloyd and Poppy merely realising a capital asset in the

most advantageous manner or do their activities amount to them carrying on a business or business venture? When one considers their commercial activities, Lloyd and Poppy dont appear to have done much more than obtain Council approval, storm water, road, water and power. At first sight, activities amount to no more than mere realisation of capital asset: Scottish Australian Mining (1950) after coal seams exhausted, the taxpayer subdivided land, constructed roads and a railway station. It was held, the taxpayer had only sold capital asset in advantageous way. Statham (1989) the taxpayer sold land originally acquired for cattle farming. Held, mere realisation, by most advantageous means, of asset the taxpayer had on hand when abandoned intention of farming. Casimaty (1997) the taxpayer sold land due to increasing debt and deteriorating health. 8 subdivisions amounting to almost 2/3rds of property over 18 years. Held, activities amounted to no more than mere realisation. McCorkell (1998) - the taxpayer discounted fruit growing business after land rezoned and sold off 37 lots through 2 stages of subdivision. Held, facts similar to Statham; proceeds therefore of capital nature.

It would not appear that Lloyd and Poppy are engaged in the business of development or an isolated business venture. Further more the profit doesnt appear to arise from carrying on or out of profit-making undertaking or plan: ITAA 1997, sec 15-15. CGT Since Aminya was acquired before 20/09/1985 there is no CGT event. It should be noted from Casimaty and McCorkell (above) that even relatively large subdivisions can be on capital account.

G.S.T. THE MARGIN SCHEME

When a taxable supply is made by a registered entity, it is liable for G.S.T. on the supply. The amount of GST is usually 1/11th of the sale price. However, when such an entity sells real property and is liable for GST on the sale of the property, it may elect to use the margin scheme to calculate its GST liability. Note however, it is not possible to use the margin scheme if the entity acquired the property through a taxable supply on which the GST was worked out without using the margin scheme. Under the margin scheme the amount of the GST liability is 1/11th of the MARGIN (which is usually the sale price less cost of acquisition).

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If the margin scheme is used, the purchaser will NOT be entitled to input tax credits on the acquisition more on this later. Example Builder Pty Ltd purchases land from Wealthland for $1.1 million. When the transaction occurred, the margin scheme was used to calculate vendor Wealthlands GST and both entities are registered for GST. Builder now sells the land to Smithers for $1.32 million. Builder is eligible to use the margin scheme to calculate its GST liability on the transaction. This is because the original purchase of the land from Wealthland constituted a taxable supply to Builder and the GST on that sale by the vendor was calculated using the margin scheme. If Builder uses the margin scheme, with the prior written consent of Smithers, its GST liability will be $20,000 (1/11th x ($1,320,000 - $1,100,000)). Note however that Smithers will not be eligible to claim any input tax credit on the acquisition. If the margin scheme were not used, Builders GST liability would be $120,000 (1/11th x $1,320,000). In that case Smithers would be able to claim input tax credits on the acquisition. If the margin scheme had NOT been used in the original transaction (Wealthland to Builder) and GST had been calculated using the normal method, then Builder would not be allowed to use the margin scheme when it sold to Smithers. In the event Wealthland was not a GST registered entity at the time it sold to Builder and not required to be registered, it would not be liable to pay any GST on the transaction. In that case Builder would still be entitled to use the margin scheme when it sells the land to Smithers. Note the only time an entity is disqualified from using the margin scheme is when it acquires a property through a taxable supply on which the GST was calculated without using the margin scheme. Business Activity Statements Recent updates have dealt with tax cases where taxpayers filling out B.A.S. have incorrectly claimed input tax credits where the margin scheme was applied on the purchase of real property. The ATO have shown little leniency when applying penalties and real care needs to be taken. Cases: AAT Case (2009) AATA 805, YXFP and FCT Supply of property not GST-free; no deduction for trading stock The AAT has confirmed that the sale of a property by a property developer was not a GST-free supply by a going concern because the taxpayer had not satisfied that the supplier and recipient agree in writing that the supply is of a going concern. Also the AAT considered whether an amount of $220,000 was considered legitimate trading stock and as such tax

deductible. However, the AAT determined that the $220,000 was in fact more in the nature of a capital contribution or loan to another property developing entity. Although the taxpayer may have been genuine in his belief that there had been an acquisition of trading stock, the AAT clearly thought otherwise, rejecting the tax deduction. So developers beware, if the matter is not clear cut or there are unusual circumstances involved (particularly other entities), be very careful before making a claim for trading stock. Margin Scheme and GST Anti-avoidance The Taxpayer and Commissioner of Taxation (2010) AATA 497 This case dealt with Developco an ASX listed company , which was part of a GST group and all other companies involved in the case were members of this group. Developco was involved in property development and like most developers had a pattern of using a separate company to undertake the development and sale of each of its developments. However in 2003 and 2004, Developco changed the manner in which it undertook developments and transferred some partly completed developments to separate special purpose development companies in the same GST group. These transfers were on a GST-free basis by applying the going concern exemption. Subsequently the member companies sold the completed apartments applying the margin scheme. When applying the margin scheme, these member companies used the purchase price of the going concern paid to Developco as the consideration for the acquisition of their respective interests in the units sold. Essentially this case decided whether the GST anit-avoidance rules applied to this arrangement. The AAT held that the GST anti-avoidance provisions did apply to certain parts of the scheme that the parties entered into. This centred on the use of the going concern exemption to impact on the amount of GST subsequently payable under the margin scheme. However, in relation to other transactions, the AAT was satisfied that the dominant purpose was asset protection and on that basis the taxpayers appeal was allowed. Most of us are familiar with Part IVA the anti-avoidance provision of the Tax Act which pertains to income tax. This case is noteworthy in that it provides a comprehensive analysis of the GST anti-avoidance provisions. The AATs analysis on the application of the margin scheme will impact on the Commissioners position in relation to other related schemes particularly where the Commissioner relies on the single entity concept that was rejected by the AAT. As mentioned in previous issues, the margin scheme rules have been updated to apply a look-through approach but these changes only apply to sales made after 16 March, 2005.

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TAX-SMART, INVESTING IN SHARES

If you own shares you will have tax entitlements and obligations. Dont pay more tax than you need to. Acquisition You can acquire shares: By buying By inheriting As a gift On the breakdown of your marriage Through employee share schemes Through a conversion of notes to shares Through demutualisation Through bonus share schemes Through dividend reinvestment plans Through mergers, takeovers and demergers Ownership The following activities can affect your tax: Receiving dividends Dividend reinvestment plans Bonus share schemes Call payments on bonus share schemes Receiving non-assessable payments Mergers, takeovers and demergers. Disposal Disposing of your shares can affect your tax. You can dispose of your shares: By selling By giving them away On the breakdown of your marriage Through company liquidation Through share buy-backs Through mergers, takeovers and demergers.

*What you do during each stage of the life of your shares can affect your tax for years to come. BUYING Did you know? OWING Did you know? SELLING Did you know?

Generally, the names you put on the You need to declare all of your dividend When you dispose of your shares you purchase order determine who must income on your tax return, even if you may make a capital gain or capital loss. declare the dividends and can claim use your dividend to purchase more the expenses. shares (for example through a dividend reinvestment plan). If you hold a policy in an insurance Tax deductions on shares can include Your capital gain is the difference company that demutualises, you may be management fees, specialist journals between your cost base (costs of subject to capital gains tax either at the and interest on monies borrowed to ownership) and your capital proceeds time of the demutualisation or when you buy them. (what you receive when you sell your sell your shares. shares). Even if you did not pay anything for Receiving bonus shares can alter the your shares you should find out the capital gains tax cost base (costs of market value at the time your acquired ownership) of both your original and them. bonus shares. In some circumstances, you may be You may choose to roll over any capital The law has been changed so that an the owner of shares purchased in your gain or capital loss you make under an administrator as well as a liquidator childs name. eligible demerger. can declare that a companys shares are worthless. Costs associated with buying your shares The ATO produces an information fact If you have owned your shares for more such as brokerage fees and stamp duty sheet for each major takeover, merger than 12 months, you may be able to are not deductible, however they form or demerger. reduce your capital gains by the tax part of the cost base (costs of ownership) discount of 50%. for capital gains tax purposes. Payments or other benefits you obtain Simply transferring your shares into from a private company in which you are someone elses name may mean you a shareholder may be treated as if they have to pay capital gains tax. were a taxable dividend paid to you.

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HOLDING SHARES OR ACTIVELY TRADING: WHAT IS THE DIFFERENCE?

Unit recently the Australian share market had enjoyed an extended period of growth, with prices at historically high levels and solid dividends being paid. Taxpayers who have bought or sold shares as part of their investment strategy will need to determine their tax liability. An important part of that process involves deciding whether they are a share trader or share holder. While the Tax Office considers each case on its individual features, in summary, a share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares. A share holder, on the other hand, is someone who holds shares for the purpose of earning income from dividends and similar receipts. Relevant matters include nature, regularity, volume and repetition of the share activity; the amount of capital employed; and the extent to which there is organization in a business-like manner, through the keeping of books or records and the use of a system. For a share trader: Receipts from the sale of shares are income Purchased shares would be regarded as trading stock Costs incurred in buying or selling shares are an allowable deduction in the year in which they are incurred, and Dividends and other similar receipts are included in assessable income.

office in one of the rooms in her house. She has a computer and access to the internet. Sally has $100,000 of her own funds available to purchase shares and, in addition, she has access to a $50,000 borrowing facility through her bank. She conducts daily analysis and assessment of developments in equity markets, using financial newspapers, investment magazines and stock market reports. Sallys objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period. In the year ended 30 June 2006, Sally conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1000. The average selling transaction involved 750 shares and the average selling prices was $1800. All transactions were conducted through stock broking facilities on the internet. The average time that shares were held before selling was twelve weeks. Sallys activities resulted in a loss of $5000 after expenses. Sallys activities show all the factors that would be expected from a person carrying on a business. Her share trading operation demonstrates a profit making intention even though a loss has resulted. There is a repetition and regularity to her activities. Her activities are organized in a business-like manner. The volume of shares turned over is high and Sally has injected a large amount of capital into the operation. Share Holder Cecil is an accountant. He has bought 20,000 shares in twenty blue chip companies over several years. His total portfolio costs $500,000. Cecil bought the shares because of consistently high dividends. He would not consider selling shares unless their price appreciated markedly before selling them. In the year ended 30 June 2006, he sold 2,000 shares over the year for a gain of $30,000. Although Cecil has made a large gain on the shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of gaining dividend income rather than making profit.

In the case of share holder: the cost of purchase of shares is not an allowable deduction it is a capital cost receipts from the sale of shares are not assessable income however, any net profit is subject to capital gains tax a net loss from sale of shares may not be offset against income from other sources, but may be carried forward to offset against future capital gains made from the sale of shares costs incurred in buying or selling shares are not an allowable deduction in the year in which they are incurred, but are taken into account in determining the amount of any capital gain dividends and other similar receipts are included in assessable income, and costs incurred in earning dividend income such as interest on borrowed money are an allowable deduction at the time they are incurred.

TAXPAYER ALERT - TA 2009/12

Re-Characterising Capital Losses as Revenue Losses This Taxpayer Alert anticipates that many investors will be scrambling to minimise tax. This taxpayer alert is intended to apply to arrangements having features that are substantially equivalent to the following: The taxpayer is an individual investor who holds shares The taxpayer has previously disposed of shares realising a profit and treated that profit as a capital gain

These practical examples supplied by the Tax Office could be helpful: Share Trader Sally is an electrical engineer. After seeing a television program, Sally decides to start share trading. She sets up an

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This is done on the basis that shares were held with the intention of benefiting from a long term increase in capital value and/or the receipt of dividend income during the holding period. The taxpayers records are maintained on this basis. As the taxpayer is an individual and had held the shares for more than 12 months, the taxpayer claimed the 50% CGT discount in their income tax return for each of the relevant financial years

SHARE INVESTOR, NOT A SHARE TRADER - SMITH AND FCT (2010) AATA 576
The AAT held that the taxpayer did not carry on a share trading business but he was an investor. During the 2007 and 2008 income years, the taxpayer engaged in the buying and selling of shares. The taxpayer lodged his tax return on the basis that he was a share trader for the relevant income years. In reaching its decisions, the AAT considered the below factors: Indicators of whether a business was being carried on as established by case law Evidence presented by the taxpayer The taxpayers evidence that he did not really intend to be a share trader. The AATs view was that the evidence suggested that the taxpayer did not represent himself as a share trader until his tax returns had been lodged. The AAT suggested the taxpayer was influenced by the entrepreneurial approach at his workplace and the increase to his disposable income. The taxpayer held his shares for periods longer than a share trader generally would The taxpayer participated in dividend reinvestment plans and received dividends. The number of transactions in the taxpayers share portfolio, which it noted was heavily weighted towards entities of his employer. Restrictions in trading imposed on the taxpayer by his employer were noted by the AAT. Further, the taxpayer had to seek permission from his employer to trade and the timing of when he could buy and sell shares in entities of his employer.

The value of shares still held by the taxpayer decreased as a result of market conditions and the taxpayer has an unrealised loss in respect of those shares. The taxpayer may receive advice from a tax professional or financial advisor regarding the deductibility of losses incurred on the sale of shares for the current income year, including the benefits of being regarded as holding shares as a share trader when making such a loss. Without changing the economic substance of their shareholdings, the taxpayer decides to arbitrarily re- characterise their shareholding in order to claim the net loss from their sale as a revenue deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA) This is done on the basis that the taxpayer is now carrying on a business of share trading (as opposed to carrying forward capital losses indefinitely to be offset against any future capital gains, as would be the case for an investor) To support a contention that the taxpayer is carrying on a business of share trading, the taxpayer may artificially adopt specific practices to present pretence of being a share trader, but with no objective, material change in either the nature of investments held (or sold) or their holding activities. Some of these practices (which in the relevant circumstances a reasonable person would regard as artificial and contrived) may include: (a) (b) (c) (d) Purchasing or selling shares on a more regular basis (often with small net volumes). This is often called window dressing; Creating a trading plan for their share transaction activities with a newly stated goal of maximizing profit even though the shares sold will generate a loss, rather than a profit; Increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and Maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions).

Accordingly the AAT was satisfied the taxpayers activities did not have the repetition and regularity of a business nor a profit making motive. The fact the taxpayer did not maintain a separate office and worked full-time was not a major concern. However, it was crucial that the taxpayer was unable to indicate the amount of time he spent on his share trading activities. Juxtaposing the taxpayers activities against the indicators of whether a business exists, the AAT concluded that the taxpayer was not in a business of share trading. Shareholders should be aware that the ATO has a clear focus on share disposals as part of its Compliance Program for 2010-11. It had also issued an alert in 2009 warning taxpayers against claiming losses on revenue account when they had previously claimed gains on capital account; see Taxpayer Alert TA 2009/12. The above facts are really important because given the level of activity by the taxpayer and the sums involved, many advisers would have suggested to their clients that they are shareholders. Given the on-going nature of the Global Financial Crisis and the volatility in equity markets many taxpayers are seeking to have their losses characterised as revenue (tax deductible) losses and not capital losses which can only be offset against capital gains.

The taxpayer subsequently decides to dispose of the shares to realise the net loss The change in approach is applied on a prospective basis only, such that only future transactions are affected, even though there has been no substantive change in objective facts between the current year and previous years.

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TAX IMPLICATIONS FOR VARIOUS SECURITIES

Tax time is a confusing time of year for most investors. The ASX assembled the following table to help identify the tax implications of the various products traded on ASX. Instalment Warrants Exchange Traded Options Holders will need to consider dividends and associated franking credits (subject to 45 day holding period rule). Some Holders may be entitled to deductions for interest paid. Remember, some installment transactions involving shares and warrants may not trigger a capital gains tax event. Tax assessment is dependent on individuals classification as a trader, a speculator, or as a hedger. Selling options for premiums is treated as income subject to the individuals classification (as above). Buying an option and then exercising into the underlying share adds to the cost base for CGT purposes. The length of time shares are held for will determine the CGT rate, and remember the holding period rule in relation to dividends.

Listed Investment Dividend payments are typically fully franked and capital gains are managed by the fund manager to minimize Companies (LICs) cost to investors. Equities (shares) Shareholders need to keep a record of the date and value of share parcels they acquire. When shares are sold they are generally subject to capital gains tax (CGT). The length of time shares are held for will affect the CGT rate applicable. Shareholders can receive franked dividends. These carry imputation credits that may potentially reduce tax payable on dividend income. Shareholders should consult their taxation adviser regarding the deductibility of interest on margin loans.

Bonds and Hybrids The sale or redemption of bonds is generally not subject to CGT, but is assessable for income tax. However, there are CGT considerations following disposal of shares that are received form convertible notes. It is important to note that there are distinctions in the taxation treatment for convertible notes issued after 14 May 2002. International Shares via ASX World Link ASX World Link service provides dividend and transaction information in Australian dollars to help in preparation of tax returns. Investors may be able to claim a foreign tax credit in respect of all or part of the dividend withholding tax amount.

Infrastructure funds A portion of the income (distributions) is typically tax deferred until the holder sells their units. Property trusts Pooled development funds (PDFs) A portion of the income (distributions) is typically tax deferred until the holder sells their units. These funds display some unique taxation characteristics and investors are advised to seek professional advice. Generally, capital gains and dividends are tax-free. The PDF only pays 15% corporate tax rate. Dividends carry franking credits at the 30% rate.

Exchange Traded Dividends from EFTs typically have franking credits attached to them. Capital gains are managed by the fund Funds (EFTs) manager in order to minimize costs to investors. Low portfolio turnover means Indexed EFTs have low capital gains tax consequences. Absolute Return funds Capital gains are managed by the funds manager to minimize cost to investor. Dividends may be fully franked.

Investors Disposal of Shares If you have sold or given away shares you may have a capital gain or capital loss to take into account when completing your tax return for the income year in which you sold or gave them away. Acquisitions and Disposals You acquire shares when you become their owner. The most common way of acquiring your shares is by buying them. However, there are other ways such as receiving them:

As bonus shares; On the breakdown of your marriage; Through a conversion of notes to shares; Through employee share schemes; Through demutualization; Through a merger, takeover or demerger; Through dividend reinvestment plans; and As an inheritance or as a gift.

Simply, you dispose of your shares when you stop being their owner. The most common way of disposing of your shares is by selling them. Other ways include disposal through a

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merger, takeover or demerger, or through a share buy-back. You may also dispose of the shares by giving them away or through your will upon death. What Happens When You Sell Or Give Away Shares? Disposing of shares is a capital gains tax event (CGT event). When a CGT event happens, you need to know whether you have made a capital gain or a capital loss to determine whether you need to pay tax on your capital gain or claim a capital loss on your tax return. Sometimes a rollover may apply which enables the capital gain to be deferred or disregarded until a later CGT event happens. You can only offset your capital losses against capital gains you make on other assets, reducing the overall amount of tax you must pay. You can use these losses in the financial year you made them, with unused capital losses carried forward for use in a future year. To work out your capital gain or capital loss and therefore ensure you do not pay more tax than you need to you need to know how much you spent on your shares when you first acquired them and while you owned them. This means making sure you keep records. If you give away shares or your shares were given to you as a gift, you use the stock exchange closing price on the date of the gift in your calculation. If the company is not quoted on the exchange for example, it is a private company, you will need an independent accounts valuation to demonstrate the share value. Why should you keep records? You will generally either pay tax on any capital gain or claim a capital loss on what you make on your shares when you sell them or give them away. You will need to have records to work out whether you can claim a capital loss or record a capital gain when you complete your yearly tax return. Although CGT on shares transferred under a Will is usually disregarded, your beneficiaries may need your records to work out the cost base of your shares. You need to keep evidence of all youve spent, from the beginning, to ensure you (and your beneficiaries) do not pay more tax than needed. What records should you have? Most of the records you will need would have been given to you by the company that issued the shares, your stockbroker or online share trading provider and your financial institution (if you took out a loan). It is important for you to have kept everything they gave you in relation to your shares. You should have records of: The date of purchase; The date of sale; Pg 38

The amount paid to purchase the shares; Any commissions paid to brokers when you acquired or disposed of them; Any stamp duty paid; and The amount received upon sale.

You may (if applicable) also need records of: Details of any non-assessable payments made to you during the time you owned the shares; The date and amount of any calls, if the shares were partly paid; The date and amount of shares purchased through a dividend reinvestment plan; The treatment of your shares during a merger, takeover or demerger; and The amount of any loans taken out to purchase your shares. What do you do if you dont have records? If you do not have the relevant records, you may be able to reconstruct them by obtaining copies, or details from: The company; Your stockbroker or investment adviser; Your bank statements; The Australian Stock Exchange (ASX); The share registry administering the shares; Your online share trading provider; or Your financial institution.

The main thing is to get as many relevant details as possible. In particular, each record should show: The date of the transaction / event; The parties involved; and How it is relevant to working out your capital gain or capital loss (that is, what the receipt or record is for).

How long should you keep records? You must keep records of everything that affects your capital gains and capital losses for at least five years after the relevant CGT event (such as the sale of the shares). Is there an easier way for you to keep records? Yes. An easier way to keep your records is to set up a capital gains tax (CGT) asset register. It is comparatively easy and once you have entered your information into the register you may be able to discard records much sooner than would otherwise be the case. If you have a taxable capital gain on the disposal of an asset such as shares, carefully consider whether you have purchased an eligible asset that has gone down in value. Prior to 30

June each year, consideration should be given to crystallizing capital losses. This means in effect, creating a capital gains tax event disposal by selling an underperforming asset to offset taxable capital gains with taxable capital losses.

SHARE INVESTORS
Wash Sales and Part IVA The ATO has issued a taxable ruling (TR2008/03) on the Application of Part IVA to wash sale arrangements. Generally speaking, the term wash sale refers to an arrangement under which a taxpayer sells an asset to realise a capital loss on the sale, and then offsets this against a capital gain that they have made elsewhere. The ATO will examine transactions where there is effectively no change in beneficial ownership of the asset, because the taxpayer either buys the asset back at the lower cost base or sells it to a related party. Although this is only a draft ruling, we do not expect substantial revisions in the final ruling. The message here is dont make it obvious that the disposal is a wash sale.

A high proportion of those stocks that are sold have been held for a significant number of years (see AGC Investments where 75% of stocks sold was held more than 5 years). However, if a high proportion of the remainder are then also turned over, this tends to support the opposite conclusion;

A low level of sales transactions compared with the number of stocks in the portfolio see Milton Corporation Pty Ltd V FC of T 85 ATC 4243; (1985) 16 ATR 437; Profits on sale normally only constitute a small percentage of total income; Significant percentage of aged stocks remain in the portfolio (see AGC Investments where nearly 60% of remaining stocks had been held more than 10 years); and The existence of a family as distinct from a commercial explanation for the dealing. If you are unsure of your position you should seek specialist advice.

SHARE TRADERS
At year end, when reviewing share trading profitability and other assessable income, carefully consider closing stock valuations for ASlisted shares. Effectively you have a choice to value each individual parcel of shares at purchase cost or listed market value. This could enable you to defer tax or better utilise lower marginal tax rates over a number of years.

TAXATION DETERMINATION TD 2011/21

TD 2011/21 Released On 18 August, 2011 Flags The Intention Of The ATO To Target Trusts And Capital Gains. It is vital that you keep proper documentation to support a particular investment plan in respect of the various share portfolios. Paragraph 56 outlines: the absence of an investment style which envisages an exit point for example the trustee adopts a buy and hold style of investment; A low average annual turnover A lack of regularity in the particular sale activity AGC (Investments) Limited v FC of T (1992) 23 ATR 287; 92 ATC 4239 (AGC Investments); Trent Investments Pty Ltd V FC of T 76 ATC 4105; (1976) 6 ATR 201;

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