ATO. Quarterly Tax Update

ATO Quarterly Tax Update

Taxation Update TaxBanter Update Materials 16 January 2014 to 09 April 2014

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Table of Contents PENDING LEGISLATION... 1 INCOME TAX... 11 Announcements... 11 2014 Announcements... 11 Discussion paper - Enhanced third party reporting, pre-filling and data matching... 11 Inspector-General of Taxation releases reports on ATO compliance approach to individuals... 15 Exposure draft - Re-instating and centralising the special conditions for tax concession entities... 26 Exposure draft - Protection for discontinued announced measures... 32 Exposure draft - Calculating defined benefit contributions... 36 Exposure draft - Preventing dividend washing... 38 Media Release - Working to remove barriers to help small businesses... 42 ATO Media Release - Taxpayers urged to declare offshore income... 43 2014 - Legislation... 44 Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014... 44 Bill receives Royal Assent... 44 Tax Laws Amendment (2014 Measures No. 1) Bill 2014... 50 Introduced into Parliament... 50 Income... 58 Ordinary Income... 58 Blank v FCT - Amount received on termination of employment was deferred compensation... 58 TR 2014/1 - Derivation of income by commercial software developers from right to use proprietary software... 62 Exempt Income... 64 Macoun and FCT - Payments received by taxpayer were emoluments... 64 Assessable Recoupments... 67 Batchelor v FCT - Court settlement was not an assessable recoupment... 67 Capital Gains Tax... 71 General... 71 FCT v Resource Capital Fund III LP - Taxpayer taxable on capital gain... 71 Core Capital Gains Tax Issues... 77 16 January 2014 to 09 April 2014 i

Taras Nominees Pty Ltd ATF the Burnley Street Trust v FCT - Appeal lodged to the Full Federal Court... 77 Small Business CGT Concessions... 79 Gutteridge and FCT - Decision impact statement... 79 Deductions... 81 General Deductions... 81 Executor for the late Joan E Osborne and FCT - Taxpayer s losses from share transactions were not deductible... 81 Yerro and FCT - Taxpayer not entitled to claim deductions and education tax refund... 85 SPI PowerNet Pty Ltd v FCT - Impost was not deductible... 87 Capital Allowances... 90 SPI PowerNet Pty Ltd v FCT - Copyright had separate value to purchase price of business assets... 90 Work-related Expenses... 95 The Taxpayer and FCT - Taxpayer denied work-related deductions... 95 Tax Offsets... 98 Research and Development Tax Offset... 98 Tier Toys Limited and FCT - Taxpayer not entitled to R&D tax offset... 98 Company and Shareholder Issues... 100 Division 7A... 100 Discussion paper - Post implementation review of Div 7A... 100 Trust Issues... 103 General... 103 ATO ID 2014/3 - Deceased individual cannot be specified in family trust election... 103 Partnership Issues... 105 General... 105 Palermo v Palermo - Brothers were not in partnership... 105 Special Classes of Taxpayers... 108 Primary Producers... 108 Nelson v FCT - Tribunal was correct to conclude that taxpayer was not carrying on primary production business... 108 Exempt Organisations and Funds... 111 Prescribed Ancillary Funds... 111 PS LA 2014/1 - Administration of penalties for non-compliance with Ancillary Fund guidelines... 111 International Issues... 113 ii 16 January 2014 to 09 April 2014

Withholding Tax... 113 Task Technology Pty Ltd v FCT - Annual payments to Canadian entity were royalties... 113 AVOIDANCE AND TAX PLANNING... 117 Tax Schemes... 117 General... 117 TD 2014/1 - Private company dividend access share arrangement is a dividend stripping scheme... 117 GOODS AND SERVICES TAX... 121 Goods and Services Tax Issues... 121 General... 121 GSTD 2014/1 - Objections to private rulings relating to overpaid GST... 121 GST-free Supplies... 124 ATS Pacific Pty Ltd v FCT - Supplies to non-resident travel agents not GST-free... 124 Creditable Acquisitions and Input Tax Credits... 129 Margin Scheme... 129 GSTD 2014/2 - Call option fee does not form part of consideration for real property... 129 Residential Premises... 132 Living Choice Australia Limited and FCT - Acquisitions related to the supply of residential premises... 132 SUPERANNUATION... 135 2014 Superannuation - Legislation... 135 Social Services and Other Legislation Amendment Bill 2014... 135 Bill receives Royal Assent... 135 Superannuation Issues... 138 General... 138 SCCASP Holdings Pty Ltd ATF the H&R Super Fund v FCT - High Court refuses special leave... 138 ATO publication - Key superannuation rates and thresholds for the 2014-15 income year... 141 ATO publication on SuperStream Standards for contributions to SMSFs... 143 TD 2014/7 - When a bank account of a complying superannuation fund is a segregated pension asset... 146 16 January 2014 to 09 April 2014 iii

TAX ADMINISTRATION... 151 Administration Issues... 151 General... 151 Updates to PS LA 2008/5 Private advice, guidance and objections... 151 Tax Agents... 153 Tax Practitioners Board released guidance on managing conflicts of interest... 153 Returns and Assessments... 156 Lodgment Issues... 156 ATO is contacting businesses that have not lodged their 2012-13 taxable payments reports... 156 Payment of Tax... 157 Release from Tax Debts... 157 Thomas and FCT - Taxpayer could not be released from his tax debts... 157 Audits and Recovery Action... 161 Collection and Recovery... 161 Australian Building Systems Pty Ltd v FCT - Appeal lodged to the Full Federal Court... 161 iv 16 January 2014 to 09 April 2014

Pending Legislation Measure Stage Status Company losses Continuity of ownership test and entry history rule from 1 July 2002. Announced Exposure draft Simplified imputation Holding period rules from 1 July 2002. Elections in income tax laws Establishes guidelines for framing elections (start date not announced). Off-market share buy-backs Various improvements from Royal Assent. Capital allowances Technical changes (1 July 2001 and 1 July 2009). Charities Amends the in Australia requirements in Div 50 of the ITAA 1997 from Royal Assent. Restates and standardises the special conditions for tax concession entities Announced Announced Discussion paper BOT report Announced Discussion paper Exposure Draft Announcement MYEFO Announced Announcement MYEFO Announced Exposure Draft Exposure Draft Bill Lapsed Announcement MYEFO (Former Government) Federal Budget 2008 09 TLA (2009 No. 6) Bill 2009: Company losses (Former Government) Federal Budget 2008 09 Federal Budget 2008 09 Federal Budget 2009 10 Released Released Federal Budget 2009 10 Further details announced Released Taxation of Share Buy-backs Will not proceed Federal Budget 2009 10 Will not proceed Federal Budget 2009 10 TLA (2011 Miscellaneous Measures) Bill 2011 (No. 1) 2011: tax exempt body 'in Australia' requirements Restating and standardising the special conditions for tax concession entities Introduced into Parliament Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill 2012 Parliament prorogued Will not proceed with providing a definition of not-for-profit in the tax laws. 7/4/04 13/5/08 4/9/09 11/5/04 13/5/08 13/5/08 12/5/09 16/6/10 17/7/07 12/5/09 14/9/09 1/6/09 20/10/11 14/12/13 12/5/09 14/12/13 12/5/09 4/7/11 18/4/12 23/8/12 5/8/13 14/12/13 16 January 2014 to 09 April 2014 1

Measure Stage Status Foreign source income deferral CFC rules Foreign source income attribution rewrite and modernisation of the CFC rules. Foreign source income deferral FAF rules Foreign source income attribution new FAF rules to replace the former FIF rules. GST: margin scheme Restructuring the margin scheme provisions. Instalment warrants and limited recourse borrowings Tax relief for investors in instalment warrants and receipts over listed and unlisted securities and for fund trustees who enter into permitted limited recourse borrowing arrangements from 1 July 2007. Earnout arrangements Treats all payments under a qualifying R arrangement as relating to the underlying business asset from Royal Assent. Announced Exposure draft Announcement Announcement MYEFO Announced Exposure draft Announcement Review Announced Discussion paper Announcement MYEFO Exposure Draft Announced Discussion paper Announced Announced Discussion paper Federal Budget 2009 10 TLA (Foreign Source Income Deferral) Bill 2011: Main provisions Federal Budget 2013 14: Deferred until after the OECD has analysed the CFC rules in its work on base erosion and profit shifting Will not proceed Federal Budget 2009 10 TLA (Foreign Source Income Deferral) Bill 2011: Foreign accumulation funds Federal Budget 2013 14: Deferred until after the OECD has analysed the CFC rules in its work on base erosion and profit shifting Discussion paper Treasury review released Federal Budget 2010 11 Released The Government will not proceed with the restructure of the margin scheme Tax Laws Amendment (2012 Measures 2 No. 5) Bill 2012: GST margin scheme and subdivided land Announcement Federal Budget 2011 12 Released Extension announced Federal Budget 2010 11 Released 12/5/09 17/2/11 14/5/13 14/12/13 12/5/09 17/2/11 14/5/13 12/5/09 11/5/10 11/5/10 10/12/10 22/10/12 15/8/12 10/3/10 10/5/11 10/3/10 17/1/11 11/5/10 12/5/10 2 16 January 2014 to 09 April 2014

Measure Stage Status GST and cross-border transactions How to apply GST to crossborder transactions. Consolidation Alleviate tax consequences that arise when a consolidated group or MEC group restructures by undertaking a demerger from 9 November 2010. CGT minor amendments Minor CGT changes to scripfor-scrip roll over; trust to company asset roll over; exempt gain or loss from life insurance policy; and CGT exclusion for testamentary trust asset distributions. Company loss recoupment rules Removes requirement to trace ownership through superannuation entities; and technical amendments for widely held entities from 1 July 2011. Functional currency rules Extends foreign currency taxable income calculation rule to certain trusts and partnerships from 1 July 2011. Business conducted by charity Tax exemption for not-for-profit (NFP) entities will only apply to profits generated by unrelated business activities that are directed back to the NFP entity to carry out its altruistic work from 1 July 2014. Announced Discussion paper Announced Consultation Paper Announced Discussion paper Announcement MYEFO Federal Budget 2010 11 Released Federal Budget 2012 13 GST treatment of cross border transport Mid-Year Economic and Fiscal Outlook 2010 11 Released Will not proceed 11/5/10 15/2/11 8/5/12 9/10/12 9/11/10 7/12/10 14/12/13 Announced Federal Budget 2011 12 10/5/11 Announced Consultation Paper Federal Budget 2011 12 Released 10/5/11 14/7/11 Announced Federal Budget 2011 12 10/5/11 Announced Consultation Paper Announced Announced Federal Budget 2011 12 Released Federal Budget 2012 13 Announcement delaying start date to 1 July 2014 10/5/11 27/5/11 8/5/12 31/1/13 16 January 2014 to 09 April 2014 3

Measure Stage Status SMSF audit period extended SMSFs audit period will be extended where the report cannot be provided within the timeframe as a result of circumstances beyond the control of the auditor. Exposure Draft Revised Exposure Draft CGT relief and natural disasters CGT relief will be available to taxpayers affected by natural disaster, including a CGT exemption and retaining of pre-cgt status for replacement assets. Trusts modernising the taxation of trusts income The current issues impeding effective operation of Div 6 and taxation of trusts are considered in the consultation paper. Three methods are also proposed to overcome these issues: Patch model; Proportionate within a class model; and Trustee assessment and deduction model. Extending roll-over for exchange of units for shares The Government proposes to extend the CGT roll-over in Subdiv 124-H of the ITAA 1997 which enables the exchange of units in a unit trust for shares in a company where units in the unit trust are held on revenue account. Wider CGT exemption for compensation payments and insurance policies A compensation payment received by an individual indirectly through a trust will be CGT exempt in the same manner as compensation received directly by a taxpayer. Discussion paper Announcement MYEFO Consultation Paper Discussion Paper Policy Paper Proposals Paper Exposure draft Superannuation Industry (Supervision) Amendment Regulations 2011 (No. ) Superannuation Industry (Supervision) Amendment Regulations 2012 (No. ) Capital gains tax relief for taxpayers affected by natural disasters Will not proceed Modernising the taxation of trust income A more workable approach for fixed trusts. Policy options paper Taxing trust income options for reform Extending the roll-over for exchange of units in a unit trust for shares in a company Removing tax impediments to certain business structures 21/9/11 15/10/12 9/10/11 14/12/13 22/11/11 30/7/12 23/10/12 14/11/11 12/10/12 Announced Federal Budget 2012 13 8/5/12 4 16 January 2014 to 09 April 2014

Measure Stage Status Minor amendments to CGT rules for deceased estates Minor amendments will be made to previously announced measures affecting the CGT rules applicable to deceased estates. Bad debts between related parties A tax deduction will be denied for written off, where the debtor is a related party and not part of the same consolidated group. GST registration The Commissioner will only be permitted to backdate a GST registration for a period of up to four years with effect from 1 July 2012. Refunds of overpaid GST Implements recommendations made by the Board of Taxation. Acquisitions and disposals of certain assets by SMSFs and related parties The superannuation law will be amended so that acquisitions and disposals of assets between related parties and SMSFs must be conducted through an underlying market where one exists, or where one does not exist, must be supported by a valuation from a suitably qualified independent valuer. Implementation of the IGoT review of the self assessment system Improving taxpayer certainty, reducing compliance costs and rebalancing taxpayer protections. Announced Announcement MYEFO Announced Discussion Paper Federal Budget 2012 13 Will not proceed Federal Budget 2012 13 Released 8/5/12 14/12/13 8/5/12 16/7/12 Announced Federal Budget 2012 13 8/5/12 Exposure draft Revised exposure draft Bill Lapsed Bill Exposure draft Bill Proposal withdrawn Lapsed Announcement MYEFO Announced Refunding excess GST Refunding excess GST Introduced into Parliament Tax Laws Amendment (2013 Measures No. 4) Bill 2013 Parliament prorogued Introduced into Parliament Tax Laws Amendment (2014 Measures No. 1) Bill 2014 Tax Laws Amendment (2013 Measures No. 1) Bill 2013: self managed superannuation funds and related parties Introduced into Parliament Tax and Superannuation Laws Amendment (2013 Measures No.1) Bill 2013 The Schedule relating to this measure was excised from the Bill Parliament prorogued Will not proceed Announcement by Assistant Treasurer 17/8/12 26/2/13 26/6/13 5/8/13 27/3/14 21/12/12 13/2/13 29/5/13 5/8/13 14/12/13 13/2/13 16 January 2014 to 09 April 2014 5

Measure Stage Status MIT withholding tax changes Ensuring foreign pension funds can access the MIT withholding tax regime. Announced Announcement by Assistant Treasurer Removing R&D tax offset for very large businesses Businesses with annual turnover of $20 billion or more will no longer be eligible for the R&D tax incentive Examination of native title payments The Government will establish a Treasury-led working group to examine the tax treatment of native title payments and how they can better benefit Indigenous communities now and into the future. Investment manager regime Element three of the regime to expand the exemption available for qualifying investment income of certain widely held foreign managed funds. Exempt current pension income Earnings on superannuation assets supporting income streams > $100,000 will be taxed at 15% from 1 July 2014. Deferred lifetime annuities will be provided with the same concessional tax treatment that superannuation assets supporting income streams receive. Announcement Exposure Draft Bill Lapsed Bill Announced Announcement by the Treasurer and Minister for Industry and Innovation Tax Laws Amendment (2013 Measures No. 2) Bill 2013: Targeting R&D tax incentive to small and medium businesses Introduced into Parliament Tax Laws Amendment (2013 Measures No.4) Bill 2013 Parliament prorogued Introduced into Parliament Tax Laws Amendment (Research and Development) Bill 2013 Passed by the House of Representatives Introduced into the Senate Joint announcement by the Attorney- General, Minister for Families community Services and Indigenous Affairs and the Assistant Treasurer Exposure draft Tax Laws Amendment (2013 Measures No.2) Bill 2013: Investment Manger Regime Announced Announcement MYEFO Announcement by the Treasurer and Minister for Financial Services and Superannuation Will not proceed 13/2/13 17/02/13 7/5/13 26/6/13 5/8/13 14/11/13 9/12/13 10/12/13 18/3/13 4/4/13 5/4/13 14/12/13 6 16 January 2014 to 09 April 2014

Measure Stage Status R&D quarterly credits Eligible companies will be able to claim the R&D refundable tax offset on a quarterly basis Exposure draft Bill Cap on self-education expense deductions Deductions for self-education expenses will be capped at $2,000 per annum per person from 1 July 2014. Changes to Farm Management Deposits Increase in the non-primary production income threshold from $65,000 to $100,000 Deferral of increase in tax-free threshold Deferral of the increase in the tax-free threshold from $18,200 to $19,400 which was to apply from 1 July 2015 Changes to Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes Deeming certain gains or losses to be on capital account, lowering the minimum investment capital and phasing out Pooled Development Funds Improving the foreign resident CGT regime New withholding tax of 10% on disposal of certain taxable Australian property and amendments to the principal asset test Lapsed Announcement MYEFO Announced Discussion paper Deferred until 1 July 2015 Announced Exposure draft Bill Announced Tax Laws Amendment (2013 Measures No.2) Bill 2013: quarterly R&D credits Introduced into Parliament Tax Laws Amendment (2013 Measures No.4) Bill 2013 Parliament prorogued Will not proceed Announcement by the Treasurer Reform to deductions for education expenses Economic Statement (August 2013) Announcement by the Treasurer and Minister for Agriculture, Fisheries and Forestry Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: farm management deposits Introduced into Parliament Tax Laws Amendment (2014 Measures No. 1) Bill 2014 Transcript of a speech by the Minister for Climate Change, Industry and Innovation and Federal Budget 2013 14 12/4/13 26/6/13 5/8/13 14/12/13 13/4/13 31/5/13 2/8/13 27/4/13 12/2/14 27/3/14 8/5/13 Announced Federal Budget 2013 14 14/5/13 Announced Federal Budget 2013 14 14/5/13 16 January 2014 to 09 April 2014 7

Measure Stage Status Offshore Banking Units (OBU) Improving the integrity of the OBU regime Better targeting exploration deductions Removing the immediate deduction for mining rights and information Closing loopholes in the consolidation regime Amendments as a result of the Board of Taxation s reviews; inconsistencies between MECs and ordinary consolidated groups; and interaction of consolidation and TOFA Changes to the thin capitalisation rules Tightening all safe harbour limits, increasing the de minimis threshold to $2 million of debt deductions; and amending the worldwide gearing test. Review of the arm s length debt test Non-portfolio dividend exemption Ensuring s. 23AJ operates as intended and expanding it to investments in trusts and partnerships Exempt foreign income interest deduction Repeal s. 25-90 which allows a tax deduction for interest incurred in deriving certain exempt foreign income Preventing dividend washing Close a loophole that enables investors to engage in dividend washing from 1 July 2013 FBT statutory rate for cars to be abolished The statutory formula method for car fringe benefits will be removed for new contracts entered into after 16 July 2013 with effect from 1 April 2014. Announced Discussion paper Federal Budget 2013 14 Improving the Offshore Banking Unit Regime 14/5/13 28/6/13 Announced Federal Budget 2013 14 14/5/13 Announced Federal Budget 2013 14 14/5/13 Announced Announcement Federal Budget 2013 14 Discussion paper 14/5/13 16/12/13 Announced Federal Budget 2013 14 14/5/13 Announced Federal Budget 2013 14 14/5/13 Announced Discussion paper Announcement Announced Confirmed Federal Budget 2013 14 Preventing dividend washing Announcement by the Assistant Treasurer Announcement by the Treasurer Economic Statement (August 2013) 14/5/13 3/6/13 28/6/13 16/7/13 2/8/13 8 16 January 2014 to 09 April 2014

Measure Stage Status Emissions trading scheme Introduction of Emissions Trading Scheme brought forward to 1/7/2014 Exposure Draft legislation Clean Energy Legislation Amendment (Emissions Trading Scheme) Bill 2013 Carbon tax to be repealed The carbon tax will be repealed from 1 July 2014. Minerals Rent Resource Tax (MRRT) to be repealed The MRRT will be repealed from 1 July 2014. Tax Bonus The Tax Bonus Act will be repealed to ensure that the Commissioner does not make any further tax bonus payments. Exposure Draft Legislation Bill Exposure Draft Legislation Bill Bill Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 Clean Energy (Income Tax Rates and Other Amendments) Amendment Bill 2013 Introduced into Parliament Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 Passed by the House of Representatives Introduced into the Senate Clean Energy (Income Tax Rates and Other Amendments) Amendment Bill 2013 Passed by the House of Representatives Introduced into the Senate Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 Introduced into Parliament Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 Passed by the House Representatives Introduced into the Senate Introduced into Parliament Tax Bonus for Working Australians Repeal Bill 2013 Passed by the House of Representatives Introduced into the Senate 29/7/13 15/10/13 13/11/13 21/11/13 2/12/13 21/11/13 2/12/13 24/10/13 13/11/13 20/11/13 2/12/13 12/12/13 24/2/14 3/3/14 16 January 2014 to 09 April 2014 9

Measure Stage Status Enhanced third party reporting, pre-filling and data matching A framework is proposed to be introduced to create a new third party reporting regime encompassing: sales of real property; sales of shares and units in unit trusts; sales through merchant debit and credit services; and taxable government grants and other payments. Protection for discontinued announced measures A protection provision by way of a statutory bar on the Commissioner amending an income tax assessment will be introduced Preventing dividend washing From 1 July 2013, a taxpayer who receives a franked distribution due to distribution washing will: not be entitled to a tax offset; and not be required to include the franking credits in their assessable income. Discussion paper Exposure draft Exposure draft Improving tax compliance enhanced third party reporting, prefilling and data matching Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: Protection for discontinued announced measures Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: Preventing distribution washing 7/2/14 25/3/14 24/3/14 10 16 January 2014 to 09 April 2014

Income Tax Announcements 2014 Announcements Discussion paper - Enhanced third party reporting, pre-filling and data matching KEY POINTS On 7 February 2014, the Government released for comment a discussion paper titled Improving tax compliance enhanced third party reporting, pre-filling and data matching. The discussion paper proposes a framework to create a new third party reporting regime encompassing: sales of real property; sales of shares and units in unit trust; sales through merchant debit and credit services; and taxable government grants and other payments. These measures give effect to an announcement in the 2013 14 Federal Budget. The measures are proposed to commence from 1 July 2014. On 7 February 2014, the Government released for comment a discussion paper titled Improving tax compliance enhanced third party reporting, pre-filling and data matching, which gives effect to an announcement in the 2013 14 Federal Budget. START DATE 1 July 2014 Background On 6 November 2013, the Government announced that it would proceed with the 2013 14 Federal Budget measure Tax Compliance Improving compliance through third party reporting and data matching, which should enhance the information reported to the ATO by third parties, thereby improving taxpayer compliance. The measures are proposed to commence from 1 July 2014. Proposed measures The discussion paper proposes a framework to create a new third party reporting regime encompassing: 1. sales of real property; 2. sales of shares and units in unit trust; 16 January 2014 to 09 April 2014 11

3. sales through merchant debit and credit services; and 4. taxable government grants and other payments. The ATO already receives information from third parties, which enables pre-filling for simple income tax returns. However, the ATO seeks to make greater use of the pre-filling function by introducing a new online substantially pre-prepared tax return for the 2013 14 income year targeted towards taxpayers with relatively straightforward tax affairs. For pre-filling to be effective, the information must be received in a timely manner. Given the current lodgement timeframes for taxpayers commence on 1 July, the relevant information should be reported to the ATO either throughout the income year or as soon as possible after 30 June. However, this timeframe presents difficulties because some of the information cannot be finalised until after the end of the income year. Moreover, entities have competing priorities (i.e. their own accounts) at the end of the income year. The table below summarises the proposed measures. Proposed measures Sales of real property Information required The ATO would require the following information in relation to each property transaction: vendor and purchaser name; vendor and purchaser address; vendor and purchaser date of birth (for individuals); vendor and purchaser ABN or ACN (for entities); property details, including ID and address; property type (for example residential, commercial, new residence or vacant land); contract date; settlement date; and consideration and any other costs and charge Potential third party responsible for information The parties that would readily have access to the relevant information associated with a sale of real property are the purchaser or the relevant State or Territory government agency. The government agency gives legal effect to the property transfer. The compliance burden on the purchaser to report to the ATO is likely to be greater in comparison to the government agency. 12 16 January 2014 to 09 April 2014

Proposed measures Sales of shares and units Information required The ATO would initially require the following information in relation to each share or unit transaction respectively: shareholder s name, address and date of birth (if applicable); shareholder s TFN, ABN or ACN (if applicable) TFN withholding tax code; non-resident indicator in respect of the shareholder; company name and ASX code, and the CHESS and internal registry reason codes; shareholder s account holding number (Share Reference Number (SRN)/Holder Identification Number (HIN)) (if applicable); acquisition and disposal dates, prices and quantities; incidental costs (such as broker s fees); and any capital returns or payments and the associated dates unit holder s name, address and date of birth (if applicable); unit holder s TFN, ABN or ACN (if applicable); non-resident indicator in respect of the unit holder; TFN withholding tax code; name, ABN and/or TFN of the trustee and the trust and any other information required to specifically identify the unit(s) subscribed/redeemed; subscription (purchase) and redemption (sale) dates; quantity of units purchased/disposed of; incidental costs (such as broker s fees or initial entry fees); and any non-assessable payments paid by the trust to the unit holder in respect of the units Potential third party responsible for information The parties that have access to the relevant information, and therefore may be able to report the information to the ATO, include: 1. the market participant; 2. the clearing house provider; and 3. the share registry 16 January 2014 to 09 April 2014 13

Proposed measures Sales through merchant credit and debit services Information required The ATO would require the following information: 1. merchant name, address and ABN or date of birth; 2. all monthly purchase/sale amounts from credit card and debit card transactions; and 3. all monthly cash out amounts Potential third party responsible for information The third party with access to this information is generally the entity providing the merchant payment facilities for the debit and credit payments, which is usually the financial institution. Government and payments grants Only grants and payments that are taxable to the recipient are included in the proposed regime. Information required The ATO would require the following information for each grant or payment: ABN (for grants and payments made to businesses); TFN or date of birth (for grants made to non business individuals); full name; address gross amount paid; total GST (if applicable); BSB and account number; and other contact details such as phone number or email address Potential third party responsible for information The government entities (federal, state, territory and local) making the grants and payments will have the necessary information and therefore should be able to report these amounts to the ATO. When and how the information should be reported The ATO would seek the information in an electronic format, initially commencing with annual reporting and would then seek quarterly, monthly or real time reporting. In relation to the government grants and payments, the potential reporting due date could be 21 July, which would align with the existing taxable payments annual reporting that applies to the building and construction industry. Law design It may be appropriate to create a new legislative framework within Schedule 1 to the TAA to deal with these proposed rules. However, the approved form provisions contained in s. 388-50 of Schedule 1 to the TAA may provide an existing framework for entities to provide information to the ATO. It is proposed that entities not complying with the reporting obligations could be subject to the existing administrative penalty regime contained in Divs 284 and 286 of Schedule 1 to the TAA. 14 16 January 2014 to 09 April 2014

Website The discussion paper is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/improving%20tax %20compliance/Downloads/PDF/Improving_Tax_Compliance_DP.ashx Inspector-General of Taxation releases reports on ATO compliance approach to individuals KEY POINTS On 21 February 2014, the Assistant Treasurer, Arthur Sinodinos AO, released three reports by the Inspector-General of Taxation (IGT). The reports released and the ATO s responses are summarised below: Review into the ATO s compliance approach to individual taxpayers use of data matching; The ATO agreed with all the IGT s recommendations with one qualification regarding recommendation 2.2 (refer table below); Review into the ATO s compliance approach to individual taxpayers income tax refund integrity program; The ATO agreed with 12 out of the 13 recommendations the IGT made; Review into aspects of the ATO s use of compliance risk assessment tools; and The ATO agreed with all the recommendations made by the IGT. On 21 February 2014, the Assistant Treasurer, Arthur Sinodinos AO, released the following reports by the Inspector-General of Taxation (IGT): Review into the ATO s compliance approach to individual taxpayers use of data matching; Review into the ATO s compliance approach to individual taxpayers income tax refund integrity program; and Review into aspects of the ATO s use of compliance risk assessment tools. The IGT s recommendations and the ATO s responses to them are summarised in the table below. Review into the ATO s compliance approach to individual taxpayers use of data matching The IGT found that the ATO s data matching program was generally effective in detecting instances of omitted income. The IGT s 13 recommendations are aimed at improving the timeliness and effectiveness of the data matching projects. The ATO has agreed with all the IGT s recommendations, listed below, with one qualification regarding recommendation 2.2. 16 January 2014 to 09 April 2014 15

The IGT recommended that the ATO: 2.1 minimise the time between data being received and when it may be compared to taxpayer information by regularly reviewing and improving its data validation and identity matching processes. 2.2 1. update PS LA 2006/8 to reflect that, consistent with other active compliance activities, delay in commencement of data matching activities is a relevant factor when considering remission of SIC; and 2. clarify its internal SIC remission guidelines to require ATO officers to consider any delay in the commencement of data matching activities and whether remission is warranted on such grounds. ATO s qualification Given the high volume of transactions undertaken through an automated process, consideration of the remission of the Shortfall Interest Charge (SIC) will occur as requested by the taxpayer post issue of the amended assessment. 2.3 2.4 1. formalise and improve its current processes for determining the reasons for compliance action being only undertaken in a very small number of cases where potential discrepancies have been identified between third party information and those contained in corresponding tax returns; 2. following the above investigation, seek to improve the effectiveness of the relevant data matching projects through, for example, improving the quality and utility of third party data; and 3. where (b) is not possible, consider abandoning the relevant data matching projects and redirecting those resources to other data matching projects that are likely to yield better results. 1. formalise a strategic enterprise approach to the collection and application of third party data used in its data matching activities. Such an approach should include: (a) (b) undertaking pilots and/or manual reviews for audit selection where new data sources are being used or new risks sought to be treated; and consulting with third party data providers regarding their natural business systems and any necessary changes to these systems or processes to accommodate ATO needs and undertaking a cost-benefit analysis to determine whether the ATO can reimburse or subsidise any of their associated costs. 2. consolidate its evaluations of data matching projects to capture observations made during those projects to determine: (a) (b) (c) any material changes in the effectiveness of the project to accurately identify taxpayers who had omitted or underreported their income; the underlying causes for the variation in the data matching project s effectiveness; and use this information to enhance similar data matching projects for future years, or to redeploy staff to focus on other data matching projects representing higher risks. 16 16 January 2014 to 09 April 2014

2.5 1. widely communicate a streamlined process through which taxpayers and tax agents may clarify or correct pre-filled data which is incomplete or inaccurate; and 2. periodically reinforce instructions and escalation processes for ATO staff to manage these enquiries and, where appropriate, assist taxpayers to resolve them in a timely manner. 3.1 publicly release information on the processes involved in its data matching activities, particularly those relating to refining and validating of third party data before comparing them to taxpayer-provided information. 3.2 3.3 1. improve the effectiveness of data matching correspondence to generate the intended behavioural response by, for example, conveying more details regarding any research that it has undertaken to resolve the discrepancies before contacting the taxpayer; and 2. use randomised controlled trials to evaluate the effectiveness of such correspondence. 1. reinforce that ATO officers should ensure taxpayers understand the information being sought and how that information is relevant to the investigation; 2. identify potential sources of data held by other government agencies (such as DIAC ) which may assist the ATO in its data matching audit activities; and 3. outline the circumstances in which it would be appropriate to make information requests from other government agencies and the procedures that should be followed in making such requests. 3.4 update its current data matching procedures to emphasise that ATO officers may make information requests in writing where: 1. specifically requested to do so by taxpayers or their agents; or 2. the information is lengthy or complex. 3.5 widely communicate to the public through such channels as its website, the initial discrepancy letter to taxpayers and tax agents and its consultative forums that taxpayers may request a full written explanation regarding any adverse adjustments made to taxpayers liabilities at the conclusion of data matching activities. 3.6 identify the causes of amended assessments issuing prematurely and to prevent the occurrence of such events by, for example: 1. clearly communicating the channels through which taxpayers should direct their responses to ATO enquiries; 2. where prior communication has been established, instructing staff to contact taxpayers to verify whether the taxpayer has sent or is sending the required information before cases are finalised; and 3. developing systems-based rules to ensure that taxpayer correspondence records are checked before amended assessments are issued. 16 January 2014 to 09 April 2014 17

4.1 1. actively raise awareness of the administrative reversals process in data matching cases, including how taxpayers can initiate this process, for example through tax agent seminars and communiqués; 2. improve ATO call centre scripting to prompt ATO officers to identify cases of data matching and to escalate these to the DMCS team appropriately; and 3. periodically reinforce guidance and instruction to staff in relation to escalating cases for reversal consideration when requested by taxpayers, or where the ATO officer otherwise identifies that it would be appropriate to do so. Review into the ATO s compliance approach to individual taxpayers income tax refund integrity program The implementation of the IGT s 13 recommendations should result in: more expedient processing under the Income Tax Refund Integrity Program; improved communication between tax agents and the ATO; and clearer lines of escalation in the tax dispute process. The ATO agreed in full with 12, and in principle with one, of the IGT s recommendations. 2.1 The ATO: The IGT recommended that 1. ensures that the MEI 1, CAS 2 and SNC 3 business lines collaborate to develop a comprehensive record keeping system to identify and report on: (a) (b) (c) the number of cases referred from the ITRIP 4 to the SNC business line for fraud investigation and the number of these cases where actual fraud was established; the number of cases in which identity crime was observed and those in which the ATO suspects that false tax returns were lodged by perpetrators of crime; and the actions taken by the ATO to address the fraud and the outcomes of such action; 2. distils common factors in cases where fraud activity has been identified and use such findings in its annual review process of the ITRIP models to improve their ability to detect potential fraud. 3.1 The ATO should, whilst maintaining robust governance processes with respect to initiatives such as the ITRIP, consider more streamlined governance arrangements, particularly in the early stages of the initiative, to facilitate a timely resolution of issues that might arise and to minimise uncertainties, duplications and inefficiencies. 1 2 3 4 Micro Enterprises and Individuals. Client Account Services. Serious Non-Compliance. The ATO s income tax refund integrity program. 18 16 January 2014 to 09 April 2014

The IGT recommended that 4.1 1. the ATO continuously improve the time period between a return being stopped and initiating inquiries with the taxpayer or their agent by increasing staff conducting ITRIP reviews during Tax Time and commencing audits sooner; 2. the ATO continue to implement strategies to obtain data in a timely manner which may be applied to verify tax returns held by the ITRIP; and 3. where any new risk or label rules are proposed to be incorporated into the ITRIP, or where any existing rules are proposed to be updated, the ATO build into the model available third party data that could be used for compliance verification. 4.2 The ATO, in addition to undertaking specific campaign visits to assist tax agents: 1. undertake site visits at the request of tax agents with larger numbers of delayed income tax returns held under the ITRIP to review and finalise these in an efficient and cost effective manner; and 2. provide a direct contact point within the ATO and clear lines of escalation to assist tax agents to raise and address areas of concern in relation to the ITRIP. 4.3 The ATO develop and adopt a differentiated approach in reviewing and processing income tax returns held under the ITRIP by: 1. the MEI and CAS business lines enhancing the management reporting of ITRIP serious hardship cases and using such findings to continually improve the management of these cases; and 2. augmenting its pre-issue compliance procedures to: (a) (b) provide clear instruction and guidance to ATO staff to holistically consider taxpayers or tax agents circumstances and respond to these in a flexible manner; and provide clear lines of escalation where taxpayers and their agents are unable to resolve any disputes which may arise directly with the ATO audit officer. 5.1 The ATO, having regard to the applied research emerging from the UK s Behavioural Insights Team: assess the effectiveness of the ITRIP letters to generate the intended behavioural response from individual taxpayers through the use of randomised controlled trials in correspondence design; and ensure that it acknowledges and deals with any information received by taxpayers or their agents in response to the ATO s ITRIP letters, including in cases where the ATO has not specifically requested information be provided. 16 January 2014 to 09 April 2014 19

The IGT recommended that 5.2 As part of its ITRIP work to improve communication of reasons for delays in processing of income tax returns, including through the use of reason codes, the ATO: 1. better distinguish between potential fraud and overstated claims cases; 2. provide greater specificity as to why certain tax returns have been held for review, such as what label or what claims the ATO is seeking to address; and 3. implement a mechanism for taxpayers and their agents to easily obtain more information where specific reasons cannot be provided in correspondence. In principle agreement Changes to IT systems and business processes will be required to implement the requirements of this recommendation around updated reason codes. In some cases these requirements are quite complex. This work will be subject to prioritisation on the Enterprise Solutions and Technology Forward Program of Work. 5.3 The ATO augment its ITRIP information gathering procedures, including relevant written guidance or scripting, to: 1. ensure that taxpayers understand the nature of the ATO s inquiry and information which may assist to address the ATO s concerns, including how the requested information is likely to impact any potential adjustments; and 2. authorise ATO officers to grant extensions of time for the provision of additional information in appropriate circumstances, such as where the relevant taxpayers are unavailable or the information is difficult to obtain. 5.4 The ATO: 1. consult with external stakeholders on strategies to improve the specificity of communicated reasons for adjustments; and 2. provide specific reasons for ITRIP adjustment decisions including how the ATO has considered information provided by taxpayers in making adjustment decisions. 5.5 The ATO consult with the tax profession to identify and implement strategies to: 1. ensure that specific ITRIP audit correspondence and enquiries are directed to the person designated by the taxpayer; and 2. inform tax agents of ITRIP correspondence which the ATO proposes to use during Tax Time and on which their clients may seek advice and assistance. 6.1 The ATO make use of the in-house facilitators pilot program or other informal dispute resolution process to address and resolve disputes arising out of the ITRIP. 20 16 January 2014 to 09 April 2014

The IGT recommended that 6.2 The ATO: 1. update its finalisation letters to invite taxpayers to contact the ATO before disputing any adjustments to enable ATO officers to understand the dispute and provide advice as to the most appropriate channel for resolving the dispute; and 2. implement a communications strategy to ensure that taxpayers and tax agents are aware of administrative reversal as a cost effective dispute resolution mechanism and how taxpayers and tax agents may seek such reversals in appropriate cases. 6.3 The ATO: 1. undertake an analysis of the patterns and features of cases where default assessments have had to be reversed and accordingly use the findings to limit the instances of default assessment being issued; and 2. refine default assessment finalisation letters to encourage taxpayers with genuine claims to engage with the ATO by, for example, clearly communicating the availability of administrative reversal process and to distinguish this process from the statutory rights to object. Review into aspects of the ATO s use of compliance risk assessment tools The IGT made 16 recommendations concerning the adoption of a set of guidelines for the design of more effective risk assessment tool and to improve the existing risk assessment tools with which taxpayers have raised most concern. The ATO agreed with all 16 recommendations. The IGT recommended that 3.1 Discrete transactions or business activities of a taxpayer that cause concern for the ATO should not be determinative of the taxpayer s overall risk rating unless they are substantial compared to the taxpayer s tax base or are indicative of poor internal governance or fraud. 3.2 The ATO revise its internal and public documentation to: 1. acknowledge that, for the purpose of the risk differential framework (RDF), the presence of a number of contestable tax positions does not of itself render a taxpayer as non-compliant; and 2. replace references to controversial or contentious tax positions with contestable tax positions. 16 January 2014 to 09 April 2014 21

The IGT recommended that 3.3 1. The ATO consider willing participation or transparency in terms of information confidence and cost and use them alongside, but separate from, the RDF in determining the ATO compliance approach to taxpayers. 2. The tool for assessing information confidence and cost should consist of objective and specific criteria such as: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) The ATO should: Does the taxpayer voluntarily disclose information to the ATO? Does the taxpayer respond to informal ATO information requests? If no, what were the reasons for this? Have you used formal information gathering powers with respect to this taxpayer? If so, what were the reasons for this? Did the taxpayer outline a specific concern that gave rise to a need for you to exercise such powers? How did the taxpayer respond to our formal information gathering requests? Did the taxpayer exercise their right to legal professional privilege correctly? If not, what was the issue of concern? How was it resolved? Did the taxpayer avail themselves of the accountants or board papers concessions correctly? If not, what was the issue of concern? How was it resolved? 3. update its internal guidance to ATO officers to reflect its stated position in the large business and tax compliance (LBTC) booklet in relation to taxpayer requests for exercise of the Commissioner s formal information gathering powers; and 4. state, in an appropriate publicly available document such as the LBTC booklet, its position with respect to the exercise of such taxpayer legal rights as LPP and FOI as well as use of Accountants Concession when determining the taxpayer s risk categorisation. 3.4 The ATO share with taxpayers greater detail about how the ATO assesses particular risks, including details about how the effective tax rate is calculated. 3.5 The ATO update its internal and public documentation to make it clear that use of particular tax advisors is not a factor in determining a taxpayer s risk categorisation. 3.6 The ATO: 1. ensure that its Large Business and International (LB&I) compliance staff are appropriately skilled to examine and assess the adequacy of a taxpayer s corporate governance and tax risk management arrangements and that such assessments are the subject of an appropriate internal assurance process; and 2. remove tax manager personal tax obligations as a consideration when assessing the taxpayer s tax risk management and corporate governance. 22 16 January 2014 to 09 April 2014

The IGT recommended that 3.7 The ATO update its LB&I RDF categorisation template along with internal and external communications to be consistent with the following principles: 1. higher consequence taxpayers will always be subject to a form of direct ATO engagement regardless of likelihood factors and the nature, extent and timing of this engagement is influenced by likelihood factors; 2. likelihood factors consist of inherent and behavioural factors and should be addressed separately; 3. inherent factors require the testing of particular hypotheses; 4. behavioural factors require the testing of the taxpayer s tax risk management and governance processes; and 5. the intensity and formality of the review depends on the taxpayer s approach to provision of information as well as inherent and behavioural factors. 3.8 The ATO continue to improve the LB&I risk identification process including: 1. better identification of potential risk hypotheses through closer working relationships between risk managers and operations teams on an ongoing basis; 2. capturing better input data through the income tax return and its associated schedules; and 3. refining or removing inappropriate risk filters. 3.9 The ATO improve the RDF notification letter process for higher consequence taxpayers by: 1. providing tax managers with a draft risk report; 2. having a dialogue with tax managers to address any factual errors and discuss the ATO s concerns; 3. having the risk report subject to a moderation process after this dialogue; 4. preparing the RDF notification letter by: (a) (b) (c) (d) taking into account previous dialogue with the tax manager; reflecting any recent ATO compliance activity, such as current or concluded PCRs or ACA 5 s; aligning it with any protocols or frameworks generated as part of implementing the Taxpayer Assurance Plan (TAP); and including a roadmap for expected or likely ATO compliance requirements regarding specific concerns; and 5. upon finalising, sending the RDF notification letter to the CEO. 5 Annual Compliance Arrangement. 16 January 2014 to 09 April 2014 23

The IGT recommended that 3.10 The ATO: 1. make the pre-lodgment compliance review (PCR) framework guide publicly available as a part of either the large business compliance manual or large business and tax compliance booklet; 2. disclose the risk categories more fully, including any sub-categorisations of the key taxpayer segment, in RDF notification letters and in the LBTC booklet; 3. ensure that the compliance burden of PCRs are graduated according to differing levels and mixes of inherent risk, behavioural risk and information confidence and cost factors; and 4. update the LBTC booklet to indicate that audits may still be applicable to manage legacy issues even where the taxpayer is a key taxpayer. 4.1 The ATO incorporate compliance officer experiences and case work results into the risk rule review processes. 4.2 The ATO: 1. ensure all ATO risk guides contain: (a) (b) (c) an explanation of the ATO s risk hypothesis; explanations of any applicable false positives; and an indication of the types information that the compliance officer should be seeking from the taxpayer to determine the presence of a risk. 2. publish additional information on the risk factors currently listed in the publication Tax compliance for small-to-medium enterprises and wealthy individuals such as the risk hypothesis and the indicators used to determine the presence of risk. 4.3 The ATO, in consultation with stakeholders, test the distinction between inherent factors, behavioural factors and information confidence and cost for this market segment. 5.1 The ATO research and develop strategies to improve aggregated taxpayer risk analysis in the ATO micro business segment. 24 16 January 2014 to 09 April 2014

The IGT recommended that 7.1 The ATO, in consultation with tax practitioners, develop and publish a complete guide on the operation of RDF for tax practitioners. Matters to be covered by the guide include: 1. the risk hypothesis being tested; 2. the inputs used; 3. tax practitioners opportunity for review to initial risk rating (consistent with the principles of natural justice); 4. communications between the ATO and practitioners; 5. confidentiality of the risk rating as between the ATO and the practitioner; 6. referral to the ATO s Aggressive Tax Planning Unit where the promoter penalty regime may apply; and 7. referral to the Tax Practitioners Board where the Code of Professional Conduct contained in the Tax Agent Services Act 2009 may have been breached. 8.1 1. the checklist in Appendix 12 of the report should be incorporated into the ATO s compliance risk assessment tool design processes; and 2. the ATO s Enterprise Risk Management Framework consider risk premium compliance costs as a type of taxpayer compliance cost. Website The reports are available here: www.igt.gov.au/content/reports/ato_data_matching/ato_data_matching_with_cover.pdf www.igt.gov.au/content/reports/ato_income_integrity/downloads/igt-itrip-report.pdf www.igt.gov.au/content/reports/risk_assessment/downloads/risk_assessment_tools_with_cover.pdf 16 January 2014 to 09 April 2014 25

Exposure draft - Re-instating and centralising the special conditions for tax concession entities KEY POINTS On 12 March 2014, the Government released for comment exposure draft legislation titled: Tax and Superannuation Laws Amendment (2014 Measures No. 3) Bill 2014: in Australia special conditions; and Tax Laws Amendment (2014 Measures No. 2) Regulation, and accompanying explanatory material. These proposed measures will amend the tax law to re-state and centralise the special conditions for tax concession entities. The amendments: re-state the in Australia special conditions for income tax exempt entities, ensuring that, in general, they must be operated: principally in Australia; and for the broad benefit of the Australian community (with some exceptions); centralise in one place and simplify the other special conditions that entities must satisfy to be income tax exempt; and codify the in Australia special conditions for deductible gift recipients (DGRs) ensuring that they must generally: operate solely in Australia; and pursue their purposes solely in Australia (with some exceptions, such as overseas aid funds, some environmental organisations, some touring arts organisations and medical research institutes). The proposed measures will commence from Royal Assent. On 12 March 2014, the Government released for comment exposure draft legislation titled: Tax and Superannuation Laws Amendment (2014 Measures No. 3) Bill 2014: in Australia special conditions; and Tax Laws Amendment (2014 Measures No. 2) Regulation, and accompanying explanatory material. These proposed measures will amend the tax law to restate and centralise the special conditions for tax concession entities. The amendments: 1. re-state the in Australia special conditions for income tax exempt entities, ensuring that, in general, they must be operated: (a) (b) principally in Australia; and START DATE Royal Assent for the broad benefit of the Australian community (with some exceptions); 2. centralise in one place and simplify the other special conditions that entities must satisfy to be income tax exempt; and 26 16 January 2014 to 09 April 2014

3. codify the in Australia special conditions for deductible gift recipients (DGRs) ensuring that they must generally: (a) (b) operate solely in Australia, and pursue their purposes solely in Australia (with some exceptions, such as overseas aid funds, some environmental organisations, some touring arts organisations and medical research institutes). Background Under the current law, entities cannot be income tax exempt unless they are: operated principally in Australia; prescribed as income tax exempt entities (exempt entities) under Div 50 of the ITAA 1997 and the ITAA Regs; or deductible gift recipients (DGRs) under Div 30 of the ITAA 1997. While both exempt entities and DGRs are subject to the in Australia special conditions, they are subject to different thresholds (with the in Australia conditions for DGRs applying a stricter test). Recent court decisions have raised doubts about the proper application of both of these tests. For example, the High Court in FCT v Word Investments Limited [2008] HCA 55 found that a charity is considered to be pursuing its objects principally in Australia if it operates in Australia by making payments in Australia to another charity that conducts its activities and expends those funds overseas. The previous Government announced, as part of the 2009 10 Federal Budget, that it would amend the in Australia special conditions in Div 50 of the ITAA 1997 to ensure that Parliament could fully scrutinise those organisations seeking to pass money to overseas charities and other entities. On 14 December 2013, the current Government announced that it would proceed with this measure. Proposed new law Income tax exempt entities In order to become income tax exempt, an entity must: operate principally in Australia; pursue its purposes principally in Australia; comply with all the substantive requirements in its governing rules; apply income and assets solely to pursue the purposes for which it was established; and be a non-profit entity. Proposed ss. 50-50(1) to (3) Important Under the current law, the test for an entity to be tax exempt under Div 50 is determined by reference to its location in Australia, and the extent to which it incurs its expenditure, and pursues its objectives, principally in Australia. The new law refers to operates and pursues its purposes in Australia (proposed s. 50-50). 16 January 2014 to 09 April 2014 27

Principally in Australia The replacing of the current expenditure based test with an operates and pursues its purposes based test widens the range of circumstances that can be considered in Australia. There is no one factor that is conclusive in determining whether an entity is operating in Australia and pursing its purposes principally in Australia and so, the Commissioner is expected to consider all surrounding circumstances including: where the entity: incurs its expenditure; undertakes its activities; has its property located; is managed from; is resident or located; has its employees or volunteers; and who is directly and indirectly benefiting from its activities. Definition Principally Principally means mainly or chiefly. Less than 50 per cent is not considered to be principally. An entity will be considered to be operating in Australia if it is an Australian resident or has a sufficient connection with and presence in Australia. An organisation will not have a sufficient connection with Australia if it is present in Australia only through an agent or it only owns an investment property in Australia. Certain distributions may be made overseas and disregarded when considering whether an entity meets the in Australia conditions. These are distributions that are received by way of government grants, and distributions received as a gift (money or other property) where the provider is not an income tax exempt entity and is not entitled to a deduction for the contribution. In order for such gifts to be disregarded, the tax exempt entity must ensure that they meet any requirements set out in the regulations (if any). These requirements are expected to include such things as the entity must: 1. demonstrate that any activities undertaken outside Australia and the use of any money or property outside Australia is effective in achieving the entity s purpose; 2. demonstrate that it effectively interacts and coordinates activities with the other persons outside of Australia; 3. must not commit a serious infringement of Australian laws; and 4. show that it has in place current and appropriate governance arrangements for the proper monitoring of any overseas activities undertaken by both it and any in-country partners to ensure that any money and property is being used in a proper and effective manner. Proposed s. 50-50(5) 28 16 January 2014 to 09 April 2014

Example 1.3 of the draft EM Operating principally in Australia A literary society is set up in Australia to promote indigenous writing, both in Australia and abroad. The entity operates out of and is managed from Melbourne. Most of its expenditure is directed towards donating books to local schools and libraries. Occasionally it incurs expenditure purchasing books from other indigenous culture organisations overseas. The society will meet the in Australia conditions. The occasional overseas expenditure will not prevent this criteria being met. While no one factor is determinative, the society is overall principally pursuing its purposes in Australia and is principally operating in Australia because it is managed in Australia, most of the expenditure is benefiting Australians and any assets and employees are in Australia. Proposed s. 50-50(4) provides that if an entity provides money, property or other benefits to another entity that is not an income tax exempt entity, the use of the money, property or other benefits by the recipient (or any other entity) must be taken into account when determining whether the entity satisfies the in Australia special conditions. However, the entity is only required to take steps to reasonably confirm or trace the use of money, property or benefits by the other entity (proposed s. 50-50(4A)). This means that the providing entity can rely on the reasonable and genuine steps taken to demonstrate compliance with the special conditions if it later becomes apparent that the funds were spent in a manner that would result in the loss of the providing entity s income tax exempt status. Example 1.9 of the draft EM Taking account of money provided to other entities Myra Charity receives donations and income of $10,000 in an income tax year. They are not a deductible gift recipient. Myra provides $8,000 to West Charity. West Charity is located in Australia and is not income tax exempt. West Charity passes the money to its local partner in Africa to build a school. Myra Charity would not meet the in Australia special conditions, as it is not operating principally in Australia, and incurring its expenditure principally in Australia. Although Myra provides the $8,000 to an entity in Australia, Myra must consider the use of this money offshore when considering whether it is meeting the in Australia special conditions. These proposed measures address the problem that arose in FCT v Word Investments Limited 6, that entities are considered to be pursuing their objectives principally in Australia if they merely operate to pass funds within Australia to another charity that conducts its activities overseas, and ensures that tax exempt entities cannot avoid the special conditions by having other entities use its funds on activities that it itself cannot undertake. Deductible gift recipients (DGRs) DGRs (or entities endorsed as DGRs for the operation of a fund, authority or institution, to the extent that they operate that fund, authority or institution) are exempt from the in Australia special conditions for tax exempt entities in Div 50. DGR entities are subject to a separate test. Proposed s. 50-51(2)(a) and (b) The proposed law codifies the in Australia special conditions for DGRs so that the core principle for tax exempt entities is applied similarly to DGRs but with a differing (stricter) threshold test. 6 [2008] HCA 55. In that case, the High Court found that charities are considered to be pursuing their objectives principally in Australia if they merely operate to pass funds within Australia to another charity that conducts its activities overseas. 16 January 2014 to 09 April 2014 29

Proposed ss. 30-15(2), 30-18 and 31-10(2)(a) DGRs must: be established in Australia; operate solely in Australia; and pursue their purposes solely in Australia. Proposed s. 30-18(1) Definition Solely in Australia Solely in Australia is to be interpreted as requiring DGRs to be established and operated only in Australia (including control, activities and assets) and must have their purpose and beneficiaries only in Australia. 7 Example 1.16 Minor and incidental activities A large public museum operating in Australia has a large permanent collection of artwork in Australia, as well as collections which tour around Australia. The museum has made an arrangement to send temporarily, a collection of artwork overseas, along with an individual who is an expert in the collection era, in return for receiving a temporary exhibition of artwork from overseas. This would be considered to be incidental when considered with reference to the museum s operations and pursuit of purposes in Australia. Note Special consideration is given to entities that are DGRs under the category of international affairs. DGRs such as overseas aid funds, developed country relief funds and similar DGRs (where their activities are clearly intended to be undertaken overseas) are not subject to the in Australia rule (s. 30-18(5)). In addition, entities on the Register of Environmental Organisations, which the Secretary to the Environment Department authorises as being exempt from the in Australia special conditions, may also undertake overseas activities. However, in order to ensure the integrity of the DGR regime, an exemption from the in Australia conditions will be limited to certain entities listed on the register (ss. 30-18(7) and 30-280(1)). If a DGR provides money to another entity to further its purposes, the DGR must look through the entity to which it has given money and consider the final use of this money, property or benefits when considering whether it meets the in Australia special conditions. Proposed s. 30-18(3) However the fund, authority or institution is only required to take all steps that are reasonable to have knowledge of, or obtain knowledge of, the use of the money, property or benefits by the entity outside Australia. Proposed s. 30-18(4) 7 However, the majority membership of an Australian subsidiary by an overseas entity will not, of itself, contravene the in Australia requirement. 30 16 January 2014 to 09 April 2014

Tax Laws Amendment (2014 Measures No. 2) Regulation The regulation: sets out the integrity rules that: START DATE The day after it is registered DGRs listed on the Register of Environmental Organisations must meet for the Environment Minister to authorise them as being exempt from the in Australia special conditions; DGRs that are touring arts organisations listed on the Register of Cultural Organisations must meet in order for the Arts Minister to authorise them as being exempt from the in Australia special conditions; entities must satisfy to disregard distributions received by way of government grant and distributions received as gifts that are not tax deductible when considering the in Australia requirement; and re-makes existing regulations under the new centralised special conditions. Website The Exposure Draft is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/conditions%20for %20tax%20concession%20entities/Downloads/PDF/ED_TSLA_2014_Measures_Bill_V2.ashx The Explanatory Material is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/conditions%20for %20tax%20concession%20entities/Downloads/PDF/EM_TSLA_2014_Measures_Bill_V2.ashx The Regulation is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/conditions%20for %20tax%20concession%20entities/Downloads/PDF/ED_TLA_2014_Measures_Regulation.ashx The Explanatory Statement is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/conditions%20for %20tax%20concession%20entities/Downloads/PDF/ES_TLA_2014_Measures_Regulation.ashx 16 January 2014 to 09 April 2014 31

Exposure draft - Protection for discontinued announced measures KEY POINTS On 25 March 2014, the Government released for comment exposure draft legislation titled Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: Protection for discontinued announced measures, and accompanying explanatory material. The proposed measures will introduce a protection provision by way of a statutory bar on the Commissioner amending an income tax assessment if: the taxpayer has made a statement in their return that is consistent with anticipated amendments having been made to a taxation law; and the statement: has been made in good faith; and is in a return that was lodged in the period that the announcement was on foot and was not required to be lodged before the start of that period; or the events happened or the circumstances existed while the announcement was on foot that enabled the taxpayer to anticipate the announced proposal. The proposed protection will extend only to the discontinued announcements that are listed in the table in proposed s. 170B(9) of the ITAA 1936. On 25 March 2014, the Government released for comment START DATE exposure draft legislation titled Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: Protection for Royal Assent discontinued announced measures, and accompanying explanatory material. The proposed measures will introduce a protection provision which ensures that the Commissioner cannot amend an income tax assessment if: the taxpayer has lodged a return that reasonably and in good faith anticipated the impact of certain proposed changes to the tax law with retrospective effect that were announced by the previous Government; and the current Government has decided that the proposed amendment will not proceed. Background On 14 December 2013, the Assistant Treasurer, Arthur Sinodinos AO, announced that the Government, following industry consultation, had decided not to proceed with 48 of the 64 measures that had been announced but not legislated by the previous Government. The Commissioner s administrative approach to taxpayers who have lodged a return that reflects announced but unenacted retrospective changes to the tax law is set out in PS LA 2007/11. Proposed law Proposed s. 170B(5) of the ITAA 1936 will prevent the Commissioner from amending an assessment if: 1. a statement in the taxpayer s return is consistent with anticipated amendments to the tax law, that, if they had been made, reasonably reflect the announced change; and 2. the statement is made in good faith; and 32 16 January 2014 to 09 April 2014

3. the statement: (a) (b) (c) is in a return that was lodged in the period that the announcement was on foot and was not required to be lodged before the start of the period; or relates to the application of the tax law to events that happened or circumstances that existed while the announcement was on foot; and amending the assessment would produce a less favourable result for the taxpayer. It is not necessary for the taxpayer to be aware of the announcement to satisfy the condition in s. 170B(1)(a). 8 Note The protection provision is not intended to allow taxpayers who previously did not anticipate the announcements in their returns to now seek an amendment or adjustment of their position. An announcement is on foot during the period: starting on the date of the discontinued announcement which is listed in the table in proposed s. 170B(9) of the ITAA 1936; and ending on 14 December 2013. Important The protection provision will override any other provision in the taxation law (proposed s. 170B(5) of the ITAA 1936). Less favourable result The expression less favourable result is intended to mirror the concept of the more favourable result that is used in the existing tax rulings provisions in s. 357-70(1) of Schedule 1 to the TAA. 9 In an income tax context, a less favourable result would generally be an amendment to an assessment that: creates an income tax liability; or increases taxable income but does not increase the tax payable e.g. as a result of the tax-free threshold or tax offsets because such an increase in taxable income may result in a greater tax liability in the future. A less favourable result could also arise where the announced proposal to change the tax law is initially reflected in an assessment in an income year where a tax loss arises. However, under the law, an assessment can only be amended if the amount of taxable income or income tax payable changes. Therefore, there would not be an assessment to reverse an anticipated position where its impact is less than the tax law. However, the protection provision may apply in a later income year where: further adjustments are made to the assessment in accordance with the time limits in s. 170(1) of the ITAA 1936 which, together with the anticipated position, would result in an amended assessment; or the tax loss is sought to be deducted in a subsequent income year. 8 9 Explanatory Material at para. 1.45. Explanatory Material at para. 1.23. 16 January 2014 to 09 April 2014 33

Testing whether the anticipated amendment reasonably reflects the announcement Announcements of proposed measures are frequently lacking in detail. It is therefore necessary to assess whether the taxpayer s self-assessed position is consistent with how the proposed amendment might reasonably have been given effect by way of amendment to the tax law. Determining whether the taxpayer s anticipated amendments reasonably reflect the announcement Proposed s. 170B(2) Statements made in good faith The following factors should be considered when applying the reasonableness test in proposed s. 170B(1)(a): 1. the terms of the announcement; 2. any related documents published after the announcement on behalf of the Commonwealth Government, Treasury or the Commissioner (i.e. discussion papers or exposure drafts) 3. specific schemes or practices to which the announcement was proposed to apply; 4. existing provisions of the tax law that give effect to the same or similar result as the proposed announcement; 5. any other relevant matter. The good faith test considers the behaviour of the taxpayer or its agent in completing the tax return. That is, if the taxpayer or the tax agent knows that the announcement would not apply in the taxpayer s circumstances then the statement would not be in good faith. Warning The protection provision will not apply to discontinued announcements that are not listed in the table in proposed s. 170B(9) of the ITAA 1936. Lodgment or events while the announcement was on foot To attract the protection provision, a taxpayer must meet one or both of the two timing conditions in proposed s. 170B(1)(c), namely: Lodgment-based eligibility Proposed s. 170B(1)(c)(i) Event-based eligibility Proposed s. 170B(1)(c)(ii) The taxpayer lodged its income tax return during the period that the announcement was on foot provided that the return: was not required to be lodged before the original announcement was made; and is for an income year to which the proposed change would have applied. Transactions may have been entered into, or events or circumstances occurred during the period that the announcement was on foot that would allow for the anticipation of the announced proposal even if the return is lodged after the announced measure was discontinued on 14 December 2013. 34 16 January 2014 to 09 April 2014

Exceptions to the protection provision The protection provision will not apply in the following three sets of circumstances: Exception 1 Taxpayer chooses not to have an eligible assessment protected 2 Amendments to give effect to decision on review or appeal Explanation Where a taxpayer chooses not to have the assessment protected, the Commissioner is not prevented from amending the assessment. Proposed s. 170B(6) The operation of the protection provision may be the subject of a review or appeal under Part IVC of the TAA. This means the Commissioner has the power at any time to amend the assessment in accordance with the decision of the Tribunal and the Courts. Proposed s. 170B(7) 3 Later inconsistent statements Since a taxpayer s anticipated self-assessed position may have a deferred or ongoing impact, the protection will not be available for taxpayers who, in a later income year, adopt a position in the later income year that is inconsistent with the anticipated amendments. Proposed s. 170B(8) Website The Exposure Draft is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/protection%20me asure%20for%20announced%20but%20un- Enacted%20Tax%20Amendments/Key%20Documents/PDF/Protection%20for%20discontinued%20announced%20m easures%20draft%20law.ashx The Explanatory Material is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/protection%20me asure%20for%20announced%20but%20un- Enacted%20Tax%20Amendments/Key%20Documents/PDF/Explanatory_Material.ashx 16 January 2014 to 09 April 2014 35

Exposure draft - Calculating defined benefit contributions KEY POINTS On 25 March 2014, the Government released for comment exposure draft legislation titled Tax and Superannuation Laws Amendment (2014 Measures No. 2) Regulation 2014: Calculating defined benefit contributions final arrangements from 1 July 2013, and accompanying explanatory material. The proposed amendments to the Income Tax Assessment Regulations 1997 (ITA Regs): provide the meaning of defined benefit contributions; and prescribe the methodology for determining an individual s defined benefit contributions for the 2013 14 and later income years, for Div 293 purposes (about reducing the concessional tax treatment of superannuation contributions for very high income earners). The proposed amendments: define the meaning of defined benefit contributions for: non-accruing members; accruing members with funded benefit interests; and accruing members with other interests; set out in Schedule 1AA a methodology for working out the amount of the defined benefit contribution. On 25 March 2014, the Government released for comment START DATE exposure draft legislation titled Tax and Superannuation Laws 1 July 2013 Amendment (2014 Measures No. 2) Regulation 2014: Calculating defined benefit contributions final arrangements from 1 July 2013, and accompanying explanatory material, which prescribes the methodology for determining defined benefit contributions for Div 293 purposes. Background Division 293 of the ITAA 1997, which was introduced by the Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 10, applies to high income earners (i.e. those whose income and concessionally taxed superannuation contributions exceed $300,000 in an income year). These individuals are required to pay tax at 15 per cent on certain superannuation contributions that exceed the $300,000 threshold. An individual s concessionally taxed superannuation contributions include defined benefit contributions. However, given that the actual value of the benefits received by an individual from a defined benefit interest can only be known when the benefit is paid, it is necessary to estimate the value of the employer-financed benefits that accrue in a financial year for the interest (notional employer contributions) in order to assess liability to Div 293 tax. 10 The Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 received Royal Assent on 28 June 2013. 36 16 January 2014 to 09 April 2014

In a defined benefit fund, employer contributions are generally made in aggregate to the fund, based on actuarial advice to ensure there are sufficient funds to pay benefits to members as and when the benefits become due. Section 293-115(1) of the ITAA 1997 provides that the defined benefit contributions for an individual for an income year has the meaning given by the regulation. Subdivision 293-DA of the ITA Regs provides the methodology for determining the amount of the defined benefit contributions for an individual who is an accruing member with a defined benefit interest. Proposed amendments The proposed amendments to the ITAR set out the defined benefit contributions for the purposes of s. 293-115 of the ITAA 1997 (about defined benefit contributions) for the 2013 14 and later income years for: non-accruing members; accruing members with funded benefit interests; and accruing members with other interests. Schedule 1AA about working out defined benefit contributions will also be inserted into the ITA Regs. Website The Exposure Draft is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/sustaining%20the %20SCC/Downloads/PDF/ED_SSCC.ashx The Explanatory Statement is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/sustaining%20the %20SCC/Downloads/PDF/ES_SSCC_20140325 16 January 2014 to 09 April 2014 37

Exposure draft - Preventing dividend washing KEY POINTS On 24 March 2014, the Government released for comment exposure draft legislation titled Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: Preventing distribution washing and accompanying explanatory material. Dividend washing (or distribution washing) allows shareholders to obtain multiple franking credits on one economic interest by: selling an interest after the franking credit entitlement has accrued i.e. ex-dividend; and buying an equivalent interest with a further entitlement to a franking credit i.e. cumdividend. It is proposed that, from 1 July 2013, a taxpayer who receives a franked distribution due to distribution washing will: not be entitled to a tax offset; and not be required to include the franking credits in their assessable income. The distribution washing rules will apply if: the taxpayer acquires a washed interest after they, or their connected entity, disposed of a substantially identical membership interest; and the taxpayer or their connected entity receives a corresponding distribution in respect of the substantially identical interest. An interest is substantially identical to the washed interest if it is fungible with, or economically equivalent to, the washed interest. It is proposed that there will be a small holder exception for individuals entitled to tax offsets on franked distributions of $5,000 or less for the income year. On 24 March 2014, the Government released for comment exposure draft legislation titled Tax and Superannuation Laws START DATE 1 July 2013 Amendment (2014 Measures No. 2) Bill 2014: Preventing distribution washing and accompanying explanatory material. The proposed measures will introduce an integrity rule to limit the ability of taxpayers to obtain a tax benefit from dividend washing also referred to as distribution washing. Background The previous Government announced on 14 May 2013, as part of the 2013 14 Federal Budget, that it would close a loophole that enables investors to engage in dividend washing. Dividend washing allows shareholders who place a relatively low value on franking credits to effectively sell their franking credits to shareholders who place a relatively high value on franking credits (high value shareholders), enabling the high value shareholders to obtain two franked dividends. 38 16 January 2014 to 09 April 2014

On 6 November 2013, the Assistant Treasurer, Arthur Sinodinos AO, announced that the Government would proceed with the previous Government s proposal to insert a specific integrity rule into the law to prevent dividend washing. 11 Note On 15 January 2014, the ATO issued TD 2014/D1 which provides that s. 177EA of the ITAA 1936 will generally apply to a dividend washing scheme of a type described in the draft determination. 12 Proposed law It is proposed to amend the franking credit streaming rules in ss. 207-145 and 207-150 of the ITAA 1997 to extent their scope to also apply to a franked distribution that is received as a result of distribution washing as defined in proposed s. 207-157 of the ITAA 1997. 13 Note Where the franking credit streaming rules in ss. 207-145 or 207-150 of the ITAA 1997 apply, the taxpayer that receives the franked distribution directly or indirectly: does not include the franking credit on the distribution in their assessable income; and is not entitled under Subdiv 207-F of the ITAA 1997 to a tax offset because of the distribution. 14 A franked distribution will be within proposed s. 207-157(1) if it is received by a member of a CTE on a membership interest (the washed interest) if: 1. the washed interest was acquired after the member, or a connected entity 15 of the member, disposed of a substantially identical membership interest; and 2. a corresponding franked distribution is made to the member, or the connected entity, on the substantially identical interest. Proposed s. 207-157(1) of the ITAA 1997 11 12 13 14 15 On 3 June 2013, the previous Government released for comment a discussion paper titled Preventing dividend washing. On 28 June 2013, the then Assistant Treasurer, David Bradbury, announced that, having considered the industry submissions on the proposal to prevent dividend washing, a specific integrity rule would be inserted into the tax law. The ATO view expressed in the determination will apply both before and after the date of the final determination. See proposed ss. 207-145(1)(da) and 207-150(1)(ea). See s. 207-145(e) to (f) and s. 207-150. A connected entity of an entity means an associate of the entity or another member of the same wholly owned group if the entity is a company and is a member of such a group: s. 995-1(1) of the ITAA 1997. 16 January 2014 to 09 April 2014 39

Example 1.4 of the draft EM Rose and Tom are a married couple. Rose, but not Tom, is a beneficiary of Flower Trust. The trustee of Flower Trust is Bloom Ltd. Bloom Ltd, acting in its capacity as trustee of Flower trust, disposes of 300 shares in Sunshine Co shortly after the shares go ex-dividend. It remains entitled to the fully franked dividend on the shares. Both Rose and Tom are associates of Bloom Ltd in its capacity as trustee, Rose as a beneficiary of the trust, and Tom as an associate of Rose. If either Rose or Tom purchase a substantially identical interest (which could be an interest of the same type in Sunshine Co, but could also be some other type of economically equivalent interest) and receive a corresponding dividend, they will be subject to the distribution washing rules. Definition substantially identical interest Without limiting the meaning of substantially identical 16, proposed s. 207-157(2) of the ITAA 1997 states that a membership interest is substantially identical to the washed interest if it is any one or more of the following: (a) (b) (c) (d) (e) fungible with, or economically equivalent to, the washed interest; a membership interest in the same CTE as the washed interest and of a class that is the same as, or not materially different from, the washed interest; a membership interest in the same CTE as the washed interest and of a class that is exchangeable at a fixed rate for an interest of the same class as the washed interest; a membership interest in another CTE that holds predominantly membership interests that are covered by any of the preceding paragraphs; or a membership interest in another CTE that is exchangeable at a fixed rate for interests that are covered by any one or more of paras. (a) to (c) above. Important It is possible that only some of the taxpayer s interests may be substantially identical to the washed interest. 16 The concept of substantially identical is drawn from existing law under the holding period rules see former s. 160APHF of the ITAA 1936 and is intentionally flexible to accommodate the existing and new financial instruments. See para. 1.31 of the draft Explanatory Statement. 40 16 January 2014 to 09 April 2014

Example 1.2 of the draft EM Sophie (an Australian resident taxpayer) holds 10 Class A shares in NAFR Ltd. On 20 March 2015, NAFR Ltd declares a $5 fully franked dividend on all of its Class A shares and a $1 fully franked dividend on all of its Class B shares (with the ratio between the dividends being a matter of established practice). Shortly after her shares commence trading ex-dividend, Sophie sells all 10 shares, retaining the $50 fully franked dividend entitlement. Sophie then purchases 65 Class B shares in NAFR Ltd in a special cum dividend market. She becomes entitled to fully franked dividends in respect of those shares totalling $65. Sophie has disposed of shares she held and acquired new shares and she is entitled to corresponding dividends in respect of each set of interests. To the extent the shares are substantially identical, Sophie is not entitled to the benefits of franking credits attached to the dividend in respect of the Class B shares. The Class B shares are not interchangeable with the Class A shares. However, in the circumstances they are in part economically equivalent 10 Class B shares will provide the same immediate returns and similar expected returns as one Class A share. As a result, 50 of the Class B shares are substantially identical to the 10 Class A shares Sophie sold. Sophie is entitled to the benefit of the franking credits she receives in respect of her original 10 Class A shares and 15 of her new Class B shares (assuming no other integrity rules have been engaged). She is not entitled to receive the benefit of the franking credits she receives in respect of the remaining 50 of the Class B shares she has acquired. Exception for individual small shareholders The franking credit streaming rules in s. 207-145 and 207-150 of the ITAA 1997 will not apply to a franked distribution made to an individual in an income year if the sum of the tax offsets to which the individual would be entitled is $5,000 or less. Proposed s. 207-157(3) of the ITAA 1997 When working out the sum of the tax offsets to which the individual would be entitled, the individual is required to: disregard Subdiv 207-F 17 of the ITAA 1997 for distributions received directly; and apply Subdiv 207-F of the ITAA 1997 for distributions received indirectly through another entity. Proposed s. 207-157(4) of the ITAA 1997 Website The Exposure Draft Legislation is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/preventing%20divi dend%20washing/key%20documents/pdf/ed_preventing_dividend_washing.ashx The accompanying draft Explanatory Statement is available here: www.treasury.gov.au/~/media/treasury/consultations%20and%20reviews/consultations/2014/preventing%20divi dend%20washing/key%20documents/pdf/em_preventing_dividend_washing.ashx 17 About no gross-up of tax offset where the imputation system has been manipulated. 16 January 2014 to 09 April 2014 41

Media Release - Working to remove barriers to help small businesses KEY POINTS On 28 March 2014, the Acting Assistant Treasurer, Mathias Cormann, together with the Minister for Small Business, Bruce Billson, and the Parliamentary Secretary to the Treasurer, Steven Ciobo, announced that the Government has asked the Board of Taxation (BoT) to conduct a fast-track review to identify features in the tax system that unreasonably or unnecessarily hinder or prevent small businesses from reaching their commercial goals. The BoT is required to report to the Government before 31 August 2014. On 28 March 2014, the Acting Assistant Treasurer, Mathias Cormann, together with the Minister for Small Business, Bruce Billson, and the Parliamentary Secretary to the Treasurer, Steven Ciobo, announced that the Government has asked the Board of Taxation (BoT) to conduct a fast-track review to identify features in the tax system that unreasonably or unnecessarily hinder or prevent small businesses from pursuing and reaching their commercial goals. The Government has requested that the BoT undertake its review by drawing on its extensive links with tax professionals as well as conducting consultation with key business groups. The terms of reference require the BoT to: provide business and broader community perspectives on issues in the tax system that are of most concern to small businesses; identify the short- and medium-term priorities for small business tax reform in Australia; and identify high priority options for simplification and deregulation. The BoT is required to report to the Government before 31 August 2014. Website The Media Release is available here: http://bfb.ministers.treasury.gov.au/media-release/015-2014/ The Board s terms of reference are available here: www.taxboard.gov.au/content/content.aspx?doc=reviews_and_consultations/impediments_facing_small_business /default.htm&pageid=007 42 16 January 2014 to 09 April 2014

ATO Media Release - Taxpayers urged to declare offshore income KEY POINTS On 27 March 2014, the ATO issued a Media Release urging taxpayers with any offshore assets to declare their interests, ahead of a global crackdown on international tax havens. The ATO s offshore voluntary disclosure initiative Project DO IT: disclose offshore income today provides a last opportunity to taxpayers to declare their overseas assets and income before 19 December 2014, and avoid steep penalties and the risk of criminal prosecution for tax avoidance. On 27 March 2014, the ATO issued a Media Release urging taxpayers with any offshore assets to declare their interests ahead of a global crackdown on international tax havens by the ATO. The ATO s offshore voluntary disclosure initiative Project DO IT: disclose offshore income today provides taxpayers with a final opportunity to declare overseas assets and income before December 2014 to avoid steep penalties and the risk of prosecution for tax avoidance. The key benefits for those who are accepted for Project DO IT include the following: the ATO is seeking information only to assess tax for the income years where the time limit for amending an assessment has not yet expired (generally four income years for taxpayers with offshore financial affairs); taxpayers will be liable to a tax shortfall penalty of 10 per cent on the tax found to be owing (it could otherwise be as high as 90 per cent) and will not have to pay any shortfall penalty in an income year if their additional income is no more than $20,000 in that year (interest charges will still need to be paid at normal rates on the tax owed); the ATO will not investigate taxpayers disclosure for the purposes of prosecuting them for a criminal offence, nor will the ATO refer them for criminal investigation by another law enforcement agency. Note These benefits are available only to eligible taxpayers who come forward before 19 December 2014. This initiative does not change the ATO s ongoing compliance action. The Commissioner stated that international co-operation through information exchange sharing (such as the sharing of banking data) has assisted in closing the net on global tax evaders. Further, countries such as Switzerland and the Cayman Islands that were previously thought of as tax havens are also working to increase transparency. Website The ATO s media release is available here: www.ato.gov.au/media-centre/media-releases/australians-with-undisclosed-offshore-income-urged-to-comeclean--ato/ The ATO s fact sheet Project DO IT: Disclose offshore income today is available here: www.ato.gov.au/general/correct-a-mistake-or-dispute-a-decision/in-detail/project-do-it/project-do-it/ 16 January 2014 to 09 April 2014 43

2014 - Legislation Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014 Bill receives Royal Assent KEY POINTS On 18 March 2014, the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014 received Royal Assent as Act No. 11 of 2014. Schedule 1 to the Act amends the SIS Act to introduce penalties to deter and penalise persons who promote illegal early release schemes from Royal Assent. Schedule 2 to the Act amends the SIS Act to introduce administrative directions (relating to rectification and education) and penalties for contraventions relating to SMSFs, which will assist the Regulator to respond to SMSF non-compliance from 1 July 2014. Schedule 3 to the Act amends the ITAA 1936 to phase-out the net medical expenses tax offset (NMETO) by the end of the 2018 19 income year, with transitional arrangements applying in relation to the 2013 14 to 2018 19 income years from 1 July 2013. Schedule 4 to the Act amends the ITAA 1997 to update the list of deductible gift recipients. On 18 March 2014, the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014 received Royal Assent as Act No. 11 of 2014. Schedule 1 Unlawful payments from regulated superannuation funds Schedule 1 to the Act amends the SIS Act to introduce penalties to deter and penalise persons who promote illegal early release schemes. START DATE Royal Assent Background The superannuation legislation restricts when which is usually when a person reaches preservation age and in what form, an individual can access their superannuation benefits. Illegal early release schemes are generally promoted to individuals as a means of accessing their superannuation benefits before they are eligible to do so. These schemes commonly involve requesting a fund regulated by APRA to pay a member s superannuation benefit to the bank account of a purported SMSF established purely to receive such transfers, and subsequently transferring the benefits to the scheme participants. These schemes undermine the Government s retirement income policy. New law Schedule 1 to the Act inserts new s. 68B into the SIS Act. The section provides that a person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund which is not in accordance with the payments standards prescribed in Part 6 of the SIS Regs. 44 16 January 2014 to 09 April 2014

Definitions Person, promote and scheme A person is not defined in the SIS Act, and so takes its meaning from s. 2C of the Acts Interpretation Act 1901 to mean an individual and a body corporate. Promote, in relation to a scheme, includes the following: (a) (b) (c) (d) enter into the scheme; induce another person to enter into the scheme; carry out the scheme; facilitate entry into, or the carrying out of, the scheme. A scheme means: (a) (b) any agreement, arrangement, understanding, promise or undertaking: (i) (ii) whether express or implied; or whether or not enforceable, or intended to be enforceable by legal proceedings; or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. s. 68B(3) of the SIS Act Whether a person promotes a scheme will depend on the particular facts. However, a person may be taken to have promoted a scheme if they: market or encourage interest in the scheme by distributing marketing material, advising persons to enter the scheme or employing persons to market the scheme; devise or design the scheme; facilitate the means for the participants to take part in the scheme; provide information to the individuals in relation to participating in the scheme; and undertake the relevant activities with the intention that they will result in a payment being made by the regulated superannuation fund otherwise than in accordance with the payment standards. Although the receipt of consideration may indicate that a person has promoted a scheme, it is not a necessary element for the purposes of establishing that the person has promoted the scheme. The promotion of such schemes may result in a civil penalty being imposed. The amendments apply to actions that occur after Royal Assent, i.e. 18 March 2014. Schedule 2 Administrative directions and penalties for contraventions relating to SMSFs Schedule 2 to the Act introduces administrative directions (relating to rectification and education) and penalties for contraventions relating to SMSFs, which will assist the Regulator to respond to SMSF non-compliance. START DATE Contraventions that occur on or after 1 July 2014 16 January 2014 to 09 April 2014 45

Before this amendment, the only avenues that were available to the Regulator (i.e. the ATO) to deter and address non-compliance by SMSFs included: 1. making the SMSF non-complying for tax purposes; 2. applying to a court for the imposition of civil or criminal penalties; 3. accepting an enforceable undertaking in respect of the contravention; and 4. disqualifying the trustee of the SMSF. New law Schedule 2 to the Act provides the Regulator with the following powers in new Part 20 of the SIS Act: New power Regulator may Section Rectification direction Education direction Administrative penalties require a trustee or a director of a corporate trustee to undertake a specified action to: rectify the contravention within a specified time frame; and provide evidence of the compliance with the direction; revoke or vary a rectification direction. require a trustee or a director of a corporate trustee to: undertake a specified course of education within a specified time frame; and provide evidence of compliance with the direction; revoke or vary an education direction. The costs of the education course cannot be paid or reimbursed from the assets of the fund. impose an administrative penalty on a trustee or a director of a corporate trustee as provided in the table under s. 166 of the SIS Act; Note: Directors of a corporate trustee are jointly and severally liable to the administrative penalty. If the corporate trustee is liable to an administrative penalty, its directors are jointly and severally liable to pay the amount. This is consistent with s. 284-95 of Schedule 1 to the TAA. commence proceedings for contravention of a civil penalty provision, in which case the administrative penalty is withdrawn. The penalty must not be reimbursed from the assets of the fund. s. 159 s. 160 s. 162 s. 166 s. 167 s. 168 46 16 January 2014 to 09 April 2014

The contraventions which will be subject to administrative penalties are as follows: Provision of the SIS Act Penalty units Provision of the SIS Act Penalty units s. 34(1) prescribed operating standards 20 s. 104A(2) declaration relating to trustee duties 10 s. 35B accounts and statements 10 s. 105(1) member reports 10 s. 65(1) lending prohibition 60 s. 106(1) notification of significant adverse events s. 67(1) borrowing prohibition 60 s. 106A(1) notification of change in status of an entity s. 84(1) in-house asset rules 60 s. 124 appointment of investment manager 60 20 5 s. 103(1) duty to keep minutes two or more trustees s. 103(2) duty to keep minutes one trustee s. 103(2A) retention of election relating to geared investments 10 new s. 160(4) compliance with an education direction 10 s. 254(1) provide information to regulator 10 s. 347A(5) participation in statistics program 5 5 5 s. 104(1) record keeping 10 Note The value of one penalty unit is currently $170: s. 4AA of the Crimes Act 1914 (Cth). Accordingly, the above administrative penalties per breach will range from $850 to $10,200. Schedule 3 Phase-out of the net medical expenses tax offset (NMETO) Schedule 3 to the Act amends the ITAA 1936 to phase-out the NMETO by the end of the 2018 19 income year. Transitional arrangements apply for the 2013 14 to 2018 19 income years. Background START DATE Transitional arrangements will apply from 1 July 2013 The tax offset will cease on 1 July 2019 The NMETO provides taxpayers with a non-refundable tax offset for eligible out-of-pocket medical expenses that exceed the NMETO claim threshold. Out-of-pocket medical expenses are medical expenses less any reimbursements from Medicare, the Pharmaceutical Benefits Scheme, the Repatriation Pharmaceutical Benefits Scheme, Government aged care subsidies and private health insurance. 16 January 2014 to 09 April 2014 47

Definition Eligible medical expenses Eligible medical expenses are defined in s. 159P(4) of the ITAA 1936 to include expenses relating to an illness or operation which have been paid to a legally qualified doctor, nurse, chemist or hospital. Expenses relating to cosmetic operations are ineligible for the NMETO. The tax offset, which has been means tested since 1 July 2012, is limited to the taxpayer s income tax liability. For the 2012 13 income year, the NMETO was as follows: Adjusted taxable income NMETO (% of eligible expenditure above ) Singles Couples or families 2012 13 income year Up to $84,000 Up to $168,000 20% of expenses > $2,120 > $84,000 > $168,000 10% of expenses > $5,000 The NMETO is being phased out because of the following shortcomings: it does not provide financial assistance at the time the medical expenses are incurred because it is claimed through the tax return at the end of the income year; and only taxpayers that have a tax liability benefit from it and so, taxpayers who have high out-ofpocket medical expenses and minimal or no tax liability do not benefit from the NMETO as it is not refundable. This measure was first announced by the previous Government as part of the 2013 14 Federal Budget. New law Schedule 3 to the Act phases out the NMETO between the 2013 14 and 2018 19 income years, and ultimately repeals it on 1 July 2019. The following two transitional rules will apply during the period from the 2013 14 to the 2018 19 income years: Transitional arrangements Category A Details The NMETO will be available for out-of-pocket medical expenses (as currently defined in s. 159P of the ITAA 1936) from the 2012 13 income year until the end of the 2018 19 income year only for medical expenses relating to the following: disability aids i.e. an instrument, apparatus, assistance device or any other item of property that is manufactured, distributed and generally recognised to be an aid to the function or capacity of a person with a disability; attendant care i.e. services rendered by a person as an attendant of a person with a disability; or aged care i.e. care provided by an approved provider (under the Aged Care Act 1997) of a person who is a care recipient or continuing care recipient. 48 16 January 2014 to 09 April 2014

Transitional arrangements Category B Details Taxpayers who received an amount of NMETO during the 2012 13 income year will be eligible to claim the NMETO for the 2013 14 income year. The NMETO is not limited to medical expenses relating to disability aids, attendant care or aged care. Taxpayers who received an amount of NMETO during both the 2012 13 and 2013-14 income years will also be eligible to claim the NMETO for the 2014 15 income year. The NMETO is not limited to medical expenses relating to disability aids, attendant care or aged care. Note Where a trustee has received an amount of NMETO on behalf of a beneficiary during the 2012 13 income year (or both the 2012 13 and 2013 14 income years), the Category B transitional arrangements will extend to the trustee in respect of the particular beneficiary. s. 159P(1D) of the ITAA 1936 Consequential amendments to the FBTA Act The definitions of medical expense and ineligible medical expenses have been rewritten directly into s. 58L(2) of the FBTA Act (about exemption for certain travel to obtain medical treatment). Schedule 4 Deductible gift recipients Schedule 4 to the Act amends the ITAA 1997 to update the list of deductible gift recipients by: including: The National Arboretum Canberra Fund; and The Prince s Charities Australia Limited; extending the existing listing of the Bali Peace Park Association; and START DATES The National Arboretum Canberra Fund 1 July 2013 The Bali Peace Park Association 16 December 2014 The Prince s Charities Australia Limited 1 January 2014 changing the name of the Sir William Tyree Foundation of The Australian Industry Group to the Sir William Tyree Foundation. Website The Bill as passed is available here: http://parlinfo.aph.gov.au/parlinfo/download/legislation/bills/r5168_aspassed/toc_pdf/14008b01.pdf;filetype=ap plication%2fpdf The Explanatory Memorandum is available here: http://parlinfo.aph.gov.au/parlinfo/download/legislation/ems/r5168_ems_3b4fd6f8-bfad-4a3c-b17f- 58abb7638cdc/upload_pdf/391353.pdf;fileType=application%2Fpdf 16 January 2014 to 09 April 2014 49

Tax Laws Amendment (2014 Measures No. 1) Bill 2014 Introduced into Parliament KEY POINTS On 27 March 2014, the Tax Laws Amendment (2014 Measures No. 1) Bill 2014 was introduced into Parliament. The Bill contains the following measures: Schedule 1 Improvements to the Farm Management Deposits (FMD) scheme: allowing individuals to consolidate multiple Farm Management Deposits (FMDs) into a single FMD without being subject to adverse tax consequences; raising the non-primary production income threshold to $100,000; and ensuring that the unclaimed moneys rules do not apply to FMDs. Schedule 2 Refunding excess GST: ensuring that overpaid GST is refundable only in certain circumstances. On 27 March 2014, the Tax Laws Amendment (2014 Measures No. 1) Bill 2014 was introduced into Parliament. The amendments will: improve the Farm Management Deposits (FMD) scheme by: allowing individuals to consolidate multiple FMDs into a single FMD without being subject to adverse tax consequences; increasing the non-primary production income threshold for exclusion from the FMD concessions from $65,000 to $100,000; and preventing FMDs from becoming unclaimed money. ensure that where a taxpayer s assessed net amount for a tax period takes into account an amount of GST exceeding that which is payable, the excess GST is only refundable in certain circumstances. Schedule 1 Improvements to the FMD scheme Background FMDs are a risk management tool to help farmers deal with START DATE uneven income over different income years. Division 393 of the 1 July 2014 ITAA 1997 allows primary producers to claim a tax deduction for deposits that they make in an income year and to treat the deposits as assessable in the year they are repaid. Section 393-5 of the ITAA 1997 provides that an owner of an FMD is entitled to a deduction if they satisfy the following conditions: 1. the FMD is not withdrawn within 12 months; 50 16 January 2014 to 09 April 2014

2. the owner of the FMD has taxable non-primary production income for the year of not more than $65,000; 3. the individual does not die or become bankrupt during the income year; and 4. the amount of the deposit does not cause the individual to exceed the $400,000 cap on total FMDs. The owner of the FMD must include any withdrawals from the FMD in their assessable income in the income year in which they are repaid. The withdrawals are taxed at the owner s marginal tax rate. From 1 July 2012, FMD owners have been able to hold FMDs with more than one FMD provider. There are special rules in Div 393 of the ITAA 1997 which apply to prevent tax consequences arising where an FMD is extended or reinvested with the same provider or transferred to a new provider. New law Consolidation of FMDs New s. 393-16 of the ITAA 1997 provides that consolidation of multiple FMDs into a single FMD will not be subject to any income tax consequences. This means that if an owner withdraws an FMD, but immediately reinvests the amount in a new FMD, the amount will not be included in the owner s assessable income. Similarly, the deposit into the new consolidated FMD will not result in a deduction to the owner. Further, a consolidated FMD will not give rise to a deduction when the FMD is created. Critical Point Only those amounts that were part of the FMD immediately prior to consolidation can be included in the new consolidated FMD. If the owner includes a new amount in the consolidated FMD, the normal tax rules for withdrawing and depositing FMDs will apply. New s. 393-16(1) New ss. 393-16(1)(a) and (c) will provide that the following amounts may not be included in the consolidated FMD: amounts from FMDs that are less than 12 months old; and amounts that did not give rise to an FMD deduction when deposited, despite being included in the FMD. The consolidated FMD is treated as having the same age as the youngest of the FMDs from which the amounts were consolidated. This ensures that the consolidated FMDs are not subject to special rules that treat amounts withdrawn in the first 12 months after the new FMD is established as never having been part of an FMD. New s. 393-16(4) The unrecouped FMD deduction, which is the key mechanism by which FMDs achieve tax deferral, is calculated differently for a consolidated FMD. Generally, the unrecouped FMD deduction is the amount of the deduction under s. 393-5 when the deposit is made until such time as the amount is withdrawn from the FMD. Once the amount is the withdrawn, the amount of the unrecouped deduction is: The amount of the unrecouped FMD deduction immediately prior to withdrawal LESS Any amount included in the owner s assessable income because of the withdrawal However, a consolidated FMD does not give rise to a deduction when it is created. The unrecouped FMD deduction of a consolidated FMD is equal to the sum of the unrecouped FMD deduction of the accounts that have been consolidated immediately prior to consolidation, until it is withdrawn. 16 January 2014 to 09 April 2014 51

Given that an FMD can only be consolidated where the amount of the FMD is equal to the unrecouped FMD, the value of the unrecouped FMD of the consolidated account is the same as the value of the consolidated FMD. Accordingly, this means that all of the amounts which the taxpayer withdraws from the FMD will have to be included in assessable income. New s. 393-16(3) Increase in the non-primary production income threshold New s. 393-5(1)(d) will amend the ITAA 1997 to increase the amount of taxable non-primary production income that an individual can earn before being excluded from accessing the FMD concessions from $65,000 to $100,000. Unclaimed moneys The new law will also amend the Banking Act to exclude an FMD from being unclaimed moneys under the Banking Act. Schedule 2 Refunding excess GST Background The basic premise of the GST Act is that the GST is remitted by suppliers who pass on the GST in their prices to private consumers. Suppliers obtain an input tax credit (ITC) on their acquisitions for their enterprise. A supplier who obtains a refund of GST which it has passed on to a private consumer will have a windfall gain unless it reimburses the recipient of the supply for the GST paid. The amendments will: restrict refunds of excess GST to prevent windfall gains; and provide an incentive for the supplier to reimburse their customer. A taxpayer can overpay GST if they: 1. incorrectly treat a supply (or arrangement) as a taxable supply, when the supply (or arrangement) is not a taxable supply; 2. incorrectly treat something which is not a supply as a taxable supply; 3. miscalculate the GST; or 4. incorrectly report an amount of GST on a GST return. Restricting GST refunds current rules Section 105-65 of Schedule 1 to the TAA operates to ensure that taxpayers do not obtain a windfall gain by restricting the circumstances when the Commissioner can refund an amount of overpaid GST. In particular, the Commissioner is not required to refund an amount of overpaid GST that would otherwise be refundable where: the taxpayer (supplier) does not reimburse a corresponding amount to the recipient of the supply; or the recipient of the supply is registered or required to be registered. A number of deficiencies have been identified in the operation of s. 105-65, namely: 1. The use of the word need not in s. 105-65 has caused uncertainty about whether the discretion is a discretion to refund or a discretion not to refund. The Commissioner has interpreted it as being a discretion not to refund. 52 16 January 2014 to 09 April 2014

2. The Federal Court in International All Sports v FCT 18 (Sportsbet) decided that the restriction in s. 105-65 on refunds did not apply where the supply was correctly treated but a miscalculation of the GST amount resulted in an overpayment. The Commissioner has accepted that this decision also applies where there has been a miscalculation of the GST under the margin scheme. The Sportsbet decision means that taxpayers may, contrary to policy intent, obtain a windfall gain in circumstances where the GST is overpaid as a result of a miscalculation. 3. In Naidoo and FCT 19 (Naidoo), the Tribunal found that it did not have jurisdiction to conduct a merits review of the Commissioner s decision under s. 105-65 because it did not alter the determination of the taxpayer s net amount under the GST Act. The Tribunal considered that the net amount did not include amounts of overpaid GST because the net amount was determined as the difference between the sum of all the GST for which the taxpayer was liable and input tax credits (ITCs). The Naidoo decision meant that taxpayers who applied for a GST refund were not able seek a merits review of the Commissioner s decision refusing to exercise the discretion under s. 105-65 to pay the refund. Restrictions on GST refunds Current s. 105-65 of Schedule 1 to the TAA 1. The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Divs 3 or 3A of Part IIB) an amount to which this section applies, if: (a) (b) (c) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply, to any extent; and the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is GST-free); and one of the following applies: (i) (ii) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is registered or required to be registered. New law The table below summarises the circumstances when a taxpayer will be entitled to a refund for the excess GST: START DATE Royal Assent Treatment of the excess GST Excess GST has not been passed on Excess GST has been passed on BUT other entity has NOT been reimbursed for the excess GST Availability of a refund for excess GST Refund available the taxpayer can self assess their entitlement to a refund of the excess GST. No refund available excess GST is taken to have always been payable and always on a taxable supply. 18 19 [2011] FCA 824. [2013] AATA 443. 16 January 2014 to 09 April 2014 53

Treatment of the excess GST Excess GST has been passed on AND other entity has been reimbursed for the excess GST Availability of a refund for excess GST Refund available the taxpayer can self assess their entitlement to a refund of the excess GST. Repeal of s. 105-65 The amendments, which will replace existing s. 105-65 with a new division in the GST Act, ensure that where a taxpayer s assessed net amount for a tax period takes into account the amount of GST exceeding that which is payable, the excess GST is only refundable in certain circumstances. New s. 142-1 Although s. 105-65 will be repealed from 1 July 2018, it will continue to apply in relation to amounts for the tax periods commencing on or prior to Royal Assent of the Bill. Restrictions on refunds and excess GST Under new s. 142-10, the taxpayer will be entitled to a refund of excess GST provided that: 1. the excess GST has not been passed on; or 2. if the excess GST has been passed on, the other entity has been reimbursed for the overpayment. Definition excess GST Excess GST is an amount of GST that has been taken into account in an assessed net amount, but in fact is not payable. However, excess GST excludes an amount of GST that is: correctly payable and attributable to the tax period, but which later becomes the subject of a decreasing adjustment; or payable, but is correctly attributable to a different tax period. New ss. 142-5(1) and (2) of the GST Act New s. 142-10 will provide that so much of the excess GST that has been passed on to another entity is taken to have always been payable on a taxable supply, until the taxpayer reimburses the recipient. If the excess GST that has been passed on is later reimbursed, the excess stops being treated as payable on a taxable supply and the reimbursement is an adjustment event because it has the effect of changing the consideration for the supply or it is no longer treated as a taxable supply. An amount of GST that is correctly payable but has been attributed to an incorrect tax period will not give rise to excess GST in that incorrect tax period. New s. 142-5(2)(b) GST always payable The excess GST, which is an amount of GST that has been taken into account in an assessed net amount but is not payable, is treated as being always payable. This is because an amount that is considered to have been always payable is not refundable as the GST is taken to have been correctly paid. If an amount of excess GST that has been passed on to the recipient is reimbursed, the excess stops being treated as payable on a taxable supply. 54 16 January 2014 to 09 April 2014

Definition Passed on Whether GST has been passed on is a question of fact. Generally, a tax invoice issued to or by another entity, containing the relevant information would evidence that the excess GST has been passed on. However, the excess GST may have been passed on even where a tax invoice has not been issued or it is not a valid tax invoice. In deciding whether the GST has been passed on, the determinative factor is whether the recipient has actually paid the supplier for the supply. New s. 142-25(2)(c) In the case of GST calculated under the margin scheme, an assertion that GST was not a factor in setting the price will not, of itself, be sufficient to establish that the excess GST has not been passed on. Whether or not the GST has been passed on in margin scheme cases will depend on the particular facts having regard to factors such as the market in which the taxpayer operates, the contracts under which the sales are made, the seller s pricing policy, practice and actual conduct in setting prices. 20 A taxpayer may have a decreasing adjustment where a refund arises because it has reimbursed the passed-on GST, and the other entity may have an increasing adjustment (Note 1 in new s. 142-10). Example 2.5 of the EM Excess GST not passed-on Melissa leases an office tower to Bank Ezy. The lease requires $120,000 rent including GST to be paid monthly. Bank Ezy pays the correct amount but Melissa incorrectly records the transaction as $220,000 in her records and pays GST of $20,000. Six months later Melissa realises her accounting error. As the excess GST (on the additional $100,000) has not been passed on, Melissa may request that the Commissioner amend her assessment for the period in which she included the excess GST. Example 2.7 of the EM Excess GST reimbursed John buys a set of spectacles from Joe s Optics and pays GST on the total price of the spectacles. Joe s Optics had passed on the GST to John. The proprietor of Joe s Optics is advised by the Commissioner following an audit that the lenses are GST-free and that Joe s Optics had overpaid GST. The excess GST is taken to have always been payable under the amendments until Joe s Optics reimburses John for the passed on GST. When John returned for his annual sight check up he was advised of the error and was reimbursed for the excess GST. As John has been reimbursed for the passed on GST, the excess GST is no longer taken to be payable. Joe s Optics would account for the reimbursement to John as a decreasing adjustment, attributable in accordance with s. 29-20. Joe s Optics would not be entitled to amend the assessments for the original tax period to remove the excess GST from its net amount. This is because these amendments treat the excess GST as payable until the time it is reimbursed. 20 Paras. 2.79 2.80 of the Explanatory Memorandum to the Bill. 16 January 2014 to 09 April 2014 55

Example 2.3 of the EM Decreasing adjustment, not excess GST In June 2015, GCorp pays $330,000 to JCorp for services provided in that quarter. On 28 July 2015, JCorp lodges its quarterly GST return for the tax period ending 30 June 2015. JCorp s assessed net amount for that tax period takes into account the $30,000 GST payable on the services supplied to GCorp. In August 2015, GCorp complains to JCorp about the cost of the services and gets a refund of $44,000 from JCorp. The change in consideration for the supply is an adjustment event. JCorp has a decreasing adjustment of $4,000 (that is, 1 / 11 th of $44,000). JCorp issues an adjustment note to reflect the change to the consideration for the supply. The excess GST for the June 2015 tax period is zero (the $4,000 which is subject to a decreasing adjustment is disregarded when working out whether there is any excess GST). JCorp instead attributes the decreasing adjustment of $4,000 to the September 2015 quarterly tax period. Example 2.4 of the EM Amount attributable to another tax period Pete Enterprises is registered for GST. On 1 April 2015, Pete Enterprises makes a taxable supply to Alan for $66,000 and issues him with a tax invoice that includes an amount of GST of $6,000. On 21 April 2015, Pete Enterprises lodges its monthly GST return for the tax period ending 31 March 2015, which incorrectly includes the GST of $6,000 relating to the taxable supply made to Alan. On 3 September 2015 the Commissioner conducts an audit and determines that Pete Enterprises has incorrectly attributed the GST of $6,000 to the March tax period instead of the April tax period. The Commissioner amends the assessments for the monthly tax periods ending March 2015 and April 2015. The overpaid GST in the March tax period does not give rise to an amount of excess GST as it is correctly attributable to a different tax period (that is, April). GST and cancelled supplies New s. 142-20 will provide that if a supply is cancelled, resulting in a decreasing adjustment for the supplier, the adjustment is reduced to the extent that GST had been passed on to the recipient, but not reimbursed. Example 2.14 of the EM Decreasing adjustment and cancelled supply In September 2015, Bams Co makes a taxable supply of goods to FT Co for $55,000 and issues a tax invoice, which includes GST of $5,000. On 21 October 2015, Bams Co lodges its monthly GST return for the September 2015 tax period. Its assessed net amount takes into account the GST payable of $5,000 for the supply made to FT Co. In November 2015, FT Co returns all of the goods because they are defective and seeks a refund. Bams Co refunds $55,000. The return of goods and associated refund cancels the supply. This is an adjustment event. Bams Co has a decreasing adjustment of $5,000 attributable to the November 2015 tax period as a result of cancelling the supply, while FT Co has an increasing adjustment of $5,000. Since Bams Co has reimbursed all of the passed on GST of $5,000, its decreasing adjustment is not reduced to any extent. Similarly, FT Co s increasing adjustment is not reduced by any extent. 56 16 January 2014 to 09 April 2014

Commissioner s discretion New s. 142-15(1) will provide that the Commissioner has the discretion to allow a refund of excess GST where the excess GST has been passed on to the recipient without the taxpayer reimbursing the recipient. However, the Commissioner will only exercise the discretion where the refund of the excess GST would not provide an entity with a windfall gain. New s. 142-15(2) will require the Commissioner to notify the taxpayer in writing of the decision to refund in full or in part, or deny a refund of excess GST. Review rights A taxpayer can challenge a decision by the Commissioner not to refund excess GST by objecting to the relevant assessment. If the taxpayer is dissatisfied with the Commissioner s objection decision, it may apply for a review or appeal in the Tribunal or Federal Court. Merits review of Commissioner s decision The amendments will enable taxpayers to seek a merits review of the Commissioner s decision under s. 105-65. New s. 105-65(4) of Schedule 1 to the TAA An objection to the Commissioner s decision made under s. 105-65 must be lodged within 60 days after the taxpayer is notified of the decision, or four years after the end of the tax period to which the decision relates. Important The time limit to object will be repealed from 1 July 2018, which is in accordance with the repeal of s. 105-65. Note The amendments will ensure that taxpayers who: lodged objections to a decision of the Commissioner under s. 105-65 before the Naidoo decision on 28 June 2013 will have their objections validated and the time within which they can apply the legislative framework for reviews and appeals of the taxation decisions does not expire until 60 days from Royal Assent of the Bill; did not lodge, and were not out of time to lodge, an objection to the Commissioner s decision under s. 105-65 on 28 June 2013 (the date of the Naidoo decision), can object to the Commissioner s decision under s. 105-65 until the later of: 60 days after receiving notice of the Commissioner s decision under s. 105-65; four years after the end of the tax period to which the Commissioner s decision under s. 105-65 relates; or 60 days after the Bill receives Royal Assent. Website The Bill is available here: http://parlinfo.aph.gov.au/parlinfo/download/legislation/bills/r5224_firstreps/toc_pdf/14076b01.pdf;filetype=application%2fpdf 16 January 2014 to 09 April 2014 57

The Explanatory Memorandum is available here: http://parlinfo.aph.gov.au/parlinfo/download/legislation/ems/r5224_ems_57942b6c-13be-47b1-8a9aa3d8e3a516ac/upload_pdf/392521.pdf;filetype=application%2fpdf Income Ordinary Income Blank v FCT - Amount received on termination of employment was deferred compensation Blank v FCT [2014] FCA 87 21 February 2014 Edmonds J Decision: In favour of the Commissioner Representation for the Taxpayer: Counsel Representation for the Commissioner: Counsel KEY POINTS On 21 February 2014, the Federal Court decided this case in favour of the Commissioner. The taxpayer was entitled to a payment of USD $160,033,328.25 (payable in 20 instalments) following his resignation from his employer, the Glencore Group one of the world s largest international commodity trading businesses. The payment related to the taxpayer s right to participate in his employer s profit participation plans. The taxpayer included the amount as a capital gain (with a nil cost base and reduced by the 50 per cent discount) in his 2006 07 income tax return. The Commissioner contended that the amounts issued to the taxpayer were assessable under one of the following four heads: (a) (b) (c) (d) assessable dividends or non-share dividends; ordinary income; eligible or employment termination payments; or capital gains. Edmonds J held that the amounts received by the taxpayer were ordinary income on the basis that the amounts were deferred compensation for the services he rendered. 58 16 January 2014 to 09 April 2014

Issue Whether the amounts received by the taxpayer under the employee profit participation plans were assessable as: 1. dividends or non-share dividends; 2. ordinary income; 3. eligible or employment termination payments (ETP); or 4. capital gains. Facts The taxpayer became an Australian resident when he arrived in Australia in early 2002 to commence employment with Glencore Australia (GA), a wholly owned subsidiary of Glencore International AG (GI), a company incorporated in Switzerland. Prior to his arrival, the taxpayer was employed with GI or one of its wholly owned subsidiaries. GI was a majority owned subsidiary of Glencore Holdings AG (GH). The Glencore Group operated one of the world s largest international commodity trading businesses. Between 1993 and 2010, GI operated various employee profit participation plans (EPPPs), whereby employees who met various criteria (i.e. performance, seniority and future potential), were selected to participate in the plan and became entitled to receive financial benefits. The taxpayer participated in the ordinary profit participation plan (OPPP) from 1994 until ceasing employment with the Glencore Group. The terms of the OPPP were set out in a Profit Participation Agreement (PPA) with GI and a Shareholders Agreement (SA) with GH. The PPA was replaced in 1999 (PPA 1999). Under the PPA 1999 the taxpayer was granted the right to participate in the profits of GI in the form of: Genussscheine 21 (GS) to be issued by GI to the taxpayer; and a contractual claim against GI. In 1994, the taxpayer entered into an Equity Participation Agreement with GI, which entitled the taxpayer to receive various payments. Under the PPA 1999, GI issued the taxpayer with GS, and GH issued the taxpayer with an equal number of shares in GH. In 2003, the taxpayer executed the Incentive Profit Participation Agreement (IPPA 2003) with GI and Glencore AG (AG), company incorporated in Switzerland and a wholly owned subsidiary of GI. Under the IPPA 2003, the taxpayer was allocated phantom units 22 in GI. The IPPA 2003 was later replaced by the IPPA 2005, which entitled the taxpayer to deferred compensation called the Incentive Profit Participation (IPP). The amounts under the IPP were calculated in the same way as under the IPP 1999, but with reference to profit participation units rather than GS and phantom units. On 31 December 2006, the taxpayer resigned from his employment with GA, which resulted in his ceasing to be an employee of the Glencore group. On 15 March 2007, the taxpayer executed certain documents pursuant to the EPPP which entitled him to receive US$160,033,328.25 payable in 20 instalments over five years for relinquishing his claim to payments in relation to profits entitlements which were allocated to him together with all preferential and ancillary rights. In his 2006 07 income tax return, the taxpayer treated the transaction on 15 March 2007 as giving rise to a capital gain of AU$100,802,046 (calculated as proceeds equal to the AUD equivalent of US$160,333,328.25 less a cost base of nil, reduced by the CGT discount). 21 22 A Genussschein (plural Genussscheine) is a profit sharing certificate that is issued by a company under its articles of association pursuant to Article 657 of the Swiss Code of Obligations. The phantom units were a mechanism for calculating the taxpayer s entitlement to the profit participation. 16 January 2014 to 09 April 2014 59

The Commissioner assessed the taxpayer on the quarterly receipts on the basis that they were eligible termination payments for the 2006 07 income year and employment termination payments for the 2007 08 to 2009 10 income years. The Commissioner subsequently sought to assess the payments in the 2007 08 to 2009 10 income years as being assessable as dividends or non-share dividends under s. 44(1) of the ITAA 1936. The Commissioner s contentions The Commissioner submitted that the amounts received by the taxpayer were assessable as: 1. ordinary income on one or more of the following grounds: (a) (b) (c) as deferred compensation as reward for services as an employee; the GS were contractual rights which were revenue assets and their realisation was ordinary income under the Myer Emporium principle 23 ; as income from property analogous to the taxpayer s holding of shares in FCT v McNeil [2007] HCA 5; 2. dividends or non-share dividends on the basis that the GS which GI issued to the taxpayer were non-share equity interests in GI under s. 974-75(1); or 3. eligible or employment termination payments. Decision Edmonds J held that amounts received by the taxpayer were ordinary income in consideration for the services rendered by the taxpayer. Whether the amounts were assessable as dividends or non-share dividends Edmonds J was not satisfied that the equity test in s. 974-75 was met because the aggregate scheme referred to by the Commissioner was not a financing arrangement for GH or GI. That is, the GS which GI issued to the taxpayer did not constitute equity interests and therefore were not non-share equity interests, which meant that the amounts paid to the taxpayer could not be dividends or non-share dividends. Edmonds J rejected the Commissioner s submissions that: the relevant scheme was the PPA and the SA, because there was no evidence to suggest it was undertaken as a financing arrangement. The Commissioner s submission had no substance because there was nothing in the SA to suggest that its purpose was to raise finance for GH. Rather, the capital raised by issuing shares by GH to the participants of the EPPPs was for the purpose of the ongoing internal management of both GH and GI being maintained in the hands of those participants; the employee s provision of services constituted the provision of finance to the employer for the purposes of s. 974-130 of the ITAA 1997 because s. 974-130(3)(b) cast doubt on the correctness of that submission. In any case, the scheme was not entered into to raise finance. However, if the amounts were dividends, they would be dividends only by virtue of s. 159GZZZP(1) 24 of the ITAA 1936. 23 24 FCT v Myer Emporium Ltd [1987] HCA 18. Section 159GZZZP(1) of the ITAA 1936 applies in relation to share buy backs. 60 16 January 2014 to 09 April 2014

Whether the amounts were ordinary income Edmonds J accepted the Commissioner s submission that the amounts that the taxpayer received were ordinary income on the basis that they were deferred compensation as a reward for the taxpayer s services as an employee. Edmonds J rejected the Commissioner s alternative grounds for the amounts being ordinary income because: the taxpayer was not carrying on a business and therefore the principles in FCT v Myer Emporium Ltd 25 could not apply; and the taxpayer did not hold any shares in GH, because the relevant company was GI and, in any case, the taxpayer did not hold any interest in GI upon execution of the documents on 15 March 2007. Edmonds J found that it was the amount received by the taxpayer not the contractual right to the amount which was the reward for his services and that it was derived by the taxpayer on a receipts basis as and when it was paid to him. Whether the amount was an ETP Edmonds J held that, given that the payments to the taxpayer were deferred compensation as a reward for his services rendered, the payments were not made in consequence of his termination of employment and therefore was not an ETP. Whether the amount was a capital gain For completeness, Edmonds J also considered the valuation methods to determine the market value of the contractual rights under the EPPPs at the time the taxpayer became a resident of Australia on 2 January 2002. Edmonds J found the valuation of the contractual rights as at the time the taxpayer became a resident would be closer to $77 million, rather than $103 million as submitted by the taxpayer s valuation expert. Website The decision of the Federal Court is available here: www.austlii.edu.au/au/cases/cth/fca/2014/87.html 25 [1987] HCA 18. 16 January 2014 to 09 April 2014 61

TR 2014/1 - Derivation of income by commercial software developers from right to use proprietary software KEY POINTS On 12 March 2014, the Commissioner issued TR 2014/1 which considers when commercial software developers derive income for the purposes of s. 6-5 of the ITAA 1997 from: (a) (b) (c) licence agreements for proprietary software; hosted or cloud arrangements for use of proprietary software; and other additional services e.g. updates, upgrades and maintenance which may or may not be bundled with 1. or 2., (collectively referred to as the Services ). The Commissioner considers that an amount is derived by a commercial software developer from the Services which are: subject to a contingency of repayment when the obligation is fully performed or the contingency of repayment otherwise lapses; or not subject to a contingency of repayment when a recoverable debt arises in respect of the contractual fee. The Ruling also considers a proper basis for apportioning a fee for bundled Services. On 12 March 2014, the Commissioner issued TR 2014/1 which considers when commercial software developers derive income for the purposes of s. 6-5 of the ITAA 1997 from: START DATE Before and after the date of the final ruling 1. licence agreements for proprietary software; 2. hosted or cloud arrangements for use of proprietary software; and 3. other additional services e.g. software updates, upgrades, maintenance, user support and training which may or may not be bundled with 1. or 2., (collectively referred to as the Services ). Note TR 2014/1 was previously issued as TR 2013/D2. No material amendments were made in finalising TR 2014/1. Ruling The Commissioner considers that an amount of income is derived by a commercial software developer from the Services which are: 1. subject to a contingency of repayment when the obligation is fully performed or the contingency of repayment otherwise lapses; or 2. not subject to a contingency of repayment when a recoverable debt arises in respect of the contractual fee. 62 16 January 2014 to 09 April 2014

Definition of contingency of repayment For the purposes of TR 2014/1, a contingency of repayment in the event of non-performance refers to there being either: (a) (b) (c) a contractual obligation to make a refund; a demonstrated commercial practice to make a refund; or contractual exposure for damages in respect of non-performance. The Commissioner s view is that the potential exposure to damages pursuant to consumer protection law, or in tort, does not result in there being a contingency of repayment. If additional services are bundled with the fee for the licence or hosted arrangement, or more than one additional service is bundled together, the proper apportionment of the contractual fee between the Services should be undertaken on a fair and reasonable basis and be evidence-based. Records must be maintained to support and explain the apportionment methods used. When contingency of repayment exists Richard Coy is an Australian software development company. It employs the accruals method of recognising income. On 1 July 2012, Richard Coy enters into an agreement with XYZ Coy which provides for: 1. the right to use a proprietary software product for a period of three years in consideration for the payment of a licence fee of $15,000; and 2. the provision of technical support for a period of 18 months in consideration for the payment of $5,000. Once the proprietary software is delivered to XYZ Coy, Richard Coy has fulfilled its full contractual obligations in respect of that part of the agreement. The contract does not contemplate any refund to be made in any circumstances and neither does Richard Coy have a commercial practice of making such refunds. No contractual obligation exists for Richard Coy to make a refund in the event of non-use of the additional services or for any other reason, and Richard Coy has no commercial practice of giving a refund in any circumstances. However, Richard Coy may have contractual exposure to damages in the event the technical support services are not provided upon request. In circumstances such as these, there is no contingency of repayment in relation to that part of the agreement which represents the licence fee and, therefore, the income from the agreement that relates to the licence fee is derived at the time a recoverable debt arises in respect of the contractual fee (that is, the 2012 13 income year). However, a contingency of repayment does exist in relation to the amount payable under the agreement that relates to the provision of technical support. Accordingly, the point of derivation for that amount will occur progressively as the contingency of repayment lapses. The quantum of exposure to contractual damages might be expected to diminish progressively on a straight line basis over the term of the agreement. Therefore, the consideration for those services should also be recognised as derived for income tax purposes on that same basis. Example 2 of TR 2014/1 16 January 2014 to 09 April 2014 63

Website TR 2014/1 is available here: http://law.ato.gov.au/atolaw/print.htm?docid=txr%2ftr20141%2fnat%2fato%2f00001&pit=99991231235958 &Life=20140312000001-99991231235959 Exempt Income Macoun and FCT - Payments received by taxpayer were emoluments Macoun and FCT [2014] AATA 155 20 March 2014 The Hon. Brian Tamberlin QC, Deputy President Decision: In favour of the Taxpayer: Representation for the Taxpayer: Counsel Representation for the Commissioner: Counsel KEY POINTS On 20 March 2014, the Tribunal decided this case in favour of the Taxpayer. The taxpayer, who was aged 66 years at the time of the hearing, was employed by the International Bank for Reconstruction and Development (IBRD) which was part of the World Bank Group. During his employment, his salary was exempt from Australian tax. As part of his employment, it was mandatory for him to participate in the staff retirement plan (SRP), whereby amounts were deducted from his salary and contributed to the SRP. The taxpayer retired from his employment with IBRD at age 60 and became entitled to receive a pension under the SRP which he contended was tax-free because it was in the nature of an emolument arising for an office or employment. Deputy President Tamberlin found that the early pension payments were emoluments because they could be described as a profit or gain arising from an office or employment or as compensation for services by way of remuneration and were therefore exempt from Australian income tax. Issue Whether the early pension amounts received by the taxpayer from the World Bank were emoluments 26 he received as an officer of the World Bank and therefore exempt from income tax under the Fourth Schedule of the International Organisation (Privileges and Immunities) Act 1963 (the Privileges Act). 26 An emolument is a salary, fee, or profit from employment or office. 64 16 January 2014 to 09 April 2014

Facts The taxpayer, who was aged 66 at the time of the hearing, had been employed by the International Bank for Reconstruction and Development (IBRD) which was part of the World Bank Group. Under his initial two-year appointment with the IBRD, he chose to participate in the World Bank Group s staff retirement plan (SRP) and made voluntary contributions out of his salary. On being appointed as a regular ongoing employee of IBRD, his participation in the SRP became mandatory and he was required to make contributions from his salary to the SRP. His salary was exempt from Australian tax under Part 1 of the Fourth Schedule to the Privileges Act. The SRP was a contributory defined benefit plan under which participants in regular employment were required to make contributions of seven per cent of their pensionable gross salaries. The taxpayer had contributed a total of US$200,842 to the SRP. The taxpayer retired from his employment with IBRD at age 60 and became entitled to receive a pension under the SRP. The taxpayer lodged income tax returns in relation to the 2008 09 and 2009 10 income years and declared the early pension payments as assessable foreign sourced income of $131,302 and $134,970 respectively but then objected to the assessments. In disallowing the taxpayer s objections, the Commissioner decided that these payments were not directly linked to the value of the taxpayer s contributions to the SRP and were not payments in the nature of deferred or delayed salary or emoluments arising from his employment, but instead were a post-employment defined benefit pension and therefore taxable. Decision Deputy President Tamberlin found that the early pension payments were emoluments and therefore were exempt from income tax. Deputy President Tamberlin s reasoning is summarised below. 1. The pension payments were in the nature of an emolument because they could be described as a profit or gain arising from an office or employment or as compensation for services by way of remuneration. 27 2. The benefits and payments that were made under the SRP comfortably came within the description of remuneration 28 because under the taxpayer s employment agreement with the IBRD, it was mandatory for him to participate in the SRP. 3. The taxpayer s pension payments were remuneration the entitlement to which arose during his employment with the IBRD. It did not matter that the amounts were received after the taxpayer retired from his employment. That is, there is nothing in the Act which expressly requires that an emolument or salary be received during the period of employment. 29 In any case, it is common ground that for example, salary earned before but paid or received after termination would continue to be exempt as retaining that characterisation after termination. 28 27 28 29 At para. 32. At para. 33. At para. 30. 16 January 2014 to 09 April 2014 65

4. The Commissioner s submission that the right and entitlement to the pension arose only after his employment terminated should be rejected because the payment was a vested entitlement prior to the termination of the employment. 30 The taxpayer s employment was the factor which gave him the right to the payment. That characterisation of the payment did not change merely because the amount was paid after the employment ceased. 5. The Commissioner s submission that Part II of the Fourth Schedule to the Privileges Act indicates that there is a difference between entitlements of an officer and those of a former officer in relation to remuneration could not be accepted. There was no such dichotomy or inference that could be inferred from the Privileges Act, nor did the language draw any such distinction that a person had to hold office in order to attract the exemption from tax. Website The decision of the Tribunal is available here: www.austlii.edu.au/au/cases/cth/aata/2014/155.html 30 At para. 35. 66 16 January 2014 to 09 April 2014

Assessable Recoupments Batchelor v FCT - Court settlement was not an assessable recoupment Batchelor v FCT [2014] FCAFC 41 3 April 2014 Edmonds, Pagone and Wigney JJ Decision: In favour of the Taxpayer Representation for the Taxpayer: Counsel Representation for the Commissioner: Counsel KEY POINTS On 3 April 2014, the Full Federal Court decided this case in favour of the Taxpayer and ordered that the proceedings be remitted to the Tribunal for redetermination. The taxpayer held an interest in the business and assets of the Cresthaven Village Partnership (the Partnership), through PTC Retirement Nominees (No 2). The Partnership paid a deposit of $6.5 million under a contract for the purchase of a property and its development as a retirement village; the taxpayer s share of the deposit was $55,000. The taxpayer claimed a deduction of $284,674 for her share of the partnership loss which included the deposit of $55,000. The project did not proceed and, following settlement of Supreme Court proceedings, the taxpayer received $47,927 which the Commissioner assessed as income under ordinary concepts. The Tribunal, before Professor Deutsch, found that the sum in question was an assessable recoupment for the purposes of s. 20-20 (about assessable recoupments) and, accordingly, was included in the taxpayer s assessable income under s. 20-35(1) of the ITAA 1997. The Full Federal Court, before Edmond, Pagone and Wigney JJ, unanimously held that the Tribunal: ought not to have included the sum in question in the taxpayer s assessable income under s. 20-20(2); and erred by purporting to vary a decision under review without varying the decision i.e. the original decision that the amount was assessable was unchanged although on a different basis. Issue Whether the Tribunal erred in concluding that the amount of $47,927 that the taxpayer received as a result of a court settlement and payable under a court order relating to a return of a deposit on the purchase of a property was an assessable recoupment under s. 20-20 of the ITAA 1997. Facts The taxpayer held an interest in the business and assets of the Cresthaven Village Partnership (the Partnership) through PTC Retirement Nominees (No 2) (TPC No 2). The Partnership business included the acquisition, development and management of retirement village facilities. 16 January 2014 to 09 April 2014 67

The Partnership, through its nominee, entered into a contract (the Purchase Contract) for the purchase of a property and its development as a retirement village (the Cresthaven Retirement Village) and paid a deposit of $6.5 million. The taxpayer s share of the deposit was $55,000. The taxpayer claimed a deduction for $284,674 which was her share of the partnership loss and which included the deposit of $55,000. The project did not proceed because ASIC took action in the Federal Court maintaining that Cresthaven operated an unregistered managed investment scheme, and Cresthaven took action in the Supreme Court against PrimeLife claiming that it had repudiated the Purchase Contract. The Supreme Court proceedings were settled and, pursuant to the deed of settlement, Primelife was required to return the deposit of $6.5 million and pay interest of $700,000. The taxpayer, as a member of the Partnership, received $47,927 but did not return this amount in her assessable income. Batchelor and FCT The facts Prime Life (Mt Evelyn) Paid deposit of $6.5 million for purchase and development of Cresthaven Retirement Village Later repudiated contract because MIS was unregistered Refunded $6.5 million plus interest of $700,000 Cresthaven Bare nominee GDK Manager Cresthaven Village Partnership TPC No 1 Partner TPC No 2 Partner Taxpayer Cresthaven Partner Cresthaven Partner Received $47,927 from settlement but did not return as assessable income Taxpayer Share of deposit $55,000 Claimed deduction of $284,674 but based on Malouf, Commissioner allowed only $55,000 Insurance or indemnity Section 20-20(2) of the ITAA 1997 An amount you have received as recoupment of a loss or outgoing is an assessable recoupment if: 1. you received the amount by way of insurance or indemnity; and 2. you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act. 68 16 January 2014 to 09 April 2014

Decision The Full Federal Court unanimously held that the Tribunal erred in including an amount in the taxpayer s assessable income under s. 20-20(2) of the ITAA 1997. Edmonds and Pagone JJ in their joint judgment observed that: 1. An amount will not satisfy the conditions of s. 20-20(2) by merely being a recoupment. Instead, the amount must also have been received by way of insurance or indemnity. Generally, an amount will not be regarded as an indemnity unless the entitlement to its receipt precedes the event in respect of which it is paid. 31 That is, an ex gratia payment or a refund could not be described as an indemnification of a loss or outgoing, notwithstanding that the payments would be to compensate the recipient for the loss suffered or an outgoing incurred. 2. Section 20-20(2)(b), which requires that the loss or outgoing can be deducted or has been deducted, would not have been engaged if the Commissioner had disallowed the deduction. On the materials before the Court, it was not possible or desirable to deal with the issue of whether s. 20-20(2)(b) would be engaged if an amount is deducted which ought not to have been deducted. The Commissioner s view that the section was engaged if the taxpayer claimed and was allowed a deduction even though the taxpayer ought not to have been allowed the deduction was unlikely to be correct. 32 3. The character of the receipt must be considered in determining whether the taxpayer received an amount that has the characteristics of an insurance or indemnity. In the taxpayer s case, the payment did not represent an amount: from a person who was obliged to make good a loss occasioned by another. What the taxpayer received was a return of the deposit from the person to whom it had been paid by her through the partnership. 33 That is, the taxpayer received a return of her deposit, plus interest, as a result of her entitlement under the contract. The interest is clearly assessable income, but the entitlement cannot be described as received by way of insurance or indemnity because it was not paid to compensate a loss, but was rather received as a return on her contribution. 4. The Tribunal has the power, under s. 43 of the Administrative Appeals Tribunal Act 1977, to affirm, vary or set aside the decision under review. In this case, the decision under review was the Commissioner s decision to include an amount in the taxpayer s assessable income. However, the Tribunal varied the objection decision by including the same amount in the taxpayer s assessable income albeit on a different basis, namely under s. 20-20 of the ITAA 1997. It was clear that the Tribunal was affirming the Commissioner s decision, however it purported to vary a decision under review without the decision under review being varied. 34 Accordingly, it was appropriate to remit the matter to the Tribunal for redetermination. 31 32 33 34 At para. 13. At para. 16. At para. 15. At para. 23. 16 January 2014 to 09 April 2014 69

Wigney J agreed with the conclusion reached by Edmonds and Pagone JJ but made the following observations. 1. The Tribunal did not err in law in reaching the conclusion that, for the purposes of s. 20-20(2), the meaning of indemnity was not limited to an obligation to make good or compensate for a loss which may happen in the future. The word indemnity should not be interpreted narrowly. That is, the word indemnity could be construed as capable of encompassing compensation for loss or damage, including compensation for loss incurred in the past. 35 2. The Tribunal erred in law in failing to inquire into, and make findings concerning, the correct characterisation of the taxpayer s receipt, rather than merely relying on and accepting the taxpayer s concession that it was a receipt of damages and therefore received by way of indemnity. In any case, even if it could be concluded, based on the inadequate facts and documents before the Tribunal, that the payment by Primelife to Cresthaven could be characterised as damages, it did not mean that the amount received by the taxpayer represented her share of the damages. Instead, these payments reflected a refund or repayment to the partners following the winding up of the business. Accordingly, the Tribunal erred in finding that the receipt by the taxpayer was a receipt of damages and therefore a recoupment by way of indemnity. 3. The requirement of s. 20-20(2)(b) that the amount has been deducted or can be deducted does not require that the deduction, as a matter of law, be properly allowable as contended by the taxpayer. Rather, the text which uses the words have deducted requires no more than that the taxpayer has claimed and been allowed the deduction. Moreover, there was no requirement to demonstrate that the deduction was properly made or allowed. 36 However, if the deduction had not yet been claimed, the words can deduct would suggest that the deduction must be allowable. 4. The Tribunal s decision that, in the alternative, the amount would be an assessable capital gain must be set aside and remitted to the Tribunal to be heard and decided again because it was based on the amount being characterised as damages (which was in turn based on the taxpayer s concession). Website The decision of the Full Federal Court is available here: www.austlii.edu.au/au/cases/cth/fcafc/2014/41.html 35 36 At para. 80. At para. 108. 70 16 January 2014 to 09 April 2014

Capital Gains Tax General FCT v Resource Capital Fund III LP - Taxpayer taxable on capital gain FCT v Resource Capital Fund III LP [2014] FCAFC 37 3 April 2014 Middleton, Robertson and Davies JJ Decision: In favour of the Commissioner Representation for the Taxpayer: Counsel Representation for the Taxpayer: Counsel KEY POINTS On 3 April 2014, the Full Federal Court decided this case in favour of the Commissioner. The taxpayer was a limited partnership formed in the Cayman Islands. For Australian tax purposes, the taxpayer was a corporate limited partnership and treated as a separate taxable entity. The entity was treated as fiscally transparent in the USA and therefore the liability for tax in the USA fell on the partners. On 26 July 2007 and 29 January 2008, the taxpayer sold its shares in St Barbara Mines Limited (SBM) and realised a capital gain. The primary judge, Edmonds J held that: the United States double tax agreement with Australia (US DTA) prevented the Commissioner from issuing an assessment to the taxpayer in relation to the capital gain on the sale of the shares the US DTA authorised the Commissioner to tax the limited partners if the relevant conditions were satisfied; and even if it were possible for the Commissioner to issue the assessment, the capital gain was disregarded under Div 855 of the ITAA 1997 because the market value of SBM s taxable Australian real property (TARP) assets calculated on an asset-by-asset basis did not exceed the market value of its non-tarp assets. In a joint judgment, the Full Federal Court unanimously overturned the primary judge s decision and held that: the inconsistency between the US tax law and the Australian tax law with respect to the tax treatment of the taxpayer meant that the provisions of the US DTA applied differently in the two countries; it did not preclude the Commissioner issuing assessments; and where the underlying value resides in SBM s bundle of assets the market value of the individual assets making up that bundle are to be ascertained as if they were offered for sale as a bundle, not as if they were offered for sale on a stand-alone basis. 16 January 2014 to 09 April 2014 71

Issue Whether the primary judged was correct in deciding that the taxpayer was not taxable on a capital gain it made on the sale of shares it held in an Australian mining company. Facts The taxpayer was a limited partnership formed in the Cayman Islands with: a general partner a limited partnership formed in the Cayman Islands; and 61 or 62 limited partners these were substantially all US residents which were principally funds and institutions. As a result of the taxpayer being a limited partnership, it was treated: 1. for Australian tax law purposes as a company 37 that was not a resident of Australia; and 2. for US tax law purposes as a fiscally transparent or flow-through entity which was not a taxpayer under US tax law. On 26 July 2007 and 29 January 2008, the taxpayer sold its shares in St Barbara Mines Limited (SBM) and realised a gain of $58,250,000 less transaction costs of $612,109. SBM conducted a mining operation in Australia. The Commissioner issued a default assessment under s. 167 of the ITAA 1936 to the taxpayer assessing it on a net capital gain of $58,250,000 and imposing a penalty of 75 per cent (i.e. $13,106,250). 38 37 38 Division 5A of Part III of the ITAA 1936 treats certain limited partnerships as companies for the purposes of the ITAA 1936 and the ITAA 1997. It was not in dispute that this assessment was excessive to the extent it did not take into account the transaction costs. 72 16 January 2014 to 09 April 2014

Resource Capital Fund III LP v FCT Parties involved in the sale of shares Limited Partners (61 or 62 limited partners which are substantially all resident in the US and are principally funds and institutions) RCF Management LLC (Delaware incorporated manager of the taxpayer) United States Resource Capital Fund III LP (Taxpayer) Resource Capital Associates III LP (General Partner) Cayman Islands Sold for $58.25 million (assessed by Commissioner under a default assessment) Australia St Barbara Mines Limited (ASX listed) Mining tenements (TARP) Other assets (non-tarp) 16 January 2014 to 09 April 2014 73

Summary of the relevant legislative provision A person that is not a US corporation is a resident of the US under Article 4 of the US DTA if it is resident in the US for the purposes of its tax. Article 13 of the US DTA provides that income or gains derived by a resident of one of the Contracting States from the alienation or disposition of real property situated in the other Contracting State may be taxed in that other State. Real property includes shares in a company, the assets of which consist wholly or principally of real property situated in Australia. Article 13(7) provides that, except as provided in the preceding paragraphs of Article 13, each Contracting State may tax capital gains in accordance with the provisions of its domestic law. Division 855 of the ITAA 1997 provides that a foreign resident can disregard a capital gain or loss unless the relevant CGT asset is a direct or indirect Australian real property interest. Shares are an indirect Australian real property interest if the shares pass: the non-portfolio interest test in s. 960-195 of the ITAA 1997; and the principal asset test in s. 855-30 of the ITAA 1997. The shares will pass the principal asset test if the sum of the market value of the entity s assets that are TARP exceeds the sum of the market value of its assets that are not TARP. Decision of the Federal Court The primary judge, Edmonds J, decided that: 1. the US DTA prevented the Commissioner from issuing an assessment to the taxpayer in relation to the capital gain on the sale of the shares the US DTA authorised the Commissioner to tax the limited partners and not the taxpayer if the relevant conditions were satisfied; and 2. even if it were possible for the Commissioner to issue the assessment to the taxpayer, the capital gain was disregarded under Div 855 of the ITAA 1997 because the shares were not an indirect Australian real property interest. Decision of the Full Federal Court In a joint judgment, Middleton, Robertson and Davies JJ, held that the primary judge had erred in deciding that: 1. the Commissioner was precluded from issuing assessments to the taxpayer because the US DTA treated the gain as not derived by the taxpayer but rather as derived by the partners of the taxpayer; and 2. the taxpayer s interest in the shares did not pass the principal interest test in s. 855-30 of the ITAA 1997 because the market value of SBM s non-tarp assets exceeded the market values of its TARP assets and therefore the taxpayer s shares in SBM were not taxable Australian property. Accordingly, their Honours gave the parties 14 days to serve minutes of orders in relation to the proper disposition of the second of the above-mentioned issues and to indicate to the Court whether any issues remained for determination. 74 16 January 2014 to 09 April 2014

The first issue Application of the DTA Their Honours reasoning was as follows: 1. The primary judge, Edmonds J, made an error in concluding that since the OECD commentary on Article 1 of the OECD Model required Australia to take into account, as part of the factual context in which the DTA was to be applied, the way in which the income in question is treated in the jurisdiction of the person claiming the benefit of the DTA, it followed that Australia was authorised to tax, under Article 13(1), the limited partners rather than the limited partnership. 39 2. The primary judge erred in his conclusion that: (a) (b) there was an inconsistency between the application of the DTA and the application of the Assessment Acts as to the entity or entities to be taxed on the gains on sale of the SBM shares; and in accordance with Article 4(2), the inconsistency had to be resolved in favour of the application of the DTA to the limited partners in RCF against the application of the Australian tax law to the limited partnership, RCF. 40 The inconsistency was between the US tax law and Australian tax law with respect to the tax treatment of RCF i.e. the inconsistency relates to the imposition of the liability for the tax on the gain, with the consequence that the provisions of the DTA apply differently between Australia as the source country and the US as the place of residence of many of RCF s partners. 41 Australian tax law treats the taxpayer as a separate taxable entity taxed as a company and taxes the taxpayer, whereas, the US treats the taxpayer as a transparent entity for tax purposes and taxes the partners. That is, US law attributes the taxation liability to the partners, whereas Australia attributes the taxation liability to the entity (i.e. the taxpayer). The provisions of the DTA do not require the liability to tax on the gain to be allocated differently to the Assessment Act, therefore the assessment was not precluded by s. 4(2) of the International Agreements Act 1953. 3. The Commissioner was not bound by TD 2011/25 which considered that the business profits article (Article 7) of Australia s tax treaties applied to Australian sourced business profits of a foreign LP where the LP is treated as fiscally transparent in a country with which Australia has entered into a tax treaty and the partners in the LP are residents of that tax treaty country. 42 The taxpayer did not satisfy s. 357-60(1)(b) of the TAA (which sets out when rulings are binding on the Commissioner) by merely raising the fact of the ruling in the course of challenging the assessment in Part IVC proceedings. Intoll Management Pty Ltd v FCT 43 was not, as contended by the taxpayer, an authority for the application of s. 357-60(1)(b) of the TAA. In any case, TD 2011/25 could not bind the Commissioner in relation to the application of Article 13 to the taxation of the capital gain because it did not deal with the taxing rights in relation to an item dealt with under another article of the DTA. 39 40 41 42 43 At para. 25. [2013] FCA 363, at para. 77. At para. 29. The Commissioner stated in this ruling that Article 7 would apply and Australia would not impose tax on business profits derived by a limited partnership to the extent that the profits are treated as profits of the limited partners in the treaty country. [2012] FCAFC 179. 16 January 2014 to 09 April 2014 75

The second issue The application of Div 855 As a foreign resident of Australia, the taxpayer was assessable on a capital gain on the sale of the SBM shares only if the shares were taxable Australian property (TAP) as defined under s. 855-15. The SBM shares were TAP if the taxpayer s interest in the shares was an indirect Australian real property interest. RCF s shares in SBM would be an indirect Australian real property interest if RCF s membership interest passed: the non-portfolio interest test in s. 960-195 broadly, if the taxpayer and its associates have a direct participation interest in the test entity of 10 per cent or more; and the principal asset test under s. 855-30 this test is passed if the sum of the entity s assets that are taxable Australian real property (TARP) exceed the sum of its non-tarp assets. The primary judge had held that the principal asset test required a separate determination of the market value of each of the entity s assets rather than the determination of the market value of all of its TARP assets as a class and a determination of all its non-tarp assets as a class. This meant that that mining information was treated as part of the value of chattels (non-tarp assets) that contained the information rather than the mining tenements (TARP assets) to which the information related. Their Honours, Middleton, Robertson and Davies JJ, held that: to determine where the underlying value resides in SBM s bundle of assets, the market values of the individual assets making up that bundle are to be ascertained as if they were offered for sale as a bundle, not as if they were offered for sale on a stand-alone basis. Moreover, the reference to the sum of the market values in s. 855-30 did not require the ascertainment of the market value of each relevant asset separately. Rather, s. 855-30(2) could still be applied by considering the matter on the basis that SBM s assets were simultaneously sold to the same hypothetical purchaser. SBM s assets should be valued on the basis of an assumed sale of SBM s assets to the same hypothetical purchasers, but not as stand-alone separate sales. Accordingly, the primary judge erred in concluding that the valuation should be determined on the basis of the market value of the individual assets as if they were sold separately from other assets. Website The decision of the Full Federal Court is available here: www.austlii.edu.au/au/cases/cth/fcafc/2014/37.html 76 16 January 2014 to 09 April 2014

Core Capital Gains Tax Issues Taras Nominees Pty Ltd ATF the Burnley Street Trust v FCT - Appeal lodged to the Full Federal Court KEY POINTS On 14 March 2014, the taxpayer appealed to the Full Federal Court against the decision of Kenny J in Taras Nominees Pty Ltd ATF for the Burnley Street Trust v FCT [2014] FCA 1. Kenny J held that: CGT event E1 happened when the taxpayer transferred its land to the Land Trustee the trust was completed when all of the parties to the JVA transferred their land to the Land Trustee; the capital proceeds for the purposes of CGT event E1 were equal to the market value of the land at the time of the transfer, namely $16,626,115 which was its market value at that time having regard to the highest and best use of the land; and the taxpayer was liable for the administrative penalty of 25 per cent in relation to the shortfall in its income tax returns for the 1999 2000 and 2001 02 income years because it had treated an income tax law as applying in a way that was not reasonably arguable within the meaning of s. 222C of the ITAA 1936 and Item 4 of s. 284-15 of Schedule 1 to the TAA. On 14 March 2014, the taxpayer appealed to the Full Federal Court against the decision of Kenny J in Taras Nominees Pty Ltd ATF the Burnley Street Trust v FCT [2014] FCA 1. Summary of the decision The taxpayer owned land (Taras land) which it transferred to a land trustee (the Land Trustee) pursuant to a joint venture agreement (JVA) (as shown in the diagram below) with two parties that owned adjoining land. The joint venture was to develop the land transferred to the Land Trustee by the taxpayer and the other two parties for commercial and residential purposes. 16 January 2014 to 09 April 2014 77

The joint venture arrangement Industry superannuation fund The taxpayer Taras Nominees Pty Ltd ATF the Burnley Street Trust Staged Developments Pty Ltd ATF the SDA Unit Trust Pty Ltd Issue to be decided whether a CGT event happened when Taras made the land available to the JV for development The joint venturers Victoria Gardens Property Trust VGD ATF the Marpine Trust Taras land The Joint Venture to develop the properties SDA land Marpine land Each party transferred their land to VGD as a land holding trustee The taxpayer contended that a CGT event did not arise on the transfer of the Taras land to the Land Trustee because its beneficial ownership did not change. Kenny J held that: The taxpayer made a taxable capital gain in the 1998 99 income year because CGT event E1 happened in relation to the land transfers that took place in August 1998. CGT event A1 also happened, however in accordance with s. 102-25 of the ITAA 1997 CGT event E1 was more specific to the taxpayer s situation. The market value of the Taras land at the time of the transfer was $16,626,115 plus an amount allowed for the relevant proportion of the development costs. This was the amount stated by the valuer to be the market value of the land in 1998 and also the amount on which the Land Trustee had paid stamp duty in 2001. The taxpayer was liable for the administrative penalty at 25 per cent of the shortfall for the 1999 2000 and 2001 02 income years because it failed to take reasonable care to comply with the relevant provisions of the tax law. The taxpayer had failed to obtain independent taxation advice after the Victorian Court of Appeal delivered its judgment concerning the stamp duty consequences of the transfer of the land to the Land Trustee. 78 16 January 2014 to 09 April 2014