Damian O'Connor, Special Counsel
Deemed Dividends - Executive And Employee Equity Plans - GST And Property – Overseas Income - Project Wickenby - Overdue Tax
While a number of key budget changes were public knowledge prior to budget night (such as deductible superannuation contribution limits, the 50% small business tax break and private health insurance rebate restrictions) there are other important tax changes hidden away in the detail of this year's federal budget.
The tax law already contains extensive rules that attempt to tax any benefits that shareholders and associates may receive from private companies, including loans and forgiven debts.
From 1 July 2009, arrangements where private companies allow the use of company assets (for example real estate, cars, boats) for less than market value will fall within the tax net.
Corporate limited partnerships which are taxed as companies will also be specifically targeted by the deemed divided rules.
Taxpayers with income over $250,000 will not be able to offset non-commercial losses from for example hobby farms against salary and wage income.
Under the existing rules, non-commercial losses could be offset against other income if, amongst other things, the value of the particular property was more than $500,000. The existing rules will continue to apply where income is less than $250,000.
Employee And Executive Equity Arrangements
Until budget night, participants in equity arrangements could choose whether they paid tax upfront or deferred tax until a later time.
All discounts on shares and options under employee share arrangements will now be assessed in the income year in which they are acquired. Tax deferral will not be available.
This is a significant change to the taxation of employee and executive remuneration and has the potential to result in large tax liabilities notwithstanding that a participant may not be able to dispose of or deal with the equity until a much later time. Equity plans will need to be carefully constructed to manage this fundamental change in tax treatment.
Offshore Employment Income
Currently an Australian resident working overseas for more than 90 days who receives foreign employment income subject to tax offshore is exempt from tax in Australia.
From 1 July 2009 this exemption will only apply to a limited category of taxpayers (such as aid or charity workers). Under the new rules foreign employment income will be taxable in Australia and taxpayers will be able to claim a tax offset for foreign income tax. This change is likely to have a significant bottom line impact on the tax costs of clients having foreign employment income, or employing staff offshore.
GST – Margin Scheme And Going Concerns
The budget includes announcements that a review of the GST legislation will be undertaken with the aim of simplifying the GST adjustment provisions and reforming the GST treatment of sales of going concerns and farm land, as well as reviewing the operation of the GST margin scheme and the application of GST to financial supplies.
Given the complexity around these issues (including the treatment of developer rentals) any clarification will be warmly welcomed.
CGT Rollover – Fixed Trusts
While the "cloning" of all trusts without triggering a CGT cost was outlawed from 1 November 2008, the budget has announced that in certain circumstances a similar outcome can be achieved for the transfer of assets between fixed trusts. This change will remove a significant impediment to business restructuring in appropriate cases.
This joint project of the ATO, Australian Crime Commission and other government agencies is targeting offshore transactions by Australian taxpayers. It was originally funded to the tune of more than $300 million.
Despite public debate about the extensive enforcement powers that have been applied (at significant cost) to produce relatively little in terms of wrongs that have been righted, a further $122 million will be spent to extend Wickenby for 3 years from the 2011 financial year, with a focus on the exchange of tax information internationally.
Making Up The Tax Collection Shortfall
In the face of the projected tax revenue shortfalls, considerable pressure will be brought to bear on businesses and other taxpayers with outstanding tax owing to the tax office.
Given the weapons in the Commissioner's armoury, including the ability to make Directors personally liable for company tax debts, early consideration of strategies for dealing with tax debts (and potential tax debts) is essential. Unfortunately, silence from the ATO does not usually mean that the problem has gone away.
The budget specifically allocates $600 million over 4 years to the Australian Taxation Office to "help businesses remain viable" and "to tackle emerging revenue risks and promote community confidence in the tax system".
With tax revenue shortfalls of hundreds of billions of dollars over the next few years, we expect that promoting confidence in the tax system may involve a hard line in dealing with tax disputes and tax debt recovery. As with most tax matters, advanced planning is preferable to being caught unprepared in the glare of the spotlight.
On a positive note, the Government has announced that it will repeal some legislation that gives the Taxation Commissioner unlimited time in which to amend tax assessments. The details will need to be carefully scrutinised however this is a step in the right direction, and may have a significant bottom line impact for some clients.
If you would like to receive updates on any of the tax changes contained in this year's federal budget, or to discuss any tax related matters please contact our Taxation and Revenue team.
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