Tax on the Couch – December 2014

Tax on the Couch

Notes December 2014

Tax on the Couch – December 2014

© Tax on the Couch: December 2014

The information in this publication has been developed in consultation with the Australian Taxation Office.

ATO Disclaimer

This general advice has been prepared by the Australian Taxation Office ABN 52 824 753 556 and does not take account of your objectives or financial, legal or taxation situation or needs. Before acting on this general advice you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice in making an investment strategy and investing the assets of any fund.

This material has been prepared based on information believed to be accurate at the time of publication. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information.

This material or information is not intended as a form of financial advice and should not be treated as such. The Australian Taxation Office does not provide financial, legal or taxation advice.

The above disclaimer also applies to, and in respect of, the NTAA.

Disclaimer

The NTAA and their presenters do not hold an Australian Financial Services Licence to provide financial product advice under the Corporations Act 2001 (Cth). This material covers general taxation information which is only one of the factors to consider when making a decision on a financial product. If you are seeking financial product advice, you should contact a person who is licensed under the Corporations Act 2001 (Cth).

Tax on the Couch is intended to be a guide only. None of the comments contained in the presentation or notes are intended to be advice, whether legal, financial or professional. You should not act solely on the basis of the information contained in these notes because many aspects of the material have been generalised and the tax laws apply differently to different people in different circumstances. Further, as tax and related laws change frequently, there may have been changes to the law since the notes were written. Specific advice should always be obtained from a tax professional.

The NTAA, their directors, employees, consultants, presenters and authors expressly disclaim any and all liability to any person, whether a purchaser or not, for the consequences of anything done or omitted to be done by any such person relying on a part or the whole of the contents of this publication.

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Table of Contents Table of Contents ....................................................................................................................................... 1

Legislative Update ...................................................................................................................................... 2

Discussion Papers................................................................................................................................... 2

Bills of interest currently before Parliament ............................................................................................ 2

Bills of interest that have received Royal Assent .................................................................................... 5

Bills of interest that have passed both houses (awaiting Royal Assent) ................................................ 6

Rulings Update ........................................................................................................................................... 7

Rulings ........................................................................................................................................................ 7

Class Rulings .......................................................................................................................................... 7

Class Rulings – Notices .......................................................................................................................... 7

Goods and Services Tax Advice – Notices ............................................................................................. 7

Goods and Services Tax Rulings – Drafts .............................................................................................. 7

Product Rulings ....................................................................................................................................... 7

Taxation Rulings ...................................................................................................................................... 7

Taxation Rulings – Notices ..................................................................................................................... 8

Determinations ........................................................................................................................................... 8

Goods and Services Tax Determinations – Drafts.................................................................................. 8

Goods and Services Tax Determinations – Notices ............................................................................... 8

Taxation Determinations – Drafts ........................................................................................................... 8

Taxation Determinations – Notices ......................................................................................................... 8

ATO Interpretative Decisions ..................................................................................................................... 9

New ATO Interpretative Decisions .......................................................................................................... 9

Withdrawn ATO Interpretative Decisions ................................................................................................ 9

Cases Update ........................................................................................................................................... 11

Appeals Update ........................................................................................................................................ 12

Decision Impact Statements .................................................................................................................... 12

Practice Statements ..................................................................................................................................13

Other Developments ................................................................................................................................ 13

Media Releases ..................................................................................................................................... 14

ATO ....................................................................................................................................................... 14

Speeches: Treasury Ministers and ATO ............................................................................................... 15

Hot Topic: Paying effective pensions – a closer look at the ABP and the TRIS ..................................... 16

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Legislative Update

Discussion Papers

Non-final withholding tax on transactions involving taxable Australian property

Treasury has released a discussion paper on a proposal to introduce a 10% non-final withholding tax on the disposal by foreign residents of certain ‘taxable Australian property’.

It is proposed to commence from 1 July 2016.

Bills of interest currently before Parliament

Australian Charities and Not-for-profits Commission (Repeal) (No. 1) Bill 2014 This Bill was introduced to the House on 19 March 2014 where it remains.

This Bill proposes to repeal the Australian Charities and Not-for-profits Commission Act 2012 and provides for transitional arrangements, including the transfer of matters and the reporting obligations of the agency which succeeds the Australian Charities and Not-for-profits Commission (ACNC).

Note that the Bill was referred to the Senate Economics Legislation Committee (Committee), which recommended (in its report issued on 16 June 2014) that the Bill, which is still in the House of Representatives be passed. Broadly, the Committee formed the view that the abolition of the ACNC would, as intended, relieve the regulatory burden from many charities. The Committee also fully endorsed the establishment of a National Centre of Excellence as an advocate for the sector and a leader in innovation and as a means of providing education, training and development opportunities.

Family Assistance Legislation Amendment (Child Care Amendment) Bill (No.2) 2014 This Bill was introduced to the House of Representatives on 25 June 2014 where it remains.

This Bill proposes to amend the A New Tax System (Family Assistance) Act 1999 to maintain the Child Care Benefit (CCB) income thresholds at the amounts applicable as at 30 June 2014 for three income years, starting from 1 July 2014, with the first indexation of these amounts recommencing on 1 July 2017.

Freedom of Information Amendment (New Arrangements) Bill 2014 This Bill was introduced to the House of Reps on 2 October 2014 and moved to the Senate on 30 October where it remains.

It proposes to abolish the Office of the Australian Information Commissioner (OAIC) and streamline the arrangements for privacy and FOI functions.

Higher Education and Research Reform Amendment Bill 2014 The Bill was introduced to the House on 28 August 2014 where it passed on 4 September 2014. It was then introduced into the Senate on 4 September 2014 where it remains.

This Bill includes a number of changes to the Higher Education Loan Programme (HELP) including:

- New indexation arrangements for HELP debts which will see the indexation rate changed from the current CPI to the Treasury 10 year bond rate, capped to a maximum of 6% per annum;

- A new minimum repayment threshold for HELP debts of 2% when a person’s income reaches $50,682 in the 2016-2017 year;

- Merging FEE-HELP and HECS-HELP loan scheme for all higher education students;

- Removal of the up-front payment discount for HECS-HELP loans and the voluntary repayment bonus for HELP loans; and

- Removal of the FEE-HELP lifetime limit and loan fee.

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Higher Education Support Amendment (Savings and Other Measures) Bill 2013 The Bill was passed by the House and introduced into the Senate on 4 December 2013, where it currently remains.

This Bill proposes to amend the Higher Education Support Act 2003 to remove the HECS-HELP up-front payment discount for units of study with a census date on or after 1 January 2014, and the HELP voluntary repayment bonus for repayments made on or after 1 January 2014 (among other changes). These measures were announced by the former Government in the 2013-14 Budget.

Labor 2013-14 Budget Savings (Measures No. 1) Bill 2014 The Bill was introduced into the House of Representatives on 16 July 2014 where it remains.

After the Clean Energy (Income Tax Rates and Other Amendments) Bill 2013 (No.2) was negatived in the Senate on 9 July 2014, the Government reintroduced the measures contained within the negatived Bill in this new Bill.

The Bill proposes to repeal revenue measures associated with the introduction of the now repealed Carbon Tax.

The Bill proposes to repeal the previously legislated for personal income tax cuts which are due to commence from 1 July 2015.

Consequences of the measures proposed in this Bill are as follows (effective 1 July 2015):

the tax free threshold remaining at $18,200;

the second personal marginal tax rate remaining at 32.5 per cent;

the maximum value of the LITO remaining at $445;

the withdrawal rate of the LITO remaining at 1.5 per cent; and

the threshold below which a person may receive LITO remaining at a taxable income of $66,667.

National Health Amendment (Pharmaceutical Benefits) Bill 2014

This Bill is currently being debated in the Senate following an inquiry and report being tabled by the Community Affairs Legislation Committee.

This Bill proposes to amend the National Health Act 1953 to increase patient co-payments and safety net thresholds for the Pharmaceutical Benefits Scheme (PBS) and the Repatriation Pharmaceutical Benefits Scheme (RPBS). The proposed amendments, from 1 January 2015:

increase the concessional patient co-payment by 80 cents;

increase the general patient co-payment by $5.00;

increase the concessional safety net threshold by two prescriptions each year for four years, from 2015 to 2018; and

increase the general patient safety net threshold by 10% each year for four years, from 2015 to 2018.

These increases are in addition to the usual Consumer Price Index indexation on 1 January each year.

Broadly, under the safety net arrangements for the PBS and RPBS, once the safety net threshold is reached, the co-payment amount is reduced for prescriptions for the remainder of the calendar year. For general patients, the co-payment reduces to the concessional amount, and for concessional beneficiary patients, the co-payment is reduced to zero. The proposed increases in co-payments will apply for prescriptions for which a PBS or RPBS subsidy is payable, except where the patient charge is less than the co-payment amount.

Paid Parental Leave Amendment Bill 2014 This Bill was introduced to the Senate on 16 June 2014 where it currently remains.

To ease administrative burdens on business, this Bill proposes to amend the Paid Parental Leave Act 2010 to remove the requirement for employers to provide Government funded parental leave pay to their eligible long-term employees.

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Under the proposed changes, from 1 July 2014, employees will be paid directly by the Department of Human Services, unless an employer opts in to provide parental leave pay to its employees and an employee agrees for their employer to pay them.

Personal Property Securities amendment (Deregulatory measures) Bill 2014 This Bill was introduced into the House of Representatives on 19 March 2014, where it currently remains.

This Bill proposes to amend the Personal Property Securities Act 2009 (PPS Act) so that leases of serial numbered goods of 90 days or more will no longer be deemed to be PPS leases for the purposes of the PPS Act. This will simplify the deeming provisions in the PPS Act and minimise the need for small and medium hire businesses to make registrations in respect of leases of a term of less than 12 months.

Social Services and Other Legislation Amendment (2014 Budget Measures No. 1) Bill 2014 and Social Services and Other Legislation Amendment (2014 Budget Measures No. 2) Bill 2014 * These Bills were passed by the House and then introduced into the Senate on 26 June 2014, and at the Government’s request, have been discharged from the Senate Notice Paper as their amendments have been split into four other bills (outlined below) which are at various stages in Parliament.

Social Services and Other Legislation Amendment (2014 Budget Measures No. 4) Bill 2014 This Bill was introduced to the Senate on 2 October 2014, where it currently remains.

This Bill reintroduced several measures, previously introduced in the Social Services and Other Legislation Amendment (2014 Budget Measures No 1) Bill 2014 and the Social Services and Other Legislation Amendment (2014 Budget Measures No 2) Bill 2014 including from 1 July 2015 – maintaining for 3 years the income free areas for all working age allowances (other than student payments), and the income test free area for parenting payment single, indexing Parenting Payment Single to the CPI only from Royal Assent, from 1 July 2015, maintaining the current family tax benefit free area levels and the income free areas and other means-test thresholds for student payments, including the student income bank limits. Also from 1 July 2015, the Bill proposes to maintain the standard FTB child rates for 2 years in the maximum and base rate of family tax benefit Part A and the maximum rate of family tax benefit Part B, revise the family tax benefit end-of-year supplements to their original values and cease indexation and limit family tax benefit Part B to families with children under 6 years of age, with transitional arrangements applying to current recipients with children above the new age limit for 2 years. From 1 January 2015 the Bill seeks to extend and simplify the ordinary waiting period for all working age payments, cease the Pensioner Education Supplement and the education entry payment and extend Youth Allowance (other) to 22 to 24 year olds in lieu of Newstart Allowance and Sickness Allowance.

Social Services and Other Legislation Amendment (2014 Budget Measures No. 5) Bill 2014 This Bill is currently in the House of Representatives.

This Bill will reintroduce several 2014 Budget measures including increasing the qualifying age for the Age Pension and the non-veteran pension age, to 70. As the current legislation provides that the pension age will reach 67 by 2023, the proposed changes provide for a further increase in the pension age from 67 to 70 years by 6 months every 2 years, commencing on 1 July 2025.

Social Services and Other Legislation Amendment (Seniors Supplement Cessation) Bill 2014 This Bill is currently in the Senate being debated after being introduced on 28 October 2014.

This Bill will reintroduce a measure, originally introduced as Sch 1 to the Social Services and Other Legislation Amendment (2014 Budget Measures No 1) Bill 2014 that from 20 September 2014, payment of the seniors supplement for holders of the Commonwealth Seniors Health Card or the Veterans' Affairs Gold Card will cease.

Tax Laws Amendment (Research and Development) Bill 2013

The Bill was passed by the House and introduced into the Senate on 10 December 2013, where it currently remains.

This Bill amends the Income Tax Assessment Act 1997 to deny access to the research and development tax incentive for companies with aggregated assessable income of $20 billion or more for an income year, and the Industry Research and Development Act 1986 to provide that the conditions

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for eligibility of research and development activities conducted outside Australia continue to operate as intended.

Tax and Superannuation Laws Amendment Bill (2014 Measures No. 5) Bill 2014 The Senate Economics Legislation Committee tabled its report on this Bill on 28 October 2014. The committee recommended that the Senate pass the Bill but it remains in the Senate at the time of writing.

This Bill proposes changes in the following areas:

Repeal of the Mature Age Worker Tax Offset from the 2014-2015 income year;

Repeal of the Seafarer Tax Offset from the 2015-2016 income year;

To reduce the rates of the tax offset available under the Research and Development tax incentive by 1.5%;

To add Australian Schools Plus Ltd, East African Fund and The Minderoo Foundation Trust to the list of specifically listed deductible gift recipients.

Tax and Superannuation Laws Amendment Bill (2014 Measures No. 6) Bill 2014 This Bill was introduced to the House of Representatives on 30 October 2014 has been referred to the Senate Economics Legislation Committee for inquiry and report by 25 November 2014.

This Bill contains amendments to remove tax impediments to certain business structures, deals with managed investment trust (MIT) withholding regime for foreign pension funds, deals with US Force Posture Initiatives, and fuel tax credits and grants.

Bills of interest that have received Royal Assent

Tax and Superannuation Laws Amendment (2014 Measures No. 4) Bill 2014 This Bill received Royal assent on 16 October 2014.

The Bill proposed changes in the following areas:

Thin capitalisation - the Bill proposes to tighten the debt limit settings and reduces the maximum statutory debt limit from 3:1 to 1.5:1 (on a debt-to-equity basis) for general entities and from 20:1 to 15:1 (on a debt-to-equity basis) for non-bank financial entities. The Bill also proposes to increase the de minimis threshold in relation to debt deductions from $250,000 to $2,000,000;

Foreign residents and capital gains - the Bill proposes to correct a technical anomaly that currently exists whereby certain assets can be double counted when applying the Principal Asset Test;

Foreign dividends – the Bill proposes to rewrite the existing S.23AJ (ITAA 1936) exemption for foreign non-portfolio dividends into the Income Tax Assessment Act 1997; and

Tax receipts – the Bill proposes to provide a legal obligation on the Commissioner of Taxation to issue individual taxpayers with tax receipts outlining, amongst other things, how the individual’s tax liability has been notionally spent on different areas of Government expenditure. For the year ended 30 June 2014 the Commissioner is providing such tax receipts under general administrative powers. This proposal seeks to make it a legal obligation to provide such tax receipts for the year ending 30 June 2015 and future income years.

Omnibus Repeal Day (Autumn 2014) Bill 2014 This Bill received Royal assent on 16 October 2014.

This Bill made various amendments, including amending two Acts administered in the Social Services portfolio in relation to the certification of residential aged care services, and six Acts administered in the Treasury portfolio in relation to the Education Expenses Tax Offset, the Sugar Industry Reform Program, the Financial Services Reform roll-over, and the Superannuation Safety Reform roll-over. Also repeals 43 Acts administered in nine portfolios.

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Bills of interest that have passed both houses (awaiting Royal

Assent)

Social Services and Other Legislation Amendment (2014 Budget Measures No. 6) Bill 2014 This Bill was passed by the Senate on 17 November 2014 and now awaits Royal Assent.

This Bill will reintroduce several measures, previously introduced in the Social Services and Other Legislation Amendment (2014 Budget Measures No 1) Bill 2014 and the Social Services and Other Legislation Amendment (2014 Budget Measures No 2) Bill 2014 including a move to include untaxed superannuation income in the assessment for the Commonwealth Seniors Health Card. In addition it also proposed to make a number of Family Tax Benefit (FTB) payment changes including: (i) limiting the Family Tax Benefit Part A large family supplement to families with 4 or more children. (ii) removing the FTB Part A per-child add-on to the higher income free area for each additional child after the first.; (iii) improving the targeting of FTB Part B by reducing the primary earner income limit from $150,000 a year to $100,000 a year.

Private Health Insurance Amendment Bill (No. 1) 2014 This Bill was passed by the Senate on 18 November 2014 and now awaits Royal Assent.

It proposes to implement a 2014 Budget announcement to pause the income thresholds which determine the tiers for the Medicare levy surcharge and the Australian Government Rebate on private health insurance at 2014-15 rates for 3 years, with effect from 1 July 2015 and set income thresholds for the income tiers at the 2014-15 rates in the financial years 2015-16, 2016-17 and 2017-18. The 2014-15 thresholds that will apply for 3 years commencing on 1 July 2015 are:

Income for surcharge purposes 2014-15 Medicare levy surcharge

Tier Singles $

Families $

Base 0 - 90,000 Up from $88,000 in 2014

0 - 180,000 Up from $176,000 in 2014

Nil

Tier 1 90,001 - 105,000 Up from $102,000 in 2014

180,001 - 210,000 Up from $204,000 in 2014

1%

Tier 2 105,001 - 140,000 Up from $136,000 in 2014

210,001 - 280,000 Up from $272,000 in 2014

1.25%

Tier 3 140,001+ 280,001+ 1.5%

Note: For families, the income thresholds are increased by $1,500 for each child after the first.

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Rulings Update

The following lists the Rulings, Determinations, Practice Statements and Interpretative Decisions (and other related documents) issued by the ATO from 16 October 2014 to 15 November 2014.

Rulings

Class Rulings

CR 2014/85 Income tax: Macquarie Atlas Roads International Limited Return of Capital

15 October 2014

CR 2014/86 Income tax: Macquarie Bank Limited - Macquarie Bank Capital Notes

15 October 2014

CR 2014/87 Income tax: Challenger Limited: Challenger Capital Notes 15 October 2014

CR 2014/88 Goods and services tax: bus transport in New South Wales - offers of employment and subsequent recompense payments made under Bus Service Contracts

22 October 2014

CR 2014/89 Income tax: RMIT University Academic Voluntary Departure Program 2014-2015 (AVDP)

22 October 2014

CR 2014/90 Income tax: off-market share buy-back: Telstra Corporation Limited

29 October 2014

CR 2014/91 Income tax: scrip for scrip roll-over: acquisition of units in Federation Centres Trust No. 2 and Federation Centres Trust No. 3 by Federation Centres Trust No. 1

12 November 2014

Class Rulings – Notices

CR 2014/63A1 - Addendum

Income tax: Sydney Trains Maintenance Division Early Retirement Scheme

22 October 2014

Goods and Services Tax Advice – Notices

GSTA TPP 032 - Withdrawal

Goods and services tax: Can a tax invoice show an amount representing combined GST and wine equalisation tax (together sometimes called WEG) instead of the amount of GST?

15 October 2014

Goods and Services Tax Rulings – Drafts

GSTR 2014/D5 Goods and services tax: development lease arrangements with government agencies

12 November 2014

Product Rulings

PR 2014/18 Income tax: AgriWealth 2015 Softwood Timber Project 12 November 2014

Taxation Rulings

TR 2014/6 Income tax: transfer pricing - the application of section 815-130 of the Income Tax Assessment Act 1997

12 November 2014

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Taxation Rulings – Notices

TR 2005/7A1 - Addendum

Income tax: the taxation implications of 'partnership salary' agreements

5 November 2014

Determinations

Goods and Services Tax Determinations – Drafts

GSTD 2014/D4 Goods and services tax: is the supply of brokerage services that facilitates the sale or purchase of financial products on overseas securities or futures exchanges, a GST-free supply under paragraph (a) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

29 October 2014

Goods and Services Tax Determinations – Notices

GSTD 2013/1A1 - Addendum

Goods and services tax: when a payment for a supply fails, is a failed payment fee charged by the supplier consideration for a supply?

15 October 2014

Taxation Determinations – Drafts

TD 2014/D17 Fringe benefits tax: when are the duties of the employment of an employee of a government body exclusively performed in, or in connection with, a public hospital or 'non-profit hospital' for the purposes of paragraph 57A(2)(b) of the Fringe Benefits Tax Assessment Act 1986?

29 October 2014

TD 2014/D18 Income tax: will paragraph 974-80(1)(d) of the Income Tax Assessment Act 1997 be satisfied merely because a non-resident entity has chosen to invest indirectly in a debt interest issued by an Australian resident company and there is one or more equity interests interposed between the non-resident entity and the entity holding the debt interest?

12 November 2014

TD 2014/D19 Income tax: is the reference to 'the interest' as it appears in the phrase at the end of subsection 974 80(2) of the Income Tax Assessment Act 1997 a reference to the interest held by the 'ultimate recipient'?

12 November 2014

Taxation Determinations – Notices

TD 2011/25A1 - Addendum

Income tax: does the business profits article (Article 7) of Australia's tax treaties apply to Australian sourced business profits of a foreign limited partnership (LP) where the LP is treated as fiscally transparent in a country with which Australia has entered into a tax treaty (tax treaty country) and the partners in the LP are residents of that tax treaty country?

22 October 2014

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ATO Interpretative Decisions

New ATO Interpretative Decisions

ATO ID 2014/29 Assessable income of a non-resident subcontracting activities to an Australian resident

17 October 2014

ATO ID 2014/30 refund of excise duty - goods destroyed after delivery for home consumption

17 October 2014

ATO ID 2014/31 payment of salary and wages after the death of an employee to the deceased estate

24 October 2014

ATO ID 2014/32 is a term deposit a qualifying forex account? 31 October 2014

ATO ID 2014/33 Commercial debt forgiveness: gross forgiven amount 7 November 2014

ATO ID 2014/34 Section 82KK: anti-avoidance - supply of goods or provision of services by an associate

14 November 2014

ATO ID 2014/35 Excise PSO: entitlement for a PSO benefit under category 1 where re-refined base oil is not used or sold for use as a lubricant or a hydraulic or transformer oil

14 November 2014

Withdrawn ATO Interpretative Decisions

ATO ID 2003/216 (Withdrawn)

Trading stock: valuation at cost - GST and second-hand goods acquired from an unregistered entity

17 October 2014

ATO ID 2003/507 (Withdrawn)

Lodgement requirements of receivers and liquidators 17 October 2014

ATO ID 2004/100 (Withdrawn)

Excise: refund of excise duty - goods destroyed after delivery for home consumption

17 October 2014

ATO ID 2006/193 (Withdrawn)

Energy Grants (Cleaner Fuels) Scheme: biodiesel - blend made by biodiesel producer with purchased diesel

17 October 2014

ATO ID 2007/38 (Withdrawn)

Energy Grants (Cleaner Fuels) Scheme: provisional entitlement 17 October 2014

ATO ID 2007/81 (Withdrawn)

Cleaner Fuels Grants: reductions resulting from refunds of duty 17 October 2014

ATO ID 2009/89 (Withdrawn)

Capital Allowances: tax break- sale and leaseback - used for the principal purpose of carrying on a business

17 October 2014

ATO ID 2002/615 (Withdrawn)

Exemption from withholding tax - charitable trust 24 October 2014

ATO ID 2003/217 (Withdrawn)

Trading stock: valuation at market selling value - GST and second-hand goods acquired from an unregistered entity

24 October 2014

ATO ID 2003/223 (Withdrawn)

Capital works: replacement of kitchen cupboards in a rental property

24 October 2014

ATO ID 2003/427 (Withdrawn)

Employee Share Schemes: Reasonable valuation methodology where shares are not listed

24 October 2014

ATO ID 2003/6 (Withdrawn)

CGT - shares - capital reductions - reduced cost base 24 October 2014

ATO ID 2003/651 (Withdrawn)

Employee share scheme - commissioner's discretion - valuation of shares

24 October 2014

ATO ID 2004/812 (Withdrawn)

Employee Share Scheme - Restricted Share Units 24 October 2014

ATO ID 2006/182 (Withdrawn)

Diesel Fuel Rebate Scheme: 24 October 2014

ATO ID 2007/83 (Withdrawn)

Fuel Tax: Transitional - energy grants claimed under the Fuel Tax Act 2006 and adjustments

24 October 2014

ATO ID 2009/101 Capital Allowances: tax break - use of an asset merely for the 24 October 2014

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(Withdrawn) purposes of reasonable testing or trialling

ATO ID 2009/113 (Withdrawn)

Capital allowances: tax break - expenditure in respect of the construction

24 October 2014

ATO ID 2003/40 (Withdrawn)

Fringe benefits tax: exempt benefits - duties of employee relating to a public hospital

29 October 2014

ATO ID 2004/156 (Withdrawn)

Is a term deposit a qualifying forex account? 31 October 2014

ATO ID 2004/750 (Withdrawn)

Capital Allowances: balancing adjustment event - incorporation of an unincorporated association

31 October 2014

ATO ID 2004/751 (Withdrawn)

Capital Allowances: termination value - incorporation of an unincorporated association

31 October 2014

ATO ID 2002/564 (Withdrawn)

Partner Salary in A Corporate Limited Partnership 5 November 2014

ATO ID 2002/371 (Withdrawn)

Part IX taxation of superannuation entities - Superannuation fund expenses - trauma policy

7 November 2014

ATO ID 2004/518 (Withdrawn)

Commercial debt forgiveness: gross forgiven amount 7 November 2014

ATO ID 2006/223 (Withdrawn)

Capital Allowances: taxable purpose - use of depreciating assets

7 November 2014

ATO ID 2010/52 (Withdrawn)

Deductions and expenses: short sale transactions and securities lending arrangements

7 November 2014

ATO ID 2002/1089 (Withdrawn)

Deduction - cost of obtaining approval as a compliance plate holder

14 November 2014

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Cases Update

Cronan and Commissioner of Taxation [2014] AATA 745 An individual failed to convince the AAT that default assessments for income tax and GST were excessive after an audit identified he bought and sold coins, banknotes and stamps via eBay.

Deputy Commissioner of Taxation (Superannuation) v Graham Family Superannuation Pty Limited [2014] FCA 1101 The Federal Court has endorsed pecuniary penalties under S.196 of the SIS Act and costs totalling $50,000 to be imposed on the husband and wife members of a self-managed superannuation fund for various SIS contraventions.

Ryan and Commissioner of Taxation [2014] AATA 818 A taxpayer’s claims for input tax credits in respect of a number of expenses were denied as the AAT found that they were not creditable acquisitions.

Frugtniet and Tax Practitioners Board [2014] AATA 766 The AAT affirmed the decision of the TPB to terminate the tax agent’s registration and preclude re-registration for five years as he was not a fit and proper person.

Kirkby and Commissioner of Taxation [2014] AATA 759 The ATT has held that a taxpayer’s sale proceeds of his interest in a share of a mining tenement was assessable income.

The Overseas Applicants and Commissioner of Taxation [2014] AATA 788 The AAT has allowed a married couple who live oversea to give oral evidence in a tax case with the use of technology via a video link (mainly because the couple were concerned about the possibility of not leaving Australia if the Commissioner decided to issue a Departure Prohibition Order (‘DPO’).

Watson and Commissioner of Taxation [2014] AATA 823 A taxpayer’s application to be released from a tax debt on grounds of serious financial hardship has been dismissed by the AAT.

Guru 4U and Commissioner of Taxation [2014] AATA 740 A taxpayer was found not to be carrying on an enterprise for GST purposes by the AAT, who affirmed the ATP’s decision to cancel its GST registration and deny input tax credits.

Dewheath Pty Ltd and Commissioner of Taxation [2014] AATA 743 No remittance was applied by the AAT to a 75% administrative penalty imposed on a taxpayer in relation to unpaid taxed in relation to BAS and tax returns which had not been lodged for multiple years.

Roche -v- Deputy Commissioner of Taxation [2014] WASCA 194

The WA Court of Appeal has dismissed a company director’s appeal against a Supreme Court decision that Director Penalty Notices issued to the director by the ATO were valid and effectively given when posted.

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Appeals of interest Update

Burnett and Tax Practitioners Board [2014] AATA 687 A Tax Practitioners Board decision to reject a tax agent’s renewal application for her registration as a tax agent was upheld by the AAT on the ground that the agent was not a ‘fit and proper’ person.

The taxpayer has appealed to the Federal Court against this decision.

Scanlon and Commissioner of Taxation [2014] AATA 725 The AAT considered the maximum net asset value test and whether or not eligible termination payments could be appropriately considered as liabilities.

The taxpayer has appealed to the Federal Court against this decision.

MBI Properties Pty Limited v FCT [2013] FCAFC 112 The High Court granted leave for the Commissioner to appeal against a Full Federal Court Decision where the Full Federal Court overturned an earlier decision and unanimously held that a taxpayer which had purchased three residential properties that were subject of leases, did not have an increasing adjustment under Division 135 of A New Tax System (Goods and Services Tax) Act 1999.

This hearing has been heard and a decision is pending.

ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33 The High Court has refused the taxpayer special leave to appeal against the Full Federal Court’s decision in ATS Pacific Pty Ltd and the Commissioner, which held that supplies made by an Australian tour operator to non-resident travel agents were not GST-free. Reference should also be made to the ATO’s Decision Impact Statement (DIS) outlining the ATO view with respect to this matter.

Commissioner of Taxation v Desalination Technology Pty Limited [2014] FCA 1120 The Federal Court has dismissed the Commissioner’s appeal and held that the taxpayer ‘incurred’ the relevant R& D expenditure for the purposes of the tax offset.

Decision Impact Statements

2012/5734-5737 Retirement Village Operator - Case 12/2013 12 November 2014

NSD 991 of 2013 (FCAFC) NSD 994 of 2013 (FCAFC) S95 of 2014 (HCA) S96 of 2014 (HCA)

ATS Pacific Pty Ltd v Commissioner of Taxation 12 November 2014

VID 1327 of 2013; VID 1328 of 2013; VID 1329 of 2013

PTTEP Australasia (Ashmore Cartier) Pty Ltd v. Commissioner of Taxation; and PTTEP Australasia (Ashmore Cartier) Pty Ltd v. Commissioner of Taxation (No 2)

12 November 2014

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Practice Statements

PS LA 2007/5 - Withdrawal

Settlements To: outline key elements of the settlement process, and prescribe mandatory use of the Code of Settlement Practice by all ATO personnel in the settlement of taxation disputes

15 October 2014

Other Developments

1. Tax changes announced for Employee Share Plans

The government has announced an overhaul to the taxation of Employee Share Plans where they have indicated that they wish to reverse for all companies the changes made in 2009 to the taxing point for options, while retaining the integrity provisions that were introduced at that time. The existing up-front tax concession, which exempts from income tax the first $1,000 of ESS interests given to an employee who earns less than $180,000 per annum, will be retained. It is proposed, amongst other things that employees who are issued with options under deferred tax schemes will generally be able to defer tax until they exercise the options, rather than having to pay tax when they receive the options.

2. Code of Settlement update The ATO has released a revised Code of Settlement setting out ATO policy on the settlement of taxation and superannuation disputes, including with respect to disputes over resolution of debts. The ATO have also issued a practical guide for the code providing further example based guidance and PS LA 2007/5 has been withdrawn.

3. Senate inquiry into corporate tax avoidance The Senate Economics Reference Committee inquiry into corporate tax avoidance and aggressive minimisation will ask 40 ASX-listed companies to explain the taxes they pay.

4. Borrowing costs – ATO Audit issue raised by members A number of NTAA members have recently contacted the NTAA Tax Team Hotline and advised that they have received letters from the ATO, advising that it believes that some of their client’s borrowing costs have been incorrectly calculated, and amendments will be made unless further information supporting the claims can be provided.

5. Franking credit offsets and the LIFO rule The ATO have recently clarified on their website that when dealing with the 45 day ‘qualified person’ rule relating to dividends and imputation credits, the last-in first-out (‘LIFO’) rule applies when determining how long a taxpayer has held shares or an interest in shares within the relevant qualification periods.

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Media Releases: Treasury Ministers and ATO

Treasurer – The Hon Joe Hockey MP

19 October 2014 Treasurer to attend APEC Finance Ministers’ meeting

Assistant Treasurer – Senator the Hon Arthur Sinodinos AO

Note that Senator the Hon Arthur Sinodinos AO stood down as Assistant Treasurer on 19 March 2014.

Acting Assistant Treasurer – Senator the Hon Mathias Cormann

22 October 2014 Electricity prices fall by 5.1 per cent after scrapping the carbon tax

23 October 2014 Initiatives to help address insurance affordability for North Queensland

24 October 2014 Government response to Senate Inquiry into the Performance of ASIC

24 October 2014 An enhanced public register of financial advisers

24 October 2014 New tax treaty with Switzerland enters into force

29 October 2014 Treasury increasing productivity by reducing regulation

7 November 2014 Reforms to align, simplify and strengthen insolvency rules

Minister for Small Business – The Hon Bruce Billson MP

22 October 2014 Reducing red tape burdens for small business

23 October 2014 Advancing Australian Exports

29 October 2014 Government cuts more than $2.1 billion of red tape

30 October 2014 Motoring industry back around the table

13 November 2014 Levelling the playing field for franchising

ATO

17 Oct 2014 Get it right and get in quick with myTax

With just two weeks until the 31 October deadline the ATO is encouraging self-lodgers who haven’t completed their tax return to check if they are eligible to use myTax, designed for people with more straightforward tax affairs.

23 Oct 2014 Employers: Remember to pay the new super guarantee rate

Ahead of the first quarterly payment under the new rate, the Australian Taxation Office (ATO) is reminding employers of the increase to the compulsory minimum super payments they make on behalf of eligible employees.

23 Oct 2014 Project DO IT - the time to act is now

With only two months until Project DO IT closes, the ATO is reminding those with

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undisclosed offshore income and assets that they need to act now or risk compliance action and harsh penalties.

27 Oct 2014 Lodge online while there's still time

The ATO is reminding those who are lodging their own tax return that there are only five days until the 31 October deadline

31 Oct 2014 ATO IT Contractor Panel upgraded

The ATO today released a Request for Tender for a flagship IT Contractor Panel designed to slash red tape and transform existing panel arrangements.

Speeches: Treasury Ministers and ATO

Treasurer – The Hon Joe Hockey MP

29 October 2014 Address at the launch of the Deloitte Access Economics ‘Unleashing Productivity’ report, Canberra

6 November 2014 Australian Institute of Company Directors’ Annual Dinner, Adelaide

Minister for Small Business – The Hon Bruce Billson MP

23 October 2014 Address to the Competition Policy Review International Conference, Canberra

27 October 2014 Address to the National Franchising Council National Franchising Convention,

Sydney

ATO

16 Oct 2014 Reinventing Law Design and Practice within the ATO

Second Commissioner Andrew Mills' address to The Tax Institute's National Resource Tax Conference.

12 Nov 2014 ATO compliance and regulation 11 September 2014

Keynote address by Stuart Forsyth, Assistant Deputy Commissioner Superannuation to ICAA National SMSF Conference 11 September, Sydney

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Hot Topic: Paying effective pensions – a closer look

at the ABP and the TRIS

One of the biggest attractions of paying part or all of a member’s superannuation entitlements in the form of an ABP (Account-Based Pension) or a TRIS (Transition to Retirement Income Stream) is the tax exemption in respect of income (and capital gains) derived from pension assets (i.e., assets used to fund the payment of pension benefits). Refer S.295-385 to S.295-395.

An ABP can only be paid out from an SMSF once a member has satisfied an eligible condition of release (e.g., the member has ‘retired’ or ‘reached age 65’). In contrast, a TRIS can be paid out from an SMSF once a member has reached their preservation age (i.e., currently, 55) without having to retire from the workforce. However, the cashing of a member’s superannuation benefits in the form of a pension will also be subject to the fund’s governing rules (e.g., its trust deed).

1.1 Key features of the ABP and the TRIS – background

The following is a summary of the key features (or minimum standards) of an ABP and a TRIS. In essence, the standards that apply to both pensions are basically the same, except that the TRIS is subject to certain restrictions that do not apply to the ABP (i.e., the 10% maximum annual pension restriction and the commutation restriction).

1.1.1 Minimum pension rules which apply to both an ABP and TRIS

The following pension rules apply to both an ABP and a TRIS:

(a) Minimum annual pension amount – The total pension payments made in an income year must be at least equal to the minimum pension amount for that year, as calculated under Schedule 7 to the SIS Regulations.

The minimum pension amount for an ABP and a TRIS for the 2015 income year is calculated as follows:

Minimum annual payment = (Account balance x percentage factor)

Where:

(i) Account balance is basically the member’s pension account balance on:

the commencement day

– for the year the ABP or TRIS commences; or

1 July – for each subsequent income year.

(ii) Percentage factor is the relevant factor as specified in Schedule 7 (refer below), which is determined by reference to the recipient’s age on:

the commencement day

– for the year the ABP or TRIS commences; or

1 July – for each subsequent income year.

Recipient’s age Percentage factor

Under 65 4%

65 to 74 5%

75 to 79 6%

80 to 84 7%

85 to 89 9%

90 to 94 11%

95 and above 14%

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The minimum pension payment is rounded to the nearest 10 whole dollars. If the amount ends in an exact 5 dollars, it is to be rounded up to the next 10 whole dollars. Furthermore:

where a pension commences during the 2014-15 year (on a date other than 1 July 2014), the minimum pension amount must be pro-rated over the period starting from (and including) the commencement day and ending on 30 June 2015;

for pensions that commence on or after 1 June (e.g., 5 June 2015), there is no requirement to make any pension payment in the first year.

The ‘commencement day’ is defined in SIS Reg 1.03(1) as: “the first day of the period to which the first payment of the pension.…relates”. Refer also to TR 2013/5.

(b) Additions to pension capital – Once a pension has commenced, additional contributions (or roll-overs) into the fund for the member cannot be added to their pension account balance. Refer to SIS Reg 1.06(1)(a)(ii).

TAX WARNING – Contributions form part of accumulation interest

Any further contributions will form part of the member’s accumulation account (or balance) within the same fund (and not part of their pension interest).

Furthermore, the member’s pensions account balance (i.e., in relation to the ABP or TRIS) will be treated as a separate superannuation interest to their accumulation account balance. As a result, the proportioning rule in S.307-125 will apply separately to each interest to determine the tax-free and taxable components of each interest.

In contrast, investment earnings derived by an SMSF while a member is drawing down an ABP or a TRIS generally can be added to a member’s pension capital/balance, which can then be effectively drawn down as part of a pension benefit paid to the member.

(c) Transfer of pension on death – An ABP can only be transferred to another person on the death of the primary beneficiary (i.e., the member) or on the death of the reversionary beneficiary (a beneficiary to whom the pension previously reverted on the death of the original member). Furthermore, an ABP can only be paid as a death benefit pension to the beneficiaries specified in SIS Reg 6.21(2A) (i.e., to certain dependants). Refer to SIS Regs 1.06(9A)(c) and 6.21(2A).

(d) Using pension capital as security for borrowings – The capital value of the pension (as well as any income derived from the pension) cannot be used as security for any borrowing (by the member). Refer to SIS Reg 1.06(9A)(d).

1.1.2 Minimum pension rules which only apply to a TRIS

The following pension rules only apply to a TRIS:

(a) 10% maximum annual draw down limit – A 10% annual maximum draw down limit applies, calculated by reference to the member’s pension account balance. The maximum annual draw down limit of 10% is calculated as follows:

Maximum annual TRIS payment = Account balance x 10%

The ‘Account balance’ is basically the member’s pension account balance on:

the commencement day

– for the income year the TRIS commences (i.e., first year); or

1 July – for each subsequent income year.

The ‘commencement day’ is defined in SIS Reg 1.03(1) as: “the first day of the period to which the first payment of the pension….relates”. Refer also to TR 2013/5.

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TAX TIP – No pro-rating required in year TRIS commences/ceases

The 10% maximum drawdown limit is not pro-rated for the year in which a TRIS commences (i.e., the first year) and/or the year in which a TRIS is wholly commuted. Furthermore, any payment to a member following the commutation of a TRIS during the year (e.g., where a member satisfies a condition of release with a ‘nil’ cashing restriction, such as the member ‘retiring’ or ‘reaching age 65’) is not included in the maximum annual amount.

(b) Commutation of the pension – Broadly, a TRIS cannot be commuted and cashed as a lump sum benefit unless the following exceptions apply:

The member satisfies a ‘condition of release’ which has a ‘nil’ cashing restriction (e.g., the member ‘retires’ or ‘reaches age 65’); or

The purpose of the commutation is to cash Unrestricted Non-Preserved Benefits (e.g., an employer ETP that was rolled-over into the fund before 1 July 2004) or to give effect to a payment split under the Family Law Act 1975.

However, a TRIS can be partly or wholly commuted by way of ‘internal roll-over’, which basically involves stopping part or all of the member’s pension and rolling-back the relevant pension account balance of the member into accumulation mode, as discussed below.

1.2 New ATO guidelines give the ‘green light’ for SMSFs to

make ‘in-specie’ pension benefit payments

Where a member satisfies an eligible ‘condition of release’ (e.g., ‘retires’ or ‘reaches age 65’), the question that is often raised is whether a benefit can be paid to the member by way of a transfer of property to the member (e.g., by transferring shares owned by the SMSF to the member).

Traditionally, it has been well accepted that a lump sum benefit can generally be paid to a member in the form of a property transfer (i.e., ‘in-specie’). Refer to S.285-5.

However, when it comes to paying a pension benefit to a member, the conservative view has been that a pension benefit cannot be paid in the form of a property transfer. In this regard, the ATO has previously confirmed that there is no provision in the SIS Act or Regulations which allows a pension to be paid in the form of an asset or property transfer. Furthermore, the following comments have been made by the ATO in SMSFR 2008/2, paragraph 73 (in the context of applying the sole purpose test and maintaining a fund solely for the purpose of providing the benefits stipulated in S.62(1) of the SIS Act – e.g., the provision of benefits upon retirement):

“…the benefits are to be provided in the form of one or more lump sums (which may be paid either in money or in-specie) or pensions (which cannot be paid in-specie).” [Emphasis added]

As a result, the traditional advice to practitioners and SMSF advisors was to warn clients of the risks associated with satisfying pension obligations by way of a transfer of assets or property.

1.2.1 Recent ATO determination allows ‘in-specie’ benefit payments

on the partial commutation of an ABP – SMSFD 2013/2

The ATO recently issued SMSFD 2013/2 (‘the determination’), which broadly allows an SMSF to pay an ‘in-specie’ benefit (i.e., by transferring an asset of the fund) to a member who is drawing down an ABP (i.e., Account-Based Pension) from the fund, subject to the fund’s governing rules.

In particular, the determination confirms that where a member of an SMSF commutes part of their pension account balance (in relation to an ABP), with the resulting commuted amount being paid out to the member (i.e., cashed), the payment to the member can be:

counted towards satisfying the total minimum pension payment for the income year (i.e., in the year of partial commutation); and

paid in cash or ‘in-specie’ (i.e., by way of an asset or property transfer to the member),

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whether the payment is an income stream (pension) benefit or an elected lump sum benefit (as further discussed below).

A partial commutation occurs when a member in receipt of a pension consciously exercises their right to exchange part of their entitlements to future pension benefits for an entitlement to be paid a lump sum. In this case, as there is still an obligation for the fund to continue to pay pension benefits, a partial commutation does not result in the cessation of the member’s pension.

TAX WARNING – ATO’s approach does not apply to a TRIS

It should be noted that the ATO’s approach above only applies in respect of an ABP and not a TRIS. Presumably, this is because a TRIS cannot be commuted and the resulting amount cashed, unless certain exceptions apply (e.g., the member ‘retires’ or ‘reaches age 65’).

Where a partial commutation of an ABP occurs, the following consequences usually arise:

(a) Partial commutation payment is an income stream (pension) benefit – In TR 2013/5, the ATO takes the view that, where only part of a member’s pension is commuted, the pension does not cease (i.e., the fund has a continuing obligation to pay the member’s pension).

Therefore, any payment resulting from the commutation is a superannuation income stream (i.e., pension) benefit for income tax purposes, and is basically taxed as follows:

Where the member is aged 55 to 59 (inclusive) – the member will be taxed on the taxable component at their marginal tax rate, and will be entitled to claim a 15% tax offset; and

Where the member is aged 60 or more – the payment to the member will be tax-free.

(b) Income stream (pension) benefit paid in cash or ‘in-specie’ – Based on SMSFD 2013/2, the income stream (or pension) benefit resulting from the partial commutation can be paid to the member in cash or ‘in-specie’ (i.e., as an asset or property transfer from the fund), subject to the fund’s governing rules (e.g., the fund’s trust deed).

(c) Tax-free and taxable components of pension benefit – The tax-free and taxable components of the pension benefit paid to the member (upon the partial commutation) are based on the same tax-free and taxable proportions of the member’s pension from which the commutation was made.

For example, if the tax-free proportion of the member’s pension (upon commencement) was 40%, the tax-free component of the pension benefit paid to the member (upon partial commutation) will also be 40% of the benefit. Refer to S.307-125(3)(c) and the NTLG Superannuation Sub-group minutes of 8 December 2010.

(d) Satisfying the minimum pension payment requirement for year of commutation – In SMSFD 2013/2, the ATO advises that a payment made to a member as a result of a partial commutation of the member’s ABP (whether paid in cash or ‘in-specie’) can be counted towards satisfying the total minimum pension payment for the commutation year.

In the case of a partial commutation, as the pension has not ceased (and continues), the fund is still required to pay the total minimum pension amount to the member for the year (not just a pro-rated amount).

1.2.2 Making an election to treat commuted payment as a lump sum

for tax purposes – tax savings for members under age 60!

A payment made from an interest that supports a superannuation income stream (i.e., a pension interest) that is a partial commutation is not a superannuation income stream (pension) benefit if the member elects (under Reg 995-1.03(b) of the Income Tax Assessment Regulations 1997), before the payment is made, for the payment not to be treated as a pension benefit. In this case, the payment instead is treated as a lump sum benefit.

Where such an election is made, the following consequences will arise:

(a) Payment taxed as a lump sum benefit – The payment will generally be taxed as follows:

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Where the member is aged 55 to 59 (inclusive) – the taxable component (taxed element) is tax-free up to the low rate cap amount (i.e., $185,000 for 2014-15), with the excess being taxed at a maximum rate of 15% (excluding applicable levies); and

Where the member is aged 60 or more – the payment to the member will be tax-free.

(b) Lump sum benefit paid in cash or ‘in-specie’ – The elected lump sum benefit resulting from the partial commutation can be paid to the member in cash or ‘in-specie’, subject to the fund’s governing rules (e.g., the fund’s trust deed).

(c) Tax-free and taxable components of lump sum benefit – The tax-free and taxable components of the elected lump sum benefit (upon the partial commutation) are based on the same tax-free and taxable proportions of the member’s pension from which the commutation was made. For example, if the tax-free proportion of the member’s pension (upon commencement) was 40%, the tax-free component of the lump sum benefit paid to the member (upon partial commutation) will also be 40% of the benefit. Refer to S.307-125(3)(c) and the NTLG Superannuation Sub-group minutes of 8 December 2010.

(d) Satisfying the minimum pension payment requirement for year of commutation – Based on SMSFD 2013/2, the elected lump sum benefit (arising on partial commutation) can be counted towards satisfying the total minimum pension payment for the year. This is because, as noted above, a partial commutation of an ABP does not result in the cessation of the pension (i.e., the pension continues to be payable). As a result, the fund is still required to pay the minimum pension amount for the year. Refer to SIS Reg 1.07D(1)(c).

TAX TIP – Potential after-tax savings for members under age 60

Commuting part of a member’s pension account balance and electing to treat the resulting payment as a lump sum benefit (whether paid in cash or ‘in-specie’) can generate substantial tax savings for a member (aged under 60) when compared to the tax that would be payable if no election was made (i.e., where the resulting payment is taxed as a pension benefit).

This is because a lump sum benefit in this case is tax-free to the extent it contains a taxable component (taxed element) which does not exceed the low rate cap amount (i.e., $185,000 for 2014-15). In contrast, the taxable component of an income stream (pension) benefit is taxed at the member’s marginal tax rate, with an entitlement to claim a 15% tax offset.

1.3 The hidden traps with stopping and starting a pension

within an SMSF – internal roll-overs

It is quite common for a member drawing down a pension from their SMSF (whether an ABP or a TRIS) to stop their pension at some stage during the life of the pension, and then restart a new pension either soon after or at some later point in time (depending on the circumstances). In some cases, a member’s pension may stop (or cease) upon a particular event occurring (e.g., failing to pay the total minimum pension amount for an income year or upon the member’s death).

When a pension (e.g., an ABP or a TRIS) stops/ceases, the member’s entire pension account balance is effectively commuted and rolled-back into accumulation phase, resulting in the member’s entitlements being left in the fund rather than being paid out (or cashed) as a lump sum benefit. This process is often referred to as an ‘internal roll-over’.

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1.3.1 In what situations would an internal roll-over occur?

There are a number of reasons as to why an internal roll-over would occur (i.e., the member’s pension is stopped or ceases, and the member’s entire pension account balance is rolled-back in the fund), including the following:

(a) Preserving pension capital – A member may find they have sufficient income from other sources (e.g., investments) at a particular time and, therefore, may decide to stop their pension altogether in order to preserve their pension capital.

(b) Combining separate superannuation interests in the fund – A member may have multiple interests in their SMSF, which can be made up of multiple pension interests, or an accumulation interest and one or more pension interests. In this case, a member may, for example, decide to combine a pension interest with an accumulation interest (e.g., by stopping their pension and rolling-back the entire pension account balance into accumulation phase), so that they can commence a new pension with a higher accumulation balance.

In an SMSF, a member’s entitlements used to support a pension (e.g., an ABP or a TRIS) are treated as a separate superannuation interest in the fund. Furthermore, all accumulation entitlements in the fund are treated as the one (single) superannuation interest. As a result, the proportioning rule in S.307-125 will apply separately to each interest, potentially resulting in each interest having different tax-free and taxable components. Refer to Reg 307-200.02 and Reg 307-200.05 of the ITAR.

(c) An SMSF fails to pay the total minimum annual pension amount during the year – In this case, the ATO takes the view (in TR 2013/5) that the pension is taken to cease at the start of the relevant income year for income tax purposes (e.g., on 1 July 2014 where an SMSF fails to pay the total minimum pension amount during the 2015 income year). As a result, the fund loses out on the pension exemption for the entire income year (i.e., in respect of income and net capital gains derived from assets used to support the pension), and any benefit payments made during the year are not taxed as pension benefits (e.g., in the case of a TRIS, any benefit payments are fully assessable and taxed at marginal rates).

Furthermore, as the member’s pension has ceased, the member’s entire pension account balance is effectively rolled-back into accumulation phase (i.e., an internal roll-over occurs).

TAX TIP – ATO concession may allow pension to continue

The ATO has advised that, where certain conditions are satisfied, it will allow a pension (i.e., an ABP, and presumably a TRIS) to continue where a member fails to withdraw the total minimum pension amount for an income year. Refer to the ATO’s fact sheet: “Self-managed superannuation funds – starting and stopping a superannuation income stream (pension)”.

In particular, the ATO’s administrative concession may be available where the following two key conditions are met (amongst other conditions):

(a) The trustee failed to pay the minimum pension amount in the relevant year because of:

an honest mistake made by the trustee resulting in a small underpayment (i.e., the underpayment was one-twelfth or less of the minimum pension for the year); or matters outside the control of the trustee (e.g., a financial institution error).

(b) Upon the trustee becoming aware the minimum payment amount was not met for an income year, the trustee generally makes a catch-up payment in the following income year (generally within 28 days of the trustee becoming aware of the underpayment).

SMSF trustees can generally self-assess that the above concession applies where the trustee has not previously been granted the concession. In all other cases, an SMSF trustee will need to write to the ATO seeking its approval to apply the administrative concession.

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1.3.2 The hidden dangers with internal roll-overs for SMSF trustees

The following two hidden dangers are often overlooked by SMSF trustees where a member’s ABP or TRIS is entirely rolled-back into accumulation mode upon an internal roll-over:

(a) Pro-rated minimum pension amount must be paid – As the member’s pension ceases (upon an entire roll-back of their pension account balance), a pro-rated minimum pension amount must be paid (prior to the commutation) in the commutation year.

The pro-rated minimum pension amount is calculated under SIS Reg 1.07D(2), as follows:

Minimum payment = Minimum annual amount x Days in payment periodDays in financial year

Where:

(i) Minimum annual amount is the minimum pension amount calculated for the income year under Schedule 7 to the SIS Regulations; and

(ii) Days in payment period is the number of days in the period that:

begins on (and includes) the commencement day (if the pension commenced during the commutation year) or 1 July of the commutation year; and

ends on the day on which the commutation takes place.

TAX TIP – Number of days includes the day of commutation

The ATO has previously confirmed that the ‘Days in the payment period’ includes the day on which the commutation takes place. This basically means that if a commutation occurs on 1 July of an income year, the ATO considers that there is one day in the payment period and, therefore, a minimum pension payment representing a one-day period must be paid. Refer to the NTLG Superannuation Technical minutes of meeting dated 16 June 2009.

(b) Re-calculating tax-free and taxable components under the proportioning rule (diluting the value of any tax-free component) – Where a member’s pension ceases (and their entire pension account balance is rolled-back into accumulation phase), a commutation lump sum benefit is taken to arise, which is effectively rolled-back into the fund (rather than being cashed out of the fund). In these circumstances, the following consequences arise:

The tax-free and taxable components of such a rolled-over commutation lump sum benefit will be calculated under the proportioning rule in S.307-125 by reference to the same tax-free and taxable proportions of the pension from which the commutation was made. For example, if the tax-free proportion of a member’s pension is 40%, the tax-free component of a commutation lump sum benefit will also be 40% of the benefit. Refer to S.307-125(3)(c) and the NTLG Superannuation Sub-group meeting of 8 December 2010.

The commuted lump sum rolled-back into the fund will form part of the member’s accumulation entitlements in the fund (and will be mixed or combined with any other accumulation entitlements in the fund just before that time). Therefore, if the fund at a later time either pays a lump sum benefit or a new pension to the member, the tax-free and taxable components of the new benefit would need to be calculated by reference to the tax-free and taxable proportions of the member’s accumulation entitlements at the time the new benefit is paid from the fund. This would take into account the tax-free and taxable components of the commuted lump sum benefit, and the tax-free and taxable components of any existing (and new) accumulation entitlements.

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EXAMPLE – Internal roll-over dilutes the tax-free component

Bob commenced drawing down a TRIS two years ago at age 55 (whilst working as an employee) using all of his accumulation entitlements of $600,000, made up of the following:

Tax-free component $ 300,000 (50%)

Taxable component $ 300,000 (50%)

$ 600,000

On 30 June 2014, following a salary increase, Bob requested the trustee(s) of his fund to stop his pension and roll-back the entire pension balance into accumulation phase in order to preserve his pension capital. At this time, Bob had total entitlements in his fund of $660,000, which were made up of the following:

a pension account balance (or commuted lump sum) of $560,000 – this was the amount rolled-back into the fund upon cessation of Tim’s pension; and

accumulation entitlements of $100,000 (representing salary packaged contributions made by Bob’s employer since Bob had commenced his TRIS).

What are the tax-free and taxable components of the $560,000 commuted lump sum?

The tax-free and taxable components of Bob’s commuted lump sum are based on the same tax-free and taxable proportions of Bob’s original pension interest from which the commutation was made (i.e., 50% each), as follows:

Tax-free component $ 280,000 (50%)

Taxable component $ 280,000 (50%)

Commuted lump sum benefit $ 560,000

Bob retires in May 2015 and commences an ABP using his entire accumulation balance. Just before the new ABP commences, Bob’s accumulation balance is $700,000, comprising:

the $560,000 commuted lump sum amount (i.e., at 30 June 2014);

salary packaged (employer) contributions of $100,000 (up to 30 June 2014); and

salary packaged (employer) contributions of $40,000 (since 1 July 2014).

What are the tax-free and taxable components of Bob’s new ABP? The tax-free and taxable components of Bob’s new ABP will be based on the tax-free and taxable components (and proportions) of Bob’s $700,000 accumulation entitlements (at the time just before the new pension commences), as follows:

Tax-free component $ 280,000 (40%)

Taxable component $ 420,000 (60%)

Total current balance $ 700,000

The taxable component is calculated as a balance, that is, the total value of the interest less the tax-free

component (ie, $700,000 less $280,000). Refer to S.307-215.

Therefore, by rolling back his entire pension account balance into accumulation phase (as part of stopping his original TRIS and mixing his pension entitlements with his accumulation entitlements), Bob’s tax-free proportion has effectively been reduced to 40% (down from his tax-free proportion of his original pension of 50%).