Reserve Bank Raises Interest Rates

I noted in my post on 5 February 2010 that an interest rate rise was likely to 4.5% this year according to press reports at the time. Today the Governor of the Reserve Bank, Glenn Stevens announced a rise in interest rates to 4% from 3.75%. The RBA press release can be found here.

From Governor Glenn Stevens' statement today,

With the risk of serious economic contraction in Australia having passed, the Board moved late last year to lessen the degree of monetary stimulus that had been put in place when the outlook appeared to be much weaker. Lenders generally raised rates a little more than the cash rate and most loan rates rose by close to a percentage point.

Interest rates to most borrowers nonetheless remain lower than average. The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.

The rate interest rate rise is effective from 3 March 2010.

Not-for-Profit Sector Research report released

This report released by the Australian Productivity Commission on 11 February 2010 includes sections on taxation of not for profit entities.

The report can be found here on the Productivity Commission site.

BHP MD warning on Resources Rent Tax

In today’s Sydney Morning Herald, BHP managing director Marius Kloppers warned against a rumored resources rent tax at a Sydney briefing on the group’s profit.

The possibility of a resources rent tax on minerals, to replace state-based royalties, is believed to be a key recommendation in Treasury secretary Ken Henry's review of the tax system.

But Mr Kloppers warned that ''fiscal stability is a very important thing'' to an industry that is helping Australia invest its way out of the economic slump.

Without specifically referring to the Henry tax review, Mr Kloppers said mining companies had a ''reasonable expectation that things are not going to change'' throughout the life of assets that had attracted investment in the first place. ''This is an extraordinarily important thing,'' he said. 

Mr Kloppers said other countries that had ''tinkered'' with fiscal regimes had lost investment over 10 and 20-year time frames and that the ''most important driver of overall return for a country is always growth and investment''. He said Latin America took decades to recover from the investment drought that followed the wave of nationalisations in the 1970s.

Read the SMH article here.

Review Super Funds and Minimum Pension Payments Before 30 June

A meeting of the NTLG Superannuation Technical Sub-group that took place in Canberra on 8 September 2009 contains an important agenda item on SMSF and other super funds with members in pension mode that trustees and advisors should carefully note in the run up to 30 June.

Failure to pay the minimum prescribed pension amount even by a small amount jeopardises the fund’s ability to claim exempt current pension income as this is only available to funds paying pensions that meet the requisite SIS provisions and thus exposes such current pension income to tax.

The question was put at the meeting whether a shortfall could be accrued and payed in a subsequent year which would satisfy the relevant regulatory requirements.

Question: If a fund trustee fails to physically pay sufficient pension payments to meet the minimum pension obligations under SIS Regulation 1.06, is it acceptable for the fund to accrue the shortfall in its financial statements and ensure that this additional amount is paid in the following year?

ATO Initial Response: No

The ATO’s reasons can be read here in the minutes of the meeting.

Some interesting discussion ensued:

A member asked if the draft response takes into consideration the implications for exempt current pension income. The Tax Office stated that the issue is being considered in the work the Tax Office is doing on exempt current pension income and when and how a superannuation income stream can come to an end.


The Tax Office asked whether members had considered whether aspects of trust law can be relevant? For example, if having commenced a pension, a trustee is required by the trust deed to pay a pension that satisfies the requirements of the superannuation law, what are the trust law consequences of a trustee failing to fulfil that obligation?


Could that situation be compared with the case of income to which a beneficiary of a trust is presently entitled? That is, could the shortfall in the amount payable under the pension, be required to be held on a separate trust because equity would treat as done that which ought to be done?


The members advised that was not something they had considered.


The Tax Office advised that even if such an approach could be argued, there would remain significant practical difficulties. For example, it might be necessary to deal with the case when a clear attempt to the pay the pension is made quite separately from where no genuine attempt to meet the minimum payment requirement has been made.


The timing issue could be an important consideration: what happens if the member simply expected a single annual payment of the pension, having agreed to receive that amount at the end of June, and unforeseen circumstances occur and the payment is not paid until early July?

I will be advising of any developments as they are announced as it is an area where mistakes can occur due to inadvertent errors or delays.

Now is a good time to review funds paying pensions and ensure the minimum pensions can be paid as leaving this too late could mean facing delays in realising assets outside the trustees control. Note that minimum pension level for the year ended 30 June 2010 has been reduced by half by the government due to difficulties that can arise in realising assets in the current economic climate. In addition the minimum pension level increases as the pensioner’s age increases, increasing 1% for every 5 years after age 65, as determined by the member’s age as at 1st July and their account balance as at 30th June.

Whether the government will retain the 50% reduction in the minimum level of pension payable into 2011 is unknown.

For more information contact me at my office on (07) 3220 2244 or by email using the Contact Menu above.

ACCI Press Release: Henry Tax Review

MEDIA RELEASE

Monday 8 February 2010

HENRY RESPONSE SHOULD ADDRESS SMALL BUSINESS CONCERNS

Statement by Greg Evans, Director of Economics and Industry Policy

The Henry Tax Review and the government response provide the best opportunity in over a decade to deliver substantive tax reform including lower taxes for smaller and medium sized enterprises across Australia.

Small business is essential to delivering sustainable economic recovery and job creation and the sector needs a tax system that provides the incentive for private business investment, encourages workforce participation and rewards risk taking and entrepreneurship.

Priorities need to include:

• reducing personal income tax rates and the number of thresholds, eliminating bracket creep and a commitment to gradually align the top marginal rate with the company tax rate;

• providing further capital gains tax (CGT) relief measures to ensure small business operators have the incentive to invest and risk their capital. Australia needs to move to a simpler stepped-rate system with reduced and eventually nil CGT applying on the sale of longer held assets;

• working towards the eventual abolition of payroll tax which is a tax on the jobs of all Australians. Payroll tax represents a major obstacle to the growth of small businesses, and creates a significant disincentive to increase employment;

• abolishing many of the state-based transaction taxes which are both inefficient and place cost imposts across business;

• implementing a depreciation regime, especially as it relates to larger capital items, which fosters investment and the upgrading of less efficient technology; and

• reducing the complexity in the taxation system, although this should not be viewed as a substitute for genuine and substantive reform initiatives.

The most pressing requirement for tax reform is to remain internationally competitive, however the tax regime applying to the SME sector is slipping behind the pack. It is also doubtful the global economic slowdown provides a buffer to enable Australia to relax the reform process.

ACCI is cognisant of the nation’s current fiscal circumstances. Accordingly, achieving the nation’s tax reform goals and maintaining our competitiveness may require spending cuts targeting inefficiencies and government waste.

ACCI has been supportive of the Henry Review process and considers that it should be accompanied by a ‘root and branch’ review of expenditure with a focus on the overall size of government.

ACCI represents over 350,000 businesses in every State and Territory and all industries. Our network employs around 4 million employees, ranging from the top 100 companies to tens of thousands of small and medium businesses.

www.acci.asn.au

For further information:

Greg Evans Director, Industry Policy & Economics 02 6273 2311 / 0407 204 559

Brett Hogan Director of Communications 03 9668 9950 / 0407 273 884

ATO crackdown on DIY super funds

News.com.au has an article on an ATO "blitz" on self-managed superannuation funds that fail to meet regulations.

THE Australian Taxation Office has launched a blitz on unlawful self-managed superannuation funds, with almost 100 funds shut down last year.

According to the latest ATO data, it made 99 self-managed funds non-compliant in 2009, compared with 24 the previous year and only five in 2007.
After a self-managed super fund is banned, the market value of assets can be taxed at up to 45 per cent, leaving members with little more than half their savings.

The rise in penalty activity is a result of a tougher line by the ATO, rather than a rise in dodgy DIY funds, says superannuation lawyer Bryce Figot of law firm DBA.

When a fund is tagged as non-compliant it loses its discounted tax benefits, is slugged with penalty interest charges and is hit with the highest marginal rate, going back many years in some cases to the first breach of the laws.

When Not Making an Election in Writing is Making an Election in Writing

At a meeting of the National Tax Liaison Group (FBT subcommittee) on 12 November 2009 the ATO noted that a written election was not required to be lodged with the Commissioner where car fringe benefits are calculated under the cost basis method that results in a nil benefit to the employee such as where the car is used 100% for business purposes. The ATO accepts that the employer has made a declaration to the Commissioner although in fact such a declaration was not made.

This issue has again arisen as a result of Jetto Industrial Pty Ltd and Commissioner of Taxation [2009] AATA 374.

Where the cost nasis method (rather than the "statutory method") is used for the purposes of calculating FBT for a motor vehicle benefit the FBT Act provides that an election shall be made in writing by the employer to the Commissioner:

FRINGE BENEFITS TAX ASSESSMENT ACT 1986 - SECT 10

Taxable value of car fringe benefits--cost basis

1) An employer may, in relation to a particular car, elect that this section apply in relation to all the car fringe benefits in relation to the employer in relation to a year of tax that relate to that car.
...

4) An election by an employer under subsection (1) in relation to a year of tax:

a) shall be made by notice in writing to the Commissioner; and
b) shall be lodged with the Commissioner on or before the declaration date.

In Jetto the employer did not make such a written election although the cost basis was used. In that case the employee director’s vehicle was used 100% for business purposes and no FBT return was lodged since the taxable value was nil. As a return was not lodged there was no written election lodged with the Commissioner. The tribunal in Jetto’s Case was of the view that once a car benefit exists and no election is madem the statutory formula method would automatically apply (p32).

The ICAA requested clarification of the ATO view and the tortuous response was as follows:

“There does not appear to be any good reason why an employer should be required to actually prepare a notice and lodge it with the Commissioner. The TA believes that it should be sufficient that the employer has calculated any car fringe benefits under section 10 rather than section 9. In calculating benefits under S.10 and lodging a return accordingly, the TA believes that the ATO should accept that the employer has made a declaration which complies with the requirements of the section.

The requirement to lodge a declaration would, in any case, seem to be contrary to both the concepts of a self-assessed tax and simplification.

The ATO advised that this matter was considered by the National Tax Liaison Group at its meeting of 17 July 1991. The minutes of that meeting include:

'... the ATO does not require elections to be lodged with the annual return. Rather, an employer must be able to demonstrate through adequately maintained business records that the election has been made, if required to do so on audit.

... in regard to motor vehicle benefits, employers are able to demonstrate their election on the return form itself. A separate record of the election is not required.'

Where a fringe benefits tax return is not required to be lodged (for example, due to employee contributions), adoption in the working papers of the operating cost basis, supported by the necessary logbook, odometer and other motor vehicle records, would be sufficient election. In accordance with Taxation Determination TD 92/199, the necessary calculations would need to be completed by 28 April each year.

The ATO also advised that the policy advice provided to the NTLG in 1991 and restated above amplifies and clarifies the advice given in question 31 of attachment 3 of Miscellaneous Tax Ruling MT 2021 which issued on 25 August 1986. (MT 2021 is under review for a rewrite, however it does not have a high priority.)

It is noted that whilst TD 92/199 (mentioned above) has been withdrawn, the reason for withdrawal was due to the change in the due date for FBT returns and the issue was also covered in the Fringe benefits tax: a guide for employers.”

Although in the end this ends up being in the taxpayer’s favour we should not be surprised when the same “tortuous” logic is used that results in a position unfavourable to the taxpayer. This is not a satisfactory solution and is dangerous for taxpayers. The obvious solution is amendment of the FBT legislation which is entirely preferable to attempting to justify how not making an election in writing to the Commissioner somehow equals making an election in writing to the Commissioner. It also runs counter to the certainty principle, amongst others.

Clients and advisors should consider whether to lodge a nil FBT return (See: How Exposed Are You). The cost of preparation and lodgement should be viewed as a form of insurance as the FBT ammendment clock is stopped at 3 years. Although we have the ATO view that lodgement of a return (and an election) is not necessary where a nil liability results from the cost basis method, a nil FBT return has the advantage of complying with the law as written. Business owners will need to decide whether the additional compliance costs of preparation and lodgement are worth the added security.