April 2006 Voice - NTAA · house asset rules being sought by virtue of the operation of S.71(1)(j)(i) and (ii) of the SIS Act. ATO Response The ATO confirmed that a water right did

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April 2006

April 2006 Edition No.147

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Voice Tax Advisers'The

What's NEW This Issue Page

What's in Tax on the Couch this Month? 2Your Association at Work 3Practice Notes 7– GIC for June 2006 quarter– Tax and far north Queensland cyclone– Cash economy is at least $13.4bn and (probably) rising– Running balance account statements– Comparison study of taxation system announced– More workers eligible for Choice of Super– Proposed amendment to GST law for real property– PSI Business Premises Test passed– FBTandemployeebenefittrustarrangements– Super guarantee late payment offset form– Cost base where building write-off not claimed – PSLA 2006/1(GA)– Div.7A and statute barred loans – PSLA 2006/2(GA)– BAS service provider self-assessment tool– Australian super pension still taxable in the US– NewreportprofilingSMSFsInterpretative Decisions 14 FBT 2006 17

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NTAA National Headquarters29-33 Palmerston Crescent

South Melbourne Vic. 3205All inquiries, please call: The

Tax Advisers'ABN: 76 057 551 854Ph: (03) 9209-9999Fax: (03) 9686-4744Email: [email protected]: www.ntaa.com.au

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DISCLAIMERThis publication has been prepared for the members of the National Tax & Accountants' Association Ltd. Many of the comments contained in Voice are general in nature and anyone intending to apply the information to practical circumstances should independently verify their interpretation and the information's applicability to their particular circumstances.

The NTAA's Tax on the Couch is a monthly tax update on CD that we’ve created to help you (and your practice) keep up to date. For more information, please call 1800 808 105 and speak to one of our friendly staff.

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What's in Tax on the Couch this month?This month's edition of Tax on the Couch features our three tax specialists discussing the following issues in detail (among others):

u Tax Laws Amendment (2005 Measures No 6) Bill 2005 (now passed);

u The introduction of Tax Laws Amendment (2006 Measures No. 1) Bill 2006, and:

– enhancing the foreign income tax exemption for temporary residents;

– providing a systematic treatment for business ‘blackhole’ expenditures;

– deterring the promotion of tax avoidance and evasion schemes; and

– GST and phone vouchers;

u New ATO Practice Statements: 2006/1 (GA), 2006/2 (GA), 2006/1 and 2006/2;

u New Cases: The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins (Transfer of assets to defeat creditors was void); Raftland Pty Ltd as Trustee of the Raftland Trust v FCT (Distributions to a trust with tax losses held to be a “sham”); Re Secretary, Department of Family and Community Services and Linton (Attribution of family trust assets for social security purposes); Dixon Consulting Pty Ltd and FCT (PSI business premises test passed); Other cases of interest;

u Other Developments, including the Treasurer's announcement of the comparison study of taxation system, the Proposed amendment to the GST law due to Marana Holdings, the newRBLlistforindividualsavailablefromFebruary2006,andFBTandemployeebenefittrust arrangements; and

u This month's Hot Topic:LivingAwayFromHomeAllowancefringebenefits

In addition, a representative from ATO sits down on the couch to talk about the Consolidation regime, giving insights into the background behind it, and why tax agents should be interested in it.

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Your Association at WorkNTLG Superannuation sub-committee submissions Editor: The NTAA represents its members' interests in many tax forums. The following are five superannuation issues that Andrew Gardiner raised at a meeting of the Superannuation Sub-committee of the NTLG – National Tax Liaison Group.

Special income and capital gains

By way of background, a self managed superannuation fund (“SMSF”) must treat income that it derives in its capacity as a beneficiary of a trust estate (other than byvirtue of holding a fixed entitlement to theincome) as special income.

In these circumstances, the special income is taxed at 47% – S.273(6) of the ITAA 1936.

Strangely, the wording of S.273(6) only deals with income distributions that are received by anSMSFfromanon-fixedtrustestate,andthe concept of what represents “income” for thepurposesofS.273 isnotdefinedwithinthe ITAA 1936.

It is therefore our understanding that the special income provision in S.273(6) only applies to “income” distributions from a non-fixed trust estate as defined under normalaccounting and tax principles.

As such, the NTAA submits that a capital gain (within the meaning of Chapter 3 of the ITAA 1997)thatisdistributedbyanon-fixedtrusttoan SMSF would not be subject to the special income provisions because the distribution does not represent “income”.

This is because the distribution from the trust remains “capital” despite the fact that the amount may be taxable in the SMSF by virtue of the capital gains tax measures.

Furthermore, all of the wording that is contained within S.273 which deals with special income applying to distributions from trust estates (whether fixed or non-fixed) also refers toincome distributions.

It is therefore conceivable that any taxable capital distributions that are made by a trust to an SMSF are not caught by the special income provisions because the amount being received by the SMSF does not represent “income” for these purposes.

The NTAA seeks clarification on whetherthe ATO would apply the special income provisions that are contained within S.273 to taxable capital gain distributions that are made fromatrust(whetherfixedornon-fixed)toacomplying SMSF.

ATO ResponseThe ATO disagrees with that interpretation and relies upon the comments in Draft Taxation Ruling TR 2006/D1 for support.

In this draft ruling, the ATO makes the comment that it was Parliament’s intent for income to represent “income” as determined under the ITAA and not to be limited to “income” under ordinary concepts.

Business real property and water rights

A number of NTAA members have recently expressed concerns over the ability of an SMSF to purchase a water right from, or lease a water right to, a related party of the fund.

It is also our understanding that several farming representative groups have approached different politicians about this issue and that these representations have gained momentum because this problem is increasingly causing angst amongst a number of farming communities.

By way of background, in certain parts of Australia the ownership of primary production land also entitles the owner to the property to an accompanying water right. In most cases, the owner of the primary production land must also be the owner of the water right.

Therefore, an SMSF that acquires primary production land may be acquiring two assets, namely the title of the underlying primary production land and a water right.

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Furthermore, it may also be a commercially prudent decision for an SMSF to acquire the water right with the land (where this is an option) because the value of the land is enhanced where a water right is attached.

However, an SMSF that purchases primary production land and a water right in relation to the property may be breaching the in-house asset rules where the property is leased to a related party.

In these circumstances, an in-house asset problem arises because the SMSF is providing the related party with the use of two assets.

It is providing the related party with the use of the primary production property which is excluded from the in-house asset rules because it represents business real property (refer to S.71(1)(g) of the SIS Act) and it is also providing the use of the water right.

Unfortunately,thedefinitionofbusinessrealproperty that is contained in S.66(5) of the SIS Act does not appear to extend to a water right, andthisunderstandinghasbeenconfirmedbythe ATO via an Interpretative Decision.

In particular, in ATO Interpretative Decision 2004/229 the ATO concluded that a water right did not constitute business real property for the purposes of S.66(5) of SIS Act.

It reached this conclusion, correctly we believe, on the basis that the ordinary dictionary meaning of “real property” is limited to the “land and interests in land” and it did not (and does not) extend to a water allocation or entitlement that is authorised by a water licence.

The above interpretation is likely to create substantial problems for many SMSFs that currently own primary production land and lease it to a related party. These funds may be inadvertently breaching the in-house asset rules where the fund also owns water rights which attach to the property.

The NTAA requests that the ATO determines whether a water right represents business real property for the purposes of S.66 (i.e., acquiring assets from a related party) and S.71 (i.e., the in-house asset rules).

If not, we request that the SIS Act be amended to broaden the definition of “business real

property” to include water rights/allocations associated with primary production land.

Another way to achieve the desired outcome mentioned above involves amending the SIS regulationstoprovideaspecificexclusionforwaterrightsfromthedefinitionofanin-houseasset.

Such an amendment to the SIS regulations would ultimately provide relief from the in-house asset rules being sought by virtue of the operation of S.71(1)(j)(i) and (ii) of the SIS Act.

ATO ResponseThe ATO confirmed that a water right didnot represent “business real property” and thus represents an in-house asset where the water right is used by a related party to a superannuation fund.

However, the ATO appeared agreeable to amendments being made to eliminate this problem. They acknowledged that the rules were not designed to create an in-house asset problem where an SMSF allows a related party to use a water right that attaches to the land.

Equally, the ATO also appreciated the sensitivity of the issue and they have given a commitment to work with us and issue a determination under S.71 of SIS Act to overcome this problem.

Self managed superannuation funds carrying on business

The NTAA is concerned that a number of ATO publications have almost “out of hand” taken the view that an SMSF would breach the sole purpose where it carries on a business.

By way of illustration, at page 6 of the ATO publication “DIY Super - It’s your money….But not yet” the following comment is made regarding SMSFs carrying on a business:

“…Our view is that if a superannuation fund is running a business it is not being administered forthesolepurposeofprovidingbenefitsformembersandbeneficiaries”.

Similar remarks have also been made by the ATO in other publications such as “Self managed superannuation funds - Roles

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and responsibilities of trustees” and “Self managed superannuation funds - Roles and responsibilities of approved auditors”.

The NTAA is concerned that these remarks almost dismiss the acceptance of an SMSF being legally capable of carrying on any type of business. However, at paragraph 13 of Taxation Ruling TR 93/17, the ATO makes the following comments about superannuation funds carrying on a business:

“… Therefore, superannuation funds are generally prohibited from undertaking speculative activities or carrying on an active business such as operating a retail shop, motel or primary production business. However, the activities of a superannuation fund in holding shares and other investments and from time to time realising them may, in some cases, amount to the carrying on of a business (cf. FC of T v Radnor Pty Ltd 91 ATC 4689; (1991) 22 ATR 344)."

That is, TR 93/17 implies that an SMSF may satisfy the sole purpose test in relation to certain activities that may be regarded as amounting to a business. It would appear that the types of businesses being contemplated by the above paragraph would include share trading and funds that turn over their property portfolios so regularly that their activities would be regarded as carrying on a business.

Furthermore, this issue has become particularly important because recent court decisions have shown an increasing willingness of the courts and AAT to treat a taxpayer’s activities as amounting to carrying on a business.

In particular, we believe the decision handed down in Shields v DFC of T 99 ATC 2037 will result in many superannuation funds being considered share traders (i.e., carrying on the business of share trading) where they have large share portfolios which are sold regularly.

Another area in which the strict approach mentioned has also caused confusion relates to superannuation funds investing in tax effective investments.

Morespecifically,theNTAAhasbeenaskedby members whether a superannuation fund satisfiesthesolepurposestestwhereitinvests

in a “tax effective” investment that has a product ruling in which the Commissioner accepts that investors are carrying on a business for the purpose of various tax concessions.

The NTAA therefore seeks clarification onwhether a superannuation fund can carry on any type of business activity and satisfy the sole purpose test. If so, we would ask that current and future ATO publications and guidelines be amended to accept that superannuation funds can carry on certain business activities (e.g., share trading).

ATO ResponseThe ATO accepted that there are certain “businesses” that an SMSF can conduct without breaching the sole purpose test under S.62 of the SIS Act.

Morespecifically, theATOaccepted thatanSMSF which carries on either of the following businesses is unlikely to fail the sole purpose test:

n share trading as a result of a large share portfolio and turnover that is regarded as commensurate with being a share trader; and

n a primary production, afforestation or other agriculture style business by virtue of investing in a tax effective investment, whereby the fund is not actively involved in the business and represents a passive investor (e.g., as is the case with most tax effective investments).

The ATO also agreed to update a number of its currentpublicationstoreflectamoreflexibleapproach in relation to this issue.

However, the ATO made it abundantly clear that SMSFs are generally only entitled to conduct a limited number of businesses. Some examples that were submitted during the meeting which received no ATO support included property development, actively conducting a primary production business and viticulture.

Individual and corporate trusteesEditor: A superannuation fund is a complying fund where it meets the requirements of S.19 of the SIS Act.

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One of the main requirements contained in S.19 of the SIS Act relates to the trusteeship of a regulated fund. In particular, S.19(3) of the SIS Act provides that a regulated fund must have a constitutional corporation as trustee unless the governing rules of the fund provide that the sole and primary purpose of the fund is the provision of old age pensions.

TheNTAAseeksclarificationonwhetheranSMSF with an individual trustee can make lump sumpaymentstomembersorbeneficiariesofthe fund, without the need for the members or beneficiariestocommencereceivingapensionfrom the fund and then commute the amount into a lump sum payment.

The NTAA is concerned that certain correspondence has been released by the ATO which insinuates that a fund with an individual trustee cannot immediately pay out a lumpsumamounttoamemberorbeneficiaryof the fund once a condition of release has beensatisfied.

The indication from the ATO’s correspondence was that the chronology of events must involve the fund initially paying out a pension and the member or beneficiary then commuting theamount into a lump sum.

ATO ResponseThe ATO acknowledged that an SMSF with an individual trustee can pay out a lump sumbenefittomember(s)ofthefundwithoutbreaching the requirements contained in S.19 of the SIS Act.

In fact, the ATO gave a clear undertaking that they will take the same approach to this issue as the previous Regulator (being APRA).

That is, an SMSF can make a lump sum payment to amember or beneficiary of thefund where there is an individual trustee without the need to initially commence paying a pension. Reference should also be made to Superannuation Circular III.A.1.

Unpaid present entitlements to SMSFs

The NTAA has also received feedback indicating that the ATO is intending to treat an unpaid present entitlement between a unit trust and a superannuation fund (as a unitholder of

the unit trust) as a loan to the unit trust for the purposes of the in-house asset rules that are contained in S.71 of the SIS Act.

Typically, the above situation will arise where a unit trust (of which a superannuation fund is a unitholder) makes the unitholder presently entitled to income of the trust without physically paying the distribution.

In most cases, the unpaid entitlement to the superannuation fund (i.e., as a unitholder) is not recorded in the unit trust as a loan and it is treated as an amount that is held “on trust” forthebenefitofthesuperannuationfund.

The above treatment has been predicated on the ATO’s interpretation of unpaid entitlements in relation to the deemed dividend rules that are contained in Div.7A of the ITAA 1936.

That is, the ATO has publicly stated that an unpaid entitlement between a trust and a company (as a beneficiary or unitholder ofthe trust) is not regarded as a loan for Div.7A purposes.

The ATO has accepted that the unpaid entitlement represents an amount that is held ontrustforthebenefitofthecompanyand,therefore, the deemed dividend rules do not apply to these arrangements because there is no “loan” being provided by the company.

Therefore,theNTAAseeksclarificationfromthe ATO on whether an unpaid entitlement between a unit trust and a superannuation fund will be treated as a “loan” for the purposes of the in-house asset rules.

ATO ResponseThe ATO accepted that an unpaid present entitlement does not of itself create a loan for superannuation purposes.

However, the TaxOffice did say that it willconsider whether an unpaid trust distribution from a trust is to be treated as a reinvestment in the trust for the purposes of the in-house asset rules.

Editor: Ah well . . . it's never easy. One step forward, one step back. We'll get back to you.

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PRACTICE NOTES

GIC for June 2006 quarterThe general interest charge (GIC) for April to June 2006 is 12.61%, down from 12.63% for the March 2006 quarter.

Tax and far north Queensland cyclone Tax Commissioner Michael D’Ascenzo has assured those affected by the far north Queensland cyclone not to worry about their tax matters at this time.

“Thisisaverydifficulttimeforresidentsoffarnorth Queensland, especially those who have suffered damage to homes and businesses,” Mr D’Ascenzo said.

“We realise people have other priorities to sort out now and it may be some time before they are able to focus on tax matters.”

If taxpayers in the cyclone affected area are experiencing any difficulties meeting tax obligationstheycancalltheTaxOfficeon1311 42 (option 3) during business hours.

TheTaxOfficecanhelpby:u fast tracking refunds for people

impacted by the cyclone;u giving extra time to pay debts - without

interest charges;u giving more time to meet activity

statement and other lodgement obligations;

u helping reconstruct tax records where documents have been destroyed; and

u offeringpersonalvisitsfromfieldofficerstohelpreconcilelostrecords.

More informationIf taxpayers have any questions or require assistance should call the ATO on 13 11 42 between 8am and 6pm Monday to Friday.

Ref: ATO Media release – Nat 2005/9

Cash economy is at least $13.4bn and (probably) risingThe Auditor-General has released his report into the ATO and its handling of the cash economy.

TheATOdefines the ‘casheconomy’as ‘alllegal transactions which are not disclosed and result in evasion of tax’. According to the ATO, the major tax risk arising from the cash economy is business income not being reported.

However, the ATO does not attempt to estimate the size of the ‘cash economy tax gap’.

Its reasoning is that accurate and defensible measures of the tax gap are impossible to achieve in a practical sense.

Editor: With all due respect, why would they want to? It just puts the spotlight on them.

The Auditor-General acknowledges that, since the cash economy is ‘hidden’ activity, it is difficulttoquantifywithanyprecision.

At the lower end of the range of estimates, in 2003 the Australian Bureau of Statistics estimated that the cash economy was approximately $13.4 billion in 2000/01 (Treasurysupportedthisfigure).

Running balance account statementsThe ATO has announced that tax agents may receive running balance account statements on behalf of their clients who have outstanding debtsdueforpaymenttotheTaxOffice.

Such statements advise that the outstanding amount is to be paid immediately.

If agents receive running balance account statements on behalf of clients who have an agreed arrangement to pay the debt over time, they don’t need to take any further action as

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long as they continue to meet the conditions of that arrangement.

Agents may, however, need to remind their clients that where any amount is not paid by the due date, the general interest charge (GIC), calculated on a daily compounding basis, accrues on the outstanding balance until the entire balance has been paid.

Comparison study of taxation system announcedThe Treasurer has asked Mr Richard (Dick) Warburton and Mr Peter Hendy to lead a study examining how Australia’s tax system compares with other developed economies.

This will involve a comparison of overall taxation levels and rates and coverage of the indirect tax, income tax and company tax systems.

The aim of the study is to provide a public document that compares Australian taxes to those in other countries. This will identify those areas where Australia leads comparable countries and those areas where it lags. It will enable a focus on the most important areas.

The study will cover taxes collected at national, state and local government levels.

Personal, business, indirect, property, transaction and superannuation taxes will be included.

The report is due 3 April 2006, theoretically in time to help prepare the May Budget.

Ref: Treasurer’s Press Release No.008, 26 February 2006

Editor: What can you say? A whole month?

More workers eligible for Choice of SuperThe Minister for Revenue and Assistant Treasurer has announced that up to 500,000 additional employees will be included in the choice of superannuation fund regime from 1 July 2006, under amendments made to the superannuation guarantee law.

These changes will apply to employees working for a corporation who were previously employed under a State industrial award.

Known as ‘notional agreement preserving State awards’ – these are old State awards which now have effect under the Federal workplace relations system.

If an employer is an incorporated business and they have employees under a State award, they should check whether they are now under one of these new federal workplace agreements.

Employers and employees can get information on WorkChoices on the website www.workchoices.gov.au or by cal l ing the WorkChoices Infoline on 1300 363 264.

Employers affected by this measure will have to give an employee who commences work on or after 1 July 2006 a Standard choice form. Existing employees can request a form after that date.

The form can be downloaded from the superchoice website or by calling the ATO on 13 10 20 and quoting NAT number 13080.

Ref: Assistant Treasurer's press release No.009, 19 March 2006

Proposed amendment to the GST law for real property The Minister for Revenue and Assistant Treasurer has announced that the Government will amend the GST law in light of the decision of the Full Federal Court in the Marana Holdings case (Marana Holdings Pty Ltd v FCT [2004] FCAFC 307).

Editor: In the Marana Holdings case, the court held that sales of motel units that had been converted into residential units were sales of "new residential premises" and therefore not input taxed.

According to the Minister, the decision in that case has resulted in a blurring of the lines between properties that are subject to GST and those qualifying for input taxed treatment.

The Government will amend the GST law to continue the tax treatment of property that existed prior to the Court’s decision.

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It considers it appropriate that supplies involving properties such as serviced apartments and strata units leased to hotel operators remain input taxed, which will avoid the need for many small investors to register for the GST.

The amendments apply from 1 July 2000.

As this measure affects the GST revenue base, it will be subject to the unanimous approval of the States and Territories, which receive the GST revenue.

Ref: Minister for Revenue and Assistant Treasurer’s media release No.006, Monday, 27 February 2006

PSI Business Premises Test passedThe AAT has held that a taxpayer’s business premises, comprising a separate two-storey structure of office premises and garage on residential land, satisfied the BusinessPremises Test in S.87-30(1) of the ITAA 1997 for the purposes of the PSI rules.

FactsThe taxpayer company employed Mr Dixon, a director and shareholder of the company, to provide business analysis consulting services to its clients.

A significant proportion of the services soprovided were performed at premises situated on land owned by Mr and Mrs Dixon.

There were two main buildings erected upon that land, one being the family home, and the other a two-storey structure with a three car garage,officefacilitiesandofficespaceonthesecond level, with separate external access.

The taxpayer sought a personal services business (PSB) determination under Div.87 of the ITAA 1997 from the Commissioner, but he refused.

If a PSB determination had been made, the PSI rules would not apply to the taxpayer.

Reasons for DecisionSuch a determination could be made if the taxpayer met the Business Premises Test.

That is, if the taxpayer maintained and used business premises that were physically separate from any premises that Mr Dixon and/or his family used for private purposes.

The AAT held that the business premises comprisingthetwo-storeystructureofofficepremisesandgaragesatisfiedthetest,asitwassatisfiedthatthebusinesspremiseswere“physically separate” from the premises used for private purposes.

“It is clear on the evidence that the buildings are separate one from the other. It is clear on the evidence that a client wishing to do business with the Applicant would be directed to the appropriate location and not consider the domestic dwelling the place to visit. The buildings are largely functionally independent of one another."

The Tribunal also agreed with the taxpayer that the test does not require “exclusive use” of the business premise by the taxpayer, but that what the legislation does provide “is that for premises to be “mainly” used by the (taxpayer) to conduct activities producing personal services income.”

Ref: Dixon Consulting Pty Ltd and Commissioner of Taxation [2006] AATA 186

FBT and employee benefit trust arrangementsThe ATO has advised that participants in some employeebenefittrustarrangementswillhavetheir FBT liability amended to nil in relation to that arrangement.

Thisdecisionappliestoemployeebenefittrustarrangements where taxpayers:

q have received both income tax and FBT assessments with respect to the arrangement; and

q have not entered into a settlement withtheTaxOfficewithrespecttothisarrangement; and

q the circumstances of their arrangement are similar to arrangements considered by the courts in either Essenbourne, Spotlight/Pridecraft P/L or Kajewski

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(eachofwhicharebrieflyconsideredinthe ATO’s fact sheet).

Affected taxpayers will receive a letter from the ATO advising that it will be amending their FBT assessments to exclude adjustments madeasaresultoftheemployeebenefittrustarrangement.

Ref: http://www.ato.gov.au/atp/content.asp?doc=/content/69685.htm

Super guarantee late payment offset form The ATO has released a new form for the new superannuation guarantee late payment offset, and instructions for completing the form.

Why has the superannuation guarantee late payment offset been introduced?Sometimes an employer may be late in paying a quarterly superannuation contribution to a complying superannuation fund or retirement savings account (RSA). The contribution is late if it was paid after the 28th day of the month following the end of the quarter.

If this happens, the employer needs to lodge a Superannuation guarantee charge statement – quarterly (SGC statement) and pay the superannuation guarantee charge (SGC) to the ATO.

Editor: The SGC is made up of the shortfall of superannuation not paid by the due date, an administration fee, and interest.

Since they have paid the contribution late, it then means the employer has paid the contribution twice for the same quarter – once to the superannuation fund or RSA and once to the ATO.

What is the superannuation guarantee late payment offset?The late payment offset was introduced to helpemployerswhofindthemselveshavingto pay a superannuation payment twice for the same employee in the one quarter (the Bill introducing this measure received Royal Assent on 14 December 2005).

If an employer makes the late payment before the SGC statement is due to be lodged (i.e.,

before the 28th day of second month after the end of the quarter), then they can apply for the late payment offset.

ExampleFor the quarter ending 31 March 2006, to avoid the SGC, superannuation must be paid by 28 April, and, if this date is missed, the SGC statement must be lodged by 28 May.

What happens if I apply for the late payment offset?By electing to take advantage of the late payment offset, employers can reduce their SGC liability by the amount of the superannuation they paid late (note that since SGC includes other components, this is unlikely to reduce the SGC to nil), but they also acknowledge that they cannot claim a deduction for the amount of the superannuation they paid late.

The form and instructionsThe form and the instructions are available as separate documents (Nat 14899).The instructions include:u what is a superannuation guarantee

late payment offset;

u who is eligible for the offset; and

u when and where to lodge the form.

An employer should only complete this form if they paid superannuation contributions to a superannuation fund after the cut-off date for any of their employees, but on or before the date the SGC statement was due to be lodged, and either:

q they did not claim the late payment offset on a previously lodged SGC statement for the relevant employee and quarter; or

q the ATO has issued, or is about to issue, a default superannuation guarantee charge assessment for the relevant employee and quarter.

Use this form when super contributions have been paid to a superannuation fund or RSA from 1 January 2006.

Complete a separate form for each quarter (i.e., for the quarter ended 31 December 2005 or subsequent quarters).

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Cost base where building write-off not claimed – PS LA 2006/1 (GA) This Practice Statement advises that, in certain circumstances, the ATO will accept that a taxpayer cannot deduct an amount under Div.43 (i.e., building write-off) for a CGT asset and is therefore not required to reduce the asset’s cost base and reduced cost base.

Div.43 deductions and Cost base adjustmentsDiv.43 of the ITAA 1997 allows a deduction for construction expenditure in respect of certain income producing buildings and structural improvements (capital works).

To the extent a taxpayer has deducted or can deduct Div.43 expenditure in relation to a CGT asset, the expenditure does not form part of the cost base (or reduced cost base) of the CGT asset.

These cost base adjustments generally only apply to CGT assets acquired after 13 May 1997, or where the expenditure is incurred after 30 June 1999 and forms part of the fourth element of the cost base of the asset.

Practice StatementFor the purpose of working out the cost base and reduced cost base of a CGT asset under Div.110 of the ITAA 1997, the Commissioner will accept that a taxpayer cannot deduct an amount under Div.43 for construction expenditure in respect of an asset if the taxpayer:

u does not (as a question of fact) have sufficientinformationtodeterminetheamount and nature of the expenditure; and

u does not seek to deduct an amount in relation to the expenditure under Div.43 (or any other provision).

This means that, in working out a capital gain or capital loss arising from a CGT event happening in relation to the asset, the taxpayer is not required to reduce the asset’s cost base and reduced cost base by the amount not deducted under Div.43 in relation to the asset.

Such a practice recognises that the impediment which has prevented the taxpayer from claiming a Div.43 deduction (i.e., the lack of information) also prevents them from complying strictly with the CGT cost base reduction rules.

This practice is consistent with the policy that an amount should either be allowed as a deduction or included in the asset’s cost base and reduced cost base, but not both. It results in the amount being recognised only once for tax purposes.

However, if a taxpayer has, as a question of fact, sufficient information to determine thenature and amount of the expenditure, then the Commissioner’s practice is not available.

This may occur, for example, if a taxpayer has been provided with all the relevant information by a previous owner, and the taxpayer has retained that information.

Editor: It will normally be in a taxpayer’s best financial interests to try and obtain the relevant information and claim the deductions provided compliance costs are not prohibitive.

In the vast majority of cases, the tax benefit of deductions now will exceed the tax benefit of a larger cost base and reduced capital gain in the future.

Div.7A and statute barred loans – PS LA 2006/2 (GA)Editor: Div.7A can deem the forgiveness of a loan to be a dividend. A loan may be deemed to be forgiven if it can no longer be recovered because it has become "statute-barred".

This has been a real concern, as it may have meant that all untouched pre-4 December 1997 loans were deemed to be forgiven, at the latest, by December 2003 and, therefore, deemed to be dividends at that time.

This Practice Statement advises that statute barred private company and trustee loans made prior to the enactment of Div.7A of the ITAA 1936 will not be treated as giving rise to a deemed dividend under Div.7A.

BackgroundUnder Div.7A, which applies on and after 4

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December 1997, amounts paid, lent or forgiven by a private company to shareholders or shareholder’s associates are generally treated as dividends, unless they are specificallyexcluded.

Similar provisions apply to the forgiveness of certain loans made by trustees.

TheTaxOfficeviewisthataloanbyaprivatecompany to a shareholder, or a shareholder’s associate, will be deemed to be a forgiven debt merely by the fact that the statutory period, within which the creditor is entitled to sue for recovery of the debt under the relevant Limitations Act, ends (although the matter is not entirely free from doubt).

Practice StatementThis practice statement advises that the Commissioner has decided to take no active compliance action that would treat statute barred private company and trustee loans made prior to the enactment of Div.7A as giving rise to a deemed dividend under Div.7A.

This decision not to treat statute barred loans as giving rise to a deemed dividend recognises a number of factors, including:

q the complexity of Div.7A and the fact that this particular issue arises from the interaction of two quite separate codes of law – The state and territory based limitation of action provisions impact on parts of the income tax law, that is, the commercial debt forgiveness provisions, which in turn affect Div.7A, giving rise to an adverse tax outcome;

q the complexity provided by variation in state and territory limitation of action provisions, leading potentially to differing results across Australia;

q the general scheme of Div.7A to ‘grandfather loans’ made before its introduction, and the doubt this brings to an interpretation leading to the outcome that mere inaction would causeasignificantlyunfavourabletaxoutcome;

q this issue provides no ongoing risk to the tax system;

q action to amend assessments would

be limited to only a small proportion of loans taken out shortly before enactment of the provisions in Div.7A; and

q thefactthattaxpayersfirstconfrontedthis issue at a time when they and their tax advisers were dealing with a range of new laws of high volume and complexity.

Any taxpayer who has been assessed on a deemed dividend in consequence of a statute barred private company or trustee loan made prior to the enactment of Div.7A may lodge an objectionwiththeTaxOffice.

Where necessary, the objection should be accompanied by a request that it be treated as having been lodged within time.

InappropriatecasestheTaxOfficemayenterinto an agreement/settlement with the taxpayer that he or she does not have to pay tax on the deemed dividend.

Editor: Although this is great news, this is not the end of the story. Although such loans may not be deemed to be dividends due to the operation of Limitation of Action legislation, they are still open to be forgiven in other ways. Therefore, to be safe, it would seem that such loans should be left on the books for now. We intend to clarify this with the ATO in the coming months.

Also note that the Practice Statement says the Commissioner will not take "active" compliance action. This implies that if a statute-barred loan issue comes up during an audit, or before a Court, there may still be a Div.7A problem . . .

BAS service provider self-assessment toolThe ATO has developed a tool on its website to help people self assess as to whether they qualify as a provider of a business activity statement (BAS) service for a fee.

Only registered tax agents can charge or receive a fee for providing tax agent services on behalf of a taxpayer as prescribed in S.251L(1) of the ITAA 1936.

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This provision includes preparing, lodging and providing advice regarding BASs as well as all income tax related matters.

However, under S.251L(6) a person who is not a registered tax agent may provide a BAS service for a fee if, for example:

u they are a member (except a student member or retired member) of a recognised professional association; or

u if they are a bookkeeper working under the direction of a registered tax agent.

It is an offence to knowingly or recklessly charge a fee for the provision of tax services if you are not a registered tax agent or a person eligible to provide a BAS service for a fee. Offenderscanbeprosecutedandfinedupto$22,000 for a breach of this law.

The ATO recommends that people interested inthetoolalsoreadtheTaxOffice’sGuidelinesfor ‘working under the direction of a registered tax agent’.

Also, if circumstances change, the ATO advises that they use the self assessment tool again to assess whether they continue, cease or begin to meet the requirements of S.251L(6).

The tool takes 10-15 minutes to complete.

Australian super pension still taxable in the U.S.A Memorandum (which is similar to an ATO interpretative decision) issued by the United States Internal Revenue Service (IRS) has indicated that a taxpayer may need to pay tax in the US on the exempt component of a superannuation pay out if they are a dual citizen of the US and Australia.

The taxpayer, a resident of Australia, was the dependant of a member of an Australian superannuation fund who had recently died.

The taxpayer and the fund member were dual citizens of the United States and Australia at the time of member’s death and at all other relevant times.

The Deed provided that when a member died beforeretirement,themember’sbenefitwould

be paid in a lump sum to one or more of the member’s dependants at the discretion of the trustees of the Fund. The trustees paid a lump sum to the taxpayer.

Generally, in Australia, such a payment to a “dependant”would be a death benefitETP,and tax-free up to the deceased’s pension RBL (which is $1,297,886 for 2005/06).

However, the Memorandum considered that such a payment was taxable under US tax law, and also concluded that the relevant double-tax treaty was not relevant:

"Based on the information submitted and the representations made, we conclude that Taxpayer is subject to U.S. income tax on Decedent’sMemberBenefitas if theTreatyhad not entered into force."

Ref: Office of Chief Counsel, Internal Revenue Service, Memorandum Number: 200604023, Release Date: 27 January 2006

New report profiling SMSFsSMSFs remain a popular retirement savings option for people with the time and skills to ‘do-it-themselves’.

The Investment and Financial Services Association (IFSA) has released a report examining the desires and drivers behind the establishment of SMSFs.

Among other results, the report found that:

l the average starting balance for SMSFs established in the last two years was $300,000;

l 55% of investors cited ‘control’ as a reason for establishing an SMSF;

l shares and property were the dominant asset classes for SMSFs, with 89% of SMSFs holding shares and 60% holding property; and

l 58% of SMSFs have managed funds as part of their asset mix and investment in managed funds averaged $120,000.

Copies of the full report are available from the IFSA website at http://www.ifsa.com.au/Ref: IFSA Media Release, 22 February 2006

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Interpretative Decisions

ID2006/39 – Scholarship received from a Swiss university

A scholarship that an Australian resident received from a Swiss university is not assessable as it is exempt income under S.51-10 of the ITAA 1997.

Facts The taxpayer is a resident of Australia who is undertaking full-time studies in Australia.

He receives scholarship income from a Swiss University. He's in Australia to study and to be with his spouse.

Reasons for Decision Certain education and training receipts are exempt under S.51-10 of the ITAA 1997.

Item 2.1A in the table in S.51-10 provides that a scholarship, bursary, educational allowance or assistance received by a full-time student at a school, college or university is exempt from tax unless the conditions in S.51-35 of the ITAA 1997 apply.

None of those circumstances apply to the taxpayer.

As the taxpayer is a full-time student at a university, the scholarship income received by the taxpayer is exempt income under S.51-10 of the ITAA 1997.

ID2006/44 – FBT: Exempt Benefits – portable computer

A computer that is portable but noticeably different to a notebook or laptop computer cannot be an eligible work related exempt benefit under S.58X(2)(h) of the FBTAA 1986.

Facts An employer provides an employee with a computer which is marketed as a portable model designed to be more powerful than a standard laptop but to be portable between various work sites.

The computer:

n is lighter than an average desktop computer but much heavier than a notebook or laptop computer;

n comes in three separate units:

– a case with carry handle containing the processing unit;

– a monitor; and

– a keyboard;

n needs no installation at each new work site;

n can perform all functions that a laptop can; and

n has no battery power and uses mains electricity.

Reasons for Decision

S.58X of the FBTAA exempts from FBT the provision of certain work related items including a notebook computer, a laptop computer or a similar portable computer.

The primary characteristics of notebook and laptop computers are that they:

u are easily portable and designed primarilyforuseawayfromanofficeenvironment;

u are smaller and lighter than even the most compact desktop computer;

u can operate without an external power supply; and

u are designed as one complete unit.

An example of a similar portable computer would be a tablet computer, which is approximately the same size as a laptop computer but with the ability for direct data input via a touch screen.

A mains powered computer that is formed of three separate parts would not be considered

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to be similar to a battery powered notebook computer or a laptop computer.

Such a computer, whilst being portable in the sense that it canbemoved fromoneofficeto another, is not capable of being operated in a mobile environment, for example whilst travelling on a plane.

ID2006/52 – FBT: Education of children of overseas employees

Additional tuition costs of children of overseas employees are considered to be expenditure ‘in respect of the full time education of a child’ and eligible for reduction of the taxable value for FBT purposes.

Facts An employer employs an expatriate employee. The employee’s family, including a school age child, is relocated to Australia for the duration of the appointment.

Their child is enrolled in a Development & Coaching Centre which specialises in teaching school subjects to support school study needs.

The child attends this Centre one afternoon a week after normal school hours.

The employer pays the tuition fees which wouldbeanexpensepaymentfringebenefit(S.136(1) of the FBTAA).

Reasons for Decision To qualify for a reduction in the taxable value of the expense payment fringe benefit, therecipient’s expenditure must be in respect of the full time education of the child of the employee.

Although the attendance of a child at this Coaching Centre is not of itself ‘full time education’, it needs to be considered whether the additional tuition is ‘in respect of the full time education’ of a child.

The ATO considers that the extra tuition provided to the employee’s child supports the study needs of the child in practical areas of its normal education and, not being in the area ofgeneral interestpursuits,hasasufficientor material connection to the child’s full time education.

Therefore, the recipient’s expenditure is ‘in respect of the full time education’ of a child of the employee and eligible for reduction under S.65A of the FBTAA.

ID2006/58 – GST: Seats for use by disabled persons in shower

A supplier of medical aids and appliances makes a GST-free supply when it supplies a shower seat that is designed to enable a disabled person to be seated while in the shower.

Facts The entity is a supplier of medical aids and appliances which supplies a shower seat specifically designed to enable a disabledperson to be seated while in the shower. The shower seat is not widely used by people without an illness or disability.

The entity is registered for GST.

Reasons for Decision Under S.38-45(1) of the GST Act, the supply of a medical aid or appliance is GST-free where the medical aid or appliance:

n is covered by Schedule 3 to the GSTActorspecifiedintheGSTRegulations;

n isspecificallydesignedforpeoplewithan illness or disability; and

n is not widely used by people without an illness or disability.

Item 113 in the table in Schedule 3 lists ‘shower chairs or stools’.

As all of the requirements of S.38-45(1) of the GST Act have been met, the entity makes a GST-free supply when it supplies a shower seat designed to enable a disabled person to be seated while in the shower.

ID2006/66 – Super Guarantee: unused flex leave to ex-employees

Payments of unused flex leave to non-ongoingemployeescoveredunderaCertifiedAgreement are not considered to be ordinary times earnings (OTE) and therefore are not subject to the superannuation guarantee.

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Facts The organisation offers non-ongoing employees theopportunitytocashoutamaximumoffivehoursflexcreditpaidatsingletimerates.

The payment of unused flex is not paid ontermination of the employees’ employment.

TheorganisationhasaCertifiedAgreementunder which flex credits and debits accrueon the basis of a 7 hour 25 minute day for full time employees and on a pro rata basis for part time employees.

If the employees do not elect to be paid out theirexcessflex,theywillbeabletotaketimeoffontheunusedflexsubjecttoorganisationalrequirements.

The Agreement does not contain an acceptable earnings base for the purposes of the superannuation guarantee.

Reasons for Decision T h e S u p e r a n n u a t i o n G u a r a n t e e (Administration) Act 1992 (SGAA) outlines the earnings base on which an employer is required to provide superannuation support.

An employee’s earnings base can be stated in a Certified or Australian work place Agreement.

If an employee’s earnings base is not stated, then the default earnings base, OTE, as prescribed by the SGAA, will be used as the applicable earnings base.

ForthepurposesofthedefinitionofOTE,apayment will be taken to be 'earnings in respect of ordinary hours of work' if it is made:

u for attendance, or for work done, in those hours; or

u to satisfy an entitlement that accrued as a result of attending, or working, in those hours.

Forthepurposesofflextime,creditsanddebitswill accrue on a 7 hour 25 minute day for full time employees, and on a pro rata basis for part-time employees.

UndertheAgreement,flexcreditrepresentstheaccumulationofflextimeinexcessoftheworking hours over a two week period (that is, 74 hours and 10 minutes).

Thismeansthatpaymentforunusedflexwouldrepresent an amount paid for work performed in excess of an employee’s normal working hours and therefore would not be ‘in respect of’ ordinary hours of work.

Therefore,paymentofunusedflexleavewouldnot be considered to be OTE (whether paid on termination or not) for the purposes of the superannuation guarantee.

ID2006/67 – Singapore resident conducting research in Australia

Salary and wages derived from employment performed in Australia by a resident of Singapore is assessable under S.6-5(3) of the ITAA 1997.

Facts The taxpayer is a citizen and resident of Singapore and is employed by an Australian university to conduct academic research as a Research Fellow.

The taxpayer arrived in Australia at the beginning of the 2005/06 income year and has no intention of residing permanently in Australia.

The taxpayer will stay in Australia for a few months (less than 183 days) and then will leave for 12 months (only returning to Australia for a short visit during this time).

The taxpayer rents an apartment on the university campus and their salary and wages are paid by the university.

Reasons for Decision Under S.6-5(3) of the ITAA 1997, the assessable income of a non-resident taxpayer includes ordinary income derived from all Australian sources during the income year.

Therefore, the salary and wages received by the taxpayer from employment performed in Australia by a resident of Singapore, even during short visits (less than 183 days), is assessable in Australia under S.6-5(3) of the ITAA 1997.

In addition, the tax treaty between Australia and Singapore does not reverse this result, so the salary and wages paid to the taxpayer are taxable in Australia.

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2006 FBT UpdateThe following is an update on rates, declarations and other precedent forms that may assist in the preparation of clients’ 2006 FBT returns.

General FBT update The FBT rate of tax for the year ended 31 March 2006 is 48.5%.

Taxable value of fringe benefits The taxablevalueofa fringebenefit,whichwas subject to GST, is always calculated on theGST-inclusive cost of the benefit to theemployer/provider.

It does not matter whether or not the employer was entitled to an input tax credit on the acquisitionofthefringebenefit.

ForfringebenefitswhichwerenotsubjecttoGST (e.g., fresh food or education costs), the taxable value is the GST-exclusive cost of thebenefit.

That is, the employer does not have to increase the taxablevalueof theGST-freebenefit tofactor in the GST.

Two FBT gross-up rates Two separate gross-up rates apply to fringe benefitsprovidedtoemployees.

The gross-up rates are as follows:

Type 1 benefits

u These arise where an employer is entitled to an input tax credit when the fringebenefitisacquired.

Gross-up rate 2.1292

Type 2 benefits

u These arise where an employer is not entitled to an input tax credit when the fringebenefitisacquired.

Gross-up rate 1.9417

Which gross-up rate applies where an employer decides not to claim an input tax credit on a fringe benefit?The fact that an employer decides not to claim an input tax credit for the GST included in the costofafringebenefitdoesnotaffectwhichgross-uprateappliestothefringebenefit.

Once an employer “has claimed or is entitled to claim” an input tax credit, they must use the higher gross-up rate of 2.1292.

Example

Robin’s Clothing Shop incurs expenditure of $1,100 in providing Bill, the Store Manager, with a set of golf clubs.

Asthegolfclubsrepresenta fringebenefit,Robin’s Clothing Shop will be entitled to claim an input tax credit of $100 (i.e., 1/11th of $1,100) and the higher gross-up rate of 2.1292 will apply.

The higher gross-up rate of 2.1292 will apply to the provision of the golf clubs, regardless of whether or not Robin’s Clothing Shop decides to claim an input tax credit when acquiring the golf clubs.

Employee contributionsGST implications Employers are generally liable to GST on employee contributions which are paid or credited via journal entry to the employer in relation to fringe benefits provided to anemployee.

Employee contributions which take the form of unreimbursed car expenses (e.g., petrol) which are paid by an employee receiving a carfringebenefit,donotgiverisetoaGSTliability for the employer.

FBT implications The full amount of an employee contribution is used to reduce the taxable value of a fringe benefit, even though the employer may beliable to remit 1/11th of the contribution in GST.

FBT 2006

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Income tax implications An employer is only assessable on the GST-exclusive value of employee contributions they receive in the form of direct after-tax cash contributions or via a journal entry.

Minor benefits exemptionFringebenefitswitha taxable valueof lessthan $100 may be exempt from FBT if they are provided on a irregular and infrequent basis.

ForabenefittoqualifyfortheS.58Pexemption,thebenefitmusthaveaGST-inclusivetaxablevalue of less than $100.

This is regardless of whether or not the employer was entitled to input tax credits when providingthefringebenefit.

Capping rules for FBT-exempt and rebatable employers The FBT Act places a ceil ing on the concessional FBT treatment that is applied tofringebenefitsprovidedbyallFBT-exemptand rebatable employers.

FBT is payable on those fringe benefits inthe normal way (i.e., the same as for FBT taxable employers) where an FBT-exempt or rebatableemployerprovidesfringebenefitstoan employee which exceed the ceiling (refer below).

Employer Grossed-up limit

Hospitals and Public $17,000*Ambulance Services

Other public $ 3 0 , 0 0 0 * benevolent institutions FBT rebatable $ 3 0 , 0 0 0 * employers

Note (*): Not all fringe benefits with a taxable value are taken into account when applying the $17,000 or $30,000 ceiling.

Meal entertainment, entertainment facility leasing expenses and car parking are not taken into account for the purposes of the above ceilings.

The non-grossed-up taxable value cap for fringebenefitsprovidedtoemployeesworkingfor hospitals and public ambulance services is:

$8,755 at the 1.9417 gross-up rate; and

$7,984 at the 2.1292 gross-up rate.

The non-grossed-up taxable value cap for fringebenefitsprovidedtoemployeesworkingfor other FBT-exempt and rebatable employers is:

$15,450 at the 1.9417 gross-up rate; and

$14,090 at the 2.1292 gross-up rate.

Do you need to lodge a nil FBT return?An employer is not required to lodge an FBTreturnwherethefringebenefitstaxableamount is nil.

However, where an employer is registered for FBT purposes, they should advise the ATO that they will not be lodging an FBT return by completing and lodging a “Notice of Non-Lodgment of FBT Return” form by the due date of the annual return – 21 May 2006 for self preparers and 28 May 2006 for tax agents on lodgment program 1.

Tax agent warning The ATO has indicated that part of its audit focus this year will be to identify and audit employers who are not lodging FBT Returns and have certain FBT attributes*.

Note(*): These employers will be identified by certain business expenses contained in their income tax returns (e.g., claims for car running expenses).

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What is a car fringe benefit?Acarfringebenefitariseswhenacar,normallyheld by an employer, is made available for the private use of an employee.

An arrangement to provide a car to an employee includes an arrangement between the employer and a third party (e.g., when a parent company makes a car available to an employee working for a related subsidiary).

A car is generally deemed to be available for private use where the employee has the use, custody or control of the car.

What types of vehicles are considered cars?

A vehicle is considered to be a “car” where it satisfiesanyofthefollowingrequirements:

q it is a motor car, station wagon, panel van, utility truck or similar vehicle designed to carry a load of less than 1 tonne; or

q any other road vehicle designed to carry a load of less than one tonne or fewer than 9 passengers; but does not include a motor cycle or similar vehicle.

Statutory formula method The formula for calculating the taxable value of a car under the Statutory formula is:

A x B x C/D – E

A = Base value of car

B = Statutory percentage

C = The number of days in the FBT year that the car fringebenefitwas provided

D = The number of days in the FBT year

E = The recipient’s payments

A = Base value of car

The base value of a car which is acquired on or after 1 July 2000 is calculated as follows:

Cost price $ _____

Add: GST on cost price (regardless of whether input tax credit claimed) _____

GST-inclusive cost of car _____

Less: Employee payment or trade-in, paid direct to car dealer _____

Sub-total _____

Add: GST-inclusive cost of dealer and delivery charges _____

Add: GST-inclusive cost of non-business accessories (such asair-conditioning and car stereos) _____

Less: Expenditure in respect of registration and transfer of car _____

Registration costs _____

Stamp duty on transfer _____

Base value of car for FBT $ _____

B = Statutory percentage

The statutory percentages for 2006 year are:

Total annualised kilometres travelled Statutory during 2006 FBT year percentage

Less than 15,000 26

15,000 to 24,999 20

25,000 to 40,000 11

Over 40,000 7

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C = Days when car used or available for private use of employee

Thetaxablevalueofacarfringebenefitunderthe Statutory formula method is reduced by the number of days during the FBT year when the car was not used or available for the private use of an employee.

E = Recipient’s payments

The taxable value of a car fringe benefit isreduced by recipient’s payments that are made inrelationtoacarfringebenefit.Arecipient’spayment will normally occur if:

q an employee pays for car expenses. A “car expense” means:

– fuel and oil;

– registration and insurance; and

– repairs and maintenance (including car washes and auto club fees); or

q a direct cash payment or journalised contribution (out of after-tax dollars) is made by the employee to the employer.

Operating cost method The taxable value of a car fringe benefitunder the operating cost method is basically calculated by applying the private use percentage of the car against its operating costs. The operating cost formula is:

Taxable value = [C x (100% – BP)] – R

C = Operating costs of car

BP = Business use percentage

R = Recipient’s payments

C= Operating costs

The operating costs of the car not only include actual running costs of the car, but can also include certain deemed costs.

The following is a guide to the types of expenses included and excluded:

Car expenses that are included

u Actual expenses:

– fuel, repairs and maintenance (including auto club fees and car washes/polishes);

– registration and insurance related to the period the car was held by employer; and

– for leased cars, the lease charges related to period car was held by the employer.

u Deemed costs (only where the car is owned or hire purchased by the employer):

– deemed depreciation – at 18.75% (for cars acquired from 1 July 2002) under the diminishing value method; and

– deemed interest – which applies the statutory percentage (currently 7.05%) to the opening written down value of the car.

What car expenses are excluded?

q road and bridge tolls;

q car parking expenses;

q interest on hire purchase agreements; and

q repairs paid for by an insurance company.

BP = Business use percentage

The business use percentage is basically the number of business kilometres travelled by the car, as a proportion of the total kilometres travelled during the FBT year.

To establish the business use percentage of a car during an FBT year, an employer is required to make an estimate which takes into account all relevant factors, including:

u information contained in log book records – which must be kept for a continuous period of at least 12 weeks, generally every 5 years;

u odometer records – which must be kept every year; and

u any variations in the pattern of business use of the car, throughout the FBT year – such as a change in jobs, holidays, seasonalfluctuation,andanyvariationsin employment duties.

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When does an entertainment fringe benefit arise?

ForFBTpurposes,“entertainment”isdefinedin S.32-10 of ITAA 1997, as follows:

u “entertainment by way of food, drink or recreation; or

u accommodation or travel to do with providing entertainment by way of food, drink or recreation.”

Further, S.32-10(2) states:

“You are taken to provide entertainment even if business discussions or transactions occur.

The following are some examples of what is entertainment:

q business lunches

q social functions.

These are some examples of what is not entertainment:

q meals on overnight business travel

q theatre attendance by a critic

q a restaurant meal of a food writer.”

An employer who has provided meal enter-tainment fringe benefits may work out thetaxable value of their meal entertainment under one of these three methods:

q 50/50 split method;

q 12 week register method; or

q actual expenditure incurred on entertainment.

50/50 split methodUnder the 50/50 split method, the employer firstlycalculatesthetotalmealentertainmentexpenditure incurred on all persons during the FBT year.

The employer then:

– pays FBT on 50% of the total meal entertainment (including meal entertainment provided to clients);

– claims input tax credits for the GST embedded in 50% of the meal entertainmentbenefits;and

– claims a tax deduction for 50% of the totalmealentertainmentbenefits(lessany input tax credit entitlement).

Example – Calculating taxable value under 50/50 split method

Billy Blades Pty Ltd (“Billy Blades”) incurs total expenditure on meal entertainment of $40,000 in the 2006 FBT year and elects to use the 50/50 split method.

The following types of meal entertainment expenditure have been incurred while entertaining employees, associates and clients:

u restaurants where associates and clients were entertained;

u food and drinks provided at staff social function;

u entertainment and drinks provided to current employees on Friday nights;

u cost of taking staff and their partners out to lunch; and

u cost of taxis and limousines to and from entertainment venues.

Mealentertainmentbenefitsof$20,000(i.e.,50% of $40,000) will be subject to fringe benefitstaxanddeductiblefortaxpurposes(less any input tax credits).

The remaining 50% or $20,000 continues to be non-deductible for income tax purposes.

12 week register method Under the 12 week register method, the taxable value ofmeal entertainment fringe benefitsis the total meal entertainment expenditure incurred by the employer on all persons in the FBT year, multiplied by the register percentage.

Entertainment Fringe Benefits

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The 12 week register percentage The register percentage is calculated as:

Total value of meal entertainment fringe benefits provided in 12 week period

Divided by

Total value of meal entertainment provided in 12 week period

This method requires an employer to maintain a 12 week register separating meal entertainment provided between employees and their associates, and others (such as clients, suppliers, etc.).

The percentage of the meal entertainment provided to staff and associates is then applied to the total meal entertainment expenditure incurred by the employer throughout the entire FBT year.

Example – 12 week register method An employer’s total meal entertainment expenditure in an FBT year is $20,000.

The employer maintains a 12 week register and determines that 40% of meal entertainment expenditurewasprovidedasfringebenefits.

The taxable value of meal entertainment fringebenefitsprovidedduringtheFBTyearis $20,000 x 40% = $8,000.

An income tax deduction (less any input tax credits) will be allowed up to the register percentage, i.e., $8,000 (GST exclusive) with the remaining $12,000 (i.e., 60% of $20,000) being treated as non-deductible entertainment.

Actual entertainment methodWhere an employer does not elect to value their mealentertainmentbenefitsundereitherthe50/50 split or the 12 week register method, the taxable value is determined under the actual expenditure method.

This method requires an employer to pay FBT on the taxable value of meal entertainment fringebenefitsprovidedtoemployeesand/ortheir associates during the FBT year of tax.

Mealentertainmentbenefitsprovidedtoclientsand non-employees are not subject to FBT

and generally not deductible for income tax purposes.

Employers who use the actual expenditure method do not complete Item 22P on the 2006 FBT Return form.

These employers will have to break up and record the taxable value of their meal entertainment as follows:

Fringe benefit type Label code 2006 FBT Return

Expense payments 22E

Airline transport 22H

Property 22K

Tax-exempt body entertainment 22L

Residual 22M

Tax tip – using the actual expenditure methodOnly employers who use the actual expend-iture method can claim the following FBT exemptions for meal entertainment:

– S.41 (applies to meal entertainment provided to staff on business premises during a working day); and

– S.58P (applies to meal entertainment which is less than $100 and is provided on an infrequent and irregular basis).

Employers who adopt the 50/50 split and 12 week register methods cannot claim FBT exemptions under S.41 and S.58P in relation to their meal entertainment.

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Election by employer to adopt the 12 week register methodin 2006 FBT year

I, (insert name of authorised person) ..................................................................................

hereby give notice that (insert name and address of employer) .........................................

...........................................................................................................................................

elects to adopt the 12 week register method to determine the taxable value of meal entertainmentfringebenefitsinaccordancewiththeformulaandregisterpercentagesforthe period (insert date e.g. 1 April 2005 to 31 March 2006) .................................................

By electing the 50/50 split method, I acknowledge the taxable value for FBT purposes of meal entertainmentfringebenefitsprovidedtoouremployees,associatesandnon-employeesishalf the meal entertainment expenses incurred for the FBT year of tax.

I advise that the taxable value of meal entertainment expenses is net of any employee contributionactually paid. Also I confirm that recreationexpenseshavebeenexcluded,including non-meal entertainment outgoings.

Name of authorised person ..................................................................

Signature of authorised person ............................................................

Date ........................................

Election by employer to adopt 50/50 split method in 2006 FBT year

I, (insert name of authorised person) .................................................................................

hereby advise that (insert name and address of employer) ................................................

............................................................................................................................................

elects to adopt the 50/50 split methodofvaluingmealentertainmentfringebenefitsprovidedduring the period ................................................................................................................(e.g. 1 April 2005 to 31 March 2006).

Iconfirmthatavalidregisterhasbeenmaintained.

Name of authorised person .................................................................

Signature of authorised person ............................................................

Date ........................................

Meal Entertainment Elections

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Motor Vehicle Elections

Statutory formula declaration – opening and closing kms2006 FBT year

Name of employee ________________________

Name of employer ________________________

Date of entry ________________________

Make and model of car ________________________

Car registration ________________________

Engine capacity ________________________

Opening odometer reading at 1/4/20051 ________________________

Closing odometer reading at 31/03/20061 ________________________

Signed as a true and correct record ________________________ (to be signed by employee)

Dated ________________________

1 Where the car was acquired, or disposed of, during the 2006 FBT year, insert alternative dates.

Petrol expense declaration2006 FBT year

(Note: Do not complete if using actual petrol receipts)

I, __________________________________________________________ declare that (Employee’s full name)

petrol expenses of $ __________________ were incurred by me during the period 1 April

(amount in figures)

2005 to 31 March 20061, in respect of _________________________________________

(make, model and registration of car)

I also declare that the total kilometres travelled during the period were _______________

Signed ................................................................................................. (to be signed by employee)

Date ........................................ 1 Where the car was acquired, or disposed of, during the 2006 FBT year, insert alternative dates.

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April 2006

Motor Vehicle ElectionsCar residual benefit declaration

Section AI, __________________________________declare that ________________________ (name of employee)

_______________________________________________________________________

(shownatureofbenefits,e.g.,carinsurance,carrepairs)

was provided to me by or on behalf of my employer during the period:

________________ 20_____ to _________________ 20 _____

and was used by me for the following purpose(s):

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

(Please give sufficient information to demonstrate the extent to which the benefit was used for the purpose of earning your assessable income.)

IalsodeclarethathadIpurchasedthebenefitforitsmarketvalue,Iwouldhavebeenentitledto claim an income tax deduction equal to __________ % of the purchase price.

(If the property relates to a car owned or leased by you, read explanatory notes 1, 2 and 3 below.)

Section B(To be completed where the benefit relates to a car owned or leased by you and the necessary logbook records, odometer records and car records have been maintained).

I declare that:

a. The period of the FBT tax year the car was in use by me for the business purposes was:

________________ 20_____ to _________________ 20 ____

b. Logbook and odometer records for the car (or a car which this car replaces) were kept for a minimum of 12 consecutive weeks during that period and have been given to the employer; or

c. Logbook and odometer records for the car (or a car which this car replaces) were kept for a minimum of 12 consecutive weeks in an earlier year, and odometer records were kept this year and have been given to the employer; or

d. The car business percentage for the period mentioned in a. above was ______%.

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Section C(To be completed where the benefit relates to a car owned or leased by you, the car travelled more than an average of 96 business kilometres per week, and Section B has not been completed).

I declare that the period of the FBT year during which the car was in use by me for business purposes was:

________________ 20_____ to _________________ 20 ____

and that an average of more than 96 business kilometres per week was travelled in that period.

Signature .............................................................................................

Date ........................................

Section D(To be completed where the property relates to a car owned or leased by you and neither Section B nor Section C is applicable).

I declare that:

The period of the FBT year the car was in use by me for business purposes was:

________________ 20_____ to _________________ 20 ____

The total number of kilometres travelled by the car in that period was ________________

The number of business kilometres travelled by the car in that period was ____________

Signature .............................................................................................

Date ........................................

Explanatory notes1. If Section B is completed, the tax deductible percentage stated in Section A should

equal the percentage of business use shown at Item (d) of Section B.

2. If Section C is completed, the tax deductible percentage stated in Section A should be 33.33%.

3. If Section D is completed, the tax deductible percentage stated in Section A should be the lesser of 33.33% and the proportion of business kilometres to total kilometres as shown in Section D.

4. The percentage of business use is the proportion of business kilometres to total kilometres. The business percentage nominated in Section A and Section B should be determined by taking into account the logbook records and any variations in the pattern of business use throughout the FBT year.

5. A new logbook must be kept by employees every 5 years if a reduction in the taxable valueofthebenefitistooccurunderSectionB.

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April 2006

Operating cost method worksheet – Type 1 BenefitsThis worksheet is to be used for cars where the employer was entitled to input tax credits with respect to providing the car fringe benefit.

Item 22B of 2006 FBT Return FormFor the FBT year of tax from 1 April to 31 March

Administrative details

Name of usual driver: ____________________________________________________

Make and model: ____________________________________________________

Registration number: ____________________________________________________

Purchase date: ____________________________________________________

Original cost: ____________________________________________________

Log book information

Opening odometer reading ____________________

Closing odometer reading as at 31 March 2006 ____________________

Total kilometres ____________________

Number of days car held by employer ____________________

Business use percentage __________________ %

(Remember that the business use percentage must incorporate changes in the pattern of the use of the car during the FBT year of tax)

Calculation of FBT payable

Calculation of GST inclusive car expenses

Lease payments $ ____________________

Fuel and oil $ ____________________

Repairs and servicing $ ____________________

Registration $ ____________________

Insurance $ ____________________

Deemed: Depreciation $ ___________________ $ ____________________

Interest $ ___________________ $ ____________________

Total operating expenses $ ____________________

Less: Business use reduction $ ___________________ $ ____________________

Employee contributions $ ___________________ $ ____________________

Taxable value $ ____________________

FBT gross-up x 2.1292

Grossed-up taxable value (Item 13A) $ ____________________

FBT rate x 48.5%

FBT payable $ ____________________

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Statutory formula method worksheet – Type 1 benefitsThis worksheet is to be used for cars where the employer was entitled to input tax credits with respect to providing the car fringe benefit.

Item 22A of 2006 FBT Return FormFor the FBT year of tax from 1 April to 31 March

Administrative details

Name of usual driver: ____________________________________________________

Make and model of car: ____________________________________________________

Registration number: ____________________________________________________

Datecarfirstheld: ____________________________________________________

Car usage information

Closing kilometres _________________kms

Opening kilometres – _________________kms

Total kilometres _________________kms

Days in FBT year x 365 days

Days car held in FBT year ÷ ________________ days

Annualised kilometres _________________kms

FBT Calculation

Base value of car $ ____________________

Statutory percentage x __________________ %

Gross taxable value $ ____________________

Days available for private use x ________________ days

Days in FBT year ÷ 365 days

Sub-total $ ____________________

Less: Employee contributions ($ ___________________ )

Taxable value of car benefit $ ____________________

FBT gross-up x 2.1292

Grossed-up taxable value (Item 13A) $ ____________________

FBT rate x 48.5%

FBT payable $ ____________________