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More Tax Changes!!

On 11 and 12 October 2000, new draft legislation and a new GST Bill were released, resulting in yet more changes to taxation in Australia in relation to the taxation of trusts, imputation rules and GST.

Imputation

The proposed new rules will apply to companies, unit trusts, public trading trusts and non-fixed trusts (all called 'corporate tax entities' because they are taxed at the company tax rate).

The new rules are intended to provide the same outcome as the existing rules, but the mechanics are different. There are three major changes:

• Franking rules currently require companies to frank their dividends to the maximum extent possible. The draft legislation will allow corporate tax entities to set their own franking rate within a six month period.

• Franking accounts currently operate on a taxed income basis. This requires a 'gross up' of the income tax which is paid when the franking credit is recorded. The draft legislation proposes to simplify this so that the franking credit is instead expressed as the actual amount of tax paid.

• The draft legislation proposes to treat dividends to corporate tax entities on a gross up and credit basis, which is similar to the system for individuals and superannuation funds. Currently, companies which receive franked dividends are required to include those dividends in their assessable income and then obtain a dividend rebate.

In addition the draft legislation also proposes to align the franking year with the income tax year and to remove the franking deficit tax offset against income tax.

Entity Taxation

Companies, fixed trusts, corporate unit trusts, public trading trusts, limited partnerships and co-operatives will retain their current tax treatment. The "collective investment vehicle" regime proposed by the Ralph Report will not proceed.

Under the new rules, from 1 July 2000 non-fixed trusts will be liable to pay income tax at the company tax rate. A "non-fixed trust" is a trust where a beneficiary does not have a fixed entitlement to the income and capital of the trust – these will mostly be discretionary trusts.

Distributions by non-fixed trusts will be taxed in the hands of the recipient in a similar manner to a distribution by a private company, at the time that the amount is distributed or credited to the recipient. Taxation of distributions in the hands of the recipient will depend upon whether there is a distribution of income or capital for tax purposes. Distributions in consideration for cancellation or redemption of the member's interest are taxed using the "slice rule". All other distributions use the "profits first rule".

Under the slice rule, distributions are treated as coming from contributed capital to the extent of the recipient's share of the contributed capital, then its share of tax profits and, finally, untaxed profits. Under the profits first rule distributions will be treated as coming from profits to the extent of the non-fixed trust's available profits, then from contributed capital and then from deemed profits.

A non-commercial loan by a member or associate to a non-fixed trust that is not fully repaid within twelve months of the end of the income year in which it was made will be deemed to be a contribution of capital. Subsequent repayments of principal or interest will be treated as distributions from the non-fixed trust to the member and covered by the profits first rule. This rule applies to non-commercial loans made to non-fixed trusts after 21 February 1999.

GST

The new GST Bill seeks to amend the current GST law in relation to: GST Free and input taxed supplies, importations, fringe benefits, adjustments, administration, and other miscellaneous matters. Unfortunately, the amendments are too numerous and diverse to be fully discussed in this article, however, a few are summarised below:

• Input tax credits can be claimed for acquisitions made in making input taxed supplies made through an enterprise outside of Australia.

• Input tax credits will not be available for certain non-deductible (for income tax purposes) entertainment expenses.

• Commissions paid to travel agents for arranging supplies to take place outside of Australia will be GST Free.

• The GST Free treatment for grants of unimproved government land will be extended to some short term leases.

• The definition of 'new residential premises' is to be amended to prevent double taxation where an entity constructs new premises and rents them out as a residence prior to sale.

• Marina berths for live aboard vessels will in some circumstances be input taxed.

• Some supplies from coin operated machine may be input taxed until 1 July 2005.

• Subject to certain conditions, goods which are exported and then reimported will be non-taxable importations.

• A supplier of real property under the margin scheme will not be required to issue a tax invoice.

• An increasing adjustment will be allowed to an insurer where it receives a payment of an excess and makes acquisitions directly for the purpose of settling the claim.

• A payment by an insurer to eg a repairer for services rendered to an insured will not be GST free as a payment made in settlement of a claim.

In addition, amendments to the adjustments provisions will ensure that the law reflects the Government's intentions and other amendments are proposed to allow for more flexible administration of the GST law by the ATO.

For further information about issues covered in this article or any aspect of the GST legislation and its applciation, please contact Kim Evans on +61 8 8210 1287 or e-mail kevans@normans.com.au.

Norman Waterhouse is a registered supplier with the GST Start-Up Assistance Office and can accept your business' $200 GST Certificate up to 31 October 2000.

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