Tax Newsletter – March 2012

Wrong property valuations can be costly

A few cases recently before the courts have centred on the issue of property valuations. If a valuation of a property is not above board, the ramifications could include a larger tax bill. The Australian Tax Office (ATO) has recently highlighted what it believes to be recurring issues concerning valuations of property in relation to the application of the GST margin scheme provisions. Often, when certain elements of a valuation are outside an acceptable range, the ATO says the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable. One common area of contention is the use of purported comparable sales figures in making a valuation. The ATO has warned that comparable sales must withstand objective scrutiny of their comparability.

ATO to hold refunds pending checks

The government has announced that it will amend the tax law to allow the Tax Commissioner to hold onto refunds pending “verification checks”. Assistant Treasurer Mark Arbib said the legislation would provide the Commissioner with “legislative discretion” to delay refunding certain amounts to taxpayers pending necessary verification of their claims. Interested stakeholders have a very small window of time to comment on the draft legislation which is in response to a recent Full Federal Court decision which required the Commissioner to immediately pay to a taxpayer GST refunds worth around $930,000. The ATO had withheld the money pending the outcome of its audit of the taxpayer’s entitlement to the refunds.

Tricky excess super refund proposal

The government has released for comment draft legislation to implement its proposal to give individuals a once-only option to be refunded excess superannuation concessional contributions up to $10,000 from 1 July 2011. The proposal aims to stem the instances of inadvertent breaches of the caps which result in the “excess contributions tax”. However, there have been criticisms that the $10,000 amount may not be enough. Another concern is the application start date of 1 July 2011. Many commentators have said it should apply from at least the 2009–2010 year when the concessional contribution caps were halved to $25,000 ($50,000 for those over age 50 until 30 June 2012).

TIP: Although the proposed refund may provide some welcome relief in limited situations, it is not without its complexities. Some commentators have indicated that many individuals could still find themselves inadvertently breaching the relevant caps. If you have any questions, please contact our office.

No more deductions with Youth Allowance

The government is expected to introduce legislative amendments soon to prevent deductions against all government assistance payments for individuals from 1 July 2011, following a controversial High Court decision in 2010 (the Anstis decision). In that decision, the High Court had allowed an individual who incurred study expenses in gaining Youth Allowance to deduct the expenses from her assessable income. The government’s proposed legislative amendments will also affect students on Austudy and ABSTUDY.

Personal services income test failed

The Federal Court has recently confirmed an earlier Tribunal decision that the taxpayer had failed the “unrelated clients” test for the purposes of the personal services income (PSI) rules in the tax law in relation to a drafting business he carried on through his private company. However, the Court found the Tribunal had not properly applied the “business premises” test.
This issue has been sent back to the Tribunal for

TIP: Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as PSI if certain tests are not passed. However, the PSI rules do not apply to individuals or interposed entities carrying on a “personal services business”. It should be noted the ATO has recently advised that it will hold onto some income tax returns to check for PSI where appropriate. Please contact our office for any assistance.

Unfranked dividends from off-market share buy-back

A taxpayer has recently been unsuccessful before the Administrative Appeals Tribunal in arguing that an amended tax assessment was excessive. The amount of tax in question was around $195,000. The Tribunal concluded the amount of $451,600 for unfranked dividends that the taxpayer had received from a selective off-market buy-back of her shares in a company was properly included in her assessable income for the 2009 income year.

TIP: Off-market share buy-backs can give rise to deemed dividends. In the above case, the Tribunal held the consideration for the buy-back was a “deemed dividend” that was assessable to the taxpayer under the tax law in the year in which the buy-back occurred. The rules to determine the deemed dividend in these situations can be complex. In addition, special rules may apply to determine a capital gain tax (CGT) liability. In the above case, it was determined that there was no CGT as the shares were acquired before the commencement of the CGT provisions (that is, they were “pre-CGT shares”).

Tribunal highlights responsibility of SMSF trustee

A recent matter before the Administrative Appeals Tribunal has highlighted the importance of what it means to be a trustee of a self-managed super fund (SMSF). The case involved a trustee of an SMSF along with her husband. In 2006, some $3,460,000 was removed from the SMSF and transferred to an overseas bank account of the husband. The Commissioner issued a non-complying notice to the taxpayer along with an income tax and penalty assessment. Among other things, the taxpayer argued she had no knowledge of her husband’s acts as co-trustee and that the SMSF was entitled to a deduction for the misappropriated funds. However, the Tribunal affirmed the non-complying status of the SMSF and held there was no deduction available in this case. It also affirmed the 75% shortfall penalty. The taxpayer has appealed to the Federal Court against the decision.

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