Law Institute Journal (Victoria)
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At the 13 November 1996 meeting of the official
Technical Liaison Group between the Victorian Tax Office and tax practitioners a number of issues were discussed. The following is a summary of key points from the discussion. These notes have been pre-pared by John Morgan, the tax partner with Phillips Fox.
In the previous meeting (31 July 1996) there was discussion about whether a distribution from a family discretionary trust out of a revaluation of goodwill would be tax free, and some discussion about the minutes. Some practitioners are aware of attempts by the Moonee Ponds Tax Office to assess capital distributions as ordinary income or under sl6OM(7). The Tax Office advised that the need to test such notions had arisen out of the investigations into the high net worth individuals and that we shouldn't assume that the Tax Office was intending to turn principle on its head for "plain vanilla" circumstances.
The question of whether there is any difference as to when an outgoing is incurred, depending on whether the taxpayer returns the derivation of income either on a cash or an accruals basis, raised its head in a question to do with the draft ruling on solicitors' disbursements and recoupments (TR96/D16). Generally, it has been accepted that an outgoing has been incurred prior to its payment if there is a present liability for the amount. How-ever, the Tax Office was exploring whether persons who returned their income on a cash basis could claim their deductions in the year in which they were paid, rather than the year in which the liability was incurred.
The Tax Office is, I think, not interested in actually offering cash-based taxpayers a choice, but rather in requiring them to claim the deduction in the later period. However, the tax office personnel advised that we could expect a draft ruling before Christmas on the meaning of "incurring" losses and out-goings for the purposes of s51(1) and that it was likely to say that the meaning of "incurred" for deductions did not depend on whether you returned income on a cash or an accruals basis. If this is so, then the solicitors' disbursements ruling will also have to be changed.
The Tax Office confirmed that ss160ZL and 160ZM do not apply to reduce the cost base of shares and units (respectively), when a non-assessable distribution is received if the shares and units are trading stock. This is by virtue of sl6OL(3)(a), which says that the CGT regime does not apply in respect of disposals of assets which constitute trading stock and that this applies to the deemed disposals and reacquisitions that ss160ZL and 160ZM would otherwise ordain.
The Tax Office, however, was reticent about leaving the assessment of such distributions to non-CGT provisions (such as the general assessing provisions in s25(1) or the trading stock valuations provisions in ss28 and 29). In searching for a way for the CGT provisions to form an assessing safety net, the Tax Office advised it was entertaining ideas of using sl6OM(7) to assess such distributions in the expectation that s16OZA(4) would prevent double tax if the ordinary assessing provisions were to apply. The practitioners expressed concern about such a view, primarily because sl6OM (7) is expressed to be subject to the other provisions of the Part, which in turn say that the CGT regime is not to apply to trading stock (or at least to disposals of it), and that if sl6OM(7) could invade this precinct, then why not many of the other exempt areas such as pre-CGT assets and principal residences.
There was also concern that s16OZA(4) could not be relied on to avoid double tax as it is not triggered unless the relevant assessable income arises "as a result of the disposal of the asset" that gave rise to the capital gain. In these circumstances there have been no disposal of the actual units or shares which were the trading stock, but rather the tax free distribution has been treated as a deemed disposal of a notional asset and it is not so clear that s16OZA(4) applies to assessable income that arises as a result of deemed disposals of notional assets. The finalaspect of concern was that if sl6OM(7) were to apply, it would create assessable income from the first dollar of the tax free distributions, whereas under ss160ZL and 160ZM an amount does not become assessable until the indexed cost base is reduced below zero or the shares or units are ultimately disposed of for a price above the eroded index cost base.
The Tax Office amplified on comments made at a recent seminar that it does not apply s99B literally. On its face this section is very wide in that it assesses a beneficiary of a trust estate on any amount that was paid to the beneficiary or applied for his or her benefit out of the trust estate unless it falls within one of the except-ions mentioned in sub-sec(2) - which don't always extend as far as they ought. The Tax Office recounted the history of the 1979 amendments which introduced this section following the Union Fidelity case [1969] HCA 36; (69 ATC 4084), which left foreign source trust income untaxed if it accumulated in the trust, even if subsequently distributed to beneficiaries in Australia. The Tax Office was saying that s99B was drawn wider than was perhaps necessary to deal with this problem in the hope of catching all problems of this type, but with the intention that it would not be applied literally beyond the purpose of dealing effectively with foreign source trust income. For in-stance, it is not necessarily meant to tax distributions out of "sheltered" income (i.e. where trust law income exceeds tax law income).
As evidence of this, the Tax Office cited the financing unit trust ruling, which didn't use s99B to assess the distributions. Apparently the decision not to use s99B was taken at a very high level. I should be very careful not to put words into the Tax Office's mouth about when it will and won't apply this section, and this note is not meant to do that. Rather, its purpose is to draw to readers' attention that the Tax Office will not always insist on this section being applied literally.
Section 160ZI, dealing with the apportionment of cost base on disposal of an asset, could to some extent also be dealt with under ss160ZH(12) and (13) dealing with the cost base of split assets. It is obvious that in some cases of part disposals the asset had to be split before it could be partly disposed of (e.g. subdivision of land).
The difference may not be all that significant except that the s160ZH provisions are perhaps more flexible than the sl6OZI provisions, which require the cost base to be split between the part of the asset disposed of and the part retained, in proportion to the consideration received for the part disposed of and the market value of the part retained. By comparison, s160ZH (13) simply requires the cost base to be split between the split assets on whatever basis is "reasonable". The commissioner has issued a draft determination (TD96/D12) dealing with subdivisions of land and the possible application of both these provisions. A draft determination concludes that the disposal of a subdivided block is the disposal of a split asset, not a part disposal of the original asset.
The emergence of this legislation apparently remains on the agenda, with a revised issues paper from the Tax Office due in the treasurer's office very soon.
The implications of this case will also apparently be the subject of a minute to the treasurer from the Tax Office, to be completed shortly.
JOHN MORGAN
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URL: http://www.austlii.edu.au/au/journals/LawIJV/1997/15.html