|
|
|
|
Business Brief From Chotais, Chartered Accountants NEWSLETTER No. 99-8 August 1999
The Latest Tax ChangesAre You Prepared?Time to Revisit Salary Packages Interest Deduction Allowed After Business Had Ceased Frequent Flyer and Consumer Loyalty Programs
The Tax Office has issued its long awaited draft ruling on salary sacrifice arrangements. The ruling draws significant distinction between retrospective and prospective arrangements. A retrospective arrangement is one where an employee directs that a presently existing entitlement to salary or wages (relating to services already performed) is paid in a different form. A prospective arrangement involves employees contractually forgoing a future (not presently existing) entitlement to salary or wages. The ruling states that benefits provided under retrospective arrangements are ineffective and remain subject to income tax (in the hands of the employee) rather than FBT. Benefits under a prospective arrangement are effective and will be subject to FBT. Arrangements to package salary below minimum entitlements under an industrial law are also ineffective. While the Tax Office view concerning retrospective arrangements is not unexpected, there is doubt as to its correctness. The Tax Office approach can have serious implications if employees seek to package accrued annual or long service leave, or bonus payments. Time to Revisit Salary Packages The proposed 1-April 2000 FBT changes will limit the tax efficiency of fringe benefits provided by FBT exempt and FBT rebatable employers. Employers should therefore consider renegotiating salary packages for the current year to maximise benefits prior to 31 March 2000. Employees of FBT payable employers can still benefit from salary sacrifice arrangements. There are a number of FBT exempt or concessionally treated benefits that can still provide an effective and efficient salary package. Salary packages should be reviewed in light of tax reform (for example, Fringe Benefits Reporting rules that apply from 1 April 1999) to ensure the maximum benefit is obtained. The Tax Office has released a statement of principles concerning trust resettlements. It states that an amendment to an existing trust will result in a resettlement of a trust (and a disposal of its assets for CGT purposes) where there is a fundamental change in the relationship between the trustee and beneficiaries. Potential situations in which a resettlement could occur include: · a redefinition of the class of trust beneficiaries or the issue of a new class of units; · any change in beneficial interests in trust property; · changes in the terms of the trust or the rights or obligations of the trustee; · changes in the nature or features of the trust property; · changes in the termination date of the trust; · changes in the essential nature and purpose of the trust; · a unit trust being converted into a hybrid or discretionary trust; and · a merger of two or more trusts or splitting of a trust into two or more trusts. The Tax Office states that a new trust arises when there is a fundamental change to the essential nature and character of the original trust relationship. As such, a question of degree arises. Interest Deduction Allowed After Business Had Ceased The Full Federal Court has decided that interest on a loan used to purchase a business, which had long since ceased, remained deductible. The occasion of the recurring liability for interest on the bank loan was the bank loan agreement, the purpose of which was to acquire and carry on a business to produce assessable income. The fact that the outstanding loan could have been repaid earlier did not affect the deductibility of the interest. A significant fact was that the business owners used the business sale proceeds to partially repay the loan. There may have been a different outcome if they had used the proceeds for some other perhaps non-income producing purpose. The Tax Office has announced that it will disallow tax deductions for significant prepaid interest amounts arising under linked bond or note arrangements. The bonds combine a fixed interest income component, and the possibility of a bonus return, linked to a nominated equity or index. The main features of the bonds are: Investors typically borrow 100% of the face value of the bond, and prepay interest (most of which typically is also borrowed) claiming a significant up-front tax deduction; · the investor returns the fixed interest income on maturity (usually in the following year resulting in a tax deferral); · due to the degree of movement required in the linked share or index, there is little if any prospect of worthwhile commercial gain. Taxpayers who entered into such arrangements should consider their position carefully. Frequent Flyer and Consumer Loyalty Programs The Tax Office has released a tax ruling and two determinations concerning the income tax and FBT implications of rewards received from frequent flyer and consumer loyalty programs. The following principles emerge: · employers will not be subject to FET unless they receive rewards and pass them on to employees (where possible) in respect of employment; · rewards received by employees from employer-paid expenditure will typically not be assessable income; · rewards received by individuals as a result of business expenditure will not be assessable, unless entitlements are provided as remuneration, or business activities give rise to the benefits (for example, acquisition and supply of trade goods); · joining or annual fees are not deductible, except where paid by an employer as an employment cost. The ruling also suggests a method of valuing the flight rewards where appropriate. One of the lessons learned from the 1980’s tax reform is that those who embrace the tax reform changes first will do well. Those who delay will lose. You might seriously consider setting time aside to conduct structural reviews of your business, and your marketing plans, in the near future.
|
Send mail to webmaster@chotais.com.au with questions or comments about this web site.
|
