Taxation Determination TD 2012/10
This TD deals with the issue of when income tax of a private company will be a “present legal obligation” for the purposes of the distributable surplus calculation under s 109Y(2) of Div 7A. It provides that if a private company has a liability to pay instalments for an income year under Pt 2-10 of Sch 1 to the Taxation Administration Act 1953, and some or all of an instalment is unpaid as at 30 June, then the unpaid amount of that instalment is a “present legal obligation” for the purposes of the distributable surplus calculation worked out at that time.
The TD also states that if a private company which is a full self-assessment taxpayer has an amount due and payable (after credits for instalments payable for the income year) by reason of s 5(4) of the ITAA 1997, then this amount is a present legal obligation for the purposes of the distributable surplus calculation worked out at 30 June of the income year which is subject to the deemed assessment under s 166A of the ITAA 1936. According to the determination, the fact that the tax is due on the day the return is lodged which is after the end of the year of income is not relevant for the purposes of the distributable surplus calculation.
CGT trust streaming: “reasonably expected to receive net financial benefit”
Taxation Determination TD 2012/11
This TD expresses the ATO view that it is possible (depending on the circumstances) for a beneficiary of a trust estate to be “reasonably expected” to receive a share of the net financial benefit referable to a capital gain for the purposes of s 115-228(1)(a) of the ITAA 1997 (ie, the “CGT trust streaming measures”), despite the making of the capital gain not being established until after the end of the income year. The ATO says that “the reasonable expectation requirement is directed to the future receipt by the beneficiary of an amount referable to the gain should it arise, not to the likelihood of the gain itself being made”.
The TD emphasises that the “requirement that a beneficiary be ‘reasonably expected to receive’ an amount equal to a financial benefit does not focus on whether the beneficiary has a reasonable expectation of the relevant capital gain arising. The provision is premised on there being such a gain. Accordingly, the requirement instead focuses on whether the beneficiary has a reasonable expectation of receiving an amount referrable to that gain (should the gain arise)”.
Division 7A: operation of exclusion rules in Subdiv D
Taxation Determination TD 2012/12
This TD states that the rules in Subdiv D of Div 7A of Pt III of the ITAA 1936 (which exclude certain payments or loans from being treated as dividends under Subdiv B) do not necessarily affect the circumstances in which a deemed payment or notional loan arises under Subdiv E. Whether or not the exclusion rules in Subdiv D have an impact on the application of Subdiv E will depend upon the facts and circumstances of each case.
Under Subdiv B, private company payments or loans made directly to an entity that is a shareholder (or an associate of a shareholder) are taken to be a dividend paid to the shareholder (or associate). The ATO notes there are occasions when it would be inappropriate to apply the broad rules in Subdiv B. Subdivision C sets out the rules that provide that a dividend does not arise under Subdiv B where certain debts are forgiven (eg, between companies). Subdivision D sets out rules about payments and loans that are also not treated as dividends under Subdiv B.
For example, payments of genuine debts to an entity, payments and loans to other companies and otherwise assessable payments or loans are excluded from the general rules in Subdiv B under ss 109J, 109K and 109L, respectively. Loans made in the ordinary course of a private company’s business on an arm’s length basis are also not taken to be dividends (s 109M).
The ATO says a way of avoiding the operation of the primary rules in Subdiv B may be to cause an entity interposed between the private company and its shareholder (or their associate) to itself make a payment or loan to the shareholder (or their associate). However, it says Subdiv E anticipates this kind of arrangement and sets out rules to treat payments and loans through interposed entities as giving rise to direct payments and loans under Subdiv B from a private company to a shareholder (or their associate) which are then taken to be dividends.
SMSFs and limited recourse borrowing arrangements
Self Managed Superannuation Funds Ruling SMSFR 2012/1
This ruling explains the Commissioner’s views on the limited recourse borrowing arrangement (LRBA) provisions in ss 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act). It is a very important ruling for any SMSF that invests in property.
The ruling explains the key LRBA concepts of:
- what is an “acquirable asset” and a “single acquirable asset”
- “maintaining” or “repairing” the acquirable asset as distinguished from “improving” it
- when a single acquirable asset is changed to such an extent that it is a different (replacement) asset.
Broadly, an SMSF is permitted to borrow money (and maintain a borrowing) provided the borrowing is made pursuant to an LRBA. The ruling outlines where money borrowed under an LRBA can be applied in maintaining or repairing (but not improving) a single acquirable asset.
While borrowings under an LRBA cannot be used to improve an acquirable asset, the Tax Office says money from other sources (eg, accumulated funds held by the SMSF) could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset (ie, a “replacement asset” in circumstances not covered by s 67B).
While money borrowed under an LRBA can only be applied for the acquisition of a single acquirable asset (or a collection of identical assets with the same market value), the Commissioner considers that a single object of property may be acquired notwithstanding that it is comprised of separate bundles of proprietary rights (eg, if there are two or more blocks of land).
The ruling goes over the well-worn path of repairs versus improvements that will be familiar to many tax practitioners.
Borrowings applied for repairs (but not improvements)
Money borrowed under an LRBA may be applied in “maintaining” or “repairing” (but not “improving”) the acquirable asset: s 67A(1)(a)(i). To determine if an asset has been repaired or maintained (or whether it has been improved), the Tax Office says reference is made to the qualities and characteristics of the asset at the time the asset is acquired under the LRBA. To this end, the Tax Office says an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.
Maintaining the asset
The ruling states that “maintaining” means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration provided that the work merely ensures the continued functioning of the asset in its present state.
Repairing the asset
According to the ruling, “repairing” means remedying or making good defects in, damage to, or deterioration of, an asset and contemplates the continued existence of the asset. The Tax Office says a repair (usually occasional and partial) restores the function of the asset without changing its character and may include restoration to its former appearance, form, state or condition.
Acquiring asset in need of repair (restoration)
If an asset is acquired in a state in which a part of the asset is defective, damaged or suffering some deterioration of what would be considered to be its normal level of function, the Tax Office says the subsequent repair of the asset using borrowings under the LRBA for that purpose is nonetheless permitted under s 67A(1)(a)(i).
