Capital Gains Tax Laws

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Compensation Payments               Small Business CGT                 At a later date, the
                                                                       partnership entity ceased
In a recent case, the Adminis-      Concessions                        being connected to the
trative Appeals Tribunal            Certain small business             taxpayer when the common
(AAT) has confirmed that                                               controller sold its shares.
                                    taxpayers may be entitled to
compensation payments               CGT concessions on disposal        However, the entity
received by a taxpayer after                                           continued to carry on the
                                    of their CGT assets.
turning age 65 were assess-                                            same business.
able income even though the         In order to apply the small
taxpayer argued that they           business CGT concessions,          Subsequently, the taxpayer
were capital in nature.             the asset disposed of must         sold the premises and made a
                                    have satisfied the active asset    capital gain. The taxpayer
The taxpayer was unable to                                             argued that the premises
work due to ill health and          test. The test requires that the
                                    asset must have been an            were an active asset just
received fort-nightly                                                  before the cessation of the
compensation payments.              active asset in the taxpayer’s
                                    business just before the           partner-ship business, which
Upon turning age 65 in                                                 occurred on disposal of its
March 1994, the taxpayer’s          earlier of:
                                                                       shares.
payments continued to be               its disposal; and
taxed as income. The                                                   Therefore, the active asset test
taxpayer objected on the               the cessation of the           would be satisfied and the
grounds that the receipts               relevant business (if the      concessions would be
represented payment of a                relevant business has          available to reduce the capital
capital sum for loss of                 ceased in the previous 12      gain.
earning capacity.                       months before the
                                        disposal).                     The Tax Office rejected this
In response, the Tax Office                                            argument and emphasised
argued that the payments            In regard to the second            that the sale of shares did not
were ordinary income in the         requirement, the Tax Office        constitute a cessation of
hands of the tax-payer              has declared in a recent           business. As such, the
regardless of age and should        Interpretative Decision (ID)       taxpayer was not entitled to
therefore be included in            that the sale of shares in         the CGT concessions, as the
assessable income. The Tax          the relevant business is not a     active asset test could not be
Office argued that payments         cessation of that business.        satisfied.
were ordinary income
                                    The ID examines a case              TIP: Small businesses should
because they were received          where the taxpayer owned               carefully consider their entitle-
periodically, on a regular          premises that were used in             ment to small business CGT
basis, and they supplemented        the business of a partnership.         concessions whenever an asset
income.                                                                    is sold.
                                    One of the partner-ship
The AAT agreed with the Tax         entities was connected to the      Foreign Rental Income
Office’s arguments and held         taxpayer through a common
that the payments were              controller. As a result, the       The Tax Office has recently
assessable income. The AAT          premises were an active asset      released an Interpretative
held that the amount could          of the taxpayer even though        Decision (ID), which
not be capital as it was not a      the taxpayer did not use the       considers whether rental
fixed sum and it was unable         premises in the course of          income from property
to be redeemed (i.e. received       carrying on its own business.      outside of Australia is
as a capital lump sum).




                                                                                             June 2005
assessable income of                               held that a taxpayer company                        Changes to GST Laws
Australian tax residents.                          was entitled to deduct legal                        on Property Sales
                                                   expenses incurred in settling
The assessable income of an                                                                            The Federal Government has
                                                   a damages claim even though
Australian resident includes                                                                           recently introduced a number
                                                   it had not produced any
income from all sources,                                                                               of important changes to the
                                                   income.
whether in or outside of                                                                               GST laws, which will impact
Australia. However, in                             The taxpayer owned a large                          the sale and purchase of real
relation to foreign-sourced                        rural property that had a                           property.
income, a Double Tax                               leased dwelling situated on it.                     The new laws are, in part,
Agreement (DTA) between                                                                                designed to stop
Australia and the contracting                      In lieu of rental payments, the                     arrangements whereby
nation must be considered, as                      tenant agreed to provide                            entities reduce or eliminate
the DTA typically takes                            certain services on the                             GST on supplies of real
precedence.                                        property with the taxpayer’s                        property through the use of
This ID reviews the                                agent being responsible for                         the going concern, GST group
                                                   maintenance on the dwelling.                        and GST joint venture
assessability of income
derived by an Australian                                                                               provisions.
                                                   A legal dispute arose
resident taxpayer from a                           following the tenant’s injury                       It is very important that
rental property in                                 in connection with                                  sellers of residential
Switzerland.                                       maintenance of the property.                        properties undertake a
Under the DTA between                                                                                  review of their structures and
Australia and Switzerland,                         In settling the dispute, the                        operations in order to ensure
rental income derived by an                        tax-payer and its agent                             that there are no adverse GST
Australian tax resident from                       incurred approximately                              implications or ‘hidden’ GST
real property in Switzerland                       $39,780 in legal fees.                              costs.
may be taxed in Switzerland.                       The Tax Office disallowed                            CAUTION: GST needs to be
                                                   the legal expense deduction                              carefully considered prior to
The Tax Office considers that                                                                               completing any sales or
the phrase ‘may be taxed’                          on the basis that there was no                           purchase of real property.
indicates that Switzerland has                     nexus between incurring the
a non-exclusive taxing right.                      legal expenses and the tax-
                                                   payer’s income producing                            Evidence for Expenses
Accordingly, the rental
income may potentially be                          activities.                                         Substantiation
taxed in both countries.                                                                               The Tax Office has recently
                                                   However, the AAT accepted
Where foreign tax has been                                                                             released a Practice Statement
                                                   that the taxpayer held the
paid on income subject to                                                                              (PS) providing guidance to
                                                   dwelling separately for the
Australian tax, a foreign tax                                                                          individual taxpayers as to
                                                   purposes of producing
credit is typically available                                                                          generally accepted
                                                   assessable income and that
against the Australian tax                                                                             documentation that may be
                                                   the function of maintaining
payable.                                                                                               used to substantiate
                                                   the property by the agent was
                                                                                                       deductions in the tax return.
                                                   incidental and relevant to
 CAUTION: It is critical to                                                                           The PS outlines that
    receive professional taxation                  that purpose.
    advice when dealing with
                                                                                                       individuals without a receipt
    foreign income to ensure that                  Consequently, even though                           for work-related expenses
    correct tax is paid and any                    no rental income was                                may still be able to claim a
    available foreign tax credit is                derived, the AAT found that                         deduction by maintaining
    claimed.                                       the legal expenses incurred                         other records, which include:
                                                   by the taxpayer were an                              online banking and credit
Deductibility of Legal                             allowable deduction.                                    card statements;
Fees                                                                                                    online, email and photo-
                                                                                                           copied receipts; and
The Administrative Appeals
Tribunal (AAT) has recently                                                                             BPay records.

 Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general
 comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend
 that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private
 information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

				
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