greenwoods & freehills budget briefing the 2009-10 commonwealth budget
TRANSCRIPT
Greenwoods & FreehillsBudget Briefing
The 2009-10 Commonwealth Budget
The 2009-10 Commonwealth Budget
• Managed investment trusts – Andrew Mills
• Superannuation and related measures– Shayne Carter
• Employee share schemes– Ernest Chang
• Foreign source income (CFCs, FIFs etc)– Jane Michie
• Off-market share buy-backs– Ernest Chang
• GST– Andrew Howe
The 2009-10 Commonwealth Budget
MITs
Andrew MillsDirector
MIT CGT treatment• Why?
• What is it?
• Who qualifies?
• What will it apply to?
• When will it apply?
MIT CGT
– History– ATO activity and industry lobbying– MIT Review terms of reference– International competitiveness and certainty
Why?
MIT CGT
– Elective– CGT to apply to disposals of “eligible assets”
What is it?
MIT CGT
– “MITs” – which definition? – trusts 100% owned by MITs
• satisfying “eligible investment” rule in Div 6C• not unit trusts subject to corporate tax
Who qualifies?
MIT CGT
– not same as EIB list– shares, units, real property– likely follow super rule– TOFA arrangements probably excluded
What assets?
MIT CGT
– elective – 2008/09 year and following– irrevocable– query
(a) new trusts
(b) change in assets
(c) mergers of trusts
When applies
Trust to trust rollover• Proposed abolition of E1 and E2 announced October 2008
• Discussion paper and submissions followed
• Limited rollover announced in budget
• Fixed trust requirement
• No material discretionary elements
• Same beneficiaries
• Benefit in stapled trusts arrangements
SUPERANNUATION MEASURES
Shayne CarterDirector
11
The 2009-10 Commonwealth Budget
The Measures
• Reduction of the concessional contribution caps
• Transfer of small and lost accounts
• Account-based pensions draw-down relief
• Trans-Tasman retirement savings scheme
• Capital loss roll-overs for complying superannuation fund mergers
• Life insurance – immediate annuity business
• Henry Review of Retirement Income System
Contribution caps from 2009-10 year
• Concessional– cap halved to $25,000 ($50,000 transitional for those
aged 50 and over until 30 June 2012)
• Non-concessional– cap maintained at $150,000 by changing cap from
3 x concessional cap to 6 x concessional cap
• Grandfathering– pre-Budget defined benefits where notional
contribution will exceed new concessional limit
Transfer of small and lost accounts
• ‘Efficiency’ measure
• Lost accounts with balances less than $200, and inactive for 5 years and insufficient records to identify owners
• Members can reclaim such money
Account-based pensions draw-down relief
• Currently flexible rules concerning pensions
• Minimum draw-down rules
• 18 February the minimum draw-down amount for 08/09 was halved
• Measure extended to 09/10
Trans-Tasman retirement savings portability scheme
• In-principle agreement to a memorandum of understanding with New Zealand to establish a Trans- Tasman retirement savings portability scheme
• Proposal to permit transfers between New Zealand Kiwi Super funds and certain Australian superannuation funds
• No real detail and no start date
Capital loss roll-over for complying superannuation mergers
• Build up of capital losses in funds created a barrier to transfer
• Government announced CGT loss roll-over relief in transfers to superfunds with at least 5 members
• Broadly proposed CGT loss roll-over would allow the transferring fund to disregard some or all of any capital losses
• The receiving fund to inherit the transferring fund’s cost base
Capital loss roll-over for complying superannuation mergers ... continued
• Announcement in April 2009 of further refinements to proposal – extension of arrangements to mergers involving pooled superannuation trusts and the complying super business of a life insurance company
• Will allow super entities in a net capital loss position to roll-over assets with capital gains and capital losses
• Extended to realised capital losses or revenue losses
Government co-contribution
• Currently government makes a co-contribution of $1.50 for each $1 of personal after-tax contributions made by a person earning under $30,342
• Co-contributions phase out to persons earning $60,342
• The rate of government co-contribution will be temporarily reduced as follows, returning to the present rate of $1.50 in the 2014-2015 year:
Government co-contribution
Income year 2009/1020010/1120011/12
2012/132013/14
2014/15
Rate of Government co-contribution
$1.00 $1.25 $1.50
Maximum available co-contribution $1,000.00 $1,250.00 $1,500.00
Rate of shading out of maximum available Government co-contribution if income exceeds full-contribution threshold
$0.03333 per $1 of excess income
$0.04167 per $1 of excess income
$0.05 per $1 of excess income
Life insurance – immediate annuity business
• Problem with exemption for life policies
• Particular issues with application of provisions after consequential simpler super amendments
• Super income stream benefits to be treated on same footing as other providers
• Ordinary money annuities old rules apply
Henry Review of retirement incomes released
• That the three pillar approach (that is, the means-tested Age Pension, compulsory superannuation guarantee and voluntary contributions) be retained
• Greater consideration of the interaction of the tax transfer system and the aged care system is required
• Concern that the longevity risk (the risk that individuals will exhaust their assets before death) is a structural weakness of the superannuation system
• A general lack of awareness and engagement of individuals with the retirement income system
Henry Review ... continued
• That tax-assisted voluntary superannuation contributions should be more fairly distributed
• Questioning the current cap on concessional contributions - which the government specifically announced it would act on
• That the current 9% compulsory rate of saving was appropriate; and
• That preservation age should be gradually increased to 67, subject to further examination how mandatory retirement ages should be treated
EMPLOYEE SHARES SCHEMES
Ernest ChangDirector
24
The 2009-10 Commonwealth Budget
Changes
1.Tax ‘deferral’ abolished
2.$1,000 exemption restricted
Commencement: acquisitions after 7:30pm, 12 May 2009
Employee share & option plans
Policy
1. Economy: imperative for cash
2. Competitiveness: trading partners defer at least until vesting
3. Fairness: income tax when something at your disposal
Employee share & option plans
Comparators
options shares
US exercise when forfeiture conditions cease (must be substantial risk)
UK exercise when forfeiture conditions cease (max. 5 years)
France exercise upon vesting
Germany exercise upon vesting
Japan exercise [upon vesting]
Employee share & option plans
Practical implications
Immediate
• New hires under offer
• ‘Rolling’ plans – allow opt-out
Long term
1. All employee (“$1,000”) plans – continue?• discrimination per $60,000 threshold• still cheap shares
2. Loan plans / phantom plans / other?
Employee share & option plans
FOREIGN SOURCE INCOME (CFCs, FIFs etc)
Jane MichieDirector
29
The 2009-10 Commonwealth Budget
Foreign source incomeIntroduction
• Tax Board recommendations (10)
• Government responses
• Treasury consultation
Recommendation #1
Repeal FIF and deemed presententitlement rules
Re-write CFC rules
Apply CFC rules to (fixed) CFTs
Apply CFC rules to NCLEs
Foreign source incomeRecommendations
Recommendation #2
Exempt listed public companies
Provided– comparable worldwide tax rate; or– sufficient distributions; or– limited consolidated passive income
Foreign source incomeRecommendations
Recommendation #3
Modernise definition of ‘passive income’
(adopting group approach)
Foreign source incomeRecommendations
?
Recommendation #4
Remove ‘base company’ income fromattribution (tainted sales and taintedservices)
(Subject to integrity rule, if necessary)
Foreign source incomeRecommendations
?
Recommendation #5
Exempt complying superannuation funds from new CFC rules
Foreign source incomeRecommendations
Recommendation #6
Offer choice of methods:
– calculation– deemed rate of return (without 4%)– market value
(Subject to integrity rule)
Foreign source incomeRecommendations
?
Recommendation #7
Calculation method to be based on tax principles, not accounting principles
Foreign source incomeRecommendations
Recommendation #8
Repeal section 404
Amend 23AJ
Foreign source incomeRecommendations
Recommendation #9
Introduce narrow anti-roll-up measure in lieu of FIF regime
– low risk offshore accumulation funds– dominant tax deferral purpose
Foreign source incomeRecommendations
Recommendation #10
Transferor Trusts
– remove shelters where non-control– allow for multiple transferors– consider other
Foreign source incomeRecommendations
Foreign source incomeTreasury consultation
• Pre-drafting Discussion Paper
• Part X to be re-written in ITAA 1997
• Principle-based drafting
Foreign source incomeTreasury consultation
• Passive vs Active income
– ‘active’ can include traditionally passive items– possibly, no special rules for AFI subsidiaries– ‘intra group’ relief is limited– flow-on for s.23AH and Div 768-G
Foreign source incomeTreasury consultationSection 23AJ
• seeking a single non portfolio concept – less emphasis on voting rights – possible loss of s.387 relief
• apply to equity interests – shares only?– debt interests excluded
• 3rd party arrangements?
• interposed trusts/partnerships
• extend to corporate unit trusts/public unit trusts
• s.23AI to be repealed?
Foreign source incomeTreasury consultations – additional insights
• De facto control to dominate
• Possible loss of FITOs
• Debt/equity and TOFA rules likely to apply
• Possible limit on debt deductions
• Limits on choice of methodology
Foreign source incomeTreasury consultation – noticeable omissions
• No effective dates (anywhere)
• No discussion of NCLE application
• No discussion of FIF integrity rule
• No discussion of base company integrity rule
• Foreign hybrids not addressed
Foreign source incomeTake-away points
Good Bad
• End of FIF regime
• End of tainted sales and services
• Room for ‘integrity’ optimism
• No exemption for listed companies
• Limited intra-group relief
• Threatened loss of FITOs
OFF-MARKET SHARE BUY-BACKS
Ernest ChangDirector
47
The 2009-10 Commonwealth Budget
Off-market share buy-backs
• Background
• Implementation of all six Board of Taxation recommendations– legislating current ATO administrative practice (PS
LA 2007/9)– change in tax recognition of notional losses by
shareholders – differentiation between listed and unlisted companies
• Application– Effective from date of Royal Assent
48
Off-market share buy-backsBoard of Taxation recommendations
49
Issue Current position Recommendation
1 Level of discount to VWAP
14% ‘administrative cap’
Removal of cap for listed companies
2 Non-resident to resident streaming
Administrative formula to calculate franking debit
Legislative formula to calculate franking debit
3 ‘Notional’ losses on disposal
Notional losses denied for companies
Notional losses denied for all shareholders in listed company buy-backs
Notional losses not denied to all shareholders in unlisted company buy-backs
Off-market share buy-backsBoard of Taxation recommendations
50
Issue Current position Recommendation
4 Dividend capital split(preferred method)
Average capital per share (on an administrative basis) plus Commissioner’s discretion
Average capital per share (on a legislative basis) plus Commissioner’s discretion
5 Application of anti-avoidance rules (s.45A, 45B and 177EA(5)(b))
These rules may apply (subject to Commissioner’s discretion)
These rules will not apply to shareholders in listed company tender style buy-backs
6 Legislative rewrite Division 16K of the ITAA 1936
New provisions in ITAA 1997
Off-market share buy-backsProposed key measures
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Buy-back by LISTED company Buy-back by UNLISTED company
No 14% discount ‘cap’ 14% discount ‘cap’ remains
Formula for non-resident streaming franking debit
Formula for non-resident streaming franking debit
No ‘notional losses’ for all shareholders
‘Notional losses’ can occur for all shareholders (including corporate shareholders)
Average capital per share (plus discretion)
Average capital per share (plus discretion)
Sections 45A, 45B, 177EA(5)(b) not to apply to tender style buy-back
Sections 45A, 45B, 177EA(5)(b) may apply (subject to Commissioner’s discretion)
Off-market share buy-backsNext steps
• Consultation – details by 31 May 2009
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GSTchanges/announcements
Andrew HoweDirector
The 2009-10 Commonwealth Budget
Reform of GST administration
• Released BoT report & Government response
• Support 41 out of 46 BoT recommendations, including:– simplify Div 129– review non-resident provisions – manufacturer’s rebates – appealable rulings – option to tax B2B– wider grouping provisions
• Immediate measure: 4 year limit to claim ITCs …. plus …
Review of margin scheme
• Is margin scheme meeting its objectives?– denial without adjustment– unregistered landowners – valuation dispute
• Options to reform:(i) replace provisions with principles
(ii) replace with notional ITC regime
(iii) amend existing provisions
Review of financial supplies
• Reduce complexity and inconsistencies:
(i) replace framework with principles (incl. TOFA definitions)
(ii) amend existing law • acquisition supplies• pre 1 July 2000 financial supplies
• Review RITC regime • clarify RCA items • multiple RITC rates?
www.gf.com.au
Contact details for speakers Shayne Carter Direct: 9225 [email protected]
Ernest ChangDirect: 9225 [email protected]
Andrew Howe Direct: 9225 5919 [email protected]
Jane MichieDirect: 9225 5915 [email protected]
Andrew Mills Direct: 9225 5966 [email protected]