greenwoods & freehills budget briefing the 2009-10 commonwealth budget

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Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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Page 1: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Greenwoods & FreehillsBudget Briefing

The 2009-10 Commonwealth Budget

Page 2: Greenwoods & Freehills Budget 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

Page 3: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

The 2009-10 Commonwealth Budget

MITs

Andrew MillsDirector

Page 4: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

MIT CGT treatment• Why?

• What is it?

• Who qualifies?

• What will it apply to?

• When will it apply?

Page 5: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

MIT CGT

– History– ATO activity and industry lobbying– MIT Review terms of reference– International competitiveness and certainty

Why?

Page 6: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

MIT CGT

– Elective– CGT to apply to disposals of “eligible assets”

What is it?

Page 7: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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?

Page 8: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

MIT CGT

– not same as EIB list– shares, units, real property– likely follow super rule– TOFA arrangements probably excluded

What assets?

Page 9: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

MIT CGT

– elective – 2008/09 year and following– irrevocable– query

(a) new trusts

(b) change in assets

(c) mergers of trusts

When applies

Page 10: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 11: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

SUPERANNUATION MEASURES

Shayne CarterDirector

11

The 2009-10 Commonwealth Budget

Page 12: Greenwoods & Freehills Budget Briefing 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

Page 13: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 14: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 15: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 16: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 17: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 18: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 19: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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:

Page 20: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 21: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 22: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 23: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 24: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

EMPLOYEE SHARES SCHEMES

Ernest ChangDirector

24

The 2009-10 Commonwealth Budget

Page 25: Greenwoods & Freehills Budget Briefing 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

Page 26: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 27: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 28: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 29: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

FOREIGN SOURCE INCOME (CFCs, FIFs etc)

Jane MichieDirector

29

The 2009-10 Commonwealth Budget

Page 30: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Foreign source incomeIntroduction

• Tax Board recommendations (10)

• Government responses

• Treasury consultation

Page 31: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 32: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #2

Exempt listed public companies

Provided– comparable worldwide tax rate; or– sufficient distributions; or– limited consolidated passive income

Foreign source incomeRecommendations

Page 33: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #3

Modernise definition of ‘passive income’

(adopting group approach)

Foreign source incomeRecommendations

?

Page 34: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #4

Remove ‘base company’ income fromattribution (tainted sales and taintedservices)

(Subject to integrity rule, if necessary)

Foreign source incomeRecommendations

?

Page 35: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #5

Exempt complying superannuation funds from new CFC rules

Foreign source incomeRecommendations

Page 36: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #6

Offer choice of methods:

– calculation– deemed rate of return (without 4%)– market value

(Subject to integrity rule)

Foreign source incomeRecommendations

?

Page 37: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #7

Calculation method to be based on tax principles, not accounting principles

Foreign source incomeRecommendations

Page 38: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #8

Repeal section 404

Amend 23AJ

Foreign source incomeRecommendations

Page 39: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 40: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Recommendation #10

Transferor Trusts

– remove shelters where non-control– allow for multiple transferors– consider other

Foreign source incomeRecommendations

Page 41: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Foreign source incomeTreasury consultation

• Pre-drafting Discussion Paper

• Part X to be re-written in ITAA 1997

• Principle-based drafting

Page 42: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 43: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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?

Page 44: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 45: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 46: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 47: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

OFF-MARKET SHARE BUY-BACKS

Ernest ChangDirector

47

The 2009-10 Commonwealth Budget

Page 48: Greenwoods & Freehills Budget Briefing 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

Page 49: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 50: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 51: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Off-market share buy-backsProposed key measures

51

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)

Page 52: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

Off-market share buy-backsNext steps

• Consultation – details by 31 May 2009

52

Page 53: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

GSTchanges/announcements

Andrew HoweDirector

The 2009-10 Commonwealth Budget

Page 54: Greenwoods & Freehills Budget Briefing 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 …

Page 55: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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

Page 56: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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?

Page 57: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

www.gf.com.au

Page 58: Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget

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]