Issue 132, 28 July 2006

Welcome to the latest issue of Thomson’s Tax & Accounting Insight, your free news service for tax and accounting professionals.

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Articles in this edition include:

• Resignation tax surprise

• Operation Wickenby: Three company directors charged with tax evasion

• Common mistakes in claiming rental property deductions

• Thomson special offers and product alert

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Resignation tax surprise

When employees leave their jobs, they not only have to know their tax positions in relation to any eligible termination payments but also the tax implications of any shares or rights received under an employee share scheme during the current or previous years.

A great deal of the time, accountants are unaware of their clients’ participation in employee share schemes until such time as they leave their jobs or the shares are sold. This is largely due to the unusually complex nature of the provisions relating to employee share schemes. However, it is possible to work through the complexity by carefully determining what sort of shares or rights a taxpayer has received and when a tax liability arises in relation to those shares or rights.

Shares or rights issued under an employee share scheme can be either qualifying shares or rights that are subject to certain concessions, or shares or rights that are not subject to any concessions. Consequently, the first issue to resolve is to determine if the employee has received qualifying shares or rights.

Qualifying shares or rights

The shares or rights will be qualifying shares or rights if:

• the shares or rights were acquired under an employee share scheme; 
• the shares or rights are held in the employer or in the holding company of the employer;
• the shares are ordinary shares or the rights are the right to acquire ordinary shares;
• the employee does not hold more than 5% of the shares in the company after the acquisition of the shares;
• the employee is not in a position to cast or control more than 5% of the maximum number of votes at a general meeting; and
• for qualifying shares (but not qualifying rights) at least 75% of permanent employees of the employer are entitled to acquire shares or share rights under the scheme.

Concessions

If it is determined that the employee’s shares or rights are qualifying shares or rights then one of two concessions apply. The employee can:

• defer tax for up to 10 years; or
• pay tax on the market value of the qualifying shares or rights, reduced by $1,000, in the income year in which the shares or rights are acquired.

Taxing points

Most employees do not pay tax in the year in which the shares or rights are received and therefore by default choose to defer their tax obligation for up to 10 years. The deferred taxing point becomes a particular issue if the employee leaves her or his job. At this point, the employee will be taxed on the benefit, being the difference between the market value of the share or right at the termination time, and any consideration paid for its acquisition. Generally, the employee has not contributed any consideration and, therefore, tax is imposed on the market value of the share or rights.

This is an edited version of an article that appeared in Thomson’s InTax Magazine (July 2006), Australia’s best independent monthly tax magazine. It provides concise reports of the latest tax news, plus the practical implications of tax developments in an easy-to-read magazine format. To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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Operation Wickenby: Three company directors charged with tax evasion

The Treasurer has announced that three directors of a Queensland company were arrested on 20 July 2006 by the Australian Crime Commission and charged with tax evasion offences. He said the directors were arrested at the Southport Police Station on the Gold Coast and were charged with conspiracy to defraud the Commonwealth. The Treasurer said it is alleged that between 1999 and 2005 the benefit that the three directors received through defrauding the Tax Office was $6.6 million. Conviction on these charges carries jail terms of up to 10 years and fines totalling up to $110,000 each. Proceeds of Crime Action have also been used in respect to this specific investigation and $10 million in assets are currently restrained, Mr Costello said. The Minister of Justice and Customs, Senator Ellison, said this particular case has involved extensive investigations in Australia, Switzerland, the United Kingdom and China. ‘Investigations are continuing into a number of similar complex cases with a view to laying criminal charges and taking proceeds of crime recovery action,’ the Treasurer said. 

This article appeared in ATP’s daily Latest Tax News (20 July 2006). With tax fast-moving and ever changing 
— EVERY DAY —  practitioners rely on Thomson ATP’s daily Latest Tax News for quick, accurate, comprehensive information — no compromises. When you need to know what’s new in tax and related news every day, there’s only one place to look — LTN. To find out more, click here. 

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Common mistakes in claiming rental property deductions

The Tax Office has recently released a guide to help taxpayers claim deductions on a property they lease. The guide outlines common mistakes made on income tax returns, some of the more common of which are outlined below:

• claiming the cost of improvements such as remodelling or adding sections to the property as repairs when these should be claimed as capital works deductions;
• over-claiming deductions of interest where a loan was taken for both private and income-producing purposes;
• claiming deductions for items that have been incorrectly identified as depreciating assets; and
• claiming deductions on a property that is only available for rent for a portion of the year (i.e. a holiday house).

TIP: When preparing your personal income tax return, make sure to consult the Tax Office guide: Rental properties 2005–06, to ensure that depreciating assets have been identified correctly and their effective lives are reasonable.

This article appeared in Thomson’s Client Alert Newsletter Service. Client Alert is a monthly newsletter that promotes your business and develops your client’s awareness of upcoming tax issues. To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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Thomson special offers and product alert

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