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Issue 144, 2 March 2007
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Articles in this edition include:
Editorial Enquiries:
Tel: 1300 304 197
LRA.Service@thomson.com Copyright:
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Pyrmont NSW 2009
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Commissioner's discretion - non-commercial losses
The Tax Office recently released a draft ruling providing
guidelines on how the Commissioner's discretion, contained in the
non-commercial loss provisions, may be exercised.
The non-commercial loss provisions prevent taxpayers from
offsetting losses generated from a non-commercial business activity
(e.g. a hobby farm) against the taxpayer's other assessable
income.
There are four tests that apply to determine if a loss can be
considered a business loss and hence deductible against the
taxpayer's other income.
In addition to these tests, there is also a provision that allows
the Commissioner to exercise his discretion in circumstances where
he determines it would be unreasonable to defer the loss.
The ruling indicates that the Commissioner may exercise his
discretion in the following circumstances:
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special circumstances: the
business activity has been affected by special circumstances
outside of the taxpayer's control, specifically including:
flood, drought or natural disaster;
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nature of business: an
inherent characteristic of the business would necessarily cause
the taxpayer to fail one of the tests mentioned above; and
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objective expectation: there
is an objective expectation that during a commercially viable
period of time, the activity will meet one of the four tests.
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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Q. An employee of a construction
company is to be made redundant in May 2007. The employee is a
minority shareholder (not a director). The employee is being made
redundant because the company is ceasing to trade and is being
shut down.
The employee will be owed about $50,000 in
long service leave and $40,000 in holiday pay. The company will
also pay $100,000 if he stays to May 2007, most likely to be a
bona fide redundancy payment (to the maximum amount, as he
commenced employment with the company in 1988).
What tax issues should we consider so as to
best structure the payout (the employee would prefer that no money
go to super, but is flexible)?
A. If the $100,000 payment qualifies
as a 'bona fide redundancy payment' under section 27F of the Income
Tax Assessment Act 1936 (see Taxation Ruling TR 94/12), the
first $6,783 plus $3,392 for each whole year of service is
tax-free: section 27CB. The remainder is regarded as an eligible
termination payment (ETP) under section 27A as it is made 'in
consequence of' the termination of the taxpayer's employment:
see Taxation Ruling TR 2003/13. Such an employer ETP (i.e. in
excess of the tax-free amount of a bona fide redundancy payment)
is currently taxed as follows:
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pre-July 1983 component - 5% of this amount is included in the taxpayer's assessable
income and taxed at marginal rates;
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post-June 1983 component - for those aged 55 and over, the first $135,590 of this
component is taxed at 15% (plus Medicare levy) and the excess
at 30% (plus Medicare levy). For those aged under 55, the
entire component is taxed at 30% (plus Medicare levy);
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excessive component - taxed at up to 45% plus Medicare levy on that element of an
ETP above the taxpayer's reasonable benefits limit (RBL)
(i.e. lump sum RBL of $678,149 for 2006/07).
The leave components will be taxed as follows
(if there is a bona fide redundancy):
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annual leave amount - included in assessable income but a rebate applies to
effectively limit the maximum tax rate to 30% (plus Medicare
levy): sections 26AC and 159S to 159SG; and
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long service leave
(post-18.8.78) - included in assessable income but a rebate
applies to effectively limit the maximum tax rate to 30% (plus
Medicare levy): sections 26AD and 159S to 159SG.
Option to roll over to super
All employer ETPs rolled over to a
superannuation fund between 1 July 2004 and 30 June 2007
must be preserved in the superannuation system until the fund
member satisfies a condition of release (e.g. retirement from
gainful employment at least after age 55).
Importantly, it will no longer be possible
for employees to roll over an employer ETP to superannuation from
1 July 2007. This will be a particular disadvantage for those
under age 55 who will no longer be able to 'park' the benefits
in super until after age 55 when further concessional rates apply.
However, if the employer ETP is rolled over it will be subject to
15% contributions tax on its way into the complying fund. Note
that any part of a bona fide redundancy payment amount that is
tax-free under section 27CB is not considered an ETP and cannot be
rolled over to superannuation.
This is an extract of an article that
appeared in Thomson's InTax
(February 2007); 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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Review of military superannuation
announced
The Minister Assisting the Minister for
Defence, Mr Bruce Billson, on Tuesday (27 February 2007) announced
that an independent review of military superannuation arrangements
has been commissioned. He said the aim of the review is to ensure
that the military schemes continue to 'meet the needs of our
people and reflect contemporary superannuation standards in a
sustainable manner'. The Minister assured serving and former ADF
members that 'there will be no detriment to their accrued
superannuation entitlements no matter what the outcome of the
review'.
Mr Billson said the report will be completed
in mid-2007 and submitted for Government consideration.
Submissions are welcomed. Additional information about the review,
the terms of reference and consultation arrangements are available
on the Defence
Website.
For more on this topic see the Minister
Assisting the Minister for Defence's media release - No.
MINASSIST 010/2007, 27 February 2007.
This article appeared in Thomson's daily Latest
Tax News (27.2.07). With tax fast-moving and ever changing - EVERY DAY, practitioners rely on Thomson'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
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