Issue 165, 21 January 2008

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

Tax & Accounting Insight is the easy way to keep up with the latest developments in your industry. Watch your inbox for your fortnightly issue of this free, informative service from Thomson.

Articles in this edition include:

• Tax Office Assistance Visits for Small Businesses

• PSI and the Results Test

• Exempt Income of a Non-profit Entity

• Thomson Tools

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Tax Office Assistance Visits for Small Businesses

As part of its Small Business Assistance Program, the Tax Office has announced that Tax officers can visit business owners ‘at their own premises or a preferred location anywhere in Australia’ to help them to better understand their tax and superannuation obligations. The Commissioner of Taxation, Michael D’Ascenzo, said the Tax Office’s ‘objective is to help new and existing businesses get on track with their tax affairs and resolve any issues they may be experiencing’. Mr D’Ascenzo also said that any information shared with the Tax Office will be kept confidential and will not be used for any other purpose. A visit can be arranged by phoning the Tax Office on 13 28 66. Further information is also available on the ATO website.

This article appeared in Thomson’s daily Latest Tax News (Tuesday 15th January 2008). 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 day, there’s only one place to look — LTN. 
To find out more, click here.

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PSI and the Results Test

In a recent Federal Court case, two taxpayers generating personal services income (PSI) lost their appeals against the Commissioner of Taxation. The case concerned the Commissioner’s refusal to grant the taxpayers personal services business (PSB) determinations on the basis that they did not satisfy the results test.

The Court found that the relationship between the taxpayers and the company engaging their services was that of an employer–employee because:

• the taxpayers were not liable to rectify any defects in the work performed;

• payment for the services rendered was not pegged to the completion of any specific tasks; and

• no further equipment was required to be provided by the taxpayers for the efficient performance of the tasks.

If a taxpayer meets the requirements of the results test, they will be regarded as carrying on a PSB and be excluded from the PSI regime. The results test requires a taxpayer to meet three conditions:

• the income is paid to achieve a specific result or outcome;

• the taxpayer provides any necessary tools or equipment to do the work; and

• the taxpayer is liable to rectify any defects in the work.

Tip: In determining whether a taxpayer meets the conditions of the results test, it is the economic substance and not the legal substance that is important.

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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Exempt Income of a Non-profit Entity

Q. My client is a non-profit organisation established for the purpose of promoting the development of Australian agricultural resources. It is exempt from tax under section 50–40 of ITAA 1997. Does this exemption apply to all income received by the organisation, including dividends, interest and income from the hire of facilities to non-members?

A. Section 50–1 of ITAA 1997 provides that ‘the total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax’. If your client is covered by item 8.2 of the table in section 50–40 (as appears to be the case based on the information provided), its total ordinary and statutory income is exempt. This would include dividends, interest and the hiring fees.

Of course, one issue to consider is whether the investment and hiring activities are so extensive that the organisation would fail the non-profit requirement. Taxation Ruling TR 97/22 discusses the non-profit requirement (although the ruling is concerned with exempt non-profit sports clubs, the comments on the non-profit requirement are relevant). The ruling states (para. 21-22):

Where members, in their individual capacity, are to receive benefits from a club, the club fails the non-profit test. However, benefits received by members communally as members (e.g. by using the club’s facilities) and incidental to the pursuit of a club’s objects do not prevent the club from passing the non-profit test nor does the payment of reasonable remuneration to members for services they provide to the club.

We accept a club as being non-profit where, by operation of law (for example, a statute governing a club’s activities) or by its constituent documents, the club is prevented from distributing its profits or assets among members while the club is functional and on its winding-up. The club’s actions must, of course, be consistent with the prohibition.

If not exempt under section 50–1, amounts received from members would be exempt under the mutuality principle, but not dividends, interest and hiring fees (from non-members).

This issue appeared recently in Thomson Tax Q&A. Thomson Tax Q&A is issues-based and uses actual scenarios confronted in practice to help you understand how developments affect your client’s tax position. New Q&As are added regularly and the answers provided online are updated to take into account tax changes that impact on the issues raised. It therefore provides an up-to-date database of real solutions to actual tax issues facing tax advisers in practice.

To obtain more information, or to subscribe, simply contact your nearest Thomson representative or call 1300 304 197.

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Thomson Tools

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To find out more, phone Thomson Customer Service on 1300 304 197 or click here.

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