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Issue 171, 11 April 2008
Welcome to the latest issue of
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Articles in this edition include:
Editorial Enquiries:
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LRA.Service@thomson.com Copyright:
Thomson Legal & Regulatory Limited
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Pyrmont NSW 2009
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First Home Savers Accounts
The Federal Government has formally approved
the establishment of the First Home Savers (FHS) Accounts scheme. It
is anticipated that eligible first home buyers will benefit from the
scheme. The scheme will be offered through banks, building
societies, credit unions and life insurers.
Although the detailed features of the scheme
have not been finalised, key features include:
-
co-contribution from
the government of a minimum of 15% on after-tax contributions of
up to $5,000;
-
individuals aged
between 18 to 65 will be able to open an account with an initial
contribution of at least $1,000, so long as they comply with the
eligibility criteria for the First Home Owners Grant;
-
the minimum savings
period for the scheme is four years;
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interest earned will
be taxed at a rate of 15%; and
-
withdrawals will only
be permitted for the purchase of an eligible first home and will
be tax-free. Alternatively, individuals can roll over the full
amount of the account to their superannuation fund at any time.
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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SMSF Borrowings and Instalment Warrant
Arrangements — Taxpayer Alert
The Tax Office has issued Taxpayer Alert
2008/5 warning trustees of self-managed superannuation funds (SMSFs)
that certain features of limited recourse borrowings from a
related party may not comply with the borrowing restrictions under
the SIS Act. The Tax Office also published ‘Instalment warrants
and super funds — questions and answers to assist trustees and
members of SMSFs’.
The Commissioner of Taxation, Mr Michael
D’Ascenzo said recent changes to the SIS Act have relaxed
previous bans on SMSFs borrowing money to purchase assets but,
restrictions still apply, particularly on in-house assets and in
the acquisition of certain assets from a related party of the SMSF.
While the Tax Office is not concerned about all limited recourse
borrowings by SMSFs, it is concerned where borrowings feature
non-commercial interest rates, or where there is a capitalisation
of interest, or, where members provide personal guarantees secured
beyond charges over the asset purchased, Mr D’Ascenzo said. The
Commissioner also reminded trustees that the limited recourse
borrowing arrangement under section 67(4A) of the SIS Act does not
apply to existing SMSF assets.
SMSF trustees wanting information about
Taxpayer Alert 2008/5 can call the Tax Office — Tel: 13 10 20.
The Commissioner also said tax agents wanting to provide
information about people or companies who may be promoting
arrangements covered by this alert should call the ATO tax agent
integrity service — Tel: 1800 639 745.
Source: Tax Office media release No 2008/16,
4 April 2008
This article appeared in Thomson’s daily Latest
Tax News. With tax fast-moving and ever changing —
EVERY DAY, practitioners rely on Thomson’s daily Latest Tax News
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When you need to know what’s new in tax and related news every
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Source of Income – a Common Law View
The differences that exist between the tax
treatment of a resident and non-resident taxpayer raise the issue
of how we determine the source of income derived by a taxpayer.
This is because the Australian taxation system operates on the
principle of source basis. The assessable income of an Australian
resident includes any ordinary and statutory income derived from
all sources, whether in or out of Australia: sections 6–5(2) and
6–10(4) of ITAA 1997. By contrast, a non-resident is only
subject to tax on ordinary and statutory income that has an
Australian source: sections 6–5(3) and 6–10(5) of ITAA 1997.
Therefore, establishing the source of income is of paramount
importance to determining whether the amount is included in the
assessable income of a taxpayer.
Where income has a clear geographical
connection with Australia, it can be described as having a source
in Australia. However, source rules will vary depending on the
type of income derived. Therefore, the classification of income
into a particular category is pertinent to enable the selection of
the appropriate source rules. Further, the source rules are a
combination of both statutory rules and rationes decidendi
established by the courts.
In absence of a specific statutory rule to
determine the source of income, reliance must be placed on the
general common law source rules. The general principle for tax
purposes is to examine the place at which the substantial elements
of production of income occur.
In Nathan v FCT (1918) 25 CLR 183, Isaacs J
stated (at p189) that:
‘The Legislature in using the word
‘source’ meant, not a legal concept, but something which a
practical man would regard as a real source of income. Legal
concepts must, of course, enter into the question when we have to
consider to whom a given source belongs. But the ascertainment of
the actual source of a given income is a practical, hard matter of
fact. The Act, on examination, so treats it.’ [Emphasis added]
The judgment of Nathan’s case has been
cited as authoritative in a number of cases: see FCT v Mitchum
(1965) 113 CLR 401, Esquire Nominees Ltd v FCT (1973) 4 ATR 75 and
Thorpe Nominees Pty Ltd v FCT (1988) 19 ATR 1834. Nathan
established the common law test to be applied when determining the
source of an income. However, what is meant by the phrase ‘a
practical, hard matter of fact’?
The Chief Justice in Mitchum’s case (at
p407) stated:
‘In each case, the relative weight to be
given to the various factors which can be taken into consideration
is to be determined by the tribunal entitled to draw the ultimate
conclusion as to source … there are no presumptions and no rules
of law which require that that question be resolved in any
particular sense.’
Similarly, in Esquire Nominees v FCT (1973)
129 CLR177 (at p192), Gibbs J stated that the phrase embodied the
notion that the source must be decided ‘in accordance with the
practical realities of the situation without giving undue weight
to matters of form, and not by the application of absolute rules
of law’.
Burchett J in Thorpe Nominees (at p1846)
reinforced Gibbs J’s comment in a rather colourful fashion:
‘Practical reality is not a test so much as
an attitude of mind in which the court should approach the task of
judgment … What the cases require is that the truth of the
matter be sought with an eye focused on practical business
affairs, rather than on nice distinctions of the law. For the word
‘source’, in this context, has no precise or technical
reference. It expresses only a general conception of origin,
leading the mind broadly, by analogy. The true meaning of the word
evokes springs in grottos at Delphi, sooner than the incidence of
taxes … The substance of the matter, metaphorically conveyed
when we speak of the source of income, is a large view of the origin of the income
— where it came from — as a businessman would perceive it.’
The common law test requires an examination
of all the factual circumstances in a case to determine the source
of an income. While it is essential to understand the common law
test for the source of an income, attention must also be given to
the operation of any applicable double tax agreement (DTA).
Generally, Australia’s DTA will contain its own source rules for
various types of income. Further, it is of paramount importance to
realize that the rules contained in a DTA will override both
common law rules and statutory source rules.
This is an article that appeared in
Thomson’s InTax
magazine (April 2008); 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.
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