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Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget.

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Presentation on theme: "Greenwoods & Freehills Budget Briefing The 2009-10 Commonwealth Budget."— Presentation transcript:

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

2 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

3 The 2009-10 Commonwealth Budget MITs Andrew Mills Director

4 MIT CGT treatment Why? What is it? Who qualifies? What will it apply to? When will it apply?

5 MIT CGT –History –ATO activity and industry lobbying –MIT Review terms of reference –International competitiveness and certainty Why?

6 MIT CGT –Elective –CGT to apply to disposals of “eligible assets” What is it?

7 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?

8 MIT CGT –not same as EIB list –shares, units, real property –likely follow super rule –TOFA arrangements probably excluded What assets?

9 MIT CGT –elective –2008/09 year and following –irrevocable –query (a) new trusts (b) change in assets (c) mergers of trusts When applies

10 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

11 SUPERANNUATION MEASURES Shayne Carter Director 11 The 2009-10 Commonwealth Budget

12 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

13 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

14 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

15 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

16 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

17 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

18 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

19 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:

20 Government co-contribution Income year2009/10 20010/11 20011/12 2012/13 2013/14 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

21 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

22 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

23 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

24 EMPLOYEE SHARES SCHEMES Ernest Chang Director 24 The 2009-10 Commonwealth Budget

25 Changes 1.Tax ‘deferral’ abolished 2.$1,000 exemption restricted Commencement: acquisitions after 7:30pm, 12 May 2009 Employee share & option plans

26 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

27 Comparators optionsshares USexercisewhen forfeiture conditions cease (must be substantial risk) UKexercisewhen forfeiture conditions cease (max. 5 years) Franceexerciseupon vesting Germanyexerciseupon vesting Japanexercise[upon vesting] Employee share & option plans

28 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

29 FOREIGN SOURCE INCOME (CFCs, FIFs etc) Jane Michie Director 29 The 2009-10 Commonwealth Budget

30 Foreign source income Introduction Tax Board recommendations (10) Government responses Treasury consultation

31 Recommendation #1 Repeal FIF and deemed present entitlement rules Re-write CFC rules Apply CFC rules to (fixed) CFTs Apply CFC rules to NCLEs Foreign source income Recommendations

32 Recommendation #2 Exempt listed public companies Provided –comparable worldwide tax rate; or –sufficient distributions; or –limited consolidated passive income Foreign source income Recommendations 

33 Recommendation #3 Modernise definition of ‘passive income’ (adopting group approach) Foreign source income Recommendations ?

34 Recommendation #4 Remove ‘base company’ income from attribution (tainted sales and tainted services) (Subject to integrity rule, if necessary) Foreign source income Recommendations ?

35 Recommendation #5 Exempt complying superannuation funds from new CFC rules Foreign source income Recommendations

36 Recommendation #6 Offer choice of methods: –calculation –deemed rate of return (without 4%) –market value (Subject to integrity rule) Foreign source income Recommendations ?

37 Recommendation #7 Calculation method to be based on tax principles, not accounting principles Foreign source income Recommendations

38 Recommendation #8 Repeal section 404 Amend 23AJ Foreign source income Recommendations

39 Recommendation #9 Introduce narrow anti-roll-up measure in lieu of FIF regime –low risk offshore accumulation funds –dominant tax deferral purpose Foreign source income Recommendations

40 Recommendation #10 Transferor Trusts –remove shelters where non-control –allow for multiple transferors –consider other Foreign source income Recommendations

41 Foreign source income Treasury consultation Pre-drafting Discussion Paper Part X to be re-written in ITAA 1997 Principle-based drafting

42 Foreign source income Treasury 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

43 Foreign source income Treasury consultation Section 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?

44 Foreign source income Treasury 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

45 Foreign source income Treasury 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

46 Foreign source income Take-away points GoodBad 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

47 OFF-MARKET SHARE BUY-BACKS Ernest Chang Director 47 The 2009-10 Commonwealth Budget

48 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

49 Off-market share buy-backs Board of Taxation recommendations 49 IssueCurrent positionRecommendation 1Level of discount to VWAP 14% ‘administrative cap’ Removal of cap for listed companies 2Non-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

50 Off-market share buy-backs Board of Taxation recommendations 50 IssueCurrent positionRecommendation 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 5Application 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 6Legislative rewriteDivision 16K of the ITAA 1936 New provisions in ITAA 1997

51 Off-market share buy-backs Proposed key measures 51 Buy-back by LISTED companyBuy-back by UNLISTED company No 14% discount ‘cap’14% discount ‘cap’ remains 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) 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)

52 Off-market share buy-backs Next steps Consultation – details by 31 May 2009 52

53 GST changes/announcements Andrew Howe Director The 2009-10 Commonwealth Budget

54 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 …

55 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

56 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?


58 Contact details for speakers Shayne Carter Direct: 9225 5959 Ernest Chang Direct: 9225 5965 Andrew Howe Direct: 9225 5919 Jane Michie Direct: 9225 5915 Andrew Mills Direct: 9225 5966

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