Simplified Superannuation - changes effective 1 July 2007 - make sure your TFN has been quoted
The ATO has clarified the application of the new Simplified Superannuation legislation in relation to no tax file number (TFN) contributions tax where individuals have previously quoted TFN exemptions to their superannuation fund.
The ATO has confirmed that there is no provision in the new legislation for individuals to quote TFN exemptions for the purposes of the application of no-TFN contributions tax. All members (including non-residents) must quote a valid TFN to avoid application of no-TFN contributions tax to non-concessional contributions (in excess of $1,000 for existing accounts) post 1 July 2007.
As a result, individuals who previously quoted TFN exemptions (eg pensioners) may be required to apply for a TFN, and provide it to the fund by the end of the financial year that the contributions were made in, to avoid the application of the no-TFN contributions tax. The Treasury have confirmed that this is the intended application of the legislation.
United Kingdom (UK): guidance on taxation of stock options granted prior to repatriation to the UK
Her Majesty’s Revenue & Customs’ (HMRC) latest revisions to their guidance on the tax treatment of share options granted to employees “not ordinarily resident" in the UK suggest that options granted to an employee who is not resident in the UK will still be subject to income tax in the UK. If it is known at the time of grant that the employee will “earn" those shares by working in the UK at some point between the grant date and the date the options first become exercisable, income tax will be payable.
For share options granted whilst an employee was not resident in the UK, HMRC had previously accepted that there was no income tax charge on or after the exercise of the options, provided the options were not granted in contemplation of UK duties.
On 10 May 2007, HMRC published a new version of their guidance on the tax treatment of securities acquired for less than market value. This guidance gives the example of an employee seconded abroad who is granted options at a time when he knows he will be returning to the UK at the end of his secondment, and states that in these circumstances the grant of the option is “in respect of UK duties", and that the subsequent exercise will in part be subject to income tax. This treatment appears to confirm a change in HMRC’s position.
Employers should note that HMRC’s guidance published in their manuals represents HMRC’s current interpretation of the law, and is designed for the use of HMRC employees, not taxpayers. As HMRC’s thoughts on the law in this area evolve, their guidance is subject to change without notice and has no legal force in itself.
The example given by HMRC seems to be very limited in scope, as the options are granted at a time when the employee “knows he is returning to the UK". When a secondment is arranged, most employers would not guarantee secondees that their next posting will be in the UK, and many would not commit to the next posting until very close to the end of the secondment. HMRC’s suggestion that the tax treatment needs to be determined by reference to something the employee “knows", rather than the employer, is also unsatisfactory due to its subjectivity.
United States (US) Senate Bill revives capital gains on individuals giving up US citizenship or Green Cards
Senate revives exit tax proposal
On 12 June 2007, the US Senate introduced the “Defenders of Freedom Tax Relief Bill" which includes an exit tax or “mark-to-market" tax provision. The mark-to-market tax on individuals who expatriate (relinquish their US citizenship or give up their permanent US residence) would raise an estimated $444 million in tax revenues to offset the proposed costs of tax relief for military veterans, soldiers, and their employers.
The mark-to-market tax provision is similar to past proposals that were introduced by the Senate but were never passed.
Individuals subject to the mark-to-market tax
The Senate Bill applies to US citizens who relinquish their citizenship and long-term US residents who terminate their residence (known as “expatriation"). An individual is a long-term resident if he was a lawful permanent resident for at least eight out of the fifteen taxable years ending with the year in which the residency termination occurs.
Date of expatriation
The Bill sets forth rules for establishing the date of expatriation. In the most common case, this will be the date the individual swears or affirms his oath of renunciation in front of a consular officer and witnesses.
Mark-to-market tax imposed
The Senate Bill proposes that expatriating individuals be subjected to tax on the net unrealised gain on their property as if such property were sold at the fair market value on the day before the expatriation date. The gain from the deemed sale is taken into account at that time without regard to other tax code provisions; any loss from the deemed sale generally would be taken into account to the extent otherwise provided in the code.
Deemed sale of property upon expatriation
The deemed sale rule generally applies to all property interests held by the individual on the date of expatriation. Special rules apply in the case of trust interests. The Bill generally does not apply to US real property interests, which remain subject to US tax under the existing Foreign Investment in Real Property Tax Act (FIRPTA).
Any net gain on the deemed sale is recognised to the extent it exceeds US$600,000 (US$1.2 million in the case of married individuals filing a joint return, both of whom relinquish citizenship or terminate residency). The US$600,000 amount is increased by a cost of living adjustment factor.
Effective date
The mark-to-market tax would be due on the 90th day after expatriation.
The new law would take effect on the date enacted and would apply to individuals who expatriate on or after the enactment date. Individuals who expatriate prior to the enactment date would continue to be covered by the existing expatriation rules.
Election to be treated as a US citizen
An individual is permitted to make an irrevocable election to continue to be taxed as a US citizen with respect to all property that otherwise is covered by the expatriation tax. This election is an “all or nothing" election; an individual cannot pick and choose properties to which it will be applied.
The individual would continue to pay US income taxes at the rates applicable to US citizens following citizenship relinquishment or residency termination on any income generated by the property and on any gain realised on the disposition of the property. In addition, the property would continue to be subject to US gift, estate and generation-skipping transfer taxes.
In order to make this election, the individual would be required to waive any treaty rights that would preclude the collection of the tax. The individual would also be required to provide security to ensure payment of the tax under this election in such form, manner and amount as the Treasury Secretary requires. The amount of tax that would have been owed but for this election (including any interest, penalties, and certain other items) would comprise a lien in favour of the US on all US-situs property owned by the individual.
The Senate Finance Committee plans to formally consider the Bill before the 4 July 2007 recess.
Capital gains tax when owners of jointly-held shares unscrambled their interests
In a recent Administrative Appeals Tribunal (AAT) decision in Johnson v Federal Commissioner of Taxation, the AAT has determined that the transfer of a 50 per cent interest in jointly-owned shares in CSR Limited by two brothers to each other, so that they could hold their shares separately was subject to capital gains tax (CGT).
The moral of this case is that family members should in general not hold assets, such as shares, as joint tenants.
Capital gains tax improvement thresholds
If you own real estate that is not subject to CGT, because it was acquired before 20 September 1985 (pre-CGT), a gain on the disposal of that real estate may be subject to CGT if the improvement threshold has been exceeded, in other words, if on or after that date (post-CGT) you have spent more than the threshold on the real estate by way of capital improvements. The gain is calculated only on the capital improvement, which is treated as a separate asset, and not on the component of the capital proceeds attributable to the pre-CGT real estate. In addition, the proceeds from the post-CGT improvements must exceed 5 per cent of the capital proceeds from the CGT event before the separate asset rule applies to make part of the gain taxable.
The improvement threshold is indexed annually as shown in the following table:
| Income year | Improvement threshold |
| 2007-08 | $116,337 |
| 2006-07 | $112,512 |
| 2005-06 | $109,447 |
| 2004-05 | $106,882 |
| 2003-04 | $104,377 |
| 2002-03 | $101,239 |
| 2001-02 | $97,721 |
| 2000-01 | $92,802 |
| 1999-00 | $91,072 |
| 1998-99 | $89,992 |
| 1997-98 | $89,992 |
For further information, please complete the following form, or contact:
Jim Lijeski, Partner
PricewaterhouseCoopers Tax
International Assignment Solutions
Phone: +61 2 8266 8298
Rohan Geddes, Partner
PricewaterhouseCoopers Tax
International Assignment Solutions
Phone: +61 3 8603 3844
