Taxation on grant of shareholder rights to be legislatively corrected
In our July 2007 edition of TaxTalk, we reported that following the decision of the High Court in Commissioner of Taxation v McNeil [2007] HCA 5 (22 February 2007), the then Minister for Revenue and Assistant Treasurer announced that amendments would be made to the tax law to restore the long standing taxation treatment of share rights granted to shareholders. In the McNeil decision, the High Court held that rights received by a shareholder in St George Bank Limited (SGB), under which the shareholder could require SGB to buy back a certain number of shares held by the taxpayer, were income under ordinary concepts, and thus fully assessable.
As a result of this decision, the Commissioner of Taxation had expressed the view that the receipt by a shareholder of rights to subscribe for further shares in a company was to be treated on revenue account for tax purposes, with the market value of the rights at time of grant being included in the shareholder’s assessable income. The adverse affect of this tax treatment on the ability of companies to raise capital is obvious when compared to the position generally accepted by the ATO before the McNeil decision.
Unfortunately, the former Government did not enact amending legislation prior to Parliament being prorogued, and until 8 April 2008 the tax treatment on the grant of rights was in a state of flux. Would the new Government enact provisions in line with the former Government’s announcement or would the revenue source ‘unearthed’ by the High Court be tapped to fund the new Government’s programmes?
The welcome news is that on 8 April 2008, the Treasurer confirmed that the Government will amend the income tax law to restore the long-standing taxation treatment of ‘call options’ issued by companies. The Treasurer said that ‘call options’ are routinely used by companies as a mechanism for raising capital from their shareholders. He further said that the “bring-forward of a tax liability for call options under McNeil’s case would impose unnecessary compliance costs on companies and their shareholders”.
It is proposed that the amendments will apply from the 2001-02 income year. The tax fraternity eagerly await the release of draft legislation to ensure that the ‘legislative fix’ removes any uncertainty in the market place.
Cents per kilometre rates for 2007 – 2008
Income Tax Assessment Amendment Regulations 2008 (No 1) (the Regulations), which were registered on 26 March 2008, prescribe the rates applicable for calculating deductions for the 2007–08 income year for ‘car expenses’ based on the ‘cents per kilometre’ method. The rates are the same as those applying in the previous year and are shown in the table below.
The calculation of the car expense deduction by the ‘cents per kilometre’ method requires the number of business kilometres travelled by the car during the year to be multiplied by a specified number of cents. The cents per kilometre rate is determined in relation to the car’s engine capacity. This method can be used for the first 5,000 kilometres only. One of the other prescribed methods must be used where a taxpayer wishes to claim more than 5,000 business kilometres. These rates are also used to calculate the ‘taxable values’ of a number of fringe benefits provided in the fringe benefits tax (FBT) year ending 31 March 2008 (refer to the definition of ‘basic car rate’ in the FBT legislation).
| Description | Engine capacity of car not powered by a rotary engine (cubic centimetres) | Engine capacity of car powered by a rotary engine (cubic centimetres) | Rate per km (cents) |
| Small car | Not exceeding 1600cc | Not exceeding 800cc | 58 |
| Medium car | Exceeding 1600cc but not exceeding 2600cc | Exceeding 800cc but not exceeding 1300cc | 69 |
| Large car | Exceeding 2600cc | Exceeding 1300cc | 70 |
Debt forgiveness decision to be appealed
In our March 2008 edition of TaxTalk, we reported the decision of Justice Heerey in Tasman Group Services Pty Ltd v Commissioner of Taxation [2008] FCA 23. That case considered certain aspects of the debt forgiveness rules in the tax law. As explained in our March 2008 article, the Commissioner was successful in having the Court reject a number of the points of objection raised by the taxpayer, but was unsuccessful in arguing that the Japanese parent company of the taxpayer did not carry on business in Australia. The answer to the question of whether the lender of a debt which is forgiven carries on business in Australia can have a material affect on the tax outcomes under the debt forgiveness rules. The Commissioner has now appealed the decision, and it will be of interest to see whether the Full Court reaches the same view as that expressed by Justice Heerey who concluded that the parent company carried on business in Australia “through its wholly-owned subsidiary”.
Inspector-General of Taxation office to continue
On 9 April 2008, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs announced that the Government will retain the office of the Inspector-General of Taxation (IGOT) as a separate independent statutory office.
In our view, the Government’s decision is appropriate and commendable, as the office of the IGOT has historically played an important role in developing tax policy founded on fairness and transparency.
FBT: benchmark interest rate for year commencing 1 April 2008
On 2 April 2008, the Commissioner of Taxation issued Taxation Determination TD 2008/7 which specifies the benchmark interest rate for the fringe benefits tax (FBT) year commencing on 1 April 2008. The rate is 9% per annum and replaces the rate of 8.05% per annum that has applied for the previous FBT year commencing on 1 April 2007. The Determination notes that the rate is used to calculate the taxable value of:
- a fringe benefit provided by way of a loan, and
- a car fringe benefit where an employer chooses to value the benefit using the operating cost method.
Deferred purchase agreement warrants
On 26 March 2008, Commissioner of Taxation issued Draft Taxation Determination TD 2008/D4 which considers the tax treatment of deferred purchase agreement (DPA) warrants. In summary, these are retail investment products offered by financial institutions under which an investor enters into an agreement to purchase a number of assets (usually listed shares or units) with the value and number of the assets being determined at a specified future date (typically 3 to 5 years after the date of contract) based on the performance of a nominated share market index from the date of contract until the maturity date of the contract. Other features may include a capital guarantee ensuring that at maturity date, the maturity value will be at least the initial amount invested, an entitlement for the investor to coupon payments during the investment period (coupon payments are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)) and a facility under which, after taking delivery of the assets, the investor can appoint the issuer to sell those assets on the investor’s behalf.
In TD 2008/D4 the Commissioner expresses the view that the DPA warrants are not ‘traditional securities’ under the tax law. Based on this view, any gain will not be assessable under the ‘traditional securities’ rules and any loss will similarly not be deductible. This means that if the DPA warrants were not entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction with a purpose of profit-making, any gain or loss will be dealt with solely under the capital gains tax (CGT) provisions of the tax law.
On 26 March 2008, the Commissioner also issued Draft Taxation Determination TD 2008/D5 which deals with the tax issues arising on satisfaction of contractual rights under a DPA where the investor takes delivery of the assets agreed to be provided. In TD 2008/D5 the Commissioner expresses the view that satisfaction of the contractual rights is a CGT event and if the market value of the assets acquired exceeds the cost incurred in acquiring the contractual rights, the investor will have derived a capital gain. Subsequent sale of the assets acquired will be another CGT event for the investor.
Compensation for damage to reputation was not income
On 9 April 2008, the Federal Court held, in Sydney Refractive Surgery Centre Pty Ltd v Commissioner of Taxation [2008] FCA 454, that damages awarded in defamation proceedings instituted by the taxpayer were not income according to ordinary concepts. In this case, the taxpayer received a damages award because the taxpayer’s reputation had been injured as a result of a defamatory television broadcast. The basis of the Commissioner’s claim was the fact that the damages award had been based on lost profits, and thus the award ‘filled a hole’ in the taxpayer’s profits. In rejecting this submission, Justice Sackville said that although calculated by reference to lost profit, the character of the payment was compensation for injury to a capital asset. Justice Sackville noted that the line between the treatment of awards as income rather than as capital is a fine one, however based on authority the amount received by the taxpayer in this case was not taxable as income.
