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Newsletter March 2006

In an attempt to attract internationally mobile skilled labour and promote Australia as a business location, the government is proposing to reduce the extent to which Australia taxes foreign source income of expatriates.

The proposed rules will introduce a new category of taxpayer - namely a 'temporary resident'. Temporary residents will be exempt from Australian tax on foreign source income (except foreign source employment income), foreign source capital gains, and Australian source capital gains made on certain Australian investments (eg investments in listed Australian companies).

A taxpayer will be a temporary resident if they hold a temporary visa. A further requirement is that neither they nor their spouse can be an Australian resident for Social Security purposes.

• the property is sold within two years of the deceased's death, or
• the property was from the deceased's death until the sale date, the main residence of one or more of;
  • the spouse of the deceased immediately before the death,
  • an individual who had a right to occupy the dwelling under the deceased's will.

A recent tax office case has further clarified the extent to which clothing expenses can be deductible. The case involved a female CEO who claimed $38,800 for work-related clothing. The court held that the clothing expenditure was not an allowable tax deduction as her clothing was not distinctive or unique, could be worn on any occasion including private and social occasions and was easily available to the public.

To be deductible, expenditure on clothing and its maintenance must have the 'essential character' of an outgoing incurred in gaining or producing assessable income, ie, an income producing expense. Clothing expenditure is generally private expenditure and is not deductible.

In some circumstances, however, expenditure on certain types of clothing for example uniforms, protective clothing, or occupational specific clothing may give rise to a tax deduction.

In general terms, self-education expenses (eg tuition fees, textbooks, travel and living expenses incurred in attending conferences or seminars) are deductible where the expenses have a necessary connection with the production of the taxpayer's assessable income. However, a deduction is not available in respect for the first $250 of certain kinds of self-education expenses.

The following principles govern the deductibility of self-education expenses;

1. The cost of improving knowledge or skills is not an outgoing of capital,
2. Expenses incurred in keeping up to date or to better enable the taxpayer to discharge existing duties or to earn present income may be deductible.
3. Where 2) does not exist, there must be a high probability that it will lead to an increase of earnings if the cost is to be deductible.
4. No deduction is allowable where the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity.

The NSW Office of State Revenue has recently advised that unit trusts in NSW will now be assessed as "Special Trusts".

Special Trusts are assessed for land tax at the rate of 1.7% on the combined land taxable value of land held. The $352,000 threshold is not applied.

In February 2001 St George Bank granted rights to its shareholders which permitted them to sell-back some of their shares to the bank at a price slightly above their prevailing market value as part of the bank's share sell-back program.

At the time, the Australian Taxation Office took the view that the profit on the sale of rights was assessable as income.

The St George Bank took a different view and took the Australian Taxation Office to the Federal Court which held that the shareholder was not subject to tax on the sale of the rights.

The Australian Taxation Office has now appealed to the High Court.

Fringe Benefits Tax is payable by an employer in respect to certain non cash benefits provided by an employer to an employee (or associate of an employee) in respect to their employment. For example, motor vehicles, entertainment or mobile phones.

The Fringe Benefits Tax year ends 31 March 2006. Entities that are required to lodge an FBT return should do so by late April or early May (depending on your 2005 liability).

Please contact this office if you are liable for FBT and have not received a FBT check list for 2006.