While globalisation was envisaged as bringing many benefits to Australian businesses and advisers, one overlooked drawback was its ability to extend the reach of foreign regulators. While most Australian companies and advisers have previously dealt with the US internal revenue service in movies only, is it coming to Australia in 2013 as a result of FATCA – The US Foreign Account Tax Compliance Act.

In a nutshell, FATCA requires US citizens (regardless of where they live) and US tax residents to report their foreign accounts and assets, including trust interests. Most importantly, FATCA places reporting obligations on foreign financial institutions to report details of any of their US account holders to the IRS or else face a withholding obligation to the IRS of 30% of any income paid to those holders.

Further information on FATCA can be found on the IRS factsheet.

The burden of FATCA compliance will undoubtedly fall on financial institutions, and in turn their advising firms, however it may cast a wider net. Consider the example of an expat US citizen who is a partner at an Australian law firm. At the end of the year, he receives his salary and a bonus of $55,000, with the bonus paid by the firm’s associated trust. The salary is not subject to FATCA and creates only personal taxation obligations on the US taxpayer with the IRS. However the payment from the trust could well create the situation where the firm would need to provide the bank with the US partner’s US tax details or else it would have to withhold 30% of the bonus to the IRS.

FATCA is certainly something that financial industry advisers should be planning for. It also gives rise to the question, would the Australian Treasury Department and the ATO consider a similar act here? Transferring the compliance burden for offshore accounts to foreign financial institutions would seem a cheaper exercise than a Wickenby style taskforce after all.

The run with private equity continues and shows no signs of slowing down. The angst created when TPG exited Myer a couple of years ago and the subsequent issue of TD 2010/21 continued abated when TD 2011/24 was issued.

In TD 2010/21 the Australian tax office took the view that when Australian company shares acquired with the view to making profit in a short or medium term are sold by the private equity manager the profits will be considered as revenue income arising in Australia and not capital gains.

In TD 2011/24 the tax office declared that merely because the contract for the sale of shares was executed outside Australia is does not necessarily follow that the income from the sale is not sourced in Australia. Several other factors were listed in the Determination as pointers that that income was sourced in Australia.

As a result all hell broke loose, Australia was on the verge of becoming out of bounds to private equity, see Taxman puts onus on private equity.

The recently issued TD 2011/25 comes easing the fears of  private equiters. Is the news is getting better? – see Australia a hedge play for global PE funds?

TD 2011/25 applies a ‘look- through’ approach to private equity profits derived by partners in foreign limited partnerships treated as ‘financially transparent” in a country with a tax treaty with Australia. A further significant condition is that the partner be resident in a country with which Australia has a tax treaty. The residence of the partnership and the partner need not be the same.

The full federal court has delivered significant decisions against the tax office in Qantas Airways Limited v FC of T 2011 ATC 20-276 and Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142.

In Qantas it was held that Qantas was not liable for GST in cases where a passenger books and pays for a domestic flight but cancels the booking or does not turn up for the flight. The tax office argued that there was a taxable supply when the booking was made and the fare paid.

The tax office contention was based on the judgement in the earlier case of FC of T v Reliance Carpet Co Pty Ltd 2008 ATC 20-028. In that case, the High Court held that a deposit forfeited under a rescinded contract for the sale of land was subject to GST. The conclusion of the court was that a vendor of land makes a supply to a purchaser when a contract for sale is entered into and that the deposit paid by the purchaser is consideration for that supply when the deposit is forfeited.

Unlike in Reliance where the deposit was taken to be consideration for an undertaking to supply the land on a later date, in the case of Qantas there was no such deposit payment.

In the other case, the court held that the entitlement to GST refund arises upon the taxpayer submitting a BAS with a negative GST amount. The Commissioner was refused time to undertake investigations to ascertain whether a GST assessment should be raised. The court even went on to state that a writ of mandamus may be issued against the Commissioner for the payment of public money to Multiflex by way of GST refund.

A stay order was granted today pending an appeal

These days taxes could come from anywhere: no sooner had the carbon tax debate blown over that fatty foods come under scrutiny. Denmark enacted the Danish Fat Tax Act in October.

The rate applicable is DKK 16 per kilogram of saturated fat on all food produced or imported into Denmark. There is an exemption for food containing less than 2.3 percent of saturated fat. Milk would be exempt.

Are we far from a fat tax? not, if you go by the following quote from Senator Brown in the Australian Financial Review:

“We know that obesity costs- overweight and obesity costs the economy directly $8 billion a year and indirectly up to $ 50 billion to $ 60m billion per annum so we should be looking at the Danes’s saturated fat tax.”

The flutter that was worked up before and during the tax summit about loss carry back for small business appears to have fizzled out as most things do. If implemented small  businesses will be able to get a tax refund if they had been previously profitable and currently incur losses – see carry-back tax breaks in the frame.

In the UK, similar rules were introduced at least a couple of years ago. The losses that could be carried back were unlimited. However, after carry back to the preceding year, a maximum of £50,000 of unused losses will be available for carry back to the earlier two years.
The U.S has similar rules.

Ideally the Australian carry back concession could be limited to businesses with turnover below a specific amount. Also the concessions could be made applicable exclusively to designated income years.

There are a few companies that relentlessly hog the headlines. Google is one of them, Apple is another. It is widely believed that magic happens at Google. Apple is where magic is sold. But when a slightest whiff of suspicion appears it doesn’t take long for the corporate glow to disappear. Now it is reported that the IRS has started an audit of Google’s offshore operations. It is thought that Google used “Double Irish” and “Double sandwich” arrangements, see IRS Auditing How Google Shifted Profits.

A “Double Irish” is an arrangement by which US corporate profits are shifted to a lower taxed country where the US rules on transfer pricing do not form part of the law. A “Double sandwich” increases the tax benefit by the introduction of country which does not have withholding taxes on the relevant income stream.

About an year ago Bloomberg reported how $60 Billion was lost to tax loopholes courtesy of a “Double Irish” nudge and a “Dutch sandwich” tick.

In the wake of the Buffet revelation and the pressure on the banks to increase their capital together with the proposal for a Tobin tax on financial transactions in Europe, the focus is increasingly turning on multinationals and their cross border dealings.

Housing affordability is never far away from discussion but never close enough to be taken seriously. This tax forum is no exception. A few participants referred nervously to the mortgage blight faced by many and the slow down in the construction industry. But, as always, the ball gets kicked around, loses shape and soon is out of play till it regains its shape.

If we are serious about the spectre of housing affordability isn’t it time to consider some meaningful reform of the rules affecting housing.

The same issue is before another tax forum. In the United States, the Senate Committee on Finance is examining a variety of tax incentives and their impact on home ownership.

In the U.S, the position is significantly different.

There is home mortgage interest deductibility, limited to $ 1 million ($500,000 for married persons filing separate return). A qualified residence for this purpose means the principal residence and one other residence. Negative gearing would still be available but limited to one investment property.

Gains on sale of principal residence is exempt to the extent of $250,000 ($500,00 if married and filing a joint return), provided the residence has been owned and used as the principal residence for at least two years in the five year period immediately before the sale.

Then there are deductions allowed for real property taxes, provided they are based on the assessed value of the real property.

Are incentives such as the ones above beneficial in the long run or they the harbinger of a spiraling “sub prime” debacle? If interest deduction is to allowed should the imputed rent be taxed?

Such issues should be taken up at a broad level of stakeholder participation and not swept under the carpet. Hope the tax forum is a journey and not just a destination.

Even the Buffet rule (no household making over $1 million annually should pay a smaller share of its income in taxes than middle-income families) for all its ballyhoo and after the initial euphoria is not widely accepted as a “one size fits all” fix for exploding deficits around the world, especially in the United States . When Warren Buffet confessed that the tax rate applicable to him was nearly half of what his secretary grappled with, the public mea culpa appeared to have stirred the conscience in high places, launching the current fad in government circles, a crusade to tax the rich. I am reminded of the book ‘Eat the rich” by the American political satirist P J O”Rouke. If you are lucky enough to eat the rich the resultant indigestion can be intolerable and may even lead to a shrinking pool of people willing to foot the bill in the future of governments fast running head first into deficits.

The tax systems around the world need to look elsewhere to revitalize its dwindling reserves .

There is a lot pinned on the couple days in October (4th and 5th of October) that is expected to spawn the foundation for a fairer tax system for Australia in the coming years. Unless this happens in earnest in Canberra a deepening deficit in Australia is looking increasingly unavoidable.

Isn’t it capital gains tax that requires urgent reform. Reform proposals in the Henry Report were largely rejected by the government. The recommendation to provide a 40 percent savings income discount to individuals in place of existing discounts is not under consideration in the coming tax forum.

Isn’t it time to take a hard look at the sacred cows of taxation that have got entrenched in our tax system over the years? Certainly painful in the short run but beneficial in the long?

Recent times have seen a pattern of losses for the ATO in the courts – deduction cases of BHP and Foster’s Group, transfer pricing case of SNF, AXA and the case involving a James Hardie subsidiary, to name a few.

It cannot be denied anymore, the Commissioner has warned about the dwindling tax base.

Is it time for a change in law relating to anti-avoidance  introduced quite some time ago ? Is a possible  introduction of an “economic substance” criterion  for acceptable transactions  replacing the need to establish a reasonable counterfactual by the ATO  a viable option?

See our earlier blogs:

Anti-avoidance and the economic substance Doctrine

The case of AXA:Part IVA and Multiple assessments

AXA – counterfactuals can be counterproductive

The ATO is about to introduce requirements for lodging “Reportable Tax Positions” and “ International Dealings Schedules” on companies of specific business activity. It is hoped that the information supplied in the schedules will provide an insight into any prohibited behaviour by businesses. Will this strengthen  the anti-avoidance hand of the ATO and reverse its losing trend  in the courts?

 The warning from the Treasury is loud and clear: GS T needs a hard scrub. It is inefficient and tax leakage is mounting . Something needs to done and soon.

Unfortunately, GST is not on the tax reform agenda but is very much in the news. A study by KPMG Econtech for CPA Australia found that a lift of the rate from 10 to 15 percent would increase the consumer living standards by $ 4.7 billion a year. A smaller increase of only 2.5 percent will raise the living standard by $ 1.6 billion.

In a statement made on 13 September 2011 CPA Australia is urging the Government to enter into discussion with the States and Territories with the view to increasing the rate to 20 percent in the coming decade.

In an article published in the New York Times,  Robert Barro recommends, among others, the introduction of a value added tax (there is no Federal VAT in the United States), abolishing corporate income tax and relying instead on VAT (see Isn’t it time for consumption taxes?).

At least for the time being the Treasurer has ruled out any rate increase – GST cap here to stay: Swan