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On Wednesday 31 October, 2012 Jenny Wong (KPMG) and Michael Charles (KPMG) attended a meeting of the NTLG Consolidation Sub-group on behalf of The Tax Institute. Discussions at the meeting largely focussed on the implementation of measures contained in Tax Laws Amendment (2012 Measures No.2) Act 2012, containing the new rights to future income provisions. 

The ATO committed to devoting resources to provide taxpayers with guidance focussed on the prospective and application/transitional rules. Given limited resources, participants agreed that it would be best to deal with issues arising under the historical issues or the ‘pre-rules’ on a case by case basis.

Prospective and application & transitional issues

The main focus of discussion at the meeting was on the issues list attached to the joint professional bodies’ letter (co-signed by The Tax Institute) dated 19 September 2012.

The ATO have agreed to consider these issues more closely (internally) over the next six weeks and report back at the next NTLG Consolidation Sub-group meeting, expected to be held in February 2013.

In relation to the application provisions (Part 4 Schedule 2 Tax Laws Amendment (2012 Measures No.2) Act 2012), there was a discussion on the policy of what type of assessments should be protected under the transitional provisions and what type of assessments should be reopened.  

External participants noted that some taxpayers have been exercising caution in amending assessments due to uncertainty of application of the rules. Concerns were expressed as to whether the provisions could have the effect of unintentionally ungrandfathering positions of the past.

Issues associated with the application provisions

The following issues were discussed at the meeting:

  • Whether the CGT cost base of an asset (which would be a non-deductible right to future income asset that is deemed part of goodwill under the pre rules) that was reset under the original 2002 rules is protected for the purposes of future CGT events in relation to the asset.
  • Whether the application of the interim applies (Item 50(3)) where a head company lodged a tax return during the interim period, the assessment covered a joining time in the pre-period, and relates to the original 2010 law; in circumstances where the head company had carry forward tax losses for the relevant year and there was a subsequent adjustment to the tax loss (eg the RTFI claim was based on a revised valuation of the RTFI asset (upward or downward)).
  • Another issue arose as to whether assessments were protected where an assessment is issued before 12 May 2010 and 30 March 2011 but there was a post 30 March 2011 amendment to that assessment where the subsequent amendment modifies a claim made under the original 2010 law due to say a revised valuation or the subsequent amendment relates to a new deduction claim for consumables or an adjustment in relation to a provision unrelated to the pre rules or the interim rules (revised R&D claim).
  • Whether an assessment is protected where an assessment was issued prior to 12 May 2002 but the company subsequently requested an amendment to the assessment (eg to claim a deduction for consumables)  i.e. whether the protection will be removed under Item 50(6) in respect of the entire original assessment, or only in respect of the subsequent request for amendment.

Prospective issues

The following prospective issues were also discussed at the meeting:

  • The definition of ‘work in progress’ 
  • How should WIP be valued
  • The scope of the definition ‘rights to future income’ (whether the definition covers a hedge contract, equity instrument, a contract where the actual performance of work or services or provisions of goods is contingent).
  • The scope of the deemed business acquisition model in Section 701-56
  • How the entry history rule override in s701-56(2) applies, particularly in the context of the treatment of bad debts for a non-money lender and its interaction with Section 716-400 of the ITAA 97.

Treasury update

Treasury advised that it is unlikely the Government will respond to the first Board of Taxation report on post consolidation implementation until the second Board of Taxation report (dealing the treatment of liabilities, capping the tax cost of assets and CGT Event J1 issues) has been delivered to the Government.

Members seeking further information in relation to the above are encouraged to contact us at Tax Policy.