Loose legislation taxes even the Tax Office

ONE of the main features of the tax system is the role of the Tax Office in telling taxpayers how to conduct their tax affairs. It does this by issuing draft or final determinations on how it interprets tax and other legislation.

It can be extremely helpful when the Tax Office interprets legislation reasonably, but there have been many cases where the original intent of the legislators is ignored and fairness is sacrificed to maximise tax revenue.

Interpreting tax legislation has been made harder for both the Tax Office and tax professionals by the poor quality of legislation produced by Federal Parliament. There have been two recent examples of Tax Office rulings concentrating on maximising revenue while dealing with poorly drafted legislation.

People who invested in tree-farming managed investment schemes, through companies that have subsequently gone into liquidation, have been dealt a blow by a Tax Office interpretation of legislation relating to tax deductions for these investments.

The poor drafting of this legislation is evidenced by the fact that in some cases these investments became Ponzi schemes, and the investors were given no protection from greedy banks, rapacious liquidators, and inept or dishonest managers of the schemes.

The determination issued by the office will disallow a tax deduction to investors for amounts paid where the trees were not planted. This means if the manager of a scheme has used growers' funds to prop up their ailing business, rather than the funds being used for the planting of trees, the growers will have lost money and be denied a tax deduction.

The other example of the Tax Office dealing with badly drafted legislation, and not getting its interpretation correct, was a draft self-managed super fund ruling last week relating to borrowings within a superannuation fund. This draft ruling was issued to correct a previous ruling.

At the heart of the legislation allowing self-managed super funds to borrow to buy an asset were two main requirements, the first being that any loan taken out by a super fund had to be a limited recourse borrowing arrangement in other words the loan could not put at risk any of the other assets of the super fund. The second requirement was that the asset must be owned by a warrant trust.

In the original ruling, the Tax Office said that where a property was situated on several titles, a separate warrant trust had to be set up for each title. This would have led to the ridiculous situation of a super fund that bought an income-producing building on two titles paying to set up two warrant trusts.

In its new ruling, the Tax Office concedes that a single asset can be on several titles and therefore only one warrant trust will be required. It will also allow borrowed funds to be used to repair an asset held by a warrant trust but not to improve or alter the original asset purchased. Though borrowed funds cannot be used to improve or alter an asset bought through a warrant trust, a super fund can use its own cash from contributions or selling other investments to improve it.

Hopefully the Tax Office will also change its ruling on managed investment schemes.