Breaks over! Parliament is back and a raft of previously announced and new tax and super measures have been introduced.
Major changes include the small business CGT concessions and Everett assignments, deductions for holding vacant land, circular trust distributions, and salary sacrifice and super guarantee contributions.
If you have any questions about any of the information contained in the Essential Tax Summary, please contact the John Kalachian on (02) 9267 0108.
Tax treatment of genuine redundancy payments
The Government has released exposure draft legislation to ensure that concessional tax treatment can apply to amounts paid in relation to genuine redundancy and early retirement schemes as long as the dismissal or retirement occurs before the individual reaches “pension age”.
The main driver behind the change is a discrepancy resulting from the increase in the pension age from 65 to 67, while the concessional tax treatment for taxpayers receiving genuine redundancy payments and early retirement scheme payments is only available up to the age of 65.
$10,000 cash payment limit to tackle black economy
Exposure draft legislation seeks to introduce restrictions on entities making or accepting cash payments of $10,000 or more. This is part of the Government’s response to the recommendations made by the Black Economy Taskforce.
The draft legislation introduces specific offences that apply if an entity makes or accepts cash payments with a value that equals or exceeds the $10,000 limit. The offences are intended to apply to all entities, although it appears that there will be exceptions to this which will be set out in a legislative instrument such as for payments where neither party is acting in the course of a business or other enterprise and certain payments that are already subject to reporting obligations under the AML/CTF legislation.
Disclosing business tax debt to credit agencies
Treasury has released a consultation paper that if enacted, would enable to ATO to disclose the tax debt information of businesses who do not pay their tax debts to credit reporting bureaus.
Obviously, there are a few issues within the consolation dealing with the class of business whose tax debt information can be disclosed and the safeguards and conditions:
- ensuring the entity has not entered into a payment arrangement with the ATO
- does not have a complaint with the Inspector-General of Taxation about the disclosure of debt information, and
- has total tax debts of at least $100,000 which has been payable for more than 90 days.
From the ATO
ATO confirms position on FBT and ride sourcing services
After a lengthy consultation period following the release of TPD 2017/2, the ATO has confirmed its existing view that the FBT taxi travel exemption in section 58Z FBT Act only applies to travel undertaken in vehicles licensed to operate as a taxi by the relevant state or territory.
The result of applying this view is that the exemption does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi (i.e., Uber, Lyft, etc). Where these expenses are paid or reimbursed by an employer they may be subject to FBT unless another exemption or concession applies.
For example, in some circumstances it is possible that the minor benefits exemption could apply in respect of travel involving a ride-sourcing service, depending on the value of the benefit and how frequently this type of benefit is provided.
Tax treatment of compensation from financial institutions
As a result of the recent financial services Royal Commission, a number of superannuation funds may have received compensation payments. The payments are made for various reasons, including where a financial service or advice was not provided (fee for no service), the advice was deficient, or insurance premiums for death or disability insurance cover were overcharged.
The ATO has provided a summary of the income tax and GST consequences of receiving compensation in these circumstances. Generally, the tax treatment will depend on the reason for the compensation being paid.
In some cases, payments will be taxable as income on revenue account (e.g., where the payment relates to loss of income), while some payments could be treated as additional capital proceeds from a CGT event occurring. In some circumstances it will also be necessary to make GST adjustments in order to repay credits that have been claimed previously. The ATO has a separate guide dealing with compensation paid to individuals. Many of the concepts and principles are similar.
- Compensation received by super funds from financial institutions and insurance providers
- Compensation paid to individuals for advice from financial institutions
ATO rental property toolkit
Following the ATO’s recent announcement that 90% of individual returns with rental properties that were reviewed contained errors, a new toolkit for rental property owners has been released. The toolkit focuses on areas the ATO has identified as problematic, including claiming deductions for interest, claiming borrowing expenses and making repairs and improvements to rental properties. The materials contained in the toolkit are aimed at clients and deal with common issues associated with ownership of rental properties as well as the sale of a property.
Practitioners may want to forward some or all of the information published by the ATO to clients who own rental properties. The ATO has also provided suggested wording for newsletters and websites in connection with this area.
FBT and home phone and internet expenses guide for employers
The FBT guide for employers (available at the following link) has been updated to clarify how employers should work out the taxable value of fringe benefits relating to the payment or reimbursement of an employee’s private home phone and internet costs and the evidence needed to support the calculations.
Broadly, the guidance indicates that where the payment or reimbursement of home phone or internet costs up to $50 only limited documentation needs to be retained by the employee which should be able to explain the connection between employment and expenses incurred by the employee. The employee will need to provide a declaration to the employer detailing the percentage of business use.
On the other hand, if the expense exceeds $50 then both the employer and the employee must keep records of the actual expenses as well as the employee providing a declaration to the employer detailing the percentage of business use and the purpose of incurring the expense.
2019-20 Div 7A benchmark interest rate
The benchmark interest rate for Division 7A purposes in the 2019-20 income year has been released, with the new rate being 5.37%. It should be noted that in previous years this has been contained in a tax determination (e.g. see TD 2018/14 for the 2018-2019 year), however these annual determinations for the benchmark interest rate are no longer published.
Sale of property – Activity statements for GST at settlement
The ATO has released some new instructions for vendors completing their activity statements in relation to the sale property due to a large number of errors being made since the introduction of the GST withholding rules.
Vendors still need to report the property sale in their activity statement and include the GST component at Label 1A even if the purchaser has withheld an amount, although the amount withheld and paid by the purchaser is not reported. The ATO advises that a credit for the amount the purchaser withheld and paid to the ATO will appear on the vendor’s integrated client account once the activity statement is processed.
Super clearing house for withholding payer number holders
The ATO has confirmed that withholding payer number (WPN) holders may be able to access the small business superannuation clearing house in order to complete super guarantee obligations in respect of their employees.
Individuals can access the clearing house through ATO services on their myGov account, however non-individual WPN holders need to register with the ATO and lodge by email.
Tax treatment of grants from the Australian Sports Commission
The ATO has released some specific guidance on the tax treatment of athletes who receive grants from the Australian Sports Commission. The ATO indicates that these payments will not be assessable income of the athletes as long as they are not carrying on a business because they are not received in connection with employment (i.e. the athletes are not an employee of the Commission) and the payments are not received in respect of services provided by the athletes to the Commission.
The ATO notes that while the right to receive a grant is a CGT asset, any gain or loss that arises due to the payment of a grant is disregarded. As the grants not treated as assessable income athletes are not able to claim a deduction for expenses incurred in relation to receiving the grant. No amounts should be withheld from the grant.
Perth voluntary taxi buyback scheme payments
The ATO has released a fact sheet outlining the tax consequences for taxi plate owners receiving payments under this scheme. These payments are not considered ordinary income because the payments are made either as consideration for the disposal of the taxi plate, or as compensation for the loss of value attaching to the taxi plate. However, there can still be CGT consequences for owners. Some of the key situations are discussed briefly below:
- Current owners disposing of the plates: The payment should be included in the calculation of the capital gain or capital loss that is made by the plate owner on the disposal of the taxi plate.
- Current owners who retain the plates: Should include the payment in the calculation of the capital gain or capital loss that is made from the rights which have been surrendered or cancelled under the scheme.
- Former owners of taxi plates: Plate owners who disposed of their taxi plate in an earlier income year would have already returned a capital gain or capital loss on the disposal. Plate owners in this situation will need to amend their income tax return for that year to include a payment received under the Scheme as additional capital proceeds for the disposal.
Commissioner’s reasonable rates for travel expenses
The Determination sets out the Commissioner’s reasonable amounts for the purposes of the substantiation exception for the 2020 income year in relation to claims made by employees for:
a) Overtime meal expenses – for food and drink when working overtime;
b) Domestic travel expenses – for accommodation, food and drink, and incidentals when travelling away from home overnight for work; and
c) Overseas travel expenses – for food and drink, and incidentals when travelling overseas for work.
In very broad terms, an employee does not need to satisfy the normal strict record keeping rules if they receive a bona fide travel or overtime meal allowance and the deduction they are claiming does not exceed the ATO’s reasonable rates.
However, even if an employee has received a bona fide allowance and is relying on the reasonable rates in preparing their tax return, the employee still needs to keep records to show:
- They spent the money in performing their work duties (for example, in travelling away from home overnight on a work trip)
- How they worked out their claim (for example, they kept some receipts and a diary)
- They spent the money themselves (for example, using their credit card statement or other banking records) and were not reimbursed (for example, a letter from their employer), and
- They correctly declared the allowance received as income in their tax return.
This is an area that has come under increased ATO scrutiny in recent years and practitioners should be encouraging clients to ensure that they have records which support deductions that are being claimed. Clients who do not have any documentation to support the deduction that is being claimed can expect the ATO to challenge the deductions if their tax return is reviewed.
Debt deductions and the thin capitalisation rules
TD 2019/12 what type of costs are debt deductions within scope of subparagraph 820-40(1)(a)(iii) of the Income Tax Assessment Act 1997?
Under the thin capitalisation rules, entities must determine their average adjusted debt. In completing this calculation, entities need to include “all of its debt capital that gives rise to debt deductions.” Debt deductions would typically include interest expenses, but also includes “any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest.” The TD clarifies the range of costs which should be included in this category. At a high level, the ATO considers debt deductions includes all deductible costs of raising finance through debt as well as deductible costs directly incurred in maintaining the financial benefit received in association with the debt.
A list of the types of costs that may be included for these purposes is as follows (this is not exhaustive):
- costs of certain tax advisory services
- establishment fees
- fees for restructuring a transaction
- stamp duties
- regulatory filing fees (for example ASIC lodgement fees)
- legal costs of preparing documentation associated with debt capital
- costs to maintain the right to draw down funds, and
- any costs considered to be borrowing expenses for income tax purposes.
Were losses made from a share trading business?
In this case the AAT looked at whether a taxpayer had engaged in a business of share trading. The taxpayer had suffered significant losses from the sale of shares and wanted to claim a deduction for the losses. The ATO had concluded that the activities did not amount to a business.
In determining that the taxpayer was not carrying on a business, the AAT noted that for the majority of the relevant period the transactions consisted of purchases of shares in only two companies and some limited sales transactions. Further, there was no established system and the trading was irregular, with many months passing by without any share purchases or sales taking place. Other factors which let the AAT to conclude that the taxpayer was not carrying on a business included:
- The taxpayer did not incorporate a trading vehicle or register a business name or trading name;
- The taxpayer did not engage any professionals despite having no relevant formal qualifications himself;
- The research conducted by the taxpayer was unsophisticated, relying on readily available sources from Foxtel, Commsec, Westpac and the internet generally;
- The taxpayer kept no records of this research or of any of the relatively minor expenses associated with this research; and
- The written business plan was unsophisticated and contained very little detail.
The decision in this case emphasises that it is important to look at what actually happened in determining whether a business is being carried on. Clients who want to argue that losses are deductible need to ensure that there is sufficient evidence in place to demonstrate that a business was being carried on.
Insurance settlement payment on revenue or capital account
The taxpayer in this case received a lump sum payment under a deed of release following a protracted dispute with an insurer. The question to be determined was whether the payment should be assessable as ordinary income or dealt with on capital account. This depended on the nature of the payment and whether it represented a commutation of an income stream to which the taxpayer had been entitled or was received in settlement of claims against the insurer arising from their conduct in the administration of the claim. The taxpayer’s argument was that the paymentincluded at least some amount in respect of claims of a capital nature and that the entire sum should be dealt with on capital account because the amount could not be apportioned between the capital and income components.
The ATO had taken the view that the amount should be assessed on revenue account on the basis that it represented the replacement of income which would have been assessable on revenue account.
The AAT found that the deed of release was aimed at resolving and determining the taxpayer’s rights under the insurance policy in respect of the claim that he had made, rather than representing a release of unarticulated claims for unliquidated damages relating to the distress suffered by the taxpayer. The rights included both a monthly salary continuance claim (which was income) and a superannuation continuance claim (which was not considered to be income in nature). Further, the receipt was in settlement of claims made under an insurance policy which provided for a calculable amount, meaning that it was not an undissected lump sum which should be wholly taxable on capital account.
The AAT concluded that part of the payment should be assessable as ordinary income. In respect of the portion of the payment being taxed on capital account any capital gain was disregarded as the payment related to a personal wrong suffered by the taxpayer.
The facts and decision in this case are complex and highlight the difficulty that can be faced in trying to determine the correct treatment of lump amounts received in settlement of insurance claims.
Super guarantee and agency arrangements
This case involved the question of whether a horse racing club was liable for paying riding fees to jockeys. If so, this would mean that the jockeys would be treated as employees for superannuation guarantee purposes.
The Commissioner had formed the view that the jockeys were employees of the racing club and accordingly determined that the taxpayer was liable for the superannuation guarantee charge because the required SG contributions had not been made. One of the key issues in the case was determining the nature of the arrangements between the parties involved, namely the racing club, the trainers and the jockeys. Expert evidence provided to the Tribunal indicated that racing clubs such as the taxpayer conducted race meetings but did not engage jockeys.
Generally, it was the accepted practice that jockeys were engaged by a trainer, either directly or through their agent, to ride a horse in a race. The race club’s involvement with respect to the payment of riding fees was the payment of those amounts to the owners as part of their winnings. While the decision involved detailed consideration of the relevant rules and regulations governing horse racing and the engagement of jockeys by trainers, the key point was that at no stage was there any direct relationship between the jockeys and the race clubs (including the taxpayer) in respect of the payment of riding fees.
The AAT confirmed that due to the nature of the relationships and the payments made, the taxpayer was not liable for the payment of the fees to the jockeys. Rather, the owners or trainers engaged the jockeys and the taxpayer was merely acting as an agent in making certain payments. As a result, the jockeys were not employees of the racing club and the super guarantee charge assessments were excessive.
Transfer balance cap and minor errors
In this case, the main issue for consideration was whether the excess transfer balance tax assessment issued to the taxpayer was excessive or incorrect, and if not, whether the Commissioner has any discretion to waive that tax liability. It was not in dispute that the taxpayer had an excess transfer balance due to the value of their defined benefit income stream (a special benefit for these purposes).
Being aware of the introduction of the transfer balance cap rules from 1 July 2017, the taxpayer had contacted the ATO seeking clarification of any steps which would be necessary for him to comply. On the basis of the information provided, and his own calculations, the taxpayer had determined that there was no action needed and that he was confident of meeting the cap. However, the actual calculations performed by the relevant superannuation entities and the ATO confirmed that the taxpayer had exceeded the transfer balance cap. The ATO then issued an assessment for the excess transfer balance tax.
The taxpayer objected to this decision, with his particular grievances being that the advice the ATO had given him had not indicated that there was any possibility of taking corrective action after 1 July 2017 (during the period of the transitional rules),that it was unfair that there was no provision for the exercise of discretion to resolve cases involving minor errors, and that it was not fair and reasonable to be advised by the ATO of such a fairly minor mistake only after the grace period had expired when there was no chance to remedy the situation.
Unfortunately for the taxpayer, the AAT found that the assessment was not excessive or incorrect and therefore there was no need to consider if any discretion existed, although the Tribunal noted that there was no such discretion provided for in the legislation. The fact that the taxpayer calculated the value of the special benefit incorrectly or applied an incorrect formula did not satisfy the burden of proving that the assessment was incorrect.
Personal tax rate and offset changes
In early July all three stages of the Government’s personal income tax plan passed through Parliament and are now law. The amendments to the legislation:
- Modify the income tax thresholds from 1 July 2022 and 1 July 2024
- Increase the low and middle income tax offset from the 2019 income year until the 2022 income year; and
- Increase the low income tax offset from the 2023 income year.
- Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019
- Knowledge Shop Blog – Income tax cuts pass Parliament
Changes to enhance the integrity of the tax system
This Bill introduces a range of tax integrity amendments. Several of these changes were previously in draft form prior to the election.
Major proposed changes include:
- Small business CGT concessions and Everett assignment – As announced in the 2018-19
Federal Budget the Government wants to remove access to the small business CGT concessions where partners in a partnership seek to alienate their share of partnership income by creating, assigning or otherwise dealing in rights to the future income of a partnership (often referred to as Everett assignments). The changes are intended to commence from 8 May 2018.
The changes won’t prevent the concessions from applying to all transactions relating to partnerships. For example, the concessions can still potentially apply when someone disposes of an interest in a partnership such that they are no longer a partner in the partnership.
- Deductions for holding vacant land – Taxpayers will be prevented from claiming a deduction for expenses relating to holding vacant land unless the costs are incurred in the course of carrying on a business of the taxpayer or certain related parties. However, the proposed amendments would not apply to companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.
Where there is a substantive permanent building or structure on the land that is used or is ready for use then deductions can still be claimed subject to passing the normal deduction tests. However, there will be an exception for newly constructed or substantially renovated residential premises. In these cases, no deductions will be available until the premises can be lawfully occupied and they are actually used to earn rental income, or they are genuinely available for rent.
The changes are intended to apply to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.
- Circular trust distributions – The Bill seeks to extend the trustee beneficiary non-disclosure tax rules for circular trust distributions to capture situations involving trusts that have made a family trust election from 1 July 2019.
Under the current law, penalty tax rules can apply when a trust is involved in a circular trust distribution arrangement. However, trusts that have made a family trust election are excluded from the current rules. In very broad terms, the rules are aimed at situations where a trust distributes income to another trust, but that income is distributed back to the first trust.
- Salary sacrifice and super guarantee contributions – The Bill contains amendments to improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice super contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contributions. The rules are expected to apply from 1 July 2020.
Currently, salary sacrifice contributions are counted against an employer’s SG liability for an individual and where the employee has entered into an effective salary sacrifice arrangement then the employer’s SG obligations would generally be reduced unless the parties have agreed otherwise.
A more detailed explanation of the proposed amendments can be found in the Explanatory Memorandum to the Bill (see the link here).
The Bill has been referred to the Senate Economics Legislation Committee – due to report on 05/09/2019.
SG opt-out rules when an individual has multiple employers, but no SG amnesty
The Government has introduced a new Bill to Parliament which contains several measures relating to the superannuation system.
One of the key changes contained in the Bill is the ability of individuals with more than one employer to ‘opt-out’ of the super guarantee system with one of those employers. The change allows eligible individuals to avoid inadvertently breaching their annual concessional contributions cap as a result of multiple employers making contributions into superannuation on their behalf.
The amendments have an intended effective date of 1 July 2018. Under the changes individuals with multiple employers can apply for the Commissioner to issue them with one or more “employer shortfall
exemption certificates”. An employer covered by an employer shortfall exemption certificate has a maximum contribution base of nil in relation to an employee for the quarter to which the certificate relates, meaning that no super guarantee contribution is required for that period.
The Commissioner will be able to issue a certificate where all of the following conditions are satisfied:
- The Commissioner considers that, disregarding the effect of issuing the certificate, the individual is likely to exceed their concessional contributions cap for the financial year that includes the relevant quarter;
- The Commissioner is satisfied after issuing the certificate, the employee will have at least one employer that would either have an individual SG shortfall in relation to the employee, or have such a shortfall if they did not make any contributions for the benefit of the employee; and
- The Commissioner considers that it is appropriate to issue the certificate in the circumstances.
The Bill also includes several other changes to the operation of the superannuation system, such as changes to the non-arm’s length income rules that are designed to ensure that complying superannuation funds cannot circumvent the non- arm’s length income rules by entering into schemes involving non-arm’s length expenditure (including where expenses are not incurred). These changes are intended to commence in respect of income derived in the 2019 income year (i.e. they will apply to schemes entered into before that time that result in income being derived in the 2019 year).
The total superannuation balance rules are also amended to ensure that, in certain circumstances involving limited recourse borrowing arrangements, the total value of a superannuation fund’s assets is taken into account in working out a member’s total superannuation balance (increasing the member’s total superannuation balance). The changes will generally apply in respect of limited recourse borrowing arrangements commenced on or after 1 July 2018 where the member has satisfied a condition of release with a nil cashing restriction and the limited recourse borrowing arrangements are between the SMSF and one of its associates. It will be important for SMSF practitioners to understand the scope of these changes and how they may apply to their clients. A copy of the Explanatory Memorandum to the amending legislation can be found at the following link.
The major change from the previous version of this legislation is the removal of the proposed 12-month superannuation guarantee amnesty. The original Bill that was introduced in 2018 contained a 12- month amnesty for employers who have failed to meet their SG obligations in the past. However, this proposal has been completely removed from the current Bill.
Tax changes for cross border dealings
Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019
The Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019 has been introduced to Parliament and contains a number of measures which relate to international tax and cross border dealings.
The main items included in the Bill are as follows:
- Modifications to the operation of the thin capitalisation rules;
- Offshore suppliers of rights or options to use commercial accommodation in Australia will need to include these supplies in working out their GST turnover (aimed at online hotel booking providers); and
- The luxury car tax provisions will be amended to remove liability for luxury car tax from cars that are re-imported following service, repair or refurbishment overseas.
Preventing illegal phoenix activity
This Bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances. This will extend the director penalty regime to ensure that it covers unpaid PAYG withholding amounts, superannuation guarantee amounts and GST liabilities.
The Bill also amends the Corporations Act 2001 to introduce new criminal offences and civil penalty provisions for company officers who fail to prevent the company from making creditor-defeating disposals of property, as well as allowing liquidators to apply for a court order in relation to these disposals.
The legislation also prevents directors from improperly backdating resignations or ceasing to be a director when this would leave a company with no directors.