There is no progress on the proposed changes to the application of the main residence exemption for non- resident taxpayers, even though the transitional period for the changes is due to expire on 30 June 2019.
Parliament does not resume until mid-February 2019 and we are only expecting a relatively small number of sitting days before the election is called, which means opportunities for the Government to pass outstanding legislation are limited.
In the meantime, clients who are likely to be affected by these changes are left in limbo, wondering whether they will need to take action in the near future to avoid losing all access to the main residence exemption. Hopefully we will see some positive developments in this area shortly after Parliament resumes.
If you have any questions about any of the information contained in the Essential Tax Summary, please contact John Kalachian on 02 9267 0108
Let us know if we can help!
Taxation of an individual’s fame or image
Treasury has released a discussion paper on how sports people and celebrities will be taxed.
The discussion paper seeks to implement the 2018-18 Federal Budget measures to ensure that an individual would be personally taxed on any income relating to the commercial exploitation of their fame or image regardless of whether that income was received personally or by another related party. The changes are intended to apply from 1 July 2019.
In the past it has been possible for rights relating to this type of income to be licensed to a company or trust, allowing the income to flow through to other shareholders or beneficiaries who might be on lower tax rates. This is because the ATO took the view that this income was not derived from personal services.
However, from 1 July 2019 it is expected that this income would be taxed in the hands of the individual, regardless of whether the rights have been licensed to another entity.
The exploitation of someone’s fame or image could potentially consist of involvement in advertisements, sponsorships, including wearing associated brand products, public appearances and the promotion of products.
Mini-Budget: Redundancy rule changes
The Government published its Mid-Year Economic and Fiscal Outlook on 17 December 2018. While most measures had previously been announced, there was a new measure dealing with the tax treatment of redundancy rules.
In terms of new measures, the Government has indicated that it plans to life the age limit for receiving tax-free redundancy payments so that it will be aligned with the Age Pension qualifying age. The rules currently provide that tax-free treatment cannot apply if the employee id dismissed on or after the day they turned 65. This change is intended to apply from 1 July 2019.
More information – Mid-Year Economic and Fiscal Outlook
Tax treaties modified by multi-national crackdown
On 26 September 2018 Australia ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This instrument entered into force in Australia on 1 January 2019 and will impact on the way that certain double tax agreements (DTA) need to be approached.
However, in order for a DTA to be impacted by this instrument, both countries need to have taken certain steps. At this stage only the DTAs with France, Japan, New Zealand, Poland, Slovakia and the UK are affected, although it is expected that other DTAs will gradually be affected as well.
What this means at a high level is that in addition to considering the domestic tax provisions in each country and the terms of the DTA it will also be necessary to consider the potential impact of the MLI. The impact will not necessarily be consistent between countries, because this ultimately depends on the position taken by each country.
Treasury has produced a summary of the main features of the MLI and the position taken by Australia. Treasury also provides a list of DTAs and whether they are modified by the MLI.
From the ATO
Non-qualifying earnout arrangements
The ATO has released a discussion paper focusing on the tax treatment of earnout arrangements that do not fall within the scope of the relatively new CGT provisions dealing with this area.
The ATO expects that most earnout arrangements relating to the sale of a business or equity interests in a business entity will fall within the scope of the new CGT provisions. However, the ATO is seeking comments from stakeholders on whether public guidance is required on the tax treatment of non- qualifying earnout arrangements.
The discussion paper focuses on a number of issues that arise in connection with earnout arrangements, including:
- Whether it is always appropriate to adopt a separate asset approach (as taken by the ATO in TR 2007/D10);
- Whether a deduction should be available in some cases for payments made under an earnout arrangement;
- Whether the blackhole expenditure rules in section 40-880 should apply;
- Issues relating to the creation and ending of an earnout right; and
- Issues that arise when earnout arrangements are entered into in connection with depreciating assets.
More information – Issues concerning earnout arrangements
GST and health products
The ATO has issued an issues register dealing specifically with the GST treatment of medical and health related products. The register should prove useful when trying to determine whether a supply of health related goods and products should be classified as GST-free under various provisions in the GST Act.
This includes items that could potentially be classified as GST-free medical aids and appliances, other GST-free health goods and also deals with drugs and medicinal preparations.
Home office expenses rate increased
PSLA 2001/6 Verification approaches for home office running expenses and electronic device expenses
The ATO has increased the hourly rate for home office running expenses from 45 cents per hour to 52 cents per hour, effective from 1 July 2018. This rate is relevant where an individual decides to use the ATO’s safe harbour rate as opposed to keeping records and determining the work related proportion of actual expenses incurred
Individuals who choose to apply the hourly rate method only need to keep a record to show how many hours they work from home. This could be done over the course of the income year, or over a four-week representative period if the individual’s work from home hours are regular and constant. The hourly method incorporates all of the items that a taxpayer can claim as a home office running expense including lighting, heating, cooling, cleaning costs, and depreciation of home office items such as furniture and furnishings in the work area.
Administrative approach for the new company tax and franking rate rules
PCG 2018/8 Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years
The ATO has issued some practical guidance on how it will approach compliance activities and its administrative position in light of recent changes to the company tax rate rules and franking rate rules.
When it comes to the 2016 and 2017 income years the ability of a company to apply the lower tax rate depends on whether it was a small business entity, which partly depends on whether the company was carrying on a business in the relevant income year. The ATO acknowledges that there was considerable uncertainty surrounding this issue prior to the release of TR 2017/D7 and has indicated that compliance resources won’t generally be allocated to reviewing whether a company was carrying on a business for those years, except in limited cases where the conclusion reached was plainly unreasonable or artificial or contrived arrangements are in place.
Where a company has applied an incorrect franking rate as a result of these changes it is not necessary to apply to the Commissioner for permission to amend and reissue the distribution statement. Instead, the company may inform its shareholders of the correct franking credit without reissuing the distribution statement and without needing to seek permission from the Commissioner. This administrative approach applies in relation to franked dividends paid by companies in the 2016-17 and 2017-18 income years.
Reporting for road freight, security and information technology services
LCR 2018/D8 Expansion of the taxable payments reporting system to road freight, security, investigation or surveillance, and information technology services
From 1 July 2019, the taxable payments reporting system which applies to payments made to contractors in certain industries will be expanded to cover payments relating to the following industries:
- Road freight services;
- Security, investigation or surveillance services;
- Information technology services.
In broad terms, the reporting rules are triggered if the taxpayer provides these types of services, they have an ABN and they make a payment to a contractor that is wholly or partly for providing these services on their behalf. However, there are some exceptions that can apply to this.
LCR 2018/D8 provides detailed guidance on the application of these rules and provides a range of examples which explain when payments would be captured under these reporting rules.
The LCR also explains how the reporting exemptions apply. At a high level, reporting is not required if payments received by the entity for these services are less than 10% of the entity’s current or
projected GST turnover (whichever is applicable to
the business). The ATO notes that a business which qualifies for the exemption can still choose to lodge a report on a voluntary basis.
Central management and control test for companies
PCG 2018/9 Central management and control test of residency: identifying where a company’s central management and control is located
The ATO has finalised its practical compliance guideline on the central management and control test of residency for companies. The PCG builds on the comments made by the ATO in TR 2018/5 and provides a range of examples to assist companies determine their residency status in light of the ATO’s new approach in this area.
Something to keep in mind is that the ATO has stated that it will not apply resources to disturb a foreign incorporated company’s status as a non- resident during a transitional period which was originally due to expire on 13 December 2018. However, the ATO has extended this period to 30 June 2019, which provides companies with more time to review their position and determine whether steps should be taken to ensure that the company continues to be classified as a non- resident. Even though the ATO has extended the transitional period, there really isn’t much time left for clients with foreign incorporated companies to review their position in light of the ATO’s new approach, determine whether any changes should be made and then take steps to implement those changes.
Development lease arrangements
TA 2018/3 GST implications of certain development lease arrangements
The ATO has released a Taxpayer Alert concerning the GST treatment of certain arrangements entered into between property developers and government entities. The typical arrangement involves the situation where a property developer acquires land from a government entity in exchange for money and the agreement that the developer will undertake certain development works.
The ATO is concerned that there is inconsistency in the way that each party is accounting for the GST implications and that this can cause an underpayment of GST.
The ATO notes that in some instances this can occur because the value of the development works has not been agreed between the government entity and developer or the supply is not reported until GST can no longer be recovered due to the expiry of time limits for amending activity statements.
Foreign income tax offset problem area
The taxpayer in this case was a resident of Australia but was taxed in the US on some gains that related to a real property interest in the US. Most of the gains were taxed at a concessional rate of 15% (rather than the normal rate of 35%) because the interest had been held for more than one year. Some of the gains were ultimately taxed at 35% in the US.
The capital gains were also taxed in Australia and qualified for the general CGT discount of 50%. As the taxpayer was a resident of Australia and had paid tax on these gains in the US the taxpayer sought to claim a foreign income tax offset (FITO) for the whole amount of the US tax paid. However, the ATO amended the taxpayer’s assessments and only allowed a tax offset for slightly less than 50% of the tax paid in the US on the gains.
The problem for the taxpayer where was that while the US and Australia both have concessions for longer term capital gains, they operate quite differently. The US applies a lower rate to the whole gain while Australia applies a normal tax rate to half of the gain.
Unfortunately, for the taxpayer the Federal Court held that the Commissioner’s approach was correct. That is, the rules focus on amounts that are included in assessable income. If foreign tax has been paid on an amount that is not included in assessable income, then it cannot be taken into account under the FITO rules.
The Federal Court held that this approach would also consistent with the provisions of the Double Tax Agreement between Australia and the US (refer to Article 22). While the DTA indicates that Australia needs to provide a credit against US tax, it does not prescribe the amount to be allowed as a credit. This is subject to the provisions and limitations of the Australian tax legislation.
This is a common problem area when dealing with clients who have made capital gains on foreign assets. Clients often assume that they will receive a full credit for the tax paid overseas and are often surprised to discover that they are entitled to only a partial credit, or sometimes no credit at all, for the foreign tax they have paid.
Extension of single touch payroll to small employers
The Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 contains the amendments which aim to expand single touch payroll (STP) to all employers from 1 July 2019. The Bill passed the Senate in early December, but has been handed back to the House of Representatives to consider certain amendments that have been made which are unrelated to the STP measures. As a result, the Bill is still not yet law. While the Bill has not been passed, the ATO has provided some updated guidance in this area, key comments are extracted below:
“We won’t force employers with 19 or less employees to purchase payroll software if they don’t currently use it. Different STP reporting options will be available by 1 July 2019 to help smaller employers.
We have asked software developers to build low- cost STP solutions at or below $10 per month for micro employers – including simple payroll software, mobile phone apps and portals.
We have received over 20 expressions of interest (EOI) from software developers and will publish a register of the successful EOIs we have received by 30 November 2018.
Micro employers (1–4 employees) will also have a number of alternate options that are not available to employers with 20 or more employees – such as initially allowing your registered tax or BAS agent to report quarterly, rather than each time you run your payroll.
Exemptions to STP reporting will also be available if you have no internet or an unreliable connection.”
Similar business test
The Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 was finally revisited by the Senate in early December, although the Bill appears to be back in the House of Representatives to consider certain amendments that have been made. As a result, the Bill is still not yet law. The Bill contains the proposed new similar business test that would apply to company tax losses and capital losses and which would supplement the existing continuity of ownership test and same business test. The new test would apply to income years commencing on or after 1 July 2015 if the Bill is passed in its current form.
The Bill originally contained an amendment which would allow taxpayers to self-assess the effective life of intangible assets. However, the Senate appears to have rejected this amendment and it is unlikely to proceed.