2020 September – Essential Tax Summary

From Government

New JobKeeper test date for employees

On 14 August 2020, the Treasurer released Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 7) 2020, amending the date of eligibility for JobKeeper from 1 March 2020 to 1 July 2020. The amendment applies from 3 August 2020.

Under the original JobKeeper rules, an employee generally had to be employed by the entity as at 1 March 2020 and have met certain conditions at that date to qualify as an eligible employee (e.g., long-term casual employee requirements). For JobKeeper fortnights beginning on or after 3 August 2020, the amendments allow qualifying employers to receive JobKeeper payments for employees who meet the eligibility requirements on 1 July 2020.

Employees who met the conditions on 1 March 2020 will continue to be eligible assuming they are still employed by the entity.

In practical terms this means:

• If someone commenced employment with an entity after 1 March 2020 but by 1 July 2020 and they were an employee of the entity on that date then they can potentially be eligible for JobKeeper from 3 August 2020 onwards, assuming all other basic conditions are met.
• Casuals who hadn’t been employed for at least 12 months leading up to 1 March 2020 can potentially be eligible for JobKeeper if they have been employed on a regular and systematic basis for at least 12 months leading up to 1 July 2020 (assuming all other basic conditions are met).
• Individuals who failed the age-related conditions or residency conditions at 1 March 2020 can potentially be eligible employees if they met those conditions on 1 July 2020.

The ATO subsequently announced that the deadline for making payments for new eligible employees for JobKeeper fortnights starting on 3 August 2020 and 17 August 2020 had been extended to 31 August 2020 (i.e., to meet the condition for employers to pay at least $1,500 to eligible employees in each JobKeeper fortnight).

The other key change to the Rules is that someone who was previously nominated for JobKeeper with an entity as an eligible employee or eligible business participant, can potentially be nominated for JobKeeper with a different entity if certain conditions are met. The individual must have ceased to be employed or actively engaged in the business (as a business participant) of the original entity after 1 March 2020 but before 1 July 2020. They must also meet the conditions to be treated as an eligible employee of the new employer on 1 July 2020.

These amendments focus on the eligibility rules for employees. No significant changes have been made in relation to the rules dealing with eligible business participants.

While the Government has announced that JobKeeper will be extended beyond 27 September 2020, the rules dealing with the expansion of the scheme have not been released as yet. Also, the ATO is yet to release information on the alternative tests that will be used for the decline in turnover test and the average working hours calculation which will be used in connection with the expanded JobKeeper rules.

More Information

• Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 7) 2020
• Media Release: JobKeeper Payment and income support extended

Tax treatment of State government COVID-19 assistance

The ATO has released guidance on the tax treatment of a range of State and Territory business support measures, including direct grants, payroll and other tax relief, and expense reimbursements.

Cash grants

The ATO has confirmed that these payments (both lump sums and ongoing payments) should be included in assessable income. However, these payments should not be subject to GST unless the business provides something of value in return for the payment (e.g., entering into a binding obligation to do something or refrain from doing something).

Other relief

In respect of other types of relief, such as payroll or land tax relief, the position will depend on how the relief if provided. For example, the ATO indicates refunds of payroll tax and land tax previously paid should simply reduce the amount of the deduction that is claimed, rather than giving rise to an assessable income amount. The refunds should not have any GST implications. Similarly, reductions of the State taxes payable should reduce the deductible amount.

The guidance in relation to other rebates provided – such as in relation to electricity for example – follows a similar principle. The ATO indicates that these rebates are not included in assessable income, but the rebate will reduce the deduction that is claimed by the business for the electricity.

More Information

• Government grants and payments during COVID-19

COVID and residential rental properties

The changing financial circumstances of many tenants (and landlords) have had a significant impact on many residential tenancy arrangements. The ATO has provided brief guidance on its approach to the most common changes, including:

• Tenants being unable to pay rent: In these cases the ATO indicates landlords can still claim deductions for rental expenses where tenants can’t pay their rent under the lease agreement because their income has been affected by COVID-19 and the landlord received less rental income as a result but continued to incur normal expenses on the property. The same principles apply if landlords reduce rent payable by tenants to allow them to stay in the property due to COVID-19 for commercial, arm’s-length reasons.
• Interest deductibility: Interest should remain deductible on rental property loans if it continues to accumulate, because it is an expense that is still incurred, even if the bank defers the obligation to make loan repayments.
• Back payments of rent and insurance recoveries: The ATO confirms that a back payment of rent or an insurance payment for lost rental income should be declared as assessable income in the tax year in which it is received.
• Short term rentals: Many landlords offering short term rentals will have experienced reduced demand for the short-term rental accommodation, including cancellation of existing bookings, which may affect the income received. However, deductions may still be available. Where a client’s ability to rent a property has been affected and nothing else changes, the ATO indicates the client can continue to deduct expenses, based on how they used the property in the equivalent period in earlier years. Clients can only claim a deduction for the portion of expenses that relate to income-producing use. For example, if clients use a short-term rental property for some private use, deductions would not be available for this period.

Another common scenario is that some landlords have ceased advertising their properties for rent (on the basis that holiday traffic etc has slowed / ceased). To claim deductions for periods when a property is vacant, clients generally must show that the property is genuinely available for rent. The ATO indicates that this factor alone will not determine the allowable proportion of deductions. Where clients have made a reasonable commercial decision to temporarily stop or reduce advertising for a property during a COVID-19 lockdown, they may still be able to claim deductions for this period, but this will need to be considered carefully.

More information

• COVID-19 and residential rental property

Car fringe benefits and COVID-19

The ATO has released specific guidance on fringe benefits and the impact of COVID-19, particularly in relation to car fringe benefits. For these benefits, the ATO confirms that the treatment will often depend on whether the taxable value is calculated using the operating cost method or the statutory formula method.

For example, under the statutory formula method, if a car is garaged at or near the home of an employee, then it is generally treated as being available for private use of the employee and can trigger a car fringe benefit, even if the car isn’t actually being used by the employee.

If the statutory formula method is used then the “normal” calculation process needs to be followed. When a car is garaged at or near the employee’s home then this would be taken into account in determining the number of days that the car fringe benefit has been provided.

However, the ATO accepts that if the car is not driven at all or is only driven briefly for maintenance purposes, then it will not be taken to be a fringe benefit for the purpose of the operating cost method. This means that there should be no FBT liability for the period that the car is garaged at the employee’s home and is not being driven under this method. The employer should ensure that they have odometer records to show that the car hasn’t been used or has only been driven briefly to maintain the car.

Other areas of guidance include:

• Employers providing property for employees to work from home (e.g., laptops and other devices), including the operation of the minor benefits exemption;
• Emergency transport;
• Provision of personal protective equipment (i.e. masks etc) to employees and when this may be an exempt benefit; and
• Expenses incurred in COVID-19 testing for employees.

More Information

• COVID-19 and fringe benefits tax

Super contribution age limit changes

From 1 July 2020, updated superannuation regulations (Superannuation Legislation Amendment (2020 Measures No. 1) Regulations 2020) allow members to:

• Make voluntary concessional and non-concessional super contributions without meeting the work test if they are younger than 67 (up from 65); and/or
• Receive spouse contributions if they are 75 years old or younger.

More Information

• Change to age limits on super contributions

Trusts, COVID-19 and the section 100A integrity rules

The ATO has published guidance for situations where trustees of trusts may not be able to physically pay trust distributions to beneficiaries (i.e., satisfy present entitlements to trust income from 2020) due to liquidity issues caused by COVID-19. The example used in the guidance relates to situations where financial institutions impose restrictions that affect the way a trustee can deal with its assets (i.e., prevent assets from being disposed of or borrowed against to fund cash obligations).

Section 100A ITAA 1936 is a specific integrity provision, which can operate to tax the trustee on income appointed to a beneficiary where the benefit of those funds is provided to someone else. The rules can also potentially apply in situations where the trustee appointed income to a beneficiary but had no genuine intention of ever actually paying the distributions to that beneficiary. The ATO’s comments on this issue appear to be aimed at the second scenario, potentially on the basis that where entitlements are not physically paid there could be an argument that this was the reason instead of COVID-19 related restrictions.

The ATO states that where a present entitlement arose before any effect of COVID-19, then the mere fact that the trustee may need to make subsequent arrangements to meet the requirements of a financial institution should not of itself cause the entitlement to be invalid or trigger section 100A.

Further, the guidance includes a commitment to not undertake compliance action to consider the validity of a present entitlement or the application of section 100A in circumstances where a trustee is affected by liquidity issues due to COVID-19 and is unable to satisfy the entitlement.

More Information:

• Trust liquidity issues due to COVID-19

Capital gains and the foreign income tax offset

TD 2020/7

There have been several recent cases looking at how the foreign income tax offset rules apply in cases involving foreign sourced capital gains. For example, the Burton case confirmed that taxpayers can only claim a foreign income tax offset (FITO) for foreign tax paid on a capital to the extent that the capital gain is assessable in Australia. If the gain qualifies for the 50% CGT discount then generally only half the foreign tax paid in relation to the capital gain can be taken into account under the FITO rules.

This determination outlines the technical basis for calculating the FITO limit in circumstances involving multiple foreign capital gains, on which tax was paid only on some of the gains. This is something of an extension of the principles outlined in the cases albeit focussing on how the capital gains are taken into account in relation to calculating the FITO limit and cases involving multiple gains.

The FITO limit calculation involves a comparison between Australian tax actually payable and the Australian tax that would be payable if certain income and deductions reasonably related to that income were disregarded.

The ATO takes this view primarily because a net capital gain does not have a source (i.e., it does not have an Australian source and does not have a foreign source). As a result, the FITO limit will generally be lower than it would be otherwise.

The unrelated clients test and obtaining work through intermediaries

Commissioner of Taxation v Fortunatow [2020] FCAFC 139

This case considered whether the ‘unrelated clients test’ operated to ensure a taxpayer was carrying on a personal services business in circumstances where the taxpayer ‘advertised’ through LinkedIn but in practice, exclusively obtained work through intermediaries such as labour hire firms – including those who contacted the taxpayer through LinkedIn.

Broadly, in order to pass the ‘unrelated clients test’ the taxpayer needs to have generated PSI from two or more unrelated clients during the year and the services need to have been provided as a “direct result” of the taxpayer making offers or invitations to the public or a section of the public.

When it comes to determining whether the services are provided as a result of offers or invitations to the public there is an exclusion which applies when the taxpayer provides services through an intermediary such as a recruitment agency or labour hire firm. Broadly, the exclusion operates such that the individual is not taken to have made offers or invitations to the public merely because they are available to provide services through the intermediary.

Originally, the AAT found that the unrelated clients test was not satisfied, broadly on the basis that none of the clients engaged the taxpayer as a result of the LinkedIn page or relied upon any form of advertising by the taxpayer in relation to any of the services he provided.

On appeal the Federal Court overturned the AAT decision and held that the exception has no application where there is evidence that the taxpayer advertises their services to the public or a segment of the public and also obtains work through the involvement of a recruitment or other similar intermediary company. That is, the fact that someone has undertaken work obtained through an intermediary does not automatically prevent the unrelated clients test from being satisfied.

The ATO subsequently appealed the decision to the Full Federal Court. The Full Court found that the unrelated clients test was not satisfied (agreeing with the AAT) although considered that the AAT’s reasoning was still in error (i.e. the result was correct but for a different reason).

The Full Court said that the phrase “as a direct result” means there must be “a causal connection between the services provided and the offer or invitation to the public or a section of the public” and that the causal connection must be “direct”. This will “invariably involve an inquiry about what caused the client’s decision to obtain the services”. That is, if the client’s decision to obtain the services from the taxpayer was “a direct result of the making of offers or invitations”, then the unrelated clients test would be met.

If, however, an offer or invitation is only made to an intermediary and it plays no part in the client’s decision to engage the relevant individual (or personal services entity), the offer or invitation does not directly result in the provision of the relevant services. This was found to be the case here, where none of the eventual clients had obtained the taxpayer’s services as a result of seeing the advertising on LinkedIn, but rather through their use of the intermediaries.

The Full Federal Court’s decision confirms that it is not sufficient to advertise your services. In order to pass the unrelated clients test there needs to be a direct link between the advertising and the provision of the services.

Residency and establishing a permanent place of abode overseas

Joubert and Commissioner of Taxation (Taxation) [2020] AATA 2645

This case involved a set of facts similar to the recent Harding case (see the March 2019 Round Up for details – KS login required first) where the Full Federal Court found that the fact the accommodation of the taxpayer in the overseas country was of a temporary nature did not necessarily mean that the taxpayer had not established the overseas location as a “permanent” place of abode. In Harding the Court found that the taxpayer was not a resident of Australia.

However, the facts in this case supported the conclusion that the taxpayer was a resident of Australia. That is, while the taxpayer had similarly moved overseas for work and commenced occupying temporary style accommodation, the fact that the taxpayer’s family had remained in Australia, there was no intention to remain overseas, and the taxpayer had maintained a home in Australia to which he regularly returned to his spouse and family were all strong indicators of the client remaining a resident for tax purposes.

As the Court noted in the reasons for decision, this case emphasises that it is not generally possible to rely on decisions made in relation to other taxpayers, be they private rulings or Court decisions. While high level principles can be established each case needs to be determined based on its specific facts.

JobKeeper extension

Coronavirus Economic Response Package (JobKeeper Payments) Amendment Bill 2020

The Government has introduced legislation allowing the JobKeeper scheme to be extended through to 28 March 2021. The extended period would end on 28 March 2021 rather than 31 December 2020.

The Bill doesn’t actually set out the specific details of the expanded JobKeeper scheme. We assume that once this Bill is passed the Treasurer will publish a new legislative instrument setting out full details of JobKeeper 2.0 which would run from 28 September 2020 to 28 March 2021.

At the time of writing this Bill is before the Senate.

Choice of fund rules expanded

Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019

This Bill, which is now law, amends the superannuation guarantee provisions to ensure employees under workplace determinations or enterprise agreements have the right to choose their superannuation fund.

Currently, many of these workers can be required to use a superannuation specified under the agreement, for example an industry fund based on the area of employment.

This should also minimise issues which can arise whereby employees may have multiple superannuation accounts due to working in different areas (i.e. by taking new employment their contributions could be required to go to a different fund).