From Government
Productivity Commission review of remote area concessions
The government has requested the Productivity Commission undertake a review of the ongoing operation of a number of remote area concessions, including the zone tax offset, FBT remote area concessions and the remote area allowance. This has been partly prompted by concerns that the way in which these concessions operate no longer reflects changes in demographics and other factors since their introduction. The review is intended to cover the objectives, design, operation and effects of these measures, as well as investigate possible alternatives.
A discussion paper has been released which considers the history and amendments to these provisions, noting that there has not been any substantive change in over 25 years, and that the value of the concessions (particular the zone tax offset) has been eroded by inflation over that period.
The review will be wide-ranging however is primarily focused on the economic and employment effects of the concessions. Submissions are currently being sought on the review, and you can find information on contributing through the link below. Tax agents with a number of clients (both individuals and businesses) in remote areas may consider making a submission, possibly based on the experiences of their clients.
More Information – • Remote Area Tax Concessions – Issues Paper
Aboriginal kinship and super death benefit nominations
One of the issues coming out of the recent banking Royal Commission was the unique nature of kinship for Aboriginal and Torres Strait Islander peoples and the difficulties this create making binding death benefit nominations. One suggestion that came out of the evidence heard was that the definition of ‘dependant’ should be expanded in a way that accommodates the kinship structures operating in Aboriginal and Torres Strait Islander communities.
In response Treasury has released a very broad ranging discussion paper seeking input into the issue.
More information – Superannuation binding death benefit nominations and kinship structures
Including annual leave loading as ‘ordinary times earnings’ for SG
As part of a broader focus on ensuring employers comply with their superannuation guarantee (SG) obligations the ATO notes that there have been some issues in determining whether annual leave loading amounts should be included as ordinary times earnings (OTE) and thus subject to SG.
The ATO view on this issue was outlined in SGR 2009/2, and generally the position depends on the reason the annual leave loading was payable. The ATO has announced that due to the issues in this area (largely arising from the fact that most awards don’t provide a reason for the entitlement to annual leave loading), it will be applying a concessional compliance approach.
Broadly, for previous quarters the ATO will not apply compliance resources where:
- the employer self-assessed that the annual leave loading was not OTE, with the reasonable position that the annual leave loading was for a notional loss of opportunity to work overtime;
- there is no evidence that is less than five years old (the statutory period employers are expected to keep records relating to their SG affairs) that suggests the entitlement was for something other than overtime.
For future quarters however the ATO will be expecting that there is some form of written evidence to support the position that annual leave loading was payable for a notional loss of opportunity to work overtime. This might be found in the relevant award, or alternatively may be outlined in a policy of the employer. If employers do not have this written evidence they will need to attempt to obtain it as soon as practicable, or the ATO will assess their future SG obligations on the basis that the annual leave loading falls within OTE.
More Information – Ordinary Time Earnings – Annual Leave Loading
Guidance for travel agents
Although there are a number of ATO Rulings which specifically relate to the income and deductions claimable by individuals employed in certain industries, the ATO appears to have moved away from this method and provides the relevant information directly on the ATO website. Specific guidance has been released in relation to travel agents.
In relation to the income of travel agents, the guidance mainly consists of broad information relating to including allowances in assessable income and the distinction between an allowance and reimbursement.
There is a list of common deductions of employee travel agents, which provides some guidance on some relatively tricky areas to deal with, including expenses incurred on:
- Educational / familiarisation travel;
- Industry promotion and entertainment;
- Passport expenses; and
- Travel insurance.
If tax agents have clients who are employed as travel agents it would be a good idea to review the ATO guidance, particularly with respect to deductions, to ensure that clients are claiming appropriate expenses only.
There are also a range of other guides for employees in other industries (including those covered by specific rulings).
More Information – Travel Agent Employees
New AAT Small Business Tax Disputes Division
Following the creation of the new Small Business Taxation Division of the Administrative Appeals Tribunal, the ATO has released a bulletin outlining its policy for conducting litigation through the division, DR IB 2019/1.
One of the main drivers behind the creation of the Division was the relative inequality of resources available to the ATO and small business taxpayers in supporting ongoing dispute resolution processes. The creation of the small business division was intended to go some way towards addressing the difficulty clients face in proceeding with disputes. The ATO confirms in the bulletin that as an overarching principle that it will not retain external legal representation for cases in the Division. Further, where such legal representation is obtained, the ATO has indicated it will provide funding for equivalent representation for the taxpayer.
However, as has been mentioned by a number of commentators, this measure would seem to have a limited effectiveness in dealing with the issue identified, as even though no external representation may be retained by the ATO, the ATO itself has a large legal division which it can rely on in these circumstances.
Another interesting statement in the ATO’s policy indicates that “The ATO will not enforce recovery of the tax debt in dispute before the Small Business Taxation Division other than in exceptional circumstances” although how this broad statement will be applied in practice remains to be seen.
More Information – AAT Guide to the Small Business Taxation Division
Correctly accounting for the private use of business assets
There has been an increased focus by the ATO on the use of assets held by business entities for private purposes. This includes assets that are genuinely used in the course of the entity’s business operations.
The ATO has released some guidance to assist taxpayers in correctly accounting for their private use of these assets, which can include ensuring deductions are only claimed for business use, correctly apportioning deductions, making sure FBT or Division 7A issues are considered and maintaining appropriate records to reduce the likelihood of mistakes.
The ATO’s guide provides a number of practical examples, which include situations where boats, aircraft and racing cars are involved and explains the key tax issues that need to be considered by tax payers.
More Information – Private Use of Business Assets
GST guidance for financial supply providers
Detailed guidance has been uploaded on the ATO website in relation to governance and record keeping by financial suppliers with respect to their GST obligations. While it appears that this guidance is directed more towards larger financial institutions, the ATO identifies 5 key issues which it will be focusing on in relation to financial suppliers:
- Determining the extent of creditable purpose
- Reduced credit acquisitions
- The reverse charge for recipients of cross- border supplies
- Rights for use offshore
- Significant or unusual transactions
The underlying issue would seem to be that the ATO has identified a risk of certain entities claiming input tax credits where they are not entitled to (such as incorrectly claiming certain acquisitions are reduced credit acquisitions), or to a greater extent to which they are entitled (i.e., claiming a greater creditable purpose), and that record keeping standards may make it difficult to support the position being taken.
These issues may be relevant for smaller financial suppliers, such as superannuation funds, who will often need to determine the extent to which they make taxable supplies and may make reduced credit acquisitions.
More Information – GST Reporting for Financial Suppliers
Rulings
What’s ‘restructuring’ under the demerger rollover rules
TD 2019/D1 what is a ‘restructuring’ for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997?
The ATO has released a draft determination outlining when transactions are included as part of the ‘restructuring’ of a demerger group, which can be critical in determining whether the restructure can qualify for the CGT rollover in Division 125 ITAA 1997, as the scope of the restructure will generally be important in working out whether the relevant conditions are satisfied.
One key point explained in the determination is that it may be necessary to consider transactions beyond those which directly transfer the ownership interests in a demerged entity to the owners of the head entity of the group, and that transactions may be part of the restructuring even though they are legally independent of each other, contingent on different events, or may not all occur.
That is, although you may identify a series of transactions which on their own would satisfy the conditions to apply the rollover, it is necessary to also consider other transactions which may be sufficiently related to that reorganisation of a group of entities to form part of the restructure. The examples provided by the ATO include separate capital raising (both before and after disposal of a subsidiary), changes to ownership of the head entity, and separations involving closely held groups.
Where tax agents are considering using the demerger rollover in relation to restructures of corporate groups, the principles outlined in the ruling and the examples should be considered in determining whether the conditions to apply the rollover are satisfied in relation to the restructure of the group as a whole.
Income exempt under the International Organisations (Privileges and Immunities) Act
TR 2019/D1 income of international organisations and persons connected with them that is exempt from income tax
This draft ruling provides updated guidance on income derived by someone who is working with certain international organisations. Section 6-20 ITAA 1997 states that an amount is exempt income if it is made exempt from income tax under the tax legislation or another Commonwealth law. This draft ruling looks at how to determine whether particular income of international organisations and persons connected with international organisations is exempt from tax under the International Organisations (Privileges and Immunities) Act (the ‘Act’).
The extent to which income of international organisations and persons connected with international organisations is exempt depends on the provisions of the Regulations to the Act and may be different for each international organisation. The Regulations set out:
- Whether income of a particular organisation or income of persons connected with that organisation is exempt income;
- Whether the organisation is subject to a particular taxation liability; or
- How other taxation matters that apply in relation to that organisation (for example, PAYG withholding) and persons connected with it.
The ruling also contains guidance on determining whether a specific individual is a person ‘connected with that organisation’ for these purposes, including individuals holding high office in the organisation, attending international conferences convened by the organisation, and serving on a committee or participating in the work of the organisation.
Obligations of receivers to retain money for tax liabilities
TD 2019/D2 what is a receiver’s obligation to retain money for post-appointment tax liabilities under section 254 of the Income Tax Assessment Act 1936?
The draft determination outlines the circumstances in which receivers have an obligation to retain enough money to pay tax liabilities arising to an entity as a result of the liquidator’s actions. For example, if a receiver sells an asset and the company in receivership derives a capital gain, Section 254(1) ITAA 1936 requires the receiver to retain from the proceeds an amount sufficient to meet the company’s tax liability, and further imposes a personal liability on the receiver for the tax payable.
The obligation to retain money only applies to money that has come to the receiver in their capacity as agent for the entity (i.e. where they are acting pursuant to their appointment) and would not extend to funds derived by the receiver from other activities. The amount that must be retained (and the receiver’s personal liability) is also limited to the amount that the Commissioner can legally recover.
1 July 2019 FBT rates and thresholds
The ATO has released a range of updated rates and thresholds that will apply to the FBT year commencing 1 April 2019.
The rates and thresholds released include:
- The cents per kilometre rates for calculating the taxable value of a fringe benefit arising from the private use of a motor vehicle other than a car (TD 2019/3);
- The employer record keeping exemption threshold (TD 2019/4);
- The indexation factors for valuing non- remote housing (TD 2019/5);
- The benchmark interest rate (TD 2019/6).
- reasonable amounts for food and drink expenses incurred by employees receiving a living-away-from-home allowance fringe benefit (TD 2019/7)
Cases
Tax treatment of lump sum insurance payout
JSJG and Commissioner of Taxation (Taxation) [2019] AATA 336
This case concerned a review of a private ruling made by the Commissioner with respect to a lump sum payment received by the taxpayer in relation to some insurance policies. The Commissioner had decided that the lump sum solely related to an income protection policy and was accordingly taxable on revenue account.
The taxpayer contended that the amount was rather an undissected lump sum involving a mixture of income and capital components so should be taxed solely on capital account. The taxpayer also argued that the amount should be exempt from CGT under Section 118-37 ITAA 1997 (which deals with compensation or damages for a wrong, injury or illness suffered personally).
The relevant payment arose as a result of legal action based on claims by the taxpayer under two insurance policies, being an income protection policy, and a TPD policy. The taxpayer was seeking payment for loss of income but was also seeking loss and damage for inconvenience, mental anguish, personal insecurity and distress as a result of the non-payment of income benefits by the insurers.
The AAT found that the most relevant evidence regarding the nature of the payment was to be found in the terms of the agreement to pay the compensation (the legal settlement) and the taxpayer’s statement of claim. In particular, the agreement did not specify that the relevant amount here related only to the income protection claim, but the terms of the agreement as a whole made it clear that the total of both payments to the taxpayer was intended to satisfy all claims arising against the insurers, claims which had been set out on a number of different grounds. As the payment constituted a single undissected lump sum settling all non-TPD claims the AAT concluded that the entire payment was capital in nature.
Unfortunately for the taxpayer, the AAT concluded that even though the entire payment should be dealt with on capital account, it was not exempt from CGT under Section 118-37. This was because while part of the payment might have represented compensation or damages for a wrong or injury suffered by the taxpayer personally, it was not possible to identify exactly which portion of the payment was related to that part of the claim. As a result, the AAT determined that the exemption could not be applied to any part of the payment.
This case emphasises the importance of retaining documentation to support the taxation treatment of amounts received. Further, it highlights how the drafting of a legal claim and subsequent settlement agreement may not only assist in determining whether compensation payments will be assessable as ordinary income but also whether any part of the compensation can qualify for a CGT exemption.
Legislation
MIT amendments and tax whistle-blower protections now law
Treasury Laws Amendment (Enhancing Whistle-blower Protections) Bill 2018
The whistle-blower protection bill introduces a new legislative framework to protect individuals who disclose information to the ATO on tax avoidance behaviour and other tax issues. The legislation has been modelled on similar protections available to corporate whistle-blowers, which were not specifically available in the taxation laws previously. The changes include provisions enhancing the ability for the identity of whistle-blowers to remain confidential, immunity from prosecution due to the disclosure, and in some circumstances, compensation for loss or detriment suffered as a result of making the disclosure.
Treasury Laws Amendment (2018 Measures No. 5) Bill 2018
This bill contains amendments to the recently implemented managed investment trust taxation regime to ensure the provisions operate as intended, and specifically contains changes to ensure that discount capital gains derived by MITs are treated appropriately. The changes ensure that where trustees are assessed on discount gains not attributed to members they are not eligible for the discount. Other changes include:
- Aligning the CGT outcomes for MITs with AMITs;
- Adjustments to the withholding provisions relating to ‘fund payments’
- Allow MITs with a single unitholder that is a specified widely-held entity to access the AMIT regime;
- Changes to the transitional rules to ensure that former public trading trusts and corporate unit trusts can continue to use accumulated franking credits until 30 June 2019
