The Bill tightening access to the small business CGT concessions is before Parliament. There are some important differences between the Bill and the exposure draft released in February.
Don’t forget that employers need to do a ‘headcount’ on 1 April 2018 to determine whether Single Touch Payroll will be compulsory from 1 July 2018.
If you have any questions about any of the information contained in the Essential Tax Summary, please don’t hesitate to get in touch with the team here at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
From the ATO
1 April ‘headcount’ for Single Touch Payroll
From 1 July 2018, employers with 20 or more employees will be required to report their employees’ tax and super information to the ATO through payroll software that is Single Touch Payroll (STP) ready. Employers with 20 or more employees really need to take steps now to prepare for the requirement to use the STP system as the start date is approaching rapidly.
1 April 2018 is a key date because the number of employees at this date determines whether the employer will need to start using STP from 1 July 2018.
All employees generally need to be counted, this is not done on a full time equivalent basis. If an employer has 20 or more employee at 1 April 2018 they will be required to report to the ATO through STP even if employee numbers fall below 20, unless they apply for and are granted an exemption by the ATO.
There are some exceptions when undertaking the headcount at 1 April 2018. You do not need to include the following:
- Casual employees who did not work in March
- Independent contractors
- Staff provided by a third-party labour hire firm
- Directors
Employers with fewer than 20 employees have another year before STP is compulsory, although they can choose to start reporting through STP prior to 1 July 2019 if their software is updated. In broad terms, STP aligns employer reporting obligations with their payroll processes (i.e. employers will report to the ATO each time they pay their employees).
Some issues for employers to consider include:
- Some payroll software providers have asked the ATO for more time to update their products – employers will need to check if the product they use has a deferred start date;
- The ATO has indicated that if an employer’s software will be ready by 1 July 2018 but the employer won’t be ready, they will need to apply for their own deferred start date.
Updated guidance on cryptocurrency
The ATO has already updated some of its recent guidance on the tax treatment of Bitcoin and other forms of cryptocurrency.
Previously the ATO had indicated that unless someone acquired digital currency with the intention of using it to make private purchases then it was likely to be held on revenue account on the basis that it must presumably be held with the intention of making a profit on sale.
The ATO’s updated guidance indicates that there might be situations where digital currency could be held on capital account, even if it is not held for making private purchases. For example, it could be held on capital account as part of a broader investment portfolio in which case the CGT discount could apply if the asset is held for more than 12 months.
The updated guide also provides further examples on how to determine whether digital currency is a personal use asset under the CGT provisions. This is important because capital gains made on personal use assets are ignored if the asset was purchased for less than $10,000. All capital losses on personal use assets are ignored.
The ATO also confirms that a CGT event is triggered if you exchange one cryptocurrency for another cryptocurrency and it will be necessary to determine the market value in Australian dollars of the property received as part of the transaction in order to determine the tax outcome.
More information
Tax treatment of cryptocurrencies
GST and ‘drop shipping’
With the new GST rules dealing with sales of low value imported goods (those valued at $1,000 or less) to consumers in Australia applying from 1 July 2018 this may also affect Australian GST-registered suppliers (including Australian retailers) who ‘drop ship’.
‘Drop shipping’ refers to sales of goods that are located overseas at the time of sale and shipped directly to consumers in Australia from an overseas source.
Currently, these sales do not incur GST. However, from 1 July 2018, the changes to the GST treatment of low value imported goods means that Australian retailers should treat these sales the same as other domestic sales, and apply GST at the point of sale.
The changes will ensure goods sourced domestically and from overseas receive the same GST treatment when sold to consumers in Australia.
Any Australian suppliers currently not registered for GST, will need to include drop shipping sales when determining if they are required to register.
More information
Changes for Australian retailers using drop shipping
GST on low value imported goods
Inactive ABNs to be cancelled
The Australian Business Register (ABR) periodically checks its records for Australian business numbers (ABNs) and automatically cancels those that appear inactive.
The ATO has advised that these checks will be taking place periodically throughout 2018 and that advisers should be aware their clients’ sole trader, partnership or trust ABNs may be cancelled if they have:
- Told the ATO they have stopped their business activity;
- Declared no business income for the last two income years; or
- Not lodged business activity statement or income tax returns for more than two years.
Clients with outstanding tax returns or activity statements should bring these up to date to avoid cancellation of their ABN.
Some sole traders may have activity statements or income tax returns outstanding because they think they don’t need to lodge if their income is below the tax-free threshold. However, anyone carrying on a business is generally required to lodge a tax return regardless of the income or profit being generated.
Advisers should ensure that all sole trader business clients have lodged:
- Individual tax returns including the supplementary section;
- Business and professional items schedule for individuals.
More information
Inactive ABNs will be cancelled
Rulings
GST on low value imported goods and electronic platforms
LCR 2018/1 – GST on low value imported goods
LCR 2018/2 – GST on supplies through EDPs
LCR 2018/3 – When is a redeliverer responsible for GST on a supply of low value imported goods?
The ATO has released a number of Law Companion Rulings on the new GST rules relating to low value imported goods and goods sold through electronic platforms.
LCR 2018/1 discusses the new rules for low value imported goods which will apply from 1 July 2018. The amendments change the GST Act so that supplies of imported goods to consumers in Australia are connected with Australia where the supplier was the importer (previously these supplies were not connected with Australia).
GST is normally payable by the merchant who sells the goods. In regards to imports of low value goods however, the GST may be payable by either an Electronic Distribution Platform (EDP) operator, a merchant, or a redeliverer.
An EDP is a service (such as a website) that is delivered by means of electronic communication and which allows entities to make supplies available to end-users (examples include eBay, Amazon etc.,). Redeliverers are generally entities which have an arrangement with recipients to bring goods to Australia. These arrangements usually involve the redeliverer providing an address outside Australia to which goods are delivered, after which the redeliverer arranges for the goods to be sent to Australia from that address. These services are typically used in circumstances where a retailer does not deliver to Australia.
To determine who is liable for GST, the legislation establishes a hierarchy, under which:
- If an EDP operator is responsible for GST on a supply, the merchant will not be responsible for GST, and
- If an EDP operator or the merchant is responsible for GST on a supply, a redeliverer will not be responsible for GST.
LCR 2018/2 provides specific guidance on the GST treatment of supplies made through EDPs. The Ruling outlines a four step process in applying the EDP rules, involving the consideration of:
- Whether a supply is made through an EDP
- Whether a supply is subject to the EDP rules
- Whether a supply is excluded from the EDP rules, and
- If multiple EDPs are involved, which EDP operator is responsible for the GST.
If each of the four steps set out in the Ruling are satisfied, an EDP operator will be responsible for GST on a supply made through their platform.
Guidance on when a redeliverer would be liable for GST on the supply is contained in LCR 2018/3.
As a general rule, a redeliverer will only be responsible for GST on an offshore supply of low value goods when neither the merchant, nor an EDP operator, assists in bringing the goods to Australia.
Clients who import low value goods, or who are EDP operators or provide redelivery services, will need to familiarise themselves with the way the provisions operate in respect of each type of supplier in order to determine if and when they will have a GST liability in respect of these supplies.
New 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 2018.
The rates and thresholds released include:
- The indexation factors for valuing non- remote housing (TD 2018/1);
- The benchmark interest rate (TD 2018/2);
- The reasonable amounts for food and drink expenses incurred by employees receiving a living-away-from-home allowance (TD 2018/3);
- 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 2018/4); and
- The employer record keeping exemption threshold (TD 2018/5).
Long term construction contracts
TR 2018/3 tax treatment of long term construction contracts
The ATO has finalised its updated ruling on the tax treatment of long term construction contracts, which are basically just construction contracts that cross over two or more income years (even if the contract runs for less than 12 months).
The final ruling confirms that two approaches can be used to recognise income and deductions for long term construction contracts:
- The basic approach, under which all progress and final payments received in a year are included in assessable income, with deductions allowed for all expenses incurred during that year (subject to any normal restrictions);
- The estimate profits basis, under which the taxpayer can use accounting methods to allocate the ultimate profit or loss for the project across the relevant income years.
Whichever method is chosen by an entity, the ATO expects that method to be consistently used by the entity across all years during which the particular contract runs, and to all similar contracts entered into by the entity.
Cases
Amounts taken from company treated as income instead of loans
Rowntree and Commissioner of Taxation [2018] FCA 182
This case involved a dispute between the Commissioner and the taxpayer over the characterisation of certain funds advanced to the taxpayer by related companies.
The AAT had initially concluded that certain funds advanced to the taxpayer by related companies were not in fact loans and should be assessed as income in the hands of the taxpayer.
One of the key problems for the taxpayer was that there was no contemporaneous documentation proving that the funds were advanced to the taxpayer in the form of a loan. In some cases loan agreements were put in place, but this was well after the funds were actually advanced.
The Federal Court held that the AAT had not made any error of law in reaching its decision and that the AAT was correct to consider the taxpayer’s conduct at the time of the transactions, while giving little weight to the post-dated loan agreements in characterising the receipt. The taxpayer simply failed to prove that he had made contracts for loans with the companies when he caused them to pay the funds.
This should serve as a warning and reminder of the importance of documenting transactions at the time they occur.
Sales commission in cost base of property?
Bosanac and Commissioner of Taxation [2018] AATA 472
This case primarily focused on whether an amount described by the taxpayer as a sales commission could be included in the cost base of a property for CGT purposes on the basis that it represented an incidental cost relating to the CGT event.
In broad terms, case concerned the failure by the taxpayer to include a capital gain arising from the sale of a property in their individual tax return for the 2013 income tax year. As a result, the Commissioner issued an amended assessment (including shortfall interest and penalties) for the 2013 year.
The taxpayer objected to the amended assessment and argued that the Commissioner’s calculation of the capital gain was excessive because the Commissioner had failed to take into account an amount paid as a “sales commission” by the taxpayer to the purchaser of the property. The taxpayer contended that this item should have been included in the second element of cost base as an incidental cost.
Section 110-35 ITAA 1997 provides that certain incidental costs relating a CGT event are included in the cost base of the asset. In particular subsection 110-35(2) includes “remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.”
The Commissioner refused to include the sales commission in the cost base of the property because the documentary evidence supplied by the taxpayer was insufficient. The Commissioner noted that there was no clear description of the services for which the fee was paid and that there was no evidence that the fee was paid to a ‘surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser’.
The AAT found for the Commissioner and held that the amount paid on the sale of the property did not form part of the cost base of the property. The Tribunal found that the documentary evidence, consisting primarily of a tax invoice, a letter from the purchaser and a bank statement, was not sufficient to enable the amount to be treated as an incidental cost relating to the CGT event.
Meaning of “ordinary hours of work” for SG contributions
Austral i an Wo rkers’ Un ion v Bl u escop e Steel (AIS) Pty Ltd [2018] FCA 80
Although the Commissioner was not a party to this case it did involve consideration of the superannuation guarantee (SG) legislation and how the concept of ‘ordinary time earnings’ should be interpreted.
The case considered whether the ‘additional hours component’ of an annualised salary, or the ‘public holiday component’ of either an annualised or aggregate salary should be included in the “ordinary time earnings” of an employee.
Under the terms of the enterprise agreement between BlueScope Steel and its employees, some employees were required to work additional hours as well as work on public holidays. The agreed facts of the case indicated that BlueScope Steel did not make superannuation contributions for the relevant employees in respect of either the “additional hours component” or the “public holidays component” of the annualised salary paid to them under the enterprise agreement.
The Court concluded that given the manner in which work was performed, and required to be performed, under the enterprise agreement, there was no real or practical distinction between the standard or ordinary hours of work separate from the total number of hours worked, including “additional hours”. Nor was there any real distinction between work on a public holiday and work on any other day.
Accordingly, in this case, “additional hours” and hours worked on public holidays were “ordinary hours of work” and amounts paid in relation to this work should be treated as “ordinary time earnings”. As a result, super guarantee contributions should have been paid on those amounts.
Legislation
Access tightened to small business CGT concessions
Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018
The Government has introduced a Bill to Parliament which contains the proposed changes to the small business CGT concessions that were originally announced in the 2017-18 Federal Budget.
At a high level the changes are still limited to CGT events involving shares in a company or interests in a trust.
While the wording of the Bill is broadly similar to the draft legislation that was released in February 2018, it is not exactly the same. Some of the key differences are as follows:
- The modified active asset test (i.e., 80% test) is a bit different in terms of how you treat cash and financial instruments. They no longer need to be trading stock or fit within certain other limited parameters, but there is a new integrity rule around these assets.
- The draft version included a requirement that the company or trust being sold was carrying on a business just before the CGT event. The Bill doesn’t contain this condition which should enable the sale of interests in companies or trusts which do not carry on a business in their own right to qualify for the concessions if the assets of the entity are used in a business carried on by certain related entities.
- In some instances, the Commissioner can determine that an entity does not control another entity under the connected entity rules, if the interest held in that other entity is less than 50%. The Bill states that when testing the net assets or turnover of the object entity you ignore any such determinations made by the Commissioner.
Importantly, the Government is still planning to introduce these changes from 1 July 2017. Any CGT events involving shares in a company or interests in a trust from this date onwards really need to be reviewed in light of the proposed changes to confirm whether clients are eligible for the concessions.
SG changes and extension of single touch payroll
Treasury Laws Amendment (2018 Measures No. 4) Bill 2018
This Bill contains a number of amendments relating to the superannuation guarantee system as well as expanding the existing scope of Single Touch Payroll (STP).
The amendments give the Commissioner the power to issue directions to employers to undertake specific actions if there has been a failure to comply with SG obligations.
For example, the Commissioner will be able to issue a direction to an employer if the employer has failed to pay an amount of SGC for a quarter. The employer must ensure that the amount is paid within the period specified in the direction or they could potentially face criminal penalties.
The Commissioner can also direct employers to undertake an approved course relating to their SG obligations. The employer then needs complete the approved course, or for non-individual employers, ensure an individual who participates in the decision making of the business completes the course. The employer must provide proof of completion to the Commissioner. Failure to comply with the direction can result in administrative and/or criminal penalties.
Another key feature of the Bill is the extension of STP to all employers from 1 July 2019. STP is already compulsory for employers with 20 or more employees from 1 July 2018.
The STP reporting rules require employers report any amounts that constitute ordinary time earnings that are paid to an employee. Employers are also required to report any amounts that constitute salary and wages that are paid to an employee. The Bill seeks to extend these reporting requirements to include any salary sacrificed superannuation amounts that would have constituted ordinary time earnings or salary and wages had they been paid directly to the employee.
Progress of other tax Bills – GST & property, main residence, consolidation
GST and property developers
The Treasury Laws Amendment (2018 Measures No.1) Bill 2018 has passed through Parliament (Royal Assent 29 March 2018). The Bill contains changes to the GST rules which will require purchasers of new residential dwellings or newly subdivided land to pay a GST amount directly to the ATO as part of the settlement process from 1 July 2018.
Tax consolidation reform
The Treasury Laws Amendment (Income Tax Consolidation Integrity) Bill 2018 passed the Senate on 22 March 2018 and is awaiting Royal Assent. This Bill contains a number of amendments to the tax consolidation provisions to remove double benefits that can sometimes arise and clarify the treatment of certain items.
Main residence exemption – committee pursues all or nothing approach
The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 has not yet passed through Parliament but a Senate Economics Legislation Committee has suggested the legislation be passed. This Bill contains the changes to the main residence exemption rules for non- resident individuals. The Committee recommends that “the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.”
