If you have any questions about any of the information contained in the Tax Round Up, please contact John Kalachian on 02 9267 0108.
From Government
Simplify the individual tax residency rules.
The Board of Taxation has released its review of the current tax residency rules for individuals. The Board concluded that the existing residency rules are no longer appropriate and should be reformed.
The review found that the current rules:
- No longer reflect global work practices in an increasingly global mobile labour force
- Impose an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a ‘weighting’ system that leads to inconsistent 0utcomes.
- Are an increasingly prevalent area of dispute for taxpayers and the ATO given the fundamental difference in tax consequences for residents and non-residents
The Board has recommended replacing the current rules with separate rules for individuals establishing residency (i.e., coming to Australia) and ceasing residency (i.e., leaving Australia).
When it comes to individuals arriving in Australia the Board has suggested that an initial ‘days in Australia’ test is adopted so that the majority of individuals can determine their residency status quickly and with certainty. The Board recommends that for individuals who do not satisfy the ‘days in Australia’ test, an objective test based on the individual’s facts and circumstances should then apply to determine residency on the basis of specific key factors (to determine the individual’s connection or relationship to Australia).
Further, the Board recommends that the new residency test for outbound individuals ensures that all individuals who have established residency in Australia continue to be treated as residents unless and until tax residency is established in another jurisdiction.
More Information
3 year audit cycle for SMSFs consultation
The 2018-19 Federal Budget announced that SMSFs with a good compliance history will have a three year audit cycle. The discussion paper from Treasury explores how the 3 year cycle might apply.
The stated purpose of the proposed measure is to reduce the compliance burden on SMSF trustees.
Under the proposed rules, only SMSFs with a history of three consecutive years of clear audit reports that have submitted the fund’s SMSF annual returns in a timely manner will be eligible to move to a three-yearly audit cycle – defined as an SMSF without any financial or compliance contraventions issued in an Auditor Contravention Report in the previous three years.
SMSFs would also be required to be audited in every year in which a key event occurs. Each audit would cover the period since the previous audit.
In some cases the three year audit cycle is a positive and could result in a fee reduction for Trustees, especially if software is being utilised correctly. However, our expectation is that there may not be a fee reduction and in some cases will be more expensive. Auditors will still need to audit three separate periods, not one larger period. The same amount of work will need to be completed as if the three years were audited individually, although you would expect there to be some administrative efficiencies. This may be offset by increased operating costs due to the requirement for practices to manage the adjusted SMSF audit workflows, even if there is a staggered introduction.
There may also be issues where errors occur. For example, in year one there is an increase in the property market that is not reflected in the financials, i.e., market value is incorrect. A pension is commenced on this amount. In years 2 and 3 the minimum pension is withdrawn based on this amount. The auditor involved after year 3 identifies that the year 1 market value is incorrect, as a result year 2 and 3 minimum pensions are not correct. How will this be rectified?
Treasury is currently seeking comments on the proposed three year audit cycle by 31 August 2018.
More Information
No deductions when reporting obligations aren’t met
Treasury has released exposure draft legislation that removes the ability of taxpayers to deduct certain payments if the associated withholding obligations have not been satisfied. This change was announced in the 2018-19 Federal Budget.
The following payments would be subject to the new rules:
- of salary, wages, commissions, bonuses or allowances to an employee;
- of directors’ fees;
- to a religious practitioner;
- under a labour hire arrangement; or
- for a supply of services — excluding supplies of goods and supplies of real property — where the payee has not quoted its ABN
If the PAYG withholding regime applies to the payment then no deduction would be available for the payment if no amount has been withheld at all or no notification is made to the Commissioner. However, withholding or notifying incorrect amounts would not affect a taxpayer’s entitlement to a deduction.The draft legislation is intended to commence from
1 July 2019. Submissions close 17 August 2018.
More Information
- Treasury 2018-19 Budget Black Economy
- Measure- Removing tax deductibility of certain payments
- Exposure Draft
- Explanatory Memorandum
Expansion of the taxable payments reporting system
Following the announcement made in the 2018-19 Federal Budget, Treasury has released exposure draft legislation to further expand the taxable payment reporting system (TPRS) to three new industries:
- Road freight
- Information technology, and
- Security, investigation or surveillance
The amendments require taxpayers that have an ABN and make supplies of road freight, IT or security, investigation or surveillance services report information to the Commissioner about transactions with contractors relating to the provision of these services.
The draft legislation is intended to commence from 1 July 2019. Submissions close 17 August 2018.
The TPRS currently applies to taxpayers in the building and construction industry. Legislation expanding the regime to the courier and cleaning industries is currently before the Senate.
More Information
- Treasury 2018-19 Budget Black Economy
- Measure – Further expansion of the taxable payment reporting system
- Exposure Draft
- Explanatory Memorandum
GST on offshore hotel bookings
Treasury has released draft legislation extending the GST system to ensure that offshore sellers of hotel accommodation in Australia calculate their GST turnover in the same way as local sellers from 1 July 2019.
Currently, offshore sellers of Australian hotel accommodation are not required to include sales of hotel accommodation in their GST turnover. This means they are often not required to register for and charge GST on their mark-up over the wholesale price of the accommodation.
The Explanatory Memorandum to the proposed legislation indicates that the amendments recognise that both Australian and overseas consumers now increasingly book Australian hotels and similar accommodation using online service providers that are based overseas. The amendments are intended to ensure that there is neutrality in the GST treatment regardless of whether the right to use the accommodation is purchased directly through an Australian supplier or from an offshore supplier.
The changes are intended to apply in relation to either supplies for which any of the consideration is first provided on or after 1 July 2019 or supplies where the invoice is issued on or after 1 July 2019.
Consultation on this measure closes 9 August 2018.
More Information
From the ATO
Updated property development guidance
The ATO has published draft guidance to help determine whether the sale of a property is the mere realisation of a capital asset (taxable as a capital gain) or a disposal in the course of carrying on business or a one off profit making venture (both taxable on revenue account). This distinction will often be the starting point in determining the correct tax treatment of profits and losses from property development activities.
The guidance confirms that whether a sale is a ‘mere realisation’, or something more, is determined by examining and weighing all the facts and circumstances taken as a whole. In making the determination, the ATO indicates that taxpayers should refer to an extensive list of factors, including but not limited to:
- Whether the landowner has held the land for a considerable period prior to the development and sale
- Whether the landowner has conducted farming, or other non-development business activities, on the land prior to beginning the process of developing and selling the land
- Whether the landowner originally acquired the property as a private residence or for recreational purposes
- Whether the landowner originally acquired the property as an investment, such as for long term capital appreciation or to derive rental income
- The landowner was unable to find a buyer for the land without subdivision
- The landowner applies for rezoning and planning approvals around the time or sometime after acquisition of the property, but before undertaking further steps that might lead to a profitable sale or entering into development arrangements
- The landowner has registered for GST on the basis that they are carrying on an enterprise in relation to developing the land
- The landowner has registered a related entity for GST that will participate in (or undertake) the development of the land
- The landowner has a history of buying and profitably selling developed land or land for development
- The operations are planned, organised and carried on in a businesslike manner
- The landowner has changed its use of the land from one activity to another (e.g. farming to property development)
- The scope, scale, duration and degree of complexity of any development
- The level of active involvement of the landowner in any development activities
- The level of financial risk borne by the landowner in acquiring, holding and/or developing the land
- The value of the development or other preparatory costs relative to the value of the land
The draft guidance includes a range of examples dealing with different types of property activity and how the ATO would treat the activities from a tax point of view.
The guide also discusses different types of property development agreements that landowners typically enter into with other parties and explains how to determine whether the arrangement gives rise to a partnership, a joint venture or some other contractual arrangement.
Practitioners with clients involved in property development or the sale of land should ensure that they review the ATO’s latest guidance in this area in determining how property projects should be taxed, especially as the ATO has set out an expanded list of factors that should be considered in determining whether projects should be taxed on revenue or capital account.
More Information
How the annual vacancy fee applies
Following recently introduced legislation, foreign owners of residential dwellings in Australia are required to pay an annual vacancy fee if their dwelling is not residentially occupied or rented out for more than 183 days (six months) in a year. For these purposes, the relevant year is the ‘vacancy year’, which is each successive period of 12 months starting from the first day the owner has the right to occupy the dwelling. A vacancy year is unique to each dwelling held by a taxpayer.
A dwelling is considered residentially occupied if, for at least 183 days in a vacancy year, any of the following circumstances are met:
- The owner or a relative of the owner genuinely occupied the dwelling as a residence
- the dwelling was genuinely occupied as a residence subject to lease or license for minimum terms of 30 days
- The dwelling was made genuinely available as a residence on the rental market (with minimum terms of 30 days).
The period of residential occupancy does not need to be one continuous block of time. Residential occupancy can be made up of multiple continuous periods of at least 30 days throughout the vacancy year. Further, dwellings made available for short term lease of less than 30 days (including via web based stay sites) are not considered residentially occupied and would not be taken into account in determining whether the 183 day threshold has been satisfied.
If a client can show that for at least 183 days in a vacancy year, the dwelling was incapable of being occupied as a residence they will not be liable to pay the vacancy fee. This may include circumstances where the property is damaged, undergoing renovations, where occupation of the property is restricted by law, or where the usual occupant was absent from the dwelling due to receiving long-term, in-patient, medical or residential care.
Foreign owners of residential property must lodge a vacancy fee return with the ATO within 30 days of the end of each vacancy year, regardless of whether they will be liable for the annual vacancy fee. To lodge a vacancy fee return an owner will need to be registered on the Land and Water Register.
More Information
Penalty relief extended
From 1 July 2018, the ATO will not apply penalties for a failure to take reasonable care or for not having a reasonably arguable position to eligible taxpayers for errors made in income tax returns and activity statements. Penalty relief will apply to most individuals, small businesses, self-managed super funds, strata title bodies, not-for-profits and co- operatives.
Penalty relief applies in respect of income tax, GST, PAYG Instalments, PAYG Withholding, luxury car tax, wine equalisation tax and fuel tax credits but not to other taxes such as fringe benefits tax (FBT) and the superannuation guarantee.
Taxpayers cannot apply for penalty relief. The ATO will provide it during an audit if it applies to the taxpayer. Penalty relief will be available once every three years at most.
More Information
‘Tax gap’ blows out to $8.7 billion
The ATO has published the income tax gap for individuals not in business for the 2014-15 income year. The tax gap is an estimate of the difference between the tax the ATO collects and the amount that would have been collected if every one of these taxpayers was fully compliant with the law. The estimated net tax gap for individuals not in business in the 2014–15 income year was approximately 6.4 per cent, or $8.7 billion.
The tax gap for individuals not in business is primarily driven by incorrectly claimed work-related expenses. Common mistakes include claiming deductions where there is no connection to income, claims for private expenses, or where the taxpayer has no records to show that an expense was incurred. Other areas of concern for the ATO include high rates of incorrect claims for rental property expenses and non-reporting of cash wages.
The information collected by the ATO in calculating the tax gap indicated that there are currently around 10.7 million individuals registered with a tax file number (TFN) who are not in business. Of these taxpayers, those that do lodge returns predominantly use an intermediary to prepare their tax, with around 68% lodging tax returns through a tax agent in the 2014–15 income year.
Many practitioners would already be aware that the ATO is heavily focusing on individual tax returns at the moment with a particular emphasis on work related deductions. Once again the ATO is sending a clear indicator that these claims with be targeted and practitioners should expect more ATO reviews and audits of individual tax returns.
More Information
Rulings
Managing the company tax rate and franking rate uncertainty
PCG 2018/D5 Enterprise Tax Plan: small business company tax rate change: compliance and administrative approaches for the 2015-16, 2016-17 and 2017-18 income years
As many taxpayers will be aware, the Government has introduced a Bill to Parliament which will change the company tax rate rules and maximum franking rate rules for the 2018 income year onwards. However, the changes are not yet law. In the meantime, the ATO has indicated that companies will need to determine their tax rate and maximum franking rate based on the existing legislation. For example, a company will be eligible for the 27.5% tax rate in the 2018 income year:
- It carried on a business during the 2018 income year (refer to TR 2017/D7), and
- Its aggregated turnover was less than $25 million for the 2018 income year.
The ATO has acknowledged the uncertainty faced by companies as a result of these impending changes as well as the uncertainty that still exists around whether a company might be carrying on a business under general principles.
As a result, the ATO has released a draft PCG which states that the Commissioner will not allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked dividends at the correct rate in the 2015-16 and 2016-17 income years (except in the case of clearly unreasonable determinations that a company was carrying on business, or in relation to contrived arrangements or tax avoidance schemes).
The draft PCG also outlines relief for companies which have applied an incorrect franking rate to dividends in the 2018 income year. Ordinarily, where a company has issued an incorrect distribution statement to shareholders it would need to apply to the Commissioner for permission to amend and reissue the distribution statement. However, if the Bill containing the changes to the company tax rate and franking rate rules passes through Parliament and a company realises that it has overfranked a dividend paid in the 2018 year the company may inform its shareholders of the correct franking credits in writing without reissuing the distribution statement and without having to seek the Commissioner’s permission to do this.
The Commissioner will not impose penalties on a company for giving a shareholder an incorrect distribution statement provided it gives written notice to each of its shareholders clearly showing the correct amount of the franking credit. The notice should be provided in the same way as the distribution statement was provided.
2019 FBT exemption for motor vehicles changes
PCG 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles
This compliance guide applies to car and residual benefits provided in the 2019 and later FBT years.
For FBT purposes, a fringe benefit relating to certain motor vehicles is exempt where the private use of the vehicle is limited to work-related travel, and other private use that is ‘minor, infrequent and irregular’.
In broad terms, the exemption is aimed at commercial vehicles that are mainly used for work purposes. However, it can be difficult for employers to know whether the private use of these vehicles by employees is minor, infrequent and irregular.
The PCG explains that the Commissioner will not apply compliance resources to determine if private use of a vehicle was limited to ‘minor, infrequent and irregular’ private use for FBT exemption purposes if the following conditions can be satisfied:
- The employer provides an eligible vehicle (refer to Eligible Vehicles) to a current employee;
- The vehicle is provided to the employee for business use to perform their work duties;
- The vehicle had a GST-inclusive value less than the luxury car tax threshold at the time the vehicle was acquired;
- The vehicle is not provided as part of a salary packaging arrangement and the employee cannot elect to receive additional remuneration in lieu of the use of the vehicle;
- The employer has a policy in place that limits private use of the vehicle and obtains assurance (such as a declaration) from the employee that their use is limited to use as outlined below;
- The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip; and
- For journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel:
a) More than 1,000 kilometres in total; and
b) A return journey that exceeds 200 kilometres.
In these circumstances, the Commissioner has indicated that he will not devote compliance resources (i.e., review or audit) to review whether the employer can access the FBT exemption for that employee.
2017-18 Stock taken for private use
TD 2018/10 Income tax: value of goods taken from stock for private use for the 2017-18 income year
This determination provides an update of amounts that the Commissioner will accept as estimates of the value of goods taken from trading stock for private use by taxpayers in named industries for the 2017-18 income year. The Ruling contains a table that sets out estimated amounts for the value of goods taken from trading stock, listed by industry. It is important to note that each taxpayer should be able to demonstrate that the value attributed to goods taken from stock for private use was fair and reasonable. Taxpayers should always have regard to their own circumstances when determining the appropriate value. For instance, greater or lesser values may be appropriate in particular cases. Taxpayers may be able to justify a lower value for goods taken from stock than that shown in the determination but would need to ensure that evidence is available to support the position that is taken.
2018-19 reasonable travel rates
TD 2018/11 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2018-19 income year?
The Determination sets out the Commissioner’s reasonable amounts for the purposes of the substantiation exception for the 2019 income year in relation to claims made by employees for:
- Overtime meal expenses – for food and drink when working overtime;
- Domestic travel expenses – for accommodation, food and drink, and incidentals when travelling away from home overnight for work; and
- 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.
Division 7A and interposed entity arrangements
TD 2018/13 Income tax: Division 7A: can section 109T of the Income Tax Assessment Act 1936 apply to a payment or loan made by a private company to another entity (the ‘first interposed entity’) where that payment or loan is an ordinary commercial transact
Division 7A normally applies when a private company provides certain benefits directly to shareholders or associates of shareholders. However, section 109T ITA 1936 extends the application of Division 7A to arrangements involving interposed entities. For example, if a private company makes a loan or payment to another company or trust, and the company or trust then makes a loan or payment to a shareholder of the first company, Division 7A can apply as if the first company made the loan or payment to the shareholder.
This final TD confirms the ATO’s view that section 109T can apply to a payment or loan made to the interposed entity even if that payment or loan is an ordinary commercial transaction.
For example, this could include situations where the company has paid a dividend to another company or trust that holds shares in the company. If the company or trust receiving the dividends then pays or lends the funds to another party then the interposed entity rules in Division 7A could potentially apply.
Division 7A benchmark interest rate
TD 2018/14 Income tax: what is the benchmark interest rate applicable for the year of income that commenced on 1 July 2018 for the purposes of Division 7A of Part III of the Income Tax Assessment Act 1936 and how is it used?
The determination provides that the benchmark interest rate for Division 7A loan purposes for the 2018-19 income year is 5.20% p.a.
Trust splitting arrangements
TD 2018/D3 Income tax: will a trust split arrangement of the type described in this draft Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Inc
This draft determination confirms the Commissioner’s view that a typical trust splitting arrangement will cause CGT event E1 to be triggered because it will result in the creation of a new trust. This is the case even if there is a single trust deed or the trusts are on identical terms. Broadly, trust splitting arrangements involve many of the following features:
- The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.
- Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.
- Different appointors are appointed for each trustee.
- The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee.
- The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit the subset to the exclusion of others. The original trustee will also exercise its powers in respect of the assets held by it independently of the new trustee to benefit a different subset again to the exclusion of others.
- The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed.
- The original trustee and new trustee keep separate books of account.
In addition to the CGT issues raised in the draft determination there is a risk that other issues could be triggered such as duty so it is important to ensure that proposed trust splitting arrangements are approached with caution.
