The ATO and Treasury have been busy this month.
Treasury has released draft legislation for a number of the housing related measures announced in the 2017-18 Federal Budget giving us a clearer picture of taxpayers who might be affected and the likely impact. This includes draft legislation dealing with the removal of the main residence exemption for non-residents, limitations on claiming depreciation deductions for second hand assets used in a residential rental property, the denial of travel expenses relating to rental properties and superannuation measures which allow people to add more funds to super when downsizing or save for their first home within super.
If you have any questions regarding anything in our August Essential Tax Update – please do not hesitate to get in touch with the Fortis Accounting Partners team on (02) 9267 0108, or via email at info@exemplary-financial.flywheelsites.com. We’re always ready to assist by going through with you and explaining anything that you may be finding confusing.
From the ATO
Warning on work related expenses
Following on from the general warning provided by the Commissioner in a recent speech to the National Press Club, the ATO has issued another warning that it will be focusing on work related expenses being claimed as a tax deduction.
The ATO seems particularly concerned with situations where taxpayers claim, say, $150 for laundry expenses but have no evidence to show that they are required to wear a uniform or how the laundry costs have been calculated.
Just because there are substantiation exceptions for expenses up to a certain amount does not mean that taxpayers can automatically claim that amount as a deduction or that no evidence or records need to be kept.
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Contractor checklist
The ATO has a guide dealing with a range of issues that need to be considered when hiring workers. The guide provides assistance in connection with hiring employees and contractors.
A feature of this guide is a checklist of key issues to consider when a business hires a contractor to undertake some work and also issues that should be considered when the arrangement comes to an end.
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Ride-sourcing reminder
The ATO has released a guide reminding people involving in ride-sourcing that they need to include the income they earn in their tax return.
Importantly, because ride-sourcing is treated as taxi travel for GST purposes all taxpayers involved in ride-sourcing need to be registered for GST and are liable for GST on the full fare regardless of their turnover level.
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Expansion of foreign resident CGT withholding
From 1 July 2017 the foreign resident capital gains withholding rules have been expanded. The rules now apply to properties where the contract price is $750,000 or more (previously $2m). Also, the withholding rate has been increased from 10% to 12.5%.
The ATO has issued a guide aimed at conveyancers but which works through the key aspects of the rules and should be a useful source of guidance for anyone dealing with the rules.
The guide explains how to apply for a clearance certificate from the ATO as well as addressing practical issues. For example, the ATO notes that when applying the $750,000 threshold you ignore settlement adjustments for disbursements.
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Departing Australia super payments
Significant changes have been made from 1 July 2017 to the rates of tax that apply when a temporary resident leaves Australia and applies for a departing Australia superannuation payment (DASP).
These changes apply to individuals who have been in Australia on certain working holiday visas (e.g., subclass 417 and subclass 462).
From 1 July 2017, super funds will need to withhold tax from a DASP paid to a former working holiday maker at a higher rate, if the payment includes amounts attributable to super contributions made while the person was a working holiday maker. The rate of withholding tax can be up to 65% in this case if the DASP is paid from 1 July 2017.
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From Government
Passive investment companies and SBE concessions
As mentioned in previous editions of the Essential Tax Update there is currently some uncertainty around the issue of whether a company will be treated as carrying on a business for the purpose of determining whether it is a small business entity (SBE) or qualify for a lower corporate tax rate.
Much of this uncertainty stems from comments made by the ATO in TR 2017/D2, which has not yet been finalised.
While we are still waiting on the ATO to provide further clarification in this area, the Minister for Revenue and Financial Services has issued a media release confirming that the Government did not intend the lower corporate tax rate to apply to passive investment companies.
Despite indicating that the Government only intended to provide tax cuts to companies that are engaged in active business activities, it still remains to be seen how the ATO will address this issue and hopefully we will see some clarity on this issue shortly.
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Superannuation guarantee system review
Following the release of a report issued by the Superannuation Guarantee Cross-Agency Working Group the Government has announced that it will introduce legislation this year to ensure that salary sacrificed superannuation contributions do not reduce the employer’s superannuation guarantee obligations.
Currently, salary sacrificed superannuation contributions are taken into account in determining whether an employer has met their SG obligations in relation to that employee for the relevant period.
The Government also confirms what many of us already know – that the ATO has increased its focus on superannuation guarantee compliance and ensuring that employers meet their obligations in this area.
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Rulings, IDs & determinations
Expiring sub-trust arrangements and Division 7A
PCG 2017/13 Division 7A – unpaid present entitlements under sub-trust arrangements maturing in the 2017 or 2018 income years
Back in 2009 the ATO changed its approach and indicated that unpaid present entitlements (UPEs) owed by a trust to a related company could be treated as loans for Division 7A purposes. One way of preventing a UPE from being treated as a Division 7A loan is to put in place a complying sub-trust arrangement (one of the conditions is that the funds representing the UPE are invested on commercial terms for the benefit of the company).
PS LA 2010/4 sets out some safe harbour options for showing that funds representing UPEs have been invested on commercial terms for the benefit of the corporate beneficiary, including the use of a 7 year interest-only loan using Division 7A benchmark rates. Where this option has been used for arrangements entered into on or before 30 June 2011 the 7 year period would be expected to end in the 2017 or 2018 income years.
PS LA 2010/4 makes it clear that the trust must actually pay the principal of the loan at the end of the 7 year loan term to meet the requirements. If the trust fails to meet this obligation then the unpaid amount will be treated as a loan for Division 7A purposes and a deemed dividend could potentially arise.
However, in this PCG the Commissioner accepts that this loan can be placed under a ‘normal’ 7 year complying Division 7A loan agreement prior to the company’s lodgement day, extending the period over which the amount must be paid by the trust. In this case the trust would need to make interest and principal payments each year to prevent a deemed dividend from being triggered.
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Income splitting and professional sportspeople
PCG 2017/D11 Tax treatment of payments for use and exploitation of a professional sportsperson’s ‘public fame’ or ‘image’
The ATO has issued draft guidance on the tax implications that arise when payments are made in relation to rights associated with a professional sportsperson’s public fame or image.
According to PCG 2017/D11, if a sports team makes a payment in accordance with a playing contract and/or collective bargaining agreement which includes amounts attributable to the exploitation of a sportsperson’s ‘public fame’ or ‘image’, the ATO accepts that up to 10% of these payments can be treated as referable to the use and exploitation of the professional sportsperson’s ‘public fame’ or ‘image’.
If so, this portion of the payment should not be treated as PSI of the sportsperson which means that if the rights are held by a related company or trust, this portion of the payment can form part of the income of the company or trust and does not necessarily need to be taxed in the hands of the sportsperson (subject to distributions etc., made from the company / trust).
However, this is only applicable in situations where the company or trust actually holds rights in relation to the sportsperson’s public fame or image (the company / trust needs to hold certain rights relating to the sportsperson’s image etc.,). It may be that the sportsperson has previously granted a licence to the company / trust in relation to these rights which allows the company / trust to exploit their ‘public fame’ or ‘image’.
While the exact proportion of any payment that is attributable to someone’s public fame or image would generally be determined with reference to that individual’s marketability, the ATO accepts that it can be a difficult and costly exercise to determine an appropriate basis for apportioning the payments.
Professional sportspeople do not have to accept the 10% safe harbour amount proposed by the ATO. However, if they want to attribute more than 10% of relevant payments to these items then they would be expected to be able to support this.
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Similar business test guidance
LCG 2017/D6 The business continuity test – carrying on a similar business
In December 2015, the Government announced that a ‘similar business test’ would be introduced in order to make it easier for companies to access prior year tax losses following a change in ownership or control.
The Bill containing these changes, Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017, was introduced to Parliament on 30 March 2017 and passed through to the Senate on 22 June 2017. The new rules are intended to apply from 1 July 2015.
This draft LCG provides guidance on how the ATO intends to apply the similar business test. The LCG confirms that this test is meant to be comparable to the existing same business test, but without the negative limbs that make it difficult to pass the test if a company earns income from new activities or transactions. This means that you still need to confirm that the identity of the business has stayed the same and that there has been continuity of business activities and the assets used to generate income.
The LCG provides a number of examples that illustrate how the ATO intends to apply the various factors set out in the similar business test to practical situations.
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Reasonable travel expense amounts
TD 2017/19 Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2017-18 income year?
The ATO has released updated reasonable travel expense and overtime meal allowance expense amounts for the 2018 income year.
When an employee receives a bona fide travel allowance or overtime meal allowance they do not need to meet the normal substantiation rules as long as the deductions being claimed do not exceed the ATO’s reasonable amounts.
This is an area that is under an increased level of ATO scrutiny at the moment. Taxpayers should ensure that clients are aware that they would still be expected to be able to show how their deduction has been calculated and that they have incurred the expenses being claimed.
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Liability of executor to deceased’s tax obligations
PCG 2017/D12 Income tax – liability of a legal personal representative of a deceased person
The ATO has issued a draft Practical Compliance Guideline intended to provide certainty to the legal personal representative (LPR) of a deceased individual in terms of their personal liability in connection with outstanding tax obligations of the deceased individual.
When an individual dies, their LPR is generally responsible for ensuring that any outstanding tax obligations and liabilities are dealt with as part of the administration of the estate. In general terms, the LPR’s liability to pay outstanding tax liabilities of a deceased person is limited to the value of the deceased’s assets that form part of the estate. However, in some cases a LPR may have to meet liabilities personally if they distribute the assets of the estate with notice of a claim or potential claim by the ATO.
The guideline sets out the situations where the ATO will treat the LPR as having notice of a claim and when they will not be regarded as having such notice. However, the guideline only applies if certain conditions are met (e.g., does not apply if the deceased carried on a business or was assessed on distributions from a discretionary trust in the 4 years before their death).
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GST on supply of credit card facility for overseas transactions
GSTD 2017/1 Goods and services tax: when is the supply of a credit card facility GST-free under paragraph (a) of Item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
The ATO has finalised its guidance on whether the supply of a credit card facility is GST-free under the export rules in section 38-190 GST Act (the original draft determination was released back in 2014).
The ATO confirms that the supply is GST-free to the extent that it is anticipated that the credit card facility will be used by the cardholder to undertake transactions while they are physically outside Australia.
The provider needs to determine the anticipated use of the card facility on an objective basis. This could potentially be determined by reference to past usage patterns of other cardholders for the particular credit card facility while physically outside Australia.
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Cases
Tax invoices not enough to claim GST credits
GH1 Pty Ltd, in Liquidation and Commissioner of Taxation [2017] AATA 1063
The Tribunal has found that a company was not entitled to claim GST credits in relation to invoices issued to it by a related party, even though it held what it claimed were valid tax invoices.
The companies were both involved in the property development industry and the tax invoices appeared to relate to earthwork services undertaken in connection with a property development project.
As the result of a GST audit the ATO disallowed the GST credits claimed and the AAT affirmed the ATO’s position.
The AAT confirmed that the mere existence of a document that appears to be a tax invoice is not sufficient to establish that a taxable supply and creditable acquisition have actually occurred.
In this case the tax invoices for credits claimed in the December 2009 and March 2010 quarters did not evidence any actual taxable supplies made by the related company to GH1. In fact, the AAT found that the development works were actually completed prior to the dates of the invoices and that the company had actually already claimed the GST credits in prior tax periods.
Once again we see a situation where the AAT has disallowed claims made by a taxpayer due to lack of clear and convincing evidence. The existence of tax invoices is not enough if there is insufficient evidence to support that the transactions referred to in the invoices actually took place.
Legislation
Limits on deductions for rental properties
In the 2017-18 Federal Budget the Government announced a number of measures aimed at the tax treatment of property owners, including limits on deductions for travel expenses and depreciation.
Treasury has released draft legislation that seeks to:
- Prevent rental property owners from deducting travel expenses incurred from 1 July 2017 if they relate to a residential rental property.
- Prevent depreciation deductions from being claimed for second hand assets used in a residential rental property. These changes are intended to apply from the 2018 income year to assets acquired on or after 7.30pm on 9 May 2017.
The new rules dealing with depreciation deductions should not generally prevent deductions being claimed in situations where someone buys a new residential property from a developer (e.g., off the plan) and no one has resided in the property before.
The changes are not intended to apply to taxpayers carrying on a business, companies or certain widely held trusts.
More information
No more main residence exemption for non-residents
The Government announced in the Federal Budget that changes would be made to prevent non-residents from accessing the main residence exemption for CGT purposes from 9 May 2017. Treasury has now released draft legislation dealing with this.
The way the rules will work is that a taxpayer will not generally be able to claim any exemption under the main residence rules if they are a non-resident at the time of the CGT event, even if they were a resident for some (or even most) of the ownership period. Special amendments are also being introduced to deal with deceased estate scenarios and special disability trusts.
As announced in the Budget, someone holding property at 9 May 2017 can apply the current rules if the CGT event occurs on or before 30 June 2019. This gives non-residents some time to sell their main residence (or former main residence) and obtain some tax relief under the main residence rules.
The draft legislation also contains amendments to the rules dealing with the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to get around the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.
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Superannuation concessions for housing
The Government announced a number of measures in the 2017-18 Federal Budget relating to housing and the superannuation system. Treasury has released draft legislation relating to two key measures in this area.
Firstly, the draft law contains details of the proposed First Home Super Saver Scheme, which will allow individuals to save for their first home inside superannuation. Voluntary contributions made under the scheme and an amount of associated earnings can be withdrawn for the purpose of purchasing a first home. It is expected that the ATO would withhold an amount of tax from the payment.
Secondly, individuals aged 65 or over would be permitted to make non-concessional contributions of up to $300,000 from the sale proceeds of a main residence regardless of other contribution caps and restrictions that might otherwise apply. This is expected to apply to proceeds from contracts of sale entered into on or after 1 July 2018.
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Removing double taxation of digital currency
Treasury has released exposure draft legislation which is intended to give effect to the Government’s announcement in the 2017-18 Federal Budget that the double taxation of digital currency would be removed from 1 July 2017.
This is to be achieved by treating digital currency just like money for GST purposes.
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