The major tax development this month is the passage of legislation which will prevent a deduction from being claimed for salary and wages (and certain other payments) by a business that fails to meet its PAYG withholding obligations.
This change will apply to payments made from 1 July 2019 onwards. The existing penalties for failing to comply with PAYG withholding obligations are already significant, this adds another financial incentive for businesses to ensure that they are compliant with PAYG withholding obligations.
The Government has also expanded the taxable payment reporting rules to cover IT services, road freight and security, investigation and surveillance activities. The scope of these categories is broad and will capture many businesses, especially those involved in any sort of IT activity. As these new rules apply from 1 July 2019, businesses captured by the expanded system need to ensure that they have processes in place before this date to gather the information that needs to be reported to the ATO.
If you have any questions about any of the information contained in the tax essential , please contact John Kalachian on 02 9267 0108 or email John@exemplary-financial.flywheelsites.com.
From Government
Limiting deductions for vacant land
Treasury has released exposure draft legislation dealing with the proposed changes to the rules relating to expenses for vacant land. The Government is planning to prevent taxpayers from claiming a deduction for expenses relating to holding vacant land unless those costs were incurred in the course of carrying on a business of the taxpayer or certain related parties.
However, the proposed amendments would not apply to companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.
If there is a substantive permanent building or structure on the land that is used or ready for use then deductions could still be available subject to passing the normal deduction tests, although there will be an exception for newly constructed or substantially renovated residential premises. In these cases no deductions would be available until the premises can be lawfully occupied and they are actually used to earn rental income or they are genuinely available for rent.
The changes are intended to apply to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.
Circular trust distributions
Treasury has also released exposure draft legislation dealing with the Government’s plans to extend the trustee beneficiary non-disclosure tax rules to circular trust distributions to capture situations involving trusts that have made a family trust election.
Under the current law, penalty tax rules can apply when a trust is involved in a circular trust distribution arrangement. However, trusts that have made a family trust election are excluded from the current rules. The Government wants to change this from 1 July 2019.
In very broad terms, the rules are aimed at situations where a trust distributes income to another trust, but that income is distributed back to the first trust.
New thresholds for large companies
The Government has announced that it will update the definition of what constitutes a large proprietary company for ASIC reporting purposes by raising the three thresholds.
At the moment a proprietary company is treated as a large company for ASIC reporting purposes if it meets any two of the following three thresholds in a particular financial year:
- $25 million or more in consolidated revenue;
- $12.5 million or more in consolidated gross assets; or
- 50 or more employees.
The Government plans to double the thresholds so that a company would only be classified as a large company if two of the following three thresholds are met:
- $50 million or more in consolidated revenue;
- $25 million or more in consolidated gross assets; or
- 100 or more employees.
The Government estimates that around a third of proprietary companies that are currently classified as large would no longer be large companies if these changes are made. This would mean that those companies would no longer need to comply with the financial reporting and audit requirements.
From the ATO
ATO checking on businesses that hold cars
The ATO has recently written to tax agents on behalf of clients who have cars registered in their business name but have not lodged an FBT return. The ATO is clearly targeting situations where cars or other motor vehicles have been used by employees or their related parties but the FBT issues have not been dealt with properly. Data matching programs are allowing the ATO to identify business entities that hold vehicles but don’t lodge FBT returns.
Businesses that hold cars or other vehicles are potentially exposed to historical FBT liabilities unless they can convince the ATO that either:
- No fringe benefit has been provided; or
- The taxable value of the benefit has been reduced to nil (potentially through employee contributions).
While it is reasonably common for businesses to manage FBT issues through employee contributions, it is important to ensure that there is evidence supporting the fact that sufficient after-tax contributions have actually been made. If employee contributions have been made then the ATO would generally want to ensure that any flow-on tax implications have been managed properly. This could include amounts being included in the assessable income of the employee (e.g., where a set-off arrangement is used) as well as checking that the contribution amount has been recognised for income tax and GST purposes by the employer where applicable.
Motor vehicle expenses
The ATO has issued a fact sheet dealing with tax deductions for motor vehicles. It also highlights some of the other common tax issues that can arise in relation to motor vehicles.
More information
Increased data matching for shares
The ATO is extending the data matching program to include data relating to share sales. The ATO will be receiving data from ASIC on share transactions including details of the price, quantity and time of share trading activity dating back to 2014 – this incorporates more than 500 million records.
The ATO already receives data from brokers, share registries and stock exchanges.
The ATO’s key concerns in this area appear to be:
- Some share sales are not reported at all in tax returns;
- Some taxpayers don’t keep sufficient records relating to share transactions;
- Some taxpayers are claiming losses from share sales as a deduction in their tax return, even though the shares are held on capital account.
While dividend details are often already pre-filled in taxpayer returns, the ATO is hoping to extend this eventually to also include details of shares transfers and disposals.
Certainty on tax treatment of transactions
The ATO has provided a reminder that practitioners or their clients can choose to engage with the ATO to seek agreement on the tax issues that will arise in relation to certain commercial deals. This can be done before completing a commercial deal or before lodging a tax return after a deal has been completed.
The aim is to arrive at a pre-lodgement agreement with the ATO which will provide the client with some comfort on their tax position. This process can help clients:
- have practical certainty about the tax outcomes of a proposed or completed deal
- resolve tax technical issues
- meet their tax obligations
- avoid the costs of potential tax disputes, reviews and audits
The ATO’s pre-lodgement agreements can apply to various commercial deals including the sale of business, the sale of business assets or the sale of commercial property.
Foreign owners and investors of Australian real estate
The ATO has published two facts sheets which are designed to help foreign owners and investors of Australian residential real estate to meet some of the obligations that apply to these investments.
The facts sheets include detailed steps that foreign investors should follow to meet their obligations in Australia, including:
- Obtaining FIRB approval before investing
- Recording property on the ATO Land and Water register
- Lodging an annual Vacancy fee return.
The fact sheets are available in English, Chinese traditional and Chinese simplified.
More information
- Residential property investment: fact sheet for foreign owners
- Vacancy fee return: fact sheet for foreign owners
Christmas parties, gifts and FBT
This is the time of the year when many employers provide benefits to staff in the form of parties and gifts. The ATO has issued some guidance aimed at these employers and the personnel involved in FBT administration.
For example, the FBT and income tax implications associated with Christmas parties can depend on the cost of the party per person, where the party is held and who is invited to attend. There are some exemptions that can apply to Christmas parties, such as the exemption for property benefits provided to employees on the business premises or the minor benefits exemption.
Separate issues can arise when an employer provides Christmas presents to employees or their family members. FBT issues could arise and it will be necessary to look at the nature of the gift to see whether it constitutes entertainment or not. The ATO confirms that a Christmas party and a Christmas gift are generally treated as separate fringe benefits, even if the gifts are provided to employees at the party.
Rulings
Taxable payment reporting for courier and cleaning services
LCR 2018/8 Expansion of the taxable payments reporting system to courier and cleaning services
From 1 July 2018, businesses providing cleaning services and courier services are subject to the taxable payment reporting system on payments made to contractors.
In broad terms, the reporting rules are triggered if the taxpayer provides courier or cleaning services, they have an ABN and they make a payment to a contractor that is wholly or partly for providing the courier or cleaning service on their behalf.
However, there are some exceptions that can apply to this.
LCR 2018/8 provides detailed guidance on the application of these rules and provides a range of examples which explain when payments would be captured under these reporting rules.
The LCR also explains how the reporting exemption applies. At a high level, reporting is not required if payments received by the entity for courier or cleaning services are less than 10% of the entity’s current or projected GST turnover (whichever is applicable to the business).
CGT and easements
TD 2018/15capital gains: does CGT event D1 happen if a taxpayer grants an easement, profit à prendre or licence over an asset?
The ATO has issued a new tax determination which confirms the ATO’s long-standing view that the grant of an easement, profit a prendre or licence does not involve the part disposal of the land over which it is granted. Rather, the granting of an easement, profit a prendre or licence over an asset would trigger CGT event D1.
This is relevant because certain CGT concessions can only apply to specific CGT events. For example, the main residence exemption and CGT discount cannot apply to a capital gain that arises under CGT event D1. Even if the property was acquired pre-CGT this does not prevent a taxable capital gain from arising if an easement is granted in relation to the property.
Also, when calculating a capital gain under CGT event D1 you compare the capital proceeds from the event with the incidental costs that relate to the event. That is, you do not take into account the cost base of the underlying property when calculating the capital gain (or loss) from CGT event D1.
It is important to note that the ATO does not consider that CGT event D1 is triggered if the easement arises by operation of law.
Time limits for claiming GST and fuel tax credits
MT 2018/D1time limits for claiming an input tax or fuel tax credit
The ATO has issued a draft ruling on the time limits that apply for claiming input tax credits for GST purposes or fuel tax credits.
The general position is that GST credits and fuel tax credit entitlements expire after four years. If the credit has not been taken into account in an assessment within the four year period then the entitlement generally expires.
However, the position can be complex in some cases, such as where amendments, objections or private rulings are involved. This draft ruling works through the technical aspects of the time limit rules and provides a number of examples to demonstrate how these rules work in practice.
If practitioners are assisting clients with GST and fuel tax credits for earlier tax periods then it is important to first check whether the time period for claiming those credits has expired.
Legislation
No deductions when PAYGW obligations not met
The Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018has passed through Parliament and introduces two further key tax measures as part of the Government’s attempts to prevent abuse of the tax system. Both of the measures apply from 1 July 2019.
The first main change is the introduction of provisions that prevent a taxpayer from claiming a deduction for the payment of salary and wages, director’s fees, payments to a religious practitioner, payments made to a labour hire worker and payments to contractors where an ABN is not quoted if the taxpayer fails to comply with its PAYG withholding obligations.
A deduction is also denied if a non-cash benefit is provided in lieu of a cash payment if no notification is made to the Commissioner.
However, if the business making the payment honestly believes that a worker is classified as an independent contractor and has received an invoice with the contractor’s ABN then the business can still claim a deduction for the payments even if it turns out that the worker was really an employee.
There is also an exception to the new rules if the employer voluntarily notifies the Commissioner of its failure to comply with the PAYG withholding rules before the Commissioner commences an audit or other compliance activity in relation to this. However, the employer may still be subject to penalties for its failure to initially comply with the PAYG withholding rules.
The Government has also expanded the taxable payment reporting system to businesses in the road freight, IT and security industries. Where a business in one of these industries has an ABN and makes any payments to contractors in relation to the performance of these services from 1 July 2019 the payments will need to be reported to the ATO.
It will be important to carefully identify clients who could be impacted by the new reporting rules to ensure that systems are put in place to gather the information that will need to be reported.
The categories are quite broad and there are many businesses that will be brought into the taxable payment reporting system from 1 July 2019 who have not had to comply with these rules as yet.
