From Government
Significant changes to Division 7A
Following on from announcements made in the 2017-18 and 2018-19 Federal Budgets, Treasury has released a consultation paper which explains how many of the proposed changes to Division 7A are likely to apply. It is important to note that this is merely a consultation paper, no legislation has been passed or released at this stage and the final version of the rules may end up looking quite different.
Some of the key proposals due to commence from 1 July 2019 are summarised below:
- While the current rules allow Division 7A loans to be placed under a 7 year or 25 year loan agreement, the new rules would only allow provide for a maximum 10 year loan agreement. Annual repayments of principal and interest would be required to prevent a deemed dividend from arising.
- Transitional rules would be introduced to ensure that all existing Division 7A loans are brought into the 10 year loan model. 7 year loans would retain their existing outstanding term. Existing 25 year loans would be largely exempt from the new rules until 30 June 2021.
- Loans made before 4 December 1997 that have not been forgiven (or deemed to have been forgiven) will be refreshed and brought within the scope of Division 7A. They will be treated as financial accommodation as at 30 June 2021 and will need to be repaid or placed under a complying loan agreement by the company’s lodgement day for the 2021 tax return to avoid a deemed dividend.
- The concept of distributable surplus will be completely removed, which means that the entire value of the loan, payment or forgiven debt will be an assessable deemed dividend regardless of the financial position of the company.
- Unpaid present entitlements (UPEs) will trigger a deemed dividend unless they are paid out or placed under a complying loan agreement by the lodgement day of the company’s tax return. Existing UPEs that arose between 16 December 2009 and 30 June 2019 will be brought within the scope of these new rules as well. Treasury is still considering whether UPEs that arose before 16 December 2009 should be brought within the scope of Division 7A
- A self-correction mechanism will be introduced which will enable taxpayers to fix Division 7A problems without having to ask for the Commissioner’s discretion to disregard a deemed dividend. A number of conditions would need to be met in order to be able to take advantage of this (e.g., appropriate steps must be taken to fix the problem within 6 months of identifying the error).
- The amendment period rules for Division 7A issues will be extended to cover 14 years after the end of the income year in which the loan, payment or debt forgiveness occurred.
- Safe harbour mechanisms will be introduced in relation to the use of company assets where the parties are trying to show that the shareholder has paid an arm’s length amount for the use of the asset.
A number of other changes are being proposed with the aim of clarifying issues which currently cause confusion as well as addressing some integrity concerns that have been identified. Regardless of how this process evolves over the coming months it seems pretty clear that some very significant changes to Division 7A are on the way. Given the proposed start date for most of the changes is 1 July 2019 this won’t leave much time for tax payers to understand how the new rules apply, especially as it appears that the changes may impact on existing arrangements.
More information – Targeted amendments to Division 7A
Removing GST on feminine hygiene products
The Government has announced that it plans to remove GST on feminine hygiene products effective from 1 January 2019. This is a result of the States and Territories unanimously agreeing to this change at the Council of Federal Financial Relations (CFFR) meeting on 3 October 2018.
The Government is undertaking a consultation process to determine the definition of feminine hygiene products for GST purposes. Following the consultation, a Ministerial Determination will be made which will be tabled in Parliament.
More information
From the ATO
Compensation paid from financial institutions
In recent years a number of taxpayers have received compensation payments from financial institutions in situations where advice received from the institution was inappropriate or was never actually received.
The ATO has released some guidance on the tax treatment of these compensation payments where they relate to losses made in connection with an investment, refunds or reimbursements of fees as well as interest. The ATO indicates that the tax treatment of the compensation will depend on what the compensation is being paid for and how the taxpayer holds (or held) the relevant investments.
For example, if the compensation is received in relation to an investment that the taxpayer has disposed of then the taxpayer may need to amend the tax return for the year of the CGT event to include the compensation as additional capital proceeds for that event. On the other hand, compensation received in relation to an existing investment would generally be used to reduce the cost base or reduced cost base of the investment. For refunds or reimbursements of adviser fees, if the taxpayer had deducted the fees then the refunds or reimbursements would generally be treated as an assessable recoupment in the income year the taxpayer received the payment. However, if the adviser fees are capital in nature and relate to specific assets or investments, the refund or reimbursement of fees would be used to reduce the cost base or reduced cost base of the investment. Any interest component of the compensation payment is normally assessable as ordinary income and should be included in the tax return in the income year the taxpayer receives it.
More information – Compensation paid to individuals for advice from financial institutions
Cleaning and courier services
The taxable payment reporting rules have been expanded to cover payments made to contractors in connection with cleaning and courier services. The ATO has provided guidance to businesses providing cleaning services and courier services on the new requirements that apply from 1 July 2018. The taxable payment reporting rules apply if the business has an ABN and makes any payment to contractors for cleaning services or courier services and where the contractor provides this service on behalf of the business.
The first report for payments made to contractors for cleaning and courier services will cover the period 1 July 2018 to 30 June 2019 and will be due by 28 August 2019.
Businesses providing cleaning and courier services should be made aware of the additional obligations so that they can ensure their systems are capturing the data required for ATO reporting purposes.
More information
Small business CGT concessions changes
As reported last month, the Bill containing changes to the small business CGT concessions for CGT events involving shares in a company and interests in a trust has passed through Parliament and the new rules will need to be taken into account for CGT events happening on or after 8 February 2018. These changes will make it more difficult to access the concessions when selling shares in a company or units in a trust.
The ATO has released guidance on these new rules, including the practical steps that need to be followed in determining whether the additional basic conditions can be met to access the small business CGT concessions.
More information – Additional conditions if the CGT asset is a share or trust interest
GST for events and conferences supplied by non-residents
The ATO has provided some specific guidance on determining the GST obligations and entitlements of non-resident businesses that supply or arrange events or conferences in Australia.
The following supplies provided by non-residents who are registered for GST or required to be registered for GST are generally subject to GST:
- Supply of event admission to attendees who are Australian businesses or individuals that are not registered for GST and overseas non- resident attendees who do not carry on any business activity
- Supply of food at premises in Australia
- Supply of exhibition rooms, stands or space or accommodation in Australia
- Supply of social events in Australia
- Supply of domestic transport services
- Supply of advertising services to Australian sponsors or overseas sponsors who carry on a business in Australia (i.e., have a permanent establishment in Australia
Non-residents that are registered for GST or required to be registered for GST should be able to claim GST credits for expenses incurred in making taxable supplies or GST-free supplies provided that the acquisition is not entertainment in nature.
More information – GST-events and conferences supplied by non- residents
GST and benchmarks for non-commercial supplies
Generally, supplies of accommodation and meals
for nominal consideration by endorsed charities can be treated as be GST-free. Benchmark market values can be used to determine whether the charity is making a supply which qualifies for GST- free treatment.
The ATO has recently issued new benchmark market values for supplies of long-term accommodation by endorsed charities for the period 1 July 2018 to 30 June 2019.
More information – GST and benchmark market values for non- commercial supplies
Fuel tax credit rates have increased
The fuel tax credit (FTC) rates have increased from 1 August 2018. The updated rates for the period 1 August 2018 to 31 January 2019 can be found at the link below.
Practitioners should ensure that the correct FTC rates are applied when claiming FTCs in activity statements for BAS periods from 1 August 2018.
More information – Fuel tax credit rates have increased
Rulings
Travel for residential rental properties
LCR 2018/7 Residential premises deductions: travel expenditure relating to rental investment properties
From 1 July 2017 it is not generally possible to claim a deduction for travel expenses that relate to gaining or producing assessable rental income from residential premises. The ATO has now published a final ruling which provides guidance on the meaning of ‘residential premises’, whether a taxpayer is considered to be carrying on a business of property investment (which would exclude the taxpayer from the new rules) and the tax treatment of travel that serves more than one purpose.
In broad terms, the ATO confirms that the term “residential premises” takes its meaning from the definition of the GST Act. Basically, this is a reference to premises that are fit for human habitation (i.e., have features of shelter and basic living facilities).
Whether someone is carrying on a business of renting out properties is a question of fact. The ATO refers to TR 97/11 which sets out a number of factors that would typically be used to determine whether a taxpayer is considered as carrying on a business. The new ruling also provides the following list of factors that the Commissioner would generally consider in the context of rental properties:
- The total number of residential properties that are rented out
- The average number of hours per week the taxpayer spends actively engaged in managing the rental properties
- The skill and expertise exercised in undertaking these activities; and
Whether professional records are kept and maintained in a business-like manner. The ATO notes that it would generally be more difficult for an individual to show that they carry on a business of renting properties than it would be for a company to show that it was carrying on a business.
If the travel undertaken by the taxpayer has more than one purpose (e.g., travelling to a mixed-use property), a reasonable apportionment is required to determine the portion of the travel expenses that are not deductible as a result of the new rules. What constitutes an appropriate apportionment basis would depend on the facts. Apportionment could potentially be done on a floor-area ratio, rental income or travel time spent attending to each purpose.
Royalties deemed to have an Australian source
Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172
The Full Federal Court has held that payments received by a company from Australian clients that were classified as royalties under the Australia / India double tax agreement are treated as having an Australian source for the purpose of Australian domestic law and could be taxed in Australia.
This case follows on from earlier decisions in the Tech Mahinda Limited cases which held that payments received by an Indian resident company were classified as royalties under Article 12 of the DTA. This meant that Australia was given the right to tax the payments even though they related to services provided by employees of the company who were located in India.
This case simply looked at whether those royalties should be treated as Australian sourced income for Australian domestic law even though the payments would not be classified as royalties under the definition that is contained in the Australian tax legislation.
The taxpayer argued that even though the DTA provides Australia with the right to tax the royalties, this right can only be exercised if Australia has the right to tax these amounts under Australian domestic law. The taxpayer argued that domestic law does not give Australia the right to tax the payments.
The Full Federal Court held that because Article 23 of the DTA deems the payments as having an Australian source, then the payments should be treated as being Australian sourced income when applying Australian domestic law. If there is any inconsistency between Australian domestic law and the terms of the DTA then the provision in the DTA take precedence.
As well as showing once again how complex things can be when international tax issues arise, the Federal Court has confirmed that the provisions of an applicable DTA take precedence over Australian domestic law where there is a conflict. For example, income that might normally escape Australian taxation because it has a foreign source might be brought within the Australian tax net because a DTA might deem the income to be Australian sourced income.
Legislation
Company tax cuts brought forward
Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018
The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced to Parliament on 16 October 2018 and passed both houses of Parliament on 18 October 2018. The changes ensure that companies with turnover below $50 million will be subject to a tax rate of 26% for the 2020-21 income year, with the rate then reducing to 25% from the 2021-22 income year onwards (rather than from 2026-27 income year as originally legislated).
The rules will continue to use the concept of base rate entity which means that companies will not qualify for the reduced tax rate if more than 80% of their assessable income for the relevant income year is classified as base rate entity passive income (eg, interest, rent, some dividends, net capital gains etc).
Similar timing changes will apply to the roll out of the 16% tax discount for unincorporated businesses (the cap of $1,000 per individual per income year is being retained) which can provide a tax reduction for sole traders as well as individuals who are partners in a partnership or beneficiaries of a trust which carry on a business. The rate is currently 8% but will increase to 13% for the 2020-21 income year, then increasing to 16% from the 2021-22 income year onwards.
Set out below is a summary of the new company tax rates:
While the new law will fast track the reduction of corporate tax rate for companies, there may be a negative impact when it comes to paying out profits as a franked dividend. The risk is that double taxation will occur in some cases because the maximum franking rate might be lower than the tax rate that applied to the profits being paid out as dividends. For example, some companies will be paying out profits that were taxed at 30%, but the maximum franking rate might only be 25%. The shareholders won’t receive full credit for the tax already paid by the company and the company may end up with surplus franking credits being stranded in its franking account.
Tax Payers will need to carefully consider this issue on a year-by-year basis and consider strategies for ensuring that franking credits are not wasted and that double taxation situations are avoided where possible. For example, smaller companies should consider paying out dividends earlier so that a higher franking rate applies, although this could bring forward tax liabilities for shareholders that could otherwise be deferred.
More information
- Fast tracking tax relief for small and medium businesses
- Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018
Bills that have received Royal Assent
Treasury Laws Amendment (Tax integrity and Other Measures) Bill 2018
This Bill contains the changes to the small business CGT concessions for CGT events relating to shares in a company or interests in a trust. These changes will make it more difficult for shareholders or unitholders to access the concessions. The new start date of the changes is 8 February 2018.
Treasury Laws Amendment (Black Economy Taskforce No.1) Bill 2018
This Bill operates to extend the Taxable Payments Reporting System to the courier and cleaning industries from 1 July 2018. The Bill also contains rules to ban software which allows businesses to understate their sales and income
Treasury Laws Amendment (Supporting Australian Farmers) Bill 2018
This Bill ensures that primary producers will generally be able to claim an immediate deduction for capital expenditure on fodder storage assets if they are first used or installed ready for use on or after 19 August 2018.
Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018
This Bill extends the $20,000 threshold for claiming an immediate deduction for the cost of assets acquired by small business entities that choose to apply the simplified depreciation rules to 30 June 2019.
