A 12-month amnesty for employers with outstanding super guarantee obligations announced
The Bill enabling the amnesty is before Parliament. While the amnesty is not yet law, practitioners should start identifying clients who could potentially take advantage of the amnesty as the 12-month period is already underway (it is due to expire on 23 May 2019).
The benefit of taking advantage of the amnesty is that certain penalty amounts will be waived and the employer will be able to claim a deduction for the superannuation contributions that are made, which would not generally be the case for contributions made after the normal deadline. If a business does not take advantage of the amnesty then this will be taken into account when the ATO determines penalties in the future if an outstanding superannuation guarantee problem is identified.
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Treasury consultation on super changes
Treasury has released exposure draft legislation and explanatory material to implement the “Protecting Your Super” package which contains a number of reforms that are designed to protect
superannuation savings from erosion by fees and insurance premiums. The package contains the following elements:
• A cap on administration and investment fees charged on superannuation accounts with balances of $6,000 or less.
• Banning superannuation funds from charging exit fees for any account.
• A requirement on superannuation funds to only offer insurance on an opt-in basis in relation to accounts that have balances below $6,000, new members who are under 25 years old, or that have not received a contribution for 13 months or longer.
• Changes to strengthen the consolidation regime by requiring the transfer of all inactive accounts where the balances are below $6,000 to the ATO.
The reforms are based on recent findings that a large number of taxpayers with low value superannuation accounts were subject to disproportionately high fees and insurance premiums which added little value to their superannuation. The reforms are intended to complement the existing range of superannuation consolidation powers available to the ATO.
More Information
• Treasury Consultation
• Exposure Draft
• Explanatory Materials
Review of small business concessions
The Board of Taxation is conducting a review of tax concessions that apply to small business. This will involve assessing the effectiveness of existing concessions and possibly recommending new
concessions to Government.
A consultation guide has been released which includes an outline of the current small business concessions (such as the lower corporate tax rate, the small business tax offset, the small business
CGT concessions etc.) and the broad principles that will be applied in considering reform options, being:
•The concessions should be designed having regard to the small business life cycle,
• The concessions should assist in cash flow for small businesses,
• The concessions should relieve compliance burdens on small businesses,
• The concessions should promote growth and innovation,
• The concessions should be targeted and affordable, and
• The concessions should not create incentives for complex business structuring
Consultation on the review will involve public forums and meetings over the next few months. Information about these meetings will be available on the Board of Taxation website, although this
information has not been posted yet. Written submissions can also be made up until 20 July 2018. Knowledge Shop members who would like to raise small business concession issues or ideas should also feel free to contact Michael Carruthers (Tax Director of Knowledge Shop) who is a member of the Reference Group that is working closely with the Board of Taxation on this review.
More Information
• Consultation Guide
Investigation of garnishee notices
Following the recent media coverage of the ATO’s use of garnishee notices to assist in the recovery of unpaid tax liabilities, particularly small businesses, the Inspector-General of Taxation has commenced a review of the ATO’s use of this power.
Garnishee notices are written notices which may be issued by the ATO to third parties, who are required to pay money owed to the taxpayer. The notices generally instruct the third party to pay amounts to the ATO to satisfy the taxpayer’s tax debt. The third parties could include employers, banks, trade debtors and certain agents. Garnishee notices may require either a one-off payment or standard recurring payments for certain periods of time. The ATO’s debt recovery actions have consistently formed over 20% of all complaints made to the Inspector-General of Taxation, with the use of garnishee notices being a major source of concern for taxpayers.
At the moment, tax professionals are being encouraged to lodge a submission to this review setting out their, or their clients’, experiences with the ATO’s use of garnishee notices including any impact it has had on the professional or their clients. The closing date for submissions is 22 June 2018.
From the ATO
Inadvertent concessional cap breaches
As part of the recent Federal Budget, the Government announced that eligible employees would be able to choose to nominate that their wages from certain employers not be subject to the
superannuation guarantee (SG) rules from 1 July 2018.
The rationale for the introduction of this change is that where a high income earner has multiple employers they may end up breaching their annual concessional contribution cap if each of the employers complies with their SG obligations. The change allows high income earners to opt out of receiving SG contributions from a particular employer to ensure they do not exceed the concessional contributions cap.
Eligible employees will be high earning individuals with more than one employer who expect their income for SG purposes (ordinary time earnings) will exceed $263,157 in the income year. Individuals will still need to receive SG payments from at least one employer.
The ATO has indicated that from 1 July 2018, eligible individuals will be able to download an application form from the ATO website that will need to be completed and returned to the ATO for approval in order to obtain an exemption certificate.
It appears that the exemption certificates would apply on a quarterly basis and it is expected that individuals would need to submit their applications 60 days before the start of the quarter the exemption will apply to. The ATO also indicates that exemption certificates may be issued for multiple quarters within a financial year and will not extend
beyond the financial year in which they are issued. Interestingly, the ATO states that employers will not be bound by the exemption certificate. The application of these rules and any changes to an employee’s remuneration package would need to be negotiated between employees and their employers.
More Information
• Preventing Inadvertent Concessional Cap Breaches
• Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018
Excess transfer balance assessments
The ATO has begun to issue Notices of Assessment to SMSF clients who had previously received an excess transfer balance (ETB) determination and rectified the excess. The assessments are sent to SMSF members or their advisers, not to the fund. It is the member’s responsibility to decide how to cover the liability. They can either use assets from
outside super, or they can access their super and either:
• make a larger than usual one-off pension payment
• make an additional commutation of their income stream
• take a lump sum from any accumulation interest they hold
ETB tax is calculated on the ETB earnings from when the individual started to have an ETB to when they are no longer in excess. The tax rate is set at 15% for an ETB in the 2017–18 income year. The rate will increase to 30% from 1 July 2018 for second time offenders. ETB tax is due and payable 21 days after the assessment is issued. GIC will accrue if any amount remains unpaid after the due date.
More Information
• ETB Tax Assessments
ATO crackdown on car expenses
The ATO has announced that it will be closely examining claims for work-related car expenses in income tax returns for the 2017-18 year as part of its broader focus on work-related expenses.
Following recent legislative changes, there are two ways to calculate a deduction for car expenses, the cents per km method (which is limited to claims for work-related travel up to 5,000 km), and using a log book to determine the work-related percentage of actual expenses incurred.
The ATO has stated that each year around 870,000 people claimed the maximum amount under the cents per km method, noting that while it is legitimate to claim for 5,000 km if the taxpayer did actually travel at least this far in the course of earning assessable income, the ATO is concerned that some taxpayers mistakenly believe that this is a “standard” deduction they are entitled to, without needing to provide any evidence of having travelled that distance, or even having undertaken any travel at all.
Even though the cents per km method does not require a log book for substantiation purposes, taxpayers still need to have travelled as part of their employment or other income earning activities and need to be able to show how they calculated their claim. For example, this could include keeping a diary of places they had to drive to for work, and how often this happened.
Practitioners should take care in preparing 2017-2018 tax returns to ensure that clients can support the deductions that they are seeking to claim for car expenses as this is clearly an area that will be targeted by the ATO in the short term.
More Information
• ATO Scrutiny of Work Related Car Expenses
Rulings
Travel relating to residential rental properties
LCR 2018/D2
This draft Ruling concerns the amendments commencing from 1 July 2017 which deny deductions for travel expenditure incurred in gaining or producing assessable income from using
residential premises to provide residential rental accommodation. Prior to the amendments, travel expenditure was generally deductible under section 8-1 to the extent that it was incurred in gaining or producing assessable income from a rental property.
The ruling confirms that certain taxpayers are not subject to the amendments (such as companies) and that the restrictions do not apply if the expenditure was necessarily incurred in carrying on a business.
The draft ruling considers whether someone might be carrying on a business of property investing and indicates that this is a question of fact. The ATO notes that it would generally be more difficult for an individual to demonstrate that they are carrying on a rental business compared with a company as the rent will typically be treated as passive investment income rather than income from a business. However, in some cases an individual could potentially show that a business is being carried on with reference to the following key factors:
• the total number of residential properties that are rented out
• the average number of hours per week you spend 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.
Downsizer contributions to super
LCR 2018/D4
The draft ruling deals with the downsizer contribution rules which apply from 1 July 2018 and allow eligible individuals who are at least 65 years old to contribute amounts of up to $300,000 from the sale of their main residence to super. The contributions are not considered to be nonconcessional contributions and will not count against the contributions caps if all of the relevant conditions are met.
There are a number of conditions that need to be met to access these rules, including that the taxpayer has held their main residence for at least 10 years prior to sale and that the property was at least partially exempt from CGT under the main residence exemption. For example, the draft ruling confirms that even though the main residence CGT exemption is subject to a 2 hectare limit, the downsizer contribution rules can potentially apply as long as the taxpayer would be entitled to a partial exemption under the main residence CGT
exemption rules.
The ruling provides some initial ATO guidance on a number of practical aspects associated with these new rules, including how to approach situations where someone’s spouse has died, where property has been subdivided and where someone bought vacant land and built their main residence on it.
More Information
• LCR 2018/D4
• Downsizing Contribution Measure
Schemes limiting an entity’s presence in Australia
TD 2018/D1
This draft Determination relates to the application of section 177DA ITAA 1936 and indicates that schemes designed to limit an entity’s taxable presence in Australia could fall within the scope of the general anti-avoidance rules in Part IVA ITAA 1936.
The purpose of section 177DA is to ensure that foreign multinational entities cannot avoid the taxation of business profits in Australia by avoiding having a taxable presence in Australia. If the following features are present then the entity will be treated as having participated in a scheme that limits a taxable presence in Australia under section 177DA:
• A foreign entity makes a supply to an Australian customer;
• Activities are undertaken in Australia ‘directly in connection with’ the supply;
• Some or all of those activities are undertaken by an Australian entity who is an associate of, or is commercially dependent on, the foreign entity;
• The foreign entity derives ordinary or statutory income from the supply, some or all of which is not attributable to an Australian permanent establishment of the foreign entity
The draft Determination focuses on the meaning of the phrase ‘directly in connection with’ the supply made to the Australian customer. The ATO indicates that this condition can capture activities which:
• Contribute to bringing about the contract for the supply,
• Attract new customers or maintain existing customer relationships,
• Relate to the ability to supply the goods or service, or the manner in which it is supplied,
• Support the ongoing execution of a supply under an existing supply arrangement, or
• Actively procure demand for sales
Car depreciation limit unchanged for 2019 income year
TD 2018/6
The luxury car limit for depreciation purposes stays at $57,581 for the 2019 income year.
Cases
Substantiation of work-related expenses
Hussain and Commissioner of Taxation (Taxation) [2018] AATA 1111
This case concerned whether the taxpayer was entitled to claim deductions for a number of work-related expenses in the 2013 and 2014 income years. The ATO had initially held that the taxpayer was not entitled to claim a range of work-related expenses that had been shown as deductions in his tax returns.
A number of problems with these claims became apparent during the course of this case, some of which are summarised below:
• The taxpayer indicated that substantiation of many of the expenses claimed was not available due to a relationship breakdown
• The taxpayer conceded that he had mistakenly attempted to claim some capital items
• The taxpayer could not prove that travel expenses were related to his work
• The taxpayer conceded that no uniform was required for his work despite claiming clothing expenses
• Self-education expenses were claimed but the taxpayer could not provide any documents substantiating either the expenses claimed or that the courses were actually held
• Claims for deductions in relation to occupancy expenses for the taxpayer’s residence were included, but there was no evidence that the property was used to carry on a business
• The taxpayer had attempted to pass off a work diary from the 2013 year as relating to the 2014 year
• The taxpayer had failed to include cash allowances in his tax return
As well as confirming that most of the expense claims should be disallowed, with the exception of some very limited claims which could actually be substantiated, the Tribunal also considered whether the discretion in Subdivision 900-H ITAA 1997 (about relief from the effects of failing to substantiate) could be exercised. The Tribunal indicated that the taxpayer could not rely on this discretion as the facts of the case did not suggest that the taxpayer was incapable of organizing their affairs following the marriage breakdown.
Specifically, the AAT found that “the Commissioner has advised the Applicant on many occasions what he had to provide to support his claimed deductions but he has simply not put in the effort to obtain the material. While doing so is time-consuming and perhaps tedious, if a taxpayer wants to claim deductions, they have to make the effort.”
This case is another reminder that substantiation and record keeping is critically important for clients in claiming work related deductions. The ATO has indicated recently that there will be an increased focus in this area which means that it is essential for clients to obtain documentary evidence supporting claims they are making in their tax returns.
SMSF trustee failing to comply with obligations
Hart and Commissioner of Taxation (Taxation) [2018] AATA 1267
In this case, the issue was whether the Commissioner was correct to disqualify the trustee of a SMSF due to a number of breaches of obligations under the SIS Act, including:
• Failing to lodge the fund’s returns on time;
• Paying benefits without the member satisfying a condition of release;
• Providing financial assistance to relatives of members;
• Acquiring prohibited assets from related parties;
• Causing the fund to fail the in-house asset provisions; and
• Breaching the sole purpose test.
Under the SIS Act, the Commissioner may disqualify an individual from acting as a trustee for a number of reasons, including on the basis that the individual has contravened the SIS Act or that the individual is not a fit and proper person to be a trustee. In this case, the Commissioner relied on both grounds. The AAT found that the trustee’s conduct in this case failed exhibit the skills and judgement required of a fit and proper person in that capacity. Also, not only where there a number of breaches, they were extremely serious breaches which resulted in an almost entire dissipation of the funds in the SMSF (over $600,000).
The AAT found that the Commissioner was entitled to exercise this discretion on the basis that the trustee displayed a wanton disregard for the duties of a trustee including deliberate breaches of the inhouse asset rules and the existence of seriously dishonest conduct.
While this case dealt with some serious breaches of the SIS Act, it is important to note that the obligations of a SMSF trustee should not be taken lightly and clients who have a SMSF or are considering utilising a SMSF need to understand the importance of exercising their duties with skill and care.
Legislation
SG amnesty and other superannuation changes
Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018
As indicated above the Government plans to introduce a 12 month amnesty for employers who have failed to meet their superannuation guarantee (‘SG’) obligations in the past. This Bill includes amendments that are designed to encourage employers to voluntarily disclose historical SG noncompliance and pay an employee entitlements in full (including the interest charges).
Employers who take advantage of the amnesty will be able to claim a tax deduction for payments of SG amounts made during the amnesty period. Certain penalties and fees that would otherwise apply in relation to historical SG non-compliance can also be reduced to nil. To qualify for the amnesty employers must make a voluntary disclosure during the amnesty period which is intended to operate from 24 May 2018 until 23 May 2019. An employer who has an amount of SG shortfall for a quarter that qualifies for the amnesty and has made the appropriate disclosure:
• Can claim deductions in respect of payments made in relation to SG charge and contributions that offset the charge to the extent the charge relates to the SG shortfall; and
• Does not have any additional administrative components in respect of the SG shortfall; and
• Is not liable to any penalties for a failure to lodge an SG statement in respect of the shortfall by the time that they were required to do so under the SGAA 1992.
The Bill also includes several other changes to the operation of the superannuation law, such as the changes that will enable high income earners to exclude certain employers from making SG payments, changes to the legislation relating to non-arm’s length income and modifications in relation to the calculation of the total superannuation balance of a SMSF member in circumstances where the member has entered into a limited recourse borrowing arrangement. The changes to the non-arm’s length income rules are designed to ensure that complying superannuation funds cannot circumvent the non-arm’s length income rules by entering into schemes involving non-arm’s length expenditure (including where expenses are not incurred). These changes are intended to commence in respect of income derived in the 2019 income year (i.e. they will apply to schemes entered into before that time that result in income being derived in the 2019 year).
Under changes to the superannuation rules in 2016, the concept of ‘total superannuation balance’ was introduced. The Bill seeks to amend the total superannuation balance test so that, in certain circumstances, it takes into account the outstanding balance of a limited recourse borrowing arrangement entered into by the trustee of an SMSF (or other fund with less than 5 members), increasing the member’s total superannuation balance. The changes will generally apply in respect of limited recourse borrowing arrangements commenced on or after 1 July 2018 where the member has satisfied a condition of release with a nil cashing restriction and the limited recourse borrowing arrangements are between the SMSF and one of its associates.
It will be important for SMSF practitioners to understand the scope of these changes and how they may apply to their clients. A copy of the Explanatory Memorandum to the amending
legislation can be found at the following link – 2018 Superannuation Measures No. 1 Bill Explanatory Memorandum.
Personal income tax cuts
Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018
The Government has introduced legislation implementing its proposed changes to the individual income tax rates. This Bill includes the new ‘Low and Middle Income Earners Tax Offset’, and changes to the income tax rate thresholds, both commencing from the 2019 income year. The Bill also includes the Government’s more ambitious plans to change the thresholds in the 2023 and 2025 income years to increase the 32.5% threshold to apply to individuals earning up to $200,000. Equivalent changes will also extend to other entities taxed as individuals, foreign residents and working holiday makers.
This legislation has already been the subject of heated debate and is still before the House of Representatives. We will have to wait and see whether the Government is able to secure enough support to push the Bill through Parliament.
Other tax related Bills
There are a number of other pieces of tax related legislation currently being considered in Parliament. These include:
Instant asset write-off extension
Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 – this Bill extends the operation of the small business $20,000 instant asset write-off threshold to 30 June 2019 and was introduced to the House of Representatives on 24 May 2018.
Foreign residents excluded from main residence exemption
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 – this Bill includes amendments which seek to prevent foreign residents from being able to access the main residence CGT exemption. The Bill is currently before the Senate.
Tightening of small business CGT concessions
Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 – this Bill contains the changes the basic conditions for accessing the small business CGT concessions for CGT events involving shares in a company or interests in a trust. The Bill is still before the House of Representatives.
If you have any questions about any of the information contained in the Essential Tax Summary, please contact John Kalachian from Fortis Accounting Partners on 92670108.
