Essential Tax Summary

From Government

Reform of the residency rules for individuals

The Board of Taxation has released a consultation guide to reform the residency rules for individuals.

The consultation follows the Board’s self-initiated review provided to the Government in August 2017.

The Board’s review looks at options to simplify the residency rules while protecting the integrity of the system. This simplification includes options for a two-step model for individual tax residency introducing:

Primary test – A primary bright-line test based on time spent (i.e., a ‘day count’) to automatically determine the residency status of the majority of individuals. The test explores rules for inbound and outbound individuals.
Secondary test – A secondary test for those who do not pass the bright-line tes The secondary test would consider individual circumstances, leveraging existing case law.

In addition, the guide addresses other areas for consultation:

Integrity – the integrity risk posed by ‘residents of nowhere’ and related schemes to circumvent the tax residency rules.
Superannuation test – updating of the outdated superannuation tes The test only applies to Commonwealth officials and their families where the official is a member of certain closed Government superannuation funds (the last fund closed in 2005).
Part-year residency – align the part-year rules for the tax-free threshold with the residency rules

The Board considers any change to the rules to be prospective to reduce the transitional impact.

Written submissions in response to the Consultation Guide close on 26 October 2018. The Board’s working group will conduct targeted consultation with interested parties.

The guide also contains a handy high-level summary of the residency rules for other countries (annexure C).

More information – Reforming the Income Tax Residency Rules for Individuals

Refundable franking credits removal inquiry

The new Treasurer, Hon Josh Frydenberg MP, has asked the House of Representatives Standing Committee on Economics to take a closer look at the implications of removing refundable franking credits.

The ALP has set out a number of tax related policies it would seek to implement if it was to win the next Federal election, including preventing taxpayers from being able to access a refund of excess franking credits.

The Committee has invited interested parties to make a submission on this proposal, which must be received by 2 November 2018.

More information – Inquiry into removing refundable franking credits

From the ATO

Home based businesses targeted

The ATO is targeting home office expenses and has identified a high number of mistakes, errors and questionable claims in this area. This is an area that clients and practitioners will need to ensure that claims are accurate and substantiated.

The common mistakes identified by the ATO are taxpayers claiming expenses they didn’t incur, claiming expenses that were reimbursed by their employer, claiming private expenses and not retaining sufficient records.

As part of its compliance activities the ATO may contact a taxpayer’s employer to check whether the employee is actually required to work from home, and whether the employer has reimbursed them or paid for their home office expenses. The ATO is also using data analytics to identify claims that are outside of the norm compared to similar occupations.

New guidance released by the ATO states that when a taxpayer is seeking to claim home office expenses they should keep a diary for a 4 week period that can be used to determine the deductible portion of the relevant expenses. However, the ATO expects the taxpayer to adjust this for changes in their normal pattern of behaviour, including periods where the taxpayer is ill or on holidays during the year.

As with many areas involving work related deductions, clients need to be aware of the limitations around claiming deductions but also the records that they are expected to keep to substantiate their deductions, even if the amounts being claimed are relatively small.

More information

Updated guidance on cryptocurrency

The ATO has updated its guidance on the tax treatment of cryptocurrency including practical issues associated with exchanging one cryptocurrency for another and record keeping requirements.

A common area of confusion for those involved in cryptocurrency transactions is whether a taxing event is triggered if one cryptocurrency is exchanged for another cryptocurrency. The ATO confirms that this exchange trigger is a taxing event as one CGT asset is disposed of in exchange for another CGT asset. The market value of each item needs to be taken into account in determining whether a taxable gain or loss arises as well as determining the tax cost base of the new item.

For record keeping purposes, the ATO expects taxpayers to keep the following details of cryptocurrency transactions:

The date of the transactions;
The value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
What the transaction was for and who the other party was (even if it’s just their cryptocurrency address).

Other common records that may need to be kept include:

Receipts of purchase or transfer of cryptocurrency
Exchange records
Records of agent, accountant and legal costs
Digital wallet records and keys
Software costs related to managing tax affairs

More information – Cryptocurrency and tax

Occupation guides for deductions

The ATO is clearly focusing on deductions claimed by individual taxpayers for work-related expenses and has launched a significant education campaign to help taxpayers get their tax returns right. As part of this campaign, the ATO has updated and published specific guidance on the deductibility of common expenses incurred by employees

including:

As well as referring to these updated guides when preparing client tax returns, practitioners should consider distributing copies of the guides to clients who work in these occupations.

Reminder on cents per kilometre rate

The cents per kilometre rate increased from 66 to 68 cents per kilometre for the income year starting 1 July 2018. As such, employers who use the cents per kilometre rate to pay car allowances to their employees should ensure that rates are up to date.

The ATO has also confirmed that where an employer pays a car allowance that is higher than 68 cents per kilometre they need to withhold tax on the excess amount under the PAYG withholding system.

More information – New cents per kilometre rate

Peer-to-peer caravan and RV sharing

The ATO has updated its guide to the sharing economy to include specific guidance on peer-to- peer caravan and recreational vehicle (RV) sharing arrangements. These typically involve the use of a vehicle sharing platform to rent or hire caravans or RVs to others for a period of time.

The ATO confirms that payments received by someone who rents or hires their caravan or RV are assessable for tax purposes even if the taxpayer is not carrying on a business of sharing caravans or RVs on lease or hire. The ATO also provides guidance on how to apportion the expenses for private use and how to determine the GST implications.

If the taxpayer has purchased or used the caravan or RV mainly for producing and income, they are entitled to claim a deduction for the periods when the caravan or RV is actually rented or genuinely available for rent (on a ‘days’ basis). To be genuinely available for rent the taxpayer must:

Advertise it widely so it will attract users and respond to enquiries in a reasonable period
Make it available during peak periods when people want to rent it
Ask for fair rent that is comparable to other listings
Ensure it’s in a location and condition that will make it likely to attract tenants
Not refuse to rent it to interested people without adequate reasons

If the caravan or RV is rented out for less than market rate then the deduction will be limited to the amount of rent received.

More information – Peer-to-peer caravan and recreational vehicle sharing

Low income earners may still need to lodge tax returns

The ATO has issued a guide to confirm that individual taxpayers might still need to lodge a tax return even if their taxable income is under the tax- free threshold.

There are a number of situations where someone needs to lodge a tax return even if they have no tax liability for the year. For example, if an individual made a loss for the income year then they would need to lodge a tax return.

More information – Low income earners and lodgment of tax returns

Under-reporting of income: data exchange with 100 foreign tax authorities

The ATO is increasing its efforts to identify taxpayers who fail to report all their assessable income.

The most common mistakes identified by the ATO are taxpayers leaving out cash wages, income from second jobs, capital gains on cryptocurrency, the sharing economy, the gig economy and foreign- sourced income.

In addition to the ATO’s existing data matching activities, from September 2018 the ATO will be exchanging information with over 100 foreign tax authorities under the Common Reporting Standard which is expected to identify Australian residents who derived income from foreign sources.

More information – Don ’ t make extra income a tax time headache

Rulings

GST and supplies of goods connected with Australia

GSTR 2018/2 supplies of goods connected with the indirect tax zone

This draft ruling deals specifically with the issue of whether a supply of goods is connected with the indirect tax zone (i.e., Australia) for GST purposes. This guidance was previously contained in GSTR 2000/31 which also dealt with services and real

property.

This issue is relevant because a supply can generally only trigger a GST liability if it is connected with Australia.

The ATO notes that whether a supply of goods is connected with Australia does not depend on the residency status of the parties to the transaction or where they carry on their business activities. The rules require you to look at whether the goods are delivered or made available to another party in Australia, whether they are imported into Australia, or exported from Australia.

If the goods are located outside of Australia for the duration of the transaction then the supply should not be connected with Australia and should not trigger a GST liability in Australia, even if the parties involved are residents of Australia.

Cases

Employee share scheme amount could not be ignored

Fox and Commissioner of Taxation [2018] AATA 2791

The AAT has confirmed that the taxpayer was correctly taxed on the value of rights / shares acquired under an employee share scheme (ESS), even though the shares became worthless after the vesting date was triggered.

The taxpayer was provided with some rights which were converted into shares in the employer company in the 2014 income year. The taxpayer included an assessable amount of $106,058 in her 2014 tax return based on an ESS statement issued by the employer. However, shortly after lodging the 2014 tax return the taxpayer was made redundant by the company. Later in 2015, the company was placed into liquidation and in October 2015 the liquidators declared in writing that the shares were basically worthless.

The taxpayer lodged an amendment to the 2014 tax return to exclude the discount received under the ESS on the basis that there was no financial benefit received as a result of the acquisition of the shares. The taxpayer also argued that the contract of the offer of the shares was void or voidable because she was coerced into signing the ESS offer. The amendment was not accepted by the Commissioner. The taxpayer subsequently applied to the AAT to consider the matter after the Commissioner disallowed the taxpayer’s objection to the amended notice of assessment.

The AAT held that the taxpayer should have included the discount received in relation to the rights / shares in the 2014 tax return. The fact that the shares subsequently became worthless did not change the outcome under the ESS rules. The taxpayer failed to establish that she was coerced or otherwise unduly influenced by reason of excess pressure into signing the ESS offer.

The key take-out for taxpayers here is that the tax impact under the ESS is determined at the relevant taxing point, the fact that the value of the shares might fall later on is not really relevant, although it could result in a capital loss arising.

When the ATO can decline to make a private ruling

Decision impact statement – Commissioner of Taxation v Hacon Pty Ltd

This case dealt with a situation where the taxpayer had applied for a private ruling on the potential application of the general anti-avoidance rules in Part IVA to a proposed restructure of their business. However, the Commissioner exercised his discretion to decline to provide a private ruling on the basis that the correctness of the ruling would depend on assumptions about future events or other matters. The taxpayer applied to the Federal Court for judicial review of the Commissioner’s decision. While the taxpayer was successful in the Federal Court, the Commissioner was later successful on appeal to the Full Federal Court.

The ATO has published a decision impact statement following the Full Federal Court decision in this

case. The ATO’s view is that the Commissioner is entitled to decline to make a private ruling where the correctness of the ruling would depend on assumptions about future events or other matters and that the Commissioner is not obliged to first request information from the taxpayer in those circumstances.

The ATO intends to publish further guidance on this issue, which should be considered by taxpayers who are contemplating seeking a private ruling. Practitioners should be aware that in some circumstances the Commissioner may decide not to issue a private ruling, such as where the application of the law is dependant on assumptions about future events or matters. In these cases, a private ruling may not be the most appropriate way for the taxpayer to seek clarity on the likely tax treatment.

No GST credits available as transactions never occurred

Mango Reef Pty Ltd v Commissioner of Taxation [2018] AATA 3091

The AAT has confirmed that the taxpayer was not entitled to claim GST credits in relation to scrap gold because there was insufficient evidence to show that the transactions actually took place. While the taxpayer had initially sought to claim GST credits on the basis that these items had been purchased in connection with its business activities, the ATO refused to allow the GST credits on the basis that the transactions never took place. The ATO also imposed administrative penalties – 75% of the shortfall amount for intentional disregard of the taxation law and an additional uplift of 20% because the taxpayer took steps to prevent or obstruct the Commissioner from finding out about the shortfall.

The AAT agreed with the ATO position that there was insufficient evidence to conclude that the taxpayer actually purchased the scrap gold. The taxpayer had also failed to satisfy the AAT that there were any grounds which would warrant the remission of all or part of the penalty amounts.

Legislation

Revised start date for small business CGT concession changes

Treasury Laws Amendment (Tax integrity and Other Measures) Bill 2018

Parliament has finally passed the Bill containing 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 good news is that the start date for the changes has been deferred from 1 July 2017 to a new start date of 8 February 2018. Practitioners may need to review transactions that have occurred on or after 8 February 2018 to check whether the changes impact on the ability of clients to access the small business CGT concessions.

In broad terms, the amendments introduce some additional basic conditions that need to be met in order to apply the small business CGT concessions to a capital gain arising in relation to a share in a company or an interest in a trust as well as modifying some of the existing conditions.

The changes are complex and will make it more difficult for many shareholders or unitholders to access the concessions on the sale of shares or units from 8 February 2018. Broadly, the proposed new conditions require that:

If the taxpayer selling the shares / units does not satisfy the $6m maximum net asset value test, they would need to have carried on a business just before the CGT event to be able to access the concessions using the $2m turnover test;
The company or trust being sold must either be a CGT small business entity (i.e., using a $2m turnover threshold) or satisfy the $6m maximum net asset value test. When applying these tests to the company or trust a modified version of the normal grouping rules is applied; and
The shares / units must satisfy a modified version of the active asset test.

Immediate deduction for fodder storage assets

Treasury Laws Amendment (Supporting Australian Farmers) Bill 2018

This Bill passed Parliament on 20 September 2018 and ensures that primary producers will generally be able to claim an immediate deduction for capital expenditure on fodder storage asset (e.g., silos and hay sheds used to store grain and other animal feed) if they are first used or installed ready for use on or after 19 August 2018. The deduction would be claimed in the year the expenditure is incurred.

Prior to this date primary producers could generally deduct the cost of these assets over 3 years.

This is one of several measures announced as part of the Government’s drought assistance package.

Payments to contractors in the courier and cleaning industries

Treasury Laws Amendment (Black Economy Taskforce No.1) Bill 2018

This Bill, which passed through Parliament on 18 September 2018, extends the Taxable Payments Reporting System to the courier and cleaning industries from 1 July 2018. While the rules are broad and can apply to all entities that provide cleaning or courier services (if they have an ABN), some exceptions were added to the final version of the legislation to ensure that reporting is not required if less than 10% of the entity’s GST turnover for the relevant year relates to cleaning or courier services.

The Bill also contains rules to enforce a ban on software that allows businesses to understate their sales and income. The new rules impose penalties in exceeds $1 million for the production, supply, possession or use of such software.

Extension of $20,000 instant asset write-off

Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018

As announced in the 2018-19 Federal Budget, 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. The Bill received Royal Assent on 21 September 2018.

OECD hybrid mismatch rules

Treasury Law Amendment (Tax Integrity and Other Measures No. 2) Bill 2018

Parliament has passed this Bill which enables the implementation of the OECD hybrid mismatch and branch mismatch rules into Australian domestic tax law.

The hybrid mismatch rules are basically aimed at preventing multinational corporations from using hybrid mismatch arrangements to gain an unfair competitive advantage by avoiding income tax or obtaining double tax benefits. For example, this could occur where a particular financing arrangement provides a deduction in Australia but no income is taxable overseas. Alternatively, the

arrangement might give rise to a deduction in more than one country.

While the rules target multinational corporations, they could end up impacting smaller taxpayers that are engaged in offshore investments. This is an area tax payers need to understand (at least to some degree) when involved with cross border investments or finance arrangements (e.g., loans etc.).

More information – Implementation of the OECD hybrid mismatch rules

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