While Christmas is normally a quiet time for tax related activities with the annual shut down of Parliament, the ATO and the courts, there have been some significant developments since the start of December 2017 that have made some changes for all taxpayers.
From Government
2017-18 Mini budget clarifies tax initiatives
The Government released its Mid-Year Economic and Fiscal Outlook 2017-18 in December 2017. While no new tax measures were announced, some clarification was provided on certain tax items including:
- The Government confirmed that it is planning to remove access to the CGT main residence exemption for foreign residents, but this will no longer affect Australian residents who are classified as temporary residents. It is not entirely clear whether the rules will apply as set out in the exposure draft legislation released by Treasury.
- Legislation will be introduced to require purchasers of new residential premises and newly subdivided residential land to remit GST directly to the ATO. However, some transitional rules will be introduced for pre-existing contracts.
- The previously announced tax offset for expenditure on Standard Business Reporting enabled software will not proceed.
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Exposure draft: Recalcitrant employers targeted in SG integrity measures
Treasury has released exposure draft legislation relating to proposed changes to the superannuation guarantee system.
The draft legislation contains the following proposed changes which were previously announced by the Minister for Revenue and Financial Services in August 2017:
- Allow the ATO to issue directions to pay unpaid SG and undertake SG education courses in cases where employers fail to comply with their obligations;
- Introduce criminal penalties for failure to comply with a direction to pay;
- Allow the ATO to disclose more information about SG non-compliance to affected employees;
- Extend Single Touch Payroll to all employers;
- Facilitate more regular reporting by superannuation funds;
- Improve the operation of the ATO’s collection and compliance measures; and
- Streamline employee commencement processes.
One of the major practical outcomes of these reforms for businesses is the expansion of Single Touch Payroll. While Single Touch Payroll will be compulsory from 1 July 2018 for employers with 20 or more employees, the Government wants to make the system compulsory for all employers from 1 July 2019.
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Consultation: LRBAs used to circumvent total super balance rules
Treasury has released a consultation paper and exposure draft legislation covering two superannuation taxation measures announced in the 2017-18 Budget.
The first measure ensures that SMSFs are not entering into Limited Recourse Borrowing Arrangements (LRBA) to circumvent the total superannuation balance (TSB) rules.
Under the measure, subsections 307-230 and a new subsection 307-231 will be added to ITAA 1997 to include a member’s share of the outstanding balance of an LRBA entered into on or after 1 July 2018 in their total superannuation balance.
A member’s TSB is based upon the value of their superannuation interests. For a retirement phase interest, this is generally the value the member would receive if they commuted their interest for a lump sum. Similarly, the value of an accumulation phase interest will usually equal the total amount that could be withdrawn or rolled over into another fund. Therefore, the liability under an LRBA currently reduces a member’s TSB by reducing the amount available for commutation or withdrawal. The new measure will cancel out this effect, so that a member’s TSB will not be affected by whether their fund has an LRBA liability or not.
The second measure is to ensure any expenditure is taken into account when determining whether the non-arm’s length income (NALI) taxation rules apply to a transaction. The measure targets scenarios where the trustees artificially bolster superannuation earnings.
The amendments ensure that non-arm’s length expenses incurred to produce assessable income are included in the entity’s non-arm’s length component (NALC). This means the income will be taxed at the top marginal rate. This will be the case whether the expenses are of a capital or revenue nature.
The measure also ensures that SMSF members that have attained a condition of release cannot circumvent the caps by withdrawing lump sums and re-contributing the funds as a loan.
Both integrity measures are minor amendments to the legislation.
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Review into early release of super benefits
Treasury has been asked to conduct a review of the rules governing the early release of superannuation benefits.
The rules governing early release of superannuation benefits have not changed substantially since 1997. Since that time the superannuation system has developed exponentially and become increasingly complex.
Several key issues have arisen in relation to the application of the early release provisions, including:
- The rapid increase in the use of superannuation for medical treatment;
- Whether the mortgage foreclosure ground should be extended to rental eviction;
- Whether the current rules for release on grounds of severe financial hardship appropriately balance the need for simplicity and consistency with fairness; and
- Whether an offender’s superannuation should be available to pay compensation or restitution to victims of crime.
One of the key drivers of the review has been the significant increase in funds released on compassionate grounds , which has raised the question of whether the current rules may be too lenient.
The review is also considering whether the current grounds for early release of superannuation benefits should be expanded to include new grounds (for example, for victims of domestic violence).
Submissions concerning the Treasury consultation paper may be made up to 18 February 2018.
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Exposure draft: ATO’s power to disclose tax debts
The Government announced in the 2016-17 Mid-Year Economic and Fiscal Outlook that it would allow the ATO to report tax debt information of businesses to registered credit reporting bureaus if the business does not effectively engage with the ATO to manage the debts.
The Government hopes that this will provide an additional incentive for businesses to pay their tax debts in a timely manner and engage with the ATO.
Treasury is accepting comments on the draft legislation until 9 February 2018.
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Clarifying treatment of taxi industry assistance payments
With the recent success of various ride- sharing platforms in Australian markets, many State and Territory Governments have announced reforms to the regulation of the taxi and ride-sourcing industry. In many cases this includes industry assistance payments being made to taxi licence holders. These payments are generally intended to help offset the impacts of new regulatory regimes and help taxi licence holders compete under new industry conditions.
While the assistance payments vary between States and Territories, some payments include:
- One-off transitional assistance payments to help transition to the new regulatory arrangements; or
- Recurring hardship or income support payments.
The ATO confirms that transitional assistance and hardship payments from governments are generally not capital receipts, but are taxed on revenue account in the hands of the recipient (see TR 2006/3). Where a government payment is made to an industry to assist businesses within that industry to continue operating or to compensate for loss of income, the payment is assessable income of the recipient.
In some cases it may be possible to argue that the payment is on capital account if it is made in connection with a permanent and complete exit from the industry or in connection with the disposal or surrender of a taxi licence.
The ATO confirms that GST would not generally apply to these payments as they don’t typically represent consideration for any supply made by the recipient.
The ATO’s guidance also deals with the treatment of passenger movement levies. Amounts received by a taxi operator or taxi network should generally be assessable to them, but the costs of paying the amount to another party should generally be deductible. GST can potentially apply to these amounts, except where the levy is paid to the government.
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SMSF event based reporting and excess transfer balance determinations
The introduction of the SMSF event based reporting regime for the 2018 income year has necessitated the release of guidance as to when SMSFs are required to report and the nature of events which are to be reported.
The ATO has confirmed that only events that affect an individual member’s transfer balance need to be reported. Common events to be reported include:
- Income streams a member was receiving just before 1 July 2017 which continued to be paid to them on or after 1 July 2017 and that are in the retirement phase;
- New retirement phase income streams; and
- Commutations of retirement phase income streams.
Whether a SMSF is required to report will depend on the value of the member’s total individual superannuation balances. SMSFs with members whose balances are less than $1 million are not required to report and can choose to report events which impact their members’ transfer balances at the same time that the SMSF lodges its SMSF annual return.
On the other hand, SMSFs with members with balances above $1 million will be required to report events impacting members’ transfer balances within 28 days after the end of the quarter in which the event occurs.
Certain events are required to be reported sooner.
Further, commencing in January 2018 the ATO will send Excess Transfer Balance (ETB) Determinations to individuals who have exceeded their transfer balance cap and not rectified the excess.
Where a SMSF member receives an ETB Determination from the ATO:
- If the SMSF trustee has not already reported information to the ATO for the member, they must do so as soon as possible;
- The sooner the member removes the amount set out in the ETB Determination out of retirement phase, the less excess transfer balance tax they will pay;
- The member must commute the amount set out in the ETB Determination from retirement phase.
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Rulings
Safe harbour for exempt car fringe benefits
PCG 2017/D14
When an employer provides an employee with the use of a car or other vehicle then this would generally be treated as a car fringe benefit or residual fringe benefit and could potentially trigger an FBT liability.
However, the FBT Act contains some exemptions which can apply in situations where certain vehicles (e.g., utes and other commercial vehicles) are provided and the private use of the vehicles is limited to work-related travel, and other private use that is ‘minor, infrequent and irregular’.
One of the practical challenges when seeking to apply the exemption is how to determine if private use has been minor, infrequent and irregular. PCG 2017/D14 explains how the Commissioner will approach this issue from a compliance perspective.
PCG 2017/D14 sets out situations where the Commissioner will not devote compliance resources to review whether the exemption is available as well as providing some examples of situations when the guidelines can be used.
Generally, the ATO has indicated that private use by an employee will qualify for the exemptions where:
- The employer provides an eligible vehicle to the employee to perform their work duties;
- The employer takes reasonable steps to limit private use and they have measures in place to monitor this;
- The vehicle has no non-business accessories;
- The value of the vehicle when it was acquired was less than the luxury car tax threshold;
- The vehicle is not provided as part of a salary sacrifice arrangement; and
- The employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip, they travel no more than 750 kms in total for each FBT year for multiple journeys taken for a wholly private purpose and, no single, return journey for a wholly private purpose exceeds 200 kms.
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Capital gains of foreign trusts
TD 2017/23 & TD 2017/24
When you are calculating the taxable income of a trust, section 95 ITAA 1936 generally requires you to assume that it is a resident trust. However, TD 2017/23 confirms that this residency assumption does not apply when a foreign trust makes a capital gain or loss on an asset that is not classified as taxable Australian property. This means that these gains and losses should be ignored when calculating the taxable income of the trust.
Even though a capital gain made by the trust in this situation might be ignored when calculating the tax position of the trust, if an amount relating to the gain is paid or applied for the benefit of a resident beneficiary then it could be taxed in their hands under section 99B ITAA 1936.
TD 2017/24 then considers whether these resident beneficiaries of a foreign trust who are taxed under section 99B can offset capital losses against this amount or apply the CGT discount.
The ATO’s view is that even though the beneficiary might be taxed on something that relates to a capital gain made by the trust, it is not treated as a capital gain for the purpose of applying capital losses or the CGT discount.
When clients are beneficiaries of a foreign trust it is important to understand that the tax treatment can be very different depending on the nature of the asset involves as well as the residency status of the beneficiary across the year in which the distributions are made.
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Amending the vesting date of a trust
TR 2017/D10
This draft ruling explains the Commissioner’s views on the tax consequences of a trust vesting and the ability of trustees or the Court to amend the vesting date of a trust.
A trust deed will nearly always specify a date on which the interests in the trust vest. This is to ensure that the rule against perpetuities is not breached. Prior to a trust’s vesting, it may be possible for the trustee or a Court to postpone the vesting of the trust by nominating a later date as the new vesting date. However once the vesting date has passed, the trust has vested and this is no longer generally possible.
When a trust vests, all of the interests in the trust as to income and capital become vested in interest and possession. The tax consequences of this will depend on the terms of the deed.
The vesting of beneficial interests in a trust does not ordinarily cause the trust to come to an end, or cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, nor that the trust must be wound up.
The ATO’s comments in the ruling show how important it is to closely consider the terms of the trust deed as this will help in determining whether a new trust has been formed or whether any beneficiaries have becomes absolutely entitled to assets of the trust, each of which could cause immediate CGT issues. In some cases it may be that no CGT event happens as a direct result of the trust’s vesting and that events occurring after this point in time cause a CGT event to happen.
In the year in which vesting occurs, different beneficiaries may be presently entitled to income of the trust derived before as opposed to after the vesting date. In these cases the Commissioner may accept a reasonable allocation of the income between the respective beneficiaries.
The ruling does not consider the question of whether the amendment of a trust’s vesting date causes a resettlement of a trust. This issue is discussed in TD 2012/21 where the ATO indicates that the mere extension of the vesting date would not necessarily cause any immediate CGT issues, although this would depend on the circumstances.
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Confirming supplies connected with Australia
GSTR 2017/D1 & GSTR 2017/D2
These two draft rulings set out the Commissioner’s view on whether a supply of goods or real property is connected with ‘the indirect tax zone’ (ie, Australia). In very broad terms, the Australian GST system only applies when the supply is connected with Australia.
When it comes to a supply of goods, TR 2017/D1 discusses three different scenarios, being:
- Supplies wholly within Australia;
- Supply made from Australia; and
- Supplies made to Australia.
The draft ruling confirms that if a foreign entity sells goods to a customer before the goods enter Australia then this sale would not generally be connected with Australia. However, if the customer imports the goods into Australia this could trigger the taxable importation rules.
GSTR 2017/D2 considers the same issue in respect of supplies of real property (including lease and licence arrangements). In broad terms, supplies relating to real property would be connected with Australia if they relate to land or buildings situated in Australia.
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Cross border related party financing arrangements
PCG 2017/4
The guideline outlines the ATO’s compliance approach to the tax outcomes associated with financing arrangements entered into with a cross border related party. The guideline is effective from 1 July 2017 and will apply to existing and newly created financing arrangements.
The ATO’s approach will be dependent on the risk rating of the taxpayer’s related party financing arrangement, with arrangements falling within colour coded ‘risk zones’.
If a taxpayer’s arrangement does not fall within the low risk zone, the ATO considers the related party financing arrangement or its tax treatment to be at risk of giving rise to an inappropriate tax outcome, and will generally conduct some form of compliance activity to further test the taxation outcomes of the arrangement.
The guideline contained detailed information on how to self-assess the risk of a taxpayer’s arrangement, and what to expect from the ATO as a result of that assessment.
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Cases
Effectiveness of trust distribution resolutions
Lewski and Commissioner of Taxation [2017] FCAFC 145
The Full Federal Court has held that the taxpayer was not presently entitled to income of the trust for the relevant income years, which meant that they should not be taxed on any of the taxable income of the trust for those years.
The case involved two related trusts which had some tax losses denied by the ATO. As a result, the net income (ie, taxable income) of the trusts was increased for the 2006 and 2007 income years. The Commissioner issued amendment assessments to a beneficiary of the trust on the basis that they were presently to some of the income of the trust for those years.
The taxpayer objected to the increased assessments and argued that they were not presently entitled to any income of the trusts for those years.
One of the key issues in this case was the way the trustee resolutions had been made for those years. In summary, the resolutions were in two parts:
- Firstly, the trustees of each trust had resolved to distribute certain amounts of trust income to the taxpayer (distribution of income resolution);
- Secondly, the trustees also resolved that should the Commissioner disallow a deduction or include an amount as assessable income of the trust, there would be a deemed distribution of such amounts to a corporate beneficiary (variation of income resolution).
The ATO argued that the variation resolution was not effective because all income of the trust had already been dealt with by the distribution resolution. That is, the ATO argued that the resolutions should be read as separate and sequential.
The Full Federal Court rejected the Commissioner’s position. The Court’s view was that the resolutions were interdependent with the result that the taxpayer’s entitlement to income under the distribution resolution was contingent, since it depended on the occurrence of an event that may or may not take place . As a result, although the resolution was found to have created an income entitlement in the taxpayer for trust purposes, the taxpayer did not have a vested and indefeasible interest in any income of the trusts as at 30 June and therefore was not presently entitled to any trust income for tax purposes.
Unfortunately the Court did not consider who should actually be taxed on the relevant taxable income of the trust. In a decision impact statement relating to this case the ATO has indicated that the most likely result is that the trustee should be assessed under section 99A at penalty rates.
This decision muddies the water somewhat when it comes to applying the tax rules to trust distributions. The decision seems to indicate that trustees could draft resolutions that change the outcome in the event of an ATO amendment. However, the unresolved issue is what happens in terms of the tax and who has to pay it.
Also, the case raises the issue of whether original resolutions would be effective if there is no ATO amendment. If not, the risk is that trustees could being assessed at penalty rates. Practitioners should carefully consider the flow-on implications before suggesting that clients adopt the type of resolutions used in this case.
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Price vs value when applying the $6m net asset value test
Commissioner of Taxation and Miley [2017] FCA 1396
This is an appeal from the case of Miley v FCT (2016) AATA 73 which was discussed in the March 2016 Tax Round-Up.
In the original case, the AAT had confirmed that the market value of shares sold by the taxpayer was less than the actual sale price received in an arm’s length transaction. This was relevant in determining whether the taxpayer passes the $6m maximum net asset value test under the small business CGT concessions which is tested just before the CGT event is triggered.
The Tribunal had decided that the consideration actually received by the taxpayer was more than a hypothetical willing but not anxious purchaser would have paid if they had only acquired the shares held by the taxpayer. The AAT concurred with the valuer’s determination that the purchaser had paid a 20% premium for taking control of the company. As the taxpayer only held one third of the shares, they did not have control of the company so it was appropriate to apply a discount to take this lack of control into account.
The Commissioner appealed against the AAT’s decision. The Federal Court decided that the AAT had erred in its valuation of the shares.
The Court indicated that the broadly accepted definition of the expression ‘market value’ refers to “what a willing and knowledgeable, but not anxious purchaser would pay a willing and knowledgeable, but not anxious vendor for the assets in question”.
The Court then referred to previous decisions which held that “Where the asset in question has been the subject of a recent arm’s length sale, it is generally unnecessary to hypothesise. If the recent sale transaction can be said to be one between a willing but not anxious seller, and willing but not anxious buyer, the price that the buyer and seller actually agreed on may generally be taken to be the market price, or at least a reliable indicator, if not the best evidence, of the market price.”
The Court concluded that the discount for lack of control should not have been applied in valuing the shares just before the disposal of those shares. The price agreed between the parties should be used as the market value for the shares.
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Legislation
First Home Super Saver Legislation
First Home Super Saver Tax Bill 2017 & Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Bill 2017
These two Bills passed the Senate and received Royal Assent in December 2017.
The Bills allow first home savers to make voluntary super contributions which can be withdrawn for the purpose of purchasing a first home. They also enable certain individuals aged 65 years or over to use the proceeds from the sale of their home to make super contributions.
The first home super saver scheme applies to voluntary contributions that are made into superannuation on or after 1 July 2017, however amounts can only be withdrawn under the scheme after 1 July 2018.
On the other hand, only proceeds from contracts for the sale of a main residence entered into (exchanged) on or after 1 July 2018 are eligible to be contributed to superannuation under this legislation.
Would you like to speak with one of our knowledgeable and experienced accountants with regard to either of the above notes? Please don’t hesitate to get in touch with the team here at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
