Significant small business CGT concessions changes looming.
Treasury has finally released an exposure draft on the 2017-18 Federal Budget announcement tightening access to the small business CGT concessions.
The proposed amendments will make it more difficult for clients to access the concessions on the sale of company shares or trust interests. Unfortunately, it appears that the Government is planning to introduce these changes with effect from 1 July 2017 as originally announced in the Budget last year.
In addition, the Bill containing changes to the main residence exemption rules has been introduced to Parliament. The rules appear to be largely the same as the draft version that was released by Treasury and will basically prevent someone from accessing the exemption if they are a non-resident at the time of the CGT event – no apportionment is allowed.
From Government
Restricted access to small business CGT concessions
In the 2017-18 Federal Budget the Government announced that changes would be made to the small business CGT concessions to address some integrity concerns. While the Government stated that the changes would apply from 1 July 2017, no specific details were released until Treasury released exposure draft legislation in February 2018.
The draft legislation changes the 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.
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 1 July 2017. Broadly, the proposed new conditions require that:
If the taxpayer selling the shares or units does not satisfy the $6m maximum net asset value test, they would generally need to have carried on a business just before the CGT event;
The company or trust being sold must have carried on a business just before the CGT event;
The company or trust must either be a CGT small business entity ($2m turnover threshold applies) or satisfy the $6m maximum net asset value test (the grouping rules will be modified in this instance); and
The shares or units must satisfy a modified active asset test that looks through to the activities and assets of the underlying entities.
Depending on the business structure that has been adopted these changes could prevent a number of taxpayers from accessing the concessions including where someone is selling interests in an entity that has been used to hold assets that are then leased or licenced to a related entity that operates the relevant business.
While the changes are not yet law and may change before the final legislation is introduced to Parliament, clients need to be mindful of the fact that any changes could apply to CGT events that have already occurred as well as future transactions.
Reversionary TRIS pensions
Treasury has released an exposure draft to allow a Transition to Retirement Income Stream (TRIS) to automatically transfer to eligible dependants on death.
The amendments modify the rules that determine when a TRIS is in retirement phase to ensure that a reversionary TRIS can always be paid to a reversionary beneficiary.
The change will allow the original TRIS to be paid to the dependant beneficiary rather than having to be commuted and a new income stream started from the deceased member’s underlying superannuation interests. This approach is consistent with the treatment of other superannuation income streams.
A reversionary beneficiary is a beneficiary who receives a benefit from a superannuation income stream that continues to be paid after the death of the primary beneficiary (that is, the income stream does not cease on death).
A reversionary TRIS can only be paid to a reversionary beneficiary who is also a dependant beneficiary of the deceased.
In practice, the amendment largely applies from 1 July 2017, being the time from which the retirement phase definition generally became relevant.
Tax treatment of Bare Trusts – the Board of Tax recommendations
The Board of Taxation has released its report into the tax treatment of bare trusts and similar arrangements.
The report notes that there is currently a gap between the tax legislation dealing with trusts and the way that bare trust arrangements are dealt with in practice and by the ATO.
Currently, it is common practice for bare trusts to be ignored or disregarded for tax purposes. However, the Board of Taxation notes that this practice does not appear to be supported by the tax legislation and is only maintained by an ongoing administrative approach from the Commissioner of Taxation.
The Board recommends that the Government legislate to provide a look-through approach for bare trusts and similar arrangements for certain income tax purposes. The report also recommends that if this occurs the ATO provide contemporaneous guidance in the form of a Law Companion Guideline.
The Government has indicated that further consultation on the scope of potential changes will be undertaken, however no details of that consultation have yet been released.
From the ATO
Small business benchmarks
The ATO has updated its small business benchmarks to incorporate data from the 2015-16 financial year.
The ATO notes that the benchmarks are used to identify businesses that might represent a higher risk in terms of tax compliance.
Where clients fall outside the benchmarks this might indicate a problem, but this will not necessarily be the case. It may be an indicator that the business is simply performing poorly relative to others in the industry or that the business operates using a different model or in a niche market segment.
Foreign resident vacancy fee on residential dwellings
Under new rules that were introduced late in 2017, certain foreign owners of residential dwellings need to pay an annual vacancy fee if their dwelling is not genuinely rented out or occupied by the owner or family members for more than six months each year.
The annual vacancy fee applies to:
- Foreign investors who make a foreign investment application for residential property after 7.30pm AEST on 9 May 2017; and
- Foreign investors who purchase a dwelling with a New Dwelling Exemption Certificate that was applied for by a developer after 7.30pm AEST on 9 May 2017.
All foreign investors with a residential property who meet the criteria must report to the ATO annually about the use of their dwelling in the previous 12 months, even if they believe that they are not liable for the vacancy fee in that year.
The rules are more complex than many people realise, especially when it comes to rental arrangements. For example, short term letting arrangements generally won’t assist in reducing exposure to the fee, even if the property is actually let for more than half of the year.
ATO focus on ‘other work related expenses’
In various publications the ATO has indicated that it is focusing on ‘other work related expenses’ in individual tax returns for 2017.
If clients include claims for work-related expenses at label D5 this year, it is important to make sure that they can prove:
- They spent the money themselves and were not reimbursed;
- The expense was directly related to earning their income; and
- They have sufficient records to support this.
The ATO has reiterated that taxpayers cannot simply claim a ‘standard’ deduction for other work related expenses, and that they need to be able to show how they worked out their claims under this item, even if they qualify for reduced substantiation requirements in respect of certain expenses.
Rulings
Use of electronic records
TR 2018/2 record keeping and access – electronic records
The ATO has released an updated ruling which consolidates previous guidance on electronic records.
One of the key principles is that electronic records are subject to the same basis record keeping requirements as paper records including:
- They must not be altered or manipulated, and must be stored in a way that restricts the information from being altered or manipulated;
- They must be retained for five years after the records are prepared or obtained, or the transactions are completed, whichever occurs later;
- They must be capable of being retrieved and read by the ATO when required; and
- They must be in English, or in a form that allows them to be accessed and easily converted to English.
These principles also apply to records that are stored in the cloud and records that relate to transactions that were carried out electronically.
The ATO confirms that it is acceptable to keep true and clear electronic reproductions of original paper records as long as the documents created through conversion processes produce a complete and accurate copy of the original documents.
Where systems are updated, the original data must be capable of being reconstructed.
The ruling also contains some information on the access powers of the ATO in relation to electronic records.
Cases
Recoupment of expenditure
Denmark Community Windfarm Ltd v Commissioner of Taxation [2018] FCAFC 11
This case concerns an appeal from the earlier decision of the Federal Court (covered in the June 2017 Tax Round Up) where it was held that a Government grant received by the taxpayer in connection with the establishment of wind turbines should be taxed on revenue account under the assessable recoupment rules in Subdivision 20-A ITAA 1997.
The taxpayer argued in the appeal that the government grant it had received in the relevant income years did not constitute an assessable recoupment because it was not received by way of indemnity.
The taxpayer also argued that the grant was not an assessable recoupment under Subdivision 20-A because the rules require the relevant deduction to have been claimed “for the loss or outgoing” (as opposed to deductions being claimed for depreciation in this case).
Section 20-20(2) ITAA 1997 provides that an amount received by a taxpayer will constitute an “assessable recoupment” (and be included in the taxpayer’s assessable income) if the amount was received as “recoupment” of a loss or outgoing, the amount was received “by way of insurance or indemnity”, and the taxpayer can deduct, or has deducted, an amount for the loss or outgoing under a provision of the tax legislation.
In respect of the first argument, the Court found that the amounts received by the taxpayer fell within the ordinary meaning of the word “indemnity”, which includes a sum of money paid to compensate a person for liability, loss or expense incurred by the person. The fact that the amounts were received in the form of a government subsidy or rebate did not affect the position. The amounts bore the character of compensation for a liability, loss or expense incurred.
The Court also considered the phrase “for the loss or outgoing” was sufficiently broad to include a depreciation deduction under Division 40 or Subdivision 328-D where the relevant outgoing is the cost of the depreciating asset. In such circumstances, the depreciation deduction may properly be regarded as a deduction “for the loss or outgoing”.
Legislation
No main residence exemption for foreign residents
Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018
Following announcements made by the Government in the 2017-18 Federal Budget the Government has introduced a Bill which seeks to remove access to the main residence CGT exemption for non-resident taxpayers.
The Bill is currently being considered by the Senate Economics Legislation Committee (with a report due 23 March 2018).
As a result of these changes a taxpayer will not generally be able to claim any exemption under the main residence rules if they are a non-resident at the time of the CGT event, even if they were a resident for some (or even most) of the ownership period. No apportionment applies, the exemption simply doesn’t apply at all if the individual is a foreign resident when the CGT event is triggered.
On the other hand, if the taxpayer is a resident of Australia at the time of the CGT event then the normal main residence exemption rules apply, even if they have been a non-resident for some or most of the ownership period.
Although the initial Budget announcement indicated that temporary residents would no longer be able to access the exemption, the legislation introduced to Parliament excludes temporary residents from the changes. This means that an individual who is classified as a temporary resident at the time of the CGT event can still access the main residence exemption as long as they are a resident of Australia at that time.
Special amendments are also being introduced to deal with deceased estate scenarios and special disability trusts. Under these rules the executor or beneficiary of a deceased estate is not generally entitled to the main residence exemption if the deceased individual was a foreign resident at the time of death (although there are some exceptions to this). The rules for special disability trusts are similar.
The amendments will generally apply to CGT events happening at or after 7.30 pm, by legal time in the ACT, on 9 May 2017 (i.e. Budget night 2017).
However, there are some transitional rules which broadly state that the amendments do not apply to a capital gain or loss from a CGT event that occurs to a dwelling on or before 30 June 2019 if the individual held an ownership interest in the dwelling at all times from immediately before Budget night 2017 until immediately before the CGT event happens.
Clients holding a main residence in Australia who are currently non-residents or planning to leave Australia need to be made aware of these changes so that they can weigh up their options and make a fully informed decision.
Purchasers of new residential property to pay GST to the ATO
Treasury Laws Amendment (2018 Measures No. 1) Bill
Legislation has been introduced to address integrity concerns in connection with the property industry.
Under the amendments proposed in the Bill, purchasers of new residential dwellings or newly subdivided land will be required to pay a GST amount directly to the ATO as part of the settlement process of the property.
The Government and ATO have been concerned that some property developers have been selling properties for a purchase price that reflects their GST obligations but have then taken steps to dissolve their business before the next BAS lodgement to avoid remitting the GST.
The new rules will apply in relation to supplies for which any of the consideration is first provided (other than consideration provided solely as a deposit) on or after 1 July 2018.
Currently, supplies of new residential premises are generally subject to GST and the supplier remits the GST to the ATO in their next BAS, which can be up to three months after the date of settlement.
Under the new rules purchasers will be required to pay the GST amount as soon as the transaction occurs. The GST amount will simply be 1/11th of the full sale price, regardless of whether the vendor is eligible to apply the margin scheme to reduce the GST liability associated with the transaction. In these cases the vendor will receive a credit for the amount that has been paid by the purchaser and may apply to the ATO for a refund of any excess GST component.
New reporting rules for couriers and cleaners
Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018
This Bill contains two key components, both of which relate to recent efforts to address concerns with the so-called Black Economy.
The first relates to the prohibition of the production, distribution and possession of sales suppression tools in relation to entities that have Australian tax obligations. The rules will also prohibit the use of electronic sales suppression tools to incorrectly keep tax records.
These tools can remove transactions from electronic record keeping systems, falsify transactions to reduce the amount of each sale and modify GST taxable sales to GST non-taxable sales.
The amendments introduce new offences for the production, supply, possession and use of electronic sales suppression tools. The offences are strict liability offences with high penalties.
The second part of the Bill is concerned with imposing new reporting requirements on the courier and cleaning industries. This is basically an extension of the taxable payments reporting system (TPRS) that already applies to payments made to contractors in the building and construction industry.
The new rules will require entities providing courier or cleaning services that have an ABN to report to the ATO information about transactions that involve engaging other entities to undertake those courier or cleaning services for them.
The ATO has also released guidance on how it will apply the proposed amendments to businesses in the courier and cleaning industries. The ATO guidance can be found here.
