What’s due for March
21 March – Activity statements – February monthly activity statements – final date for lodgment and payment.
From Government
CGT rollovers – proposed general business restructure to replace
In 2019, the Board of Taxation started a review of CGT roll‐overs. A new recently released consultation paper is the next key phase of this review.
The consultation paper discusses the proposed introduction of a general business restructure rollover to replace the existing range of transaction‐based roll‐overs that can be used in connection with business restructures.
While the consultation paper is detailed (and lengthy) there appear to be three general concerns surrounding the current system:
- It impedes activity that would otherwise be beneficial to both affected businesses and the broader economy;
- It sometimes produces anomalous outcomes; and
- It is overly complex, uncertain and imposes an onerous compliance burden on taxpayers.
The policy considerations and operation of the simplified business restructure model are set out in detail in the consultation paper. In broad terms, the idea is to remove the complicated set of rollovers contained in Divisions 122, 124, and 126 (among others) of the Income Tax Assessment Act 1997 with a single model that can apply to a wide variety of transactions and entities. The key focus of the new rollover would be on the ultimate economic ownership of the relevant assets at the beginning and end of the restructure process.
Submissions for the consultation paper closed in early February. We will have to wait and see if the Government takes the proposal further, particularly given one of the key points made in the paper is that reforms are needed to assist business transform and transition in a post COVID‐19 business environment.
More Information – Review of CGT Roll-overs
From the ATO
STP: deadline changes and options for small employers with closely held employees
The ATO has made two important announcements in relation to the single touch payroll (STP) system.
A legislative instrument has been released that extends the deadline for phase 2 reporting through STP from 1 July 2021 to 1 January 2022 (i.e., six-month extension). STP phase 2 will require additional payroll information to be reported to the ATO, which will be subsequently shared with Services Australia and other government agencies.
The ATO also confirmed that small employers will be required to start using STP for closely held payees from 1 July 2021. That is, no further extension has been granted.
However, the ATO will allow small employers to report payments to closely held payees through STP in three ways: reporting actual payments in real time, reporting actual payments quarterly or reporting a reasonable estimate quarterly.
The first option involves small employers reporting each payment to a closely held payee on or before each pay event (essentially using STP ‘as normal’).
The quarterly option involves lodging a quarterly STP statement detailing these payments for the quarter, with the statement being due when the client’s activity statement is due.
The third option involves reporting broadly in the same manner as the quarterly option referred to above (i.e., a quarterly STP report) however under this option the entity would report estimates of reasonable year-to-date amounts paid to employees. This option is similar in some ways to the PAYG instalment system, with employers potentially subject to penalties if the amounts paid to individuals are under-reported.
It is also important to note that small employers with only closely held payees will have up until the due date of the closely held payee’s individual income tax return to make a finalisation declaration for a closely held payee.
These changes should allow some level of flexibility in relation to determining and making payments to closely-held payees (e.g., directors of family companies, salary and wages for family employees of businesses). However, it will still be important to ensure clients are aware of the new reporting obligations and the necessity for ongoing planning throughout the year, to prevent being caught out at year-end.
More Information
Indexation of the general transfer balance cap
The general transfer balance cap for superannuation will increase from $1.6 million to $1.7 million from 1 July 2021. While the effect of this change will be complicated and impact on taxpayers in different ways depending on their circumstances, the following general comments should be broadly applicable:
- Taxpayers starting a retirement phase superannuation income stream for the first time after 1 July 2021 will have a cap of $1.7 million;
- For taxpayers who started a retirement phase superannuation income stream before this time their personal cap may increase slightly from $1.6 million;
- Taxpayers who made non-concessional contributions after 1 July 2017 will have breached the contributions cap where their superannuation balance is more than $1.7 million at 30 June 2021;
- Taxpayers can be eligible for the government co-contribution after 1 July 2021 where their superannuation balance is less than $1.7 million as at 30 June 2021.
The way the changes impact on clients who have already commenced superannuation pensions will depend on their individual circumstances.
COVID-19 and permanent establishments
The ATO has provided some additional guidance on its website in relation to whether the presence of employees in Australia for longer periods due to COVID-19 travel restrictions could cause non-resident businesses to have a permanent establishment in Australia.
Having a permanent establishment here could mean that business profits generated by non- resident entities could be taxable here.
The guidance indicates that for the period up to 30 June 2021 the ATO will not be applying compliance resources to determine whether a permanent establishment arises if:
- The busines did not otherwise have a permanent establishment in Australia before the effects of COVID-19;
- The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions;
- Those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions; and
- The business has not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdicti
After this time clients will need to consider whether the continued presence of employees in Australia could be a risk from a tax perspective.
More information
Rulings
Deductions for employee transport expenses
This ruling is the finalised version of TR 2019/D7 and covers the deductibility of transport expenses (e.g., flights, car expenses etc) incurred by employees in the course of their employment. As a general comment, the principles outlined in the ruling are also relevant in relation to the otherwise deductible rule for FBT purposes and may also have some relevance for individuals operating a business as a sole trader or through a partnership.
The general principle in this area is that travel between home and a regular work location is not deductible. On the other hand, travel to an alternative place of work or between workplaces can be deductible. There are several broad exceptions that should also be considered.
The finalised ruling provides that clients and practitioners need to focus on the reason for the travel in determining the deductibility of the expenses, indicating that there are two key considerations:
- The obligation to travel should arise in connection with the employment and not as a result of a personal choice of the employee; and
- The travel must be relevant to the demands of the work and a necessary consequence of those activities.
Other relevant factors indicating travel could be deductible include the employer requesting the travel to be undertaken, the travel occurs on work time and the travel occurs when the employee is under the direction and control of the employer.
The ATO appears particularly concerned with situations where taxpayers travel to distant work locations and where this is due mainly to a choice that they have made. For example, the employee might have chosen to accept a job that is a significant distance from their home and they have chosen not to relocate their home. Likewise, an employee might have chosen to perform most of their work from home, even though the employer would have provided them with an office or other place to perform their work. The ATO indicates that travel in these circumstances is not generally deductible. However, if it can be shown that the primary reason for the travel is due to the employee’s work duties rather than a choice made by the employee then deductions might be available.
Other general positions confirmed by the ATO in the ruling include:
- FIFO workers are not generally able to claim deductions in respect of travel from their home to a point of departure for their worksite (e.g., between home and the location at which they fly out to a mine etc);
- There is only limited scope to claim deductions in respect of travel undertaken while an employee is ‘on-call’ although this is possible in some situations.
As the tax treatment of work-related travel can be complex and an area of ATO focus, it will be crucial for practitioners to review and understand the finalised guidance so that appropriate and practical advice can be provided to clients.
Deductions for accommodation and meal expenses
This draft ruling updates the guidance that was previously contained in TR 2016/D7 and focuses on the tax and FBT treatment of expenses on accommodation and meals relating to employees.
The ATO confirms that accommodation and meal expenses are normally private in nature, however where employees travel overnight in the course of their employment it can be possible to claim deductions for those costs. However, where the employee is considered to be living away from home or relocating the costs should not be deductible.
The ruling states that the following factors would suggest that the employee is living away from home rather than merely travelling in the course of their work:
- There is a change in the employee’s regular place of work;
- The length of the overall period the employee will be away from their usual residence is a relatively long one;
- The nature of the accommodation is such that it becomes their usual residence;
- The employee is, or can be, accompanied by family or visited by family and friends.
The ruling indicates that the reason for the expenses being incurred needs to be the employee’s work activities rather than any choice made by the employee in order to be deductible. That is, the treatment of expenses on accommodation and meals will often match the treatment of transport costs associated that trip.
In addition to the updated draft ruling the ATO has issued a practical compliance guideline which sets out the ATO’s approach to determining whether employees are travelling for work or living away from home. Very
broadly, the guideline provides that the ATO will accept that an employee is travelling for work when all of the following are satisfied by the employee (there are also requirements for the employer that must be met):
- They are away from their normal residence for work purposes;
- They do not work on a fly-in fly-out or drive- in drive-out basis;
- They are away for no more than 21 days at a time continuously, and an overall total period of fewer than 90 in the same work location in an FBT year; and
- They must return to their normal residence when their period away ends.
Rental properties and the small business CGT concessions
This determination confirms that a company is not generally able to access the small business CGT concessions on the sale of rental properties, even if the company carries on a business of renting properties as outlined in TR 2019/1. The ATO states that this is due to the fact that an asset that is mainly used to derive rent cannot be an active asset (unless such use was only temporary) even if it is used in the course of carrying on a business. This is because of a specific exception contained in section 152-40 ITAA 1997.
Whether an asset is mainly used to derive rent is a question of fact. TD 2006/78 provides some further guidance in this area and suggests that properties such as hotels, motels etc could still be eligible for the concessions if they are not used to derive rent, even if they are used in supplying accommodation.
Cases
Tax agent registration terminated for over-claimed expenses
S & T Income Tax Aid Specialists Pty Ltd Trading as Alpha Tax Aid and Tax Practitioners Board [2021] AATA 161
The AAT has confirmed the TPB’s decision to terminate the registration of a tax agent due to claiming inflated, unsubstantiated, and/or non- deductible work-related expenses for their clients. This is in addition to the termination of the registration of one of the directors of that firm for threatening an ATO officer.
In this case, the ATO had conducted an audit of eight of the firm’s clients. All eight of the clients audited had work-related expense claims reduced and/or disallowed. On average, the ATO allowed only 18% of the work-related expense deductions claimed. Following the ATO’s complaint to the TPB the firm’s registration was terminated.
Although the list of specific deduction claims and the issues raised is very extensive, briefly the AAT commented in relation to the firm’s conduct:
“The conduct of the applicant in respect to the preparation and lodgement of the ITRs for the eight taxpayers, as detailed above, demonstrates that in 2016, the applicant failed to ensure that a tax agent service it provided, or that was provided on its behalf, was provided competently. The applicant repeatedly claimed work-related expense deductions without first obtaining or satisfying itself that there was appropriate evidence to support the claims; the applicant failed to properly ascertain through its own enquiries and failed to obtain sufficient evidence to support the required nexus between the expense claimed and earning assessable income; and the applicant incorrectly applied the relevant tax law with respect to several of the taxpayers.”
The AAT also indicated that the tax agent had essentially relied solely on the client’s verbal claims and often estimated expenses when receipts were not available. Further, the evidence provided by the tax agent at the hearing was that even on occasions when he was not convinced an expense was deductible, he would claim it anyway, often with some small reduction “for protection”. The agent seemed to take the position that if the client was happy to take the risk, then he would claim the deduction.
The question that often arises is whether tax agents are required to effectively ‘audit’ their clients before providing tax agent services. The Tax Practitioners Board makes it clear that this is not a requirement, but tax agents are expected to ask clients appropriate questions, based on the registered agent’s professional knowledge and experience and to obtain supporting documents and evidence where this is appropriate. Cases like this suggest that the threshold is reasonably high and that this is to protect the general public.
TPB guidance in this area can be found in Explanatory Paper TPB(EP) 01/2010.
