November 2019 – Essential Tax Summary

From Government

Distributions from testamentary trusts to minors integrity measures

Treasury has released exposure draft legislation aimed at tightening the rules in relation to ‘excepted income’ of minors derived from testamentary trusts. The proposed changes limit the concessional tax treatment of this income by specifying that ‘excepted income’ from testamentary trusts only includes income derived from property acquired from a deceased estate (or subsequently accumulated by the trust). That is, the changes seek to prevent taxpayers from injecting assets from outside the trust to take advantage of the concessional rates that would otherwise apply on distributions to minor beneficiaries.

The changes would apply to income that is derived from assets that are injected into a trust on or after 1 July 2019.

The amendments introduce a new subsection (2AA) into Section 102AG ITAA 1936 stating that the income of the trust will be excepted income if it is derived from:

• Property that was transferred to the trustee of the trust to benefit the beneficiary from the estate of the deceased person as a result of the will, codicil, intestacy or order of a court; and
• Property that, in the opinion of the Commissioner, represents accumulations of income or capital from property that satisfies the above requirement.

While there are already some integrity provisions in the current law, this change would place further restrictions on the types of income that can be distributed to minors and be taxed on normal marginal rates rather than penalty rates.

More information – Tax Integrity – Improving the taxation of testamentary trusts

From the ATO

Single Touch Payroll – options for late adopters

Small employers were required to transition to reporting through STP by 30 September 2019. If you have clients who have not yet commenced using STP, the ATO has released guidance for these taxpayers encouraging them to contact the ATO as soon as possible to assist with the transitions.

Clients who have not commenced using STP have three broad options:

• Obtain STP enabled software (or start using existing software if it has STP capability);
• Apply for reporting concessions; or
• Ask the ATO for a deferral.

The reporting concessions are available for ‘micro employers’ (with 1 to 4 employees) and allow quarterly reporting through a registered tax agent, although taxpayers in the agriculture, fishing and forestry industry and non-profit clubs and associations may be able to apply to report quarterly without using a registered tax agent. Concessions are also available for seasonal employers.

Note that small employers (19 or fewer employees) with only closely-held payees (such as family businesses for example) are exempt from complying with STP until the 2021 income year.

Deferrals may also be available for taxpayers who need more time to start using STP.

Practitioners should confirm whether clients who have not commenced using STP yet are eligible for one of the reporting concessions, and if not, contact the ATO to request a deferral as soon as practicable.

More Information

• Taxpayers who have missed the STP start date
• Concessional Reporting
• Transitional Deferrals

Clarifying fuel tax credit claims

Following the recent decision in the Linfox case, the ATO has provided a brief clarification with respect to fuel tax credits (FTCs) claims for fuel used by heavy vehicles travelling on public roads. Broadly, the case confirmed that:

• Toll roads are public roads for the purpose of calculating FTC entitlement and rates; and
• Fuel used to power all aspects of the vehicle’s function when travelling (e.g., lights, air-conditioning units in the driver’s cabin) is used for ‘travelling’ on public roads.

Given the recent clarification of these issues it will be important to review fuel tax credit calculations and check that they are being performed correctly. The key points dealt with in the case are important in determining when the lower rate (i.e., reduced by the road user charge) should apply to claim credits for the eligible use of fuel.

More Information

• Fuel tax credits – for travelling on public roads
• Decision impact statement –  Linfox v C of T

Rulings

Commercial debt forgiveness exclusion for ‘natural love and affection’

TD 2019/D9 Commercial debt forgiveness – does the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person?

In February 2019, the ATO withdrew ATO ID2003/589 that indicated it was possible for a company to forgive a debt for reasons of ‘natural love and affection’, as it no longer reflected the ATO’s view on this issue.

TD 2019/D9 updates the guidance on this point and confirms the ATO’s current view that only natural persons (i.e., not companies) can apply this exclusion. The draft ruling interprets the legislation to require that the creditor must actually feel the natural love and affection.

The draft TD also indicates that the exclusion does not operate when an individual is acting in their capacity as a trustee, because the fiduciary relationship will govern the decisions taken by the trustee (rather than any personal relationships of the individual).

Given that a contrary view was set out in previous ATO guidance, the draft TD indicates that the Commissioner will not devote compliance resources to apply the updated approach in relation to debts forgiven prior to 6 February 2019 (the date ATO ID 2003/589 was withdrawn).

Capital gains and the FITO limit calculation

TD 2019/D10 can capital gains be included under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 when calculating the foreign income tax offset limit?

When a taxpayer is taxed on income or gains in Australia and overseas, they will sometimes be able to claim a foreign income tax offset (FITO) to reduce their Australian tax liability. The FITO is limited to the lower of the actual amount of foreign tax paid and the FITO limit.

Broadly, the FITO limit calculation involves a comparison between Australian tax actually payable and the Australian tax that would be payable if certain income, and deductions reasonably related to that income, were disregarded. TD 2019/D10 confirms that capital gains are not disregarded when determining the second element of this calculation.

Section 770-75(4)(a)(ii) states that taxpayers should disregard “any other amounts of ordinary income or statutory income from a source other than an Australian source…” in the second element of the calculation. The legislation refers to “statutory income”. With respect to capital gains, it is the taxpayer’s “net capital gains” which are statutory income, not each individual gain or loss. As the net capital gain does not have a source (i.e., being the total of capital gains and losses), it is not able to be disregarded under section 770-75.

What this means in practice is that a taxpayer’s net capital gains, regardless of the source of each individual gain, should be included in both elements of the calculation (i.e., the Australian tax actually payable and Australian tax that would be payable if certain amounts are disregarded) when determining the FITO limit. This would generally have the effect that the FITO is lower than it would otherwise be.

Apportioning GST credits for financial supplies & the impact on SMSFs

GSTR 2006/3DC1 Determining the extent of creditable purpose for providers of financial supplies

The ATO has released proposed amendments to GSTR 2006/3 that determines the extent of creditable purpose of acquisitions for entities providing financial supplies. While the changes are brief, they could be relevant for a range of taxpayers who may be required to apportion their input tax credit claims as a result of making input taxed supplies (this can be particularly relevant for SMSFs).

The ATO confirms that it is necessary to first consider whether the acquisitions only relate to making input taxed (or taxable and GST-free) supplies. For example, this is a common situation for SMSFs with commercial property, which are likely to incur expenses solely relating to the property (such as repairs and maintenance), or expenses which relate solely to other aspects of the fund’s operation.

That is, for those expenses, the ATO indicates that it is possible to claim all (or none) of the credits relating to an acquisition with reference to the nature of the acquisition as opposed to applying the reasonable apportionment to all expenses.

Cases

High Court overturns decision on payments to acquire gaming machine entitlements

Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36

The High Court has reversed an earlier decision of the full Federal Court (see the  November 2018 tax round-up for details of the Federal Court decision) and unanimously held that payments made by the taxpayer to acquire gaming machine entitlements (GMEs) were on capital account rather than revenue account.

Sharpcan Pty Ltd was a corporate beneficiary of the Daylesford Royal Hotel Trust that operated a pub with 18 gaming machines. The trustee derived commission income from gaming conducted at the Royal Hotel in the form of a percentage of the net revenue from gaming on the 18 machines. As the licences for the gaming machines were due to expire, the taxpayer made a bid for 10-year GMEs so that the trust could continue to have the 18 machines on its premises.

A majority of the Full Federal Court previously held that the amount paid to acquire the GMEs was revenue in nature and deducible under section 8-1 because the outgoing was paid to preserve the hotel business as a going concern and not to enhance goodwill. The Federal Court determined that although there were a number of factors that indicated the payments should be on capital account, it was more appropriate for the payments to be considered on revenue account, broadly for the following reasons:

• The taxpayer intended to recoup the purchase price of the GMEs over time out of everyday trading;
• The purchase price of the GMEs reflected the economic value of the income stream expected to be derived from gaming;
• The taxpayer’s hotel business was an integrated business which would have been significantly prejudiced and possibly failed if the taxpayer had not purchased the GMEs;
• The reason the Trustee decided to acquire the GMEs was the change in the law that made it necessary for a venue operator to own GMEs.

However, the High Court considered that these reasons were not as relevant to the determination of the underlying character of the payment, but rather that the taxpayer’s purpose and the intended benefit of the payments for the taxpayer was the critical issue. The High Court stated:

“The Trustee’s purpose in paying the purchase price of the GMEs was to acquire, hold and deploy the GMEs as enduring assets of the hotel business for the purpose of generating income from gaming. There can be no question that the purchase price was incurred on capital account.”

That is, because the taxpayer made the payments primarily for the purpose of obtaining assets providing an enduring advantage, the payments should be on capital account, notwithstanding that the payment for those assets may have been in instalments with reference to the expected income to be derived and funded from everyday trading activities.

The High Court’s decision in this case provides a greater level of certainty for practitioners on the main issues when determining whether amounts are on revenue or capital account. The previous Federal Court decision had raised the prospect that there could be more scope for business taxpayers to claim deductions for amounts that would traditionally have been unquestioned as being on capital account. However, the High Court has reaffirmed that the principal consideration in these cases is the intention and purpose of the taxpayer in incurring the expenditure, and whether it is expenditure made once and for all with a view to bringing into existence an advantage of enduring benefit, or recurrent expenditure connected with the ordinary operations of a business or providing periodic benefits.

No relief for relying on ATO guidance

Lacey and Commissioner of Taxation [2019] AATA 4246

This case has attracted attention primarily because it involved a taxpayer being assessed on an amount after relying on the ATO website for guidance.

Briefly, the taxpayer had an excess transfer balance in his superannuation account that needed to be commuted to avoid tax on the notional earnings on the excess. On this point, the ATO website used the word “removed” rather than “commuted” (the relevant page was updated after the taxpayer had seen it). Because of the statement on the ATO website, the taxpayer believed he had effectively removed the excess by drawing down a pension in addition to a small commutation, however an assessment was issued (correctly) on the notional earnings of the excess.

Before the AAT, the taxpayer argued that the error was caused because he was “misled by the poor use of language” on the website. Unfortunately for the taxpayer, the AAT found that it did not have jurisdiction to make a judgement on this point (i.e., whether the ATO could be held responsible due to misleading or deceptive conduct), despite the AAT and the ATO both accepting the taxpayer’s evidence that if he had been aware of the correct position, he would have complied.

Legislation

Deductions for vacant land and other key changes

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 received Royal Assent on 28 October 2019.

The Bill contains several significant measures:

• Limiting deductions for holding vacant land in some circumstances;
• New rules prevent the application of the small business CGT concessions to assignments of partnership income (i.e. Everett assignments);
• Allowing tax debt information to be disclosed to credit reporting agencies;
• Integrity rules relating to circular trust distributions are extended to trusts that have made a family trust election; and
• Salary sacrificed super contributions are prevented from reducing an employer’s super guarantee obligations for the relevant employees.

Deductions for vacant land

Taxpayers will be prevented from claiming a deduction for expenses incurred after 1 July 2019 for holding vacant land unless the costs are incurred in the course of carrying on a business of the taxpayer or certain related parties. There is no grandfathering for land acquired before 1 July 2019.

Where the holding costs, such as interest and council rates, are denied they will generally go to the cost base of the CGT asset. However, holding costs for CGT assets acquired before 21 August 1991 cannot be added to the cost base.

The amendments do not apply to companies, superannuation funds (other than SMSFs), managed investment trusts or certain public trusts.

These amendments are targeted to the ‘Mum & Dad’ market, that is, individuals and closely held trusts and SMSFs. This is the same target as previous changes which deny travel claims to visit residential rental properties and depreciation claims on plant and equipment in some residential rental properties. However, these new changes do not just affect vacant land used for residential purposes.

If there is a substantial (substantive) and permanent building or structure on the land that is used or ready for use then deductions for holding costs could still be available subject to passing the normal deduction tests. As to exactly when a structure is ‘substantial’ is not clearly defined. However, the Bill suggests that a silo or shearing shed would be substantial. On the other hand, a residential garage is unlikely to be substantial.

When constructing residential premises, for the holding costs to be deductible, there will need to a certificate of occupation granted by the relevant authority and the premises will need to be available for rent (although there will be an exception for newly constructed or substantially renovated residential premises. In these cases, no deductions would be available until the premises can be lawfully occupied and they are actually used to earn rental income or they are genuinely available for rent).

The changes apply to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.

Key changes were made to the rules ensuring that deductions can still potentially be available in relation to land in the following circumstances:

• The property becomes or is treated as being vacant due to significant and unusual events or occurrences outside the reasonable control of the entity, such as fire, flood, or substantial building defects;
• The land is held for use in a primary production business; or
• The land is leased or licensed under an arm’s length arrangement to another entity for use in carrying on a business on the land.

While the amendments address many of the key concerns that were raised by stakeholders in relation to the original version of the Bill, the rules are complex and will need to be carefully analysed whenever clients incur holding costs in relation to property that they hold.

Everett assignments

As announced in the 2018-19 Federal Budget, access to the small business CGT concessions has been removed where partners in a partnership seek to alienate their share of partnership income by creating, assigning or otherwise dealing in rights to the future income of a partnership (often referred to as Everett assignments). The changes apply from 8 May 2018.

The changes will not prevent the concessions from applying to all transactions relating to partnerships. For example, the concessions can still potentially apply when someone disposes of an interest in a partnership such that they are no longer a partner in the partnership.

Disclosure of business tax debts by the ATO to credit reporting agencies

The ATO will have new powers to disclose business tax debts to credit reporting agencies. The disclosure of tax debts in these situations is limited to circumstances where:

• The disclosure is to a credit reporting bureau; and
• The record or disclosure is of information that relates to the tax debts of a taxpayer who is within the class of entity whose tax debt may be disclosed, as set out in a legislative instrument to be made by the Treasurer; and
• The disclosure is for the purpose of enabling the credit reporting bureau to prepare, issue, update, correct or confirm a credit worthiness report in relation to a particular taxpayer; and
• Certain procedural conditions and safeguards for disclosure of the taxpayer’s information have been met.

The procedural conditions referred to above include a requirement to notify the taxpayer at least 28 days before the disclosure and to consult with the Inspector-General of Taxation prior to disclosure. Having said that, once the initial disclosure has been made, further disclosures can be made in order to keep the information provided up to date. The legislative instrument is expected to specify that an entity is within the class of entity whose tax debt information may be reported if the entity is carrying on a business with an ABN and has a tax debt of which at least $100,000 is overdue for more than 90 days. Disclosure will not occur where the taxpayer is engaged with the ATO in managing their debt or in a dispute with the ATO through the AAT or Courts.

A key point to note is that these changes will allow credit reporting bureaus to use the tax debt information of particular taxpayers to prepare credit worthiness reports, which will be made available to various third parties, such as banks and other businesses seeking to make a more complete assessment of the entity’s credit worthiness, which could have a significant flow-on impact on the business activities of the taxpayer in question.

Circular trust distributions

From 1 July 2019, the trustee beneficiary non- disclosure tax rules for circular trust distributions have been extended to capture situations involving trusts that have made a family trust election from 1 July 2019.

Under the current law, penalty tax rules can apply when a trust is involved in a circular trust distribution arrangement. However, trusts that have made a family trust election are excluded from the current rules.

In very broad terms, the rules are aimed at situations where a trust distributes income to another trust, but that income is distributed back to the first trust.

Changes to SG calculation for certain employees

From 1 July 2020, an individual’s salary sacrifice super contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contributions.

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

More Information – Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019

Main residence exemption changes for non-residents re-emerges

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019  is before the House of Representatives.

In this Bill, the Government is having another go at preventing non-resident taxpayers from applying the main residence exemption for CGT purposes.

As per the previous Bill, the rules would prevent someone from applying a full or partial exemption under the main residence rules if they are a non- resident for tax purposes at the time of the CGT event, regardless of whether they have been a resident of Australia for some or most of the ownership period.

However, there are concessions in this version of the Bill for individuals who have been non-residents for less than 6 years if certain “life events” occur within that period. The relevant events include where the taxpayer, a spouse or child:

• Has a terminal medical condition during the non-residency period,
• Dies during the non-residency period; or
• Divorces or separates from their spouse and would qualify for the marriage breakdown rollover relief for a CGT event that occurs as part of the separation.

The changes also impact on deceased estate situations where either the deceased or a beneficiary of the estate was a non-resident. The other key change from the earlier Bill is an extension of the transitional period for sales of existing properties. While the new rules are proposed to apply to CGT events happening from the original Budget announcement date back on 9 May 2017, a transitional rule would allow CGT events happening up to 30 June 2020 to be dealt with under the existing rules as long as the property was held continuously from before 9 May 2017 until the CGT event.

In addition to the changes to the main residence exemption, the Bill includes amendments that would increase in CGT discount percentage of up to 10% for taxpayers (individuals and beneficiaries of certain trusts) who dispose of properties which have been used to provide affordable housing for at least 3 years from 1 January 2018. This additional discount is only available for the period that the property was used to provide affordable housing and may require additional apportionment calculations (including where the taxpayer was a non-resident for part of the ownership period).

Luxury car tax refunds and genuine redundancy payments

Treasury Laws Amendment (2019 Measures No. 2) Bill 2019  received Royal Assent on 28 October. The two key amendments in this Bill are:

Genuine redundancy payments

The amendments extend the concessional taxation treatment for genuine redundancy payments to taxpayers between the age of 65 and the recently changed pension age (67).

Increased luxury car tax refunds for primary producers

The amendments as well as the increased entitlement to luxury car tax refunds for eligible primary producers and tourism operators.

The luxury car tax refund available has been increased from a refund of 8/33rds of the LCT paid up to a cap of $3,000 by increasing the cap to $10,000. The explanatory memorandum notes that entities entitled to increased refunds will not generally need to make a new claim to receive their increased entitlement.