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We finally have clarity around the application of the company tax rate rules for the 2017 year and beyond with the release of a draft ruling by the ATO and the introduction of a Bill into Parliament.
This should provide taxpayers with some comfort as they seek to determine the tax rate that applies to their companies. The good news is that the Government has scrapped plans to introduce further changes on a retrospective basis, with the new 80% passive income test to be introduced from the start of the 2018 income year rather than the 2017 income year.
From Government:
Clarity on Company tax rate rules
The Minister for Revenue and Financial Services has issued a media release relating to the introduction of the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 to Parliament.
The Minister notes that the Bill will prevent passive investment companies from accessing the lower corporate tax rate if more than 80% of their total income is passive in nature.
The 80% passive income test contained in the Bill basically replaces the need to determine whether the company is carrying on a business for the purpose of figuring out the tax rate that applies. However, this concept will still be important when determining the tax rate of companies in the 2017 income year.
The Minister also notes that the ATO released a draft ruling dealing with the carrying on a business issue. The media release provides the following comments:
“The ATO has advised that it will adopt a facilitative approach to compliance in relation to the ‘carrying on a business’ test for the 2016-17 year. That is, it will not select companies for audit based on their determination of whether they were carrying on a business in the 2016-17 income year, unless their decision is plainly unreasonable.”
Further comments on the Bill and draft ruling can be found below.
More information
Expansion of taxable payment reporting rules
Following recommendations made by the Black Economy Taskforce, the Government announced in the 2017-18 Federal Budget that the taxable payment reporting system that currently applies to businesses in the construction industry would be expanded to include courier and cleaning services.
Treasury has released draft legislation relating to the expansion of the system. The ATO has also released draft guidance indicating how the new rules will be administered.
The way the new rules will work is that entities that supply courier services or cleaning services will be required to report to the ATO the details of payments made to other entities that relate wholly or partly to courier or cleaning services (respectively).
The aim is to capture details of payments made to contractors. Payments to employees should be excluded from the reporting rules because the business would already be required to withhold from those payments under the PAYG withholding system.
The draft ATO guidance notes that an entity only needs to report payments if it has an ABN. Payments to sole traders, companies, partnerships and trusts can be captured under these rules.
The rules will apply to payments made on or after 1 July 2018 and the first report will be due by 28 August 2019.
The exposure draft legislation also contains measures that will ban the manufacture, distribution, possession, use or sale of sales suppression technology.
More information
Protection of whistleblowers
Following announcements made in the 2016 Federal Budget, Treasury has released draft legislation that seeks to provide a greater level of protection for whistleblowers.
There are two parts to this. Firstly, the Government is seeking to create a single whistleblower protection regime in the Corporations Act to cover the corporate, financial and credit sectors. The Government will also introduce a new whistleblower protection regime that applies under the tax system that is aimed at those who expose tax misconduct.
The tax regime will operate by:
- Introducing protections and immunities against victimisation of eligible whistleblowers;
- Introducing a compensation scheme for eligible whistleblowers; and
- Introducing mechanisms designed to protect the identify of eligible whitleblowers.
More information
R&D claims under increased scrutiny
The Minister for Revenue and Financial Services has issued a media release referring to the recent succession prosecution of a tax agent who has been sentenced to 29 months’ imprisonment for his involvement in a scheme relating to R&D tax incentive claims.
The ATO has already indicated that it will be increasing its focus on claims made under the R&D tax incentive and the Minister notes that the Serious Financial Crime Taskforce have also become involved in seeking to identify serious abuse of the R&D system.
Clients who are seeking to access R&D tax offsets not only need to ensure that the basic eligibility criteria are met but also that appropriate documentation is produced and kept on file to support claims that are made.
More information
From the ATO:
Treatment of property flipping
On the ATO is a guide which deals with various tax issues associated with property. One aspect of this guide deals with a scenario that hasn’t really received a great deal of attention in the past and this is where someone buys a property with the intention of carrying out renovations while living in the property and then selling the property once the work is completed (i.e., property flipping).
Many clients make the assumption that any gain made from the activity will be exempt from tax as long as the property is their main residence for the entire ownership period. However, this is only the case where the property is held on capital account.
The ATO guide indicates that someone who is renovating a property with the intention of selling the property again at a profit could be taxed on revenue account in which case the main residence exemption is no longer applicable.
The ATO identifies three main scenarios and the general tax implications as follows:
- Personal property investor – this is someone who purchases a property with the primary intention of using it as a long-term rental property or private residence. If this person undertakes some renovation activities and then sells the property earlier than originally planned then they should still generally be able to argue that the sale is dealt with on capital account, which means that the main residence exemption and/or CGT discount could apply.
- Isolated profit making undertaking – this is someone who buys a property with the primary intention of carrying out renovation activities and then selling the property when the work is completed. Someone in this category is likely to be taxed on revenue account with no access to the main residence exemption or CGT discount.
- Business of renovating properties – this is someone who undertakes property flipping activities on a regular or repetitive basis and where the activities are organised in a business-like manner. As with the category above, there is generally no access to the main residence exemption or CGT discount.
Just because someone may live in the property for all or part of the ownership period does not automatically mean that profits on sale are exempt from tax. The main residence exemption can only reduce capital gains, it cannot reduce amounts that are taxed on revenue account.
More information
Rulings:
When is a company carrying on a business?
TR 2017/D7
The ATO has finally released further guidance on when a company will be treated as carrying on a business for the purpose of the company tax rate rules.
Consistent with the comments made earlier this year in TR 2017/D2 the ATO has indicated that activities carried on by a company are more likely to amount to carrying on a business than if they were carried out by either an individual or trust.
In broad terms, the ATO indicates that a company should be regarded as carrying on a business under general principles if the company aims to make a profit and has a genuine prospect of making a profit. However, if a company has no purpose or prospect of making a profit and its activities lack a commercial character then it is unlikely to be carrying on a business.
The draft ruling sets out a number of examples that explain the ATO’s approach to this issue. The examples show that a company could be carrying on a business in the following situations:
- The company owns a single commercial property, which is rented at market rates on normal commercial terms and it produces a profit from these activities.
- The company holds a portfolio of listed shares, which are held with the purpose of earning dividend income.
- The company receives distributions of income from a related trust, with the distributions lent back to the trust in return for a commercial rate of interest secured against the assets of the trust.
While it will still be some time before this ruling is finalised (comments on the draft ruling will be accepted until 1 December 2017), practitioners will want to start identifying any company clients where the ATO’s views could impact on the position taken in 2017 (or perhaps earlier) income years in terms of the company tax rate, access to other small business tax concessions and access to deductions under the blackhole expenditure rules in section 40-880 ITAA 1997.
More information
Long term construction contracts
TR 2017/D8
The ATO has withdrawn its previous ruling on the tax treatment of long-term construction contracts (IT 2450) and replaced it with a new draft ruling, which basically replicates the approach adopted in the old ruling, but with updated references to recent accounting standards.
In TR 2017/D8 the ATO confirms that two approaches can be used to recognise income and deductions for long-term construction contracts:
- The basic approach, under which all progress and final payments received in a year are included in assessable income, with deductions allowed for all expenses incurred during that year (subject to any normal restrictions);
- The estimate profits basis, under which the taxpayer can use accounting methods to allocate the ultimate profit or loss for the project across the relevant income years.
A long-term construction contract is any contract under which the construction work extends across more than one income year, even if the contract runs for a total period of less than 12 months.
When it comes to the basic approach, the ATO accepts that some departures from the standard rules are acceptable, such as where amounts are retained under retention clauses or where up-front payments are made by customers to purchase equipment that will be used across the whole contract period.
More information
Legislation:
Rental property travel and depreciation deductions
Treasury Laws Amendment (Housing Tax Integrity) Bill 2017
This Bill has moved to the Senate. This is the Bill which contains the measures announced in the 2017-18 Federal Budget that seek to limit the deductions that can be claimed by rental property owners for travel expenses and also depreciation on certain assets.
Digital currency and GST
Treasury Laws Amendment (2017 Measures No. 6) Bill 2017
This Bill has passed both Houses of Parliament and is awaiting Royal Assent. The Bill ensures that supplies of digital currency are no longer subject to GST and apply to supplies made on or after 1 July 2017.
