November 2020 – Essential Tax Summary

From Government

2020-21 Federal Budget

The 2020-21 Federal Budget was handed down on 6 October 2020, delayed from the usual time in May. Legislation has already been introduced or passed to give effect to a number of the tax related measures announced on Budget night. Several of these (the loss carry-back rules, immediate expensing of depreciating assets, and the changes to the R&D tax incentive) are discussed in more detail in the legislation section below. Other proposed changes in the tax space include:

• An update to the company residency rules;
• Changes to the CGT treatment of ‘granny flat’ arrangements; and
• Changes to thresholds for accessing some small business tax concessions.

Company residency

The company residency rules are proposed to be modified such that a company that is incorporated offshore will be treated as an Australian tax resident if it has a “significant economic connection to Australia”. This test will be satisfied if both:

• The company’s core commercial activities are undertaken in Australia; and
• Its central management and control are in Australia.

To some extent this is meant to alter the application of the current central management and control test for company residency by creating a higher threshold than simply carrying on a business in Australia. Recent guidance from the ATO on that test has indicated that a company that carries on a business anywhere would be treated as a resident of Australia if its central management and control is in Australia to some extent.

CGT treatment of granny flats

The Government has announced that changes will be made to ensure that a capital gain will not result from the creation, variation or termination of a formal written granny flat arrangement. A granny flat arrangement generally involves the granting of a right to a relative to live with the taxpayer in exchange for payment.

Ordinarily the granting of that right will trigger CGT implications under CGT event D1 and it is not currently possible to apply the main residence exemption or the general CGT discount to capital gains arising under CGT event D1. Also, the market value substitution rules can potentially lead to a significant capital gain under the current rules. At this stage it is not entirely clear how the Government will address the key tax issues that currently arise in relation to these arrangements.

More Information

• 2020-21 Budget overview
• Knowledge Shop Budget review (KS login required first)

JobMaker hiring credits

In the Budget, the Government announced high level details of the JobMaker hiring credit scheme. To date, the Bill enabling JobMaker has been introduced into Parliament but has not passed. In addition, Treasury has released an exposure draft of the rules for consultation.

Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020

The Bill enabling JobKeeper has been introduced into Parliament and referred to the Senate Economics Legislation Committee (due to report on 6 November 2020). Much like the JobKeeper rules, this Bill simply gives the Treasurer power to issue a legislative instrument setting out the rules for the JobMaker scheme.

Exposure draft – JobMaker Hiring Credit Rules

In addition to outlining the requirements and workings of the JobMaker, the exposure draft outlines the integrity provisions – where the employee headcount or payroll has been artificially inflated to access the hiring credit. Consultation closes on 27 November 2020

JobMaker hiring credit outline

The comments below reflect guidance provided by the Government and Treasury but remember that the final details could well be different.

Eligible employers will have access to a JobMaker hiring credit for each new job they create over the 12 months from 7 October 2020, for which they hire an eligible employee, for a maximum claim period of 12 months from their employment start date.

For a business to be eligible it needs to meet the following criteria:

• Hold an ABN;
• Be up to date with their tax lodgement obligations;
• Be registered for Pay As You Go (PAYG) withholding;
• Be reporting through Single touch payroll (STP); and
• Keep adequate records of the paid hours worked by the employee they are claiming the hiring credit in respect of.

The business must also be able to show that the employee is working in an additional job created from 7 October 2020. To demonstrate that the job is additional, specific criteria must be met.

The ‘additionality’ criteria require that there is an increase in:

• The total employee headcount (minimum of one additional employee) of the business compared initially to 30 September 2020 and then to the previous reporting period; and
• The total payroll of the business for the reporting period, as compared initially to the September 2020 quarter and then to the previous reporting period.

Newly established businesses and businesses with no employees at the reference date of 30 September 2020 are also able to claim the credit where they meet the criteria, however they will not be eligible for the first employee hired (i.e. as the minimum headcount is one), but will be eligible for the second and subsequent eligible hires.

Eligible employees must have received JobSeeker Payment, Youth Allowance (Other), or Parenting Payment for at least one of the previous three months at the time of hiring and work at least 20 paid hours per week on average for the full weeks they are employed over the reporting period. They are also required to be in their first year of employment with that employer, reflecting that the hiring credit is only available for 12 months for each additional job. The credits are available for employees employed on a permanent, casual or fixed term basis.

To receive the JobMaker credits, employers will need to register with the ATO and make claims quarterly, with claims commencing in February 2021.

The amount of the JobMaker hiring credit will be:

• $200 per week for each eligible employee aged 16 to 29
• $100 per week for each eligible employee aged 30 to 35.

Note that employers cannot claim JobKeeper and JobMaker hiring credit for an employee at the same time.

The JobMaker credit cannot be claimed where other Federal Government payments are being received for the employee, i.e., JobKeeper or apprenticeship subsidy.

More Information

• JobMaker factsheet
• ATO guidance on JobMaker credits
• Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020

DGRs required to register as charities

The Government has released draft legislation that would require non-government deductible gift recipients (DGRs) to register as charities with the Australian Charities and Not-for-profits Commission (ACNC). This requirement already applies to 41 of the 52 general DGR categories and the amendments would extend the requirement to the remaining 11 categories.

The amendment will make charity registration a prerequisite for all entities seeking DGR endorsement under the general DGR categories.

More Information – Requiring Deductible Gift Recipients (DGRs) to Register as Charities

From the ATO

Company losses and COVID-19

The ATO has provided some guidance for companies impacted by COVID-19 and utilising losses.

Changes to business operations could potentially impact on whether the company is able to utilise carried-forward losses in the current year or a future income year with reference to the same or similar business tests. As a general rule, a company that has completely closed its business with no intention to resume will normally fail the same or similar business test. However, a company that has temporarily closed its business may still be able to satisfy the same or similar business test in future.

The ATO’s guidance on the company loss tests has been updated to include the following comments with respect to changes in business operation and closing business:

“If a company is still carrying on its business, it will not fail the same business test or similar business test merely because it has:

• reduced the scale of its business, including if its activities have reduced to a minimum or are almost entirely suspended
• suspended or temporarily closed its business only because of temporary adversity or due to reasons beyond its control which it intends to overcome.

In determining whether a company’s business is still being carried on the following must be considered:

• reasons for the inactivity– for example, whether the company is actively holding itself out for business though obtaining none, and
• whether there is the expectation of resuming active operations within a reasonable time.”

That is, at a high level, the ATO seems to be indicating that changes to business models or the scale of activities should not automatically mean a company is considered to fail the same or similar business test. Having said that, this is an issue that will need to be considered separately for each client that may be affected, based on the specific facts of their case.

The ATO also confirms that a company will not fail the same business test or similar business test merely because it has received JobKeeper payments.

More Information – COVID-19 and loss utilisation

Budget – personal tax cuts and withholding

Following the bringing forward of personal income tax cuts in the Budget, the ATO has advised that employers should be making adjustments in their payroll processes and systems in order for the tax cuts to be reflected in the take-home pay of employees.

Employers must make sure they are withholding the correct amount from salary or wages paid to employees for any pay runs processed in their system from no later than 16 November 2020 onwards.

Payroll software providers should be currently updating their software to reflect the reduced withholding rates associated with the changes. Software providers will hopefully be providing updates on this process.

Note that updated withholding schedules are available from the ATO – see the link below.

More Information

• 2020–21 personal tax cuts
• Tax tables

Active ABNs and non-lodgement advice

The ATO is advising that if clients have an active ABN and are operating a business, they must lodge an income tax return in all circumstances. If clients still have an active ABN they will need to lodge a return even if there is no business income to report. This appears to be due to the ATO’s systems not being able to accept a non-lodgement advice where a taxpayer has an active ABN for any part of the financial year.

If an entity ceases to operate a business, then it needs to meet all lodgement and payment obligations before requesting cancellation of the ABN. Once the ABN has been cancelled it should be possible to lodge a non-lodgement advice to advise the ATO that future returns are not required.

More Information – Non-lodgement advice for business clients

Cases

Land sold in the course of an enterprise

San Remo Heights Pty Ltd v FC of T [2020] AATA 4023

One of the necessary conditions for a sale of property to be a taxable supply is that the sale must be made in the course or furtherance of an enterprise carried on by the taxpayer. For example, sales of assets should not generally be subject to GST if they have only been used for private purposes.

In this case, the taxpayer was a company that sold some properties. The company was registered for GST and had argued that it was not liable for GST on the sales of vacant land because they were not made in the course or furtherance of an enterprise.

The properties were vacant lots that were apparently not used for any purpose. The company carried on grazing and rental activities; however, it was accepted that the lots were not used in those activities. It was also noted that the company had not claimed income tax deductions or input tax credits for expenses or depreciation of the properties.

The ATO maintained the company’s enterprise was broader and included the acquisition, subdivision and sale of the vacant lots. Alternatively, the ATO took the position that the company had not established that the land sales were not made in the course or furtherance of the rental or grazing enterprises.

Ultimately, the AAT agreed with the ATO and confirmed that the sales were subject to GST.

While the AAT was satisfied the sales had no connection with the grazing and rental activities, they were made in the course or furtherance of another enterprise. A critical issue here was the lack of evidence the company had to prove that the sales were not connected with an enterprise.

The AAT found there was no evidence that the company acquired the property other than for commercial purposes and that the company did carry out a series of activities (i.e., subdivisions and sales,  albeit over an extended period), which constituted an enterprise on the basis that the company was involved in an adventure or concern in the nature of trade

Several other points were made by the AAT including that long periods of apparent inactivity are not necessarily inconsistent with the activities being in the form of a business, and that the company’s choice not to claim deductions for the expenses should not alter the position.

SG and employee vs contractor

MWWD v FC of T [2020] AATA 4169

This case involved a company which did not make superannuation guarantee contributions for an individual on the basis that they were a genuine independent contractor rather than an employee. The individual (and the ATO) disagreed with this position.

The ATO’s position was based on the extended definition of employee for super guarantee purposes, which ensures that an individual is an employee under the SG rules where they are working under a contract that is wholly or principally for the labour of the person.

While the AAT was satisfied from the evidence that both parties intended to establish what they individually understood to be an independent contractor relationship, the necessary question is whether they were able to do so.

The decision sets out in some detail the main relevant considerations, including whether the:

• Employer exercised control over where, when, and how the worker provides the services;
• Worker was paid primarily for personal labour and skills;
• Worker had a right to delegate; and
• Worker provided their own tools and equipment.

At a high level the decision was based extensively on the evidence and the terms of the contract. The AAT found that although the employer could exercise some control, in practice this was exercised rarely. On the other hand, while the contract allowed delegation and also for the worker to undertake work for other parties, this was also not utilised.

The position in relation to the worker providing their own tools pointed slightly more toward an independent contractor relationship, however not decisively.

In terms of payment, the worker was not paid a regular wage, and he was not paid for time off. Invoices were provided to the applicant which were paid in respect of work that was completed.

Based on the facts, the AAT considered that the relationship the parties actually established is a hybrid that exhibits some of the features of an employment arrangement and some of the features of an independent contracting relationship. Overall, the AAT concluded that parties were dealing with each other as principals and that the individual was not an employee or deemed employee for SG purposes.

Working holiday visas and tax residency

Gurney v FC of T [2020] AATA 3813

This is another case emphasising the importance of considering the residency of individuals in Australia under working holiday visas. While the ATO has indicated that individuals using these visas should generally be treated as non-residents, the position depends on the facts of each particular case.

The taxpayer in this case entered Australia on a working holiday visa having previously sought a longer-term visa without being aware of the processing time for such a visa. The taxpayer’s intention and expectation were that they would be able to change the visa arrangement and that this would allow him to remain here indefinitely. To this end the taxpayer sought to establish permanent accommodation and seek more permanent style employment, with the view of becoming a resident.

However, the taxpayer was unable to secure the visa arrangements that they sought and some nine months later abandoned their plans and returned to the UK. The taxpayer considered themselves to be a tax resident for the period they were in Australia, however the ATO sought to argue that they remained a resident of the UK.

The intention of the taxpayer was a critical element here in distinguishing this case from the Addy case (discussed in the December 2019 Knowledge Shop Tax round-up) which featured substantially similar facts but in which the opposite conclusion was reached.

The AAT in this case held that the taxpayer should be considered a resident for the 9 month period they were in Australia. The relevant distinguishing fact was that at all times the taxpayer had an intention to reside in Australia and had actively sought to make that a reality, obtaining the working holiday visa only as a substitute for a longer-term visa (with a longer processing time which was impractical given his arrival date). The taxpayer arrived with the intention and expectation to live in Australia and continued to have that intention until it became clear that he would not be able to achieve his objectives.

Legislation

Budget measures enacted

Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020

Legislation has now passed giving effect to some of the key tax changes announced in the 2020-21 Federal Budget, including the loss carry back rules, the immediate expensing rules for depreciating assets and the changes to the R&D tax offset.

Loss carry-back tax offset

At a high level, the new rules allow companies with an aggregated turnover of less than $5 billion which have a loss in the 2020, 2021, or 2022 income years to carry back the loss and apply it against the company’s taxable income in the 2019, 2020, or 2021 income years where there is a tax liability in those earlier years.

Instead of amending the prior year returns the effect of carrying back the loss is to entitle the company to claim a refundable tax offset up to the amount of the income tax liability. The tax offset would be applied in the 2021 or 2022 returns, potentially generating tax refunds.

To be entitled to a loss carry back tax offset, a company must have lodged an income tax return for the current year and each of the previous five years, however this does not prevent companies from being eligible if they were not required to lodge a return for that period (for example, new companies).

The amount of the loss carry back tax offset for an income year is the lesser of the company’s “loss carry back tax offset components” (which is the amount of the tax loss that the entity is carrying back, reduced by net exempt income for the income year, and multiplied by the company’s tax rate for the loss year), and the entity’s franking account balance at the end of the current year. Broadly, the amount cannot exceed:

• The amount of earlier tax paid by the entity; and
• The entity’s franking account balance at the end of the income year for which the refundable tax offset is claimed.

Immediate expensing of depreciating assets

These changes allow businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time (6 October 2020) and 30 June 2022. Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period (i.e. second element costs).

To be eligible the assets acquired must be:

• First held, and first used or installed ready for use for a taxable purpose, after 7:30 PM ACT time on 6 October 2020 and by 30 June 2022; and
• Located in Australia and principally used in Australia for the principal purpose of carrying on a business.

There are exclusions from the rules for assets that are depreciated under Subdivision 40-E (about low value and software development pools) or 40-F (about primary production depreciating assets). However, assets which are let out on depreciating asset leases do not seem to be excluded from these rules, although the taxpayer would need to be carrying on a business under general principles to access these rules.

Second hand assets can potentially qualify for these rules, however this is only for businesses with turnover below $50m.

Small business entities that have assets in a general small business pool will be able to write-off the pool balance (if any) at the end of the 2021 and 2022 income years.

The changes also confirm that the provisions that prevent small business entities from accessing the simplified depreciation rules for five years if they opt out of the rules continue to be suspended for income years that include 30 June 2021 and 30 June 2022, meaning entities can opt-out for a year and remain eligible to use the rules in the next income year.

Changes to the R&D tax incentive

Following a recent review of the R&D tax incentive, the Government has announced a range of changes to the operation of the rules. While these would need to be examined in detail for any affected entities, very broadly the changes involve:

• Increasing the R&D expenditure threshold (above which there is no difference between claiming the R&D tax incentive and claiming the expenses as ‘normal’ deductions) from $100 million to $150 million and making the threshold a permanent feature of the law;
• Standardising the benefit of the incentive by linking the R&D tax offset available for entities entitled to the refundable R&D tax offset to the company’s corporate tax rates plus a 18.5 percentage point premium; and
• Increasing the generosity of the R&D Tax Incentive for larger R&D entities with high levels of R&D intensity. Under this change, large R&D entities with aggregated turnover of $20 million or more for an income year are entitled to an R&D tax offset equal to their company tax rate plus one or more marginal intensity premiums.

Additional changes have also been made in respect of the clawback rules relating to situations in which companies recoup some of the R&D expenditure or receive income from the sale of the outcomes of the research and development activities.