The biggest news this month is the announcement that retrospective changes will be made to the company tax rate rules.
Presumably as a result of all the uncertainty that has surrounded the recent lowering of the corporate tax rate, the Government has stepped in to ensure that companies deriving 80% or more of their income from passive activities will not be entitled to the lower rate.
While this may well help to solve some of the uncertainty in this area moving forward, it is likely to cause headaches for some taxpayers who will need to reassess whether they have paid tax at the correct rate for the 2017 year. There could also be flow-on implications for franking rates and shareholders of these companies.
In addition to this legislation has been introduced to Parliament to make significant changes to the deductions that can be claimed by rental property owners as well as the operation of the superannuation guarantee system.
If you have any questions about any of the information contained in this month’s Essential Tax Update – please don’t hesitate to get in touch with the team at Fortis Accounting Partners. You can reach us via email at info@exemplary-financial.flywheelsites.com, or by giving us a call on 02 9267 0108.
From Government
Retrospective changes to company tax rate rules
As many taxpayers would be aware there has been considerable uncertainty around the application of the lower company tax rate rules, especially in light of the ATO’s comments in TR 2017/D2 that suggested that the threshold for carrying on a business is lower for a company than it is for other taxpayers.
While we are still waiting on the ATO to provide further clarification around this issue (not expected until November 2017), the Government has stepped in to try and limit the scope of the tax rate reduction to companies that earn more than 20% of their income from active trading activities.
Treasury has released exposure draft legislation setting out how the new rules are intended to apply but keep in mind that this could potentially change before the new rules are actually introduced.
The draft legislation basically ensures that a company will only qualify for the lower rate of 27.5% if:
- The company carries on a business in the relevant income year;
- Its aggregated annual turnover for the year is less than the applicable threshold (e.g., $10m for the 2017 year); and
- Less than 80% of its assessable income is passive in nature.
For the purpose of these rules, passive income includes the following:
- Dividends received from another company (except where the company holds at least a 10% interest in the company paying the dividend);
- Interest income;
- Rent;
- Royalties;
- Capital gains;
- Amounts that have flowed through a partnership or trust and that are attributable to passive income; and
- Gains on qualifying securities.
These changes should ensure that companies that only hold rental properties would not qualify for the lower tax rate. However, a company that receives distributions from a related trust could still qualify if the company carries on a business in its own right and more than 20% of its income is attributable to trading profits (directly or indirectly through the trust). In this scenario we will still end up having to determine whether the company carries on a business under ordinary principles.
The problem for some clients will be that the changes are intended to apply from the 2017 year onwards. The current rules allow small business entities to qualify for the lower rate and these rules allow prior year or current year turnover to be taken into account. However, the proposed new rules will only look at the current year turnover in the 2017 year which means that companies with aggregated turnover of $10m or more in the 2017 year will be subject to a 30% tax rate, even if their aggregated annual turnover was less than $10m in the 2016 year.
There may well be a number of situations where clients will need to amend 2017 tax returns to reflect a different tax rate, we will have to wait and see how the ATO proposes to deal with this issue.
Changes will also be made to the maximum franking percentage rules. In determining a company’s maximum franking rate for a particular income year you need to look at the tax rate that would apply in the current year if the following assumptions are made:
- The company’s aggregated turnover in the current year is the same as in the previous year;
- The company’s assessable income in the current year is the same as in the previous year; and
- The company’s passive income in the current year is the same as in the previous year.
Some companies have already been forced to adjust the franking percentage that applies to dividends paid out in the 2017 year. These changes could potentially cause further adjustments to be made, with flow-on implications for the shareholders.
More information
Increased CGT discount for affordable housing
In the 2017-18 Federal Budget the Government announced a series of measures that are intended to improve housing affordability in Australia. Treasury has now released exposure draft legislation relating to the proposed increase in the CGT discount percentage for people who invest in affordable housing.
There are two aspects to these changes. Firstly, individuals who make a capital gain on residential dwellings that have been used to provide affordable housing can potentially qualify for an additional CGT discount of up to 10%, this could take the total discount percentage from the existing maximum level of 50% to 60%.
The increased discount will only be available if the dwelling has been used to provide affordable housing for at least 3 years after 1 January 2018. The 3 year period does need to have been continuous.
The additional discount needs to be apportioned to take into account periods when the individual was a non-resident or temporary resident as well as periods when the property was not used to provide affordable housing over its ownership period.
The second aspect to the rules allows individuals to also access an additional 10% CGT discount on their share of capital gains that are distributed by a certain trusts (e.g., managed investment trusts) where the gain is attributable to dwellings that have been used to provide affordable housing for at least 3 years.
The draft legislation sets out a number of conditions that need to be met in order to demonstrate that the dwelling has actually been used for affordable housing.
More information
Phoenix activity
The Government has announced a series of reforms aimed at preventing illegal phoenix activity from taking place. The Government estimates that this activity costs the Australian economy up to $3.2 billion per year.
Phoenixing is basically where the assets of one entity are transferred to another entity, with the original business entity being unable to meet its liabilities. The original entity is often then wound up, leaving employees, suppliers, the ATO and other creditors out of pocket.
One of the key measures announced by the Government is the introduction of a Director Identification Number (DIN). This will be a unique number issued to each company director and it is hoped that this will allow Government agencies to determine the relationship between individuals and other entities or people.
In addition to this, the Government has announced the following reforms:
- The introduction of specific offences relating to phoenix activity to enable the regulators to take more decisive action against those involved in these activities;
- The establishment of a hotline that can be used by members of the public to report phoenix activity;
- Increased penalties for those who promote tax avoidance schemes;
- Stronger powers for the ATO to recover a security deposit from suspected phoenix operators;
- Extending the director penalty regime to include GST liabilities;
- Preventing directors from backdating resignations or leaving a company with no directors; and
- Preventing entities that are related to a phoenix operator from appointing a liquidator.
In addition to these measures the Government has indicated that it will engage in a consultation process to determine how best to identify high risk individuals who will be subject to additional measures including:
- A next-cab-off-the-rank system for appointing liquidators;
- Allowing the ATO to retain tax refunds; and
- Allowing the ATO to commence immediate recovery action following the issuance of a Director Penalty Notice.
More information
Changes to tax consolidation system
Treasury has released exposure draft legislation to implement a number of recommendations made by the Board of Taxation to improve the operation of the tax consolidation rules. Most of the changes were previously announced by the Government in the 2013-14, 2014-15 and 2016-17 Federal Budgets.
The changes are primarily aimed at improving the integrity of the consolidation system and include:
- The removal of a double benefit that can currently arise in respect of certain liabilities held by an entity that joins a consolidated group;
- Simplifying the operation of the entry and exit tax cost setting rules by ensuring that deferred tax liabilities are disregarded;
- Removing certain anomalies that arise when an entity joins or leaves a consolidated group where the entity has securitised an asset;
- Switching off the entry tax cost setting rules for a joining entity where a capital gain or capital loss made by a foreign resident owner when it ceases to hold membership interests in the joining entity is disregarded in certain circumstances;
- Clarifying the operation of the TOFA provisions when certain intra-group assets or liabilities emerge from a consolidated group because a subsidiary member leaves the group; and
- Removing anomalies that arise when an entity leaves a consolidated group holding an asset that corresponds to a liability owed to it by the old group because the value of the asset taken into account for tax cost setting purposes is not always appropriate.
The proposed start date for the measures varies. In some cases the changes will apply from 13 May 2014 while other changes will apply from 1 July 2016.
More information
From the ATO
Payments to taxi licence holders
The ATO has released updated guidance on the income tax and GST treatment of payments made by State Governments in relation to taxi and hire car licences.
In very broad terms, the ATO’s view is that industry assistance payments made to taxi licence holders are ordinary income and taxed on revenue account rather than being subject to the CGT provisions. However, GST generally won’t apply to these payments.
In recent times some State Governments have decided to make payments to taxi licence holders to help offset the impact of new regulatory regimes and help them compete under new industry arrangements.
In some cases one-off payments are being made while in other situations recurring hardship or income support payments are being made. Either way, the ATO’s view is that the payments should be taxed on revenue account if the payment is made to assist a business to continue operating or to compensate for loss of income.
On the other hand, if a licence holder has permanently and completely exited the industry or has evidence to show that they have undertaken a process to permanently exist the industry at the time of receiving the payment it can be included in the CGT calculation that applies to the surrender or disposal of the licence.
In situations where passenger movement levies have been imposed, taxi operators need to include any fees charged to passengers in their assessable income but can claim a deduction for the fee that is charged by the taxi network. While GST does not apply to the levy paid to the Government, if it is passed on to passengers then this would be regarded as an increase in the price of the supply being made, which means that GST should apply.
More information
Car expenses and ride-sourcing
A range of issues need to be considered when clients are involved in ride-sourcing activities, including the deductions that can be claimed for car expenses.
As with any other car expense claims, these need to be made using either the cents per kilometre method or log book method.
If the cents per kilometre method is used the taxpayer can only claim up to 5,000kms for each car per year. The ATO has indicated that while there is no need to keep specific evidence of all kilometres travelled, the taxpayer might be asked to show how the business kilometres were calculated (e.g., diary records etc.,).
The ATO also provides some examples of situations where travel can be treated as deductible when undertaking ride-sourcing activities. If someone is already undertaking travel for a private or non-deductible purpose, they can treat travel as work related if they accept a job on the way, but only the kilometres travelled when driving to collect a passenger and taking them to their destination.
On the other hand, if someone leaves home solely for the purpose of looking for work then the travel can be deductible even if they do not actually end up providing any ride-sourcing services. However, if their intention changes before returning home (e.g., decide to meet friends or family) then the travel from this point onward would not be work related.
More information
Online PSI tool
The ATO has released a PSI tool that can be used to work through the application of the PSI provisions. The tool can be used regardless of whether the business is operated as a sole trader or through an entity such as a company or trust.
The ATO website states that you will be able to rely on the result provided by the tool if you keep a record of the result and your responses accurately reflect your personal circumstances.
In some cases it will be necessary to apply to the Commissioner for a personal services business determination. While a PSB determination cannot be accessed through the normal online tool, the ATO has a version that can be accessed through their online services for individuals and is capable of issuing a PSB determination in some situations.
Regardless of whether the PSI tests are passed or failed the tool provides a summary of the tax implications that flow from this, including a warning that the general anti-avoidance rules in Part IVA can apply in situations where the PSI tests are satisfied and the income is split with other taxpayers or is retained in a company structure.
More information
Rulings
Is a trust a fixed trust
PCG 2016/16 Fixed entitlements and fixed trusts
At a practical level it can be very difficult for a trust to be classified as a fixed trust for tax purposes unless the Commissioner exercises his discretion to treat the beneficiaries’ interests in the trust as fixed entitlements. This is especially relevant when looking at the trust loss tests.
The ATO has issued a PCG to try and address this issue and remove some of the uncertainty that arises when trying to determine whether a trust is a fixed trust.
Basically this PCG sets out a safe harbour compliance approach which means that it will be possible to manage a trust’s tax affairs as if the Commissioner had exercised his discretion to treat the trust as a fixed trust as long as certain conditions are met.
However, it is important to recognise that even if the safe harbour conditions are met, this cannot be relied upon when applying the non-arm’s length income rules for superannuation funds or the holding period rules when beneficiaries are seeking to claim franking credits that have flowed through the trust.
More information
Legislation
Rental property travel and depreciation deductions
Treasury Laws Amendment (Housing Tax Integrity) Bill 2017
The Government has introduced legislation relating to 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.
The Bill ensures that travel expenses incurred on or after 1 July 2017 are not deductible if they relate to deriving income from a residential rental property. There are some exceptions for certain entities (e.g., companies) and where the taxpayer carries on a rental property business.
The Bill also prevents taxpayers from claiming depreciation deductions on certain assets from the 2018 income year. The new restrictions are intended to ensure that depreciation deductions cannot be claimed on assets that have previously been used by another taxpayer in connection with gaining or producing income from residential rental properties or assets that have been used by the taxpayer for a non-taxable purpose. As with the rules on travel deductions, there are exceptions for certain entities and for those carrying on a rental property business.
Assuming these rules are passed by Parliament practitioners will need to spend some time working out how the new depreciation rules will operate in practice because they are complex.
Superannuation guarantee changes
Fair Work Amendment (Recovering Unpaid Superannuation) Bill 2017
A Bill has been introduced to Parliament which contains a number of fundamental changes to the superannuation guarantee (SG) system. If passed, the changes are expected to apply from 1 July 2018.
The first change is designed to improve the ability of employees to recover unpaid SG amounts by bringing superannuation contributions within the National Employment Standards. This would enable the Fair Work Ombudsman to take steps to recover unpaid SG amounts and also provide employees with a direct legal avenue to recover these amounts, rather than having to hope that the ATO can recover the amounts on their behalf.
Some of the other key changes include:
- Requiring employers to notify employees when superannuation contributions have been made (it is expected that this will generally be done via payslips);
- Ensure that amounts contributed by way of salary sacrifice are not treated as employer contributions (i.e., will not reduce the employer’s SG obligations);
- Remove the current SG exemption for situations where the employee is paid less than $450 in a particular month; and
- Ensure that superannuation funds are required to notify members if the fund could reasonably have expected to receive a contribution for the benefit of the member, but no contribution was actually received.
In addition, the ATO will be required to conduct a review of employers’ compliance with the SG rules and provide recommendations to improve compliance.
Digital currency and GST
Treasury Laws Amendment (2017 Measures No. 6) Bill 2017
Following on from the announcement made in the 2017-18 Federal Budget the Government has introduced legislation which will ensure that supplies of digital currency are no longer subject to GST. The changes are expected to apply to supplies made on or after 1 July 2017.
In broad terms, the amendments treat digital currency in much the same way as money. This is being done to remove the double taxation that can arise when digital currency is used to pay for goods or services (i.e., the supply of the digital currency can potentially trigger GST, in addition to the supply of the goods or services).
While supplies of digital currency will generally be disregarded for GST purposes, a transaction will still be recognised in the GST system if digital currency is exchanged for other money or digital currency (much like the way the rules work currently when money is exchanged for other money). While this might bring the supply or acquisition within the GST system, it could still potentially be treated as an input taxed financial supply. The Government intends to amend the GST Regulations to provide equivalent treatment for digital currency.
If you have a question relating to this month’s Essential Tax Update and would like to speak with an experienced accountant; please get in touch with the team at Fortis Accounting Partners via info@exemplary-financial.flywheelsites.com, or by giving us a call on 02 9267 0108.
