Still waiting…..
While the ATO has released a number of guides over the last month, we are still waiting on the ATO to clarify its position on when a company might be carrying on a business for tax purposes. As many taxpayers would realise, this has a significant impact on tax rates, maximum franking rates and the deductions that can be claimed by companies. Hopefully we won’t have to wait too much longer to have some much-needed clarity on this crucial issue.
If you have any questions regarding anything in our August Essential Tax Update – please do not hesitate to get in touch with the Fortis Accounting Partners team on (02) 9267 0108, or via email at info@exemplary-financial.flywheelsites.com. We’re always ready to go through everything with you and explain anything that you may be finding confusing.
From the ATO
Small business tax offset for trusts and partnerships
The ATO has confirmed its view that the small business tax offset can only be applied to income derived by an individual through a partnership or trust if an individual receives income directly from the partnership or trust that carries on the business and is classified as a small business entity.
That is, it is not generally possible to access the small business tax offset in situations where a partnership or trust carries on a business and is classified as a SBE, but the business income flows through an interposed entity (usually another trust) before reaching the relevant individual.
This means that the offset cannot generally apply if:
- The business is carried on in a unit trust where the units are held by a discretionary trust, which distributes the business income to an individual beneficiary; or
- The business is carried on through a partnership where a discretionary trust is a partner in the partnership and it distributes its share of the business income to an individual beneficiary.
If the interposed entity also carries on a business in its own right and is classified as a small business entity then this income can qualify for the offset when distributed directly to an individual. That is, you would need to split the distribution received by the individual into its different components.
More information
HELP and TSL reporting for non-residents
New rules apply to ensure that non-residents are required to make compulsory repayments against HELP and TSL loans if their worldwide income is at or above A$54,869 for the 2017 income year.
Individuals who were non-residents for some or all of the 2017 income year and who had a HELP or TSL loan balance at 1 June 2017 will need to report their worldwide income to the ATO.
These individuals must report their non-resident foreign-sourced income with their 2017 tax return or notify the ATO that a return is not necessary.
This income is reported by completing the non-resident foreign income schedule which should be lodged with their tax return. The schedule is not available as a paper form.
In addition, individuals must submit an overseas travel notification if they intend to, or already reside overseas for 183 days or more in any 12 months. This must be done within seven days of leaving Australia and can be lodged through the Tax Agent Portal.
More information
Tax issues for trusts
The ATO has released a guide which sets out a number of key issues that need to be considered by trustees, beneficiaries and their advisers.
The guide provides a high level summary of some of the important tax issues that should be taken into account when dealing with trusts, including:
- Timing rules for trust distributions to be effective;
- How to complete certain labels on the trust tax return;
- Distributing amounts to tax exempt beneficiaries;
- Reminders on the revenue / capital distinction when trusts are involved in property development activities; and
- Issues to consider when distributions are made to SMSFs.
More information
Amending a trust deed
A range of issues need to be considered when clients are contemplating making changes to a trust deed. While a legal adviser should often be involved in this process, the ATO has released a brief guide to some of the things that should be checked before any changes are made to a trust deed, including:
- Check if there is a power of amendment within the deed.
- Check who can exercise that power and whether they are authorised to do so under the deed.
- Check if the amendment power permits the proposed change.
- Check what consent (if any) is required to exercise the amendment power (e.g., the settlor, appointor, beneficiary etc.,).
- Check how the power is to be exercised (e.g., whether a separate deed of amendment will be required).
If changes made to a trust deed which are not contemplated by the trust deed or where the procedures set out in the deed are not followed then there is a risk that this could cause a resettlement of the trust (i.e., treat the old trust as having come to an end, with a new trust being formed). Significant tax issues can arise when a trust is resettled. State tax issues such as stamp duty could also potentially be triggered.
More information
Warning on work-related expenses
The ATO has announced that a message will display in the Tax Agent Portal pre-filling report if the work-related deductions claimed by a particular client in the 2016 tax return were high in comparison to clients in similar occupations and income range in 2016.
The Commissioner has clearly indicated that the ATO will be targeting deductions claimed by individuals for work related expenses this year. This will serve as another reminder for clients and their advisers to take care when claiming these expenses and to ensure that all deductions can be supported by appropriate evidence.
More information
ABN cancellation
The ATO has confirmed that the process for cancelling the ABN of a deregistered company has changed.
The ABN cancellation will now happen as soon as ASIC informs the ATO that the company has been deregistered.
The ABN cancellation is now effective from the date of deregistration.
More information
Ride-sourcing and tax
The ATO has updated its guidance on the tax issues that need to be considered when clients are involved in ride-sourcing arrangements.
The ATO confirms that ride-sourcing providers need to be registered for GST regardless of their turnover. This means that they need to obtain an ABN, register for GST, be prepared to issue tax invoices and meet activity statement obligations.
Income from ride-sourcing also needs to be included in a tax return along with deductions for expenses incurred when transporting passengers for a fare.
More information
GST on exported goods
The GST rules are generally intended to apply where goods and services are consumed in Australia. The rules contain concessions to ensure that goods and services exported from Australia are generally treated as GST-free supplies.
The ATO has released guidance which sets out some of the common circumstances in which Australian businesses might still have a GST liability such as:
- Where the goods have not been exported from Australia within 60 days of the day an invoice is provided or when some of the consideration is received, whichever occurs earlier, unless the Commissioner has allowed additional time; or
- Where the purchaser is responsible for sending the goods overseas.
The ATO confirms that GST should not apply in situations where goods are delivered from one overseas location to another overseas location and they do not pass through Australia. In this case the supply is not connected with Australia and should not fall within the scope of the GST system. These sales should not be reported at G2 or G3 on the supplier’s activity statement, although should still be included as income at T1 – PAYG Instalment Income.
More information
From Government
Modernising business registers
The Government is working on a project to determine whether improvements can be made to the existing systems that deal with business registrations. This forms part of the National Business Simplification Initiative that was announced in 2016 and is aimed at reducing the time that businesses in Australia spend complying with regulations and interacting with Government.
Treasury has released a discussion paper which sets out some background information on business registers and which sets out a broad vision for how existing registry services could be improved, including bringing together different business registry services where possible.
The review appears to be primarily focused on the Australian Business Register (ABR), the Companies Register (which is administered by ASIC) and the Business Names Register.
Treasury is seeking comments from interested parties, submissions are due by 6 September 2017.
More information
Cases
Tax deduction scheme struck down
Academy Cleaning & Security Pty Ltd v Deputy Commissioner of Taxation [2017] FCA 875
The Federal Court has held that the taxpayer was not entitled to claim a deduction for the contract price for the supply of sequestered carbon under the general deduction provisions in section 8-1 ITAA 1997. The Court also held that the general anti-avoidance rules in Part IVA ITAA 1936 should apply to the arrangement.
The taxpayer entered into an emissions purchase agreement on 29 June 2009 with a Malaysian company. The taxpayer agreed to acquire three contract lots of sequestered carbon. The total price payable under the contract was $420,000 and the taxpayer paid a non-refundable deposit of $63,000 upon entering into the agreement. The taxpayer claimed a deduction for the full price of $420,000 in its 2009 tax return.
Upon auditing the company’s 2009 tax return the Commissioner disallowed the deduction and imposed a 75% penalty. The Commissioner found that at most the taxpayer had incurred only $63,000, in any case the expenditure was capital in nature and lastly that Part IVA would apply. The taxpayer appealed the decision.
The Federal court rejected the taxpayer’s appeal, finding that:
- The taxpayer had not incurred the balance of the purchase price at 30 June 2009. At best the taxpayer had an inchoate liability that may have been in the process of accrual, but was subject to a number of contingencies. No reasonable businessperson would have understood that by entering into the agreement the company had completely subjected itself to pay the remaining balance.
- The outgoing was not necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
- Part IVA could apply to the arrangement because the dominant purpose of the parties involved was to enable the company to claim a deduction. It appeared that the arrangement had been contrived by the company’s professional advisers in order to obtain an immediate deduction.
No release from tax debt
BFCB and Commissioner of Taxation [2017] AATA 1294
The AAT has confirmed that the taxpayer should not be released from a tax debt on the grounds of serious hardship.
The taxpayer sold an investment unit in the 2013 income year and made a net capital gain of $159,440 which was included in her taxable income along with some business income.
The taxpayer partly paid the tax liability for the 2013 year, but subsequently applied for release from the remaining debt on the basis that she would suffer serious hardship if she were required to satisfy the liability.
The Commissioner refused the application and disallowed the objection that was made against the decision. The taxpayer applied to the AAT for review of this decision.
The AAT was satisfied that the taxpayer was facing serious financial hardship. However, the taxpayer would suffer that hardship even if she was released from the tax liability. Relieving her of the tax liability would result in other creditors being preferred.
The Tribunal noted that the taxpayer had made new financial commitments (e.g., buying a house and car) knowing that she had a CGT liability, even if she did not know exactly how much that liability was. The taxpayer’s financial difficulties arose before she knew the size of her tax debt, and while this added to her total debts, it was not the cause of her financial difficulties.
This case shows how difficult it is to convince the Commissioner and AAT that tax debts should be released due to serious hardship. It is not enough merely to show that the taxpayer suffers serious hardship, you need to be able to show that it is the tax debt that causes that hardship.
Income derived from the UN not exempt from tax
Commissioner of Taxation v Jayasinghe [2017] HCA 26
The High Court has decided that the income derived by an Australian resident performing work with the United Nations Office for Project Services was not exempt from tax in Australia.
The key issue in this case was whether the taxpayer was a person who held an office in an international organisation (ie, the United Nations). This is because the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act) provides exemption from taxation for income derived by certain people working with international organisations such as the UN.
In this case the taxpayer was engaged as a contractor and the High Court decided that he did not ‘hold an office’ within the meaning of the IOPI Act. As the taxpayer was engaged by the UN as an expert the Commissioner was not bound to provide an exemption from taxation (ie, TD 92/153 did not apply in this case).
The AAT and Full Federal Court had previously found that the taxpayer did qualify for the tax exemption, which in itself shows how complex this area can be.
When taxpayers have performed work for international organisations it is important to consider a range of tax issues, including their residency status, the potential application of foreign income exemptions (e.g., in sections 23AF and 23AG ITAA 1936, the application of relevant double taxation agreements as well as the IOPI Act.
Legislation
Increase in Medicare levy
Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017
The Government has introduced legislation relating to the funding of the National Disability Insurance Scheme.
A key component of this package is an increase in the Medicare levy from 2% to 2.5% of taxable income, starting from the 2020 income year. It is intended that the current exemptions will continue to apply and relief will continue to be available to certain low-income earners.
If the Medicare levy rate changes then this will also cause a change in a number of other rates that are linked to the top marginal tax rate plus Medicare levy, such as FBT, family trust distribution tax and excess contributions tax.
It is not yet clear whether the Government will have sufficient support to push this change through Parliament.
Credit for foreign resident CGT withholding
Taxation Administration (Remedial Power-Foreign Resident Capital Gains Withholding) Determination 2017
This legislative instrument applies from 1 July 2016 and ensures that the credit for amounts withheld by the purchaser under the foreign resident CGT withholding rules are available to the vendor in the year in which they are taxed on the sale of the asset (normally real property in Australia).
This will assist in ensuring that the PAYG withholding credit rules work appropriately in situations where the CGT event is triggered in one income year, but settlement occurs in a later income year. The withholding obligation would typically arise on settlement.
Changes to WET producer rebate
Treasury Laws Amendment (2017 Measures No. 4) Bill 2017
This Bill has passed through both Houses of Parliament and is just waiting Royal Assent. The Bill makes a number of changes to the wine equalisation tax (WET) producer rebate rules, including reducing the cap from $500,000 to $350,000.
If you feel that the any part of this month’s Essential Tax Update may be relevant to your current, or future financial situation – and you’d like to discuss matters 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.
