This month is dominated by the ATOs focus on the validity of deductions being claimed.
A new draft PCG sets out the timing of deductions for contributions made through superannuation clearing houses, a new draft ruling on labour costs when developing capital assets sets the boundaries for deductibility (and what to look out for), and the Reid case shows how far the ATO will go to validate a claim.
From Government
Extending the definition of ‘Significant Global Entity’
Treasury has released exposure draft legislation aimed at ensuring that groups headed by entitiesother than listed companies are included in the definition of an Significant Global Entity (SGE).
If an entity is an SGE, it is subject to Australia’s country by country reporting rules, the multinational anti-avoidance law, and the diverted profits tax. SGEs also face increased administrative penalties under taxation law and may face additional reporting requirements.
The proposed changes expand the scope of the SGE definition by introducing the concept of a notional listed company group – a group of entities that would be required to consolidate for accounting purposes as a single group under the applicable accounting rules if:
- Any member of the group was a listed company; and
- Exceptions to requirements when a group of entities would be required to consolidate, including materiality rules, were disregarded.
The amendments also provide that if an entity does not have adequate global financial statements for a particular period, its annual global income for that period is the amount that would have been its annual global income if such global financial statements had been prepared.
Given that the definition of an SGE may include Australian subsidiaries of large foreign entities, practitioners should explore the possibility that a greater number of clients will be caught in the net of the expanded definition.
More information
- Extending the definition of a Significant Global Entity (SGE) – November 2019
- Significant global entities
From the ATO
Lodgment and payment relief for bushfire affected taxpayers
The ATO has provided relief from lodgement and payment obligations for those affected by the bushfires in November. For those with a business or residential address in one of the prescribed postcodes, the ATO has automatically granted a two month deferral for activity statement lodgments and payments.
Taxpayers can also call the ATO directly to request further assistance, such as:
- Requesting extra time to pay or lodge
- Help in finding lost TFNs by using methods to verify a taxpayer’s identity such as date of birth, address and bank account details
- Have the ATO re-issue income tax returns, activity statements and notices of assessment
- Help in re-constructing tax records that are lost or damaged
- Fast tracking any refunds owed
- Setting up a payment plan tailored to a taxpayer’s individual circumstances including interest-free periods
- Request remittance of penalties or interest charged during the time a taxpayer has been affected
More Information – Bushfires November 2019
Rulings
Timing of deductions for contributions made through super clearing houses
PCG 2019/D8
This new draft Practical Compliance Guide works through the timing of deductions for superannuation contributions made through a clearing house. Note that the draft PCG is only applicable to the ATO’s Small Business Superannuation Clearing House (SBSCH). Payments made through other clearing houses may require the employer to confirm when the payment was actually received in order to determine when deductions can be claimed.
An employer can normally only claim a deduction for superannuation contributions in the income year in which the contribution is made. Super contributions are made to a superannuation provider or RSA when the payments are received by the trustee of a complying superannuation fund or an RSA.
For contributions made through a clearing house, this issue is determining the time this occurs. This can be a significant issue where contributions are made on or just before 30 June. While there is a special rule (section 23B SGAA 1992) to manage the gap between an employer’s payment to the SBSCH and the trustee of a complying super fund receiving the contribution to ensure that employers have met their super guarantee obligations, this does not apply to working out when a deduction arises.
The draft PCG indicates that the ATO will not devote compliance resources to investigating the issue of when the deduction arises for employers provided that the employer made the payment to the SBSCH before close of business on the last business day on or before 30 June, the payment is not dishonoured or returned by the SBSCH, and the employer is otherwise entitled to the deduction. As a consequence of this compliance approach, there is no need for employers to check with their employees’ super funds to determine the income year in which the contributions were received from the SBSCH prior to claiming an income tax deduction in the income year the payment was made. As mentioned, this approach does not apply to payments made through other superannuation clearing houses.
Labour costs in developing capital assets not deductible
TR 2019/D6
While recurring labour costs incurred by a business are normally deductible, this draft ruling confirms the principle that labour costs incurred in connection with the construction or development of capital assets are not deductible under section 8-1. For example, this can be an issue where a business employs staff to develop intangible assets (such as copyright) or to build capital works (paying staff or contractors to construct a building on land that they own).
Section 8-1(2)(a) prevents taxpayers from deducting an amount of expenditure to the extent that the expenditure is capital, or of a capital nature. TR 2019/D6 confirms that labour costs incurred specifically for constructing or creating capital assets are considered to be capital or of a capital nature and therefore cannot be deducted under section 8-1.
In this context, the key issue will generally be determining whether the costs are specifically incurred to construct or develop the capital asset, or whether the costs are more general in nature (for example, if an employee is only incidentally engaged with the construction or development of a particular asset). In some cases an apportionment may be required. On this point the ATO states:
“The cost of workers or employees whose role has a remote connection with constructing or creating capital assets, or who have a broader role that involves incidental activities connected with constructing or creating capital assets, will generally not be regarded as being incurred specifically for constructing or creating capital assets and therefore will not be capital or of a capital nature.”
Deductions for work related expenses
TR 2019/D4
This draft ruling sets out a basic framework for the requirements to claim deductions for work-related expenses under section 8-1 (i.e., whether the expense is incurred, whether it is ‘in the course of’ gaining or producing assessable income, not capital or private or domestic in nature, etc). The ruling also includes guidance on the substantiation requirements that apply to work related expenses. While there is little substantive content directly aimed at specific types of work-related expenses (the ruling doesn’t provide specific guidance on claiming car expenses, or laundry expenses etc.,), there are a few points worth mentioning.
- Whether an expense becomes deductible merely because an employer specifically requires the employee to incur the expense – this is not determinative on its own and it is always necessary to apply the relevant tests in section 8-1. That is, an expense is not necessarily deductible just because an employer requires the employee to incur that expense.
- Links to other ATO rulings and published guidance – the draft ruling is a reference point to TDs, IDs and PCGs, for the treatment of work related expenses if you are dealing with deductions for specific expenses, including car expenses, laundry expenses, self-education expenses, and a range of other specific items (for example, legal expenses on a number of issues, physical fitness, cosmetics).
New draft ruling on car parking fringe benefits
TR 2019/D5
The ATO has replaced TR 96/26, which previously covered the provision of car parking fringe benefits, with a new draft ruling.
Advisers will need to revisit this issue for clients who provide car parking to their employees unless they fall within the exceptions for small businesses.
Key clarifications include:
- Meaning of ‘commercial parking facility’. There are two basic indicators, being that the facility is a purpose-built parking facility (including parking provided as part of an office or apartment building), and that it offers parking to members of the public. One important change in this area is that the ATO considers a facility is ‘commercial’ if it is run to make a profit, which may include a facility operated by a not-for-profit organisation.
- Requirement for all-day parking to be available for a fee. Specifically, the ATO indicates that if a car park allows all-day parking, but its fee structure discourages it with higher fees, the car park can still be considered a commercial parking station if it satisfies other requirements. Further, a car park operator may charge this fee daily, or over a longer period of time, that is, even though a fee may not be payable daily this requirement can still be met.
- Parking must be offered in the ordinary course of business by the facility operator, and that this expression has a broad meaning. The ATO states that what constitutes the ‘ordinary course’ depends on the business being carried on and whether the offer of all-day parking is a usual or regular part of business activities even if it is not the sole business activity. A car parking facility may still qualify as a commercial parking station even if the facility has another purpose other than providing all-day parking, for example, it may also have a purpose of providing short term parking, such as hourly parking at a hospital, shopping centre, hotel, university or an airport. This means that businesses located near these parking operations may be caught.
Cost base of an asset and assumed liabilities
TD 2019/D11
This draft determination applies in circumstances where:
- A taxpayer acquires a CGT asset from another entity, and
- That asset is subject to a liability, and
- The first element of the cost base of that asset includes an amount of the liability assumed by the taxpayer (under section 112-35).
In these circumstances, the liability assumed by the taxpayer does not form part of the cost base of the asset to the extent that the taxpayer has deducted, or can deduct, expenditure in discharging that liability. That is, the cost base of the asset is reduced in a similar manner to situations involving capital works deductions.
Taxpayer alert on schemes using the Division 126-G rollover and unit trusts to avoid CGT
TA 2019/2
The ATO has issued a taxpayer alert regarding the use of unit trusts and the small business restructure rollover to potentially avoid CGT. Specifically, the ATO is concerned with arrangements where a trustee of a unit trust (the Transferring Trust), sells a CGT asset with a large unrealised capital gain to an arm’s length purchaser (Purchaser), for an agreed purchase price (Purchase Price), by:
- Transferring the asset to a trustee of a new unit trust (Receiving Trust) for the Purchase Price which gives rise to a debt owing to the Transferring Trust
- Choosing rollover under Subdivision 126-G ITAA 1997 for the transfer
- The Purchaser subscribing for new units in the Receiving Trust equal in value to the Purchase Price, and
- The Receiving Trust repaying the debt to the Transferring Trust with the funds received from the issue of the new units.
By entering into these arrangements rather than selling the asset directly to the Purchaser, the Transferring Trust is able to transfer the underlying ownership of the Relevant Asset to the Purchaser but purportedly avoids tax on the large capital gain that would otherwise have been made with an asset sale.
The ATO has a number of concerns with these arrangements, including whether the structure of the arrangement meets all of the conditions necessary to apply the rollover, and that the extended form of the arrangement to transfer the asset is only explained by seeking to obtain a tax advantage.
The ATO considers that Part IVA may apply to these arrangements where they would otherwise qualify for rollover relief under Subdivision 126-G and they are actively reviewing these arrangements. Taxpayers and advisers who enter into these types of arrangements will be subject to increased scrutiny.
Cases
The validity of a logbook to substantiate deductions
Reid and Commissioner of Taxation [2019] AATA 4624
This case involved a taxpayer objecting to an ATO decision to disallow deductions claimed for work- related expenses in several income years.
The taxpayer had claimed car expense deductions using the logbook method in Division 28 ITAA 1997. However, the ATO determined that the logbookwas not valid and reduced the deductions to the maximum amount allowable under the cents per kilometre method.
Affirming the ATO’s decision, the Tribunal noted that the logbook contained a number of errors which meant that the taxpayer was not entitled to use the logbook method. The errors included inconsistencies between the day of the week and the date, using the same odometer readings on different dates, and entries that indicated “customer visit” (i.e., business trip) when the employer’s records showed that the taxpayer was sick and on personal leave.
As the taxpayer had claimed more than $20,000 in car expenses each year, which was reduced to the maximum of $3,300, this case is a reminder of the importance of ensuring that expense claims are substantiated and documentation is accurate.
The case also discussed home office expense claims. In this case, the taxpayer’s home was a ‘place of business’ (i.e., they were required to work from home because an office was not available), and that the taxpayer was entitled to claim occupancy costs such as rent. Again, the taxpayer was unable to substantiate the claims, and evidence provided by the employer and colleagues seemed to contradict the taxpayer’s claims. This was also the case for a number of other expenses, such as phone, internet and trade journal expenses, which were also disallowed.
The ATO has made it clear that work related expenses are being subjected to increased scrutiny and many taxpayers are discovering that the rule in this area are stricter than they assumed. Advisers can play an important role to educate clients on the requirements, especially when it comes to documentation and record keeping, to ensure that clients can claim a deduction for the expenses that they have actually incurred in the course of their work.
