Tax Round Up February 2020

In the final sitting of Parliament late last year, the Senate passed amendments that prevent non- residents from accessing the Main Residence Exemption.

The controversial measures apply to CGT events happening from 7.30pm (AEST) on 9 May 2017. While the new rules are ‘black and white’ in their application, they do include a short transitional period (to 30 June 2020) and some limited exceptions (see  Legislation).

Also of interest is the movement to the Senate of the Bill enabling the superannuation guarantee amnesty. The Senate sits again on 4 February and again on 24 February – we’ll keep you posted if the status of this Bill changes.

It’s going to be a big year with major changes to Div. 7A on the horizon and the Board of Taxation flagging significant changes to the way concessions and roll-overs apply to small business. We’ll look forward to helping you stay ahead of the curve.

From Government

Significant changes to small business concessions flagged

The Government has released the Board of Taxation’s report into the concessions that are available to small business. The report contains a number of recommendations aimed at improving the tax landscape for small business taxpayers.

The major recommendation by the Board is the simplification of the definition of ‘small business entity’ so that a $10 million turnover threshold would apply across all tax concessions for small business (i.e., adjusting the different thresholds that currently apply to the CGT concessions and small business tax offset). In conjunction with this recommendation, the Board proposes significant changes to the small business CGT concessions including the removal of the $6m maximum net asset value test and combining the four different CGT concessions into one exemption with a lifetime cap.

The Board also recommends either replacing the small business tax offset with a different concession or increasing the cap on the offset to make it a more meaningful concession.

The review also contains a number of other recommendations aimed at simplifying the concessions, expanding access to some concessions and removing others. These include:

• Re-introducing the loss carry back rules for small business companies;
• Increasing access to the instant asset write- off for entities not using the pooling rules;
• Apply one rate (30%) to small business general pools;
• Repealing the simplified trading stock provisions; and
• Allowing small businesses to calculate PAYG obligations using real-time figures.

A consistent theme by the Board’s review was the complexity of the concessions available and the wide range of eligibility requirements. Review submissions received pointed to the difficulty of applying the small business CGT concessions in practice and the need for SMEs to engage high-cost specialist advice. Simplifying these rules was therefore a key focus.

It will be interesting to see how many of the Board’s proposals are adopted by the Government. We’ll keep you informed when changes are announced.

Simplification of CGT rollovers

The Board of Taxation has started its review of general CGT rollovers (e.g., Divisions 122, 124, 126 of ITAA 1997). The review, announced in December 2019, will focus on rationalising the existing CGT rollovers into a simplified set with the intention of making them easier to interpret and use.

One key concept considered will be maintaining two broad main categories of rollovers:

• Rollovers where there is no change in underlying economic ownership after the CGT event; and
• Rollovers where the disposal is involuntary.

The terms of reference note that if the Board believes that the system would benefit from additional categories of rollovers these could be options for the Government to consider, assuming the measures  that defer capital gains tax, “…encourage the active use of assets in the economy and, consequently, support the payment of income tax on profits generated from using those assets (for example, when compared with no change in ownership).”

Round table consultations will be held from February to 30 April 2020 with the final report due 30 November 2020 – so watch this space.

More information –  Board of Taxation – Review of CGT Roll-overs

From the ATO

Bushfire lodgement relief extended

With the bushfire ravaging parts of Australia throughout December and January, the ATO has expanded and extended the relief initially announced in November.

Approximately 3.5 million businesses, individuals, and self-managed superannuation funds in identified areas (see the list of  affected postcodes) have been granted special concessions and relief by the ATO:

• An automatic extension until 28 May 2020 to lodge and pay activity statements, income tax, SMSF and FBT lodgements.
• The deferral does not apply to:
  –  Superannuation guarantee payments or lodgements.
  –  Large PAYG withholders (although they will be assessed on a case by case basis if they apply for relief from the ATO).
• Fast tracking of refunds due.

• Tax debt recovery on hold until 28 May 2020.
  –  Impacted taxpayers need to apply for special consideration. The ATO has stated they will, “consider releasing individuals and businesses from income tax and fringe benefits tax debts if they are experiencing serious hardship.”
  –  Interest and penalties accrued by taxpayers in affected areas since the bushfires commenced will be remitted
  –  If clients are not in one of the identified postcodes but have been impacted by the bushfires, relief might still be available.
• Income tax instalments able to be varied to nil without penalty.

If clients are not in one of the identified postcodes but have been impacted by the bushfires, relief might still be available.

The ATO will continue to assess the impact of the bushfires and will keep the community informed as it receives more information on additional impacted postcodes and available support.

Federal and State governments have announced a range of bushfire support measures including payments and low-interest loans available for businesses that have been affected. While we will need to wait until the relevant legislation is enacted, at a high level, the Government has indicated that these payments are intended to be exempt from income tax.

More Information

• ATO extends tax relief and assistance for people impacted by bushfires
•  Bushfire support
•  Bushfires 2019-20
•  Disaster recovery payments
•  State Government Grants
• 0220 Your Knowledge (Know ledg e Shop’s  newsletter for your client base covered the bushfire assistance and support available)

ATO concerned non- residents incorrectly reporting ‘taxable Australian property’

The ATO has expressed concerns that non-resident taxpayers are incorrectly or falsely reporting CGT assets as not being taxable Australian property (TAP) to avoid tax on disposal of the asset. In response, is currently reviewing arrangements where foreign residents are:

• Structuring investments in companies or trusts that hold Australian real property in such a way that each entity holds an interest of less than 10% (i.e. so those shares or units are not TAP);
• Attributing significant value to non-taxable Australian real property assets to reduce tax when disposing of taxable Australian real property; or
• Dissipating funds by transferring them offshore prior to meeting Australian tax obligations.

Taxpayers who may have entered into such an arrangement (or are contemplating doing so) are being encouraged to contact the ATO, obtain a private ruling, or seek professional tax advice. There is also scope to make a voluntary disclosure to reduce penalties that may apply.

More Information – Treatment of taxable Australian property

ATO residency ruling review following Harding case

Following the Full Federal Court’s decision in

Harding v Commissioner of Taxation [2019] FCAFC29, the ATO has announced that it will review the application of the domicile residency test in  IT 2650. In the Harding case, the Court held that the term ‘place of abode’ in the context of the domicile test has a broad meaning which encompasses a particular location (i.e., a country) rather than being limited to a specific dwelling.

The ruling sets out that a place of abode means “a person’s residence, where one lives with one’s family and sleeps at night” and contains several references to the place being a fixed residence.

The Full Federal Court determined that this concept did not require a specific or long-term residence at a particular address, but rather the establishment of a home in the foreign location that was permanent in nature, irrespective of whether the particular accommodation at a point in time may be temporary. This interpretation takes into account the increasingly common situations where individuals work abroad and move between short- term rentals or serviced apartments in the same city or town.

More Information

•  Decision impact statement – Harding vCommissioner of Taxation

•  IT 2650

Transitional period extended for corporate tax residency

The transitional period for the ATO’s new compliance approach to the residency status of companies that have been incorporated overseas and may have been impacted by the ATO’s updated position on the central management (outlined in  TR2018/5) has been extended.

The ATO indicates that compliance resources would not be dedicated to reviewing the residency status of companies incorporated overseas if steps were being taken to alter governance arrangements to ensure that the company did not have its central management and control in Australia.

The transitional compliance approach originally expired on 30 June 2019. However, a new paragraph 104A has been added to PCG 2018/9 extends this period. The new deadline depends on the accounting period used by the company:

• Early balancer taxpayer with a 31 December year-end extended until 31 December 2020.
• Taxpayer with a 30 June year-end extended until 30 June 2021.

“The Commissioner has become aware that implementing the changes envisaged in this compliance approach is taking an extended period of time for some companies. The Commissioner will therefore extend the transitional period for companies that are taking active and timely steps to change their governance arrangements as envisaged by paragraph 103 of this Guideline.”

This extension will allow foreign incorporated companies additional time to modify their governance practices in order to continue to be classified as non-resident companies. However, the ATO notes that where a company is incorporated overseas and all its trading activities are offshore, then this would represent a relatively low-risk position because, even if the company was a resident of Australia, some, most or all of its business profits could be exempt from tax in Australia anyway under  section 23AH ITAA 1936.

More Information

•  PCG 2018/9
• Central management & control transitional relief extended

Rulings

Yet another draft ruling on employee travel expenses

TR 2019/D7 Income tax: when are deductions allowed for employees’ transport expenses?

Further guidance has been issued relating to employee travel expenses. TR 2019/D7 provides updated guidance in relation to transport expenses (e.g., car expenses, flights etc) and overrides any conflicting comments contained in the previous draft ruling TR 2017/D6. While TR 2017/D6 appears to still represent the ATO’s position on certain areas such as the treatment of meal and accommodation expenses and in determining whether someone is living away from home, it should be noted that where an employee cannot deduct transport expenses then it would normally be difficult to claim meal and accommodation costs.

The new draft ruling provides general comments on the treatment of travel expenses and then provides

specific guidance on common scenarios faced by employees who are travelling for work purposes.

This draft ruling suggests that clients and practitioners need to focus on the reason for the travel in determining the deductibility of the expenses. The ATO appears particularly concerned with situations where taxpayers travel to distant work locations and where this is mainly a choice that they have made.

For example, the employee might have chosen to accept a job that is a significant distance from their home and they have chosen not to relocate their home. Likewise, an employee might have chosen to perform most of their work from home, even though the employer would have provided them with an office or other place to perform their work. The ATO indicates that travel in these circumstances is not generally deductible. However, if it can be shown that the primary reason for the travel is due to the employee’s work duties then deductions might be available.

Other general positions confirmed by the ATO in the ruling include:

• FIFO workers are not generally able to claim deductions in respect of travel from their home to a point of departure for their worksite (e.g., between home and the location at which they fly out to a mine etc);
• There is only limited scope to claim deductions in respect of travel undertaken while an employee is ‘on-call’ although this is possible in some situations.

As the tax treatment of work-related travel can be complex and an area of ATO focus, it will be crucial for practitioners to review and understand the updated guidance so that appropriate and practical advice can be provided to clients.

Base rate entity passive income ruling finalised

LCR 2019/5 Base rate entities and base rate entity passive income

This ruling looks at the relatively new rules that apply in determining the tax rate of companies as well as the maximum franking rate for dividends.

The ruling clarifies the types of income that are considered base rate entity passive income, including the meaning of key terms such as rent, royalties and interest.

One of the key points from the ruling is that dividends received by a trust that are passed on to a company are classified as base rate entity passive income even if the trust owns 10% or more of the shares in the company paying the dividend. This is because dividends can only be classified as non- portfolio dividends (excluded from being passive income) if they are received by another company.

The ruling confirms that the term ‘royalties’ has a broad meaning and includes arrangements where one party provides assets or equipment to another entity, even if these are referred to as lease, hire or licence arrangements.

The ruling also confirms that where a company

does not have any income at all in the previous year then dividends paid by the company in the current year would be subject to the lower maximum franking rate (i.e., 27.5% in the 2020 year rather than 30%).

When supplies of services and intangible items are connected with Australia

GSTR 2019/1 Goods and services tax: supply of anything other than goods or real property connected with the indirect tax zone(Australia)

This is the finalised version of GSTR 2019/D2 (discussed in the  October 2019 Knowledge Shop Tax Round up) and looks whether a supply of services or other intangibles is connected with Australia. This is a key concept in the GST legislation because supplies cannot generally trigger a GST liability unless they are connected with Australia. The rules in this area have also changed recently and can be complex to apply in practice.

Also, supplies that are not connected with Australia are normally ignored when determining whether an entity reaches the GST turnover threshold for registration purposes.

For these purposes,  section 9-25(5) GST Act provides that these types of supply are connected with Australia in four circumstances:

• The thing is done in Australia; or
• The supplier makes the supply through an enterprise that the supplier carries on in Australia; or
• The supply is of a right or option to acquire another thing connected with Australia; or
• The recipient of the supply is an Australian consumer (this item is not covered by the ruling).

The second item looks at whether the supplier has an ‘Australian GST presence’ through which the supply is made. This is determined with reference to the presence of certain individuals involved with the business and how long they are in Australia.

The third item broadly provides that supplies of rights to acquire things will follow the treatment of the underlying supply. That is, the supply of the right will be connected with Australia where the supply of the thing is connected with Australia under one of the other items.

There are also a number of exclusions that can apply, the main one involving situations where a non-resident supplier makes a supply to an Australian based business recipient (broadly a GST- registered business) and the supply is not made through an Australian presence of the non-resident.

Remission of additional super guarantee charge

PS LA 2019/1 Remission of additional superannuation guarantee charge

This practice statement is the finalised version of PS LA 2019/D1 (covered in the  October 2019 Knowledge Shop Tax Round Up). The practice statement outlines the remission of additional super guarantee (SG) charge in circumstances where a taxpayer has failed to provide a SG statement by the due date (i.e., either late lodgement, or no lodgement resulting in a default assessment).  Section 59(1) SGAA provides a penalty double the SG is payable in these circumstances.

The ATO indicates in the practice statement that except in rare cases (e.g., where there is an employer engaging in egregious tax avoidance behaviour), ATO officers should consider remitting the penalty either in part or in full.

While the practice statement provides that all of the circumstances need to be considered and provides a three-step process for this, at a high level the ATO indicates that an employer should be eligible for the penalty relief where they have a turnover of less than $10 million and they:

• Do not have a history of lodging SG statements late;
• Have not been issued with a default assessment in the present case;
• Have lodged no more than four SG statements after the lodgement due date;
• Have no previous SG audits where they were found to have not met their SG obligations; and
• Have not previously been provided with penalty relief.

Trust splitting ruling finalised

TD 2019/14 Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Ta

TD 2019/14 (supersedes TD 2018/D3) confirms that trust splitting arrangements will result in the creation of a trust by declaration or settlement that will cause CGT Event E1 to happen in respect of the transferred assets (i.e., the assets held by the new ‘split’ trust).

While this is a somewhat controversial approach, the ATO indicates that CGT issues will typically arise in these situations.

GST and property development in the ACT

GSTD 2019/D1 Goods and services tax: development works in the Australian Capital Territory

This very specific draft GST determination relates to property development in the ACT. The draft determination provides that ‘building works’ and ‘associated site works’ carried out by property developers on land they have acquired under a long-term Crown lease (property in the ACT can only be acquired under lease arrangements – i.e., there is no freehold title) are not treated as consideration for the supply of that lease by a government agency (on behalf of the Government).  That is, the value of the work performed is not taken into account in determining the amount of input tax credits available to the developer.

These arrangements generally involve a requirement for the developer to complete certain works by a specified term as a condition of the granting of the lease. The ATO’s view is that the obligation to undertake works only arises after the Crown lease has been granted to the developer.

The nature of a Crown lease in the ACT means that effectively, the developer is constructing buildings on its own land. The developer is the entity that obtains the benefit of the buildings that are required to be constructed on the land, and therefore undertaking the building works and the associated site works is for the developer’s own benefit and the works are not a supply to the government agency.

Cases

Federal Court overturns AAT decision on whether land used for storage was an active asset

Commissioner of Taxation v Eichmann [2019] FCA 2155

The Federal Court has allowed an appeal by the Commissioner from the AAT decision in  Eichmann and Commissioner of Taxation (Taxation) [2019] AATA 162 (refer to the  March 2019 Knowledge Shop Tax Round Up for details on the original case) and has confirmed that vacant land used by the taxpayer for storage was not an active asset.

Broadly, the AAT held that vacant land can be used outside the main function of a business (i.e., in this case, as storage of equipment etc., used in a business necessarily carried on at other locations) and be able to pass the active asset test in respect of the land.

Overturning the AAT’s decision, the Federal Court stated that there does need to be “a direct relationship between the use to which the asset is put and the carrying on of the business” and that “the use must be in the activities of the business which are directed to the gaining or production of assessable income.” On this basis, the Court considered there was a distinction to be made between assets used in relation to carrying on a business and assets used in the course of carrying on the business. Assets must fall within the second category to be active assets.

In this case, the land used for storage of business assets etc., was considered as only relating to the business rather than having a sufficient direct connection with the income producing activities of the business (i.e., building services) which were necessarily carried out elsewhere. As such, the Court conclude that the use of the land did not satisfy the active asset test. The use of the land was characterised as being preparatory to the undertaking of activities in the ordinary course of business, with the use of the land not an activity in the ordinary course of the building business.

We will need to wait and see if the taxpayer will appeal the decision to the Full Federal Court, however, at present, the decision indicates that it will be more difficult for clients selling ‘vacant’ land to access the small business CGT concessions although there would be exceptions to this, especially where primary production business activities are conducted on the land.

Full Federal Court overturns decision on responsibility for SG of Jockeys

Commissioner of Taxation v Scone Race ClubLimited [2019] FCAFC 225

Another decision, this time by the Federal Court, has been overturned on appeal by a decision of the Full Federal Court. This case considered whether jockeys were employees of the relevant race club (see Knowledge Shop’s  August 2019 Tax Round Up) for details on the original case.

In the original case the Federal Court indicated that, due to the nature of the relationships between the jockeys, the race club, and the owners and the payments made, the race club was not liable for the payment of the fees to the jockeys. Rather, the owners or trainers engaged the jockeys and the race club was merely acting as an agent in making certain payments. As a result, the jockeys were not employees of the race club and the super guarantee charge assessments issued were excessive.

The appeal focused on the Commissioner’s submission that the taxpayer was required to establish that the taxpayer was not liable for the riding fees, and that the evidence provided in the original case had not done so, but instead relied on insufficient statements of industry practice. The Full Federal Court agreed with the Commissioner that the evidence provided to the Court by the race club had not established that it was not liable for the riding fees. The majority judgement noted that:

“In this case the taxpayer contended that owners of race horses, and not it, were liable to pay riding fees. It bore the onus of establishing this. The salient factors were that Racing NSW paid the fees on behalf of the taxpayer; that the taxpayer never sought to recover the fees from owners or anybody else; that the taxpayer booked the fees as an expense in its accounts; that it claimed input tax credits for GST purposes when it paid the fees to jockeys which it treated as ‘subcontractors’”.

The Court concluded that the inference made by the judge in the original case – that the owners were liable for the riding fees – was not supported by the evidence, and that the facts instead supported the conclusion that it was the club that was liable for the fees, and therefore the super guarantee obligation.

Tax treatment of medical centre lump sum payments to doctors

Healius Ltd v Commissioner of Taxation [2019] FCA 2011

This case considered the question of whether payments made by medical centres and similar operators to medical professionals should be deductible under  section 8-1 ITAA 1997 or whether the payments were capital in nature.

At a high level, these payments (including the payments in this case) are generally described as being in connection with the medical practitioner starting or continuing to work for a particular medical centre.

The major issue to be determined in these cases is the correct characterisation of the payments, which broadly involves answering the question “what are the payments actually for?” That is, what is the character of the advantage sought by the medical centre operator in making the payments.

The two arguments advanced by the Commissioner were that the payments were made to acquire the goodwill in the medical practitioners own businesses (i.e., which they operated previously), alternatively, that the payments were made as consideration for the medical practitioners entering into a restraint of trade under the agreement with the taxpayer.

However, based on extensive evidence provided by the taxpayer, the Court rejected the Commissioner’s submission and found that the medical centre operator in this case was in the business of providing premises and services to medical practitioners at its medical centres in return for fees. Accordingly, the payments of the lump sums were considered to be in relation to securing the presence of the medical professionals at the medical centres operated by the taxpayer where fees could be generated from them. In this sense, the payments were held to be made to obtain the benefit of ongoing business income. The Court also noted that the payments were recurrent and ongoing as the taxpayer consistently tried to engage medical professionals to meet its ongoing demand for them.

While the fact that a payment may be deductible for the payer does not necessarily mean that it will be assessable on revenue account for the recipient, the facts outlined in this case are increasingly common in the medical industry.

The ATO has previously issued guidance (see  Lump sum payments received by healthcare practitioners) on this point indicating that these types of payments would typically be classified as ordinary income for the recipients. The decision in this case only looked at the tax treatment for the medical centre operator but would seem to suggest that payments like this are more likely to be taxed on revenue account, although this would, of course, depend on the facts.

The value of shares and the $6m net asset value test

Miley and Commissioner of Taxation [2019] AATA 5540

This case was referred back to the AAT following an appeal to the Federal Court that found the AAT had made an error in its original decision. The case looked at the market value of shares that the taxpayer had sold. The value of the shares would determine whether the taxpayer passed or failed the $6m maximum net asset test and whether they could access the small business CGT concessions.

The AAT had originally held that the market value of the shares was lower than the actual sale price because there was scope to apply a discount for ‘lack of control’. The taxpayer effectively argued that the purchaser had overpaid for the shares (for their own reasons) and that the sale price was more than their market value in the hands of the taxpayer. The Federal Court held that this discount should not have been applied when valuing the shares just before the disposal of those shares and that the price agreed between the parties should be used as the market value for the shares.

Without the application of this discount, the taxpayer would breach the $6m maximum net asset test and would not be able to access the small business CGT concessions.

In reassessing the case, a further argument (the subject of this decision) was raised that part of the price paid for the shares was instead attributable to a restraint of trade clause (restrictive covenant) included in the sale contract rather than the shares themselves. The taxpayer argued that some of the sale price should be applied to this right, which was created when the contract was entered into and therefore did not exist “just before the CGT event”. When applying the $6m net asset value test you need to determine the market value of the assets just before the CGT event.

The Commissioner argued that the taxpayer’s submission did not have any impact on the determination of the market value of the shares just before their sale to the purchaser, arguing that any value arising from the non-competition agreements was embedded in the value of the shares immediately prior to their sale.

The AAT held that while the shares probably would have been sold for a lower amount had the restrictive covenants not been in place, without the sale the covenants probably had no value. As a result, the AAT confirmed that the market value of the shares was the same as the sale price.

Legislation

Non-residents excluded from Main Residence Exemption

Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019

This Bill received Royal Assent on 12 December 2019 and applies to CGT events happening from 7.30pm (AEST) on 9 May 2017.

At a high level, the amendments mean that the main residence exemption is not available if a taxpayer is a non-resident at the time of the CGT event, although some limited exceptions apply in cases where the taxpayer has been:

• A non-resident for up to six years; and
• Certain ‘life events’ occur (e.g., death, terminal illness, divorce or marriage breakdown).

If these rules prevent the exemption from applying then there will often be flow-on implications because the cost base reset rules will not generally apply, the CGT discount is not normally available to non-residents and the foreign resident withholding rules will often impact on the taxpayer’s cash flow position If at the time the CGT event occurs the individual is a resident for taxation purposes in Australia, they continue to be eligible for the main residence exemption (provided they satisfy the other existing requirements).

The changes will also impact on some scenarios involving properties sold by deceased estates and their beneficiaries. This is where the rules become more complex and careful analysis will be required in order to understand the tax impact.

The transitional rules to 30 June 2020

While the new rules apply to CGT events happening from the original Budget announcement back on 9 May 2017, a transitional rule allows CGT events happening up to 30 June 2020 to be dealt with under the existing rules if the property was held continuously by the taxpayer before the 9 May 2017 announcement until the CGT event.

Practitioners with non-resident clients currently holding properties that are currently eligible for the main residence (in part or in full) should discuss the impact of this change with affected clients as soon as possible. If the CGT event happens by 30 June 2020 then these clients will often still have access to the main residence exemption. However, practitioners and clients need to be mindful of the general anti-avoidance rules in Part IVA. The Government has indicated that these rules could potentially be triggered if arrangements are entered into in order to take advantage of the main residence exemption.

Alternatively, if client is planning on returning to Australia at some point in the future and becoming a resident for tax purposes before disposing of the property, then they will be able to apply the exemption on sale, although it would be necessary to check whether the sale would qualify for a full or partial exemption.

Super Guarantee amnesty Bill moves to Senate

Treasury Laws Amendment (RecoveringUnpaid Superannuation) Bill 2019

The Bill containing the one-off super guarantee (SG) amnesty has passed the House of Representatives and is now before the Senate. Parliament sits again in early February and we will keep you informed of any progress by this Bill.

In broad terms, the SG amnesty would allow employers to claim tax deductions for payments of SG charge (SGC) amounts made during the amnesty period. Normally, deductions cannot be claimed for payments relating to the SGC. In addition, employers will not be subject to the quarterly administration component of the SGC, and penalty amounts will generally be reduced. However, the nominal interest component will still need to be paid as this represents compensation for the employees in question.