New Cryptocurrency Register
On 3 April 2018 the Government introduced new rules which will mean that cryptocurrency exchanges will need to sign up to a new Digital Currency Exchange Register and transactions exceeding $10,000 must be reported to AUSTRAC in line with the existing rules for bank transfers and cash transactions.
The regulations take the form of mandatory registration and compliance obligations that are similar to those imposed on financial institutions under existing anti-money laundering (AML) and counter-terrorism funding (CTF) laws, including: Customer identification and due diligence requirements; The requirement to adopt and maintain an AML/CTF program, which includes requirements to identify, manage and mitigate money laundering and terrorism financing risk; Reporting on suspicious matters; Threshold transaction reporting; and Specific record-keeping requirements.
The new measures will mean clients have to better understand their tax implications when dealing with cryptocurrencies, as cryptocurrency transactions are now more likely to come to the attention of the ATO.
Accordingly, clients will need to be ready to explain not only where the money came from, but also to support the tax treatment that has been adopted on the transactions involving cryptocurrency. The ATO has stressed that SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions and also be aware of the various regulatory considerations for SMSF trustees, members and SMSF auditors.
More information
Regulation of digital Currency Exchange
AUSTRAC Guidance on the New Regulations
Impending changes to the R&D tax incentive
The Treasurer has used an address to the AFR Banking and Wealth Summit to discuss the R&D tax incentive review, which focused on the need to ensure that public money which is used to fund the incentive is generating maximum benefit for the Australian economy.
The R&D tax incentive has long been a concern for the ATO and Government, in particular the large number of claimants and the high value of amounts claimed under the incentive, which have fuelled concerns that it is not operating as intended.
As a result of the review, the Government has indicated that changes will be implemented to the R&D tax incentive that focus on the concept of ‘R&D additionality’, things that would not have happened without the incentive, and rewarding the intensity of R&D efforts. The proposed “relaunch” of the R&D tax incentive will likely include an overhaul of the types of activities and expenditure that are eligible.
Clients with claims under the R&D tax incentive should take care to ensure that claims actually qualify and that they can be supported by appropriate documentation.
More information
Treasurer Speech to the AFR Banking and Wealth
Payroll tax does not change business behaviour
Treasury has released a working paper that looks at the effect of payroll tax policy on behaviour by businesses.
Some people have suspected that businesses will engage in conduct that is detrimental to their growth in order to avoid the imposition of payroll tax. Treasury reviewed data to determine whether there was any evidence of ‘bunching’ (where businesses congregate just below relevant turnover thresholds) or whether businesses were structuring their affairs in order to avoid payroll tax completely.
The review considered data from the 2002 to 2015 income years to determine whether payroll tax affects the behaviour of businesses. Somewhat surprisingly, the review did not find any strong evidence of bunching or that businesses deliberately choose to avoid payroll tax by hiring contractors.
Treasury concludes that the results suggest that in general there is little change in behaviour of firms around payroll tax thresholds. However, Treasury left open the possibility that firms could still be altering behaviour in the lead up to the threshold, with the effect that businesses might be operating below an efficient level.
More information
Does Payroll Tax Affect Firm Behaviour
From the ATO
The ATO has issued further warnings indicating that it will be focusing on taxpayers who claim deductions for holiday homes that are not actually available for rent or only available to friends and family. The ATO is concerned that a large number of taxpayers are incorrectly claiming deductions for expenses relating to holiday homes which are not genuinely available for rent. Deductions can only be claimed if the property is genuinely available for rent and cannot be claimed for times when a taxpayer was using the holiday home for their own personal holidays or letting friends and family stay rent-free. Also, if the holiday home is rented to friends and family at reduced rates, the owner can only claim deductions for expenses up to the amount of the income received.
The ATO is also focused on other times when a property is not rented or genuinely available for rent, noting that some taxpayers claim their property is available for rent, but when the ATO investigates, it is clear they have little intention of renting it out.
Clients should ensure that accurate records are kept of the income received from holiday homes, expenses incurred, and evidence of the property being rented or genuinely available for rent at market rates. Clients should also keep records of who stayed at the holiday home and when, including the time they or their family stay at the property.
More information
Guidance on Tax Treatment of Holiday Homes
Lump sum payments received by medical practitioners
The ATO has reiterated its concerns around lump sum payments made to those who operate in the healthcare or medical industry. The ATO has noted a number of arrangements in the healthcare services industry where a lump sum payment is received and treated as a capital gain rather than ordinary income. These arrangements typically involve a healthcare centre operator paying a lump sum to a taxpayer or a related entity when they commence or continue to provide healthcare services at that centre. The ATO view is that generally these lump sum payments are not capital receipts but are ordinary income because they relate to the provision of services through the healthcare centre. The result is that practitioners are required to include the full amount of the lump sum payment in their assessable income.
The ATO has indicated that targeted activity has commenced in relation to these arrangements, including obtaining details of which practitioners have received payments from the healthcare centre operators. Clients who have entered, or are planning to enter, into an arrangement of this type need to consider the substance of the arrangement as the after-tax outcome could be significantly different if the payment is taxed on revenue account rather than capital account.
More information
Lump Sum Payments Received by Healthcare
Employers of working holiday makers
The ATO has released some guidance to assist employers meet their obligations in relation to the relatively new tax rules for working holiday makers. Someone is classified as a working holiday maker if hold a Working Holiday visa (subclass 417) or Work and Holiday visa (subclass 462).
From 1 January 2017 working holiday makers are taxed at 15% from the first dollar earned, regardless of their residency status. Working holiday makers can’t claim the tax-free threshold. If a working holiday maker does not provide their TFN to their employer the employer needs to withhold tax at the top rate. When employing a working holiday maker in Australia on a visa subclass 417 or 462, the employer:
Should check the worker has the correct visa using the Visa Entitlement Verification Online service;
Must register with the ATO to withhold tax at the working holiday maker tax rate before making their first payment to the worker. Once registered, employers must withhold 15% from every dollar earned up to $37,000. The tax rates change for amounts above this.
If an employer does not register under the working holiday maker rules they must withhold tax at 32.5% from every dollar earned up to $87,000. Penalties also apply for employers who do not register under the special rules.
More information
ATO Guidance for Employers of Working
Motor vehicle data matching
The ATO has announced the commencement of a data matching program with the 8 State and Territory Motor Registry authorities. The program will provide the ATO with data on vehicles that have been transferred or newly registered where the purchase price or market value is $10,000 or more.
The motor registry records will be electronically matched with ATO data to try and identify non‑compliance with obligations under taxation and superannuation laws.
The data will assist the ATO in conducting compliance checks of luxury car tax, fringe benefits tax and fuel tax credits, as well as identifying higher risk taxpayers with outstanding lodgments and those with undeclared income whose asset holdings might not seem consistent with the financial position being declared on tax returns. This data matching program replaces the previous program which was in operation in respect of the 2014, 2015, and 2016 income years.
More information
Notice of ATO Motor Registry Data Matching Program
Trading name registration
The ATO has issued a reminder in relation to the retirement of trading names as the ATO and ABR will no longer be maintaining details of these names. Clients who wish to continue trading under a specific name which is different to the name of the entity through which the business is conducted then they will need to register this as a business name with ASIC. From November 2018, all trading names will be removed from ABN Lookup.
More information
ATO Reminder Regarding Trading Names
ASIC Business Names Registration
Rulings
New GST obligations for property purchasers
LCR 2018/D1 Purchaser’s obligation to pay an amount for GST on taxable supplies of certain real property
Following the passage of legislation introducing new obligations on purchasers of certain types of property to pay GST to the ATO the Commissioner has issued a draft Law Companion Ruling which provides guidance on how to manage compliance with the new rules.
In broad terms, from 1 July 2018 purchases of new residential premises or newly subdivided residential lots will be required to pay the GST amount directly to the ATO rather than to the vendor.
The ruling confirms that purchasers must pay the GST amount to the ATO on or before the day on which any of the consideration is first provided for the taxable supply. However, the ATO confirms that this does not include payment of a genuine deposit.
Vendors of residential premises or potential residential land must give a written notice to the purchaser before making the supply, stating whether the purchaser is required to make a payment of GST to the ATO in relation to the supply.
When it comes to determining the amount that needs to be paid to the ATO this will generally be 1/11th of the contract price. However, if the margin scheme applies to the sale the purchaser needs to pay 7% of the contract price instead. If the parties involved in the transaction are associates then the purchaser will generally need to pay 10% of the GST-exclusive market value of the property.
ETPs received more than 12 months after termination
A new legislative instrument has been released which extends the definition of employment termination payment (ETP) to include certain payments that are received more than 12 months after the termination of a person’s employment. The instrument provides that the concessional tax rules for ETPs can still apply to a termination payment received more than 12 months after the termination of a person’s employment because:
a) Legal action was commenced within 12 months of the termination of employment and the legal action relates to the person’s entitlement to the payment or the amount of the entitlement; or
b) The payment was made by a liquidator, receiver or trustee in bankruptcy of an entity that is otherwise liable to make the payment, where that liquidator, receiver or trustee is appointed no later than 12 months after the termination of employment
The legal action referred to above must have commenced within 12 months of the termination of the person’s employment. Legal action is intended to cover any court, tribunal and other proceedings of a judicial or quasi-judicial nature which may result in the payment of an amount in consequence of the termination of a person’s employment.
When it comes to payments made by a liquidator, receiver or trustee in bankruptcy of an entity, the entity in liquidation, bankruptcy or receivership must have otherwise been liable to make the payment. The liquidator, receiver or trustee must have been appointed no later than 12 months after the termination of employment.
Normally the concessional tax treatment for ETPs is not available if the payment is received more than 12 months after the termination of employment. This instrument provides relief from the strict application of the 12-month rule in the specific circumstances noted above.
More information
Cases
Marriage breakdown rollover relief
Ellison and Anor v Sandini Pty Ltd and Ors; FCT v Sandini Pty Ltd and Ors [2018] FCAFC 44
The Full Federal Court has held that a trust was not entitled to CGT rollover relief under Subdivision 126-A ITAA 1997 (the marriage breakdown rollover) in respect of the transfer of assets to a company controlled by one of the former spouses.
In broad terms, Subdivision 126-A provides for CGT rollover relief to apply when assets are transferred from one spouse to another spouse (or former spouse) as a result of marriage breakdown or de facto relationship breakdown if the transfer occurs as a result of a court order under the Family Law Act. The rollover can also apply when assets are transferred from a company or trust to one of the spouses or former spouses. However, transfers from one entity to another (e.g., a trust to another trust or company) do not qualify for the rollover.
In this case the Family Court had ordered that certain shares in a public company were to be transferred to Ms Ellison. Ms Ellison subsequently directed the shares to be transferred to a company which she controlled. This occurred and the trust which disposed of the shares applied CGT rollover relief.
The primary judge in the Federal Court had previously held that the rollover was available as the Family Court order caused CGT event A1 to be triggered, with the beneficial ownership of the shares transferring to Ms Ellison.
That is, the Federal Court held that the rollover relief could apply because:
Beneficial ownership in the shares passed to Ms Ellison;She was a spouse or former spouse; and The shares were dealt with for her benefit and in accordance with her directions.
The Full Federal Court disagreed with this conclusion and found that CGT event A1 was not triggered by the making of the Family Court orders. The CGT event was triggered when the shares were transferred by the trust to Ms Ellison’s company. As Ms Ellison was not involved in this transfer as transferee and the transfer did not occur because of the Family Court orders the rollover relief was not available to the taxpayer trust.
This case highlights the complexity that can be involved in applying CGT rollover relief and how important it is to carefully understand both the precise facts and the strict requirements of the legislation.
Diversion of income from legal firm
Hart v Commissioner of Taxation [2018] FCAFC61
This case involved a convoluted scheme implemented by a solicitor to divert two classes of income away from them personally and into the hands of a company with carry forward tax losses, with funds then being advanced to the taxpayer in the form of a loan. The Commissioner had argued that the amounts should be taxable in the hands of the taxpayer.
After considering the evidence presented by the taxpayer and considering the judgement of the primary judge the Full Federal Court held that the taxpayer should be assessed on the relevant amounts. While the facts are complex and a series of complex steps were undertaken to try and avoid being taxed on the income being distributed by the legal firm, the case turned on some key issues.
Firstly, the court looked at whether there was sufficient evidence to conclude that funds had been provided to the taxpayer in the form of a loan. The court found that there was not sufficient evidence supporting the existence of a loan. The arrangement was undocumented, no payments of
principal or interest were ever made, the terms were never identified and the taxpayer’s capacity to repay the loan (if it existed) appeared to be either non-existent or negligible. The court found that references in the accounting records to a loan were not sufficient evidence of the existence of a loan.
Interestingly, the court referred to loan application documents where the taxpayer had provided details of his net monthly income to the bank and which showed his net profit before tax for the relevant income year as being the same as the amount assessed by the Commissioner. The document also failed to mention the loans that the taxpayer claimed he had been provided.
The court then looked at whether the amounts paid to the taxpayer should be assessed under the trust assessment provisions. While the court agreed with the primary judge that the taxpayer might be assessed under the trust assessment rules on the basis that he became presently entitled to the income, the court found that regardless of this the amounts should be treated as ordinary income on the basis that:
The taxpayer received the payments, including regular payments, some of which were described in bank statements as “pay” or “sol pay”; The money was sourced from the earnings of
the practice trust or the family trust which held an equity interest in the practice trust; The taxpayer was personally involved in deriving the fees from clients of the legal firm; The taxpayer did not identify any other source of income that could be used to fund his daily expenditure.
The court found that the payments were a reward for the provision of legal services by the taxpayer and were provided to his to fund his daily living expenses. The payments were therefore income under ordinary concepts.
The Commissioner had also sought to assess the taxpayer on certain other amounts under the general anti-avoidance rules in Part IVA ITAA 1936. The Full Federal Court agreed with the primary judge that the Commissioner was open to apply Part IVA to these amounts as the taxpayer could not prove that the primary judge had reached the wrong conclusion. For example, the taxpayer asserted that the dominant purpose of the schemes was asset protection, but had not been able to justify that assertion.
This is not the first time we have seen the ATO and courts conclude that amounts treated as loans by taxpayers should actually be treated as assessable income. Those taking funds from a company or trust on a regular basis need to be particularly careful in how these amounts are characterised because the courts have shown a willingness to look past accounting entries and descriptions. This case suggests that the risk is higher in situations where the funds are being used to fund daily living expenses and where the taxpayer’s other sources of income are not sufficient to cover those expenses.
