The ATO is going hard on contrived schemes to access the COVID-19 stimulus measures.
Among these are those promoting or accessing their superannuation early under the COVID-19 early release measures, and then recontributing the super to claim a tax deduction.
The Government has also announced that the major reforms to Division 7A will be delayed to “income years” on or after the date of Royal Assent. The October Federal Budget is likely to reveal more.
If you have any questions about any of the information contained in the Essential Tax Summary, please contact us on 02 9267 0108
Revised start date for Div 7A and other measures
The start date for a raft of tax and superannuation reforms has been delayed:
- Targeted amendments to Division 7A
- Start date revised from 1 July 2020 to income years commencing on or after the date of Royal Assent of the enabling legislation.
- Increasing the maximum number of allowable members in self-managed superannuation funds and small APRA funds from four to six
- Start date revised from 1 July 2019 to Royal Assent of the enabling legislation.
- Removing the capital gains discount at the trust level for Managed Investment Trusts and Attribution MITs
- Start date revised from 1 July 2020 to the income years commencing on or after three months after the date of Royal Assent of the enabling legislation.
- Petroleum Resource Rent Tax — changing the PRRT settings to get a fair return (compliance and administration changes)
- Start date revised from 1 July 2019 to the income year commencing on or after three month after the date of Royal Assent of the enabling legislation.
- Reducing red tape for superannuation funds (exempt current pension income changes)
- Start date revised from 1 July 2020 to 1 July 2021
Changes to the JobKeeper program for child care services
The Government has announced that JobKeeper payments will cease from 20 July 2020 for employees of a child care subsidy approved service and for sole traders operating a child care service. This is due to the childcare subsidy recommencing and the Government paying child care services a Transition Payment of 25% of their fee revenue during the relief package reference period (17 February 2020 to 1 March 2020) from 13 July 2020 until 27 September 2020.
Suspending indexation for PAYG and GST instalments
The Government has announced and introduced legislation (see the Treasury Laws Amendment (2020 Measures No. 3) Bill 2020 below) reducing the indexation factor applied to the calculation of PAYG and GST instalments to nil.
The amounts required to be paid under these programs are currently indexed based on GDP. For example, the ATO adjust the PAYG instalment amount for taxpayers using the instalment amount method (under which the PAYG instalments payable are based on amounts reported in prior year returns) to take into account expected changes in the economy – as measured by changes in GDP – as these may affect taxpayer’s income. The application of the indexation factor increases the instalment payable.
A similar process is used when calculating GST instalments payable by taxpayers.
This change means that the indexation factor will not be applied to increase instalments payable in the 2021 year.
From the ATO
Requests for extension of time to make Division 7A loan repayments
When a private company makes a loan to a shareholder or their associate this can trigger a deemed dividend under Division 7A unless the loan is repaid or placed under a complying Division 7A loan agreement by the relevant deadline. When a complying loan agreement is put in place this prevents the full loan balance from being treated as a deemed dividend, but the borrower then needs to ensure that minimum loan repayments are made in each subsequent income year to prevent a deemed dividend from arising.
The deadline for making these minimum repayments is generally 30 June although section 109RD gives the Commissioner the power to extend the deadline if the borrower is unable to make the minimum repayment because of circumstances beyond their control.
The ATO has recognised that due to COVID-19, some borrowers may find it more difficult than normal to make the minimum repayments by 30 June 2020. As a result, borrowers can request an extension by completing an online application.
Borrowers will be asked to confirm that COVID-19 has affected their situation and that this is the reason they are unable to make the minimum repayment for the 2020 income year.
The ATO indicates that a response should generally be provided within five business days of lodging the application form. If an extension is granted by the ATO the borrower will have until 30 June 2021 to make the repayment for the 2020 income year. They will also need to ensure that they make the repayment for the 2021 year by this date to prevent a deemed dividend from arising.
- Request to extend time to make minimum yearly repayments for COVID-19 affected borrowers under section 109RD
COVID-19 stimulus measures compliance activity and integrity concerns
The ATO has released guidance on its website of what it considers to be the high risk areas attracting compliance attention with respect to the COVID-19 stimulus measures, including the PAYG cash flow boost, JobKeeper payments and the early release of superannuation measure. Each of these measures contain integrity provisions to attempt to ensure that only eligible taxpayers can access the measures and prevent the use schemes designed to deliberately exploit these measures.
In relation to JobKeeper, the ATO indicates that its compliance efforts are focussed on confirming entities are genuinely carrying on business, that claims are only made for eligible employees and that entities have not manipulated their turnover in order to satisfy the decline in turnover test.
For the cash flow boost payments, the main issues that concern the ATO are where taxpayers have artificially restructured their businesses to gain access to the payments, have artificially changed the character of payments to salary or wages to maximise the cash flow boost credit amount and where withholding amounts are inflated to maximise the cash flow boost amount received.
Compliance activities in relation to the early release of superannuation measure will focus on taxpayers who make fraudulent statements to gain access to the scheme (including applying where there has been no change in employment or decline in income) and withdrawing and re-contributing the superannuation benefit for a tax advantage.
As always, the ATO is encouraging taxpayers who believe they may have received a benefit without meeting the relevant conditions (for example a JobKeeper payment for an eligible employee, or an excess amount of the cash flow boost) to make a voluntary disclosure in order to reduce any potential penalties.
Practitioners should also be wary of incorporating access to these schemes as part of any regular tax planning work. One example of this relates to the early release of superannuation measure where there have been taxpayers withdrawing the super and making re-contributions under various provisions allowing for additional deductions or other benefits (such as the FHSS scheme).
Guidance on the $1,500 wage condition for JobKeeper
In order for an employer to receive JobKeeper payments in relation to an employee they normally need to have paid the employee at least $1,500 during the relevant JobKeeper fortnight. The ATO has provided updated guidance on the types of payments which are taken into account when assessing whether this condition has been met.
Broadly, the ATO confirms that salary and wages (including overtime and penalty amounts), allowances, bonuses, commissions, PAYG withheld amounts and salary sacrificed superannuation contributions are all included.
On the other hand, the following items are not included for these purposes:
- Government paid parental leave
- Workers compensation payments (where completely absent from work)
- Reimbursements of expenses
- Payments included at lump sum A, B, D and E on payment summaries
- Directors fees
- Fringe benefits not provided under an effective salary sacrifice arrangement
Recognising JobKeeper payments for income tax purposes
The ATO has previously confirmed that JobKeeper payments are assessable income of the entity that is eligible to receive the payments and that the normal rules for deductibility will apply in respect of any amounts paid to employees. Also, the JobKeeper payment is not subject to GST as it does not represent consideration for a supply made by the entity.
More recently, the ATO has provided guidance on when JobKeeper payments should be recognised by employers for income tax purposes.
For entities accounting for income tax purposes using an accruals basis, the ATO indicates that JobKeeper payments are to be considered to be derived when the entity provides a valid completed business monthly declaration to the ATO. For example, payments relating to JobKeeper fortnights that end in June 2020 would normally be treated as having been derived for income tax purposes in the 2021 income year (assuming a 30 June accounting period).
When it comes to entities using a cash basis the approach is to simply look at the income year in which the JobKeeper payments are actually received. Most JobKeeper payments for fortnights ending in June will be received in July 2020 and should be recognised in the 2021 tax return.
Concession for taxpayers claiming a deduction for personal super contributions
In order to be entitled to a deduction for personal contributions to a complying superannuation fund a taxpayer is required to provide a ‘notice of intent to claim a superannuation deduction’ to their superannuation fund and receive a valid acknowledgement back from the fund by the earlier of when the individual return is lodged or 30 June of the next financial year.
The ATO has recently contacted a large number of taxpayers who have claimed deductions in the 2019 return where details of the acknowledged notice of intent was not reported by their fund (i.e., this acknowledgement had not been received).
As a concession to assist clients to retain their deduction, the ATO has indicated that they will not be reviewing the timing of that acknowledged notice of intent for the 2019 return provided that the taxpayers obtained an acknowledgement from their fund by 30 June 2020.
Allocation of profits of professional firms – further extension
As many practitioners will be aware, in 2015 the ATO released some guidance on how it would approach the potential application of the general anti-avoidance rules in Part IVA to situations where a professional services firm operates through a company, trust or partnership structure and derives income from a business structure (rather than from the personal services of any particular individuals). The guidance set out three benchmarks that could be used to ensure that the risk of Part IVA applying was low.
The ATO suspended the guidelines on 14 December 2017 and indicated that some new guidelines would be released. As the new guidelines still have not been released the ATO has advised that taxpayers who have entered into arrangements prior to 14 December 2017 can continue to rely on the suspended guidelines for the year ending 30 June 2020 as long as their arrangement:
- Complies with the suspended guidelines;
- Is commercially driven; and
- Does not exhibit any of the high risk factors identified by the ATO.
Where these conditions are satisfied, they should be considered lower risk for the year ended 30 June 2020.
Reduced minimum pension drawdown rate
Due to the impact of COVID-19 on the superannuation balances of many individuals (as a result of the loss of value of many investments and reduced income streams) the Government has temporarily reduced the minimum required rates for withdrawals from pension accounts by 50%.
This applies for both the 2020 income year and the 2021 income year.
For example, a taxpayer aged 67 with an account based pension would ordinarily be required to make a withdrawal of a minimum of 5% of their account balance in the income year. For 2020 and 2021 this has been reduced by 50% (i.e., to 2.5%).
Cents per km rate increase to 68 cents
This legislative instrument confirms that, commencing 1 July 2020, the rate used in the cents per km method for calculating car expense deductions will increase from 68 cents per km to 72 cents per km.
STP closely held payee exemption extended
Following the ATO’s announcement last month (see the June Knowledge Shop tax round-up) a draft legislative instrument has been released in respect of extending the exemption from STP reporting obligations for entities with closely held employees.
This instrument confirms that micro employers (1 – 4 employees) that make payments to closely held employees will not be required to report these payments through STP until the start of the 2022 income year (from 1 July 2021).
Closely held payees are individuals who are directly relate to the entity that is making the payments, such as directors of a company, beneficiaries of a trust or family members of the business owner.
Contributions made through the ATO’s SBSCH
This practical compliance guideline outlines the situations in which the Commissioner will not apply compliance resources in determining the year in which a super contribution was made (and therefore deductible) where the contribution has been made through the ATO’s small business superannuation clearing house (SBSCH).
A contribution is normally deductible for tax purposes at the time it is “made”. Contributions are considered to be “made” when they are received by the trustee of the super fund.
The ATO indicates that it will not apply compliance resources to determine whether the contribution made was received by the trustee of the super fund or RSA in the same income year in which the payment is made to the SBSCH, provided the employer has made the payment to the SBSCH before close of business on the last business day on or before 30 June.
The ATO had previously announced that contributions to the SBSCH should be made before 23 June 2020 to ensure they were received by the super fund before the end of the year. The PCG relaxes this approach and provides more flexibility.
Effective lives of depreciating assets
The Commissioner has released the annual ruling which sets out the effective lives of depreciating assets from 1 July 2019. Taxpayers can choose to use the effective lives set out in the ATO ruling or make their own estimate of the effective life of a depreciating asset.
Home office occupancy costs when on call
This case involved a claim for home office occupancy costs (rent etc) where the taxpayer was required by the terms of their employment contract to be on-call 24 hours a day at certain times. The had disallowed the deductions claimed by the taxpayer for occupancy costs relating to their home.
Generally, the use of a home office as matter of convenience is not sufficient to allow a deduction for occupancy costs. Also, the fact that someone might be required to perform work from home after hours is not sufficient on its own to claim occupancy costs (Faichney), even if premises are not provided by the employer.
However, in this case the AAT concluded that the taxpayer was able to claim a deduction for a portion of the occupancy costs relating to a specific area of their home that was only used for work purposes and was only incidentally used for private purposes. Part of the reason for this was that the taxpayer was required to be on call 24 hours a day for one week in every four and that the taxpayer could not practically be located in their employer’s premises throughout this roster period. Also, the AAT found that there was an implicit requirement in their employment that the taxpayer use their home to keep equipment supplied by the employer so that they were able to perform their duties when called at any time during the roster period.
It is important to note that the taxpayer failed on a number of other items. For example, the taxpayer regularly worked from home on Fridays and the AAT found that this was done as a matter of convenience. As a result, even though the AAT was happy for the taxpayer to claim some home occupancy costs, this did not extend to the time the taxpayer spent working from home on Fridays, only the periods during which they were on call 24 hours a day.
Is Bitcoin a ‘foreign currency’?
The taxpayer in this case sought to claim a deduction for a loss made on disposal of Bitcoin using the forex realisation rules in Division 775 ITAA 1997, which allow a deduction on revenue account for foreign exchange losses. However, the Commissioner disallowed the claim on the basis that the rules only applied to gains and losses from foreign currency as defined in section 995-1 ITAA 1997 and that Bitcoin was not a foreign currency.
The definition of foreign currency for income tax purposes is broadly “a currency other than an Australian currency”. The Commissioner’s position was that this definition could only include currencies similar to Australian currency in the sense that they are issued by governments (or supranational bodies – such as the EU) and that as this is not the case for Bitcoin, it is excluded. The taxpayer argued for a wider definition with the nature of currency being something “fungible, measurable and used as a medium of exchange for goods and services”.
The AAT agreed with the ATO, indicating that the use of the term “Australian currency” in the definition pointed to the definition in the Currency Act which means it was more appropriate to limit the operation to currencies that are an official currency issued or recognised by a sovereign state.
The AAT also noted that the legislation otherwise provides for gains and losses on Bitcoin to be assessable or deductible (where the Bitcoin is held on revenue account), however this was not the case for the taxpayer here.
Extension of the $150,000 instant asset write-off threshold and modifications to the cash flow boost
The Government has extended the period of the increased $150,000 threshold for the instant asset write-off rules by a further 6 months. The $150,000 threshold was initially intended to drop back to $1,000 for small business entities from 1 July 2020 and to cease completely for medium business entities from this date. However, this has now been extended until 31 December 2020.
This legislation also contains several other amendments, most notably a modification to the cash flow boost rules to provide that attributed PSI amounts will give rise to an entitlement to the credit. Under the original legislation it was necessary to distinguish between attributed PSI, which did not give rise to an entitlement, and actual payments of salary and wages from PSI income, which did. The amended legislation now includes amounts withheld in relation to attributed PSI as giving rise to an entitlement to the cash flow boost.
This Bill also contains the amendments reducing the indexation factor applied to calculation PAYG and GST instalments to nil, as referred to above.
Changes to testamentary trusts and the FBT taxi definition
This Bill, containing a number of previously announced changes and other minor amendments has now passed both Houses of Parliament and has received Royal Assent. The main amendments of interest include:
- A change to the definition of taxi for FBT purposes to remove a requirement that the vehicle be a registered taxi. The change is intended to end the discrepancy in the FBT treatment of ride-sourcing services as opposed to licensed taxis by allowing the exemption to apply to Uber and similar services; and
- The tightening of the provisions providing concessional tax treatment for distributions to minor beneficiaries from testamentary trusts. The rules now ensure that the concessional tax treatment only applies to income derived from property acquired from a deceased estate (or subsequently accumulated by the trust). The changes seek to prevent taxpayers from injecting assets from outside the trust to take advantage of the concessional rates.
Super guarantee on JobKeeper payments
These amendments to the superannuation guarantee regulations ensure that “top-up” payments made to employees for JobKeeper purposes are not subject to superannuation guarantee.
Essentially, the changes provide that where the amount of the salary or wages exceeds the amount of salary or wages the employer is required to pay the employee in respect of a fortnight in relation to the performance of work the excess is excluded from being salary and wages for super guarantee purposes.
If you have any queries about the above, please do not hesitate to contact the Partners at Fortis Accounting Partners on (02) 9267 0108.