June 2019 - Essential Tax Summary

From the ATO

Payment summaries no longer required with STP reporting

With Single Touch Payroll (STP), many larger employers will have different obligations in respect of completing their end of financial year reporting for their employees. Employers are no longer required to provide a payment summary to employees or lodge a payment summary annual report for any information that has already been reported and finalised through STP, a significant change from prior years. Employees will now be able to access this information through MyGov.

In order to be exempt from the requirement to provide payment summaries and the payment summary annual report, employers will need to complete the STP finalisation declaration for their employees by the relevant deadline. This is generally 14 July, but the ATO has extended this to 31 July 2019 for employers who started reporting through STP during the 2019 financial year.

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Trustee reporting and withholding obligations

Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax return each year. The ATO has indicated that it is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.

The TFN withholding rules require trustees to withhold amounts from distributions made to beneficiaries if they have not quoted their TFN to the trustee. In these cases, the trustee is required to withhold tax at a rate of 47% and pay this to the ATO, and lodge an annual report of all withheld amounts.

Where beneficiaries have quoted their TFN to the trustee, the withholding obligation does not arise although trustees are required to provide the ATO with a TFN report for each beneficiary. The TFN report is required to be lodged by the end of the month following the end of the quarter in which a beneficiary quoted their TFN.

Trustees need to be informed of their withholding obligation in situations where the beneficiary has not provided a TFN to the trustee prior to the distribution being made.

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Cryptocurrency data matching

The ATO has started to receive data from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program to ensure people trading in cryptocurrency are reporting transactions and paying the right amount of tax.

As part of a media release advising of the commencement of the data matching program the ATO advised that taxpayers may be contacted and given the opportunity to verify the information collected before any compliance action is undertaken. Taxpayers will be given at least 28 days to clarify any information that has been obtained from a data provider.

The ATO has been increasingly concerned with the risks posed by cryptocurrency use. Specifically, the ATO is concerned that cryptocurrency may be used to move funds within the black economy, hide money offshore and that taxpayers using cryptocurrency might have undeclared taxable capital gains.

Where errors relating to the tax treatment of cryptocurrency are identified clients may want to consider making a voluntary disclosure to the ATO. Penalties may be significantly reduced in circumstances where the ATO is contacted prior to an audit or other compliance action commencing.

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Payments received under the Australian Volunteers Program

The ATO has released a fact sheet providing information for individuals receiving payments as a volunteer in the Australian Government funded Australian Volunteers Program. This program relates to volunteer work conducted overseas.

The guidance confirms that even though in some circumstances individuals may receive a summary of payments at the end of a financial year (which would usually indicate an employment relationship), volunteers under this program are not employees of the government agency running the program.

Further, allowances received by individuals in relation to the program are not assessable income and do not need to be reported as income in the individual income tax return. These allowances are paid to volunteers to help meet living and accommodation costs only, and as these payments are made to cover a pre-estimate of actual expenditure rather than as a reward for the work performed by the volunteers, should not be assessable.

Accordingly, the fact sheet also confirms that individuals are not able to claim deductions for any of expenses incurred in relation to their involvement with the volunteer work.

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GST property decision tool

The ATO has an online tool which provides guidance on the GST implications of property related transactions. The tool provides some basic, high-level guidance as to the GST implications on the sale, purchase or lease of property.

For example, the tool can be useful in determining whether GST is payable on the sale of property (such as whether a sale is eligible for the margin scheme or going concern provisions) and for determining any obligations under the new GST withholding provisions.

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Valuation guidelines updated for SMSFs

The valuation guidelines for SMSFs have been updated to clarify the valuation of pension assets.

The market value of the assets that support a pension or super income stream needs to be determined on either:

  • the commencement day of a pension
  • for on-going pensions, 1 July of the financial year in which the pension is paid.

The ATO clarifies that the valuation can be undertaken by anyone as long as it is based on objective and supportable data. Where the nature of the asset indicates that the valuation is likely to be complex or where the valuation is materially inaccurate or a significant event has occurred, then the use of a qualified independent valuer should be considered.

The ATO also notes that, although a reasonable estimate of the value of a pension can be used for valuing the asset on commencement of the pension or at 1 July for ongoing pensions, you cannot rely on this reasonable estimate when preparing the SMSF’s financial accounts and calculating the SMSF’s entitlement to exempt current pension income (ECPI).

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Rulings

The deductibility of penalty interest

The ATO has released an updated ruling which explains when penalty interest can be deductible to the borrower. In broad terms, penalty interest is an amount payable by borrowers under loan agreements in consideration for the lender agreeing to an early repayment of a loan (that is, it is not in the ordinary nature of interest, but rather more in the nature of compensation for the lender agreeing to modify the terms of the loan).

Broadly, the ruling provides that penalty interest will generally be deductible under Section 8-1 where:

  • The borrowings are used for gaining or producing assessable income or in a business carried on for that purpose, and
  • It is incurred to rid the taxpayer of a recurring interest liability that would itself have been deductible if incurred.

However, deductions are not available under section 8-1 for losses or outgoings of a capital nature. The critical factor in determining whether penalty interest is capital in nature is the advantage sought by the early loan repayment. Where the advantage sought is a release from the recurrent liability to pay interest which would have been deductible, the penalty interest payable is revenue in character and therefore may be deductible.

On the other hand, where penalty interest is incurred to acquire a capital asset or is incidental to the realisation of a capital asset, then it will generally be on capital account. If this is the case, the penalty interest may be an incidental costthat forms part of the cost base or reduced cost base of the asset.

Beyond section 8-1, the ruling also confirms that penalty interest incurred to discharge a mortgage is deductible under section 25-30 to the extent the borrowed money was used for producing assessable income. Under section 25-30 deductibility is not affected by whether the expenditure is capital or revenue in nature.
TR 2019/2

Guidance on the new similar business test

The ATO has finalised a law companion ruling in relation to the new similar business test for company losses. The similar business test has been introduced to complement the same business test in determining a company’s ability to utilise tax losses, capital losses and bad debt deductions. The test as a whole is now referred to as the ‘business continuity test’. In broad terms the new test applies to losses incurred on or after 1 July 2015.

At a very high level, the similar business test operates in a similar way to the same business test, but without the negative limbs that form part of the same business test. In order to pass the same business test it was generally necessary to show that the company had carried on the same business during the test period, it did not commence any new business activities and it did not derive any income from new transactions.

The similar business test should enable some companies to access losses in circumstances where new activities or transactions have occurred, although it is still necessary to show that these new activities or transactions have evolved from the pre-existing business.

In the context of the similar business test, ‘similar’ does not mean a similar ‘kind’ or ‘type’ of business. The focus remains on the identity of a business, as well as continuity of business activities and the use of assets to generate assessable income. It will still be difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time.

When working through the similar business test there are four key factors that need to be considered. While other factors and matters might be relevant and should also be considered, the following four factors must always be taken into account when applying this test:

  • The extent to which the assets used to generate assessable income throughout the test period were the assets used in the business carried on at the test time (which is generally just before the company failed the continuity of ownership test);
  •  The extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously;
  • The current identity of the business compared with that of the business carried on before the test time; and
  • An assessment of the extent to which any changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business.

If a company is unable to satisfy the continuity of ownership test and would need to rely on passing the business continuity test to be able to access prior year losses, it will be important to review the ruling and the examples to determine if the relaxed similar business test could assist. Further, as this is an area that heavily relies on the interpretation of facts and the precise meaning of the legislation, it will continue to be an area where it may be prudent to consider seeking specific advice or private rulings.
LCR 2019/1

Cases

Residency: has a permanent place of abode been established overseas?

This is the latest in a number of recent cases looking at whether an individual has established a permanent place of abode overseas in determining whether the individual should be treated as an Australian resident for tax purposes. The taxpayer in this case was not residing in Australia, was only present in Australia for a very short time during the income year (less than 50 days) but nevertheless was considered to be an Australian resident under the domicile test.

Under the domicile test for tax residency, a person retains his or her place of domicile for the time being until another is adopted. Someone with an Australian domicile is deemed to be a resident of Australia unless they have established a permanent place of abode overseas.

In this case, the taxpayer had previously resided in Australia and was considered to have retained their Australian domicile. Also, they could not show that they had established a permanent place of abode overseas. As a result, they were treated as a resident of Australia for tax purposes.

The taxpayer shifted between a number of countries in the course of their employment during the year, ordinarily staying in temporary accommodation such as hotels or serviced apartments on a short-term basis. While the Harding case (see the March tax round-up, here) indicated that it is possible for a taxpayer to establish a permanent place of abode in a place despite occupying temporary accommodation, that case involved temporary accommodation in a particular location. The distinction in this case was that the temporary accommodation involved multiple locations across several countries and this led to the conclusion that the taxpayer did not have a permanent place of abode in any of those locations.

In reaching the decision, the AAT noted that the conclusion in this case was “the product of legal principles under which a person in transition between places of residence, having abandoned one but not yet done enough to take up another, is deemed to have retained his or her Australian domicile and unless a permanent place of abode outside Australia has been established, the Australian domicile will dictate Australian residence.”

The case once again demonstrates the importance of considering all four residency tests in detail. Ceasing to reside in Australia under ordinary concepts is not necessarily enough to be classified as a non-resident.
Handsley v FC of T [2019] AATA 917 

When does an employee’s entitlement to credits for PAYG withheld by the employer arise?

As a general rule, where amounts have been withheld from an employee’s salary or wages as a result of PAYG withholding obligations imposed on the employer, the employee is entitled to credits in respect of those amounts when lodging their personal return. Previously, it has been established that this entitlement can arise even in circumstances where the employer has not actually remitted the relevant amounts to the ATO (for example, this can be the case in circumstances where the employer has entered liquidation).

However, in order to be able to claim the credits in such circumstances, it is still necessary to show that the amounts were actually withheld from the employee’s salary or wages. In these circumstances the onus is on the taxpayer to show that the amounts were in fact withheld.

In this case, the taxpayer was an employee of four companies controlled by the taxpayer’s brother and argued that these employers had contemporaneously withheld amounts from his wages and that as such he was entitled to a credit for those amounts.

On the other hand, the ATO contended that the taxpayer had not been able to show that the amounts had actually been withheld. This argument was based on the fact that the employers’ records in relation to the taxpayer were inconsistent and appeared to have been prepared some time after the events in question. The ATO also noted that while the employers had lodged PAYG Payment Summary Annual Reports in respect of other employees, these did not include the taxpayer. The taxpayer had also generally not received payslips or PAYG payment summaries in respect of the income years (over a 15 year period).

The Court was unable to conclude that any amounts had actually been withheld in relation to the taxpayer. As such, the taxpayer’s objection against the ATO’s assessments for each year were correctly disallowed.

The case highlights the importance of holding appropriate tax records, particularly when seeking to claim amounts as credits against tax liabilities. When an employee is not being provided with pay slips and payment summaries by the employer this will make it difficult to argue that amounts have actually been withheld from payments that have been received.
Price v Commissioner of Taxation [2019] FCA 543

Legislation

Two seats in the Federal election are yet to be decided (Bass and Macquarie). Until the final results are released, there is no Parliamentary sitting schedule.

A series of measures may be introduced including the super guarantee amnesty, amendments to Division 7A and the removal of the CGT main residence exemption for non-residents.

At this stage it is not yet clear if any of these will be re-introduced in the short-term, particularly as the Government has indicated there is likely to only be a short period for parliament to return before the end of the financial year and the priority during this time will be the individual tax cuts which were part of the pre-election budget.

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