June 2020 – Essential Tax Summary

What’s changing on 1 July 2020

• Company tax rate reduces to 26% for base rate entities

• $150k instant asset write-off scheduled to reduce back to $1,000 for small business entities and will no longer be available for entities with aggregated annual turnover of $10m or more, although accelerated depreciation rules apply to certain entities until 30 June 2021

• Cents per km rate for work-related car expenses increase to 72 cents

• Expected reforms to allow 66 and 67 years olds to make voluntary superannuation contributions without satisfying the work test. See legislation.

• Age limit for making superannuation contributions to your spouse increases from 69-74. See legislation.

• For those 67 and under, reforms will enable you to use the ‘bring forward rule’ to make up to three years of non-concessional contributions. That is, you can make non- concessional contributions of up to $300,000 from the 2020-21 financial year. See legislation.

 

From Government

 

JobKeeper falls 3 million employees below forecast

On 22 May 2020, Treasury and the ATO released a joint statement acknowledging a reporting error in the estimated number of employees likely to access the JobKeeper program. When released, JobKeeper was expected to cost $130 billion and cover an estimated 6 million workers.

The joint release revised that estimate to 3.5 million employees. The statement says that, “The difference between Treasury’s estimates at the time and the number of employees now accessing the JobKeeper program partly reflects the level and impact of health restrictions not having been as severe as expected and their imposition not having been maintained for as long as expected at the time.”

According to the statement, validating the original estimate was the enrolment forms of 910,055 businesses which estimated the total number of employees to be covered by the scheme as 6.54 million. However, around 1,000 of these forms we’re filled in incorrectly with the most common error being the value of the JobKeeper payment, i.e., $1,500, added to the box for number of employees. Over 500 sole traders made this error.

From the ATO

JobKeeper Monthly Reporting

The Commissioner has granted a deferral for the requirement to lodge the monthly declaration to the ATO for JobKeeper purposes. The ATO has extended the deadline from the 7th day after the end of the month to the 14th day after the end of the month (e.g., 14 June deadline for May).

The monthly declaration needs to show the current GST turnover of the month that has just ended and the projected GST turnover of the following month.

However, the ATO has indicated that JobKeeper payments will be made depending on the time this declaration is lodged. That is, the earlier this step is completed from the 1st day of each month the earlier businesses will receive their payments for the JobKeeper fortnights for that month.

Super contribution deduction timing – ATO clearing house

Generally, an employer is only able to claim a deduction for superannuation contributions made on behalf of their employees when they have been received by the superannuation fund. This may not be the day they are actually paid by an employer – such as in situations where a business uses a clearing house.

While superannuation guarantee obligations are treated as having been met as soon as the payment and instructions are accepted by the ATO’s small business superannuation clearing house (SBSCH), the deduction cannot be claimed until the contribution is received by the superannuation fund.

The ATO has confirmed that to ensure the business can claim a deduction for contributions made in the 2019-20 income year payments will need to be accepted by the SBSCH by 23 June 2020. This is to allow processing time for the payments to be passed on and received by the employees’ super funds before the end of the 2019-20 income year.

Note that this is only applicable for the ATO’s SBSCH. Businesses using different clearing houses (e.g. commercial providers) or where employees have SMSF’s may be able to make contributions at a later time and still have the payments received by the end of the income year. However, this would need to be checked and will sometimes also depend on the payment method being used.

STP closely held employee exemption

The ATO has announced that the STP exemption for entities with closely held employees (e.g., family members, directors or shareholders of a company, and beneficiaries of a trust) has been extended from 1 July 2020 to 1 July 2021.

As a result, these entities should not need to commence reporting payments to these individuals through STP until the 2022 income year. However, payments made to other employees will need to be reported through STP.

Lodgment deferrals and Division 7A

The ATO has announced lodgement deferrals for 2019 company tax returns that were due on 15 May 2020 to 5 June 2020.

2019 SMSF annual returns that were due on 15 May 2020 or 5 June 2020 are now due by 30 June 2020.

This is also relevant in the context of Division 7A. To avoid Division 7A consequences for loans made by a company during the 2018-19 income year, the loan would normally need to be either fully repaid or placed under a complying loan agreement before the earlier of the due date or actual date of lodgement of the company’s 2019 tax return. If the lodgement deadline is extended, then this also extends the deadline for taking these steps to prevent Division 7A problems.

If loans that were made in the 2019 income year are placed under a complying loan agreement before the relevant deadline, the borrower will need to make their first minimum yearly repayment by 30 June 2020.

The ATO has also indicated that it will soon be issuing further guidance for those affected by COVID-19 with minimum repayments due for the year ended 30 June 2020 – many borrowers in these circumstances may be struggling to make the minimum repayments due to the impact of COVID- 19.

COVID-19 frequently asked questions

The ATO has provided a range of responses to frequently asked questions regarding issues associated with COVID-19 and government policy changes. These are set out in a number of categories such as individuals, business / employers, and superannuation. Separate guidance on interest and penalties, as well as reporting and payment obligations are also included.

The guidance on issues relating to individual taxpayers will be particularly relevant for many clients. Examples include guidance on the adjustments to the rules on claiming home office expenses for working from home, the tax consequences of utilising the early access to superannuation measure, guidance for residential rental property owners and the issues to consider for non-residents who are basically stuck in Australia.

Rulings

Adjustments to set rate for home office expenses

With the increased numbers of taxpayers working from home due to COVID-19, the ATO has released specific guidance softening the rules around claiming deductions for home office expenses, including a ‘shortcut’ set rate method.

Firstly, the ATO has reduced the usual requirements to be ‘eligible’ to claim the expenses, which usually require a specific area set aside for work purposes. During this period the ATO is allowing home office expenses to be claimed if:

  • The taxpayer is working from home to fulfil their employment duties or to run their business; and
  • They are incurring additional running expenses as a result.Broadly, there are three mechanisms by which taxpayers will be able to calculate the deduction allowable:
  1. Actual expenses: This would involve a determination of the actual expenses incurred and establishing a percentage of work or business use to calculate the deduction.
  2. ‘Normal’ set rate method: Apply the ordinary set rate of 52 cents an hour (this covers claims for home office electricity, gas for heating, cleaning and the decline in value of home office items) and separately claim deductions for other expenses such as computer consumables, stationery, phone and internet expenses or the decline in value of a computer, laptop etc (i.e. on an actual expenses basis).
  3. The ‘shortcut’ set rate method: This allows a set rate of 80 cents an hour to be claimed, however this covers all of the expenses mentioned in 2 above, both those included and excluded under the ‘normal’ set rate calculation.

Taxpayers will be able to choose which method provides the largest deductions, and it will be important to note that this may not always be the shortcut method.

Schemes in relation to the JobKeeper payment

The PCG provides guidance and examples of the types of ‘schemes’ to access or increase an entitlement to JobKeeper that the ATO are concerned about. The main factors that the ATO will be looking for in assessing ‘schemes’ include situations where the entity’s business is not significantly affected by external environmental factors beyond its control and/or where artificial or contrived steps have been taken to access JobKeeper payments.

Importantly, the ATO confirms in this guideline that

“you do not need to show that COVID-19 was the factor beyond the control of the entity (and its related parties) that affected the entity’s external operating environment.”

The range of examples considered by the ATO include:

  • Taxpayers intentionally either bringing forward or deferring the time of making supplies (i.e., such as agreeing with customers to bring forward or delay work etc. in order to manipulate the decline in turnover test);
  • Transferring assets that derive income to other entities. The example used by the ATO is a holding company holding assets that are transferred to a subsidiary such that the turnover of the holding company drops;
  • A number of situations involving service entities, employment entities and parent companies. The examples relating to these scenarios show that where arrangements such as modifying service fees payable or allowing operating entities to avoid / delay payment of fees because they are unable to make the payments are the result of external operating conditions these should not necessarily be subject to ATO compliance action.

Commissioner’s discretion to extend time for holding an ABN or making a required lodgement

One of the conditions for entities to be eligible to nominate an eligible business participant is that the entity must have held an ABN at 12 March 2020 and it must have had some business income in the 2018-19 income year and lodged a 2019 tax return by 12 March 2020 or made some supplies connected with Australia in a tax period that started on or after 1 July 2018 and ended before 12 March 2020 and notified the ATO of the supplies (e.g., on an activity statement) by 12 March 2020.

There are a number of businesses that will fail to meet this requirement. For example, many new businesses will not be able to satisfy this condition and other small businesses not required to be registered for GST may not have lodged their income tax return for 2019 as the due date may have been at a later time (e.g. under the tax agent lodgement program).

The practice statement outlines the circumstances in which the ATO will exercise its discretion to allow businesses further time to meet this requirement. The form to apply for the discretion can be found here – and it should be noted that businesses cannot enrol to receive a JobKeeper payment until they are notified that the Commissioner has granted the further time requested. That is, it is not an automatic extension. In each case where a business cannot meet the ordinary conditions it will need to seek and receive the Commissioner’s discretion to be eligible.

Broadly, the practice statement confirms that the Commissioner will likely grant further time where an entity has not lodged by the relevant due date because either:

  • They have a pre-existing lodgement deferral in place, such as through the tax agent lodgement program or the deferrals for taxpayers affected by the recent bushfires, or
  • They are a new business established from 1 July 2019 that is not registered nor required to be registered for GST, but have made supplies during a period ending between the 1 July 2019 to 12 March 2020 period, or
  • There were exceptional and unforeseen circumstances, such as the loss of a significant amount of records due to the recent bushfires.

    Deductions for work- related expenses

 The ATO has finalised the previous draft ruling TR 2019/D4 dealing with work-related expenses of employees.
This ruling provides a basic framework for the principles underlying claiming deductions for work- related expenses although there is little specific detail concerning different types of expenses. On this point however the ruling points to an extensive series of other forms of ATO guidance on particular deductions – links to rulings on work-related travel, self-education, and clothing expense for example.

The ruling also includes guidance on the substantiation requirements that apply to work related expenses, including the instances where exceptions from the general rules are allowed.

Cases

Non-resident trust beneficiaries and capital gains

At a high level this case effectively confirms the ATO view expressed in two draft determinations released last year (TD 2019/D6 and TD 2019/D7) that if a resident discretionary trust makes a capital gain then this will be taxed in Australia – even if the gain is distributed to a non-resident beneficiary and the gain does not relate to taxable Australian property (TAP).

The case involved an Australian discretionary trust disposing of shares which were not TAP and resolving to distribute the gain from the sale of those shares to a non-resident individual.

Generally, non-resident taxpayers are not subject to capital gains on the disposal of assets that are not TAP. However, the ATO view, and the Court’s view here, is that technically the way the rules in this area operate in relation to beneficiaries of discretionary trusts being entitled to capital gains derived by a trust is that the statutory exemptions do not apply.

The exemption in section 855-10 ITAA 1997 provides that foreign residents can disregard a capital gain or capital loss from a CGT event if the event happens in relation to a CGT asset that is not taxable Australian property (TAP). The interpretation of the Court confirms that this requires the event to happen directly to the beneficiary.

However, a capital gain that a foreign resident beneficiary makes because of the operation of subsection 115-215(3) is not a capital gain from a CGT event that happens to the beneficiary. Rather, such an event happens to the trustee.

That is, the legislation effectively indicates that because the CGT event does not happen to the beneficiary personally, the exemption cannot apply.

The position can potentially be different when dealing with capital gains made by a fixed trust, because section 855-40 deals specifically with this situation.

Legislation

Parliament next sits on 10 June 2020. Parliament is sitting on a limited schedule.

Superannuation flexibility for over 65 year olds

Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 was entered into Parliament on 13 May 2020.

From 1 July 2020, if enacted, the reforms will give greater flexibility to those aged 65 and over to make voluntary superannuation contributions.

The measures, provide for three changes:

• the age at which the work test starts to apply for voluntary concessional and non- concessional superannuation contributions is increased from 65 to 67;

• the cut-off age for spouse contributions is increased from 70 to 75; and

• enabling individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring forward rule.

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