June 2021 - Essential Tax Summary

From Government

Minimum superannuation drawdown rates

The Government has announced an extension of the temporary reduction in superannuation minimum drawdown rates for a further year until 30 June 2022. 

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Technical amendments to tax legislation

Treasury has released draft legislation which includes several technical changes to the tax legislation (among other provisions). These changes are intended to address unintended outcomes and ensure that the law gives effect to the original policy intent.

One of the changes relates to the temporary loss carry back provisions and would allow a company to change a choice made under the rules for the 2021 or 2022 income years by providing a notice in the approved form to the Commissioner before the end of the amendment period for the relevant assessment. Amendments would also be made to the franking account rules to deal with this change.

The GST Act will also be amended to provide that medical practitioners will be able to issue ‘disability certificates’ for the purposes of the rules allowing GST-free supplies of cars to eligible disabled persons. The current legislation refers to officers of a ‘nominated company’ (a government body who no longer issues such certificates).

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Excise refunds for brewers and distillers

Prior to the Federal Budget the government announced an expansion of the existing provisions allowing a refund of alcohol excise paid by eligible brewers and distillers, who will now receive full excise refunds (up from 60%) with a cap of $350,000 (up from $100,000) from 1 July 2021. The changes mean that these businesses will be on an equal footing with wine producers and WET rebates.

Under the current scheme, eligible manufacturers must lodge their excise return, pay their full excise duty liability and then apply for a refund of 60% of the duty paid (up to a maximum of $100,000), using a separate form.

From 1 July 2021 there will no longer be a requirement for the excise duty to be paid, and the amount of remission will equate to a full offset of the excise duty liability until the maximum amount has been reached.

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Screen production incentive reforms

Treasury has released exposure draft legislation to reform the Australian Screen Production Incentive. The incentive provides tax offsets for expenditure on Australian feature films, television production and other screen programs, post, digital and visual effects activity in the screen industry, as well as large budget international productions shot in Australia. The three tax offsets available under this Incentive are the producer tax offset, the location tax offset and the PDV tax offset.

Announced in the 2020-21 Budget, the reforms increase the offset available for some taxpayers but also impose stricter requirements and raise the qualifying expenditure cap to access the offset. The reforms:

  • Increase the Producer Offset rate to 30% across all types of eligible films that are not feature films released in cinemas.
  • Increase the minimum qualifying Australian production expenditure threshold to $1m for the producer and PDV offset.
  • Change the eligibility rules and impose integrity measures:
  • The 65 commercial hour cap on claiming qualifying Australian production expenditure is removed for a series and seasons of a series.
  • Expenditure on general business overheads can no longer be counted as qualifying Australian production expenditure towards any offset.
  • Expenditure on goods and services provided by Australian residents outside Australia can no longer be counted towards a company’s qualifying Australian production expenditure.
  • Expenditure in relation to a film incurred in acquiring Australian copyright or licensing Australian copyright in a pre-existing work for use in the film can be counted as qualifying Australian production expenditure up to a cap equal to 30% of the film’s total production expenditure.
  • For a documentary, development expenditure and remuneration provided to the director, producers and principal cast (‘above the line’ expenditure) up to 20% of the total production expenditure on a film can be counted as qualifying Australian production expenditure.
  • A company may only claim expenditure as qualifying Australian production expenditure on the first copy of a film, and one-re-version.

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From the ATO

ATO scrutinising work from home deductions

The ATO has indicated that it will be focusing on four typical types of expenses relating to working from home this year. These will be relevant where clients are using the ‘actual’ method to claim deductions connected with working from home (rather than the “short-cut” or standard cents per hour methods).

The four nominated categories of expenses are:

  • Personal expenses such as coffee, tea and toilet paper
  • Expenses related to a child’s education, such as online learning courses or laptops
  • Claiming large expenses up-front (instead of claiming depreciation for assets)
  • Occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates, which cannot generally be claimed by employees working from home.

Also, in order to use the short-cut or standard cents per hour methods taxpayers will need to have some evidence of the calculation of the number of hours they worked from home. Things like timesheets, activity logs or agreements with employers could be useful for this purpose.

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Warning on “copying and pasting” deduction claims

The ATO has also released guidance in relation to claiming work-related expenses like car and travel claims that are predicted to decrease in 2021 tax returns.

The ATO indicates that it will be on the lookout for increased claims in this area in contrast to the overall expectation that such expenses will have reduced for most taxpayers due to the impact of COVID-19 and an increase in taxpayers working from home. There is a specific mention of not being able to “copy and paste” previous year’s claims without evidence to support the deductions being claimed.

Having said that, the ATO seems to accept that other claims may increase, for example there was an increase in clothing expense claims in 2020, which was considered to be driven by frontline workers’ first-time need for things like hand sanitiser and face masks.

Practitioners should be aware of the increasing focus on claims for work-related expenses and take additional care in ascertaining the correct amount claimed by their clients.

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COVID-19 and permanent establishments

One of the tax issues that arises for some foreign companies is whether the continued presence of employees in Australia as a result of COVID-19 travel restrictions could cause the company to have a permanent establishment in Australia for tax purposes, which could then expose the company to Australian income tax.

The ATO has indicated that it will not be applying compliance resources to determine if foreign businesses have a permanent establishment in Australia if:

  • They did not otherwise have a permanent establishment in Australia before the effects of COVID-19,
  • The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions,
  • Those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions, and
  • The entity has not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.

This relaxed approach will be applied until 31 December 2021.

Practitioners should be aware of the potential for this issue to affect some non-resident clients and confirm whether the ATO’s compliance approach could provide relief.

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Rulings, determinations & IDs

Overseas intangibles arrangements

PCG 2021/D4

The ATO has released draft guidelines dealing with its compliance approach to overseas intangibles arrangements of the type previously discussed in taxpayer alert TA 2020/1.

At a high level, the ATO is concerned that some of these arrangements may be on non-arm’s length terms or might be structured to avoid tax obligations, resulting in inappropriate outcomes for Australian tax purposes.

The ATO wants to ensure that the development, enhancement, maintenance, protection and exploitation of intangible assets is properly recognised and remunerated in accordance with arm’s length principles and which are consistent with the transfer pricing provisions. Further, the ATO is concerned that some arrangements involving intangibles might not comply with Australian income tax obligations such as those dealing with CGT and depreciating assets, the withholding tax rules and Part IVA.

Practitioners with clients who have business structures involving foreign entities and transactions relating to the development or use of intangible assets should review the draft guidance to determine the risk level relating to the arrangements. The draft PCG sets out a detailed compliance framework and a set of risk factors that will be applied by the ATO in determining whether arrangements should be reviewed.

A receiver’s obligation to retain funds to meet post-appointment tax liabilities

TD 2021/5

This determination discusses the obligation of receivers to retain money under Section 254 ITAA 1936) where the entity in receivership has an assessed post-appointment tax liability.

Income, profits or gains of a capital nature are sometimes derived by an entity through the actions of a receiver acting as the entity’s agent (for example, a receiver selling assets). When this happens, the receiver must retain enough money to pay the tax that has been or will be assessed on the income, profits or gains.

Section 254 effectively creates a secondary tax liability for agents and trustees which provides the Commissioner a means of collection against agents and trustees personally to the extent amounts should have been retained.

The primary issue is that there are sometimes circumstances where the Commissioner’s rights of recovery are constrained such that they cannot legally recover the full amount of the assessment, and a question arises whether the receiver’s obligation is similarly limited.

Very generally, tax liabilities incurred by a taxpayer after a receiver is appointed are simply unsecured debts with no greater priority to payment than any other unsecured debt. There may, however, be other legislation providing the Commissioner with an enforceable legal right to require payment before unsecured creditors or even secured creditors. The facts and circumstances, relevant provisions and their interactions with the tax law, must therefore be carefully considered in each case.

Where the Commissioner has no enforceable right to be paid before a secured creditor, then the receiver’s retention obligation under Section 254 relates to the amount that the Commissioner is entitled to be paid after the secured creditors are paid.

GST and burial rights

GSTD 2021/D2

The ATO has issued a draft determination concerning whether GST is applicable to the supply of burial rights in a public cemetery.

The ATO confirms that these supplies by government agencies are not subject to GST as they are not supplies that are made for consideration. Division 81 GST Act excludes certain fees and charges from being treated as consideration for GST purposes. One such exclusion is a fee or charge that relates to (or relates to an application for) the provision, retention, or amendment, under an Australian law, of a permission, exemption, authority or licence.

The operators of public cemeteries are Australian government agencies and the fee charged relates to the provision, under an Australian law, of a permission, exemption, authority or licence. This means the fees are not consideration and should not be subject to GST.

The ATO also indicates that where funeral directors arrange for the supply of a burial right in a public cemetery they do so in the capacity as agent for the deceased estate and should not charge GST on this component of their fees (although GST could still potentially apply to other items).

A fee paid for the renewal of a burial right in respect of a public cemetery is also excluded from being treated as consideration for a supply for the same reasons.

While certain fees can fall outside the scope of the GST system, the supply of other goods or services such as gravedigging, stonemasonry and plaques will generally be subject to GST.

Cases

The tax perils of browsing Facebook while working from home

Spencer and Commissioner of Taxation (Taxation) [2021] AATA 1106

This case looked at the tax treatment of a number of work related expenses, including car expenses, clothing expenses, home internet costs and mobile phone costs and once again demonstrates the importance of keeping records to support deductions that are being claimed.

While the ATO had initially rejected all of the taxpayer’s car expense deduction claims, the AAT was satisfied that a reduced deduction amount could be claimed. However, the allowable amount was significantly less than the amount that was initially claimed in the taxpayer’s tax return.

When it came to clothing expenses the ATO conceded that a deduction could be claimed for gloves and a beanie on the basis that the taxpayer worked in cold conditions and that these were protective in nature. However, the AAT refused to allow a deduction to be claimed for the cost of a pair of socks on the basis that they were not protective in nature in their own right.

The taxpayer had also claimed 100% of his home internet expenses for the 20018 income year but the ATO reviewed this claim and reduced the deductible amount to $50. One of the key reasons behind this reduction was that the taxpayer had failed to keep any contemporaneous records of the internet use.

During the course of the dispute the taxpayer provided a record of the family’s home internet usage for a period of time. The records showed that the internet was not used exclusively by the taxpayer for work purposes. For example, the records showed that some of the websites visited, including Facebook, did not relate to the taxpayer’s employment. As a result, the AAT found that the taxpayer failed to show the ATO’s assessment was incorrect.

The taxpayer was also unable to provide sufficient evidence to support the deductions claimed for mobile phone costs. As the ATO had already allowed the taxpayer to claim a $50 deduction in relation to the internet costs no further deduction was allowed in relation to the mobile phone costs.

One of the key points to take from this case is that a claim of 100% business use for these types of expenses is far more likely to attract the ATO’s attention and can be very difficult to prove. Also, in this case it may have been possible for the taxpayer to claim larger deductions for things like internet and mobile phone usage, but they simply didn’t have the records required to substantiate deductions beyond the $50 amount allowed by the ATO.

Insurance payments and repair costs

Dessent v FC of T [2021] AATA 1206

This case looked at the tax treatment of an insurance payment and whether it should be taxed in the hands of the taxpayer under the assessable recoupment rules. The AAT held that the insurance proceeds should be assessed in the hands of the taxpayer on the basis that they related to deductible repair costs incurred by the taxpayer. However, there are some aspects of the decision that are a bit difficult to follow.

The taxpayer initially received insurance proceeds of $24,000 from an insurer in relation to lost rental income after their property sustained storm and flood damage. The taxpayer had declared this amount as income.

The taxpayer then received an additional $250,000 from the insurer with the payment described as being in consideration of the taxpayer releasing the insurer from all liability past, present and future under the insurance policy. The taxpayer believed that this payment was not in the nature of income or rent and was not used to ‘enable him to repair his property’ and as such the amount was not included as income in his tax return. However, the taxpayer did claim a deduction for repair costs in two income years.

After conducting an audit the ATO classified the payment as an assessable recoupment. The AAT agreed with the ATO and concluded that the entire payment should be taxable.

In considering the treatment of the insurance receipt the AAT outlined that there are two limbs to the criteria for an assessable recoupment:

  • First, you look at whether the amount was received by way of insurance; and
  • Second, you consider whether an amount can or could be deducted under the ITAA for the relevant loss or outgoing for the current year or has been or could be deducted for an earlier year.

The first item above was clearly satisfied in this case.

With respect to the second item the AAT stated it does not matter for the purpose of these rules whether the actual money received under the insurance policy was used for the purpose of the repairs. Section 20-20(2)(b) refers only to the existence of ‘an’ allowable deduction for the loss or outgoing in any year of income and not to the fact that the actual amount paid by the insurer was used for that purpose.

As a result, the AAT found that the whole $250,000 receipt should be an assessable recoupment because the taxpayer had incurred some deductible repair costs.

The confusing part of the decision is that the AAT concluded that the entire $250,000 payment should be included in assessable income, even though the taxpayer had only incurred roughly $130,000 in deductible expenditure. The AAT didn’t look at this in any detail and there are elements of the assessable recoupment rules in Subdivision 20-A which were not considered in any detail in the AAT decision. As a result, while it is possible to understand how the AAT reached the conclusion that at least some of the payment should be taxed under the assessable recoupment rules, it isn’t clear how the AAT reached the conclusion that the entire amount should be included in assessable income.

This would seem to be a significant issue for taxpayers who receive large lump sum insurance payments and where at least part of the reason for the payment is to compensate them for deductible repair costs relating to the relevant asset. The AAT’s approach seems to suggest that there is a risk that amounts can be assessable even if they exceed the deductible costs incurred by the taxpayer. It remains to be seen whether the taxpayer will appeal this decision.

Car parking fringe benefits and primary place of employment

Virgin Australia Airlines Pty Ltd & Anor v FC of T [2021] FCA 523

This case considered whether Virgin Australia was providing car parking fringe benefits to its flight and cabin crews with respect to parking facilities provided at several capital city airports.

The major issue of contention was whether the employee’s cars were parked in the vicinity of their primary place of employment, which involved a determination of where the primary place of employment was, if they had one at all.

The ATO had assessed the airline on the basis that the primary place of employment of the employees was the departure terminal, which meant that the parking facilities near that location were considered to give rise to car parking fringe benefits. Virgin objected against this decision, maintaining that either the relevant employees did not have a primary place of employment, or if they did, the appropriate place was the aircraft itself.

Ultimately, the Court decided in favour of Virgin. As a starting point, it was confirmed that business premises for these purposes could include aircraft, ships, or trains. The Court indicated that for these purposes primary place of employment refers to the business premises where the relevant employees primarily performed their duties. Although the ATO sought to argue that the fact some work was carried on at the departure terminal before boarding the aircraft, given the majority of the employees’ duties were carried out on the aircraft (both on the ground and in the air) the correct conclusion was that the aircraft was their primary place of employment. As this location was necessarily not in the vicinity of the car parking facilities for the majority of the day, the Court found that car parking fringe benefits were not being provided

While this was not addressed in the ruling, the fact that car parking fringe benefits were not considered to arise should not automatically mean that there are no FBT issues. For example, in cases like this it would still be necessary to consider whether the employer is providing a residual fringe benefit.

The principles discussed in this case could potentially be relevant for other businesses where employees primarily perform their duties at locations away from a particular starting point or hub. For example, businesses involved in public transport or boat hire could potentially argue that providing parking at a central location or starting point does not constitute a car parking fringe benefit.

Prepaid rent or lease premium on capital account

Mussalli & Ors v FC of T [2021] FCAFC 71

The issue in this case was whether amounts purported to be a prepayment of rent and claimed as deductible by the taxpayer were in fact in the nature of a lease premium and should be on capital account.

The payments in question related to the acquisition of McDonald’s franchises and a clause in the purchase agreements allowing for a reduced rental rate payable where an upfront payment was made to the vendor.

The taxpayer’s case was based on the language in the agreement (and others), that the upfront amounts payable represented a prepayment of rent and should be dealt with on revenue account. In disallowing the deductions, the Commissioner’s argument was that the payments were not actually genuine prepayments of rent. The ATO noted that these were not payments made to be set off or applied against future rental obligations, but rather payments to gain a capital advantage (the reduced total rent).

With respect to the construction of the agreements and the nature of the payments, the Court found the evidence provided by the Commissioner’s expert to be more compelling, with a categorisation that from an accounting point of view what was really being acquired was what he called a ” lease right “. The payment secured a better version of the lease. This was supported by the way that McDonald’s calculated the upfront amount as a residual which was left over after deducting the value of the equipment from the business purchase price.

The taxpayer’s contention was that as the payments have some effect on future outgoings (or potential future outgoings), which if paid on a recurrent basis would have been revenue, the upfront payments that substitute for them should also be revenue in nature. However, the Court confirmed that there is no general principle that a payment that substitutes for future revenue outgoings or which compensates for them must itself be revenue in nature.

Ultimately the Court found that the payments made by the taxpayer to purchase the right to have a more favourable lease with lower rent amounts were on capital account and not deductible.

This case reaffirms the great care that needs to be taken when analysing whether payments are revenue or capital in nature and that it is important to consider the substance of an arrangement rather than just the form of the contract or agreement. While in some recent cases the Courts have indicated that it can be possible for upfront payment to be deductible on revenue account (such as in the Sharpcan case) it is always necessary to examine the facts of each arrangement in reaching a conclusion.

Legislation

2021-22 Budget measures – Part 1

The Treasury Laws Amendment (2021 Measures No. 3) Bill 2021 enables a series of 2021-22 Budget measures:

Medicare levy low income threshold

Increases the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from 1 July 2020.

See Table 1.1 : 2020-21 Medicare levy low-income threshold amounts and phasing-in ranges

Tax exemption for storm and flood grants for SMEs and primary producers

Disaster recovery grant payments to primary producers and small businesses that relate to floods that occurred following rainfall and storms between 19 February and 31 March 2021 are non-assessable non-exempt income. This change applies to assessments for the 2020-2021 income year and later income years.

Family home guarantee – single parents

The Government will guarantee 10,000 single parents with dependants to enable them to access a home loan with a deposit as low as 2% under the Family Home Guarantee. Similar to the first home loan deposit scheme, the program will guarantee the additional 18% normally required for a deposit without lenders mortgage insurance.

The Family Home Guarantee is aimed at single parents with dependants, regardless of whether that single parent is a first home buyer or previous owner-occupier. Applicants must be Australian citizens, at least 18 years of age and have an annual taxable income of no more than $125,000.

Schedule 2 to the Bill amends section 3 of the National Housing Finance and Investment Corporation Act 2018 to extend the Corporation’s scope to accommodate the new program.

See also

Budget measures – Part 2

Treasury Laws Amendment (2021 Measures No. 4) Bill 2021

The Government has introduced legislation giving effect to some of the tax measures announced in the most recent Federal Budget as well as some of the measures announced last year.  This Bill includes the following measures:

  • The extension of the low and middle income tax offset (LMITO) to the end of the 2022 income year
  • The extension of the junior minerals exploration incentive until the end of the 2025 income year (it was due to end at the end of the 2021 income year)
  • Amending the rules to minimise the Australian tax exposure for NZ sportspersons and support staff who have spent an extended period in Australia participating in cross-border league competitions as a result of COVID-19
  • The introduction of a specific FBT exemption for employers in relation to providing fringe benefits in connection with the education or training of redundant employees, and
  • The introduction of a CGT exemption for granny flat arrangements that meet specific conditions.

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