April 2021 - Essential Tax Summary

From Government

Compulsory director ID exposure draft rules released

Treasury has released the exposure draft to implement director identification numbers as part of the Government plan to modernise how business registers are managed. Under the program, 31 business registers managed by ASIC will be consolidated into a single platform and directors will be issued with an ID that they will keep forever.

The transitional application period under the Corporations Act is 4 April 2021 to 30 November 2022 and the transitional application period under the CATSI Act (Aboriginal and Torres Strait Islander) is 4 April 2021 to 30 November 2023.

The director ID will provide traceability of a director’s relationships across companies, enabling better tracking of directors and preventing the use of fictitious identities.

More information  Modernising Business Registers – Transitional Application Periods

Post-JobKeeper stimulus

The Federal government has announced several new stimulus measures and the extension of some existing measures for the period following the end of the JobKeeper scheme.

Broadly, the SME Loan Guarantee Scheme will be extended to 31 December 2021 although access to the scheme is being restricted to businesses which were recipients of JobKeeper payments for the period between 4 January 2021 and 28 March 2021, specifically small and medium sized businesses with up to $250 million turnover. Other key changes in the operation of the scheme include:

  • An increase in the proportion guaranteed by the government (up from 50% to 80%);
  • Increasing the size of eligible loans from $1 million to $5 million;
  • The turnover threshold is increasing from $50 million to $250 million;
  • Maximum loan terms under the expanded scheme increased from 5 to 10 years; and
  • Allowing the refinancing of existing loans.

The other main element of the package is aimed at the airline and tourism industries, which have of course been heavily impacted by COVID-19. While the precise details of these measures have not been released, the headline item is a half-price airline ticket program initially encompassing specific destinations within Australia.

More Information – Prime Minister’s media release

From the ATO

COVID-19 and working from home benefits

The ATO has released a fact sheet to assist employers in determining the FBT consequences of any assistance they may have provided to employees in connection with working from home. The fact sheet covers many of the more common benefits provided and the exemptions or concessions that may potentially apply.

While benefits relating to items such as laptops, other portable electronic devices and tools of trade can be exempt from FBT, the provision of other general office items such as desks, chairs, stationery or computer monitors may give rise to an FBT liability depending on how they are used.

Although not strictly specific to working from home situations, the fact sheet provides some guidance on the provision of ‘work-related counselling’ services which may also be exempt from FBT. This refers to counselling that seeks to improve or maintain the quality of an employee’s work performance and relates to matters such as health and safety, stress management, relationships, retirement, and any other similar matters. This includes counselling sessions undertaken via telephone or online platforms during a period when the employee is working from home.

As this is an area that will potentially affect a large number of clients, tax payers should take care to ensure that FBT issues that could arise from modified business practices over the last year are adequately considered.

More information – COVID-19 and working from home benefits

Voluntary JobKeeper repayments

The ATO has provided some guidance on the tax treatment for businesses who wish to repay amounts received under the JobKeeper scheme. This follows on from the decision by some large employers to repay JobKeeper payments to the ATO.

The ATO confirms that the repayments do not reduce the amount that needs to be included in assessable income from the receipt of the JobKeeper payments originally.

When it comes to determining whether the amounts repaid to the ATO can be claimed as a deduction, the ATO indicates that voluntary repayments of JobKeeper amounts could be deductible in limited circumstances if the payment is clearly appropriate to achieve, or directed at achieving, the entity’s business objectives. Broadly this means that the repayments need to be connected with maintaining goodwill or are publicised in order to advertise the business.

For example, a deduction may be available if the payment is made to:

  • Prevent a reduction in business activities, or
  • Publicise and promote the business in the short-term.

Entities that decide to make a repayment should contact the ATO to make the necessary arrangements as the repayments are treated differently to other payments made to the ATO and require a special payment reference number. The ATO can be contacted for these purposes on 13 28 66 (the business info line) or by email at JKVoluntaryRepayments@ato.gov.au.

More Information – JobKeeper voluntary repayments

LRBA and Division 7A loan rules

The ATO has provided some guidance on how it would approach situations where private companies have made loans to related SMSFs and where the loan is subject to a limited recourse borrowing arrangement and also a complying Division 7A loan agreement.

The ATO notes that temporary repayment relief might be offered in relation to existing loan arrangements due to the financial effects of COVID-19. The ATO has indicated that if the varied terms arising from the repayment relief reflect similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19 then the ATO will accept that the parties are dealing at arm’s length and the non-arm’s length income (NALI) provisions won’t generally apply. This will often involve unpaid interest being capitalised on the loan.

While the ATO notes that capitalising interest on the loan should not trigger direct Division 7A implications, this doesn’t count as a payment in determining whether the minimum yearly repayment has been met for Division 7A purposes. SMSFs in this position can apply for Division 7A administrative relief if they were unable to make minimum yearly repayments by the relevant due date.

The ATO also acknowledges that there is a view that interest cannot be capitalised on such loans given their Division 7A nature. Therefore, for the 2020 and 2021 income years, where an LRBA between an SMSF and a lender is subject to repayment relief but unpaid interest is not capitalised the ATO won’t take compliance action to determine if the NALI provisions apply as long as the following conditions are met:

  • The LRBA is also subject to a complying Division 7A loan agreement;
  • The SMSF has met its minimum yearly repayment or has applied for Division 7A administrative relief where it has been unable to meet the minimum yearly repayment;
  • The temporary repayment relief is due to the financial effects of COVID-19 on the SMSF; and
  • The repayment relief is otherwise on similar terms to that offered by commercial banks.

More Information – Interaction with Division 7A and administrative relief for minimum yearly repayments

Rulings

Allocating the profits of professional firms

PCG 2021/D2

The ATO has finally released updated guidelines explaining its compliance approach to the splitting of profits of professional firms such as those operated by accountants, lawyers, doctors and financial services providers.

The guidelines are intended to apply from 1 July 2021 once they have been finalised. However, some practitioners will be given a grace period of 2 years to make necessary adjustments to existing arrangements if they were classified as low risk under the ATO’s earlier guidelines in this area but would be in a higher risk category under the new guidelines.

Broadly, the new draft guidelines are used to determine the level of risk that applies to individual professional practitioners who hold an equity stake in the firm and where the firm produces income from a business structure (ie, the income is not personal services income). If it appears that a practitioner receives income from the firm that is substantially less than the value of the services that are being provided then the Commissioner will consider applying the general anti-avoidance provisions in Part IVA or other integrity rules.

In order for the guidelines to apply, taxpayers must satisfy two separate ‘gateway’ tests. The first gateway looks at whether there is a sufficient ‘commercial rationale’ for the taxpayer’s arrangement. There must also be a genuine commercial basis for the way in which profits are distributed to the practitioner and other related parties.

The second gateway involves determining whether there are any high-risk features of the arrangement, which could include specific matters raised by the ATO in taxpayer alerts. The draft PCG also refers to the following as being high-risk features:

  • Financing arrangements relating to non-arm’s length transactions;
  • Exploitation of the difference between accounting standards and tax law;
  • Arrangements where a partner assigns a portion of a partnership interest that are materially different in principle from the Everett and Galland cases; or
  • Multiple classes of shares and units held by non-equity holders.

If the two gateway tests can be satisfied then it is necessary to work through a risk assessment framework to determine whether the practitioner falls within the low, moderate or high risk zone.

There are three risk assessment factors that can be considered:

  1. The proportion of profit entitlement from the whole of firm group (ie, including services entities etc) returned in the hands of the individual professional practitioner;
  2. The total effective tax rate for income received from the firm by the individual practitioner and associated entities;
  3. Remuneration returned in the hands of the IPP as a percentage of the commercial benchmark for the services provided to the firm (this factor is optional).

Practitioners are given a score for each of these factors, which is then aggregated to determine the risk level.

While the new guidelines are similar to the previous guidelines to some extent, there are some important differences in the approach that the ATO is taking now. For example, rather than only having to “pass” one of the risk factors to be considered low risk, practitioners need to determine their aggregate score with reference to at least two of the risk factors.

While the new approach will only apply from the 2022 income year onwards, practitioners and clients who would like to fall within the low risk zone can start to consider the steps that need to be taken in order to achieve this.

Consolidated ruling on personal services income

TR 2021/D2

A draft ruling has been released by the ATO which looks at whether income is classified as personal services income (PSI) and how to apply the PSI tests. The new ruling effectively combines the issues that were previously covered in TR 2001/7 and TR 2001/8. While the updated ruling does not appear to make any substantive changes to the ATO’s position on PSI issues, the ATO does provide more detailed and specific guidance in certain areas.

At a high level, the ruling consolidates some of the ATO’s guidance on the following issues relating to PSI:

  • The meaning of PSI;
  • What is not classified as PSI;
  • Who is not subject to the PSI rules;
  • The tax effect of the PSI rules;
  • Applying the personal services business tests;
  • Personal services business determinations; and
  • The potential application of Part IVA to personal services businesses.

One of the issues that is covered in more depth in the new ruling is how to approach situations where multiple individuals are deriving income from personal services through a single entity. The ATO confirms that the PSI rules and tests need to be applied separately in respect of each individual.

LAFHA reasonable amounts

TD 2021/3

The determination sets out the reasonable amounts for food and drink expenses incurred by employees receiving a living away from home allowance benefit from 1 April 2021 both within Australia and overseas.

The rates for employees living outside Australia depend on the country involved.

FBT: Private use of motor vehicles other than cars

TD 2021/4

The cents per kilometre rates for calculating the taxable value of fringe benefits arising from the private use of motor vehicles from 1 April 2021 remain unchanged from the previous FBT year.

Cases

JobKeeper eligibility and backdated ABN registration

Commissioner of Taxation v Apted [2021] FCAFC 45

As mentioned in the January tax round-up, the ATO had appealed the AAT decision in this case and was seeking an expedited decision from the Federal Court. The AAT had found that as long as the ABN has an effective date that pre-dates 12 March 2020 then the ABN condition in the JobKeeper rules should be satisfied. The AAT also found that even if the ABN issue was not decided in the taxpayer’s favour the Commissioner should have exercised his discretion in this area.

The Full Federal Court has now handed down its decision in the case and while it found that the taxpayer should be eligible for JobKeeper, the Court overturned the AAT’s decision on the ABN timing issue.

The Full Federal Court found that the requirement to have an ABN on 12 March 2020 should be determined with reference to the details as revealed by the ABR on that day, not by reference to a date of effect (through backdating an ABN). This would have meant that the taxpayer here was not eligible for JobKeeper as the ABR showed on that day that the taxpayer did not have an ABN on 12 March 2020.

However, the Court found that the Commissioner had the ability to exercise discretion to allow the taxpayer additional time to obtain an ABN and that discretion should have been exercised in this case. This was broadly because the Court considered that the taxpayer was the type of business that the JobKeeper scheme was intended to apply to, and that a technical condition which was inadvertently failed should not disqualify them.

While the decision means that backdating ABNs won’t be effective in meeting the ABN condition for JobKeeper purposes, there may still be an opportunity for some taxpayers to seek the Commissioner’s discretion on specific aspects of the JobKeeper rules. However, it is important to note that there are a number of areas within the JobKeeper scheme where the Commissioner simply doesn’t have the ability to exercise any discretion.

Cash flow boost denied due to business restructure

Slatter Building Group Pty Ltd v FC of T [2021] AATA 456

In this case the taxpayer company was found to be ineligible for cash flow boost payments because the business had been restructured into a company after 31 December 2019 which meant that it was unable to show that supplies had been made by the company by the relevant deadline. The outcome could have been different if the company had monthly tax periods.

While there are a number of conditions that need to be met to access cash flow boost payments, the key issue in this case was whether the company was able to satisfy either of the following conditions:

  • It must have derived some business income in the 2019 income year and notified the ATO of this (eg, in a 2019 tax return) by 12 March 2020; or
  • It must have made a supply that was connected with Australia in a previous tax period starting on or after 1 July 2018 and ending before 12 March 2020 and must have notified the ATO of the supply (eg, on an activity statement) by 12 March 2020.

The Commissioner does have the discretion to extend the deadline for reporting the business income or supplies to the ATO but doesn’t have the discretion to extend the deadline for having derived the business income or made the supplies.

In this case the taxpayer had originally carried on a business as a sole trader however early in 2020 the business was rolled over into a new company. As a result, the company could not meet the first point above because it had not been in existence in the 2019 year.

The main issue was whether it could be possible for the company to meet the second point above. However, due to the way the legislation is drafted this was not possible because the company had quarterly tax periods. The problem here was that while the company made supplies before 12 March 2020, as the company had quarterly tax periods it must have made a supply during a tax period that ended before 12 March 2012. This meant that the company would have needed to make a supply by 31 December 2019 at the latest to meet this condition.

The taxpayer argued that this was essentially discriminatory, noting that businesses in similar circumstances would have been eligible for the cash flow boost if they had monthly tax periods.

Unfortunately for the taxpayer, the AAT found that this was a feature of the legislation and that neither the ATO nor the AAT had the discretion to modify the operation of this condition.

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