The increase and extension of the instant asset write- off is now law – we explore the timing and the anomaly that benefits medium sized businesses.
Plus, the ATO announces a doubling of rental property audits and outlines FBT problem areas.
If you have any questions about any of the information contained in this article please contact us or call on 9267 0108
Expansion of tax offsets for the screen production industry
While the government’s attention has largely been focused on the release of the budget and the upcoming federal election, in April the government announced that the Post, Digital and Visual Effects (PDV) tax offset and the Location tax offset for the film industry will also be available in connection with the production of content such as television series and mini- series which are distributed through online platforms (e.g., Netflix, Stan etc.).
The change was announced prior to the election caretaker period commencing and is available for those making eligible applications from 11 April 2019.
GST regulations updated
The GST regulations (i.e. previously the A New Tax System (Goods and Services Tax) Regulations 1999) have been repealed with effect from 1 April 2019 and replaced by the A New Tax System (Goods and Services Tax) Regulations 2019. These regulations were due to sunset (expire) on the same date.
The ‘new’ regulations make only very limited changes to the operation of the GST provisions, and consist largely of the repeal of redundant regulations and simplifying the language of the regulations.
The ATO has provided a comparison table between the 1999 Regulations and the new Regulations.
More Information – GST Regulations Comparison Table
From the ATO
Rental property audits double
The ATO will be doubling the number of audits scrutinising rental deductions.
The ATO notes that a random sample of returns with rental property deductions found that nine out of ten of the returns contained errors.
As a result, the ATO expects to conduct around 4,500 audits with a specific focus on the following items:
- Interest deductions
- Capital works expenditure (e.g., initial repairs to fix problems that existed when the property was acquired) being classified as repairs
- Accommodation sharing income being left out of returns
- incorrect apportionment of expenses relating to holiday homes that are also used to produce income.
In addition to these issues, there have been some significant recent changes to the rules dealing with travel expenses and depreciation expenses for residential rental properties. In particular, the changes to the depreciation rules can be complex to apply in practice and can have a material impact on a rental property owner’s tax position.
FBT issues attracting ATO attention
The ATO has updated its ‘What attracts our attention’ list to include 6 items specifically relating to fringe benefits tax (FBT).
The main issues relating to FBT that the ATO is particularly scrutinising are:
- Failing to report, incorrectly applying exemptions to vehicles, and incorrectly claiming reductions in the taxable value of vehicles, in relation to car fringe benefits
- Mismatches between amounts reported as employee contributions on the FBT return and the amounts included as income on the employer’s tax return
- Claiming entertainment expenses as a deduction but not correctly reporting these as a fringe benefit, or alternatively incorrectly claiming the expenses as sponsorship or advertising
- Errors in calculating car parking fringe benefits, due to using discounted market valuations or non-commercial parking rates, or not having adequate evidence to support the calculated rates
- Not recognising the provision of business assets for the personal use and enjoyment of employees or associates as fringe benefits • Not lodging (or delaying lodgement) of FBT vreturns to avoid or delay payment of FBT
More Information – FBT issues on our radar
New super guarantee integrity measures
A range of new provisions relating to employer superannuation guarantee obligations have come into effect from April 2019. The changes enable the ATO to take certain action in cases where an employer has not met their super guarantee obligations, including:
- Directing non-compliant employers to complete a recently developed online education course and assessment (which takes about two hours, and a score of 80% or above is required);
- Holding company directors personally liable for super guarantee charge amounts owing earlier than previously; and
- Disclosing information about unpaid super guarantee amounts to employees.
Tax agents should check with their employer clients to ensure they understand and are complying with their super guarantee obligations to avoid potential ATO homework!
When does a company carry on business?
TR 2019/1 when does a company carry on a business?
The finalised ruling (TR 2019/1) replaces the draft TR 2017/D7 which looked at when a company would be treated as carrying on a business for the purposes of the lower company tax rate provisions. The ruling indicates that the threshold for carrying on a business is lower for companies than for other types of entities. Broadly, the ATO states that a company will be carrying on a business under general principles if it is established and operated with the purpose and prospect of making a profit. This is the case even if most, or all, of the income generated by the company is passive in nature (e.g. rent, interest, dividends).
Due to the introduction of the ‘passive income test’ for the 2018 and later income years, the determination of whether a company is carrying on business for the purposes of the lower company tax rate is mainly relevant for the 2017 income year.
However, a major change from the draft ruling is the expansion of the ruling to include the issue of whether a company is carrying on business for the purposes of section 328-110 ITAA 1997, which is relevant for both the small business entity concessions in Division 328 and the small business CGT concessions in Division 152.
It is important to keep in mind that even though a company might be treated as carrying on a business and might be classified as a small business entity, this does not necessarily mean that all SBE concessions will be available to that company or its assets. TD 2019/D4 (see below) provides an example of this in the context of the small business CGT concessions.
Small business CGT concessions and rental property businesses
TD 2019/D4 can a company that carries on abusiness in a general sense as described in TR 2019/1 but whose only activity is renting outan investment property claim the CGT smallbusiness concessions in relation to thatinvestment property?
The ATO confirms that while a company holding an investment property could potentially be treated as carrying on a business under general principles, the small business CGT concessions would still not generally be available as the property would mainly be used to derive rent.
The main exception to this would be where the property is rented to a connected entity or affiliate who uses the property in their own business activities.
Deductions for expenditure on ‘environmental protection activities’
TR 2019/D3 deductions for expenditure on environmental protection activities
This draft Ruling considers the scope of deductions available under Section 40-755 ITAA 1997 for capital expenditure incurred in carrying on ‘environmental protection activities’. These activities broadly include activities aimed at preventing, fighting or remedying pollution, and treating, cleaning up, storing or removing waste that has resulted (or is likely to result) from your income earning activities (or the activities of a business you have acquired).
Section 40-755 requires that the expenditure be incurred for the sole or dominant purpose of environmental protection activities. On this point, the ruling indicates that where a single amount is incurred for multiple purposes, the deduction available depends on whether the expenditure can be specifically allocated to each activity. In those cases, the deductible amount will be limited to the amount allocated to the environmental protection activity.
On the other hand, the ATO provides that in cases where the amount cannot be specifically allocated amongst the different activities, it is necessary to apply the sole or dominant purpose test to the expenditure as a whole in determining deductibility. The deduction claimable is limited to exclude expenditure:
- For acquiring land
- For constructing a building, structure or structural improvement (including an
- extension, alteration or improvement to any of these)
- On a bond or security for performing environmental protection activities
- To the extent it is incurred in carrying out an activity for environmental impact assessment of your project, and
- To the extent that you can deduct an amount for it under a provision other than
- Subdivision 40-H
- Further, entities are assessable on recoupments of expenditure on environmental protection activities for which they were entitled to a deductio
Wine equalisation tax – retention of title clauses
PCG 2019/3 attribution and retention of title clauses
Generally, WET and GST are attributable to the same tax period, however for wine sold subject to a retention of title clause, the transfer of title is postponed until the earlier of when the goods are sold by the purchaser or paid for in full. In this situation, the GST would commonly be attributed to the tax period the invoice was issued whereas the WET would not become payable until the transfer of title occurs.
Difficulties can arise in these circumstances where the taxpayer subject to WET has difficulty determining when the wine is used (i.e. sold) by the purchaser, for example where a winemaker sells to a retailer the winemaker cannot reliably determine when the wine is actually sold.
The practical compliance guideline provides that the attribution of WET can be simplified where certain conditions are met. The conditions are:
- The taxpayer must have sold the wine under a sale contract that contains an ‘effective’ retention of title clause; and
- The taxpayer has practical difficulties in determining when the wine is first used by the purchaser; and
- On average, the taxpayer receives full payment for their sales of wine at least one month after the invoice date; and
- On average, the taxpayer’s major customers on-sell the wine at least one month after the invoice date.
Where the conditions are met, taxpayers can attribute the WET to the following tax period where the wine is supplied in the last month of a quarter (or to the following month, for taxpayers reporting monthly).
If the conditions are not met, the taxpayer needs to either attribute and report the WET payable in the same tax period in which the GST is attributable or establish which of the following events occurs first, and attribute the WET payable accordingly:
- The time when title passes to the purchaser under the contract
- The time when the purchaser first uses the wine
- The time when the purchaser on-sells the wine
ATO response to AAT decision on courier driver
In Qian and Commissioner of Taxation  AATA 14 the AAT concluded that the taxpayer was carrying on an enterprise as a courier driver for the purpose of their entitlement to be registered for GST and claim GST credits. The case focused on whether the taxpayer was an employee of the delivery companies. The AAT noted that a number of factors pointed towards the taxpayer being an employee, but ultimately favoured the view that they were an independent contractor. One of the factors that swayed the decision was the fact that the taxpayer supplied, operated and maintained his own van and used this in the relevant activities.
The ATO has now issued a decision impact statement warning that just because someone supplies their own vehicle does not necessarily mean that they will be treated as an independent contractor rather than an employee. The classification of a worker as a contractor or employee is highly dependent on the facts and requires consideration of many factors.
The ATO notes that it is seeking an appropriate case to clarify the law in this area and determine the significance of the fact that a worker might supply their own vehicle
Instant asset write-off timing and peculiarities
One of main tax related items in the recent Federal Budget related to the expansion of the immediate deduction rules for depreciating assets. The amendments in this area received Royal Assent on 6 April 2019 and are law.
There are two major aspects of the changes.
Firstly, the legislation increases the immediate deduction threshold for small business entities (SBEs) in two stages and extends the rules through to 30 June 2020. For the 2019 income year there will actually be three separate immediate deduction thresholds that apply to SBEs that are using the simplified depreciation rules, which are summarised below:
- The immediate write-off threshold is $20,000 for assets first used or installed ready for use before 29 January 2019;
- The immediate write-off threshold is increased from $20,000 to $25,000 if the asset is first used or installed ready for use at or after 29 January 2019 and before 7.30pm ACT time on 2 April 2019;
- The immediate write-off threshold is increased again from $25,000 to $30,000 if the asset is first used or installed ready for use at or after 30pm ACT time on 2 April 2019.
The threshold for writing off a remaining SBE pool balance has been increased to $30,000 for the years ending 30 June 2019 and 30 June 2020.
In addition to this, the amendments also permit a business with aggregated annual turnover of at least $10m but less than $50m to claim an immediate deduction for depreciating assets with a cost (i.e. first element plus second element of cost) of less than $30,000 that it acquires after 7.30 pm AEST on 2 April 2019 for a tax year that ends on or after that date and on or before 30 June 2020.
Interestingly, some of the restrictions that apply to SBEs when it comes to claiming an immediate deduction don’t appear to apply to these larger businesses. For example, SBEs cannot apply the immediate asset write-off rules to horticultural plants (e.g., grapevines) or assets used mainly to generate rental income. However, these restrictions don’t appear to apply to medium businesses which means that as long as the entity carries on a business under general principles and is under the $50m turnover threshold it could claim a deduction for assets used in residential or commercial rental properties.
Medicare levy and Medicare levy surcharge low-income thresholds
The low-income thresholds below which Medicare levy is not payable have been increased in line with movements in the CPI. The changes affect the individual and family thresholds (including the thresholds applicable for taxpayers eligible for the SAPTO), the additional dependent child amount, and the phase-in limits for individual taxpayers (i.e. the upper threshold beyond which the full levy is payable), for the 2019 and later income years.
The increased thresholds are also applicable for individual family members in determining whether they are required to pay the Medicare levy surcharge where the family income is above the threshold. Family members who would otherwise be liable for the Medicare levy surcharge are not required to pay the surcharge where the total of that individual’s income for surcharge purposes does not exceed the individual low-income threshold amount.
The Bill containing the increased thresholds passed through Parliament prior to the election being called and as a result the changes are law.
2019 federal election – lapsed legislation
As a result of the calling of the 2019 federal election, legislation which was before the Parliament at that time has lapsed and will not proceed unless it is subsequently re-introduced by the newly formed government. The Bills which have lapsed include:
- Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019: The amendments proposed to prohibit certain disposals of assets to defeat creditors and to extend the Commissioner’s powers relating to GST collection to collect estimated liabilities and make company directors personally liable for GST.
- Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures N 2) Bill 2018: This Bill included the proposed removal of the main residence exemption for non-resident taxpayers and proposed introduction of tax incentives to boost investment in affordable housing.
- Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017: The Bill proposed to increase the Medicare levy rate from 2 to 5% of taxable income for the 2020 income year and later income years.
- Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018: The Bill contained the proposed SG amnesty and increased penalties for SG non- compliance.