As we approach 30 June there is an intense focus on trust distributions. This is an area of increased complexity and scrutiny.
To assist, the ATO have released a checklist for the fundamentals of what should be clarified and checked. You can also find Knowledge Shop’s comprehensive checklist to trust distributions on the member website.
And, a few of the 2023-24 Budget measures have started rolling through including a late lodgement amnesty for small business clients.
As change occurs, we’ll keep you posted through our social media accounts – twitter, facebook and Linkedin.
From Regulators
Late lodgment amnesty
Certain small business clients will be able to take advantage of a lodgment penalty amnesty up until 31 December 2023.
The amnesty provides that late lodgment penalties will be automatically remitted where tax obligations, including income tax and business activity statements, that were originally due from 1 December 2019 and 28 February 2022, are lodged between 1 June 2023 and 31 December 2023.
To qualify, the small business must have had aggregated annual turnover of less than $10m at the time the original lodgment was due. However, the ATO indicates that the amnesty will not be available to private groups controlling over $5m of net wealth. How net wealth will be calculated for these purposes is not yet clear.
While late lodgment penalties will be remitted, the amnesty doesn’t apply to general interest charge amounts that might have accrued on outstanding tax debts.
More information
Small Business – Lodgment Penalty Amnesty Program
Do you have late lodgments?
$20,000 instant asset write-off threshold
The ATO has also released some brief comments on the Budget measure relating to the increase in the instant asset write-off threshold for small businesses (turnover less than $10m) to $20,000 between 1 July 2023 and 30 June 2024.
While the measure is not yet law, the ATO indicates that the $20,000 threshold will apply on an asset-by-asset basis, which means that multiple assets can be written off in full under these rules during the 2024 income year. Assets which cost $20,000 or more and which don’t qualify for an immediate deduction can be added to the small business general pool, being depreciated at 15% in the first year and 30% in subsequent years.
More information
Small Business Support – $20,000 instant asset write-off
Distributing trust income
As we approach the end of the financial year, the ATO has reminded trustees and their advisers they need to take care with resolutions relating to trust distributions. In order for beneficiaries to be made presently entitled to trust income (or specifically entitled to franked dividends and capital gains) there are a number of items that need to be checked.
The checklist published on the ATO website highlights the following key items:
- Checking that beneficiaries are valid income or capital beneficiaries of the trust under the terms of the trust deed;
- Ensuring that any procedures within the deed are followed to make beneficiaries presently entitled to income;
- Ensuring that beneficiaries are made presently entitled to the income by 30 June 2023 at the latest, or earlier if required by the trust deed;
- Being aware of the economic and tax impact if the trustee fails the appoint income by year-end; and
- Ensuring that resolutions are clear and unambiguous.
Given the ATO’s updated ATO guidance on the reimbursement agreement rules in section 100A and Division 7A means that this is an area where trustees and advisers need to take care.
More information
Trustee resolutions
ATO’s 3 tax time targets
The ATO has stated that it has three key targets this tax time:
- Rental property deductions;
- Work-related expenses; and
- Capital gains tax.
For rental properties, the ATO states a review of income tax returns showed that 9 in 10 rental property owners are getting their return wrong. The ATO often sees rental income being left out or mistakes being made with property related deductions. This is surprising given 87% of individual rental property owners are using a registered tax agent to prepare their tax return. The ATO is focusing on interest deductions relating to rental activities and has recently implemented a residential investment property loan data matching program to improve compliance in this area.
With work related deductions, the ATO notes that working patterns have shifted for many people over the last couple of years and that taxpayers and their agents should not be tempted to copy and paste deduction details from the previous year return. The ATO will be focusing on the new work from home deduction method and the associated record keeping requirements. To use the revised fixed rate method, clients will need a record of all the hours they worked from home from 1 March 2023. The ATO has warned that it will no longer accept estimates or a sample diary over a four-week period. For the period between 1 July 2022 to 28 February 2023, the ATO will accept a record which is representative of the total number of hours worked from home.
When it comes to the CGT rules, the ATO will be focusing on the application of the main residence exemption in situations where the property has been used for income producing purposes. The ATO is also focusing on the recognition of the disposal of capital assets such as shares, crypto assets, managed investments or properties.
More information
In the ATO’s sights this tax time
STP phase 2
The ATO has outlined some common mistakes made by employers in transitioning to reporting through STP Phase 2. In reviewing their client’s reporting, advisers are recommended to:
Check that pay codes have been set-up correctly and that payments such as allowances, leave and overtime are reported separately.
Ensure all employee details are correct, including name, date of birth, TFN, and whether they are employed full-time, part-time, or casual.
Where transitioning from STP Phase 1 to Phase 2, confirm that year-to-date amounts have been correctly maintained when reporting in Phase 2.
More information
Getting STP Phase 2 reporting right
Side hustles
Taxpayers supplementing their income with ‘side hustles’ or gig work are being reminded that they need to declare all income when they lodge their tax return this year.
The ATO indicates that if individuals are earning money through continuous and repeated activities for the purpose of making a profit, it’s likely they’re running a business. This can include a wide range of activities, such as earning income through digital platforms (e.g., ride sharing or food delivery), online content creation, selling goods (e.g., drop shipping), or providing personal services like training sessions.
When a taxpayer carries on a business there might be other tax obligations that need to be complied with, such as obtaining an ABN or registering for GST.
Further, the ATO is reminding taxpayers that from 1 July 2023 the Sharing Economy Reporting Regime will commence and the ATO will receive data from more electronic distribution platforms. The ATO will be matching this information with the information taxpayers provide on their tax return or activity statement to identify income that has not been included.
More information
Joined the bustle of a side hustle?
Making money from a side hustle?
GST and motor vehicles
The ATO has published updated guidance on the application of the GST system to motor vehicles.
One of the key issues that arises under the GST system is being able to identify whether the vehicle is classified as a ‘car’ for GST purposes. A ‘car’ is defined as a motor vehicle designed to carry a load of less than one tonne and less than nine passengers, not including a motorcycle. Vehicles that are not classified as cars should not be subject to the car limit. In addition to this, the car limit does not apply to certain vehicles that would otherwise be classified as cars, including vehicles that are not designed for the principal purpose of carrying passengers, vehicles that are held as trading stock, and motorhomes / campervans.
When purchasing a vehicle, clients who are registered for GST will generally be eligible for GST credits on the purchase price (potentially subject to the car limit) to the extent that the vehicle is used for business purposes. A common mistake in this area is reducing the GST credits for vehicles held in a business entity such as a company or trust and where the vehicle is subject to some private use by an employee or director. In cases like this the business use percentage should often be 100% with any private use by the employee or director being dealt with through the FBT system.
The sale of a vehicle used for business purposes will generally trigger a GST liability if the taxpayer is registered for GST. The GST liability on sale of the vehicle will normally be 1/11th of the full GST-inclusive sale price, even if the vehicle was subject to the car limit and even if the vehicle has been used for private purposes to some extent. However, in some cases a decreasing adjustment can apply to reduce the net GST payable by the taxpayer to the ATO, although this depends on the circumstances.
More information
GST and motor vehicles
Rulings, Determinations & Guidance
Offshore intangibles arrangements
The ATO has issued a draft practical compliance guideline which sets out its approach to arrangements between international related parties involving the development and use of intangible assets, such as intellectual property.
The guideline focuses on the application of the transfer pricing provisions and general anti-avoidance rules and provides a method for classifying an arrangement as low, medium or high risk. Low and medium risk arrangements are less likely to attract ATO compliance action.
The two main areas of concern for the ATO are:
- “Migration” arrangements, where there has been a restructure which impacts on the flow of the benefits from the exploitation of the intangible assets, and
- Situations involving the mischaracterisation of Australian activities connected with the development, enhancement, maintenance, protection and exploitation of intangible assets.
The risk assessment framework utilises a points-based system to determine the level of risk associated with the arrangement. The ATO provides a number of examples, explaining the level of risk associated with each arrangement and explains the types of evidence the ATO would expect to review when examining arrangements involving intangibles.
More information
PCG 2023/D2
2024 cents per km rate
A new draft legislative instrument (LI 2023/D12) has been issued by the ATO which states that the cents per kilometre rate for the 2024 income year (i.e., from 1 July 2023) is 85 cents per kilometre. This will be relevant for taxpayers who choose to apply the cents per kilometre method when calculating income tax deductions for their work-related car expenses.
More information
LI 2023/D12
Cases
Employee or contractor – right to delegate
The Full Court of the Federal Court has overturned on appeal a prior decision of the Federal Court as to whether an individual was an employee or independent contractor. The original decision found that an individual engaged as a lecturer by an education provider was an employee, partly because the individual had limited scope in delegating the work to others.
The Full Court has found the individual was an independent contractor, holding that the primary judge had erred in applying the principles laid out in the recent High Court decisions in Jamsek and Personnel Contracting, which emphasised the importance of the agreement between the parties and two critical considerations:
- The level of control the employer has over how, where and when the individual performs the work, and
- Whether the individual can be seen to work in their own business, as distinct from the business of the employer.
A major issue here related to the individual’s right under the contract to subcontract work to others, although subject to the employer’s consent. The primary judge considered this restriction to mean the employee had little practical right to delegate, and placed a level of control in the hands of the employer that was more indicative of an employment relationship. However, the Full Court indicated that the requirement for consent did not mean that there wasn’t a genuine right to delegate or subcontract the work to others, especially when it appears that consent would only be refused in good faith and would not be unreasonably withheld.
The primary judge further placed some emphasis on the fact that the right to delegate had not been exercised by the individual. The Full Court clarified that from a legal perspective it is the existence of the right which is important, regardless of whether the right is likely to be exercised or has in fact been exercised.
The Full Court also stated that the right to subcontract under the terms of the contract indicated that this contract was not “wholly or principally for the labour of the person” for the purposes of the expanded definition of employee in section 12(3) of the SGA Act.
On the question of control, the Full Court emphasised the importance of context. The primary judge considered that the fact the individual was required to provide lectures at specific times, and to follow guidance regarding lesson plans and content, as being illustrative of an employment relationship. Considered in the context of a higher education provider though, the Full Court found that this was less an exercise of control over the worker but rather a normal facet of managing their business. Further, the lesson plans and content were not particularly restrictive, with the content requirements largely based on the conditions imposed by the regulator for the courses to be accredited. In those circumstances, the individual had a significant level of freedom in how they performed the work.
More information
JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76
Legislation
The House of Representatives sat between 9 and 11 May, with both houses sitting between 22 and 31 May 2023.
Before the House
Treasury Laws Amendment (2023 Measures No. 2) Bill 2023 contains a series of measures including some of the 2023-24 Federal Budget measures:
Medicare levy and Medicare levy surcharge income thresholds
The Medicare levy low-income thresholds for singles, families and seniors and pensioners will increase from 1 July 2022.
Threshold | From | To |
Singles | $23,365 | $24,276 |
Family | $39,402 | $40,939 |
Single seniors & pensioners | $36,925 | $38,365 |
Family seniors & pensioners | $51,401 | $53,406 |
For each dependent child or student, the family income thresholds will increase by a further $3,760 instead of the previous amount of $3,619.
Maintaining the Commonwealth Bank superannuation fund guarantee
As part of the privatisation of the Commonwealth Bank, the Commonwealth Government provided a guarantee to ensure that pre-privatisation members of the CBA Super fund would not risk losing their superannuation following privatisation. The amendments ensures that those members will continue to have the assurance of the existing Commonwealth guarantee if the CBA Super fund is merged with another superannuation fund.
Tax accounting for primary producer registered emissions units
Eligible primary producers will be able to treat the net proceeds from the sale of Australian carbon credit units they first held on or after 1 July 2022 as primary production income for the purposes of the Farm Management Deposit Scheme and accessing income tax averaging arrangements, provided they are individuals who meet the specified criteria. Specifically, under the new amendments, income derived indirectly from a trust to an eligible primary producer will be considered net income and income received directly as an individual will be considered gross income.
The taxing point for Australian carbon credit units held by eligible primary producers will also be changed to the point of sale. Similarly, income derived from farm abatement activities with carbon service providers supporting such units first held on or after 1 July 2022 will be treated as primary production income for the purposes of the Farm Management Deposit Scheme and accessing income tax averaging arrangements.
The amendment is designed to encourage primary producers to diversify their income by generating and selling Australian carbon credit units and supporting the creation of such units, to help balance fluctuations in income derived from farming.
Cash flow relief for small and medium businesses – 6% GDP adjustment factor for 2023-24 for PAYG and GST instalments
Reduces the GDP adjustment factor for the 2023-24 income year to 6%
Enhancements to the Home Guarantee Scheme
From 1 July 2023, access to the Government’s Home Guarantee Scheme will be expanded to joint applications from “friends, siblings, and other family members” and to those who have not owned a home for at least 10 years.
