Tax Round-up: Key Changes and Developments for November
In this edition, we’re bringing you the latest updates and insights from the ATO to help you navigate recent changes and stay compliant. You’ll find essential guidance on the tax treatment of ETFs, the ATO’s support for managing complex transactions, and new rules affecting debt deductions and thin capitalisation. We’re also covering the ATO’s tightened approach to unpaid tax and super obligations, updated GST rules for prepared meals, and a noteworthy Federal Court case on gambling winnings as income.
Tax Treatment of Buying and Selling ETFs
The ATO has updated its guidelines on the tax treatment of Exchange Traded Funds (ETFs). When investing in ETFs, you’re purchasing units in a fund that owns various assets, not the assets directly. Taxpayers must declare income from ETF distributions, including reinvested income through Distribution Reinvestment Plans (DRPs), and report capital gains or losses from selling ETF units.
ETF distributions represent a share of the fund’s income, which may include interest, dividends, franking credits, and capital gains—each needing accurate disclosure in your tax return. Most Australian ETFs provide an annual tax statement to simplify reporting, while foreign ETFs may require investors to use their own records for declaring foreign income.
The ATO states that all distribution income, whether received in cash or reinvested, is taxable in the year allocated. This guidance underscores the importance of accurate reporting to meet tax obligations with ETFs.
Achieving Certainty with the ATO
The ATO encourages taxpayers to consult them for certainty on tax implications in complex or unusual commercial deals, helping to avoid future compliance actions. The ATO’s commercial deals service allows taxpayers to engage after completing a transaction but before filing the tax return, facilitating a mutual agreement on tax implications and addressing any issues prior to lodgment.
This service can be used for significant transactions affecting business structure, such as financing, initial public offerings, mergers, acquisitions, restructures, business or asset sales, commercial property sales, share buybacks, and takeovers. The ATO has updated its website with case studies illustrating the service’s use, covering topics like share sales within family companies, company restructures, and capital gains tax (CGT) negotiations.
The ATO’s pre-lodgment activities focus on potential risks, such as misapplication of CGT exemptions for foreign residents and dissipation of assets, especially where funds may move outside Australia. This proactive approach offers taxpayers clearer compliance pathways and reduces potential tax complications.
ATO Targeting Unpaid Tax and Super
The ATO is intensifying its approach to businesses that disregard SMS and letter communications about unpaid tax and superannuation. If businesses fail to respond or set up payment plans for outstanding GST, PAYG withholding, or employee superannuation obligations, the ATO will escalate to firmer actions, including issuing Director Penalty Notices (DPNs) and setting up garnishee arrangements.
Directors of multiple companies who neglect their tax and super obligations across related entities can also face DPNs for the total unpaid amount across all businesses, making them personally liable for these debts. This proactive stance by the ATO is designed to recover unpaid amounts swiftly and ensure compliance.
Restructures and the New Thin Capitalisation and Debt Deduction Rules
The ATO has released a draft Guideline (PCG 2024/D3) outlining its compliance approach and risk assessment framework for restructures under the new thin capitalisation and debt deduction creation rules (DDCR). The new thin capitalisation rules, effective from 1 July 2023, introduce three earnings-based tests, while the DDCR, effective 1 July 2024, disallows certain debt deductions, such as interest, for specific related party arrangements. This rule impacts multinational groups and private businesses alike.
The guideline categorises restructures into four risk zones:
- White Zone: No further assessment needed.
- Yellow Zone: For restructures not fitting other zones.
- Green Zone: Low-risk, aligning with PCG’s low-risk examples.
- Red Zone: High-risk, covering restructures flagged by the ATO.
Schedules in the draft offer examples of high and low-risk restructures related to DDCR. Once finalized, these guidelines will apply to restructures conducted after 22 June 2023, providing clearer compliance standards under the updated rules.
Updated GST Guidance on Food Marketed as a Prepared Meal
The ATO has released a draft determination (GSTD 2024/D3) regarding the GST treatment of food marketed as prepared meals, following the Federal Court decision in Simplot Australia Pty Limited v Commissioner of Taxation [2023] FCA 1115. This draft replaces the previous guidance (GSTD 2024/D1W), now withdrawn.
Under Section 38-3(1) of the GST Act 1999, some foods in Schedule 1 are not GST-free, including frozen “food marketed as a prepared meal,” regardless of whether it requires cooking or reheating. The Court defined a “prepared meal” based on common experience, considering factors such as quantity (enough to constitute a meal), composition (multiple ingredients), and presentation (complete with seasonings and sauces).
The ATO’s draft includes examples: bircher muesli pots, frozen lasagna, and microwavable dumplings likely qualify as prepared meals, while frozen mashed potato and meal kits do not. The guidance also clarifies that complete salads with a variety of balanced ingredients may be GST-taxable if marketed as a meal. The ATO provides a 4-step method to assess whether food is marketed as a prepared meal, with specific compliance criteria for salads based on ingredient thresholds and packaging.
It Wasn’t Income, It Was Winnings from Gambling…
In Youssef v Commissioner of Taxation [2024] FCA 1154, the Federal Court dismissed two brothers’ appeal against an AAT decision that deemed substantial bank deposits as assessable income rather than gambling winnings or loans. The brothers, who ran a concrete pumping business, argued that unreported deposits in their accounts from 2011 to 2016 were due to gambling profits or loans related to gambling activities.
The AAT upheld the ATO’s assessments, finding the brothers’ evidence incomplete and inconsistent. The Federal Court concurred, noting that one brother, George, claimed gambling winnings but lacked records of his gambling losses, making it impossible to estimate his actual profits. Additionally, the Court rejected the claim that deposits were loan repayments, as no sufficient evidence supported this.
The Court concluded the brothers could not substantiate their assessable income, and the AAT’s decision was upheld, dismissing the appeal.
If you have any questions regarding the above information, please do not hesitate to contact our office to speak to one of our team.
