Review of company tax residency rules
The Government has requested that the Board of Taxation conduct a review of the tax residency rules for corporate entities, with a focus on ensuring that the rules reflect modern corporate practices and support the tax system in preventing profit shifting by multinational entities. The review follows the release of recent ATO guidance on the interpretation of the ‘central management and control test’ for residency in TR 2018/5.
Currently, company residence in Australia for tax purposes is determined under a two-step test. Companies incorporated in Australia are always considered residents under the first step. When it comes to companies that are not incorporated in Australia, they can be residents if they carry on business in Australia and either they have central management and control in Australia or voting power controlled by Australian residents. The concept of central management and control is the main consideration of the review.
At a high level, the purpose of the review is to consider whether the central management and control test is an appropriate test for company residency, including consideration of whether it could be appropriate to remove the test and rely on the incorporation test only. The working paper issued by the Board of Taxation also refers to the possibility of using a ‘place of effective management’ test, which is used as a tie-breaker residency test in some double tax agreements. Another issue to be considered is whether the rule concerning the control of the voting power needs to be retained, given that this is rarely applied in practice.
Consultation on the working paper is open until early October, however no time frame has been released with respect to a final report.
Changes to FBT definition of ‘taxi’
Exposure draft legislation has been released making a number of ad hoc changes to the tax system, including a proposed change to the FBT Act with respect to the taxi travel exemption.
This change follows the ATO’s recent statement that the FBT taxi travel exemption only applies to travel undertaken in vehicles licensed to operate as a taxi by the relevant state or territory and does not extend to ride-sourcing services provided in a vehicle.
The legislative amendment would change instances
of the word ‘taxi’ in the FBT legislation to ‘a car used for taxi travel (other than a limousine)’. Taxi travel would be defined as ‘travel that involves transporting passengers by taxi or limousine, for fares’ and remove the requirement that the vehicle be registered as a taxi. The change is intended to end the discrepancy in the FBT treatment of ride- sourcing services as opposed to licensed taxis by allowing the exemption to apply to Uber and similar services. It would also more closely align the FBT
and GST systems.
- Exposure Draft: Treasury Laws Amendment (Measures for a later sitting) Bill 2019: miscellaneous amendments
- Explanatory Memorandum
From the ATO
Profits of professional services firms
In August 2014, the ATO released the first version of a guide called “Assessing the risk: allocation of profits within professional firms”. In very broad terms, the document provided guidance on how the ATO would assess the risk level of professional firms based on how profits are distributed. The ATO has now provided some guidance on how this area will be dealt with for the year ended 30 June 2019.
In broad terms, the guide explained how the ATO would assess the risk of Part IVA applying to the allocation of profits generated by a professional firm that is carried on through a partnership, trust or company and where the income has not been generated from personal services (e.g., the income is generated from a business structure).
The guide applied from the 2015 income year and was to be reviewed in 2017. In December 2017 the ATO indicated that it had suspended the application of the guidelines and web material on Everett Assignments as a result of reviewing the guidelines. In reviewing the guidelines, the ATO became aware that they were being used in connection with arrangements exhibiting high-risk features, including the use of related party financing and self-managed super funds.
The ATO had planned to release updated guidance in this area by 30 June 2018, but this didn’t happen. Instead the ATO indicated that the guidelines could continue to be used for the year ended 30 June 2018. As the updated guidelines still have not been released the ATO has now confirmed that taxpayers who entered into arrangements before 14 December 2017 and who don’t exhibit certain high-risk features can continue to rely on the guidelines for the year ended 30 June 2019 as well.
Our understanding is that the ATO hopes to have new guidelines issued before the end of the 2019 calendar year and these should apply from the 2020 income year onwards. It is likely that the new guidelines will be issued in the form of a practical compliance guideline (PCG). The new guidelines are expected to contain some safe harbour benchmarks, but it will only be possible to apply these if the taxpayers involved can explain the commerciality of the business structure and can show that no high-risk features are present.
SMSF compliance status removed if annual returns late
The ATO has announced that SMSFs that do not lodge their annual returns on time will have their fund’s status on Super Fund Lookup changed from ‘Complying’ to ‘Regulation details removed’.
At a high level the change may result in issues for funds in receiving rollovers from APRA regulated funds and contributions from employers. Having a status of ‘Regulation details removed’ means APRA funds won’t roll over any member benefits to the SMSF and employers won’t make any super guarantee (SG) contribution payments for members of the SMSF.
This could particularly impact on clients consolidating their superannuation accounts or receiving mandated employer contributions from independent employers (note that employees are required to advise their employer if the fund is no longer complying). There is also a risk that related employers could face issues as a result of making contributions to a fund that is not confirmed to be complying, such as losing the deductibility of contributions and having super guarantee charge obligations.
Ability for employees with multiple employers to opt- out of super
The ATO has released details of how the superannuation guarantee opt-out process will work for employees with multiple employers. See Legislation/ Budget superannuation reforms introduced
The opt-out process is for those that are likely to exceed their concessional contributions cap for the financial year because of the requirement for every employer to pay SG. For those opting out, at least one employer will need to continue to pay SG for the employee. Protections are in place to ensure that the opt out process is appropriate.
From 16 October 2019, individuals will be able to download the employer shortfall exemption certificates from the ATO website. These applications must be submitted at least 60 days before the start of the quarter for which the exemption is sought.
An extension is in place for the lodgement period for the quarter commencing 1 January 2020 only. The Commissioner will accept applications lodged on or before 18 November 2019.
The certificate completed by the individual (not the employer) will need to specify:
- Which employers the exemption certificate will apply to
- the quarter(s) in the financial year for which the exemption is sought.
Exemption certificates may be issued for multiple quarters within a financial year but cannot cover more than one financial year.
If the ATO provides a certificate, they will advise the employee and the employer that the certificate has been issued. The employer is under no obligation to accept the certificate.
The certificate does not change the employer’s obligations under a workplace award or agreement, or an employer’s agreement with their super fund. Before applying to opt-out, individuals will need to speak to their employer to clarify their remuneration package without SG – generally as additional remuneration or other benefits.
- Preventing inadvertent concessional caps breaches by certain employees
- Legislation/ Budget superannuation reforms introduced
FBT and road tolls
Guidance has been released by the ATO in relation to employers providing fringe benefits to their employers by way of the payment of road tolls. The ATO indicates that the benefits generally fall within two categories:
- Expense payment fringe benefits (paying or reimbursing toll expenditure, such as paying an employee’s eTag or similar account); or
- Residual fringe benefits (such as allowing an employee to use an eTag owned by the business).
In terms of calculating the taxable value of the benefits provided, employers may use an actual method or alternatively may be able to apply a private use percentage which is established by the use of a logbook or similar document to the total expenditure for a year.
The ATO confirms that the otherwise deductible rule can apply such that tolls incurred in relation to trips solely for business purposes should not be subject to FBT. The minor benefits exemption may also be available.
The ATO also accepts that any road toll benefits provided in connection with a vehicle that is exempt from FBT will not be subject to FBT, on the basis that exempt vehicles are generally provided for work travel of the employee and any private use is minor, infrequent and irregular.
It is important to ensure that these benefits are correctly reported as they do not appear to be treated as part of the operating costs of providing a car fringe benefit.
More Information – Fringe benefits tax and road tolls
Protecting clients from scams and identity theft
The ATO has provided some information in relation to protecting clients from scams and identify theft, both in the context of tax scams and more broadly (for example, in relation to investment scams). We have certainly noticed an increased number of queries relating to people who have been affected by fraudulent activity. This is likely to continue to be an issue for more vulnerable clients in the digital age.
From a tax perspective, the ATO’s first point is that taxpayers should always use a registered tax agent. Other tips the ATO mentions include:
- Never sharing private information such as TFN’s, MyGov details, bank information on social media, or storing such information on mobile devices;
- Ensuring appropriate technological security is maintained (e.g. antivirus software, firewalls, preventing connection to unsecured networks);
- Checking your credit report.
The ATO also has a self-assessment questionnaire for online security and provides guidance on the steps which can be taken by clients after a data breach.
While these issues are clearly broad and affect many areas, practitioners may be able to play a valuable role in assisting clients maintain their financial security to avoid these issues.
- How to protect yourself
- ATO Online security self-assessment questionnaire
- Protective measures for individuals following a data breach
Remission of additional super guarantee charge
Draft practice statement PS LA 2019/D1 outlines the remission of additional super guarantee (SG) charge in circumstances where a taxpayer has failed to provide a SG statement by the due date (i.e., either late lodgement, or no lodgement resulting in a default assessment). Section 59(1) SGAA provides a penalty double the SG is payable in these circumstances.
The ATO indicates in the practice statement that except in rare cases (e.g., where there is an employer engaging in egregious tax avoidance behaviour), ATO officers should consider remitting the penalty either in part or in full.
While the practice statement provides that all of the circumstances need to be considered and provides a three-step process for this, at a high level the practice statement provides that an employer should be eligible for the penalty relief where they have a turnover of less than $10 million and they:
- Do not have a history of lodging SG statements late
- Have not been issued with a default assessment in the present case
- Have lodged no more than four SG
- statements after the lodgement due date
- Have no previous SG audits where they were found to have not met their SG obligations, and
- Have not previously been provided with penalty relief.
In these circumstances the ATO considers that education is a more appropriate response.
The guidance in the practice statement is intended to apply from the date it is finalised. Members with clients who receive these SG penalties for late lodgement of their SG statements should consider applying to the ATO for remission of the penalty amount.
See also Legislation/ Super guarantee amnesty back on the table.
More Information – PS LA 2019/D1
Rulings & determinations
Capital gains derived by trusts with non-resident beneficiaries
TD 2019/D6 does Subdivision 855-A (or subsection 768-915(1)) of the Income Tax Assessment Act 1997 disregard a capital gain that a foreign resident (or temporary resident) beneficiary of a resident non-fixed trust
1936 relevant in determining whether a non- resident beneficiary of a resident trust (or trustee for them) is assessed on an amount of trust capital gain arising under Subdivision 115-C of the Income Tax Assessment Act 1997?
These two determinations deal with complex and technical issues that arise when resident discretionary trusts make distributions to non- resident beneficiaries and this relates to capital gains. Unfortunately, the ATO’s views in this area mean that non-resident beneficiaries can be taxed in Australia on gains relating to foreign assets, which would not have been taxed had they been made by the beneficiary directly.
As a starting point, Division 855 provides an exemption from CGT in some situations involving non-resident taxpayers. The rules ensure that capital gains and losses made from assets that are not classified as taxable Australian property (TAP) are disregarded if the taxpayer is a non-resident or they receive the gain from a fixed trust. However, the provisions don’t contain any rules specifically aimed at beneficiaries of discretionary trusts.
While section 115-215 ITAA 1997 generally ensures that beneficiaries of a trust are treated as if they had made capital gains personally when they receive capital gains through a trust, the ATO’s view is that this isn’t enough for those capital gains to be exempt from Australian tax, even if they relate to non-TAP assets or have a foreign source.
TD 2019/D7 sets out the ATO’s view that the concept of source is not relevant in determining whether a non-resident beneficiary would be assessed on their share of a capital gain from a resident trust.
What this means is that if a resident discretionary trust makes a capital gain then the ATO expects that this will be taxed in Australia, even if the gain is distributed to a non-resident beneficiary, even if the gain does not relate to TAP and even if the gain has a foreign source. Given that non-resident beneficiaries will be taxed at non-resident tax rates and may not have access to the full CGT discount it will be important for trustees and practitioners to consider this carefully when deciding on distributions for trusts that have a mixture of resident and non-resident beneficiaries.
These determinations do not take into account the possible application of any double tax agreements so this is another issue that would need to be considered in reaching a conclusion on how these gains would be taxed.
Estimates of GST and other indirect tax liabilities
This guideline has been issued in relation to the operation of the proposed Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (introduced to parliament in July) which seems to expand the existing estimates and director penalty regimes to include GST, LCT and WET.
The guideline focusses on the estimates regime which currently enables the Commissioner to make estimates of a range of tax liabilities relating to employees such as PAYG and SG. The proposed changes to the legislation would mean that the Commissioner would be also able to estimate GST
liabilities and other indirect tax amounts for the purposes of assessing a taxpayer.
At a high level, the ATO indicates that these new provisions will only be used in very limited circumstances. Consistent with the purpose behind the introduction of the legislation, the ATO states that “the GST, LCT and WET estimate provisions will only be applied where there are reasonable grounds to believe that:
- the taxpayer, or related entities, are involved in phoenix behaviour, or
- assets are being dissipated with the intention to defeat creditors or other action is being taken to defeat creditors (which may be a precursor to phoenixing).”
Whether services and intangibles are connected with Australia for GST purposes
This ruling discusses when a supply of anything other than goods or real property (i.e. intangibles, services etc) is connected with the indirect tax zone (Australia) for GST purposes. This is an important concept because supplies are not generally subject to GST unless they are connected with Australia. Also, supplies that are not connected with Australia are normally ignored when determining whether an entity reaches the GST turnover threshold for registration purposes.
For these purposes, section 9-25(5) GST Act provides that these types of supply are connected with Australia in four circumstances:
- The thing is done in Australia; or
- The supplier makes the supply through an enterprise that the supplier carries on in Australia; or
- The supply is of a right or option to acquire another thing connected with Australia; or
- The recipient of the supply is an Australian consumer (this item is not covered by the ruling)
The rules in this area have changed recently so it will be important to ensure that both new and existing arrangements are reviewed in light of these latest developments. For example, changes have been made to the rules that determine whether the supplier carries on an enterprise in Australia. The rules now tend to focus on the presence of certain individuals (e.g., employees) in Australia and how long they have been in Australia.
It is also important to remember that even if a supply is connected with Australia, this doesn’t necessarily mean that a GST liability will arise. For example, there are a number of situations where supplies made in connection with Australia can be treated as GST-free supplies under the export rules.
ATO denied special leave on residency domicile test
The High Court has declined to grant the ATO special leave to appeal the decision of the Full Federal Court in Harding v Commissioner of Taxation  FCAFC 29.
In this case, the full Federal Court considered that restricting the meaning of ‘permanent place of abode’, in relation to the domicile test of residency, to mean specific premises was too narrow a construction of the legislation, and that the phrase ‘place of abode’ in these circumstances can be extended to mean a town or country. In this case the fact that the taxpayer moved between different apartments in the same foreign city did not prevent them from showing that a permanent place of abode had been established overseas.
The Full Federal Court recognised the fact that changing work arrangements mean it is more common for individuals to occupy premises on a more temporary basis (i.e. shifting rental accommodation) while still establishing a permanent place of abode at the overseas location.
Super guarantee amnesty back on the table
The Government has introduced a Bill that contains a one-off amnesty which seeks to encourage employers to self-correct historical non-compliance with the superannuation guarantee (SG) provisions. The Government had previously tried to introduce this amnesty in 2018 but the Bill failed to pass through Parliament. It remains to be seen whether this Bill will actually become law.
In broad terms, the amnesty would allow employers to claim tax deductions for payments of SG charge (SGC) amounts made during the amnesty period. Normally no deductions can be claimed for payments relating to the SGC. In addition, employers will not be subject to the quarterly administration component of the SGC and penalty amounts will generally be reduced as well. However, the nominal interest component will still need to be paid as this represents compensation for the employees in question.
To qualify for the amnesty an employer must disclose to the Commissioner information related to an SG shortfall for the March 2018 quarter or any earlier quarter. The amnesty period would cover disclosures made from 24 May 2018 until 6 months after the Bill receives Royal Assent.
The legislation also amends the law to ensure that tougher penalties apply to taxpayers who do not take advantage of the amnesty. When an employer fails to meet their SG obligations additional penalties of up to 200% can be imposed on them.
However, the ATO has the power to remit this particular penalty in whole or part. The rules would be amended to ensure that the minimum penalty would be 100%, but could still be up to 200%. This change would only apply to SG quarters covered by the amnesty.
While it is not clear whether the Bill will pass through Parliament, it is important to start identifying clients who could potentially benefit from the amnesty if it becomes law. SG issues are often complex and identify problems and the steps that need to be taken to fix them could take a considerable amount of time. Also, it is crucial to pay attention to the finer details of the amnesty provisions to ensure that concessional treatment is actually available to employers.
Budget superannuation reforms introduced
Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 passed both houses of Parliament on 19 September 2019 and addresses 3 key issues:
- The ability for a taxpayer with multiple employers to opt-out of the Superannuation Guarantee (SG) system.
- Non arm’s-length income (NALI) within a super fund, with specific reference to non arm’s-length expenses and non arm’s-length asset acquisitions.
- The requirement to include the outstanding balance of a limited recourse borrowing arrangement (LRBA) when calculating the total super balance of an individual.
SG opt-out for taxpayers with multiple employers
Applying from 1 July 2018, the Bill amends the Superannuation Guarantee (Administration) Act 1992 to allow individuals to avoid unintentionally breaching their concessional contributions cap when they receive super contributions from multiple employers. Instead of receiving contributions, the individual can apply to the Commissioner for one or more ‘employer shortfall exemption certificates’ to opt out of the SG system for particular employers and instead receive additional cash or non-cash remuneration.
An employer covered by an employer shortfall exemption certificate has a maximum contribution base of nil for an employee for the quarter to which the certificate relates.
The employer may choose to disregard the certificate and continue to pay SG if they cannot come to an agreement on remuneration or if their systems don’t allow them to isolate SG payments for one employer.
The taxpayer may choose to revoke the certificate, for example if their circumstances change.
If the ATO issues an employer shortfall exemption certificate:
- It prevents the employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for a period.
- Reduces that employer’s maximum contribution base for that employee for a quarter to Nil.
- The certificate cannot be varied or revoked for the period (the quarter) that it covers.
- There is no requirement to evidence that the foregone contributions have actually been substituted for a higher salary.
The Commissioner will only issue an employer shortfall exemption certificate where:
- The taxpayer is likely to exceed their concessional contributions cap for the financial year (just because you have multiple employers does not mean you can opt out of SG), and
- At least one employer is paying SG for the employee
The Commissioner might deny the certificate if it’s not appropriate, the application would significantly reduce the amount of SG by an amount larger than necessary (for example, opting out of SG from the largest of the multiple employers), or where there is a contrived arrangement to take advantage of the new rules.
The due date for the employer shortfall exemption certificate is 60 days before the first day of the quarter to which the application relates.
Non arm’s-length income (NALI) and super funds
Amendments to the non-arm’s length income provisions prevent the inflation of superannuation fund earnings through non-arm’s length dealings.
Previously, a technical deficiency in the non-arm’s length income provisions meant that non-arm’s length expenses (including where no expenses are charged) resulted in income not being treated as non-arm’s length income as intended. The amendments remove any ambiguity to ensure that superannuation entities cannot circumvent the provisions by entering into schemes with non-arm’s length expenditure (including where they do not charge expenses).
The framework for the new non-arm’s length income rules remains broadly the same:
- there must be a scheme; and
- the parties to the scheme must incur less (or nil) expenditure than would otherwise be expected if the parties were dealing with each other on an arm’s length basis in relation to the scheme.
For income derived in the 2018-19 income year and later income years (regardless of whether the scheme was entered into before 1 July 2018):
- Non-arm’s length expenses (whether revenue or capital in nature) incurred by a superannuation entity in gaining or producing assessable income result in such income being included in the entity’s non-arm’s length component (non-arm’s length component). This means the income will be taxed at the top marginal rate.
- Where the right to income from a trust through a fixed entitlement was acquired on a non-arm’s length basis, the income is included in a superannuation entity’s non-arm’s length component and taxed at the top marginal rate.
As the rules apply where parties are not dealing with each other at arm’s length, the non-arm’s length income rules do not apply to arrangements that are purely internal. For example, an SMSF trustee may undertake bookkeeping activities for no charge in performing their trustee duties. In certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties (for example, if the fund had a real estate portfolio, the trustee may be able to manage the properties or contract the services of a real estate agent).
The question of whether the non-arm’s length income rules apply in respect of services or functions that are undertaken by the trustee depends on the capacity in which the trustee undertakes those activities
Non-arm’s length capital expenditure can result in a superannuation entity earning non-arm’s length income. For example where a fund acquires an asset for less than market value through non-arm’s length dealings, the revenue generated by that asset may be non-arm’s length income, as well as any statutory income (that is, net capital gains) resulting from the disposal of that asset.
The non-arm’s length income rules continue to apply to an asset that has its cost base increased by the market substitution rule. For example, where real property is acquired (not as a contribution) by the fund for less than market value as part of a scheme where the parties were not dealing at arm’s length, any income generated from that asset (for example, rental income) will be non-arm’s length income. When the property is ultimately disposed of, the resulting capital gain will also be non-arm’s length income. However, in calculating the resulting capital gain, the market value substitution rule may apply such that any capital gain on the disposal of the asset is reduced as a result of the asset’s increased cost base to the market value at the time of acquisition.
The Bill clarifies that NALI can apply to income received from an entitlement held in a fixed trust in certain circumstances. For instance, where the right to income from a trust through a fixed entitlement was acquired on a non-arm’s length basis, income will be treated as NALI.
Limited Recourse Borrowing Arrangements (LRBAs): Calculation of a client’s total super balance
A client’s total superannuation balance (TSB) is the sum of:
- The accumulation phase value of all superannuation interests not in the retirement phase;
- the transfer balance in their transfer balance account, subject to certain modifications (but not where the balance is less than nil), and
- the amount of each roll-over superannuation benefit that is not reflected in the individual’s accumulation phase or transfer balance.
The Bill amends the TSB test so that, in certain circumstances, it takes into account the outstanding balance of a LRBA that is entered into by the trustee of an SMSF or a fund with less than five members.
As a result of these changes, an individual member’s TSB may be increased by the share of the outstanding balance of an LRBA, under contracts entered into on or after 1 July 2018, related to the assets that support their superannuation interests. However, the increase only applies to members who have satisfied a condition of release with a nil cashing restriction, or those whose interests are supported by assets that are subject to a limited recourse borrowing arrangement between the superannuation fund and its associate.
The changes do not apply to the refinancing of the outstanding balance of borrowings arising under contracts entered into prior to 1 July 2018, or to borrowings arising under a contract that was entered into prior to 1 July 2018.
International tax changes
This Bill received Royal Assent on 13 September
2019 and provides:
- Modifications to the operation of the thin capitalisation rules
- Offshore suppliers of rights or options to use commercial accommodation in Australia will need to include these supplies in working out their GST turnover (aimed at online hotel booking providers), and
- The luxury car tax provisions are amended to remove liability for luxury car tax from cars that are re-imported following service, repair or refurbishment overseas.