December Essential Tax Summary – GST on Import of Low Value Goods; Tax Treatment of Holiday Homes; Warning on Aggressive Trust Arrangements & ‘Backpacker’ Tax Changes

From Government 

GST on the import of low value goods

GST does not currently apply when goods are imported into Australia if they have a customs value of $1,000 or less and the supplier is not registered or required to be registered for GST. Arguably this places Australian retailers / suppliers at a competitive disadvantage compared with foreign suppliers that are not required to be registered for GST and creates a risk to the integrity of the GST system.

In the 2016/17 Federal Budget the Government announced plans to remove the $1,000 exemption for certain supplies of low value goods to Australian consumers. Treasury has now released exposure draft legislation and explanatory materials relating to the new rules.

From 1 July 2017 foreign suppliers and goods forwarders will be required to register for GST in Australia if their GST turnover is at least $75,000 per year. The rules will be amended to ensure that a supply is treated as being connected with the indirect tax zone (i.e., Australia) if it is a supply of low value goods to a consumer that involves the goods being brought to Australia with the assistance of the supplier.

Someone will be treated as a consumer if they are not registered for GST or they do not acquire the goods solely or partly for the purpose of an enterprise that is carried on in Australia. If the recipient is registered for GST and acquires the goods partly for a creditable purpose may be subject to the reverse charge provisions contained within the GST system.

 

Tax treatment of holiday homes

In recent years the ATO has been focusing more on the tax treatment of rental properties in popular holiday destinations. The ATO suspects that some taxpayers are claiming deductions that they are not really entitled to.

The ATO has released a guide dealing specifically with holiday homes. The guide explains how the ATO expects expenses to be apportioned to take into account periods when:

• The property is genuinely used as a rental property;
• The property is used privately;
• The property is made available to family and friends for less than market value rent.

One of the issues that the ATO considers is whether the property is genuinely available for rent during periods when it is not being occupied. The ATO has stated that the following factors may indicate that a property is not genuinely available for rent:

• It is advertised in ways that limit its exposure to potential tenants (e.g., the property is only advertised at the taxpayer’s workplace, by word of mouth or outside annual holiday periods);
• The location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it;
• The owner places unreasonable or stringent conditions on renting out the property such as setting the rent above the rate of comparable properties in the area
• The owner refuses to rent out the property to interested people without adequate reasons.

The guide also provides a number of examples which seek to explain the approach that should be taken when completing tax returns for clients who own holiday homes.

 

Withholding relief for relationship breakdowns

The ATO has issued a legislative instrument varying the rate of PAYG withholding to nil for transactions that qualify for marriage or relationship breakdown CGT rollover relief under section 126-5 ITAA 1997.

This is to ensure that a withholding tax obligation does not arise to the recipient under the foreign resident withholding rules that apply from 1 July 2016 in situations where CGT rollover relief would be available to the individual disposing of the property.

This also avoids the need for the parties to apply to the Commissioner to vary the withholding rate.

 

What is the ATO looking for at the moment?

The ATO has released a document summarising some of the key behaviours and characteristics that tend to attract attention from a compliance and review perspective. While this document refers specifically to economic groups with an annual turnover of more than $2m and resident individuals with net wealth of over $5m it should serve as a warning to all privately held groups.

Some examples of characteristics that might draw the ATO’s attention in relation to specific areas of the tax law are listed below:

• Large capital losses;
• Where the net capital gain reported in a tax return is different to the ATO’s estimates based on external data sources;
• Entities utilising the small business CGT concessions;
• Directors of private companies who report low levels of salary and wages or directors fees in their tax returns;
• Private companies issuing different classes of shares (ie, dividend access shares);
• Mismatches between the FBT return and employer tax return for employee contributions towards fringe benefits;
• Situations where living away from home allowances are being paid;
• Non-lodgement of an international dealings schedule;
• R&D tax incentives claimed in the agriculture, building and construction, mining and software development industries;
• Distributions by trusts to complying superannuation funds;
• When there is a significant different between the distributable income of a trust and its taxable income;
• Property developers attempting to take advantage of CGT concessions;
• A high proportion of unidentified expenses to total expenses.

While this is not an exhaustive list, it shows that the ATO is using data matching to target tax payers for this reason and going forward. All information must be provided and entered correctly.

 

ABN review

The ABR receives around 80,000 applications for ABNs a month with the vast majority of these applications being processed straight away. The ATO is currently undertaking a review of some recent ABN applications to confirm that the entity is actually entitled to an ABN.

If you have applied for an ABN for an individual, partnership or trust client in August or October this year then the ATO may contact you and request evidence that the client is actually carrying on an enterprise or has taken steps to start an enterprise.

 

Data matching programs

The ATO has confirmed that data matching programs will continue to operate in relation to:

• Credit and debit card payments including the name and contact details of the merchant and the quantity of transactions processed.
• Share transactions from various share registries.
• Online selling data where the entity sold goods and services of $12,000 or more in the relevant income year.

The ATO publishes these details partly to promote voluntary compliance with the tax laws on the basis that taxpayers should be more likely to disclose income if they know the ATO has access to the data.

 

Rulings, IDs & determinations

Warning on aggressive trust arrangements

TA 2016/12 – Trust income reduction arrangements

For a number of years now the ATO has expressed concern with a range of tax planning strategies involving trust structures. The ATO has issued a new taxpayer alert setting out particular arrangements which display features that concern the ATO and have been identified by the Trusts Taskforce.

At a very high level, the alert focuses on arrangements where steps are taken to ensure that much of the economic benefit that is reflected in the taxable income of a trust is excluded from the distributable income of the trust. The ATO is concerned with certain arrangements where the taxable income of a trust is assessed to a particular beneficiary, with the economic benefits reflected in the taxable income being retained in the trust or being distributed to capital beneficiaries.

The alert provides some examples of arrangements that are likely to draw the ATO’s attention. One of the examples describes the following arrangement:

• The taxable income of a trust is $1m which relates to business income.
• The accounting records of the trust show a profit of a similar amount.
• The trust determines that the distributable income of the trust is 30% of the taxable income for the year.
• The balance of the profit made by the trust in the year is classified as trust capital.
• The trustee appoints the income (i.e., $300,000) to a corporate beneficiary. The company recognises assessable income of $1m under the proportionate approach and uses the $300,000 distribution to satisfy its tax liability for the year.
• The $700,000 balance is distributed to individual beneficiaries as a tax-free capital distribution.

The ATO considers that arrangements such as this (and the other examples set out in the alert) could potentially lead to a range of tax and other implications depending on the steps that have been followed.

 

CGT relief under superannuation reforms

LCG 2016/D8 – Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds

A number of significant changes are due to apply to the superannuation system from 1 July 2017. Some of these reforms may lead to capital gains being triggered as trustees / members of superannuation funds seek to comply with the new rules dealing with the transfer balance cap or reforms relating to transition-to-retirement income streams. For example, in some cases members may arrange to transfer items of value from the retirement phase to the accumulation phase.

As a result of this the Government has introduced some transitional rules which will provide CGT relief from certain capital gains that might arise as a result of individuals complying with the new rules. This draft LCG sets out guidance on how the ATO will seek to apply the transitional rules in practice.

The CGT relief provided by these transitional rules is not automatic and the choice to apply the relief must be made before the trustee is required to lodge the fund’s 2016-17 income tax return.

The CGT assets that qualify for the relief will depend on whether the fund uses the segregate method, starts using the proportionate method or continues using the proportionate method during the relevant period.

The LCG also sets out the ATO’s views on when the general anti-avoidance rules in Part IVA could potentially apply. For example, if it appears that a scheme has been carried out to do more than what is necessary to comply with the reforms then Part IVA could apply.

The ATO also discusses the impact of the deemed sale and re-purchase of the relevant assets that will occur when the CGT relief is chosen. For example, the ATO takes the view that the 12 month holding period under the CGT discount rules is reset.

 

GST and barter arrangements

PCG 2016/18 – GST and countertrade transactions

The ATO has indicated that it will not devote compliance resources to GST-neutral transactions involving the exchange or goods or services for other goods or services and there is no monetary consideration involved.

This PCG takes into account the fact that it may be difficult to determine the market value of the goods or services being supplied and that compliance and administrative costs may create an unnecessary burden for businesses that do not usually engage in this sort of transaction.

Basically, the ATO will not seek to verify GST compliance in these cases if:

• Countertrade transactions account for no more than 10% of each entity’s total number of supplies;
• Both parties are registered for GST;  Both parties would be able to claim back full GST credits on the transaction;
• The parties agree that the values of the countertrade supplies are equal or the relevant taxpayer uses the same value for calculating their GST liability and GST credits;
• Appropriate records are maintained;
• There is no evidence of fraud or evasion.

This guideline does not apply to transactions between members of a barter scheme conducted by a barter or trade exchange. Also, the guideline cannot apply when some of the supplies would be GST-free or input taxed.

 

Lump sum payment taxable

TD 2016/18 – Income tax: is a redemption payment received by a worker under the Return to Work Act 2014 (SA) assessable income of the worker?

This determination, although specific to a South Australian law, confirms the ATO’s view that a redemption payment relating to weekly compensation payments for an injured worker is ordinary income of the worker and therefore assessable income.

Under the relevant legislation, injured workers are entitled to receive certain ongoing weekly payments. In some cases, a liability to make weekly payments can be redeemed by an agreement between the injured worker and the relevant body (e.g., ReturnToWorkSA). Rather than continuing to receive weekly payments the worker is basically agreeing to receive a lump payment.

The ATO’s view is that these payments are ordinary income of the worker, even though they are paid as a lump sum amount.  They represent a recoupment, replacement or compensation for income that would otherwise be derived in the form of weekly payments.

Payments are not covered by the TD if they qualify as an employment termination payment (ETP) for tax purposes. While these payments would not generally be classified as ETPs, it is worth checking this as the tax treatment could be different.

The determination specifically states that in a series of private rulings, amounts substantially similar to those covered by this TD were accepted as not being assessable income.  It is intended that the treatment set out in the TD will only apply to redemption payments made under agreements entered into on or after the date of issue of the draft TD (i.e., 10 August 2016).

Cases

Deferred compensation treated as income

Blank v Commissioner of Taxation [2016] HCA 42 

The High Court has confirmed the Commissioner’s view that a lump sum payment received by the taxpayer in instalments under a profit participation agreement should be treated as ordinary income for tax purposes rather than being taxed under the CGT provisions.

The taxpayer had participated in an employee profit participation arrangement that was operated by his employer. Upon ceasing employment with the group and the taxpayer became entitled to a payment of more than USD 160m, to be paid in instalments.

The taxpayer argued that the payments represented the proceeds from exploiting certain rights to share in the profits of the employer and that the payments should be taxed on capital account.

The High Court rejected the taxpayer’s argument, finding that the payments should be classified as ordinary income on the basis that they represented deferred compensation for services rendered by the taxpayer as an employee.

The decision serves as a timely reminder that payments which represent remuneration or compensation for employment services that have been rendered should generally be treated as ordinary income regardless of whether the amounts are paid as a lump sum, the payments are deferred or they are only payable on the occurrence of a particular event.

 

Companies incorporated overseas were residents of Australia

Bywater Investments Limited v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45

The High Court has confirmed that four companies should be classified as residents of Australia for tax purposes despite being incorporated overseas. As a result, the companies were exposed to Australian income tax on income from all sources.

In this case two of the companies were incorporated in the UK, one was incorporated in the Bahamas and the other company was incorporated in Samoa. Most of the directors of the companies were non-residents and in most cases board meetings were held outside Australia. As a result, the companies argued that their central management and control was outside Australia and that they should not be classified as residents of Australia.

The High Court confimed that a company has its central management and control where the management and control actually abides and that this is a question of fact and degree in each case. The High Court indicated that this would ordinarily be where board meetings are conducted. However, this does not necessarily mean that the result should be the same where the board has basically handed over its decision making power to an outsider.

In this case the court was satisfied that the boards were merely rubber-stamping the decisions made by a Sydney-based accountant. As these decisions were actually made in Australia the court held that central management and control of each company was in Australia and the companies were therefore residents of Australia.

This conclusion also meant that the companies could not rely on the tie-breaker tests contained within relevant double tax agreements because the place of effective management of each company was in Australia.

The decision again supports the principle that substance will generally take precedence over form when it comes to determining the correct tax treatment of a particular arrangement or transaction.

 

‘Backpacker’ tax changes

Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016

Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016

Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016

Passenger Movement Charge Amendment Bill 2016

A package of four Bills was introduced on 12 October 2016 in relation to a range of issues for working holiday makers including changes to tax rates and the treatment of departing Australia superannuation payments.

While three of the Bills have passed through Parliament and are waiting on Royal Assent, the Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 did not originally pass through the Senate and has moved back to the House of Representatives – and now is waiting to go back to the Senate.

One of the main features of the Bill was a 19% tax rate that would apply to working holiday makers for the first $37,000 of taxable income regardless of their residency stats. However, it appears that a compromise has been made to reduce the rate to 15%. The new tax rates are intended to apply from 1 January 2017.

 

Corporate tax rate cuts and concessions for small business

Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

 

This Bill was introduced to Parliament back in September 2016 but has still not progressed through the House of Representatives with a number of other Bills taking precedence as the end of the year approaches.

This Bill contains the following measures that were announced in the 2016-17 Federal Budget:

• Reductions in the corporate tax rate;
• Increases to the turnover threshold for accessing the small business tax offset;
• Increasing the turnover threshold for most of the income tax, GST and FBT concessions that apply to small business entities.

As some of these changes were intended to apply from 1 July 2016 it looks like we will have a further period of uncertainty while we wait to see whether the Government is able to progress this Bill through Parliament.

Legislation

Superannuation reform bills pass Parliament

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016

These Bills containing significant changes to the way the superannuation system will operate have passed through Parliament and are now awaiting Royal Assent. Most of the changes were announced in the 2016-17 Federal Budget earlier this year and will apply from 1 July 2017. Changes introduced by these Bills include:

• The imposition of a $1.6m cap on capital that can be transferred into the tax-free earnings retirement phase of superannuation; – Once your super balance has reached $1.6m, from 1 July 2017 you will no longer be able to make non-concessional contributions to super.  This does not stop you from making non-concessional contributions in the current 2017 financial year.
• The imposition of an excess balance transfer tax on the notional earnings of capital moved into a retirement phase superannuation account that is in excess of $1.6m; If the balance of your superannuation pensions exceed $1.6m at 1 July 2017, the Tax Commissioner will direct your fund to reduce your retirement phase interests back to $1.6m and you will be subject to an excess transfer balance tax. Your overall super balance can be more than $1.6m but only $1.6m can be in a tax-free pension. Keeping the excess balance in super, albeit in accumulation phase, may still be worthwhile because of the low 15% tax rate.
• Earnings on fund income no longer tax-free. From 1 July 2017, the income from the assets supporting transition to retirement income streams will no longer be exempt from tax but included in the fund’s assessable income. For example, if your super fund earns interest from a term deposit, that interest is currently tax-free in a transition to retirement pension. From 1 July, that interest will be included in the fund’s assessable income.
• The introduction of new tax rules for recipients of certain defined benefit income streams in excess of $100,000 per year;
• A reduction in the threshold for Division 293 tax to $250,000;
• Transitional CGT relief for funds that adjust their asset allocations by 1 July 2017;
• A reduction in the annual concessional and non-concessional contributions caps to $25,000 and $100,000 respectively;
• Removal of the anti-detriment deduction;
• Changes to the way the maximum contribution base is determined for SG purposes;
• Changes to the low income superannuation tax offset provisions;
• Removal of the 10% test for claiming personal superannuation contributions as a deduction;
• The introduction of catch-up concessional contribution rules;
• The extension of the spouse superannuation tax offset.

From a tax perspective, the removal of the 10% test for making deductible personal superannuation contributions should help contractors who need to supplement their business income with employment income and for those whose employers will not allow them to use salary sacrifice arrangements to make additional contributions.

There are also some positives in the reforms:

• Claiming a tax deduction on super contributions – If you are under the age of 75, from 1 July 2017, you will be able to claim a tax deduction for personal superannuation contributions. Currently, you need to earn less than 10% of your income from salary or wages. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. Note that if you are over 65 you will need to meet the work test to make contributions to super.
• ‘Carry forward’ unused super cap – Where your superannuation balance is less than $500,000, from 1 July 2018 you will be able to make additional (carry forward) concessional contributions if you have not fully utilised your concessional contributions cap in previous years.  With the delayed start date of this reform, the first year that the carry forward amount can be used is 2019-20

The Superannuation (Objective) Bill 2016 has been referred to a Senate Economics Committee which is due to report back in February 2017.

 

If you have any queries on any of this or any other tax or accounting matters, please don’t hesitate to get in touch with the team here at Fortis Accounting Partners.  You can reach out to us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.