If you would like to have a word with an experienced and knowledgeable accountant or financial planner with regard to any of the information in this month’s Essential Tax Update – please don’t hesitate to get in touch with the team here at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com – we’re here and ready to help!
From Government:
New DTA with Germany On 7 December 2016, the Governments of Australia and Germany exchanged documentation ratifying the new Australia – Germany double tax agreement (DTA), which will replace the existing DTA, which was signed back in 1972.
The new DTA aligns with recent OECD tax treaty developments, including new provisions recommended by the OECD and G20 that are intended to minimise tax avoidance opportunities and create a more certain business environment for taxpayers.
Some of the DTA’s new rules entered into effect from 1 January 2017, including those relating to withholding tax rates on non-resident income and with respect to certain pensions first paid from 1 January 2017. The maximum withholding tax rates on various types of income have been adjusted to:
- Dividends: 15%
- Interest: 10%
- Royalties: 5%
There are also provisions that reduce the withholding rate on dividends to 0% or 5% if certain conditions are met (e.g. where the recipient shareholder is a company).
More information: Australia / Germany DTA
From the ATO:
New rules for employers of backpackers:
Following the enactment of the amendments to the tax rates for backpackers from 1 January 2017, employers who employ (or intend to employ) backpackers are required to register with the ATO. Backpackers are those individuals who hold a visa subclass 417 or 462, which allows them to work in Australia.
It is important that taxpayers employing backpackers register with the ATO, as non-registered employers are required to withhold at a higher rate than registered employers (see the legislation section below). Employers who fail to register could be subject to administrative penalties while employers who fail the withhold the correct amount under the PAYG rules can be exposed to PAYG penalties.
The period for registration was extended until 31 January 2017. Employers of working holiday makers will not be penalised if they used the lower withholding rate from 1 January 2017 as long as registration was completed by 31 January.
To employ backpackers with the relevant visa subclass in Australia, the employer will need to complete the registration tool available on the ATO website. If necessary, employers can check the visa status of their employees here.
Digital Products:
GST transitional rules The ATO has released some guidance in relation to the new law that will apply GST to sales of digital products and services (such as movies, music, apps, games and architectural or legal services) by foreign businesses to Australian consumers. Even though the rules begin on 1 July 2017, there are some transitional rules that are already having an impact on some clients.
The transitional rules apply to foreign businesses that meet the registration turnover threshold of $75,000 and supply digital products or services to Australian consumers before 1 July 2017 and which continue after that date.
The rules require the foreign business to register for GST where these criteria are met, and once registered, they will need to report and pay GST on supplies made after 1 July 2017.
For example, a foreign business which supplies software for download by an Australian consumer on a 12 month subscription will need to pay GST on the portion of the subscription that relates to the period from 1 July 2017 onwards. The foreign business is then required to report the GST collected and remit the amount to the ATO in the first tax period after 1 July 2017.
The ATO is preparing a simplified system to be available from 1 April 2017 to assist foreign businesses to register, report and pay GST online. Under this system, the business will lodge and pay GST quarterly, will not be able to claim input tax credits, and will not be required to provide tax invoices or adjustment notes to Australian consumers.
Rulings, IDs & determinations:
The ATO has finally released a new ruling dealing with the treatment of website expenditure. The previous ruling on this issue was withdrawn in 2009.
A website is considered an intangible asset consisting of software and the content available on the website to the extent it has no separate identity or value.
The ruling considers whether various expenses incurred in relation to websites would be revenue or capital in nature. Expenditure incurred in developing a website is a capital expense, while expenditure in maintaining the website is of a revenue nature.
The costs of modifying a website can be capital or revenue in nature, depending on the facts in each case. The more the modification relates to improving the profit yielding structure of the business, the more likely the expense will be capital in nature.
Capital expenditure incurred in relation to creating or modifying a website can be deducted under the depreciation rules if it is classified as in-house software. In-house software is defined as software, or the right to use software, that is mainly for the taxpayer (or their associate) to use in performing the functions for which the software was developed.
The cost incurred in the development of in-house software may be deducted over 5 years from the time it is used or installed ready for use. Alternatively, the expenditure may be allocated to a software development pool or (if applicable) dealt with under the small business simplified depreciation rules (including the instant asset writeoff provisions).
Any expenditure that is capital in nature but does not form part of the cost of in-house software will form part of the cost base of a CGT asset. This means that deductions will not generally be available under the blackhole expenditure provisions in section 40-880.
The ruling contains a wide range of examples as well as a useful flowchart for characterising commercial website expenditure.
Capital gains made by foreign trusts:
Section 95 ITAA 1936 contains the general rule requiring the taxable income of a trust to be calculated as if it was a resident of Australia. However, TD 2016/D4 confirms that this assumption of residency should be ignored when a foreign trust makes a capital gain from an asset that is not ‘taxable Australian property’ (TAP).
This means that when a CGT event happens to a CGT asset of a non-resident trust and the asset is not TAP you can disregard any capital gain or loss from the event in calculating the taxable (net) income of the trust. Also, the trust’s beneficiaries (or the trustee) are not treated as having made a capital gain from the CGT event.
However, if an amount attributable to a capital gain made by the foreign trust is paid to, or applied for the benefit of, a resident beneficiary, the gain can be taxed in the hands of the beneficiary under section 99B.
Where this occurs the ATO confirms that the beneficiary cannot utilise the CGT discount regardless of how long the trust has owned the asset. Also, if the beneficiary has capital losses they cannot offset these against the amount that is being taxed under section 99B.
This is an important point because at first glance it might seem favourable that the capital gain can be ignored when calculating the taxable income of the trust. The end tax result can actually be worse if the trust ends up distributing some or all of the capital gain to Australian resident beneficiaries.
One area that requires further clarification is whether temporary residents would escape taxation in this case. We have lodged a submission with the ATO requesting clarification of this point.
Depreciation and composite items:
The ATO has released a draft ruling dealing with the issue of how to determine whether an item is a depreciating asset in its own right or whether its components are separate depreciating assets for the purposes of the tax depreciation rules in Division 40.
For a component of a composite item to be considered a depreciating asset in its own right, it is necessary that the component is capable of being separately identified or recognised as having a separate commercial and economic value.
Purpose or function is generally a useful guide to the identification of an item. The main principles that are taken into account in determining whether a composite item is a single depreciating asset, or more than one depreciating asset, are:
- ‘Identifiable’: the depreciating asset will tend to be the item that performs a separate identifiable function, with regard to the purpose or function it serves in its business context.
- ‘Use’: a depreciating asset will tend to be an item that performs a discrete function, but the item need not be self-contained or able to be used on a stand-alone basis.
- ‘Degree of integration’: the depreciating asset will tend to be the whole composite item where there is a high degree of physical integration of the components.
- ‘Effect of attachment’: the item, when attached to another asset having its own independent function, varies the performance of that other asset.
- ‘System’: a depreciating asset will tend to be the multiple components that are purchased as a system to function together as a whole and which are necessarily connected in their operation.
The fact that an item cannot operate on its own and has no commercial utility unless linked or connected to another item tends to indicate that it will form part of a composite item, rather than being a separate depreciating asset.
The absence of a fixed physical connection between separate components of a composite item tends to indicate that each separate component is a depreciating asset.
The distinction can be important in practice, especially when small business clients are seeking to access immediate deductions. The question often arises whether the cost of multiple items need to be grouped together in determining whether the immediate write-off threshold is satisfied.
Beneficiaries writing-off UPEs:
The ATO has confirmed that trust beneficiaries with unpaid present entitlements (UPEs) are not entitled to bad debt deductions under Section 25-35 ITAA 1997 if they write off the UPE.
To claim a deduction for a bad debt, the amount must have been included in the beneficiary’s assessable income. However the ATO considers that where the beneficiary is presently entitled to a share of the income of a trust, that income is not the amount included in the beneficiary’s assessable income. Rather the beneficiary’s assessable income will include the same proportion of the trust’s taxable income.
As such, the amount written off as a bad debt (being the beneficiary’s entitlement to the trust income) is not included in assessable income and cannot satisfy the requirement contained in Section 25-25(1)(a) ITAA 1997, even though the beneficiary may have been assessed on the distribution.
Cross-border supplies to Australian consumers:
This draft ruling is relevant for non-resident businesses supplying digital products, services or rights to Australian consumers and who may be subject to the new ‘Netflix tax’ from 1 July 2017.
To be liable for GST on a taxable supply, the supply must be connected with Australia. Due to recent changes to the rules, supplies of services or digital products made to Australian consumers are treated as being connected with Australia.
There are two aspects to consider in determining whether the recipient of the digital products, services or rights is an Australian consumer:
- The recipient’s tax residency status, and
- The recipient’s GST registration status and the purpose of the acquisition.
The draft ruling sets out the process that businesses should follow in determining the residency status of their customers and the evidence that should be considered in reaching this conclusion and to demonstrate that reasonable steps have been taken.
The draft ruling also sets out the ATO’s expectations when it comes to determining whether the recipient is a consumer.
Intangible improvements on pre-CGT assets:
The ATO confirms that intangible capital improvements can be treated as a separate CGT asset from a pre-CGT asset to which the improvements are made.
This could be relevant to pre-CGT real property where a client has obtained rezoning approval or a successful development application.
The general rule is that capital gains made in relation to pre-CGT assets are ignored. However, certain improvements to pre-CGT assets can be treated as if they were a separate post-CGT asset in their own right.
This TD confirms that the provisions are not restricted to physical improvements and that the rules can also capture intangible improvements that relate to a pre-CGT asset.
Transfer pricing guide for offshore ‘hubs’:
PCG 2017/1 ATO compliance approach to transfer pricing issues related to centralised operating models involving procurement, marketing, sales and distribution functions
The ATO has released a document that sets out its compliance approach to transfer pricing issues that arise when a business group centralises certain business activities and operating risks. This would commonly involve the centralisation of marketing, sales and distribution functions. These centralised models are often referred to as ‘hubs’.
The aim of this document is to assist businesses with the following:
- Determine the risk profile associated with a hub under the Australian transfer pricing rules;
- Understand the compliance approach that the ATO will likely adopt having regard to that risk profile;
- Understand how the business can mitigate its transfer pricing risk; and
- Understand the type of analysis and evidence the ATO would require when testing the outcomes of a hub from a transfer pricing perspective.
Under the transfer pricing rules, Australian taxpayers are required to self-assess whether their commercial arrangements with related parties are different to the prices that would be charged in arm’s length conditions. The ATO intends to concentrate its compliance and review efforts on international related party dealings that pose the highest risk of not complying with the transfer pricing rules.
This document sets out a risk rating system based on 6 risk zones and explains the factors that should be taken into account in determine which risk rating applies to a particular hub.
Information on how to prepare for an ATO risk analysis, the expected level of ATO compliance activity for each risk zone and options for resolving disputes with the ATO are also provided in the document.
Cases:
The issue considered in this case was whether the taxpayer should be considered a tax resident of Australia or Malaysia for the 2015 income year under the Australia/Malaysia double tax agreement (DTA).
The taxpayer accepted that he was an Australian tax resident for the year under the Australian residency tests. It was also accepted that the taxpayer was a resident of Malaysia under the Malaysian residency rules.
As the taxpayer was a resident of both countries it was necessary to consider the tie-breaker provisions in the Australia/Malaysia DTA to determine which country would be able to treat the taxpayer as a resident when it comes to applying the remaining provisions in the DTA.
The tie-breaker tests in this DTA operate as follows:
- You start by looking at the country in which the taxpayer has a permanent house available to them;
- If a permanent home is available in both countries, or no permanent home is available in either country, then the country in which the taxpayer has their habitual abode;
- If they have a habitual abode in both countries, or no habitual abode in either country, then the country with which their personal and economic relations are closer (citizenship should be considered as part of this process).
The facts before the tribunal indicated that the taxpayer did have a permanent home available to him in Australia (being his parents’ residence) because informal arrangements meant that a room in the property was available to him on a continuous basis. He also left possessions at the property and retained a key to the property during the relevant period.
As the taxpayer had both a permanent home in each country as well as a habitual abode in each country it was necessary to consider the personal and economic relations of the taxpayer.
When it came to considering the final tie-breaker test, the Tribunal found that the taxpayer’s personal and economic relations were far closer to Australia. Despite the fact that the taxpayer had some connections with Malaysia, the AAT was convinced that the stronger connection was with Australia (e.g., he was an Australian citizen, most of his family lived in Australia, most of his assets were located in Australia, his business was registered in Australia, the way he completed his outgoing and incoming passenger cards suggested that he was only departing Australia temporarily etc.).
This is an important reminder to practitioner working through residency issues with their clients to ensure that they don’t stop after considering the Australian residency rules. In many cases it will be necessary to confirm whether the individual is a resident of one or more foreign countries and to also then consider the potential application of relevant DTAs to determine the tax outcome for clients.
Burden of proof for fraud or evasion:
Binetter v. Commissioner of Taxation [2016] FCAFC 163.
In this case the Federal Court dealt with the question of whether the taxpayer or the Commissioner has the burden of proof in relation to claims of fraud or evasion in extending the time to issue amended assessments.
In Binetter, the Commissioner sought to amend assessments in 2010 in respect of the 2002 – 2007 income years. As the general time periods for amending the assessments had expired, the Commissioner was reliant on his power to issue an amendment at any time if he is of the opinion there was fraud or evasion.
The Commissioner’s position was that in each case the onus is on the taxpayer to prove there was no fraud or evasion, by reason of section 14ZZK(b)(i) of the Taxation Administration Act 1953, which states that the taxpayer has the burden of proving that an assessment is excessive or incorrect.
The taxpayer argued that the section did not apply to the forming of opinions which in effect created or imposed tax liabilities on a taxpayer, and that the relevant Court or Tribunal had to form its own opinion as to whether there was fraud or evasion.
In determining the issue, the Court referred to previous decisions in McAndrew and Dalco, which provided that there was no onus on the Commissioner to prove that amended assessments issued are correctly made. The Court found for the Commissioner and held that the taxpayer has the burden of disproving that there was any fraud or evasion in regard to the amended assessments.
Legislation:
Backpacker tax & super changes.
- Income Tax Rates Amendment (Working Holiday Maker Reform) Bill (No. 2) 2016
- Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill (No. 2) 2016
- Passenger Movement Charge Amendment Bill (No. 2) 2016
- Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016
These four Bills were passed by Parliament in early December and have subsequently received Royal Assent. The major changes enacted by the Bills are:
- The application a 15% flat income tax rate from 1 January 2017 to the taxable income of working holiday makers (assessable income derived from Australian sources by working holiday makers less relevant deductions) on amounts up to $37,000, with ordinary tax rates for taxable income exceeding this amount.
- Imposes a requirement on employers of working holiday makers to register with the ATO.
- Where an employer is not registered, they must withhold tax at 32.5% for the first $37,000 of a working holiday maker’s income.
- Sets the tax payable on certain components of departing Australia super payments made to working holiday makers after 1 July 2017 at 65%
Tax related Bills carried forward to 2017:
The following tax-related legislation was not finalised by Parliament during the 2016 calendar year and will be carried forward for consideration in 2017:
Bills before the House of Representatives:
- Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016
- Treasury Laws Amendment (2016 Measures No. 1) Bill 2016
- Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
- Corporations Amendment (Crowd-sourced Funding) Bill 2016
- Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016
- Customs and Other Legislation Amendment Bill 2016
- Foreign Acquisitions and Takeovers Amendment (Strategic Assets) Bill 2016
Bills before the Senate:
- Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016
- Superannuation (Objective) Bill 2016
Standing Committee on Tax and Revenue:
- Inquiry into Taxpayer Engagement with the Tax System
- 2015-16 Annual Report of the Australian Taxation Office
Economics Legislation Committee:
- Corporations Amendment (Crowd-sourced Funding) Bill 2016
- Superannuation (Objective) Bill 2016
Economics References Committee:
- Superannuation Guarantee non-payment
- Consumer protection in the banking, insurance and financial sector
- Australia’s general insurance industry
- Corporate Tax Avoidance
