This month we take a closer look into fringe benefits tax (FBT); the proposed increase to small business tax offset, super death benefits and the transfer balance cap rules – as well as a collection of new cases; the outcomes of which may be relevant to your personal situation.
If you have any questions about any of the information contained in the March Essential Tax Summary, please do not hesitate to get in touch with the team at Fortis Accounting Partners. You can reach us via info@exemplary-financial.flywheelsites.com, or by giving us a call on 02 9267 0108.
From Government
Beneficial ownership of shares
Treasury has released a discussion paper relating to increasing the transparency of the beneficial ownership and control of companies.
At the moment when a shareholder acquires the legal interest in shares in a private company but they are not the beneficial owner there is no requirement to provide details of the beneficial owners to ASIC. There is simply a requirement to inform ASIC that the legal owner is not the beneficial owner.
As a result, it is difficult for Government agencies to determine who really owns or controls the shares when these are held by someone as trustee or nominee on behalf of another individual or entity.
The Government believes that improving transparency in this area will assist with preventing the misuse of companies for illicit activities including tax evasion, money laundering, bribery, corruption and terrorism financing.
In practice there are a number of reasons why shares might be held by someone on behalf of another individual or entity. It will be interesting to see where this process ends up and how these principles would apply to arrangements where there are a wide range of potential beneficial owners (e.g., typical family trusts etc.).
From the ATO
FBT and tax offsets
Following the passing of Budget Savings (Omnibus) Act 2016, the way that fringe benefits are taken into account has changed for the purpose of certain tax offsets. These changes will apply from 1 July 2017.
Currently, the adjusted net value of reportable fringe benefits is used in determining the taxpayer’s adjusted fringe benefits total. This then feeds into the adjusted taxable income calculation for the purpose of determining entitlement to the low income superannuation tax offset, the seniors and pensioners tax offset, the net medical expenses tax offset and the dependent tax offsets.
From 1 July 2017 the grossed up value of the fringe benefits will be used which will make it more difficult for certain taxpayers to access these tax offsets.
This change will not impact on employees of FBT exempt employers where the reportable fringe benefits amount will still be adjusted down.
Proposed increase to small business tax offset
As many practitioners would be aware, the Government announced in the 2016-17 Federal Budget that the small business tax offset rate would incrementally increase from 5% to 16% over a 10 year period. The Government plans to increase the rate to 8% for the 2017 income year.
Unfortunately, the Bill containing this change has not passed through Parliament and it is not entirely clear if and when this will occur.
If the legislation is not passed prior to relevant tax returns being lodged, the ATO has announced that from an administrative point of view, it will accept returns as lodged up until the proposed law change is passed by Parliament.
When the law is passed taxpayers and practitioners will need to seek amendments if the returns lodged do not reflect the new law.
If a taxpayer claims the increased rate but the new law is not enacted as expected, the ATO has indicated that no tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. In addition, any interest in excess of the base rate accruing after the date of enactment will be remitted. However, this will only be the case if the taxpayer actively seeks to amend their assessment within a reasonable time-frame after the law is passed.
ATO focus on non-profit organisations
The ATO has released a document setting out how it will apply compliance resources to organisations in the not-for-profit sector.
As many organisations in this sector are able to access concessions within the income tax, GST and FBT systems the ATO wants to ensure that these concessions are being utilised appropriately.
The types of things that would attract the ATO’s attention include:
- Private ancillary funds engaging in transactions with related parties;
- Charities and DGRs not applying their income and assets solely for the purpose for which the organisation was established; and
- Taxable organisations incorrectly distinguishing between mutual income and income that should be subject to tax.
It is also worth noting that a self-governance checklist is available for non-profit organisations. The ATO has produced this checklist to assist non-profit organisations determine whether they are meeting their obligations under the tax and superannuation systems as well as identifying risk areas that may need to be considered in more detail.
Rulings, IDs & determinations
ATO alerts on R&D claims
TA 2017/2 – Claiming the R&D tax incentive for construction activities
TA 2017/3 – Claiming the R&D tax incentive for ordinary business activities
TA 2017/4 – Claiming the R&D tax incentive for agricultural activities
TA 2017/5 – Claiming the R&D tax incentive for software development activities
The ATO is clearly focusing its attention on tax offsets claimed under the R&D tax incentive rules, releasing 4 separate taxpayer alerts dealing with specific areas of concern.
TA 2017/2 deals with claims that seek to include expenditure on construction activities (which are specifically excluded under the rules) or where the expenses relate to methods or techniques that are reasonably well known within the building industry.
TA 2017/3 deals with claims that relate to ordinary business expenses. For example, the ATO is concerned that the activities being registered are very broad and that business projects are being registered rather than the specific activities that are aimed at generating new knowledge. The ATO is also concerned that companies are allocating expenditure using inappropriate methods in order to artificially inflate the tax offset being claimed.
TA 2017/4 expands on previous comments provided by the ATO in relation to the application of the R&D tax incentive to certain agricultural activities (refer to TA 2015/3). As with TA 2017/5, the ATO is concerned that claims are being made in relation to ordinary business activities and do not relate to the generation of new knowledge and do not support other core R&D activities.
Finally, TA 2017/5 deals with R&D claims made in relation to software development activities. The ATO notes that some software development companies are claiming that all their development activities are eligible R&D activities. However, the ATO’s view is that this is extremely unlikely and while a particular project might involve experimental activities, that does not mean that all expenditure on the entire project will qualify.
The ATO has signalled its intention to review and scrutinise R&D tax incentive claims more closely and it will be important for companies that have claimed or intend to claim tax offset under these rules to ensure that they have adequate documentation in place to support the claims.
Practitioners should also ensure that claims made by client companies are reasonable and that sufficient and contemporaneous documentation is available.
The ATO has indicated that it may refer tax agents and R&D consultants to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agents Services Act 2009 if it appears that they have advised companies to incorrectly claim expenses under the R&D rules.
Superannuation death benefits and the transfer balance cap rules
LCG 2017/D3 – Superannuation reform: Transfer balance cap – Superannuation death benefits
The ATO has released further draft guidance on the application of the new transfer balance cap rules within the superannuation system.
This draft LCG is intended to clarify how the transfer balance cap provisions will apply to superannuation income streams that are superannuation death benefits.
The document discusses both reversionary and non-reversionary death benefit income streams and comments on the application of the rules that start before and after 1 July 2017.
GST on low value imported goods
LCG 2017/D2 GST on low value imported goods
With the introduction of the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 into Parliament the ATO has started releasing guidance on how the new rules will apply from 1 July 2017. In broad terms, the rules will ensure that goods imported into Australia by (or for) Australian consumers will be subject to GST, even if they have a value of less than $1,000.
The rules will only apply where the supply of the goods is connected with Australia. This draft Law Companion Guideline explains how to determine if a supply is connected with Australia and will be relevant to overseas supplies, electronic distribution platforms and redeliverers.
The draft LCG also discusses how to calculate the GST liability on a supply of low value goods, the rules which are designed to prevent double taxation and the interaction with other existing rules.
For example, the ATO confirms that while the customs value of the goods is used to determine whether GST applies to the supply, the actual price payable by the consumer is used to determine the GST payable on that supply.
Safe harbour options for transfer pricing
PCG 2017/2 – Simplified transfer pricing record keeping options
Back in December 2014 the ATO released a number simplified options that certain smaller businesses could use to stay under the ATO’s radar on transfer pricing issues.
This PCG basically replicates the options that were previously published in an ATO guide and explains the criteria that need to be satisfied in order to adopt each of the options. The document also provides examples and further explanations of some of the terms and concepts used.
The simplified options are intended to reduce the compliance burden and record keeping requirements that might otherwise apply to small businesses that have dealings with international related parties.
The eight options are as follows:
- Small taxpayers
- Distributors
- Intra-group services
- Low-level inbound loans
- Materiality
- Management and administration services
- Technical services
- Low-level outbound loans
Taxpayers that qualify for one of the simplified options and choose to use that option must disclose this on their International Dealings Schedule. These taxpayers still need to retain documentation to demonstrate that the eligibility criteria were satisfied but should be relieved from having to create more substantial transfer pricing documentation (e.g., benchmarking analysis etc.,).
GST and second hand goods
GSTD 2017/D1 what is excluded from being second-hand goods by paragraph (b) of the definition of that term in Division 195 of the A New Tax System (Goods and Services Tax) Act 1999?
When goods are purchased from someone who is not registered or required to be registered for GST it is not generally possible for the purchaser to claim back GST credits in relation to the purchase.
However, the GST system contains some special rules for taxpayers who carry on a business of buying and selling second hand goods. In this case the business can potentially claim notional GST credits in relation to second hand items purchased from private vendors. Certain items are excluded from these rules, including certain goods that consist of gold, silver, platinum etc.
The ATO has released a draft determination explaining the practical application of the exclusion for goods that would be precious metal if they were of the required fineness and in an investment form. This would be particularly relevant for jewellers, pawn shops and other businesses that buy and sell items that buy and sell unwanted jewellery, watches, coins etc.
Cases
Ride sharing is taxi travel under GST rules
Uber BV v Commissioner of Taxation [2017] FCA 110
The Federal Court has confirmed the ATO’s view that drivers providing uberX ride sharing services are supplying taxi travel for GST purposes.
Section 195-5 GST Act defines taxi travel as travel that involves transporting passengers by taxi or limousine for fares.
The court relied on its interpretation of the ordinary meaning of the word taxi rather than being limited to the regulatory concept of taxi that is used in various State and Territory licensing and regulatory rules. Griffiths J was satisfied that the term taxi travel was broad enough to encompass uberX services.
The decision means that drivers providing their services will be required to register for GST regardless of their turnover. It also means that GST will apply to all income derived from providing ride sharing services.
Significant self-education deductions disallowed
Vakiloroaya and Commissioner of Taxation [2017] AATA 95
The AAT has disallowed many of the travel and self-education expenses claimed by a taxpayer and has confirmed that a 25% penalty is appropriate.
The taxpayer was an engineer who was employed by a company operating in the heating, ventilation and air conditioning industry. In his 2014 tax return the taxpayer claimed approximately $60,000 of work related deductions, with approximately $48,000 relating to self-education costs. The ATO disallowed most of these deductions.
The taxpayer claimed that some of the travel expenses were deductible because he was required to transport confidential and sensitive documents relating to work projects. The AAT rejected this claim because:
- The taxpayer was not able to prove that any of the travel by car was work related and no evidence was produced to show that specific work related travel had been undertaken during the relevant year;
- Carrying confidential information is not a sufficient basis for claiming expenses for car travel on its own.
The taxpayer also claimed significant expenses relating to research and development projects undertaken in connection with the taxpayer’s PhD studies at university. The AAT found that the expenses were not deductible as they did not relate to his employment activities and there was no direct connection with the university course. The AAT found that the expenses related to his own inventions, which he hoped could be commercialised in the future. At best, the expenditure related to a possible future income earning activity, but the expenditure in this case was incurred too soon to be deductible.
The AAT also held that the taxpayer could not claim a range of other expenses such as mobile phone charges, internet expenses, membership fees, engineering reports, conference fees and depreciation of equipment. The taxpayer was unable to produce evidence that he had incurred or paid some of the expenses, some expenses were incurred in a different year and in some cases, there was simply not enough evidence to show a connection with income earning activities.
Tax payers need to be aware that the ATO is much more likely to review or query large deductions. In these instances, it is important to ensure that clients can demonstrate the connection between the expenses and their current income earning activities as well as being able to produce evidence to support the deductions claimed.
Spouse acting as carer on work trip
WTPG and Commissioner of Taxation [2016] AATA 971
The ATO has released a decision impact statement relating to a case that looked at whether deductions could be claimed for a relative’s travel expenses.
The taxpayer in this case suffered from medical conditions that meant that he was unable to walk without assistance or stand for any length of time. The taxpayer attended two work related conferences in the UK but his employer did not provide a carer or assistant to travel with the taxpayer.
The taxpayer’s wife accompanied him on the trip, acting as his carer on the flights and during his time in the UK. The taxpayer wanted to claim a deduction for the travel expenses incurred in relation to his wife.
The ATO disallowed the deduction and the matter ended up with the AAT. The AAT confirmed that:
- The expenses were not deductible under the general deduction provisions in section 8-1 ITAA 1997 because they were incurred in the course of enabling the taxpayer to undertake his duties, rather than being incurred in the course of undertaking those duties. The taxpayer’s wife did not carry out tasks associated with his employment.
- The expenses were also private or domestic in nature, so would not have been deductible even if there was a sufficient connection with earning assessable income.
- The Commissioner’s decision to disallow the taxpayer’s objection was not in breach of the Disability Discrimination Act 1992.
This decision confirms the long-standing principle that work related expenses must generally be incurred in the course of gaining or producing assessable income. Expenses that merely put someone in a position to be able to earn their income do not generally qualify for a deduction.
Legislation
Removal of $1,000 GST threshold for imported goods
Treasury Laws Amendment (GST Low Value Goods) Bill 2017
The Government has introduced a Bill to Parliament that will ensure that certain supplies of goods valued at $1,000 or less to Australian consumers will be subject to GST from 1 July 2017. That is, the existing $1,000 threshold will no longer apply to goods that are imported into Australia.
Foreign businesses that make offshore supplies of low value goods that are captured by these rules will be able to choose to register for GST on a limited basis. These supplies can take advantage of simplified registration and reporting requirements but will not be able to claim GST credits and cannot obtain an ABN.
Better access to ESIC concessions through fixed trusts
Treasury Laws Amendment (2017 Measures No. 1) Bill 2017
The Government has introduced a Bill that is intended to ensure that the CGT concessions available to investors in early stage innovation companies (ESICs) operate as intended when the investment is held through a fixed trust.
The ESIC rules apply from 1 July 2016 and can provide a tax offset as well as CGT concessions to investors in these companies. However, as the rules are currently drafted, the benefit of the CGT concession is effectively reversed if the investment is held by a fixed trust, because distributing the exempt capital gain will trigger CGT event for the beneficiaries of the trust.
This Bill ensures that CGT event E4 will not apply where the non-assessable portion of the distribution relates to the CGT concessions for investors in ESICs. Note that the relief from CGT event is only available where the fixed trust directly holds shares in the ESIC (i.e., CGT event E4 could still apply if the fixed trust holds its interest in the ESIC indirectly through another trust). This change will apply from 1 July 2017.
The Bill also ensures that investors in venture capital limited partnerships can access the concessions when the investment is held through a trust.
Miscellaneous amendments
Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016
This Bill has passed through both Houses of Parliament and is now awaiting Royal Assent. The Bill contains the following amendments:
- The introduction of a special remedial power for the Commissioner to make legislative instruments to modify the operation of a taxation or superannuation law to resolve unintended or unforeseen outcomes.
- Primary producers who opt out of the income averaging rules can access the averaging rules again after 10 years from the 2017 income year onwards.
- Luxury car tax will no longer apply to certain public institutions (e.g., museums etc.,) that import or acquire luxury cars for the sole purpose of public display.
If you feel that the any part of the above changes may be relevant to your current, or future financial situation – and you’d like to discuss matters with an experienced accountant; please get in touch with the team at Fortis Accounting Partners via info@exemplary-financial.flywheelsites.com, or by calling on 02 9267 0108.
