While some of the Budget announcements have passed through Parliament (see Legislation for the latest), we’re waiting to see whether the proposed changes to the small business entity thresholds and corporate tax rate become law in their current form. Meanwhile, the Tax Office is seeking input into travel allowance expenses and the exception to the normal substantiation rules. They’ve noticed an increasing disparity between the travel allowances paid to employees and deductions claimed. New guidance is required!
If you have any questions about any of the information contained in the Essential Tax Summary, please don’t hesitate to contact us here at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
From the ATO
Review of travel expense rules
The ATO has released a discussion paper dealing with the exception to the normal substantiation rules for travel allowance expenses. While taxpayers generally need to ensure that they have appropriate documentation to support the deductions being claimed, the rules are relaxed in cases where employees receive a bona fide travel allowance from their employer. However, the ATO has noticed an increasing disparity between the travel allowances paid to employees and deductions they claim for their travel expenses (i.e. accommodation, meal and incidental expenses). As a result, there has been an increase in the checking of these claims. The ATO recognises that taxpayers and tax advisors find the ATO’s guidance in this area confusing. The increase in cases dealing with this area certainly suggests that further clarity is required. The ATO is exploring ways to improve guidance and administrative practices in this area and to ensure that changes to typical work practices are taken into account. Submissions are due by 22 November 2016.
More information · Substantiation exception for reasonable travel and allowance expenses
Review of higher than expected deductions
The ATO has advised that it will be reviewing taxpayers who claim higher than expected deductions compared with others who work in a similar occupation or have similar income levels.
The ATO’s ability to check work related expense claims has become more sophisticated in recent years. If the ATO identifies a claim that appears to be unusual, it may take the step of checking details with the taxpayer’s employer. This could lead to an increased tax liability as well as penalties and interest for the taxpayer.
Rulings, IDs & determinations
LRBAs for SMSFs
TD 2016/16 – Income tax: will the ordinary or statutory income of a self-managed superannuation fund be non-arm’s length income under subsection 295-550(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the parties to a scheme have entered into a limited recourse borrowing arrangement on terms which are not at arm’s length?
Earlier this year, the ATO issued PCG 2016/5 which sets out the Commissioner’s views on when an limited recourse borrowing arrangement (LRBA) is structured on arm’s length terms.
It is important to identify when this might occur, because if a trustee of a SMSF enters into a nonarm’s length LRBA, it is necessary to consider whether the SMSF has derived more ordinary or statutory income under that arrangement than it might otherwise have been expected to be derive under an arm’s length arrangement. If this is the case, then the resulting income would be considered non-arm’s length income (NALI) and taxed at penalty rates.
Following feedback that the ATO received after the issue of PCG 2016/5, the ATO has now issued TD 2016/16 which confirms the view that the NALI rules would apply if the SMSF would not have been able to acquire the asset if all transactions were undertaken on arm’s length terms.
For example, if a SMSF has acquired a commercial rental property in connection with a LRBA that is not on arm’s length terms, it is necessary to consider whether the SMSF would have been able to acquire the property if all arrangements had been on arm’s length terms. If not, then all the rental income generated from the property would be treated as NALI and taxed at penalty rates.
Dividends from foreign companies
TR 2016/D2 – Income tax: distributions from foreign companies – meaning of ‘at the time the distribution is made’ when applying the participation test
When a foreign company pays dividends to an Australian resident shareholder this would normally be taxed in Australia. However, ITAA 1997 Subdivision 768-A ensures that the dividend will not be taxed in Australia if the dividend flows through to an Australian resident company that meets a 10% participation test.
This draft ruling provides guidance on applying the participation test in Subdivision 768-A when working out whether dividends received by an Australian corporate tax entity from a foreign company will be treated as non-assessable nonexempt (NANE) income.
For example, the draft ruling provides guidance on practical situations such as:
When dividends arise under an off market share buy-back; and When distributions are made in connection with winding up the company or the cancellation of shares.
The draft ruling focuses on the interest held at the start of the day on which the dividend is paid, meaning that changes that occur during that day will generally be ignored when applying the 10% test.
PCG 2016/10 – Fleet Cars: simplified approach for calculating car fringe benefits
Employers that have a fleet of at least 20 cars that are ‘tools of trade’ cars and meet specified criteria in the PCG can apply an optional simplified approach when calculating the taxable value of car fringe benefits under the operating cost method for the 2017 and later FBT years.
At a high level, the ATO will allow these employers to use an average business use percentage for the cars. The method will only be available if the employer has valid log books for at least 75% of the cars in the fleet.
This PCG has been issued in recognition that compliance with the normal record keeping requirements of the operating cost method can be difficult and time consuming for employers with large fleets of cars.
More information – PCG 2016/10
PCG 2016/D16 – Fixed trusts
For a number of years there has been a great deal of uncertainty on how to determine whether a trust should be treated as a fixed trust for the purpose of applying the trust loss rules. This is an important point because the trust loss rules apply differently depending on whether the trust is classified as a fixed trust or non-fixed trust.
Under the trust loss rules the Commissioner has the power to decide that a trust should be treated as a fixed trust, even if it would not otherwise fall within the definition provided within the provisions.
This draft PCG provides guidance on the factors that the Commissioner will consider when deciding
whether to exercise the discretion to treat an entitlement as being a fixed entitlement, which results in a trust being treated as a fixed trust under the trust loss provisions.
It also contains several examples of circumstances for different types of trusts, and the impact that may have on the Commissioner exercising his discretion.
More information – PCG 2016/D16
Cases
Special circumstances and excess superannuation contributions
Ward v Commissioner of Taxation [2016] FCAFC 132
This case dealt with the application of the Commissioner’s discretion under section 292-465 ITAA 1997 in the situation where a taxpayer was treated as having made excess non-concessional contributions.
In the 2009 income year the taxpayer and his wife transferred funds into a pension fund. This was treated as a non-concessional contribution and triggered the bring forward rule.
As a result of the impact of the Global Financial Crisis on interest rates, the taxpayer and his wife withdrew money from the fund and placed it into term deposits. They subsequently established a SMSF with the taxpayer making a non-concessional contribution of $450,000 to the fund.
As this later contribution occurred within 2 years of making the deposit to the pension fund the taxpayer was subject to an excess contributions assessment of over $200,000.
The taxpayer sought the Commissioner’s discretion to disregard or allocate to another year all or part of the taxpayer’s non-concessional contributions in question.
The Commissioner did not exercise his discretion and when the taxpayer’s case was heard at the AAT, the Tribunal concluded that the GFC, “though clearly an exceptional event in Australia’s economic history”, was not a special circumstance for the purpose of the tax laws. While the AAT found that the circumstances facing the taxpayer were unfortunate and unintentional, it upheld the imposition of the excess contributions tax.
The taxpayer appealed against the decision of the AAT to the Full Federal Court. The Full Federal Court allowed the appeal, finding that the AAT erred in law by taking too narrow a view of what may constitute special circumstances. The Court noted that it was open to the AAT to find that there were special circumstances if it found that the provisions operated on the taxpayer in an unfair or unjust way because he accidentally breached the bring forward rule and this led to consequences that were disproportionate to the intended operation of the legislation.
The Full Federal Court set aside the AAT’s decision and remitted the case to the AAT to be heard and determined according to law.
GST issues for property developer
FKYL and Commissioner of Taxation (Taxation) [2016] AATA 810
The taxpayer was a sole trader carrying on a housing construction enterprise. Upon completion of construction, each of the four properties that were the subject of the case was rented for a period of time and then sold.
Only the sale of one of the four properties was included in the taxpayer’s BAS, with input tax credits claimed.
The ATO subsequently audited the taxpayer’s BAS and the activity statements for several quarters were amended, resulting in a GST liability as well as a shortfall penalty.
The taxpayer, who had not obtained any professional advice on the GST implications associated with the projects, lodged an informal objection to the GST and administrative penalty assessments.
Following its investigations, the ATO notified the taxpayer that the sales of the four properties should be treated as sales of new residential premises, and that the margin scheme would not apply. There was also an adjustment to the amount of GST she could claim on the construction costs due to using the properties for an input taxed supply for a period of time after the construction. The taxpayer took the matter to the AAT.
The AAT found that most of the taxpayer’s objections had no legal basis but were more based on the fairness of the process in making reassessments
The AAT confirmed the following points:
The sales were taxable supplies of new residential premises; The 5 year leasing rule could not apply in order to treat the properties as ‘normal’ residential premises rather than new residential premises as they had not been used solely for deriving input taxed rental income for at least 5 years; The margin scheme could not apply to reduce the GST liability on sale because there was no evidence of a written agreement being entered into with the purchasers; and The taxpayer was not entitled to full GST credits on the construction costs because the properties had been used partly for making input taxed supplies of residential rental accommodation. An apportionment based on a comparison between the rental income and sale proceeds was appropriate in this case.
The case highlights just how many GST issues need to be considered when clients are involved in property development projects and the implications that can arise when you don’t apply the rules properly.
Unsuccessful applications for release from tax debts
ZDCW and Commissioner of Taxation (Taxation) [2016] AATA 788
The taxpayer had applied to be released from a taxation liability, comprised of primary tax, general interest charges and a failure to lodge penalty.
The Taxation Administration Act 1953 provides that a person can be released from a liability for tax if they would otherwise suffer serious hardship (i.e. if not released from their tax liability in whole or in
part) and a discretion is exercised in relation to the release from that tax liability.
The taxpayer had received payments under an income protection policy for several years after a medical condition forced him into early retirement. However, he did not realise that the payments should be included in his assessable income.
He lodged tax returns for each of the tax years in which the income protection payments were received and following the receipt of the notices of assessment, the taxpayer applied for a release from liability for taxation. This application was disallowed, the taxpayer objected against the Commissioner’s decision to disallow it, and that objection was also disallowed.
A second application for release was submitted which followed the same process and outcome as the first application. The taxpayer applied to the AAT for a review of the second objection decision.
While the AAT did acknowledge that the serious illness of the taxpayer and other family related matters were to be taken into account, it was not satisfied that the requirement to pay this tax liability would result in serious hardship. The taxpayer had disposed of assets to pay for other non-tax liabilities since becoming aware of his tax liability and had also entered into a Contractual Will arrangement with his wife in relation to jointly held assets, but he could still have borrowed funds against those assets in order to pay his tax liability.
The AAT affirmed the objection decision by the Commissioner and the taxpayer was not released from his tax liability.
Moriarty and Commissioner of Taxation (Taxation) [2016] AATA 796
The taxpayer had applied to be released from a taxation liability, comprised of primary tax and general interest charges, which related to the late lodgement of 7 tax returns relating to the 2006-07 to 2013-14 tax years (excluding 2010/11).
The taxpayer had previously applied for and was released from tax liabilities relating to the 2003-04 tax year during the 2006/07 tax year. Following subsequent lodgement of his outstanding tax returns, the taxpayer lodged two separate applications for release from the tax liabilities that related to the late lodged tax returns, which were both refused.
In reviewing the objection decisions, the AAT considered the funds that the taxpayer had available to him during the tax years in question and that he obtained finance to construct a dwelling and also to purchase a second property, which he gave priority to over paying his tax liabilities.
The AAT affirmed the objection decision by the Commissioner and the taxpayer was not released from his tax liability.
Legislation
Personal income tax threshold change now law
Treasury Laws Amendment (Income Tax Relief) Bill 2016
This Bill was introduced on 1 September 2016 and received Royal Assent on 20 October 2016, amending the Income Tax Rates Act 1986 to increase the third personal income tax threshold for individuals with tax payable at 32.5 per cent from $80,001 to $87,000.
Australia/ Germany Tax Agreement
International Tax Agreements Amendments Bill 2016
This Bill was introduced on 1 September 2016 and received Royal Assent on 20 October 2016, giving force of law to the new Australia / Germany Double Taxation Agreement.
The agreement comes into force once Germany completes its domestic requirements, and instruments of ratification have been exchanged.
Working holiday visa 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 tax arrangements for working holiday makers, which will impact the lowest tax rates that apply to them, the cost of visa applications and government charges, a requirement for employers of working holiday makers to register with the Commissioner of Taxation and with tax at applicable tax rates and increase the tax rate for a DASP for these visa holders.
If you have any queries on any of this, or anything else – please feel free 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.
Source: Knowledge Shop
