While superannuation is the hot topic right now, earlier this month the Government pushed two key Budget measures into Parliament.
The Bills enabling the personal income tax measures, the progressive company tax rate reduction, and the SBE threshold increase from $2m to $10m were all introduced into Parliament (see legislation).
If you have any questions about any of the information contained in the Essential Tax Summary, 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.
From Government
Superannuation Changes
The Government released the first tranche of superannuation reforms on 7 September only to pull back from the more controversial elements and announce a revised series of reforms on 15 September. Exposure draft legislation followed on 27 September.
The updated reforms:
- Keep the work test.
The Budget originally announced the removal of the work test and a level of harmonisation for 65 to 74 year olds. These measures have been removed.
- Remove the $500,000 lifetime non-concessional cap announced in the Budget.
- Reduce the annual non-concessional cap to $100,000. From 1 July 2017, non-concessional contributions will be subject to the new $100,000 cap. Clients will have until 30 June 2017 to utilise the current $540,000 cap across three years by triggering the bring forward rule. If clients trigger the bring forward rule but don’t use the full $540,000 cap by 30 June, future contributions are subject to the new cap, i.e., instead of the cap being $540,000 across three years, it might be $460,000 or $380,000 depending on when contributions are made.
- Cap non-concessional contributions at $1.6 million. Once an individual’s super balance reaches $1.6m, from 1 July 2017 they will no longer be able to make non-concessional contributions to super.
- Reduce the concessional contributions cap to $25,000. This measure applies to everyone from 1 July 2017.
- Limit pension balances to up to $1.6m. The reforms introduce a $1.6m ‘transfer balance cap’ on the amount of capital that can be transferred to the retirement phase of superannuation. For individuals in pension phase, the balance of their pension needs to be no more than $1.6m. If not, from 1 July 2017 the Tax Commissioner will direct their fund to reduce their retirement phase interests back to $1.6m and they will be subject to an excess transfer balance tax. Overall super balances can be more than $1.6m but only $1.6m can be transferred into a tax-free pension.
- Lower the threshold for the Division 293 tax on concessionally taxed contributions to $250,000.
- Push back ability to make ‘catch up’ contributions. From 1 July 2018, people with super balances below $500,000 will be able to rollover their unused concessional caps for up to 5 years. Unused cap amounts can be carried forward from the 2018-19 financial year; which means the first opportunity to use these new rules will be 2019-20.
- Remove the anti-detriment deduction. The reforms repeal section 295-485 ITAA 1997. The repeal applies to superannuation lump sum benefits paid because of the death of a member where that member died on or after 1 July 2017. However, from 1 July 2019, it applies to all superannuation lump sum benefits paid after this time, irrespective of whether the member died before 1 July 2017.
- Repeal regulation 995-1.03. Removes the ability for an individual to elect, before a payment is made, that the payment is not to be treated as a superannuation income stream benefit (making it a superannuation lump sum).
- Remove tax concessions on earnings on fund income. From 1 July 2017, the income from assets supporting transition to retirement income streams will no longer be exempt from tax but included in the fund’s assessable income.
- Improve access to concessional contributions. From 1 July 2017, all Knowledge Shop 2016 4 individuals under the age of 65, and those aged 65 to 74 who meet the work test, will be able to claim a tax deduction for personal contributions to eligible superannuation funds up to the concessional contributions cap. This measure if particularly useful for contractors and those with who are part self employed and part salary & wage earners.
- Replace the Low Income Superannuation Contribution (LISC) with the Low Income Superannuation Tax Offset (LISTO). The LISTO refunds the tax paid on concessional contributions by individuals with a taxable income of up to $37,000 – up to a cap of $500.
- Extend the spouse offset. Extends eligibility to the offset where recipient spouses earn up to $40,000 (currently $10,800).
- Extend the tax exemption on earnings in the retirement phase to more products. Extends the tax exemption to deferred or pooled income stream products.
- Enshrine the concept of super as a means to fund retirement. This concept will now underpin the superannuation laws.
Not all of the exposure draft legislation is available for each of these measures. A further tranche is expected within a few weeks. For those wanting to plough through the detail, Treasury has updated their fact sheets on the various measures
More information
- Consultation – Superannuation reform package tranche two – contains the exposure draft legislation and accompanying Ems
- Treasury – super reforms – contains the fact sheets on key elements of the reforms
- Media Release – Superannuation reform: Second tranche of exposure draft
- Media Release – Even fairer, more flexible and sustainable superannuation
PAYGW changes from 1 October 2016
As the Government has increased the 32.5% tax band from $37,001 to $80,000 to $37,001 to $87,000, the ATO has updated the PAYGW tax tables for employers to update the tax withholding for employees earning over $80,000 which apply from 1 October 2016.
Employers are not required to make any adjustments, and the ATO will refund any excess tax withheld to the employees when their 2016/17 tax returns are processed.
More information · ATO – Tax cuts – withholding amounts changed
Review of the R&D tax incentive
Treasury has released the Review of the R&D Tax Incentive with the panel concluding that more could be done.
The panel made 6 recommendations:
- Keep the current definition of eligible activities and expenses under the law, but develop new guidance, to give greater clarity to the scope of eligible activities and expenses. Knowledge Shop 2016 5
- Introduce a collaboration premium of up to 20% for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organisations.
- Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.
- Introduce an intensity threshold in the order of 1% to 2% for recipients of the non-refundable component of the R&D Tax Incentive, such that only R&D expenditure in excess of the threshold attracts a benefit.
- If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia.
- Improve administration of the offset including adopting a single application process; developing a single programme database; reviewing the two-agency delivery model; and streamlining compliance review and findings processes). Plus, improve transparency by publishing the names of companies using the R&D Tax Incentive and the amounts of R&D expenditure claimed.
Submissions close 28 October.
More information
- Treasury – Review of the R&D Tax Incentive
- Department of Industry, Innovation and Science – Review of the R&D Tax Incentive
WET rebate eligibility criteria tightened
Another measure announced in the 2016-17 Federal Budget related to the wine equalisation tax (WET) rebate and how that could be used to better target support to small wine producers in rural and regional Australia. The Government announced it would introduce tightened eligibility criteria as part of the reform, with the final details to be settled through consultation.
Treasury has issued an implementation paper that sets out the Government’s proposed approach to implement the tightened eligibility criteria. Submissions close 7 October 2016.
More information
‘Backpacker tax’ rate cut
The Government has announced that the tax rate applying to working holiday maker visa holders will be 19% on earnings up to $37,000 (instead of 32.5% announced in the 2015-16 Federal Budget) from 1 January 2017. Ordinary marginal tax rates will apply to income in excess of that amount.
The Government will also reduce the application fee for a working holiday maker visa and introduce more flexible arrangements to benefit working holiday makers and industries that use these workers.
Employers of working holiday maker visas will be required to register with the ATO, which will provide data on the employment of working holiday maker visa holders.
. Employers that do not register will be required to withhold tax at 32.5% and working holiday makers will be able to access a list of registered employers on the ABN Look up.
More information
From the ATO
Legislative instrument re foreign resident withholding for a deceased individual
The ATO have provided updated guidance on the foreign resident CGT withholding provisions that took effect from 1 July 2016. This is in addition to the legislative instrument that has been issued in relation to deceased estates, which allow for a variation of the standard 10% withholding tax rate to nil where: ·
CGT assets pass from a deceased individual to their estate upon their death
- A CGT asset passes from the deceased estate to a beneficiary
- An interest in a CGT asset passes to the other joint tenant upon the death of one of the joint tenants
More information
Proposed softening of penalty regime for individuals & SMEs
The ATO has reviewed its approach to penalties and proposed changes to address the perceived imbalance between mistakes that are made by taxpayers and level of penalties that may be imposed as a result.
This potential changes outlined in the consultative forum would only deal with individuals and small business taxpayers (turnover less than $2m) who would be provided with a one-off chance to avoid penalties if these taxpayers had done something that would ordinarily result in a penalty e.g. failure to take reasonable care for an error on a tax return or activity statement. The opportunity would be refreshed after a defined period of time (e.g. 3 or 4 years) and it would not be available to taxpayers that had committed recklessness or fraud.
The ATO issued a consultation paper on ‘Proposed changes to penalties for small business and individuals’ with a webinar to cover it to be held on 13 October. Submissions can be made until 24 October, after which the ATO Penalty Project team will provide a summary of the outcomes of the consultation process.
More information
ATO Panama Paper ‘week of action’
The Commissioner has released a statement regarding a ‘week of action’, outlining progress made in dealing with taxpayers exposed in the Panama Papers as trying to avoid their tax obligations. The Commissioner stated that the Knowledge Shop 2016 7 information is being shared between government agencies and with international partners.
The Commissioner also confirmed that the ATO has received data on Australians who have not disclosed offshore bank accounts and offshore service providers who have established entities for Australians in secrecy jurisdictions for the sole purpose of concealing their interests and wealth. Over 2,500 exchanges of information have taken place in the last four years that resulted in $1 billion in tax liabilities.
The ATO are currently accessing and reviewing additional information that has been received from a variety of sources and is using it to identify those who might not be disclosing offshore income or assets. If any action is taken by the ATO in relation to tax fraud, it could result in criminal charges in addition to the outstanding tax and penalties that the taxpayer would face. If the taxpayer has a criminal conviction, this could result in their removal as a trustee of a SMSF or director of a company, restrictions on international travel and difficulties in obtaining finance and insurance.
More information
ATO visits to small business taxpayers
The ATO have announced that they are having one-to-one discussions with small business clients about their range of digital services.
They may directly contact taxpayers who are new to small business or whose circumstances have changed to offer to visit those taxpayers and demonstrate the ATO products and services, stating that those visits would be covered by the ‘Commissioner’s Guarantee’ i.e., no information gathered in those visits would be used for any other purpose.
More information
Rulings, IDs & determinations Non-arm’s length LRBAs
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?
TD 2016/16 replaces ATO IDs 2015/27 and 2015/28, which have been withdrawn.
The ATO have provided further guidance in relation to SMSFs that have non-arm’s length limited recourse borrowing arrangement (LRBA) and whether the income of the SMSF from an asset acquired under the LRBA would be considered non arm’s length income.
This TD confirms that it is necessary to identify the steps of the arrangement between the parties, determine the amount of income the SMSF might have derived if the same parties were dealing with each other at arm’s length, which would include a hypothetical borrowing arrangement. If it is reasonable to conclude that the SMSF would not have entered into the hypothetical borrowing arrangement, or it might have been expected to derived more income without it, then this TD states the income derived under the scheme would be non arm’s length income.
More information
PCG 2016/5 – Income tax – arm’s length terms for Limited Recourse Borrowing Arrangements established by self managed superannuation funds
The ATO have also updated PCG 2016/5 (originally published in April 2016), which provides guidance on SMSFs with limited recourse borrowing arrangements and the impact of those on the related income of the SMSF, including examples that reflect the updated deadline of compliance with these provisions by 31 January 2017.
More information · PCG 2016/5
Fuel Tax Credits
FDT 2016/1 – Fuel tax: fuel tax credits – fuel used for idling and cabin air-conditioning of a vehicle on a public road
FDT 2016/1 clarifies that the amount of a fuel tax credit that would otherwise be claimable for a taxable fuel used in a vehicle on a public road to power the engine of the motor vehicle whilst it is idling or to power the air conditioning in the motor vehicle’s cabin must be reduced accordingly.
This FDT applies from 1 July 2006, unless a taxpayer has an existing settlement of a dispute that was agreed to before the date of issue of this FDT (being 7 September 2016).
More information
PCG 2016/11 – Fuel tax credits – apportioning taxable fuel used in a heavy vehicle with auxiliary equipment
PCG 2016/11 provides guidance on apportioning taxable fuel used in a heavy vehicle with auxiliary equipment that may be used with that heavy vehicle. The fuel tax credit will be reduced to the extent that the fuel is used to travel on a public road.
The PCG sets out a fair and reasonable apportionment between fuel used for travelling on a public road, and fuel used for other purposes (e.g. powering auxiliary equipment or travelling off public roads).
Specific types of vehicles and types of auxiliary equipment are covered in a table in this PCG.
More information · PCG 2016/11
Cases
Transporting bulky goods deduction claim denied
Reany and Commissioner of Taxation (Taxation) [2016] AATA 672
The AAT has found that an employee who had relied on ‘transporting bulky goods’ as the basis for his deduction claim for the cost of transporting his tools and equipment between his home and his workplace was not entitled to do so.
Generally, an employee is not permitted a deduction for the cost of travel between home and work. However, one exception to this general rule is where an employee is required by their employer to carry bulky tools or equipment from home to work and no secure storage is provided by the employer to the employee to store the tools and equipment at the worksite.
In this case, the employer provided the taxpayer with a locker to store his tools and equipment at his primary place of work. However, the taxpayer decided to take his tools and equipment home each night as he did not believe the storage lockers provided by the employer to be secure.
As this was the taxpayer’s own personal choice, arising out of his safety concerns for his equipment, the AAT found that the taxpayer was not entitled to a deduction for any amount of his work related travel expenses as he was not required by his employer to carry his bulky tools and equipment from home to work.
Unexplained money not income
Zhang and Commissioner of Taxation (Taxation) [2016] AATA 662
This long running case followed ATO audits that commenced in 2007 and dealt with the ATO reconstructing a large amount of transactions and concluding that the majority of them were income as the taxpayer could not evidence that they should not be treated as income.
The taxpayer was able to satisfy the ATT that he had not deliberately committed tax evasion in any of the tax years that were subject to the audits, and not being able to support the non-income nature of the specified transactions was more likely to have been due to the taxpayer’s poor record keeping or the unavailability of record from those prior tax years.
As a result, the AAT set aside the objection decisions, for some of the tax years allowed an objection against the primary tax and administrative penalties, for other tax years the primary tax was remitted to the Commissioner for reconsideration, and for some tax years, administrative penalties were reduced from 50% to 25%.
Service charge not deductible
PBKQ and Commissioner of Taxation (Taxation) [2016] AATA 681
This case centres on the deductibility of a service charge between related companies.
The common single shareholder and director of both companies is a CPA and the details of the companies and the shareholder have been withheld, pseudonyms are used instead.
The service charge in dispute was comprised of, amongst other items of expenditure, workers’ compensation expenses, and client entertainment expenses.
The AAT was not convinced that the service charge was a valid deductible expense. There was insufficient evidence that the taxpayer had actually incurred the expense in carrying on its business. The taxpayer had relied upon the description of the services in a service agreement between the two entities but did not have any supporting evidence for their position.
GST credits on construction costs
RSPG and Commissioner of Taxation (Taxation) [2016] AATA 687
This case dealt with a taxpayer claiming partial GST credits for the construction costs of a retirement village, allocating them between creditable and non-creditable acquisitions. However, the AAT rejected the taxpayer’s claim for input tax credits based on the methodology that the taxpayer used.
Although the taxpayer had used an apportionment methodology that was based on a formula in GST 2011/1, the Commissioner had argued that methodology did not reflect a fair and reasonable apportionment of the acquisitions in this case. The AAT accepted the Commissioner’s argument and also rejected the taxpayer’s argument that the entire retirement village should be characterised as commercial residential premises
Legislation
Before Parliament
SBE turnover increase to $10m and company tax reduction
Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016
Introduced on 1 September 2016, this Bill contains amendments introducing a series of 2016 Budget measures:
- Increase the SBE turnover threshold
- Increase the unincorporated small business tax discount Knowledge Shop 2016 11
- Increase the SBE turnover threshold to qualify for the lower company tax rate
- Introduce an ongoing reduction in the company tax rate over 11 years to 25% in 2026-27
Personal income tax rate reduction
Treasury Laws Amendment (Income Tax Relief) Bill 2016
Introduced on 1 September 2016, this Bill increases the 32.5% personal income tax threshold from $80,000 to $87,000 from 1 July 2016.
DTA with Germany
International Tax Agreements Amendments Bill 2016
Introduced on 1 September 2016, this Bill brings into force the new Australia / Germany Double Taxation Agreement.
Boosting the Commissioner’s powers
Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016
Reintroduced on 14 September 2016, this Bill contains the Commissioner’s statutory remedial power. If this Bill were to be passed, that power could be applied to some of the measures on the ‘un-enacted tax measure’ list of changes announced, but not enacted by the time the Commissioner’s power would be exercised.
In addition, there would also be changes to:
- Primary producer income averaging provisions effective from the 2016/17 tax year onwards, allowing the primary producers to access income tax averaging 10 years after choosing to opt out, instead of it being a permanent choice.
- Luxury Car Tax (LCT) for certain public institutions (e.g. museums, galleries, etc. that are registered for GST and endorsed as DGRs) that import or acquire luxury cars for the sole purpose of public display to access relief from the LCT.
Royal Assent
Omnibus Bill
Budget Savings (Omnibus) Bill 2016
This Bill received Royal Assent on 16 September 2016 and covers a range of outstanding measures announced in the 2016-17 Budget and earlier Budgets, including:
- Adjusting the minimum repayment threshold for HELP debts
- Changes impacting aged care providers
- Changes to various social security benefits, including indexation of family tax benefits and parental leave thresholds
- Removal of HECS-HELP benefits (from 1 July 2017)
- Rates of R&D tax offsets being reduced by 1.5% for the first $100 million of eligible expenditure. In addition, the higher refundable rate will be reduced from 45% to 43.5%, whilst the lower non-refundable rate will be reduced from40% to 38.5%.
- Single Touch Payroll reporting obligations.
If you have any queries on any of this or any other tax or accounting matters, then here at Fortis Accounting Partners, we are always happy to help.
