Client Alert Explanatory Memorandum (September 2016)

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Share economy participants reminded of tax obligations

The ATO has reminded tax professionals to consider clients who may be involved in the share economy. Some individuals may not be aware they have tax obligations when earning income through the sharing economy. The types of goods or services taxpayers provide, and how much they provide, will determine what they need to do for tax. Taxpayers may be involved in renting out part or all of a house, providing ride-sourcing services or providing other goods or services.

Source: ATO, “Sharing economy reminder for your clients”, 9 August 2016, https://www.ato.gov.au/Tax-professionals/Newsroom/Income-tax/Sharing-economy-reminder-for-your-clients/.

The ATO has previously released information on view of the tax obligations of people who provide services in the sharing economy. The ATO’s view is that the tax laws apply to activities conducted in the sharing economy in the same way as they apply to activities conducted in a more conventional manner.

Some key points:

  • Income tax obligations for providers: People who earn assessable income from providing sharing economy services need to keep records of income from that activity and any allowable deductions, which may need to be apportioned for private use.
  • GST implications for providers: Where a person is already registered for GST for another purpose, the activities in their sharing economy enterprise must be included with their other activities. People providing “taxi travel” must be registered for GST regardless of their turnover amount. People conducting other activities need to register for GST if the annual turnover from their sharing economy enterprise is $75,000 or more.
  • Taxi travel services through ride-sourcing: The ATO has previously released guidance for people providing taxi travel services through ride-sourcing (also known as ride-sharing or ride-hailing). This is available on the ATO website at: https://www.ato.gov.au/Business/GST/In-detail/Managing-GST-in-your-business/General-guides/Providing-taxi-travel-services-through-ride-sourcing-and-your-tax-obligations/. The ATO has confirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The existing tax law applies, and so drivers are required to register for GST regardless of their turnover. Other key points:
  • GST must be calculated on the full fare, not the net amount received after deducting fees and commissions. For example, if a passenger pays $55 and the facilitator pays $44 (after deducting an $11 commission), the GST payable is $5 (not $4).
  • GST credits can be claimed on business purchases, but must be apportioned between business and private use. For example, if a new car is bought for for $33,000 (including $3,000 GST), and the usage is 10% ride-sourcing and 90% private, the GST credit will be $300.
  • For fares over $82.50 (including GST), drivers must provide their passengers with a tax invoice if they request one.
  • The ATO previously allowed drivers until 1 August 2015 to obtain an ABN and register for GST. The ATO does not intend to apply compliance resources regarding drivers’ GST obligations before 1 August 2015, except if there is evidence of fraud or other significant matters.
  • Renting out part of all of a home: The ATO has also previously released information for people renting out part or all of their home (available on the ATO website at: https://www.ato.gov.au/general/property/your-home/renting-out-part-or-all-of-your-home/). The rent money received is generally regarded as assessable income. Taxpayers must declare their rental income in their income tax returns; however, they can claim deductions for the associated expenses, such as part or all of the interest on a home loan. These people may not be entitled to the full CGT main residence exemption. The ATO also notes that GST does not apply to residential rents, meaning GST credits cannot be claimed for associated costs.

Itinerant worker claim denied, so travel deductions refused

A taxpayer has been unsuccessful before the AAT in relation to deduction claims for work-related car expenses and work-related travel expenses (meals and accommodation) for the 2011-12 income tax year.

Background

The taxpayer worked a variety of short-term jobs for various employers at different New South Wales country towns over the relevant year (eg bunker hand at Bellata and West Wyalong, chemical mixer at Moree, mixer/driver at Parkes and Moree, forklift driver at Ashley). The taxpayer and his wife had a house in Springfield; however, they travelled to the various work locations taking two vehicles (a car and a motorhome) and, except at Parkes, the taxpayer and his wife stayed in the motorhome at various caravan parks. The taxpayer claimed deductions for the two vehicles using the cents per kilometre method. The amounts disputed included $5,325 claimed for car expenses and $32,543 claimed for travel expenses (comprising $26,195 for meals and $6,348 for accommodation).

The taxpayer contended he was entitled to the deductions under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis that he was an itinerant worker and that he incurred the expenses in gaining or producing his assessable income. He also argued he was entitled to rely on Taxation Ruling TR 95/34 Income tax: employees carrying out itinerant work – deductions, allowances and reimbursements for transport expenses, and that, by virtue of s 357-60 of Sch 1 to the Taxation Administration Act 1953 (TAA), the Commissioner was bound to apply the ruling if the law turns out to be less favourable to him. That is, the taxpayer claimed to be protected from any adverse fiscal consequences because of the public ruling issued by the Commissioner.

Decision

The AAT affirmed the Commissioner’s decision that the taxpayer was not entitled to the deduction claims. The AAT found that the taxpayer was not an itinerant worker and his reliance on the Commissioner’s public tax ruling was “misplaced”.

In finding that the taxpayer was not an itinerant worker, the AAT noted that his duties did not involve him travelling from workplace to workplace, and that he was not required to travel to the different locations in the course of his employment; that is, he did not have a “web” of workplaces. The AAT regarded the employment arrangements at each location to be separate and discrete, noting that the taxpayer returned home at the end of each employment arrangement. It said each workplace could be regarded as a regular or fixed place of employment, even if there was some uncertainty about the length of time that he would be employed at each location because of the seasonal nature of the work.

The AAT held that the claimed expenses were not incurred in gaining or producing the taxpayer’s assessable income, but were private and domestic in nature. In addition, the AAT held the taxpayer was not entitled to claim the car expenses using the cents per kilometre method, as he was not the owner of the vehicles for the purposes of s 28-12(1) of ITAA 1997. He also did not clarify the quantum of his claim, namely, the number of kilometres travelled in his motorhome. The AAT rejected the taxpayer’s secondary argument that he was entitled to work-related travel expenses claims under TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses, noting that the ruling had no application. The AAT was of the view that the taxpayer chose to travel from Springfield to live in towns near his work locations. It also noted that none of his employers demanded that he live away from his usual place of residence, and he was not paid an allowance or reimbursement for any expense to live away from home.

In relation to the public ruling protection claimed by the taxpayer, the AAT noted his reliance on the hypothetical examples of Valerie the fruit picker and Ian the shearer contained in TR 95/34 (at paras 44 and 55). The AAT held the taxpayer was not entitled to public ruling protection as his factual circumstances were different to those in the hypothetical examples. It said Valerie had a “web” of workplaces and Ian’s travel was fundamental to his work. There was also a potential issue that the examples were under the “Explanations” heading and not the “Ruling” heading within TR 95/34; however, as no party raised the issue and because the AAT found that the examples did not apply to the taxpayer, the AAT decided not to address that issue.

Re Hill and FCT [2016] AATA 514, 21 July 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/514.html.

 

 

ATO flags retirement planning schemes of concern

The ATO has launched the Super Scheme Smart initiative (see: https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/) to inform people about retirement planning schemes that are of increasing concern. According to the ATO, individuals approaching retirement are the most at risk of becoming involved in problematic schemes that are “too good to be true”. This target category includes people aged 50 or over looking to put significant amounts of money into their retirement, particularly self managed superannuation fund (SMSF) trustees, self-funded retirees, small business owners, company directors and individuals involved in property investment.

While retirement planning schemes can vary, people should be aware of some common features that problematic schemes share. The ATO says the schemes of concern generally:

  • are artificially contrived and complex, and usually connected with an SMSF;
  • involve a lot of paper shuffling;
  • are designed to leave the taxpayer paying minimal or no tax, or even receiving a tax refund; and/or
  • aim to give a present-day benefit.

The ATO is concerned about the following scheme types.

Dividend stripping

In this type of arrangement, the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose is to strip profits from the company in a tax-free form (refer to Taxpayer Alert TA 2015/1).

In November 2015, the ATO made an offer to SMSF trustees who may have implemented a dividend stripping arrangement substantially similar to the one described in TA 2015/1. SMSF trustees were invited to make voluntary disclosures to correct the tax position resulting from such arrangements. The offer was opened in November 2015 and ended on 15 February 2016. In May 2016, the ATO said that while it was “happy with the response” it had received to date, it believed there may be many more SMSFs that have similar arrangements in place. Going forward, the ATO said it did not believe “trustees should be harshly punished when they think they have done the right thing”. It encouraged trustees who are uncertain to engage with the ATO and, if necessary, seek an “early resolution to any dispute”. Consideration will be given to reduced penalties in accordance with the ATO’s remission guidelines.

Non-arm’s length limited recourse borrowing arrangements

In this type of arrangement, an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s length dealing. For more information, see Practical Compliance Guide PCG 2016/5, which sets out the Commissioner’s “safe habour terms” for LRBAs. If an LRBA is structured in accordance with PCG 2016/5, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the non-arm’s length income (NALI) rules (47% tax) will not apply to the income generated from the LRBA asset.

On 30 May 2016, the ATO announced that it has extended until 31 January 2017 the deadline for SMSF trustees to ensure that any related-party LRBAs are on terms consistent with an arm’s length dealing. It had previously announced a grace period whereby it would not select SMSFs for review for the 2014–2015 or earlier years where arm’s length terms for LRBAs were implemented by 30 June 2016 (or LRBAs were brought to an end before that date). The deadline extension to 31 January 2017 follows the release of PCG 2016/5.

Diverting personal services income

In this type of arrangement, an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF, where it is concessionally taxed or treated as exempt from tax (refer to Taxpayer Alert TA 2016/6).

Taxpayers who have entered into a similar arrangement to that described in TA 2016/6 are encouraged to contact the ATO so it can help resolve any issues in a timely manner and minimise the negative impact on the individual and the fund. Individuals and trustees who are not currently subject to ATO compliance action, and who come forward before 31 January 2017, will have administrative penalties remitted in full. However, shortfall interest charges still apply.

ATO’s Super Scheme Smart initiative

The ATO has said the schemes of concern “are designed by their promoters solely to help you avoid paying tax by encouraging you to channel money inappropriately through an SMSF”. The ATO’s Super Scheme Smart initiative provides information for individuals and intermediaries, including Q&As, case studies and a PowerPoint presentation.

“While the schemes we are targeting under Super Scheme Smart may be complex, our message is not – if it looks too good to be true, it probably is”, said ATO Deputy Commissioner Michael Cranston.

Taxpayers who may have been caught up in a scheme can phone the ATO on 1800 177 006 or email: reportataxscheme@ato.gov.au for further information.

Source: ATO media release, Pre-retirees warned: avoid ‘too good to be true’ tax schemes, 28 July 2016, https://www.ato.gov.au/Media-centre/Media-releases/Pre-retirees-warned–avoid–too-good-to-be-true–tax-schemes/.

Deductibility for gifts to clients and airport lounge membership fees

On 27 July 2016, the ATO issued two Taxation Determinations. They apply for income years commencing both before and after their date of issue.

Deductibility of gifts to clients

Taxation Determination TD 2016/14 states that a taxpayer that carries on a business is entitled to a deduction under s 8-1 of ITAA 1997 for an outgoing incurred on a gift made to a former or current client, if the gift is made for the purpose of producing future assessable income. The ATO notes that a gift is not deductible if the outgoing is capital, relates to gaining non-assessable, non-exempt income, or is non-deductible under another provision.

The ATO provided the following examples.

Example 1

Sally is carrying on a renovation business. She gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months.

Sally expects the gift will either generate future business from the client or make them more inclined to refer others to her business. Although Sally got on well with her client, the gift was not made for personal reasons and is not of a private or domestic character.

The outgoing Sally incurred for the champagne is not of a capital nature.

Sally is entitled to a deduction under s 8-1 of ITAA 1997.

Example 2

Bernard is carrying on a business of selling garden statues. Bernard sells a statue to his brother for $200. Subsequently, Bernard gifts a bottle of champagne to his brother worth $170. Apart from his transaction, Bernard provides gifts only to clients who have spent over $2,500 during the last year.

The gift has been made for personal reasons, and is of a private or domestic character.

Bernard is not entitled to a deduction under ss 8-1 or 40-880 of ITAA 1997.

Deductibility of airport lounge membership fees for employers

Taxation Determination TD 2016/15 states that an employer taxpayer is entitled to a deduction under s 8-1 of ITAA 1997 for annual fees incurred on an airport lounge membership for use by its employees, where that membership is provided because of the employment relationship. The determination notes that the fees will not be deductible is if they are related to gaining or producing exempt income or non-assessable, non-exempt income. The determination indicates that the fees will be deductible in full even if there is substantial private use of the lounge membership by employees (eg while they are on holiday).

Changes to $500,000 lifetime super cap confirmed

The Federal Treasurer has confirmed there will be some changes to the Government’s May 2016 Budget proposal for a lifetime cap of $500,000 on non-concessional superannuation contributions. A number of exemptions will be available.

Scott Morrison said in a Radio 2GB interview on on 8 August 2016 that he had previously spoken about the changes and that draft legislation will be released soon, containing a number of changes to the original proposal. He said if someone gets a pay-out “as a result of an accident or something like that, then that is exempted from the $500,000 cap”. If someone had entered into a contract before Budget night to settle on a property asset out of their SMSF and they are using after-tax contributions to settle that contract, “that won’t be included” in the $500,000 cap either. Mr Morrison also said there would be “other measures that will be in the exposure draft legislation […] coming out shortly”.

The Treasurer effectively ruled out lifting the cap $500,000 cap, saying “the only people that would benefit are people who […] already on average have $2 million in their superannuation scheme, have already put $700,000 in after tax contributions […] Now, I don’t know too many people out there […] who are sitting there with a bag of $500,000 which they want to put in their superannuation fund. [… T]here are about 42,000 of them in the country and that is less than 1% of the superannuants in this country. [T]hey are on higher incomes, have higher balances, have already benefited significantly from the generous tax contribution and other concessions that exist from superannuation and the argument they are making is – I want more. I want to put more in so I don’t have to pay as much tax as someone else is on those earnings. So, look, I think [the cap] is a fair measure and I stand by the measure.”

Source: Radio 2GB interview transcript, 8 August 2016, http://sjm.ministers.treasury.gov.au/transcript/100-2016/.

The $500,000 lifetime super cap as announced on Budget night

As part of the 2016 Federal Budget, the Government introduced a lifetime non-concessional contributions cap $500,000 effective from 7.30 pm (AEST) on 3 May 2016 (Budget night). The lifetime non-concessional cap (indexed) will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every three years under the bring-forward rule for individuals aged under 65).

Non-concessional contributions include contributions not included in the assessable income of the receiving superannuation fund, such as non-deductible personal contributions made from the member’s after-tax income (formerly known as undeducted contributions).

The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before the cap’s commencement cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after 7.30 pm AEST on 3 May 2016 will need to be removed or subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).

The Government believes this measure will provide people with flexibility regarding when they choose to contribute to their superannuation. It will apply for all Australians up to age 74. It is estimated to mean a gain to revenue of $550 million over the forward estimates period.

Example

Anne, aged 61, is planning for her retirement. Five years ago, Anne received an inheritance of $200,000 which she put into her superannuation. Anne now intends to sell her home and buy a smaller property. She is hoping to put the proceeds into her superannuation. Anne can contribute up to $300,000 more into her superannuation before she reaches the non-concessional cap.

Anne’s non-concessional contributions are in addition to the compulsory superannuation payments her employer makes and the additional salary-sacrificed contributions she elects to make from her salary.

Defined benefit schemes

After-tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefit fund exceeds the lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.

The amount that can be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Removal of contributions made to a defined benefit account will not be required. The Government will consult to ensure broadly commensurate and equitable treatment of individuals for whom no amount of post-1 July 2007 non-concessional contributions are available for removal. See also Budget Superannuation Fact Sheet 5 (http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/05-SFS-Defined_benefit_funds.pdf/).

Source: Budget Paper No 2, p. 27, http://www.budget.gov.au/2016-17/content/bp2/html/; Treasurer’s press release, 3 May 2016, http://sjm.ministers.treasury.gov.au/media-release/053-2016/; Budget Superannuation Fact Sheet 4, http://www.budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/04-SFS-NClifetime_cap.pdf/.

Home exempt from land tax for “world-traveller”

The Victorian Civil and Administrative Tribunal (VCAT) has set aside land tax assessments for the 2011 to 2015 land tax years issued to a taxpayer after finding that the principal place of residence (PPR) land tax exemption applied to his circumstances.

Background

In 2003, the taxpayer was left a property in Shoreham, Victoria in his mother’s will. After moving into that property, the taxpayer continued his interest of overseas travel, meeting and marrying his now wife, who continues to live in Canada. Broadly, for each tax year in question, the taxpayer spent a couple of months in Australia at the Shoreham property, with the balance spent mostly in Canada and other overseas destinations. The taxpayer submitted that he considered the Shoreham property his “home”, where he kept “all his personal treasures”, among other things. He also noted “significant and communal family ties” in Victoria (including his three children and eight grandchildren in Melbourne) and “financial ties” to Australia.

Decision

VCAT was satisfied, based on the evidence before it, that for each of the relevant tax years the taxpayer “always had the intention of returning to his home” in Australia and that the taxpayer’s absences from the property were “temporary” within the meaning of the legislation.

In this regard, the Tribunal said, “In this day and age, people are far more mobile than they have been previously and it is not unreasonable that someone should have a base at a particular place where they spent two or three months per year. It is clear that if a person has such a base as the [taxpayer] does in this case and he is away from that base but always intending to return as I find the [taxpayer] did, then it can be described that the [taxpayer’s] absence from the property was ‘temporary’ within the meaning of the legislation.”

VCAT was also satisfied that when the taxpayer returned home he had the intention to resume “occupation” of the property. Accordingly, it concluded that the taxpayer had made out the PPR exemption pursuant to s 54 and s 56(1)(a) and (b) of the Land Tax Act 2005 (Vic).

Ward v Commissioner of State Revenue [2016] VCAT 1307, 4 August 2016, http://www.austlii.edu.au/au/cases/vic/VCAT/2016/1307.html.

Client Alert (September 2016)

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Share economy participants reminded of tax obligations

The ATO has reminded people who earn income in the share economy that they have tax obligations. The type of goods or services you provide, and how much you provide, will determine what you need to do for tax. Popular sharing economy services include:

  • providing “ride-sourcing” services for a fare;
  • renting out a room or a whole house or unit on a short-time basis;
  • renting out a car parking space; and
  • providing personal services, such as creative or professional services like graphic design and website creation, or doing odd jobs like deliveries and furniture assembly.

The ATO notes that you need to get an ABN if you are carrying on an enterprise providing goods and services through the sharing economy, and register for GST if:

  • your turnover is $75,000 or more per year; or
  • you are providing ride-sourcing services, regardless of how much you earn from doing so.

TIP: No matter how much you earn or your reasons for providing goods or services, it’s a good idea to maintain records of your income and expenses, so you can keep track of your activities and deal with tax obligations when they arise.Tax deductions may also be available in certain circumstances. Please contact our office for more information.

Itinerant worker claim denied, so travel deductions refused

An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT), where he argued that he was an itinerant worker and was therefore entitled to claim tax deductions for travel expenses of some $38,000 for the 2011–2012 income year.

The taxpayer worked a number of short-term jobs in various country towns across New South Wales. He and his wife had a house, but they would travel to the work locations, taking their car and a motorhome to live in. The individual argued he was entitled to claim deductions for car expenses and travel expenses such as meals and accommodation.

The AAT found that he was not an itinerant worker and that the expenses were private in nature and therefore not tax deductible. Among other things, the AAT noted
that his duties did not in fact require him to travel between and stay near the different workplace locations in the course of his employment.

ATO flags retirement planning schemes of concern

The ATO has launched the Super Scheme Smart initiative to inform people about retirement planning schemes that are of increasing concern. According to the ATO, people approaching retirement are most at risk of becoming involved in schemes that are “too good to be true”. While retirement planning schemes can vary, you should be aware of some common features of problematic schemes. These schemes generally:

  • are artificially contrived and complex, and usually connected with a self managed super fund (an SMSF);
  • involve a lot of paper shuffling;
  • are designed to leave you paying minimal or no tax, or even receiving a tax refund; and/or
  • aim to give you a present -day benefit.

The ATO has previously issued statements about concerning schemes that involve non-arm’s length limited borrowing arrangements, dividend stripping and diverting personal services income.

TIP: The ATO encourages people to report their involvement in such schemes early. In specific circumstances, penalties may be reduced. Please contact our office for more information.

Deductibility for gifts to clients and airport lounge membership fees

The ATO has recently released the following Taxation Determinations:

  • TD 2016/14 states that business taxpayers are entitled to a tax deduction for the outgoing incurred for a gift made to a former or current client, if the gift is made for the purpose of producing future assessable income. The gift is not deductible if the outgoing is capital, relates to gaining “non-assessable, non-exempt” income, or is non-deductible under another provision.
  • TD 2016/15 states that employer taxpayers are entitled to a tax deduction for annual fees incurred on an airport lounge membership for use by employees, if that membership is provided because of the employment relationship.

Changes to $500,000 lifetime super cap confirmed

The Federal Treasurer has confirmed that there will be some changes to the Government’s proposal for a lifetime cap of $500,000 on non-concessional superannuation contributions. A number of exemptions will be available.

Scott Morrison said in a radio interview that he had previously spoken about the changes and that draft legislation on the measures, to be released soon, will contain a number of changes. He said if someone gets a pay-out “as a result of an accident or something like that, then that is exempted from the $500,000 cap”. He also said that if someone had entered into a contract before Budget night to settle on a property asset out of their SMSF and they use after-tax contributions to settle that contract, “that won’t be included” in the $500,000 cap. Mr Morrison said there also would be “other measures” in the exposure draft legislation.

He effectively ruled out lifting the $500,000 cap amount, saying “the only people that would benefit are people who […] already on average have $2 million in their superannuation scheme, have already put $700,000 in after tax contributions”.

TIP: The ATO can only calculate the amount of your non-concessional contributions available based on the information it has. You may wish to review your own history of contributions. Please contact our office for more information.


Home exempt from land tax for “world-traveller”

An individual has been successful before the Victorian Civil and Administrative Tribunal (VCAT) in seeking the principal place of residence land tax exemption for his home located in Shoreham, Victoria, despite being a “world-traveller” whose wife lives overseas.

In 2003, the taxpayer was left the property in Shoreham in his mother’s will. After moving into the property, he continued his interest of overseas travel, meeting and marrying his now wife, who continues to live in Canada. Broadly, for each of the five tax years in question, the taxpayer spent a couple of months in Australia at the property, with the balance spent mostly in Canada and other overseas destinations. He submitted that he considered the Shoreham property his “home”, where he kept “all his personal treasures”, among other things. He also noted “significant and communal family ties” in Victoria (including his three children and eight grandchildren in Melbourne) and “financial ties” to Australia.

In finding in favour of the taxpayer, VCAT said that in this day and age people are far more mobile than in the past, and it is not unreasonable that someone would have a base at a particular place to which they intend to return and resume occupation. In this regard, the Tribunal was of the view that the land tax exemption applied to the taxpayer’s circumstances.

TIP: Land tax regimes differ from state to state. Please contact our office for assistance or more information.

 

What You Need to Know About Repaying HELP Financing

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If you participate in the Higher Education Loan Program (HELP) to assist in financing your education, you must start to repay the debt once your income exceeds a government-set repayment threshold for the income tax year, even if you are still in school.

There are actually two ways in which you can pay your student contribution under the HELP scheme:


  1. Make a full or partial up-front payment to the university.     For a full up-front contribution you only need to pay 90 percent of the total; the Government pays the remaining 10 percent to the educational institution you are attending. Even partial contribution payments of $500 or more are eligible for the 10 percent discount.

  2. Repay the government through the tax system     if the government has paid your contribution under the HELP scheme. HELP debts are collectable through the pay as you go (PAYG) system. Have the government pay the contribution (or the balance if you made a partial up-front payment) and agree to repay the government through the tax system.

If you choose the second method, you start repaying when your repayment income exceeds that threshold, which changes annually. Repayment income is the sum of your taxable income, net investment losses, fringe benefits, exempt foreign employment income and superannuation contributions.

The Australian Tax Office (ATO) calculates your compulsory repayment for the income year in question and includes the amount on your notice of assessment. If you are a student, you must let your employer or other payer know that you have an accumulated HELP debt, either on a Tax File Number declaration or on a Withholding declaration.

Whoever is paying you must start to withhold additional amounts from your pay once your earnings reach a statutory amount, which is revised annually. The additional withholdings are to cover any compulsory repayments.

These amounts go into the total tax withheld shown on your annual PAYG payment summary. The compulsory repayment will be calculated when your income tax return for the year is processed. If there was not enough money withheld during the year, the amount to be repaid will show on your income tax notice of assessment.

If you made any voluntary repayments of $500 or more, you will receive a bonus on the compulsory repayment amount.

While there is no real interest charged on HELP loans, your debt is indexed each year to reflect changes in the Consumer Price Index. The ATO makes this adjustment on June 1 each year and applies it to the portion of your debt that has been unpaid for 11 months or more.

Before applying for a HELP loan, consult with us on (02) 9954 3843 to help ensure you are clear on how they work and that they are suitable for your current and anticipated financial situation.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

ATO Powers In Response to SMSF Contraventions

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The ATO – as the regulator of SMSFs (self-managed super funds) – has a range of treatments available to it to deal with SMSF trustees who have not complied with the super laws. The ATO says its primary focus is to encourage SMSF trustees to comply with the super laws. However, SMSF trustees should be aware of the range of penalties or actions that the ATO could apply in the event of a contravention.

These include the following actions:

  • Education direction – the ATO says it may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The education course is designed to improve both the competency of SMSF trustees and their ability to meet their regulatory obligations, and to reduce the risk of trustees contravening the law in future.
  • Enforceable undertakings – the ATO can decide whether or not to accept an undertaking from an SMSF trustee to rectify a contravention. The undertaking must be provided to the ATO in writing and must include the following:
    • a commitment to stop the behaviour that led to the contravention;
    • the action that will be taken to rectify the contravention;
    • the timeframe to rectify the contravention;
    • how and when the trustee will report that the contravention has been rectified; and
    • the strategies to prevent the contravention from recurring.
  • Rectification directions – the ATO may give a trustee or a director of a corporate trustee a written direction to rectify a contravention of the super laws. A rectification direction will require that a person undertakes specified action to rectify the contravention within a specified time, and provide evidence of compliance with the direction.
  • Administrative penalties – from 1 July 2014, individual trustees and directors of corporate trustees will be personally liable to pay an administrative penalty for various contraventions of the super law (breaching the SMSF borrowing rules or the in-house asset rules etc). The penalty cannot be paid or reimbursed from the assets of the fund.
  • Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened the super laws. The ATO can also disqualify an individual if it is concerned with the actions of that individual or if it doubts they are suitable to be a trustee.
  • Civil and criminal penalties – the ATO may apply through the courts for civil or criminal penalties to be imposed. Civil and criminal penalties apply where SMSF trustees have contravened provisions relating to these:
    • the sole purpose test;
    • lending to members;
    • the borrowing rules;
    • the in-house asset rules;
    • prohibition of avoidance schemes;
    • duty to notify the regulator of significant adverse events;
    • arm’s length rules for an investment;
    • promotion of illegal early release schemes.
  • Allowing the SMSF to wind-up – following a contravention, the trustee may decide to wind-up the SMSF and rollover any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority (APRA). Depending on the actions of the trustees and the type of contravention, the ATO may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance treatments.
  • Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance by the ATO. A notice of non-compliance is effective for the year it is given and all subsequent years. A fund remains a non-complying fund until a notice of compliance is given to the fund.
  • Freezing SMSF assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.

Informal arrangements

The ATO says it may take one or several courses of action, depending on how serious the contravention is and the circumstances involved. In some circumstances, the ATO may enter into an informal arrangement with a trustee to rectify a minor contravention within a short period of time. The arrangement can be made verbally or in writing and includes how and when the contravention will be rectified. The ATO will consider the trustee’s compliance history in deciding whether to accept the arrangement. The ATO may also provide trustees with informal education about their trustee obligations.

ATO identification of risk posed by SMSFs

The ATO will apply a risk-based approach in response to auditor contravention reports (ACRs). The Commissioner said he will consider multiple indicators and use risk models to determine the appropriate action to take on each SMSF. The key indicators used will include non-compliance (including regulatory and income tax matters), information from the SMSF annual return, ACRs, and other data, including trustee and members’ records.

Under this approach, the ATO will treat all ACRs received with an audit, phone call or letter, shortly after lodgment, to provide more certainty to trustees. The ATO said this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, warranting less intrusive action in many cases.

The ATO’s risk categories for SMSFs include the following:

  • High-risk SMSFs – will be selected for comprehensive audits that will see scrutiny of all regulatory and income tax risks displayed by the fund. There will be a particular focus on repeat offenders. This program will also involve an increasing number of ATO field visits to engage high-risk SMSFs. ATO administrative penalties for breaches by an SMSF trustee (up to $10,200 per breach) will be applied when the Commissioner confirms the breach is eligible for such a penalty.
  • Medium-risk SMSFs – the ATO will take less intrusive action on SMSFs assessed as medium risk. As trustees are responsible for their fund’s behaviour, the ATO says it will engage directly with trustees to discuss the reported contravention, remind trustees of their obligations, and encourage compliance in future. This action will usually occur within six to eight weeks of the ACR lodgment. In the majority of cases, if the trustee can assure the Commissioner that they understand their obligations, the issues reported in the ACR will be closed and no penalties applied. The ATO’s aim is to intervene before more serious comprehensive audits are required.
  • Lower-risk SMSFs – will be issued with tailored correspondence reminding the trustees of their obligations and encouraging compliance in future. The issue reported in the ACR will be closed with the issuing of this letter which will usually occur within six to eight weeks of the ACR’s lodgment.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Tax Scams: Don’t Be a Victim

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The ATO warns taxpayers to always watch out for scammers. Each year, the ATO receives a growing number of reports from the public of new phishing scams. Not only do scammers try to steal money, they also try to steal identities. The misuse of stolen personal information has been recognised in income tax evasion, customs duty and GST fraud, superannuation fraud and welfare fraud.

Scammers are becoming more cunning in their attempts to defraud the public and trick people into handing over money, their tax file numbers or other personal information. Some perpetrators of such scams send emails containing the latest ATO website imagery and the names and signatures of real ATO staff.

The typical story is that a fraudster contacts a taxpayer out of the blue claiming the taxpayer has overpaid taxes and is entitled to a refund. The fraudster often asks the taxpayer to pay an “administration” or “transfer” fee to obtain the refund. They may also ask for the taxpayer’s personal details including financial details such as bank account information, so the “refund” can be transferred. If the taxpayer hands over money, chances are that it is never seen again, and no transfer is forthcoming.

In another typical scam, fraudsters phone to demand that people pay allegedly unpaid taxes. The ATO is aware of one such aggressive scam where taxpayers are threatened with arrest if they do not pay a fake “tax debt” over the phone. Scammers may also demand payment in gift cards, such as iTunes or prepaid Visa cards.

Scams are most prevalent during tax time, but taxpayers should remain aware and vigilant throughout the year. If you receive an email or a phone call out of the blue from “the ATO” claiming that you are entitled to a refund, that you owe taxes or that you must confirm, update or disclose confidential details like your tax file number, delete the email (do not click any links) or hang up the phone.

From time to time the ATO will send emails, text messages or official social media updates advising of new services. However, the ATO’s messages will never request personal or financial information by SMS or email. If you receive a call, an email or an SMS and are concerned about providing personal information, you can call the ATO on 1800 008 540 (8 am to 6 pm, Monday to Friday). You can also contact our office if you have concerns.

You should practise the same level of vigilance in relation to calls and emails claiming to be from other government authorities, such as state revenue authorities.

Document verification service for businesses

The Government has developed an electronic document verification service (DVS) for business use. The DVS helps businesses to protect themselves against identity crime and makes it easier for businesses to meet their regulatory obligations to verify customers’ identities. The DVS allows businesses to verify information on driver licences, passports, visas and Medicare cards “in real time” directly with the issuing agencies. The system is not a database and does not store any personal information. All DVS checks must occur with the informed consent of the person involved. Further information is available on the DVS website.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Transitioning from Temporary Residency to Australian Residency

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Increased international labour mobility and the use of skilled temporary workers by Australian companies have resulted in a growing number of foreign nationals entering Australia. These people generally hold a temporary visa for immigration purposes. It is important to recognise that holding a temporary visa does not automatically qualify a person for temporary resident tax status.

When someone who is a foreign national first arrives in Australia, they are either a resident or a non-resident for Australian tax purposes. Depending on their visa and circumstances, they may then qualify as a temporary resident. As the tax outcomes differ, it is important to recognise and plan for the key ramifications of becoming a temporary or permanent resident of Australia for tax purposes.

Temporary resident tax status: key concept

A person qualifies for temporary resident tax status if they hold a temporary visa granted under the Migration Act 1958 and they (and their spouse) do not have Australian resident status within the meaning under the Social Security Act 1991.

A temporary visa granted under the Migration Act 1958 is generally a visa that allows someone to travel to and remain in Australia during a specified period, until a specified event happens (eg until a temporary contract ends), or while the holder has a specified status. Under the Social Security Act 1991, an Australian resident is a person who resides in Australia and either is an Australian citizen, holds a permanent resident visa or is a special category visa holder. A person who has been an Australian resident within the meaning of the Social Security Act 1991 cannot be a temporary resident for tax purposes.

The word “resides” is not defined in the legislation and therefore takes on its ordinary meaning. Factors that determine a person’s residency status on entering Australia are outlined in Taxation Ruling TR 98/17.

Tax residency status is a question of fact and the test is determined on a case-by-case basis.

Becoming a permanent resident: key tax implications

When a temporary visa holder (who also qualifies for temporary resident tax status) continues to reside in Australia and is granted permanent residency in Australia, they will cease to hold the temporary visa for immigration purposes. Generally, this occurs on the issue date of the permanent visa. This is also the time when they cease to be a temporary resident and are treated as a tax resident of Australia. The tax implications of becoming an Australian tax resident are considered below.

A temporary resident who becomes a permanent resident in Australia may find themselves in a position where they are a dual resident, in Australia and their home country, for tax purposes.

Income taxable in Australia

When a person qualifies as a temporary Australian resident for tax, certain modified tax rules in Subdiv 768-R of the Income Tax Assessment Act 1997 (ITAA 1997) apply. Broadly, these rules provide the following outcome:

  • The temporary resident is taxed on all Australian source income (eg employment income earned while working in Australia and interest from Australian bank accounts).
  • Any foreign source income the temporary resident derives is not taxed in Australia, unless the income relates to remuneration for employment or services provided in Australia.
  • Any interest the temporary resident pays to foreign residents (eg overseas lenders) is not subject to withholding tax. This type of payment usually occurs when a temporary resident has to continue meeting their existing loan obligations with foreign lenders while working in Australia.
  • Broadly, temporary residents are subject to the same capital gains tax (CGT) rules as foreign residents. Therefore, if a CGT event happens to a CGT asset the temporary resident owns and the asset is not defined as taxable Australian property (TAP), there is no CGT liability for that person. TAP assets include direct and indirect interests in Australian real property. Any gains on TAP assets are taxable to the temporary resident. As temporary residents are treated as non-residents for CGT, they are not entitled to the 50% CGT discount on assets held for more than 12 months.
  • If a temporary resident receives shares and rights under an employee share scheme during their employment in Australia, the discount amount is generally taxable in Australia, unless a portion of the discount relates to services they performed in relation to their employment outside Australia.
  • When a person becomes an Australian tax resident, they are taxed on their worldwide income, including any capital gains arising from CGT events that happen to the CGT assets they own.
  • A temporary resident who pays tax on income earned in Australia may also be taxed in their home country. If this is the case, they may be eligible to claim a foreign tax credit for tax paid.
Temporary residents are subject to tax at the same marginal tax rates as if they were tax residents.

Additional levies and tax offsets

In most cases, a temporary resident is exempt from paying the Medicare levy. However, from the day that the person becomes a tax resident they become liable for the Medicare levy.

When an individual becomes an Australian tax resident they become eligible to claim certain tax offsets under the Australian tax system that are not available to temporary tax residents, such as the low income tax offset and the private health insurance rebate.

Capital gains tax implications

When a temporary resident becomes an Australian tax resident, they are taken to have acquired each CGT asset they own for its market value at the time they ceased to be a temporary resident. This excludes TAP assets (which are already subject to CGT) and pre-CGT assets. When someone is granted permanent residency in Australia, this cessation date is normally the issue date of the visa. This means that CGT only applies to capital gains or capital losses that accrue to an asset after the person becomes a tax resident.

To access the CGT discount, the asset should be held for 12 months from the issue date of the permanent visa.

The main residence exemption

A person who sells a property that was their main residence before they became an Australia tax resident can generally claim the main residence exemption (Subdiv 118-B of ITAA 1997).

If the dwelling is not the person’s main residence for the entire ownership period, a partial exemption may be available, calculated as follows:

For the purposes of the exemption, the ownership period of the dwelling begins from the time the person acquired the dwelling – not when the person becomes a tax resident.

Conclusion

Taxpayers who qualify as temporary residents for tax are given concessional treatment under Australian legislation, with a more relaxed tax system in relation to their foreign income and gains earned while they work and reside in Australia.

If you hold a temporary visa and have temporary resident tax status, you should carefully review your position from time to time and inform your tax adviser of any changes in your circumstances. Becoming a permanent resident in Australia will have a significant impact on the tax treatment of any foreign income and capital gains, so you need to plan appropriately if you plan to apply for permanent residency and have foreign income or investments.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Beware Super Funds Offering Incentives: ASIC

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The Australian Securities and Investments Commission (ASIC) has updated its guide to help employers select a default superannuation fund for their employees. The guide sets out a range of factors for employers to consider when deciding about a default super fund for employees (eg fees, investment options, fund performance and insurance).

ASIC also encourages employers to be wary of trustees offering inducements for the employers to pick their funds. Inducements may take any form, including corporate hospitality, holidays and discounted rates on products or services. ASIC notes that the superannuation law prohibits incentives being offered to employers on the condition that their employees join a fund.

“Employers should not choose a default fund on the basis of an inducement. I strongly encourage employers who are concerned they may have been offered an inducement that is illegal to contact ASIC”, Commissioner Greg Tanzer has said.

ASIC offers the following case studies.

Jane’s super fund offers tickets to events

Jane has just started a small business and is considering what default fund is appropriate for her staff. Jane makes some enquiries with an industry fund about what they offer. The fund tells Jane they will send her tickets to a major sporting event if she agrees to sign up new employees to their default fund.

Jane is worried that she shouldn’t be accepting these gifts and selects another fund for her sales team.

 

Michael’s super fund offers discounts

Michael runs a small manufacturing business. He is considering selecting a new default super fund for his staff. Michael is a long term customer of ABC Bank that also offers a super fund. In conversations with the bank, they tell Michael that if he signs up some of his employees to their super fund, the bank will reduce the interest rate on Michael’s business loan and offer him a new overdraft facility.

This raises alarm bells for Michael because even though he has a good relationship with the bank, he knows the bank is not allowed to offer him this type of inducement. Michael decides not to go with ABC Bank’s super fund.

ASIC reminds employers to focus on what’s best for their employees and to take the time to do their research. ASIC also warns employers to be careful when one fund says that it is better with insurance, returns or fees than another – these comparisons may not compare like with like.

ASIC says the updates to its guide follow a review of some retail and industry super trustees to assess their compliance with s 68A of the Superannuation Industry (Supervision) Act 1993 (the rule prohibiting employer “kick-backs”). ASIC will continue to monitor employer inducements and may consider further enquiries to better understand employers’ experiences when dealing with super trustees and their associated businesses.

The Super for employers guide is available on ASIC’s MoneySmart website at https://www.moneysmart.gov.au/superannuation-and-retirement/super-for-employers.

If you have any questions, please contact our office on 02 9954 3843.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Five Changes That Will Make You An Exceptional Leader

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WHEN IT COMES to leadership roles in business, accountants and finance professionals have an edge over other professions. Their insights and acumen are highly prized by the corporate sector, says Dr Byron Hanson, an associate professor at Curtin Graduate School of Business in Perth. “The language of business matters now. If you can’t speak finance, it’s very hard for you to be a CEO or senior leader,” he says. “I just see CFOs all the time being the heir apparent to large companies. They hold the cards that so many other people in the organisation don’t have.” Perhaps the not-so-good news is that accountants and finance professionals might have to unlearn some of the things that made them experts in the first place, in order to successfully make the transition to leadership.

Hanson has been researching the gaps in the training and skills of finance professionals, particularly with regard to leadership development. His paper, Leadership by the Numbers: Transitioning Finance Professionals to Leaders, was published earlier this year in Massachusetts Institute of Technology’s Sloan Management Review. Several years ago the CFO of a large company told Hanson he was concerned the business only had a 30% success rate in promoting finance people into leadership roles. What could be done to improve the situation?

Less can be more

In practical terms, it turns out that turning finance professionals into business leaders doesn’t just involve adding to their skill sets but can also involve subtracting, or at least downplaying, entrenched ones. “The first thing I would really encourage them to think about is what they need to unlearn,” says Hanson. “We so often think that leadership and learning is to keep on adding, but we have to unlearn some things and change their [finance professionals’] framing about how they’re seen – what they value, and what they have done day-to-day for success, is not going to make them successful in leadership roles.”

As part of his research, Hanson interviewed 35 finance professionals and he identified the five key leadership capability gaps as:

  • strategic thinking
  • influencing across boundaries
  • motivating/empowering others
  • leading and implementing change
  • innovation

But he says such generic leadership skills can be a bit hit and miss for specific professions such as finance.

What’s often needed is for people to change from the dominant logic – the mind set or mental models – of their profession. In effect, they might have to shake off some of the ways of thinking that they learned over years, maybe decades.

Five transitions

Feedback indicates the dominant logic of finance professionals involves such things as factual thinking, attention to details, adherence to rules, and viewing things in a structured way. But Hanson argues there are five critical changes, or transitions, that finance professionals need to make to become successful business leaders.

  1. Moving from being the expert… to leveraging expertise.

Hanson says finance people pride themselves on their expertise, which belongs to them and can seem like a secret language to others. But, despite what some people think, you don’t have to be the smartest person in the room to be a good leader. Making the most of your expertise can be more important for leaders, and he gives the example of leadership work he’s done with technology companies. “Tech people like to be the smartest Person in the room, they hate to lose their technical expertise,” he says. “And there’s a feeling of loss, ‘I’m no longer the person to go to for coding’. “They desperately try to hang on to that (expertise), at the expense of being the leader they need to be.” Hanson says finance people need to realise that the transition to leadership doesn’t mean a loss of expertise, but rather an opportunity to leverage the skills they’ve honed in a more valuable way.

  1.  Moving from the apprenticeship model… to a coaching model.

Hanson says much of the finance profession, especially accounting, involves an “earn your stripes” style of learning and acquiring skills. In many ways, it’s a white collar apprenticeship. Junior finance professionals learn through observing and working with seniors whose oversight helps them avoid mistakes. If the work is complicated, the senior accountant might step in and comzplete it. A “doing the work for the team” approach and the apprenticeship model might help hone people’s technical skills but leadership involves coaching: less doing, and more motivating and influencing. But it’s a big ask for some people. Or as one survey respondent put it: “Typically, finance people are quite detailed oriented… it is in our DNA… it can be hard to delegate and let someone else get on with the detail.”

  1. Moving from being a reporter… to a translator.

Hanson says finance professionals who step into leadership roles need to recognise that providing the numbers is not how they add value any more. Their leadership transition might instead involve creating meaning, simplicity and an informed point of view for their organisation to make better strategic choices. In effect, you can’t expect the numbers to speak for themselves or tell – or sell – a complex story. That’s a leader’s job: explaining financial data and translating it, communicating it and telling a compelling story, one that people can understand and follow. What might be obvious to a financial expert isn’t always clear to others. “I remember sitting in a session with a finance professional, and we were having an interesting debate about narrative,” Hanson says. “He said: ‘The numbers are right here, the numbers tell the story’. “And I said: ‘No they don’t. You (have to) tell the story’.”

  1. From having the right answer… to navigating multiple answers.

For most finance people, delivering the right answer or set of figures iAdd News essential. But Hanson says leadership can be more ambiguous. Sometimes there may not be a right answer but multiple options. Finance professionals are taught to see problems as complicated but having a correct answer. Leaders might have to see things differently. He cites one CEO, who used to be a CFO, who says finance people sometimes come to him and say they’ve analysed things and have the answer to an issue, but without considering the bigger picture. “I tell them you’ve got to understand your environment and the context in which you’re presenting these numbers. And is that really the right, answer?” the CEO explains. “You need to unleash your thinking a bit.”

  1. Moving from being a value protector… to value creator.

Hanson says the final leadership transition for finance professionals is to learn how to create wealth, rather than think in terms of being risk-averse and a protector of wealth. That’s because a leader’s success is often measured in terms of how much value they create. He quotes one former CFO who has made the transition to managing director: “Business leadership is trying to turn one dollar into two dollars and that is quite different… you can see (finance) people almost have a lightbulb moment sometimes when they’re transitioning between the two.” Hanson says finance people need to challenge their mind set. “Leadership is a little bit about risk taking and courage and making mistakes,” he explains. “Yet if you say to a finance person that it’s okay to make mistakes, they literally start to vibrate. “They go: ‘No, no, that’s not what we do’. “And you say ‘That’s not what you do – but that’s what leaders do’.”

The bottom line

Hanson says the bottom line is that finance professionals have a unique opportunity to become business leaders. When they make that transition they provide their organisations with a unique competitive advantage. He tells them that, in effect, they have a head start in two areas. “You speak a language that is going to matter more and more to businesses, you need to leverage that and believe that is something that nobody else really can bring,” Hanson says. The second thing that finance people bring is an understanding of the importance of values and ethics. “If you develop those things early, you are so geared for executive leadership roles, much better than other professions because you have both this language and understanding of what really matters.”

Article as seen at: ‘Five changes that will make you an exceptional leader’ Acuity (August 2016): 46-48. Print

Q&A: Interest and Other Expenses Where Property Is Negatively Geared

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Q. I have recently purchased a house for approximately $800,000. I intend to redevelop it as a family home. Ninety per cent of the purchase price was financed by a loan. In due course, I will engage an architect to draw up plans for a new house and then lodge a development application with the local council. When the new house is finished, my family will move in. The whole process could take a couple of years. In the meantime, I will rent out the house for approximately $350 to $400 a week.

The outgoings in relation to the property (interest payments, local government rates, water rates, maintenance costs, etc) will exceed the rental income. Can I claim a deduction for the outgoings while it is rented out?

A. The Commissioner’s views on whether interest and other outgoings can be deducted where a property is negatively geared are set out in Taxation Ruling TR 95/33Relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings.

The points made in the Ruling are listed below.

Taxation Ruling TR 95/33

  • If the outgoings produce no assessable income, or the amount of assessable income is less than the amount of the outgoings, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoings are wholly deductible, including the taxpayer’s subjective purpose, motive or intention in making the outgoing.
  • If it can be concluded, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, that the expenditure is genuinely, and not “colourably”, used in an assessable income-producing activity, a deduction is allowable for the loss or outgoings.
  • If, however, it is concluded that the disproportion between the outgoing and the assessable income is essentially to be explained by reference to the independent pursuit of some other objective (eg to derive exempt income or to obtain a tax deduction), the outgoing must be apportioned between the pursuit of assessable income and the other objective.
  • When considering the subjective purpose, motive or intention in incurring a loss or outgoing, regard must be had to the purpose or motive that the taxpayer had in mind when the loss or outgoing was incurred.
  • A reference to the relevant assessable income or allowable deductions does not necessarily refer to income produced, or the expenditure incurred, in a particular income year. For example, if income is expected to be produced over a number of years from a single transaction, it will be necessary to total the relevant assessable income reasonably likely to be produced during that period and compare it with the total expenditure reasonably likely to be incurred.
  • When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both “fair and reasonable” in the circumstances.

Fletcher v FCT

Note also that TR 95/33 was issued following the decision of the High Court in Fletcher v FCT (1991) 22 ATR 613 in which the Court held that it was necessary to apportion outgoings in relation to an annuity scheme that was not intended to run its full course and generate positive assessable income to the investor – with the result that there was a “significant disproportion between the deductible outgoings and the assessable income”. However, if the “disproportion” was to be explained by the pursuit of some other objective (a “colourable purpose”) it would be necessary to apportion the outgoing between the pursuit of assessable income and the other objective.

Analysis

The first question to consider is whether the interest is deductible. Whether interest is deductible is determined by looking at the purpose of the loan and how the loan is used. Ordinarily, the purpose of the loan can be ascertained from the use to which the loan is put.

In this case, the loan was taken out to acquire a property that is to become the family home. This suggests that the interest payments would not be deductible as the loan money is to be used for private and domestic purposes. However, as the property will produce income in the meantime, it is arguable that some, if not all, of the interest payments may be deductible during the period the house is rented out and income is being earned.

An apportionment of the interest and other outgoings may be appropriate in this case for the reasons listed below.

  1. There is likely to be a “significant disproportion between the deductible outgoings and the assessable income over the relevant period”.
  2. The rental income producing activities are clearly intended to end at a specified date (within a couple of years) when the house is knocked down so it can be rebuilt (similar to the annuity arrangement in the Fletcher case).
  3. The subjective purpose exercise required in such circumstances would suggest that the incurrence of the outgoings is “coloured” or motivated by another purpose or objective – perhaps something akin to “holding costs” for the construction of a non-income producing asset, namely your new home.
  4. The arrangement does not appear to be the “commonly encountered” kind of negative gearing arrangement in terms of a “commonsense or practical weighing of all the factors surrounding the acquisition of the property” – especially as it is stated that the property was acquired for the purpose of building the taxpayers’ new home.
  5. If there is, in fact, a relevant “disproportion” between assessable income and outgoings and this is explicable or coloured by a non-income producing (subjective) purpose on the part of the taxpayer, it will presumably be necessary to apportion the outgoings on a “fair and reasonable” basis in the circumstances. It may be appropriate to limit the deduction for the relevant outgoings to the amount of income derived. This may also be appropriate in a case such as this where the outgoings seem more akin to “holding costs”.

Contact us

The above is a discussion only and further advice should be obtained. Please contact our office on 02 9954 3843. to discuss your circumstances and to obtain professional advice.

This article is adapted from Thomson Reuters Tax Q&A service.

Client Alert Explanatory Memorandum (August 2016)

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CURRENCY:

This issue of Client Alert takes into account all developments up to and including 13 July 2016.

ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses, updated for the 2013–2014 financial year. These benchmarks are a guide to help businesses compare their performance against similar businesses in the same industry. The benchmarks can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

The benchmarks:

  • are calculated from income tax returns and activity statements from over 1.3 million small businesses and, according to the ATO, are verified as statistically valid by an independent organisation;
  • account for businesses with different turnover ranges (up to $15 million) across more than 100 industries; and
  • are published as a range to recognise the variations that occur between businesses due to factors such as location and business circumstances.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind. “If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

According to the ATO, if a business is reporting above the benchmarks, it may mean the expenses of the business are high relative to its sales. This may indicate that:

  • there is high wastage;
  • business competitors may be able to source inputs at lower cost;
  • the volume of sales is too low (for rent and possibly labour);
  • the mark-up is lower than business competitors’;
  • not all sales have been recorded; and/or
  • internal cash controls may need to be examined.

If a business is reporting below the benchmarks, it may mean the expenses of the business are low relative to its sales. This may indicate that:

  • expenses may be recorded under the wrong label;
  • some expenses may have not been recorded;
  • the mark-up is higher than business competitors’; and/or
  • there is less wastage.

 

 

When the ATO sees that a business is outside the key ratio for the industry, it may indicate something is unusual, prompting the ATO to obtain further information from the business, its suppliers or its customers.

The benchmarks are available on the ATO website at https://www.ato.gov.au/business/small-business-benchmarks/

Source: ATO media release, “ATO benchmarks helping build small business”, 24 June 2016, https://www.ato.gov.au/Media-centre/Articles/ATO-benchmarks-helping-build-small-business/.

ATO benchmarks in action

If a business doesn’t have evidence to support its return, the ATO may use the benchmarks to determine income that has not been reported. For each industry, the ATO will highlight the benchmark it will use to predict income or turnover.

The following recent Administrative Appeal Tribunal (AAT) case highlights the ATO’s use of industry benchmarks.

Income tax and GST and associated penalties broadly affirmed

The AAT has affirmed the Commissioner’s income tax and associated penalty decisions imposed on a taxpayer. However, it also decided to vary the GST and associated penalty decisions to reflect a reduced GST liability, as conceded by the Commissioner before the hearing.

Background

The taxpayer operated a milk bar and contended it also operated a business providing homestay accommodation for foreign students. Following an ATO audit, the Commissioner was not satisfied that the taxpayer had reported its true taxable income for the 2010–2011 and 2011–2012 income years, nor that the taxpayer had reported its true GST net amounts for the quarterly periods from 1 April 2010 to 30 June 2012. The evidence of sales and purchases manually kept in books and cash register roll totals did not reconcile to the taxable amounts reported, and were less than the amounts the Commissioner contended could be expected if industry norms or expectations were applied to the purchases reported.

In this case, the Commissioner applied the tobacco retailing industry benchmarking figures to determine the taxpayer’s business income. The Commissioner did not accept that the taxpayer operated a homestay business and excluded all reported income and expenses relating to homestay activities. The Commissioner also disallowed expenses relating to two cars, and purchases that were not supported by a valid tax invoice. The amounts in dispute before the AAT totalled some $27,000 (primary tax and penalties).

Decision

The AAT held the taxpayer had failed to discharge the onus of proving that the income tax and GST assessments and amended assessments were excessive. The AAT was of the view there was a lack of evidence to prove otherwise. It said, “The combination of the accounts book, invoices led in evidence, inconsistent cash register rolls and absence of commitment to amounts of taxable income and supplies, or particular sources from which these amounts can be determined with confidence, make determination of the [taxpayer’s] taxable income and supplies little, if at all, more than guesswork. This being the case, it is impossible to say by what amount the assessments are excessive.”

The AAT also affirmed the penalty imposed for failure to take reasonable care. Among other things, the AAT heard the taxpayer’s evidence that taxable income amounts were made up as it was told (allegedly) by its tax agent that the ATO did not like to see losses, so that would bring unwanted attention. In affirming the penalty decisions, the AAT said, “In circumstances where a fabricated income figure is used in relevant tax filings it is difficult to see how reasonable care could be demonstrated. Further, there being no evidence of what the tax agent did or did not do makes a finding that the tax agent took reasonable care impossible to make.” The AAT also concluded that there were no grounds for remission.

In making its decisions, the AAT noted the outcomes of the case should not be taken as acceptance of whether the taxpayer did (or did not) carry on a homestay business.

Accordingly, the AAT affirmed the income tax and associated penalty decisions noting the Commissioner’s “concession” to vary the GST and associated penalty decisions to allow further input tax credits in respect of a small range of acquisitions.

Re H J International Trade Group Pty Ltd and FCT [2016] AATA 450, http://www.austlii.edu.au/au/cases/cth/AATA/2016/450.html.

 

 

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service.

Each year, an approved SMSF auditor must audit the fund. The auditor is required to report certain regulatory contraventions to the ATO via the auditor/actuary contravention report (ACR). The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees and professionals to engage early with the ATO in relation to unrectified contraventions. SMSF trustees, SMSF auditors and SMSF professionals (such as tax agents, accountants, financial planners, lawyers and fund administrators acting on behalf of SMSF trustees) can use the service.

The ATO says the new disclosure service should only be used when it is clear there has been a contravention of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or regulations that remains unrectified at the time the SMSF auditor reports it to the ATO. Before using this service, the ATO says, trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure.

The SMSF auditor is still required to report regulatory contraventions via an ACR. However, the ATO says it will not commence an audit based on an ACR if the issue has been resolved through a voluntary disclosure, unless it receives additional information that requires further investigation.

The ATO warns that SMSFs should not use this service if they have already received notification of an ATO audit or review in relation to the contravention. The ATO also notes that where disclosures are made about contraventions that occurred in previous years, any outstanding SMSF annual returns must be lodged.

Source: ATO, SMSF early engagement and voluntary disclosure service, 26 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/SMSF-early-engagement-and-voluntary-disclosure-service/.

ATO case studies

The ATO has provided the following case studies to illustrate the benefits of its early engagement and voluntary disclosure service.

Example 1: overdrawn bank account

The Stephens Superannuation Fund bank account was overdrawn twice during the 2014–2015 financial year. After rectifying the breach, the trustee engaged an SMSF auditor and disclosed the breaches to ATO via the SMSF early engagement and voluntary disclosure process.

The ATO advised the trustees that, given that the contraventions were rectified, there was no need for them to use the service. By raising the breaches with their approved auditor they had discharged their reporting obligations. The trustees also put controls in place to prevent the fund bank account being overdrawn in the future.

Given it was a reportable contravention, the SMSF auditor lodged an ACR. As a result of the ACR, the ATO sent an education letter to the fund in relation to the breach.

Example 2: breach of LRBA rules

The approved auditor for trustees Emma and Jonas Klein identified a limited recourse borrowing arrangement (LRBA) breach in relation to the Klein Superannuation Fund for the 2014–2015 financial year.

The breach arose because the Klein Superannuation Fund entered into an LRBA that had not been structured correctly. A holding trust did not hold the property on trust for the fund trustees and the LRBA was with a non-related party. The trustees made a voluntary disclosure of the breach and provided all relevant facts and supporting documentation. They also provided a proposed undertaking to rectify the contravention within six months.

The trustees actively engaged with the ATO throughout the resolution process and lodged the outstanding returns. The Commisisoner accepted their undertaking to rectify the contravention. The terms of the enforceable undertaking were that the property was to be transferred into the holding trust within six months. SMSF administrative penalties were imposed and remitted in full, given that the trustees made a voluntary disclosure.

Example 3: money lost in investment scam

The trustees made an SMSF voluntary disclosure that the Okafor Superannuation Fund had not lodged annual returns for four years because all its money was lost in an investment scam. The trustees made their disclosure prior to the notification of an ATO SMSF review or audit and provided all relevant facts and

 

 

supporting documentation, including bank statements. The trustees provided an undertaking to wind up the fund and not to act as trustees of another SMSF in the future.

The trustees actively engaged with the ATO throughout the process and the ATO verified the investment scam claims. The Commissioner accepted the undertaking and the SMSF was wound up.

Source: ATO, “Early engagement and voluntary disclosure”, 27 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-case-studies/Early-engagement-and-voluntary-disclosure/.

New tax governance guide for SMSFs

When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and super laws. The ATO has released a new tax governance guide for use by SMSFs. The ATO says it has been working with businesses, tax advisers and agents to design the guide and help private groups with tax governance.

The ATO says SMSF trustees and professionals can use this guide to develop an effective governance framework and identify ways to improve existing governance practices within their SMSFs.

Issues covered in the guide include:

  • corporate governance and tax governance;
  • starting your business;
  • business expansion;
  • funding and finance;
  • philanthropy;
  • succession planning;
  • exiting a business;
  • retirement planning, including SMSFs and CGT small business concessions; and
  • estate planning.

Among other things, the guide says that SMSF trustees must ensure that their funds meet the definition of an SMSF at all times and remain complying. This includes meeting requirements for fund structure, members and trustees; and governing fund compliance with rules for contributions, investments and payment of benefits. Where an SMSF auditor or other adviser identifies issues with a fund’s compliance, trustees should take immediate steps to correct them, the ATO warned.

The fund’s financial statements and regulatory compliance need to be audited before the SMSF annual return is lodged. An audit is required even if no contributions or payments are made in the financial year. The ATO recommends that trustees ensure all documents are provided to the SMSF auditor with sufficient time for the audit to be completed within the legislated period.

The ATO encourages trustees to work closely with their SMSF advisers and auditors. The auditor will give the trustee a report on their SMSF’s regulatory compliance, including any contraventions. Any material contraventions must be reported by the auditor to the ATO. Trustees should also periodically verify that their SMSF satisfies the requirements of a regulated super fund, including requirements around contributions, investments and paying out benefits.

The ATO suggests that trustees formulate an exit strategy so they are prepared should the time come that they no longer want an SMSF and need to wind it up. Matters such as disposal of assets, paying out or rolling over benefits, arranging the final audit, lodging the final SMSF annual return, paying outstanding tax, closing bank accounts and cancelling ATO registrations should be considered.

Source: ATO, “SMSF governance”, 31 May 2016, https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Tax-governance/Retirement-planning/Self-managed-super-funds/.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the AAT in arguing that a commercial property it acquired and developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit – despite the fact that the AAT indicated the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the CGT 50% discount.

 

 

In coming to this conclusion, the AAT noted that even though the taxpayer’s property development business involved purchasing properties for resale at a profit, the business carried on by the taxpayer involved far more than this. A “wide survey and an exact scrutiny of the activities” of the taxpayer showed that over a 40-year period they involved everything from the acquisition, development and sale of residential properties to the acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income. As a result, the AAT rejected the Commissioner’s basic claim that the taxpayer was carrying on “a business of the acquisition, development and disposal of properties for a profit”.

Moreover, the AAT found that in relation to the “discrete” transaction in question (which it was required to consider for the purpose of determining the issue), all the evidence pointed to the fact that the taxpayer intended to develop the original vacant car park into commercial property to lease to government agencies, for which there was growing demand at the time. This evidence included:

  • the uncontradicted evidence of the father and son controllers of the business (who historically had adopted the approach of individually assessing the best profitable use of a particular property and then putting the property to that use);
  • contemporaneous bank records (which noted that the building was to be “retained on completion for investment”);
  • that a 15-year lease agreement was originally entered into; and
  • that the intention to eventually sell (despite the father’s original resistance and his historical preference to generate income by rental returns) was because the offer to sell “was simply too good”.

In this regard, the AAT also noted that as part of the sale deal, the purchaser offered the taxpayer the opportunity to acquire substitute investment commercial properties – and that the three properties subsequently acquired by the taxpayer as part of this arrangement were still owned by the taxpayer, almost nine years after the relevant transaction. In arriving at its decision, the AAT noted that it is always possible that the owner of an asset will sell it, “but to elevate that possibility into an intention to make a profit by selling the property is to draw a long bow indeed” – particularly in the circumstances of this case and given the nature of the transaction in question.

Accordingly, the AAT found that while the transaction by which the property was disposed of was not a transaction undertaken in the ordinary course of the taxpayer’s business activities, having regard to the overall wide scope of its business activities, in terms of examining the specific transaction and its “discrete” nature, nor was the property acquired for the “purpose of profit-making by sale”. As a result, the AAT concluded that the profit from its sale was to be accounted for as a capital gain and not revenue profit.

Re FLZY and FCT [2016] AATA 348, , 27 May 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/348.html.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before the AAT in seeking to have excess concessional contributions for the 2014 financial year disregarded or reallocated pursuant to s 291-465 of ITAA 1997.

Background

The taxpayer was a full-time employee in the Victorian Public Service and also worked a number of part-time, casual jobs with approximately four employers. As at 30 June 2014, he was 56 years of age and his concessional superannuation cap was $25,000. He salary sacrificed $100 per week of his full-time earnings into one super fund and salary sacrificed all of his casual earnings with another super fund. The taxpayer did not check his super fund balances.

In June 2015, the taxpayer received a notice of amended assessment for the 2013–2014 financial year that included excess concessional contributions of $11,055. The amended assessment detailed the increase of taxable income from $88,075 to $99,130, an excess concessional contributions tax offset of $1,658 and an excess concessional contributions charge of $250. The taxpayer had previously received a notice of assessment for 2012–2013 financial year detailing excess concessional contributions of $7,656 and excess concessional contributions tax of $2,411.

The taxpayer submitted that he worked additional casual jobs and salary sacrificed his super to provide for his retirement and for his family. He did not have the predictability of knowing what he would earn through his casual jobs, which depended on having shifts allocated. The taxpayer submitted that the rules were difficult to comprehend and he had made an inadvertent mistake. Had he been aware he was approaching his concessional super contribution cap, the taxpayer submitted that he would have stopped the salary sacrifice arrangements, and that his ultimate tax bill would have been the same, albeit the tax bill would have been met by PAYG deductions over time.

Decision

The AAT said, “In a system where there are limits on what can be contributed to a superannuation fund while retaining concessional treatment, to waive compliance in this case would effectively provide [the taxpayer] with an advantage in the form of being allowed to contribute extra to his superannuation funds, and to enjoy the benefit of that without any cost associated with the excess, to the advantage of other taxpayers in the community who observe the limits.”

The AAT said that while the taxpayer’s “motives for working hard and stowing money away for retirement income are admirable, his predicament [did] not amount to a special circumstance”. It added that inadvertent mistakes were not special circumstances and that the “complexities of the system of taxation of retirement income and providing for retirement income are complexities the whole community has to deal with”. Accordingly, the AAT affirmed the Commissioner’s decision.

Monitoring the limits: taxpayer’s submission

During the hearing, the taxpayer suggested that the ATO might do more to advise what was required. The taxpayer suggested that in other settings there are apps available for use with modern technology that let people know their progressive use of facilities such as data volume downloaded from the internet, and something similar could be adopted in a taxation setting. The AAT said that submission was not for it to deal with; however, it suggested that it was “possibly one that the ATO might wish to explore for the future”.

Re Azer and FCT [2016] AATA 472, 4 July 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/472.html.

Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal (QCAT) in arguing that there was a “constructive trust” in relation to three properties.

Background

The taxpayer had purchased three residential properties, one for each of his three children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the properties would each be left to the respective child.

The Commissioner assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The taxpayer objected, arguing that he was the trustee of each property for each child and that land tax (if any) should be assessed separately in respect of each property. The Commissioner contended that there was no “constructive trust” as was argued by the taxpayer, and that the taxpayer – as “owner” of the land – was liable to land tax on an aggregate basis.

Decision

The QCAT affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, s 20(1) of the Land Tax Act 2010 (Qld) to separately assess trust land did not apply. However, in doing so, the QCAT hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or QCAT otherwise. It also noted the possibility of a future express declaration of trust with consequential changes to the wills, which could affect future land tax liabilities.

Harrison v Comr of State Revenue [2016] QCAT 150, http://archive.sclqld.org.au/qjudgment/2016/QCAT16-150.pdf.

 

 

 

 

 

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