Contrived trust arrangements in ATO sights

On 17 November 2016 the ATO released Taxpayer Alert TA 2016/12, which deals with trust income reduction arrangements that are under review. The ATO says the arrangements appear designed to exploit the proportionate approach to trust taxation. The arrangements are deliberately structured to exclude from the trust income much of the economic benefit reflected in the taxable net income of the trust. In doing this, the taxpayers seek to gain substantial tax benefits.

The underlying premise of the arrangements described in the Taxpayer Alert is that the taxable net income of the trust is assessed to the presently entitled beneficiary, while the economic benefits reflected in that net income are retained by the trustee, or passed to a different beneficiary in a purportedly tax-free form. Under these arrangements, the rate of tax paid by the presently entitled beneficiary is lower (often significantly lower) than the rate of tax that would otherwise have been paid by the trustee and/or the beneficiary who receives the benefit.

The ATO says the arrangements in question typically display all or most of the following features:

• Steps are taken to create an artificial difference between the trust income and taxable net income of a closely held trust with the primary motivation appearing to be the avoidance of tax. The steps may include:
• amending or varying the trust deed definition of income or the trustee’s powers to determine trust income;
• the trustee taking steps for the principal purpose of reducing trust income; and/or
• the trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been.
• The beneficiary who is made presently entitled to the trust income:
• pays little or no tax on the share of taxable net income included in its assessable income; or
• is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits.
• The trust retaining the economic benefit reflects the artificial difference between the trust income and taxable net income of the trust. That benefit may subsequently be extracted in a form that is claimed to be tax-free (or subject to a reduced rate of tax) in the hands of the recipient (usually an individual related to the controlling mind).

The Taxpayer Alert gives four examples of the arrangements. The ATO is currently reviewing these arrangements. It has commenced compliance activities affecting a number of entities and is identifying tax advisors who are promoting these schemes, with plans to “follow up appropriately”. The ATO is developing its technical position on the arrangements and says it will canvass it in more detail in due course.

The ATO encourages those who may have entered, or may be planning to enter, into an arrangement of the types described to:

• phone the ATO on 1800 177 006;
• email the ATO at TrustRisk@ato.gov.au;
• ask the ATO for a private ruling;
• seek independent professional advice; and/or
• make a voluntary disclosure to reduce potential penalties.

The ATO identified the problematic arrangements through the Trusts Taskforce’s ongoing monitoring and reviews, and says it continues to look for such arrangements using sophisticated analytics.

Ten of the cases the ATO is examining show lost revenue of more than $40 million and go far beyond legitimate tax planning, raising a number of red flags, Deputy Commissioner Michael Cranston said. “We are looking closely to see if arrangements comply with trust law, constitute a sham or are captured by anti-avoidance provisions or integrity rules”, he said.

Source: ATO, Taxpayer Alert TA 2016/2, 17 November 2016, https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22; ATO media release, “ATO issues warning on contrived trust arrangements”, 17 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-issues-warning-on-contrived-trust-arrangements/.

GST and countertrade transactions

On 18 November 2016 the ATO issued Practical Compliance Guideline PCG 2016/18, which outlines the treatment of “countertrade” transactions – that is, the direct exchange of things by one entity for things provided by another entity – in the context of GST. It applies to entities that have entered into countertrade transactions as part of carrying on their enterprise, provided that that the transactions do not account for more than 10% (approximately) of the entity’s total number of supplies. The Guideline does not apply to countertrade transactions between the members of a “barter scheme”.

Broadly, the Guideline indicates that the Commissioner will not apply resources to verifyng compliance with GST reporting obligations for a countertrade transaction for taxpayers in the following circumstances:

• both parties to the transaction are registered for the GST;
• the parties engage in a countertrade transaction (directly exchange things, at arm’s length without any monetary consideration);
• both entities make wholly taxable supplies to each other, with the amount of GST payable being 1/11th of the GST-inclusive market value of those taxable supplies;
• one party makes a wholly creditable acquisition for which they are entitled to a full GST credit;
• the net effect would be GST-neutral if both parties had the same tax period;
• the taxpayers each have records that show:
• when the transaction was entered into and occurred,
• what was exchanged;
• the identity and ABN of the other entity; and
• the GST-inclusive market value of the goods agreed to; and
• there is no evidence of fraud or evasion.

The Guideline includes four examples to illustrate whether the Commissioner would take a compliance approach under various scenarios.

Date of effect

The Commissioner will adopt the compliance approach outlined in the Guideline from its date of issue (18 November 2016).

Source: ATO, Practical Compliance Guideline PCG 2016/18, 18 November 2016, https://www.ato.gov.au/law/view/document?DocID=COG/PCG201618/NAT/ATO/00001.

Companies held to be resident and liable to tax in Australia

In the long-running Hua Wang Bank dispute, the High Court has unanimously dismissed appeals of the four corporate taxpayers involved, confirming that they were Australian residents for income tax purposes. Accordingly, the companies were found to be liable to tax in Australia on the profits they made from share-trading activities on the Australian Stock Exchange (ASX). In making this finding, the Court rejected the taxpayers’ contention that because Perram J at first instance found that the directors of each taxpayer were resident abroad, and because meetings of those directors were held abroad, Perram J and the Full Federal Court should have held that the central management and control of each company was exercised abroad, and that the companies were not residents of Australia for income tax purposes.

Background

The appellants were four companies: Hua Wang Bank Berhad, Bywater Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd. Their combined amount of tax in dispute was over $14 million plus penalties. The Commissioner had issued assessments for the 2001 to 2007 income years treating profits from the companies’ acquisition and sale of securities on the ASX as income subject to tax in Australia (under s 6(1) of the Income Tax Assessment Act 1936). The taxpayers claimed they were not liable for tax on the profits because their “central management and control” was in various overseas locations, meaning they were not Australian residents for tax purposes.

In particular, the taxpayers claimed that the companies’ central management and control took place in the countries where they were incorporated (Switzerland, the UK and Samoa) because their directors were resident and held meetings of directors there. They further claimed that the profits were only subject to tax in the countries of incorporation because of the double taxation agreements (DTAs) then in effect. The parties did concede that if the taxpayers were found to be Australian residents, they would not be entitled to protection from Australian tax under the DTAs.

At first instance, in Hua Wang Bank Berhad v FCT [2014] FCA 1392, the Federal Court (Perram J) held that the taxpayers were residents of Australia, despite the directors being resident abroad. After an examination of the evidence, the judge found that the companies’ “real business”, and therefore their central management and control, took place in Australia. In particular, Perram J found that Chemical Trustee’s, Derrin’s and Bywater’s real business was conducted in Sydney by a Sydney-based accountant (Mr Vanda Russell Gould). The Court also found that Mr Gould owned Hua Wang Bank Berhad.

On appeal, in Bywater Investments Ltd v FCT [2015] FCAFC 176, the Full Federal Court unanimously dismissed the taxpayers’ appeals, holding that Perram J had been correct in concluding that each taxpayer had failed to discharge the burden of proving they were not Australian residents. Further, as none of the parties sought to challenge the Perram J’s finding that the shares were trading stock, the Court said it would be inappropriate to reconsider the issue of whether profits from the sale of shares were on revenue account.

The Commissioner told the High Court that there was no error in the prior decisions. The Commissioner argued that a company’s central management and control is located where its real business is carried on and, conversely, a company’s real business is carried on where its operations are controlled and directed. Moreover, the Commissioner argued that where a company’s operations are controlled and directed is “a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading”.

Decision

The High Court unanimously agreed with the Commissioner and held that, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the company’s central management and control actually occurs. Moreover, the Court emphasised, it was to be answered by reference to the course of the company’s business and trading, rather than by reference to the documents establishing the company’s formal structure and other procedural matters.

The High Court further held that the overseas locations of the companies’ boards of directors were insufficient to make the companies “foreign residents” in circumstances where, on the facts (as found at first instance), the boards of directors had abrogated their decision-making in favour of Mr Gould, and only met to mechanically implement or rubber-stamp decisions he made in Australia.

For the same reasons, the High Court found that the companies could not rely on the relevant DTAs to make the case that their “place of effective management” was outside Australia.

Bywater Investments Ltd v FCT; Hua Wang Bank Berhad v FCT [2016] HCA 45, High Court, French CJ, Kiefel, Bell, Nettle and Gordon JJ, 16 November 2016, http://www.austlii.edu.au/au/cases/cth/HCA/2016/45.html.

ATO statement

Tax Commissioner Chris Jordan said the High Court’s decision in Bywater Investments Ltd v FCT [2016] HCA 45 means that any parties who set up complex structures offshore “with the clear intent to avoid paying tax in Australia should take a hard look at what they are doing and whether they want to run the risk of being caught and seriously penalised”.

Commissioner Jordan said the High Court’s decision affirms the ATO’s “resolve to pursue cases of blatant tax evasion – we can and will catch this type of contrived behaviour”. He said the ATO will use all available powers and resources “to deal with such schemes and ensure all Australian residents pay the right amount of tax”.

He said the High Court’s finding was not a one-off decision. This case has a substantial litigation history, including 19 challenges to the evidence and procedure at the Federal Court, followed by an appeal to the Full Federal Court. “This was not an easy process”, Commissioner Jordan said, but “the ATO will not shy away from difficult and complex cases, no matter how long they take to run, and no matter how many obstacles are put in our way”.

Source: ATO media release, “High Court judgement confirms blatant tax evasion”, 16 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/High-Court-judgement-confirms-blatant-tax-evasion/.

Payment was assessable as “deferred compensation”

The High Court has unanimously dismissed a taxpayer’s appeal and held that payments of US$160 million made to the taxpayer pursuant to an incentive “profit participation plan” after termination of his employment was income according to ordinary concepts. In particular, the Court found that the payments were “deferred compensation” for the services the taxpayer had performed. At the same time, the Court dismissed the taxpayer’s claim that the amount was assessable as a capital gain, finding that it did not represent the proceeds for the future right to receive a proportion of company profits he was entitled to.

Background

The taxpayer was the employee of a global international commodity trading company (the Glencore Group) from January 1991 to December 2006 . The Glencore Group included an Australian subsidiary for which the taxpayer worked for the last four years of his employment. He held shares in the Group and participated in its various “profit participation plans” for key employees by way of being allocated units (or profit sharing certificates) in these plans.

The taxpayer’s employment with the Glencore Group was terminated on 31 December 2006. He subsequently relinquished his claims (by way of the required “declaration”) to his units in the profit participation plan (the Plan) then in existence and assigned his shares in the Group in consideration of the payment of US$160 million in 20 quarterly instalments over a five-year period (paid by a subsidiary of the Group).

The taxpayer returned the amount as a capital gain in the 2007 income year, as reduced by the 50% CGT discount. The Commissioner issued amended assessments, claiming the amount was assessable as either ordinary income, an ETP, dividends or non-share dividends.

At first instance, in Blank v FCT [2014] FCA 87, the Federal Court held that the amount was assessable as “ordinary income” in the income year when the entitlement to the payments arose. This was on the basis that the payments were “deferred compensation for services rendered” (because the Plan was intended to provide the taxpayer with compensation in consideration of services rendered), notwithstanding that the right to the payment arose after the termination of his employment.

In Blank v FCT (No 2) [2014] FCA 517, the Federal Court refused to re-open the case to allow the taxpayer to argue that s 23AG of ITAA 1936 (exemption of foreign income) applied to some of the payment as it related to his overseas service with the company. Instead, the Court found that s 23AG did not apply, as it required the foreign earnings to be exclusively derived from foreign service, and not from part of foreign service (as in this case). However, the taxpayer succeeded in arguing that the amount was derived in the 2008 income year.

Subsequently, in Blank v FCT [2015] FCAFC 154, the Full Federal Court confirmed in a majority decision that the payments the taxpayer received were assessable to him as ordinary income in the income year when the right to the payments arose, on the basis that the payments represented “deferred compensation” following the relinquishment of his right to participate in the company’s Plan on termination of his employment.

The primary issue on appeal to the High Court was the proper “characterisation of the receipt of the payment in the taxpayer’s hands”. In particular, the issue was whether the payments were ordinary income as a reward for services or, as the taxpayer claimed, “the proceeds of the exploitation of interconnected rights that conferred on him a right to receive, in the future, a proportion of the profit of [the Group] and therefore assessable as a capital gain”.

Decision

In unanimously dismissing the taxpayer’s appeal, the High Court concluded that the amount was income according to ordinary concepts, on the basis that it was “deferred compensation” for services the taxpayer had performed in his employment. In so finding, the Court emphasised the following matters:

• “some things are so obviously income that their nature is unchallengeable”, and one such thing is the reward for services rendered in the form of remuneration or compensation;
• the Plan expressly stated that the payment was deferred compensation from the taxpayer’s employment and that the “deferred compensation” was “in consideration of the services to be rendered” by the taxpayer;
• the Plan also recorded that the taxpayer had no proprietary interest whatsoever in the Plan and that he did not acquire any right in or title to any assets, funds or property of the Group as a result of his participation in it; and
• what the Plan conferred on the taxpayer was an executory and conditional promise to pay an amount calculated by reference to profits.

Moreover, the Court found the facts that the “payments” were paid after the termination of the contract of service, by an entity other than his direct employer and separately to his ordinary wages did not detract from its characterisation as income because the payments were “a recognised incident of his employment” with the Group.

At the same time, the High Court rejected the taxpayer’ s claim that his “associated rights” and entitlements under the Plan were of a proprietary nature. In this regard, the Court noted that the units (or profit sharing certificates) were issued to him solely for the purpose of calculating the “deferred compensation”. Further, the Court said the payment was not the proceeds of the exploitation of any anterior set of rights but was the promise to pay the taxpayer’s entitlement to profits on satisfaction of relevant conditions.

Likewise, the Court found that the rights created by the Plan were not mere “associated rights” of the shares in the ultimate holding company held by the taxpayer, as this was contrary to the express terms and purpose of the Plan. Neither did the “declaration” the taxpayer made on termination to relinquish his rights under the Plan and trigger his entitlement to the payments confer such a character on the payments.

In addition, the Court rejected that the payment was assessable under s 26(e) of ITAA 1936 (or s 15-2 of ITAA 1997). Again, the Court found this ignored the proper characterisation of the taxpayer’s rights under the Plan as an executory and conditional promise to pay money. Further, it was contrary to the purpose of s 26(e) (ie to ensure that receipts and advantages which are rewards for a taxpayer’s employment or services are treated as assessable income even if they are not paid fully in money, but by way of allowances or other advantages of a monetary value).

Accordingly, the Court concluded that the payment was ordinary income of the taxpayer in the form of deferred compensation for services he rendered as an employee, and therefore formed part of his assessable income pursuant to s 6-5 of ITAA 1997. At the same time, the Court confirmed that, as per the finding of the Federal Court, the income was derived in the 2008 income year, when the right to the payments arose.

Blank v FCT [2016] HCA 42, High Court, French CJ, Kiefel, Gageler, Keane and Gordon JJ, 9 November 2016, http://www.austlii.edu.au/au/cases/cth/HCA/2016/42.html.

ATO data-matching programs continue

On 26 October 2016, the ATO gazetted notices advising about a range of data-matching programs.

Share transactions 2016–2017 and 2017–2018

The ATO will continue to acquire details of share transactions. Data will be acquired for the period 20 September 1985 to 30 June 2018 from various sources, including:

• Link Market Services Limited;
• Computershare Limited;
• Australian Securities Exchange Limited;
• Boardroom Pty Ltd;
• Advanced Share Registry Services Pty Ltd;
• Security Transfer Registrars Pty Ltd; and
• Automic Registry Services (Automic Pty Ltd).

The ATO will collect various data items, including:

• full name and address;
• holder identity number (HIN);
• share registry number (SRN);
• entity name and ASX code;
• purchase date and price;
• sale date and price;
• share quantities acquired or disposed;
• corporate actions affecting shareholders (eg corporate reconstructions);
• broker identity;
• transaction codes;
• entity type; and
• direction indicator (buy or sell).

The ATO said the purpose of this data-matching program is to ensure that taxpayers are correctly meeting their taxation obligations in relation to share transactions. These obligations include registration, lodgment, reporting and payment responsibilities. It is estimated that data for a total of more than 61 million transactions will be obtained. Based on previous programs it is estimated that records relating to 3.3 million individuals will be matched. The ATO seeks to retain data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01398, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01398; ATO website, “Share transactions 2016–17 and 2017–18 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Share-transactions-2016-17-and-2017-18-financial-years-data-matching-program-protocol/.

Credit and debit cards 2015–2016 and 2016–2017

The ATO will continue to acquire annually data relating to credit and debit card payments to merchants. Data will be acquired for the 2015–2016 and 2016–2017 financial years from the following financial institutions:

• American Express Australia Limited;
• Australia and New Zealand Banking Group Limited;
• Bank of Queensland Limited;
• Bendigo and Adelaide Bank Limited;
• First Data Merchant Solutions Australia Pty Ltd (previously BWA Merchant Services Pty Ltd);
• Commonwealth Bank of Australia;
• Diners Club Australia;
• National Australia Bank Limited;
• St George Bank;
• Suncorp-Metway Limited;
• Tyro Payments Limited; and
• Westpac Banking Corporation.

The ATO will collect details (such as name, address and contact information) of merchants with credit and debit card merchant facilities and the amounts and quantities of transactions processed.

The ATO will match the credit and debit card payment data provided by the 12 financial institutions against ATO records to identify businesses that may not be meeting their registration, reporting, lodgment and/or payment obligations. It is estimated that around 950,000 records will be obtained, including 90,000 matched to individuals.

The data will be used to:

• identify liquidated or de-registered businesses that are continuing to trade;
• assist in identifying “cash only” businesses, by exception; and
• promote voluntary compliance with tax obligations and assist the ATO to build intelligence about businesses.

The ATO seeks to retain the data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01397, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01397; ATO website, “Credit and debit card 2015–16 and 2016–17 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Credit-and-debit-cards-2015-16-and-2016-17-financial-years-data-matching-program-protocol/.

Online selling 2015–2016, 2016–2017 and 2017–2018

The ATO will continue to acquire annual online selling data. Data will be acquired relating to registrants who sold goods and services to an annual value of $12,000 or more during the 2015–2016, 2016–2017 and 2017–2018 financial years. Data will be sought from eBay Australia and New Zealand Pty Ltd, a subsidiary of eBay International AG, which owns and operates www.ebay.com.au.

The ATO will collect personal details (such as name, address and contact information) of online selling account holders and the values and quantities of transactions processed for each online selling account.

The ATO will match the data provided by online selling sites against ATO records to identify businesses that may not be meeting their registration, reporting, lodgment and/or payment obligations. It is estimated that between 20,000 and 30,000 records will be obtained and that around half of the matched accounts will relate to individuals.

The ATO said the data will be used to:

• identify those apparently operating a business but failing to meet their registration and/or lodgment obligations; and
• promote voluntary compliance with tax obligations and assist the ATO to build intelligence about individuals and businesses that sell goods or services via online selling sites.

The ATO seeks to retain the data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01396, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01396; ATO website, “Online selling 2015–16, 2016–17 and 2017–18 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Online-selling-2015-16,-2016-17-and-2017-18-financial-years-data-matching-program-protocol/.

Tax debt release applications refused

The Administrative Appeals Tribunal (AAT) has recently refused the applications of two individuals who sought to be released from their tax debts under s 340-5 of Sch 1 to TAA 1953. The cases are as follows.

Case 1: serious illness, but debt release refused

Background

As at 9 August 2016, the taxpayer’s total liability amounted to $130,416. In 2006, the taxpayer was diagnosed with Parkinson’s disease and was forced to retire early. He received payments under an income protection policy for the years ended 30 June 2010, 2011, 2012 and 2013, but was unaware until 2012 that the payments constituted assessable income. In January 2014, the taxpayer lodged tax returns for each of the years. In May 2014, the taxpayer applied to be released from his tax debts.

The AAT heard details about the taxpayer’s assets and liabilities, including the taxpayer’s home and an investment property. Together these properties comprised the bulk of the taxpayer’s and his wife’s assets. The taxpayer contended that, as a result of mortgages over the two properties in favour of his wife, he was unable to dispose of either property to raise any amount to pay the tax debt. It was also submitted that if one of the properties was sold, that would compound the effect of the taxpayer’s illness and may make it more difficult for him to acquire food, clothing, medical supplies or accommodation, and to provide support for his son, who suffers from schizophrenia.

Decision

The AAT accepted that a serious illness and the presence of dependent children were matters to be taken into account when considering the individual circumstances of an application for release. It said the taxpayer’s illness had obviously a profound effect on his life, including on his life expectancy. However, the AAT said it was not satisfied that the requirement that the taxpayer pay his tax liability would bring about “the dire results in respect of his health or otherwise as advanced on his behalf”.

The AAT also heard details of a contractual will arrangement which, among other things, was said to secure mortgages in favour of the wife over the taxpayer’s interest in the two properties. However, the AAT said it was not satisfied that the taxpayer was under any obligation to enter into the contractual will arrangement. It was also not satisfied that the taxpayer’s wife would seek to enforce her rights under that arrangement or that the properties would not be available to him to meet his tax liabilities.

The AAT affirmed the Commissioner’s decision, finding that the taxpayer would not suffer serious hardship if he was required to pay his tax liability. Even if it were a case of serious hardship, the AAT said it would not exercise its discretion to grant relief. The AAT considered that the taxpayer had not made proper provisions to meet his tax liabilities and preferred to pay his other debts.

Re ZDCW and FCT [2016] AATA 788, 7 October 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/788.html.

Case 2: discretionary spend a consideration

Background

In November 2006, the taxpayer applied for and was granted a release from his tax debts relating to the year ended 30 June 2004. In January 2012, the taxpayer lodged his returns for the years ended 30 June 2007, 2008, 2009 and 2010. He applied for, but was not granted releases from his tax debts relating to those years. In February 2015, the taxpayer lodged his returns for the years ended 30 June 2012, 2013 and 2014. The taxpayer again applied to be released, this time for the years ended 30 June 2007, 2008, 2009, 2010, 2012, 2013 and 2014. The application for debt release was again refused. The taxpayer contended that he had an outstanding compliance history that was not properly considered and that his current circumstances were a result of a catastrophic financial event in 2005. He contended that he was still experiencing hardship and was unable to meet even basic living necessities. The liability at 11 August 2016 to which s 340-10 of Sch 1 to TAA 1953 applied stood at $437,681 (comprising $242,246 primary tax and $195,435 general interest charge).

The taxpayer had been employed since January 2015 as a salesperson with a real estate agency based on the Sunshine Coast. The Commissioner pointed to the taxpayer’s “unusually high level of discretionary spending, including on holidays, dining out and entertainment, which could be reduced”. The AAT also heard details of the taxpayer’s borrowings to purchase properties. The taxpayer contended that he and his former spouse did not invest any of their own equity into the properties but instead borrowed funds, and said there was no money that could have been used to meet his tax liabilities. He also contended that throughout this period he was continually affected by the catastrophic financial events of 2005, leaving him constantly stressed and anxious. In addition, the AAT heard details of the taxpayer’s illegal early access to his superannuation benefits in the years ended 30 June 2007 and 2009. In total, the taxpayer accessed some $164,097. The AAT noted that the taxpayer had repaid some $88,238 to the self managed super fund.

Decision

The AAT agreed with the Commissioner’s description of the taxpayer’s discretionary spending. The AAT disagreed with the taxpayer’s contentions and was of the view that he “simply gave priority to other matters and ignored his tax obligations”. Overall, the AAT said the taxpayer had a “poor compliance history”. The AAT considered its discretion to release the debt in favour of the taxpayer should not be exercised under these circumstances.

Re Moriarty and FCT [2016] AATA 796, AAT, 11 October 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/796.html.

Budget superannuation changes on the way

The Federal Government has been consulting on draft legislation to give effect to most of its 2016–2017 budget superannuation proposals. Here are some of the key changes.

Deducting personal contributions

All individuals up to age 75 will be able to deduct personal superannuation contributions, regardless of their employment circumstances. Of course, such deductible contributions would still effectively be limited by the concessional contributions cap of $25,000, proposed from 1 July 2017.

Pension $1.6 million transfer balance cap

The total amount of accumulated superannuation an individual can transfer into retirement phase (where earnings on assets are tax-exempt) will be capped at $1.6 million from 1 July 2017. Those with pension balances over $1.6 million at 1 July 2017 will be required to “roll back” the excess amount to accumulation phase by 1 July 2017 (where it will be subject to 15% tax on future earnings).

Concessional contributions cap

This cap is to be reduced to $25,000 for all individuals (regardless of age) from 1 July 2017. The concessional cap will be indexed in increments of $2,500 (down from $5,000 increments). Contributions to constitutionally protected funds and untaxed or unfunded defined benefit superannuation funds will be counted towards an individual’s concessional contributions cap. However, any excess concessional contributions in respect of such funds will not be subject to tax, but instead limit the individual’s ability to make further concessional contributions.

Note that the Government has decided to:

• dump the proposed $500,000 lifetime cap on non-concessional contributions (which would have been backdated to 1 July 2007) – instead, the lifetime cap will be replaced by a reduced non-concessional cap of $100,000 per year for individuals with superannuation balances below $1.6 million;
• not proceed with the proposal to remove the work test for making contributions between ages 65 and 74; and
• defer to 1 July 2018 the start date for catch-up concessional contributions for superannuation balances of less than $500,000.

TIP: The government says it intends to introduce the proposed changes in Parliament “before the end of the year”. It remains to be seen if the changes will pass smoothly through Parliament. In any case, it would be prudent to check in with your professional adviser to see if and how the proposed changes would affect your retirement savings strategy.

Primary producer income tax averaging

Legislation has been introduced in Parliament that proposes to allow primary producers to access income tax averaging 10 income years after choosing to opt out, instead of the opt-out choice being permanent. The Federal Government says this will assist primary producers, as averaging only recommences when it is to their benefit (ie they receive a tax offset) and they can still opt out if averaging no longer suits their circumstances. The changes are proposed to apply for the 2016–2017 income year and later income years.

TIP: Primary producers have to meet basic conditions to be eligible for income averaging. 

Research and development tax incentive rates change

The Federal Government has reduced the rates of the tax offset available under the research and development (R&D) tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points. The higher (refundable) rate of the tax offset has been reduced from 45% to 43.5% and the lower (non-refundable) rate of the offset has been reduced from 40% to 38.5%. Here are some relevant points to note:

• Eligible entities with annual turnover of less than $20 million, and which are not controlled by an exempt entity or entities, may obtain a refundable tax offset equal to 43.5% of their first $100 million of eligible R&D expenditure in an income year, and a further refundable tax offset equal to the amount by which their R&D expenditure exceeds $100 million multiplied by the company tax rate.
• All other eligible entities may obtain a non-refundable tax offset equal to 38.5% of their eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which their R&D expenditure exceeds $100 million multiplied by the company tax rate.

The changes apply from 1 July 2016.

TIP: AusIndustry and the ATO manage the R&D tax incentive jointly. The R&D tax incentive aims to offset some of the costs of undertaking eligible R&D activities. A company must lodge an application to register within 10 months after the end of its income year. 

SMSF related-party borrowing arrangements

The ATO has issued a taxation determination (TD 2016/16) concerning whether the ordinary or statutory income of a self managed super fund (SMSF) would be non-arm’s length income (NALI) under the tax law, and therefore attract 47% tax, when the parties to a scheme have entered into a limited recourse borrowing arrangement (LRBA) on terms which are not at arm’s length.

 

The ATO has also updated a practical compliance guideline (PCG 2016/5) which sets out the Commissioner’s “safe harbour” terms for LRBAs. If an LRBA is structured in accordance with the guideline, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the NALI provisions (47% tax) will not apply. Trustees who do not meet the safe harbour terms will need to otherwise demonstrate that their LRBA was entered into and maintained consistent with arm’s length terms.

TIP: The ATO has allowed a grace period to 31 January 2017 for SMSFs to restructure LRBAs on terms consistent with the compliance guideline’s safe habour terms (or bring LRBAs to an end before that date). 

Travel expense and transport of bulky tools claim denied

An individual has been unsuccessful before the Administrative Appeals Tribunal in a matter concerning certain deduction claims for work-related travel expenses. The individual was a sheet metal worker whose home was located some 60 km from his employer’s main work site. The individual made a number of work-related deduction claims. However, after various concessions made by both the individual and the Commissioner of Taxation, the remaining issue between the parties was whether the taxpayer was entitled to a deduction for work-related travel expenses.

The man argued that his employer required him to supply his own tools and that they were too bulky to be transported to work other than by car. He also questioned whether his employer provided secure storage facilities for his tools. In refusing the taxpayer’s claim, the Tribunal noted it was the taxpayer’s own admission that it was his own personal choice to transport his various hand tools out of security concerns. The Tribunal also said the taxpayer’s security concerns were “not supported by objective evidence”. The taxpayer’s claim was therefore refused.

TIP: The ATO reminds individuals to make sure they get their deductions right. In certain circumstances it will contact employers to verify employees’ claims. In this case, the ATO contacted the taxpayer’s employer to check his claims, including whether the employer supplied safe storage facilities.

Personal middle income tax rate cut on the way

The Treasury Laws Amendment (Income Tax Relief) Bill 2016 (the Bill) has been introduced in the House of Representatives. It proposes to amend the Income Tax Rates Act 1986 to increase the third personal income tax threshold applying to personal income taxpayers. The rate of tax payable on individuals’ taxable incomes from $80,001 to $87,000 would fall from 37% to 32.5%. The non-resident tax schedule would also be amended to increase the first income tax bracket to $87,000. The rate of tax of 37% would apply to taxable income between $87,001 and $180,000, and the top marginal rate of tax would remain at 45% for taxable income over $180,000. This measure was announced in the 2016–2017 Federal Budget.

On 2 September 2016, Federal Treasurer Scott Morrison announced that the ATO will now issue the new PAYG withholding tax schedules to reflect the lower personal tax rate in the Bill.

Employers will be required to lower the amount of tax withheld for affected taxpayers to factor in the new lower tax rate effective from 1 October 2016, Mr Morrison said. Any tax overpaid beforehand will be refunded by the ATO on assessment after the end of the 2016–2017 financial year. “This means that contrary to suggestions in media reports […] all affected taxpayers will be able to obtain the benefit of the cut – not at the end of the year but within one month of new PAYG withholding tax schedules being published“, the Treasurer said.

Shortly following the Treasurer’s announcement, the ATO registered Taxation Administration Act Withholding Schedules October 2016 (2 September 2016). This instrument contains eight withholding schedules and applies from 1 October 2016.

Tax rates summarized

The currently legislated rates for 2015–2016 and the proposed new personal tax rates and thresholds for 2016–2017 (including the 2% temporary budget repair levy, but excluding the 2% Medicare levy) are shown in the following: tables.

Personal income tax rates and thresholds
	2015–2016		2016–2017
	Threshold ($)	Rate (%)	Threshold ($)	Rate (%)
First rate	0–18,200	0	0–18,200	0
Second rate	18,201–37,000	19.0	18,201–37,000	19.0
Third rate	37,001–80,000	32.5	37,001–87,000	32.5
Fourth rate	80,001–180,000	37.0	87,001–180,000	37.0
Fifth rate	180,001	47.0	180,001	47.0

With Medicare levy included, the top marginal rate is 49% from 1 July 2014 to 30 June 2017.

The following table shows the proposed rates for the 2016–17 year (including the 2% temporary budget repair levy, but excluding the 2% Medicare levy).

2016–2017
Taxable income ($)	Tax payable
0–18,200 18,201–37,000 37,001–87,000 87,001–180,000 180,001+	Nil Nil + 19% of excess over $18,200 $3,572 + 32.5% of excess over $37,000 $19,822 + 37% of excess over $87,000 $54,232 + 47% of excess over $180,000

Finally, the following table shows the proposed tax rates for non-residents (including the temporary budget repair levy) for the 2016–2017 year.

2016–2017
Taxable income ($)	Tax payable
0–87,000 87,001–180,000 180,001+	32.5% $28,275 + 37% of excess over 87,000 $62,685 + 47% of excess over $180,000

Date of effect

This measure applies to the 2016–2017 income year and later years.

Source: Treasury Laws Amendment (Income Tax Relief) Bill 2016, before the House of Representatives as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5683%20Recstruct%3Abillhome; Treasurer’s media release, “Tax relief for average full-time wage earners to be delivered within weeks”, 2 September 2016, http://sjm.ministers.treasury.gov.au/media-release/088-2016/; Taxation Administration Act Withholding Schedules October 2016, registered 2 September 2016, https://www.legislation.gov.au/Details/F2016L01380.

Small business tax breaks in the pipeline

The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) has been introduced in the House of Representatives. It proposes to:

• increase the small business entity turnover to $10 million from 1 July 2016;
• increase the unincorporated small business tax discount from 5% to 16% over a 10-year period; and
• increase the turnover threshold to qualify for the lower company tax rate and lower the company tax rate on a schedule over 11 income years, reaching a unified company tax rate of 25% in 2026–2027.

The proposal was announced as part of the 2016–2017 Federal Budget.

Corporate tax rate reduction

The Bill proposes to amend the Income Tax Rates Act 1986 to reduce the corporate tax rate to 27.5% for the 2016–2017 income year for corporate tax entities that are small business entities; that is, corporate tax entities that carry on a business and have an aggregated turnover of less than $10 million. This lower corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year. The corporate tax rate would then be cut to:

• 27% for the 2024–2025 income year;
• 26% for the 2025–2026 income year; and
• 25% for the 2026–2027 income year and later income years.

The 27.5% corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year.

To achieve the progressive extension of the 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year, the 27.5% corporate tax would apply to a base rate entity from the 2017–2018 income year. A corporate tax entity would be a base rate entity if it carried on a business and had an aggregated turnover for the 2017–2018 income year of less than $25 million. The aggregated turnover threshold that would apply to determine whether a corporate tax entity was a base rate entity that qualified for the lower corporate tax rate would be raised annually, so that:

• in 2018–19, the annual aggregated turnover threshold would be $50 million;
• in 2019–2020, the annual aggregated turnover threshold would be $100 million;
• in 2020–2021, the annual aggregated turnover threshold would be $250 million;
• in 2021–2022, the annual aggregated turnover threshold would be $500 million;
• in 2022–2023, the annual aggregated turnover threshold would be $1 billion.

In the 2023–2024 income year, the aggregated turnover threshold test to qualify for the lower corporate tax rate would be removed. The corporate tax rate in that income year would therefore be 27.5% for all corporate tax entities. The corporate tax rate would then be further reduced in stages: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and later years.

In the period from the 2016–2017 income year until the 2022–2023 income year, the corporate tax rate would remain at 30% for companies that have an aggregated turnover equal to or exceeding the threshold for the income year.

Franking

The maximum franking credit that could be allocated to a frankable distribution paid by a corporate tax entity would be based on a tax rate of 27.5%. However, if the entity’s aggregated turnover for the prior income year was equal to or exceeded the aggregated turnover threshold for the current income year, then the maximum franking credit that could be allocated to a frankable distribution paid by the entity would be based on the headline corporate tax rate of 30%.

Carry forward tax offset rules

Sections 65-30 and 65-35 of the Income Tax Assessment Act 1997 (ITAA 1997) relate to the operation of the tax offset carry-forward rules. Consequential amendments would be made in particular income years to ss 65-30 and 65-35 to reflect the staged reduction in the corporate tax rate.

NFP companies

As the corporate tax rate for companies that are small business entities would be reduced to 27.5%, the shade-in limit for non-profit companies that are small business entities would be reduced to $832 for the 2016–2017 income year.

Life insurance companies

The rate of tax paid by life insurance companies on the ordinary component of the company’s taxable income would be reduced to 27.5% in the 2023–2024 income year (when the corporate tax rate would become aligned for all companies). Consistent with the treatment of other companies, the rate would then be cut: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and subsequent income years.

Date of effect

The corporate tax rate will be reduced from the 2016–2017 income year.

SME entity threshold increase

The Bill also proposes to amend the definition of “small business entity” in s 328 of ITAA 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million. The aggregated turnover threshold for access to the small business income tax offset would be limited to $5 million, and the current aggregated turnover threshold of $2 million would be retained for the small business CGT concessions. The proposal was announced as part of the 2016–2017 Federal Budget.

Small business entities with aggregated turnover of less than $10 million would be able to access a number of small business tax concessions, including:

• immediate deductibility for small business start-up expenses;
• simpler depreciation rules;
• simplified trading stock rules;
• rollover for restructures of small businesses;
• immediate deductions for certain prepaid business expenses;
• accounting for GST on a cash basis;
• annual apportionment of input tax credits for acquisitions and importations that are partly creditable;
• paying GST by quarterly instalments; and
• the FBT car parking exemption.

The Bill would also amend Subdiv 328-F to create a different aggregated turnover threshold of $5 million for the purposes of the small business income tax offset. It proposes to achieve this by modifying the meaning of “small business entity”. For the purposes of Subdiv 328-F, and therefore the small business income tax offset, an entity would work out whether it was a small business entity for the income year as if each reference in s 328-110 (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

Small business CGT concessions

The Bill proposes to amend Div 152 to retain the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions contained in that Division. It achieves this by replacing references to “small business entity” with the new defined term “CGT small business entity”. An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference in subs 328-110(1)(b) (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

Date of effect

The new thresholds would apply from the 2016–2017 income year. For the FBT car parking exemption, the new threshold would apply from the FBT year commencing on 1 April 2017.

Tax discount increase for unincorporated small businesses

The Bill also proposes to amend ITAA 1997 to increase the small business income tax offset to 16% of net small business income by the 2026–2027 income year. The proposal was announced as part of the 2016–2017 Federal Budget. In the 2025–2026 income year and earlier income years, lower rates of offset would apply as follows:

• For the 2016–2017 to 2023–2024 income years the offset would be 8% of net small business income.
• For the 2024–2025 income year the offset would be 10% of net small business income.
• For the 2025–2026 income year the offset would be 13% of net small business income.

The offset, introduced in the 2015–2016 income year, entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5% of their basic income tax liability that relates to their total net small business income, capped at $1,000. Although the proposed increases in the offset would increase the percentage of offset an eligible individual may claim, the offset amount would remain capped at $1,000.

Date of effect

The first increase to the offset would commence on 1 July 2016 and apply from the 2016–2017 income year.

Source: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, before the House of Representatives as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5684%20Recstruct%3Abillhome.

Single touch payroll reporting legislative changes

The Budget Savings (Omnibus) Bill 2016 (the Bill) has passed through the House of Representatives. It seeks to achieve savings across multiple portfolios to contribute to budget repair. The Bill would implement measures announced in the 2016–2017 Federal Budget and earlier Budget updates.

The Bill creates a new reporting framework, Single Touch Payroll (STP), for substantial employers to automatically provide payroll and superannuation information to the Commissioner of Taxation at the time it is created. A number of related amendments aim to streamline employer payroll and superannuation choice processes by allowing the ATO to pre-fill and validate employee information. The framework would apply from the first quarter beginning on or after the day the Bill receives Royal Assent.

 

Key points include the following:

• Entities with 20 or more employees (substantial employers) would be required to report the following information to the Commissioner:
• withholding amount and associated withholding payment, on or before the day by which the amount was required to be withheld;
• salary or wages and ordinary time earnings information, on or before the day on which the amount was paid; and
• superannuation contribution information, on or before the day on which the contribution was paid.
• Employers that report these obligations (including those that voluntarily report) would not need to comply with a number of other reporting obligations under the existing law.
• For the first 12 months, reporting entities would not be subject to administrative penalties, unless first notified by the Commissioner.
• An employee may make a valid choice of superannuation fund by providing the relevant information to the Commissioner. In this situation, the Commissioner may disclose an employee’s TFN and protected information to the employer.
• An employee may make an effective TFN declaration by providing the declaration to the Commissioner. In this situation, the Commissioner may make available to the employer the information in the employee’s TFN declaration. Where the information has been provided by the employee to the Commissioner, the employer would not be required to send the declaration to the relevant Deputy Commissioner, nor would they be required to notify the Commissioner where no TFN declaration was provided to them by the employee. However, if an employee chose not to provide their TFN, the obligation would remain for the employer to notify the Commissioner.
• The Commissioner may provide employers with confirmation that a recipient’s information, including their TFN, matched or did not match the information held by the ATO about the recipient (positive and negative validation).
• In general, STP reporting would commence on 1 July 2018 for substantial employers and the related amendments would apply more broadly from 1 January 2017. In some cases, the Commissioner may defer these start dates by legislative instrument.

The ATO has release a consultation paper (available on the ATO website at: https://www.ato.gov.au/General/Consultation/What-we-are-consulting-about/Papers-for-comment/Single-Touch-Payroll–ATO-consultation-paper/) which seeks comments on the ATO’s proposed administration of STP reporting, including the form the ATO guidance may ultimately take.

Previous announcements

The proposal was first flagged by then Minister for Small Business Bruce Billson on 20 June 2014. The Government officially announced the proposal on 28 December 2014. The ATO then released a discussion paper in February 2015. Following feedback, the Government announced on 10 June 2015 that it would undertake further consultation.

As part of the Mid-Year Economic and Fiscal Outlook 2015–2016 (MYEFO), released on 15 December 2015, the Government announced a $100 non-refundable tax offset for expenditure on Standard Business Reporting enabled software for small businesses. The offset is not covered in the Bill’s amendments. The MYEFO also announced the timetable for piloting STP reporting.

Other important changes

Other important changes proposed by the Omnibus Bill include:

• Rates of research and development (R&D) tax offset – reducing the rates of the tax offset available under the R&D tax incentive for the first $100 million of eligible expenditure by 1.5%. The higher (refundable) rate of the tax offset will be reduced from 45% to 43.5% and the lower (non-refundable) rates of the tax offset will be reduced from 40% to 38.5%. Key points include the following:
• Eligible entities that have annual turnover of less than $20 million and are not controlled by an exempt entity or entities may obtain a refundable tax offset equal to 43.5% of the first $100 million of eligible R&D expenditure in an income year, and a further refundable tax offset equal to the amount by which the R&D expenditure exceeds $100 million multiplied by the company tax rate.
• All other eligible entities may obtain a non-refundable tax offset equal to 38.5% of the eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which the R&D expenditure exceeds $100 million multiplied by the company tax rate.
• The changes would apply from 1 July 2016.
• Fringe benefits – changing the treatment of fringe benefits under the income tests for family assistance and youth income support payments and for other related purposes. These proposed changes are also relevant for a number of income tax provisions. The meaning of “adjusted fringe benefits total” would be modified so that the gross rather than adjusted net value of reportable fringe benefits was used, except in relation to fringe benefits received by individuals working for public benevolent institutions, health promotion charities and some hospitals and public ambulance services. The changes would apply from the first 1 January or 1 July to occur after the day the Bill receives the Royal Assent.
• Indexation of private health insurance thresholds – pausing the income thresholds that determine the tiers for the Medicare Levy Surcharge (MLS) and the Australian Government Rebate (the Rebate) on private health insurance at the 2014–2015 rates until 2020–2021. This proposal was announced in the 2016–2017 Federal Budget.
• Indexation of family tax benefit and parental leave thresholds – making amendments to the family assistance indexation provisions to maintain the higher income free area for family tax benefit (FTB) Part A and the primary earner income limit for FTB Part B for a further three years. Under the current law, indexation of these amounts is paused until and including 1 July 2016. These amendments ensure that indexation does not occur on 1 July of 2017, 2018 and 2019. Similarly, amendments are proposed to ensure that the paid parental leave income limit is not indexed for a further three years, until 1 July 2020. These changes would apply from the date the Bill receives Royal Assent.
• Pension means testing for aged care residents – introducing the 2015–2016 MYEFO measure aligning the pension means testing arrangements with residential aged care arrangements. Key points include the following:
• The changes would amend the social security and veterans’ entitlements legislation to remove the pension income and assets test exemptions that are currently available to pensioners in aged care who rent out their former home and pay their aged care accommodation costs by periodic payments.
• The removal of the income test exemption is proposed to ensure that net rental income earned on the former principal residence of new entrants into residential aged care would be treated the same way under the pension income test as under the aged care means test, regardless of how the resident chooses to pay their aged care accommodation costs.
• The current indefinite assets test exemption of the former principal residence from the pension assets test, where the property is rented and aged care accommodation costs are paid on a periodic basis, would also be removed. A person who enters a residential or flexible aged care service after the commencement of changes could still benefit from provisions in the Social Security Act 1991 and Veterans’ Entitlements Act 1986 that treat a person’s former residence as their principal home for a period of up to two years from the day on which the person enters care (unless the home is occupied by their partner, in which case it continues to be exempt).
• The changes would only apply to pensioners who enter aged care on or after the commencement of the amendments. Existing aged care residents and those who entered aged care before the commencement date would be protected from the amendments. The changes would commence from the first 1 January or 1 July to occur after the day the Bill receives the Royal Assent.
• Minimum repayment income for HELP debts – establishing a new minimum repayment threshold for HELP debts of 2% when a person’s income reaches $51,957 in the 2018–2019 income year.
• Indexation of higher education support amounts – changing the index for amounts that are indexed annually under the Higher Education Support Act 2003, from the Higher Education Grants Index (HEGI) to the Consumer Price Index (CPI), with effect from 1 January 2018. The proposal was announced in the 2016–2017 Federal Budget.
• Removal of HECS-HELP benefit – discontinuing the HECS-HELP benefit from 1 July 2017. The proposal was announced in the 2016–2017 Federal Budget.
• Job commitment bonus – giving effect to the “cessation of the job commitment bonus” proposal announced in the 2016–2017 Federal Budget.
• Interest charge on debts of ex-welfare payment recipients – introducing the legislative amendments required for the 2015–2016 MYEFO proposal to apply a general interest charge to the debts of ex-recipients of social security and family assistance payments. The interest charge would apply to social security, family assistance (including child care), paid parental leave and student assistance debts. The rate of the proposed interest charge (approximately 9%) would be based on the 90-day Bank Accepted Bill rate (approximately 2%), plus an additional 7%, as is already applied by the ATO under the Taxation Administration Act 1953. The charge would apply from 1 January 2017.
• Debt recovery for welfare payment integrity – introducing the legislative amendments required for the 2015–2016 MYEFO proposal to expand debt recovery for enhanced welfare payment integrity. The changes would allow departure prohibition orders (DPOs) to be made to prevent targeted debtors from leaving the country. DPOs would be used for debtors who persistently fail to enter into acceptable repayment arrangements. The changes would also remove the six-year limitation on recovery of welfare debts. The amendments would apply from the later of 1 January 2017 and the day after the Bill receives Royal Assent.
• Parental leave payments – introducing the amendments required for the 2015–2016 MYEFO proposal to apply consistent treatment of Commonwealth parental leave payments for income support assessment. The changes would amend the social security and veterans’ entitlements legislation to ensure Commonwealth parental leave payments and dad and partner pay payments under the Paid Parental Leave Act 2010 would be included in the income test for Commonwealth income support payments. The changes would commence on the first 1 January, 1 April, 1 July or 1 October that occurs after the day the Bill receives Royal Assent.
• Carer allowance – aligning carer allowance and carer payment start day provisions by removing provisions that apply to backdate a person’s start day in relation to payment of carer allowance in certain circumstances. The general start day rules under Pt 2 of Sch 2 to the Social Security Administration Act 1999 would apply to determine the date of effect of a decision to grant carer allowance. The changes would commence on the later of 1 January 2017 and the day after the Bill receives the Royal Assent.
• Employment income – removing the exemption from the income test for FTB Part A recipients and the exemption from the parental income test for dependent young people receiving Youth Allowance and ABSTUDY living allowance if the parent is receiving either a social security pension or social security benefit and the fortnightly rate of pension or benefit is reduced to nil because of employment income (either wholly or partly). The change would commence on 1 July 2018.
• Other changes proposed in the Bill relate to the following:
• abolishing the National Health Performance Authority;
• aged care – creating civil penalties for approved providers that do not make required notifications;
• removing the family member exemption from the newly arrived resident’s waiting period;
• repealing student start-up scholarships; and
• creating a single appeal path under the Military Rehabilitation and Compensation Act 2004.

Watch for amendments

At the time of writing, the Bill had passed the House of Representatives with 19 Government amendments. The Government amendments to the Bill include:

• adding a new schedule which provides an income limit of $80,000 on payment of the FTB Part A supplement;
• removing proposed amendments that would have stopped relevant social security payments to individuals undergoing psychiatric confinement because of serious offences;
• removing the Energy Supplement only for new recipients of FTB Part A, FTB Part B and the Commonwealth Seniors Health Card;
• restoring funding to the Australian Renewable Energy Agency (ARENA) of $800 million over five years to 2021–2022; and
• removing proposed amendments to create a Child and Adult Public Dental Scheme.

Source: Budget Savings (Omnibus) Bill 2016, before the Senate at as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5707%20Recstruct%3Abillhome.

Take care with work-related deduction claims, says ATO

The ATO has reminded individuals to make sure they get their deductions right this tax time. Assistant Commissioner Graham Whyte said the ATO has seen “claims for car expenses where logbooks have been made up and claims for self-education expenses where invoices were supplied for conferences that the taxpayer never attended”. While noting that most tax agents do the right thing, Mr Whyte said “sometimes the ATO identifies tax agents offering special deals, inflating claims to generate larger refunds”.

Mr Whyte said that in 2014–2015 the ATO conducted around 450,000 reviews and audits of individual taxpayers, leading to revenue adjustments of over $1.1 billion in income tax. Mr Whyte said “every tax return is scrutinized” and if a red flag is raised and the claims seem unusual, the ATO will check them with the claimant’s employer. In addition, Mr Whyte reminded taxpayers that this year the ATO has introduced “real-time checks of deductions for tax returns completed online”.

The ATO has prepared the following case studies.

Case study 1

A railway guard claimed $3,700 in work-related car expenses for travel between his home and workplace. He indicated that this expense related to carrying bulky tools, including large instruction manuals and safety equipment. The employer advised the equipment could be securely stored on their premises. The taxpayer’s car expense claims were disallowed because the equipment could be stored at work and carrying them was his personal choice, not a requirement of his employer.

Case study 2

A wine expert working at a high end restaurant took annual leave and went to Europe for a holiday. He claimed thousands of dollars in airfares, car expenses, accommodation and various tour expenses, based on the fact that he’d visited some wineries. He also claimed over $9,000 for cases of wine. All his deductions were disallowed when the employer confirmed the claims were private in nature and not related to earning his income.

Case study 3

A medical professional made a claim for attending a conference in America and provided an invoice for the expense. When the ATO checked, it found that the taxpayer was still in Australia at the time of the conference. The claims were disallowed and the taxpayer received a substantial penalty.

Case study 4

A taxpayer claimed deductions for car expenses using the logbook method. The ATO found the taxpayer had recorded kilometres in the logbook on days where there was no record of the car travelling on the toll roads, and further enquiries identified that the taxpayer was out of the country. The claims were disallowed.

Case study 5

A taxpayer claimed self-education expenses for the cost of leasing a residential property, which was not his main residence. The taxpayer claimed he had to incur the expense of renting the property as he “required peace and quiet for uninterrupted study which he could not have in his own home”. This was not deductible.

In addition to the rental expenses, the cost of a storage facility was claimed where “the taxpayer needed to store his books and study materials”. The taxpayer claimed he needed this because of the huge amount of books and study material associated with his course and had no space in his private or rented residence where these could be housed. This was not deductible.

The cost of renting the property was around $57,000, with additional expense of $7,500 for the storage facility. The actual cost of the study program he attended that year was only $1,200.

Source: ATO media release, “ATO exposes dodgy deductions”, 16 August 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-exposes-dodgy-deductions/.

ATO eye on SMSFs and income arrangements

The ATO is reviewing arrangements where individuals (at or approaching retirement age) purport to divert personal services income (PSI) to a self managed superannuation fund (SMSF) to minimise or avoid income tax obligations, as described in Taxpayer Alert TA 2016/6 Diverting personal services income to self managed superannuation funds.

Taxpayers who have entered into a similar arrangement are encourgaed to contact the ATO so it can help resolve any issues in a timely manner and minimise the impact on the individual and the fund. Where individuals and trustees come forward to work with the ATO on resolving issues, it anticipates that in most cases the PSI distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate.

The ATO will address issues affecting SMSFs on a case-by-case basis, but it will take individuals’ cooperation into account when determining final outcomes. 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 will still apply.

The ATO can be contacted by email at: SMSFStrategicCampaigns@ato.gov.au (with “TA 2016/6” in the subject line).

 

Taxpayer Alert 2016/6

On 29 April 2016, the ATO issued Taxpayer Alert TA 2016/6 to warn individuals about arrangements purporting to divert PSI to an SMSF to avoid paying tax at personal marginal rates.

Arrangements of concern

The ATO said it is reviewing arrangements whereby individuals (typically SMSF members at or approaching retirement age) perform services for a client but do not directly receive any (or adequate) consideration for the services. Rather, the client remits the consideration for the services to a company, trust or other non-individual entity (including an unrelated third party). That entity then distributes the income to the individual’s SMSF, purportedly as a return on an investment in the entity. The SMSF treats the income as subject to concessional tax (15%) or as exempt current pension income.

Other variations of the arrangement include the income being remitted by the entity to the SMSF via a written or an oral agreement between the entity and SMSF, instead of as a return on an investment. The SMSF may also record the income from multiple entities or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual or associates are members.

ATO’s view

The Commissioner considers that the arrangements may be ineffective at alienating income such that it remains the assessable income of the individual under s 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or PSI. The ATO also warns that Pt IVA may apply.

The amounts received by the SMSF may also constitute non-arm’s length income of the SMSF under s 295-550 of ITAA 1997, and therefore be taxable at 47%. Other compliance issues include:

• that the amounts received by the SMSF may be a contribution and generate excess contributions tax consequences for the individual; and
• superannuation regulatory issues – the arrangement may breach the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Such breaches of the SIS Act may lead to the SMSF being made non-complying or to the disqualification of an individual as a trustee.

Source: ATO, Taxpayer Alert TA 2016/6, 29 April 2016, https://www.ato.gov.au/law/view/document?DocID=TPA/TA20166/NAT/ATO/00001.

Social welfare recipients data-matching program

The Department of Human Services (DHS) has released details of a data-matching program which will enable it to match income data it collects from social welfare recipients with tax return-related data reported to the ATO.

The data matching will assist DHS to identify social welfare recipients who may not have disclosed income and assets to it. In addition, data received from the ATO will be electronically matched with certain departmental records to identify noncompliance with income or other reporting obligations.

DHS expects to match each of the approximately seven million unique records held in its Centrelink database. Based on non-compliance criteria, DHS anticipates it will examine approximately 20,000 records in the first phase of the project.

The category of people who may be affected by the data-matching includes welfare recipients who have lodged a tax return with the ATO during the period 2011 to 2014.

DHS says the information will be used to:

• verify the information reported to it by social welfare recipients;
• identify social welfare recipients who may not have disclosed income to DHS;
• match and validate the tax return and the PAYG datasets;
• identify discrepancies in the income declared to DHS by social welfare recipients; and
• consider whether it will initiate compliance action in relation to particular social welfare recipients (including debt recovery or a referral to the Commonwealth Director of Public Prosecutions).

Source: Commonwealth Gazette, Notice of data matching project between Department of Human Services and Australian Taxation Office, 19 August 2016, https://www.legislation.gov.au/Details/C2016G01112

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.