SMSF – Policy Conditions

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Income protection insurance is worth considering for working people. It can pay a proportion of your salary if you are temporarily unable to work because of sickness or injury. When taking out any insurance policy, you should check carefully the terms and conditions, and also the way the key terms of the policy are defined. This helps to avoid disappointment or disputes with the insurer should an unfortunate event occur.

This article takes a look at a determination made by the Financial Ombudsman Service (FOS) in relation to a dispute over an income protection insurance policy.

FOS examines “offset” condition

In June 2014, the FOS issued a determination regarding a claim under an income protection insurance policy. At the commencement of the policy, and until he became disabled, the applicant jointly owned and operated a family business with his wife. When the applicant became totally disabled, the family business continued and made profits without the applicant’s participation.

The determination considered the insurer’s interpretation of a policy condition which stated that “the amount of the monthly total disability benefit will be reduced, where necessary, so that the total that month of: … the total disability benefit payment … and amounts payable from the insured person’s employer or business…does not exceed 75% of pre-disability monthly earnings”.

The FOS said the insurer did not dispute that the applicant was totally disabled. However, it applied the policy condition to offset the continuing profits of the family business against the benefits otherwise payable to the applicant. The financial services provider (FSP) said that it accepted the applicant’s application for cover on the basis that he was entitled to 50% of the profits of the family business, and said that it took this into account when calculating the applicant’s pre-disability monthly earnings. Therefore, the FSP considered it was entitled to apply the policy condition.

A FOS panel did not agree with the insurer’s interpretation of the policy condition. The FOS said the panel determined that:

  • The insurer was only able to apply the policy condition to amounts which were referable to the applicant’s total disability. These did not include amounts which may have been payable to the applicant as a result of the profitability of the family business after he became incapacitated, and to which he did not contribute through personal exertion.
  • There is no unfairness or inconsistency in taking into account business profits prior to disablement when the applicant was working full time but not after he became totally disabled when he took no part in the business. Ignoring pre-disability profits of the business that were due to the applicant’s activities would contravene the policy definition of pre-disability monthly earnings.

When the applicant became totally disabled, he ceased to earn any personal exertion income. Any amounts subsequently payable to him from the business were “passive” income, in the nature of dividends on a shareholding. These were not amounts referable to his disability, and were therefore not able to be offset under the policy condition.

Talk to us

Like many things in life, the devil is in the detail, so it’s important that you understand what you are (or will be) covered for. It’s also important to consider seeking professional advice tailored to your circumstances. If you have any concerns or questions, please contact our office on 02 9954 3843.

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

Personal Tax – CGT: Deceased Estates

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It is relatively common for a taxpayer to inherit residential property under a will. While an inherited dwelling can be a wonderful gift, it often results in capital gains tax (CGT) implications, particularly where the taxpayer later sells the property. Individuals who inherit deceased estates therefore need to be aware of how the CGT rules work.

Generally, a CGT liability arises when a capital gain is made on the sale of a property. However, a taxpayer may be fully or partially exempt from CGT if the transaction involves the sale of a deceased person’s main residence, provided certain conditions are satisfied.

This article examines the rules surrounding application of the CGT main residence exemption contained in the tax law, in the context of a beneficiary selling a dwelling they acquired from a deceased estate.

Main residence exemption: basic rules

The main residence exemption rules appear in Subdiv 118-B of the Income Tax Assessment Act 1997. They provide that a capital gain or loss made on the disposal of a dwelling is generally disregarded for CGT purposes if the dwelling is a main residence of the taxpayer throughout the ownership period.

The tax legislation defines “ownership” as a legal or equitable interest or a right or licence to occupy the land or dwelling. The ownership period of a dwelling is the period during which the individual had an ownership interest in the dwelling or land.

The definition of “dwelling” includes a unit of residential accommodation, a caravan or a houseboat, and a dwelling can be made up of more than one unit of accommodation – for example, a house with a granny flat – provided they are used together as a single residence (see Taxation Determination TD 1999/69).

The main residence exemption is only available to natural persons, so it does not apply where a company or trust owns a residence, except where the residence is vested in the trustee of a deceased estate and it is the main residence of a surviving spouse.

Deceased estates and main residence

For a beneficiary taxpayer who inherits a dwelling to have access to the main residence exemption, the dwelling must have been a “main residence” of the deceased person at the date of their death. This generally means the person lived in the dwelling and it was their main residence during their lifetime, or the person stopped living in the dwelling but continued to treat it as their main residence during their lifetime. This could occur, for example, when the person lived in a retirement home or aged care facility during their later years.

A taxpayer who inherits a main residence and subsequently sells the property may be able to access either full or partial exemption from CGT. The conditions to be satisfied to access the exemption depend on whether the deceased person acquired the dwelling before or after 20 September 1985:

Full CGT exemption

Deceased person acquired the dwelling before 20 September 1985 and beneficiary acquired it after 20 September 1985

Where the dwelling is a pre-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling if either of the following applies:

  • condition 1: the taxpayer disposed of the property within two years of the deceased person’s death; or
  • condition 2: the disposal did not occur within two years, but from the date of the death until the time of the sale, the dwelling was not used to produce income and it was the main residence of the surviving spouse, an individual with a right to occupy the home under the will, or a beneficiary of the estate.

There is no requirement for a pre-CGT dwelling to have been the main residence of the deceased person.

The Commissioner of Taxation has discretion to extend the two-year period under certain circumstances.

Deceased person acquired the dwelling on or after 20 September 1985

Where the dwelling is a post-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling, provided certain conditions are met. There are different conditions depending on whether the taxpayer acquired the post-CGT dwelling before or after 20 August 1996.

Where the dwelling passed to the taxpayer on or before 20 August 1996, the full exemption is available if:

  • the dwelling was the deceased person’s main residence for their entire ownership period during their lifetime and they did not use it to produce income; and
  • condition 2 (described above) is met.
  • Where the dwelling passed to the taxpayer after 20 August 1996, the full exemption is available if:
  • the dwelling was the deceased person’s main residence just before their death and it was not being used to produce income at that time; and
  • either condition 1 or condition 2 (described above) is met.
Illustrative example 1

Andrew was the sole occupant of a home he bought in Coburg, Victoria, in December 1998. It was his main residence throughout his ownership period. Andrew died in April 2011 and left the house to his only daughter, Leanne. Leanne rented out the house for a short period, then sold it 18 months after her father died.

Is Leanne entitled to the full CGT exemption?

Yes, because she disposed of it within two years of her father’s death, it was her father’s main residence just before his death and it was not used to produce income at that time.

Partial CGT exemption

Where a dwelling was not the deceased person’s main residence during the full period of their ownership, a full or part exemption from CGT may be still available. The taxable capital gain or loss amount is calculated according to a formula prescribed in the legislation:

 Term  Pre-CGT dwelling  Post-CGT dwelling
Non–main residence days The number of days from the deceased person’s death until the disposal date, when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy it under the will, or the beneficiary The sum of (a) the number of days after the date of the death when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy under the will or the beneficiary, and (b) the number of days during the deceased person’s ownership period when the dwelling was not their main residence.
Total days The number of days from the deceased person’s death until the date of the dwelling’s disposal The number of days from the date the deceased person acquired the dwelling until the date of its disposal

If the ownership interest is disposed of within two years of the deceased person’s death, the taxpayer can ignore the non-main residence days and total days in the period from the date of death until the date of disposal if this reduces the tax liability.

Cost base of the dwelling

Where the dwelling was a post-CGT asset of the deceased person, the taxpayer inherits the deceased person’s cost base. If it was a pre-CGT asset of the deceased person, the taxpayer is taken as acquiring the dwelling for its market value at the date of the death.

Illustrative example 2

Zoe bought a house on 8 October 1995 and used it solely as a rental property. When Zoe died on 7 June 2005, the house passed to her son, John, and he used it as his main residence.

John then sold the house in November 2009, making a capital gain of $250,000 from the sale.

Is John eligible for the full CGT exemption?

No. Zoe never used the property as her main residence, so John cannot claim the full exemption for a main residence.

Is John eligible for the partial CGT exemption?

Yes, because he used the house as his main residence. John must use the prescribed formula to calculate the taxable portion of his capital gain.

Zoe owned the house for 3,531 days. John then lived in the house for 1,635 days. This gives 5,166 total days.

Zoe used the house as a rental property from the time she acquired it, so there were 3,531 non-main residence days.

Using the formula, the taxable portion of John’s capital gain is $170,876 ($250,000 x (3,531/5,166)).

On the basis that he is eligible to access the 50% CGT discount, John has a capital gain of $85,438.

Talk to us

Do you think the full or partial CGT exemption could apply to your circumstances? Please contact our office on (02) 9954 3843 for further information.

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

Agistment Activities: Business

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Q. I propose to purchase about 20 acres of land which is used for cattle grazing. I will continue to use the land for agistment purposes, although my long-term plan is to subdivide the land and sell the subdivided blocks. Will the agistment activities amount to a business?

 

A. Whether your agistment operations constitute a business is generally a question of fact and law (and possibly Old English law). The following extract from para [22-250] of Thomson Reuters’ Australian CGT Handbook indicates it is possible for agistment activities to amount to carrying on a business in appropriate circumstances:

“Land used for agistment may fall outside the exclusion [for assets used in a business ‘mainly to derive rent’] as under old law “agistment” is the act of taking another’s stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand: see, for example, Sinclair v Judge [1930] QSR 340. Therefore as the arrangement between the parties is more akin to bailment than a lease the payments may not be regarded as ‘rent’. Further it is possible to carry on a business of agistment (see, for example, AAT Case 10,331 (1995) 31 ATR 1146) – albeit, still the exclusion in s 152-40(4)(e) could be relevant as it applies to assets used in a business ‘mainly to derive rent’.”

The return on the activity may possibly be regarded as rental income. If so, the land may not be an active asset for the purposes of the CGT small business concessions – s 152-40(4)(e) ITAA 1997 excludes assets used in a business “mainly to derive rent”.

Carrying on a business

Whether a business is being carried on is a question of fact to be determined objectively on the specific facts of the case (eg Evans v FCT (1989) 20 ATR 922 at 939; Hart v FCT (2003) 53 ATR 371).

From the many court and tribunal decisions concerning this issue (eg Thomas v FCT (1972) 3 ATR 165, Ferguson v FCT (1979) 9 ATR 873, Hope v Bathurst City Council (1980) 12 ATR 231, FCT v Radnor Pty Ltd (1991) 22 ATR 344 and Spriggs and Riddell v FCT (2009) 72 ATR 148) ,it seems the following factors are particularly relevant – that is, when assessed objectively, their presence indicates a business is being carried on:

  • the person’s purpose and intention as they engage in the activities;
  • the intention to make a profit from the activities, even if only a small profit is made or a small loss incurred. (If a loss is incurred every year for a number of years, however, that suggests the activity may be more of a hobby.) It seems that an intention to make a profit is not of itself sufficient;
  • the size and scale of the activities – they must be in excess of domestic needs, but do not need to be the person’s only activities and can be carried on in a small way;
  • repetition and regularity of the activities – although the expression “carry on” does not necessarily require repetition (see FCT v Consolidated Press Holdings Ltd; CPH Property Pty Ltd v FCT (2001) 47 ATR 229 at 245) and an isolated activity may constitute beginning a business;
  • the activities being carried on in a systematic and businesslike way, as usual for that type of business (eg keeping detailed, up-to-date records and accounts); and
  • the existence of a business plan.

The factors must be considered in combination and as a whole, and no one factor is likely to be decisive: see Taxation Ruling TR 97/11. A person may carry on a business even if they are not actively engaged in the business: Puzey v FCT (2003) 53 ATR 614 at 624; Sleight v FCT (2003) 53 ATR 667 at 682 (decision upheld on appeal in FCT v Sleight (2004) 55 ATR 555).

Even if you are carrying on an agistment business, it is unlikely that it is a “primary production business” within the meaning in s 995-1 of the ITAA 1997. The Commissioner considers a landowner engaged in a primary production business if, under a share-farming arrangement allowing another person to cultivate the land, the landowner is carrying on business in partnership or is directly involved in that business with a degree of control or ongoing participation: Taxation Determination TD 95/62.

 

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

This article is sourced from Thomson Reuters TaxQ&A service.

SMSF ATO Powers

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

These include the following actions:

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

Informal arrangements

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

ATO identification of risk posed by SMSFs

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

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

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

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

Want to know more?

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

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

Tax Debt Payment Plan

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Taxpayers who can’t pay their tax by the due date should consider whether to request a payment arrangement with the ATO. An arrangement to pay in instalments does not vary the time when the amount is due and payable, and therefore does not affect any liability to pay the general interest charge, or any other relevant penalty, for late payment.

It’s best practice to address tax debt problems as early as possible. If a payment arrangement is an appropriate approach for you, you need to understand the process involved.

Depending on eligibility, the ATO has three ways to help set up a payment plan:

  • Online payment plan services for debts under $100,000: If you’re an individual or a sole trader with an income tax or an activity statement debt of less than $100,000, you may be eligible to use the ATO online services for individuals to set up a payment plan.
  • Automated payment plan phone service for debts under $25,000: If your debt is less than $25,000, you can use the ATO automated phone service to arrange a late payment or make a request to pay by instalments.
  • Contact the ATO for more complex situations: If your tax debt is $25,000 or more, you can call the ATO on 13 11 42 to discuss your circumstances, or your tax adviser can call on your behalf. The ATO may need to know more about your financial situation and your circumstances so it can set up a payment plan. Among other things, the ATO may require that you show your business is viable.

Registered agents can also request a payment plan on their clients’ behalf.

If you run a small business with an activity statement debt, you may be able to pay it off interest-free over 12 months. You will need to have a good history of tax lodgments and payments.

The Commissioner is not legally bound to allow payment by instalments, and will consider each case on its own merits. If the Commissioner refuses your request to pay by instalments, that decision should be reviewable under the Administrative Decisions (Judicial Review) Act 1977.

The ATO’s Practice Statement PS LA 2011/14 contains guidelines on when the Commissioner may agree to payment of a tax-related liability by instalments. The Commissioner will not accept payment by instalments if the ATO’s prospects of recovery in the longer term would be diminished or the revenue would be disadvantaged.

Taxpayers paying by instalments are expected to finalise their debts in the shortest possible timeframe. If the period extends beyond one or more financial years, the taxpayer may be required to provide security or a surety. Also, payment arrangements will be reviewed regularly to take into account any changes in the taxpayer’s financial situation.

The Commissioner will consider a range of matters when deciding whether to allow you to pay by instalments, including:

  • the circumstances that led to your inability to pay;
  • your current financial position, including other current payment obligations and actions you have taken to rearrange your finances or borrow to meet the debt;
  • the stage any legal recovery action has reached and the grounds you put forward to justify deferring legal action;
  • your solvency, and arrangements you have made with other creditors (arm’s-length or otherwise) to pay your debts;
  • your compliance with other taxation obligations or commitments and the history of your dealings with the ATO;
  • whether alternative collection options may result in your debt being paid over a shorter period (eg the use of “garnishee” provisions); and
  • your willingness to enter into direct debit arrangements, where that facility exists.

Where a company has a tax debt, the Commissioner may not agree to payment by instalments if there are (or ought to be) reasonable grounds to suspect that the company is insolvent (in such a case, any money received under an instalment arrangement may be recoverable by the company’s liquidator under Pt 5.7B of the Corporations Act 2001).

 

Want to know more?

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

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

Super Guarantee: “Employees” or “Independent Contractors”?

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An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.

 

Want to know more?

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

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

Sort Out the Income You Must Lodge on Your Tax Return

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Broadly speaking, if you are a resident of Australia, you must annually lodge an income tax return and pay annual taxes on worldwide income from many sources.

If you are lodging directly, the deadline is October 31 for the previous tax year ending on June 30. If the deadline falls on a weekend, you can lodge on the following Monday without incurring a penalty.  Taxpayers who lodge through tax agents should check with them for their deadlines, which vary. You must, however, contact a tax agent by October 31 if you are using one for the first time or are switching to a new one.

Here is a list of the most common sources of income you must report to the Australian Taxation Office (ATO).

Employment

With some exemptions, you must declare all income generated from employment. The most common types of employment income are:

  • Salary, wages and tips;
  • Allowances from your employer, such as a car allowance; and
  • Lump sum payments. Concessional treatment may apply, such as when you receive termination payments.

Pensions, Annuities and Government Payments

  • Pensions, which are series of superannuation income streams, generally have both a taxable and a tax-free component.
  • Annuities — a series of payments typically purchased with a lump sum from a life insurer — also contain taxable and non-taxable elements.
  • Government payments include payments such as age pensions and youth allowances.

Some government payments are subject to income tax while others are not. For example, disability support pensions can be taxable or exempt depending on, among other things, the age of the recipient.

Interest, Dividends and Rent

Interest income is generally taxable. For example, if you put money into a savings account for your child, you may need to declare interest earned on that account. Life insurance bonuses are also taxable.

If you own shares in a company, you must declare all assessable dividends paid or credited to you. You may receive dividends as cash or bonus shares from listed investment companies, public trading trusts, corporate unit trusts and corporate limited partnerships as a distribution. If you are paid or credited with bonus shares, the issuing company should provide you with a statement indicating whether the stock qualifies as a dividend. Payouts are assessable income in the year they are paid or credited to you.

Australian resident company dividends are taxed under a system called “imputation.” The tax the company pays is “imputed” to the shareholders as franking credits attached to their dividends. Depending on your financial circumstances, your might be able to use those credits to offset other tax liabilities.

Rent and rent-related payments are taxable. As an example, money from a bond associated with a lease is taxable if you received it because a tenant defaulted. Other rent-related payments may have to be declared on your income tax return.

Capital Gains

Australia does not have a separate capital gains tax. Gains are simply added to your ordinary taxable income.

Capital gains typically result from the sale of assets, such as real estate, shares or managed fund investments. The gain is the difference between what you paid for the property and the amount you received when you sold it. There are, however, many other ways to generate capital gains. Complex rules govern when gains may trigger a tax obligation, which often depends on the type of asset.

Foreign Sources

If you qualify as an Australian resident, you are taxed on worldwide income. That means you must declare all income from sources outside the country, such as foreign pensions and annuities, foreign employment income, and capital gains on the sale of foreign assets.

Foreign income may also be taxed in the country from which the income is sourced, and that could result in double taxation. However, Australia has tax treaties with more than 40 countries, including all of its major trading partners, that minimise or eliminate double taxation.

Residency requirements are complex, so if you are not sure of your tax status, consult a professional.

Partnerships and Trusts

You must pay income tax on your share of a partnership’s net income and, generally, on trust income you receive as a beneficiary.

Compensation and Insurance

If you lose salary, you may have to declare money you receive from an income-protection scheme, such as Workers’ Compensation or accident insurance. Compensation received for a personal injury caused by others, the payments may be tax-free if certain conditions are met.

Tax-Free Payments

Some payments are not taxable. For example, some Australian government pensions, allowances, first-home saver account government contributions, superannuation co-contributions, child support and spouse maintenance payments are all tax-free.

Income tax regulations can be very complex in some situations so consult with your tax adviser to ensure you meet all your obligations with the ATO.

 

Want to know more?

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

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

Super Guarantee: “Employees” or “Independent Contractors”?

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An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.

Want to know more?

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

 

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

Client Alert Explanatory Memorandum (June 2016)

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CURRENCY:

This issue of Client Alert takes into account all developments up to and including 27 April 2016.

Tax incentives to promote innovation

The Government has released draft legislation to implement more of the tax incentive measures announced as part of its National Innovation and Science Agenda (released in December 2015). The measures are designed to incentivise and reward innovation.

One of the measure will allow companies that have changed ownership to access past year tax losses if they satisfy a similar business test. Under the current law, businesses that have changed ownership must satisfy the same business test to access past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities for returning to profitability. (See Increasing access to company losses below for further details.)

The other measure will allow taxpayers the choice to either self-assess the effective life of certain intangible depreciating assets or use the statutory effective life. The current law only provides an effective life set by statute. According to the Government, the changes will better align the taxation treatment of these intangible depreciating assets with the actual period of time that the assets provide economic benefits. It will also align the treatment of intangible depreciating assets with that of tangible assets. (See Faster depreciation for intangible assets below for further details.)

Public consultation on the draft legislation closed on 22 April 2016.

At the time of writing, the Government has proposed to introduce the Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016 into the House of Representatives. It is understood the Bill would contain these two measures.

Increasing access to company losses

The draft legislation proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to supplement the existing same business test with a more flexible “similar business test” to improve access to losses for companies that have changed ownership. Under the proposed amendments, those companies would be able to deduct losses if they satisfy the similar business test, which is framed to allow companies to seek out opportunities to innovate and grow without losing access to losses.

The similar business test would also supplement the same business test for the other purposes to which the latter currently applies (such as working out whether a debt written off as bad can be deducted in an income year, and for certain purposes with respect to listed widely held trusts).

As with the same business test, the similar business test focuses on the identity of the business. It is not sufficient that the current business is of a similar “kind” or “type” to the former business. For example, it is not enough to say that the former business was in the hospitality industry and the current business is in the hospitality industry. Instead, the test looks at all of the commercial operations and activities that the former business carried on and compares them with all of the commercial operations and activities that the current business carries on, to work out if the businesses are similar.

Where a company has undergone a change of ownership or control, it may also access losses from years preceding that change if it passes the similar business test. A company passes the similar business test if its current business is a similar one to its former business. Under the proposed changes, in working out whether the business carried on throughout the business continuity test period (the “current business”) is similar to the business carried on immediately before the test time (the “former business”), three factors, which are not exhaustive, should be considered:

  • Factor 1 – same assets used to generate income: the extent to which the assets (including goodwill) that are used in its current business to generate assessable income were also used in the company’s former business to generate assessable income;
  • Factor 2 – assessable income generated from the same sources: the extent to which the sources from which the current business generates assessable income were also the sources from which the former business generated assessable income; and
  • Factor 3 – changes to a similarly placed business: whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business. This factor requires taking a hypothetical business that is similarly placed to the company’s former business, and asking whether a reasonable person would expect the changes to be made to that business. Importantly, this factor looks at the business of the company, rather than the company itself. That is, it focuses on the commercial operations and activities that the company carries on, rather than the structure of the company itself.

Source: Treasury, “National innovation and science agenda: increasing access to company losses”, 6 April 2016, www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/NISA-increasing-access-to-company-losses.

Faster depreciation for intangible assets

The changes are proposed to apply for intangible depreciating assets, listed in the table in subs 40-95(7) of the ITAA 1997, that an entity starts to hold on or after 1 July 2016. That is, the current law continues to apply to these intangible depreciating assets that an entity holds before 1 July 2016.

Under the proposed changes:

  • to calculate the decline in value of certain intangible depreciating assets, a holder of the asset has the choice to either self-assess the effective life or use the statutory effective life;
  • unless the asset is copyright, a licence relating to copyright or in-house software, a subsequent holder of certain intangible depreciating assets must use the remaining statutory effective life, if the holder chooses to use the statutory effective life;
  • if a subsequent holder of certain intangible depreciating assets self-assesses the effective life of the asset, the holder is not able to adjust the prime cost method formula;
  • if in a later income year the effective life used for certain intangible depreciating assets is no longer accurate due to a change in circumstances relating to the nature of the use of the asset, a holder of the asset can recalculate the effective life;
  • if the cost of the intangible depreciating asset increases by at least 10% in a later income year, a holder of the asset must recalculate the effective life; and
  • a new holder must recalculate the effective life for the income year that they start to hold certain intangible depreciating assets, if the cost of the asset increases by at least 10% and the asset:
  • is acquired from an associate;
  • continues to be used by the former user; or
  • has a new user who is an associate of the former user.

Source: Treasury, “National innovation and science agenda: intangible asset depreciation”, 1 April 2016, www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/NISA-intangible-asset-depreciation.

Car expenses and special arrangements for the 2016 FBT year

The ATO has updated information about use of the cents per kilometre basis for claiming car expenses and making fringe benefits calculations.

From 1 July 2015, separate rates based on the size of the engine no longer apply. Taxpayers can use a single rate of 66 cents per kilometre for all motor vehicles for the 2015–2016 income year. The Commissioner will determine the rate for future income years.

However, the ATO acknowledges there has been uncertainty about the correct rate to apply for the 2016 FBT year. Therefore, the ATO has advised of a special arrangement for 2016 whereby it will also accept 2016 FBT returns based on the 2014–2015 rates (which are 65, 76 or 77 cents per kilometre depending on the engine capacity of the employee’s car).

For future FBT years, which end on 31 March, the ATO says employers should use the rate determined by the Commissioner for the income year that ends on the following 30 June. For example, for the FBT year ending 31 March 2017, employers should use the basic car rate determined by the Commissioner for the 2016–2017 income year.

Source: ATO, “Cents per kilometre”, 30 March 2016, https://www.ato.gov.au/Business/Income-and-deductions-for-business/Business-travel-expenses/Motor-vehicle-expenses/Calculating-your-deduction/Cents-per-kilometre/.

Holiday homes: tax considerations

The ATO has released a publication concerning tax issues and holiday homes. It features eight worked examples and sets out key points that include the following.

“Genuine” availability for rent

Factors that may indicate a property is not genuinely available for rent include that:

  • it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised by word of mouth;
  • the location, condition of the property or accessibility to the property mean that it is unlikely tenants will seek to rent it;
  • there are unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out; or
  • interested people are turned away without adequate reasons.

Both rented out and used privately

The ATO notes that taxpayers who rent out their holiday home and also use it for private purposes cannot claim deductions for the proportion of expenses that relate to the private use. The ATO also makes the following key points:

  • where the property is used for private purposes for part of the year, expenses are apportioned on a time basis;
  • private purposes include use by the taxpayer, the taxpayer’s family, relatives and friends free of charge; and
  • if the holiday home is rented out to family, relatives or friends below market rates, deductions are limited to the amount of rent received for the period(s).

Travel to inspect and repair

The ATO notes that taxpayers who rent out their holiday home can claim reasonable costs that relate to those people inspecting, maintaining and making repairs to their property.

However, the ATO also notes that where a taxpayer who is primarily visiting the property to have a holiday and undertakes repairs and maintenance during this period, they can only claim repair and maintenance costs based on the proportion of the income year for which the property was rented out or genuinely available for rent. The taxpayer cannot claim travel costs to and from the property.

Source: ATO, “Holiday homes”, 5 April 2016, https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/.

Individuals caught in “Panama Papers” leak

The ATO has released a statement on the release of taxpayer data in relation to a Panamanian law firm.

The ATO said it recently received data in relation to the Panamanian law firm containing names of a significant number of Australian residents. It has identified over 800 individual taxpayers and has now linked over 120 of them to an associate offshore service provider in Hong Kong. These cases relate to the release of data by transparency or media organisations in Australia and overseas.

ATO Deputy Commissioner Michael Cranston said that since the completion of its offshore disclosure initiative “Project DO IT”, the ATO has ramped up its compliance work to deal with taxpayers who have failed to disclose offshore income and assets. Sharing information and coordinating action closely with other tax administrations is a large part of this work.

Mr Cranston said the ATO has been analysing the latest data against information these taxpayers had reported and the information the ATO already had. The ATO is also working closely with the Australian Federal Police, Australian Crime Commission and Australian Transaction Reports and Analysis Centre (AUSTRAC) to further cross-check the data and strengthen the ATO’s intelligence. Some cases may be referred to the Serious Financial Crime Taskforce, Mr Cranston said.

The information the ATO received regards some taxpayers it had previously investigated, as well as a small number who disclosed their arrangements to the ATO under Project DO IT. It also includes information about a large number of taxpayers who have not previously come forward, including high-wealth individuals, and the ATO is already taking action on those cases, Mr Cranston said.

Source: ATO, “ATO statement regarding release of taxpayer data”, 4 April 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-statement-regarding-release-of-taxpayer-data/.

ATO safe harbour for SMSF borrowings

The ATO has issued Practical Compliance Guideline PCG 2016/5, which sets out the “safe harbour” terms on which self managed superannuation fund (SMSF) trustees may structure related-party limited recourse borrowing arrangements (LRBAs) consistent with an arm’s-length dealing.

The ATO generally takes the view that an SMSF may derive non-arm’s length income (NALI) under s 295-550 of ITAA 1997 (taxable at 47%) if the terms of an LRBA are not consistent with an arm’s-length dealing: see ATO Interpretative Decisions ATO ID 2015/27 and ATO ID 2015/28.

If an LRBA under s 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) is structured in accordance with PCG 2016/5, the ATO accepts that the LRBA is consistent with an arm’s-length dealing and the NALI provisions will not apply to the income generated from the LRBA asset. While a practical compliance guideline (PCG) is not legally binding on the Commissioner, generally the ATO will not take action against a taxpayer who relies on a PCG in good faith.

Safe harbour terms: real property LRBAs

Where an SMSF uses an LRBA to acquire real property (including residential, commercial or primary production properties), the ATO will accept that the LRBA is consistent with an arm’s-length dealing if the following terms of the borrowing are established and maintained:

  • Interest rate: 75% for 2015–2016; for 2016–2017 and later years, the interest rate must be set according to the Reserve Bank Indicator Lending Rates for banks providing standard variable housing loans for investors (the rate published for May immediately prior to the start of the relevant financial year; see www.rba.gov.au/statistics/tables/xls/f05hist.xls).
  • Fixed/variable rate: the interest rate may be variable (using the applicable rate as set out above for each year of the LRBA) or fixed (but only up to a maximum of five years). The 2015–2016 rate of 5.75% may be used for existing LRBAs if the total period for which the interest rate is fixed does not exceed five years.
  • Term of loan: cannot exceed 15 years.
  • Loan-to-value ratio (LVR): a maximum 70% LVR applies for both commercial and residential property. The market value of the asset is established when the loan (original or refinancing) is entered into. Trustees of existing loans may use the market value at 1 July 2015.
  • Repayments: must be made monthly. Each repayment is of both principal and interest.
  • Security: a registered mortgage over the property is required.
  • Personal guarantees: are not required.
  • Loan agreement: must be in writing and properly executed.

Safe harbour terms: listed securities

Where an SMSF uses an LRBA to acquire a collection of listed securities (eg listed shares and listed units in a unit trust), the ATO will accept that the LRBA is consistent with an arm’s-length dealing if the following terms of the borrowing are established and maintained:

  • Interest rate: the rate above for real property LRBAs, plus 2%; that is, 7.75% (5.75% + 2%) for 2015–2016. For 2016–2017 and later years, the interest rate must be set according to the Reserve Bank Indicator Lending Rates (as noted above for real property) plus 2%.
  • Fixed/variable rate: the interest rate may be variable (using the applicable rate as set out above for each year) or fixed (but only up to a maximum of three years).
  • Term of loan: cannot exceed 7 years.
  • Loan-to-value ratio (LVR): a maximum 50% LVR applies for listed securities.
  • Repayments: must be made monthly. Each repayment is of both principal and interest.
  • Security: a registered charge/mortgage or similar security (that provides security for loans for such assets) is required; see the Personal Property Securities Register (PPSR) website: https://www.ppsr.gov.au/.
  • Personal guarantees: are not required.
  • Loan agreement: must be in writing and properly executed.

Failure to meet safe harbour rules

If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not on arm’s-length terms. It merely means that the SMSF trustee cannot take advantage of the certainty (provided under Practical Compliance Guideline PCG 2016/5) that the Commissioner will accept the arrangement is consistent with an arm’s-length dealing. Rather, trustees who do not meet the safe harbour terms need to otherwise demonstrate that their arrangement was entered into and maintained on terms consistent with an arms’-length dealing. For example, they may do so by documenting evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.

ATO grace period to 30 June 2016

The ATO has previously announced a grace period whereby it will not select an SMSF for review for the 2014–2015 year or earlier years provided that arm’s-length terms for its LRBA are implemented by 30 June 2016 (or the LRBA is brought to an end before that date).

Importantly, the ATO Compliance Guideline requires arm’s-length payments of principal and interest  to be made for the year ended 30 June 2016 (including where the arrangement is brought to an end before 30 June 2016). SMSF trustees who are concerned about their ability to make the required payments on commercial terms before 30 June 2016 can contact the ATO to discuss their particular circumstances: write to PO Box 3100, Penrith NSW 2740.

Accordingly, SMSF trustees should review the terms of their LRBAs before 30 June 2016 to ensure that each LRBA:

  • is on terms that are consistent with an arm’s-length dealing (and arm’s-length payments of principal and interest have been made for 2015–2016); or
  • is brought to an end (and the payments of principal and interest are made under LRBA terms consistent with an arm’s-length dealing).

The ATO states that SMSF trustees who satisfy these conditions and apply Practical Compliance Guideline PCG 2016/5 in good faith to revise the terms of their existing LRBAs before 30 June 2016 will not be subject to any further compliance action for 2014–2015 and earlier years.

Example: real property

The ATO compliance guideline sets out examples (for both real property and listed shares) illustrating how SMSF trustees can review and revise the terms of their LRBAs before 30 June 2016 to access the safe harbours.

The ATO example for real property involves a situation for a complying SMSF with borrowed money under an LRBA on terms consistent with s 67A of the SIS Act. The SMSF used the funds to acquire commercial property valued at $500,000 on 1 July 2011. Other facts include that:

  • the borrower is the SMSF trustee;
  • the lender is an SMSF member’s father (a related party);
  • a holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid;
  • the property was valued at $643,000 (at 1 July 2015);
  • the SMSF has not repaid any of the principal since the loan commenced.

The loan has the following features:

  • the total amount borrowed is $500,000;
  • the SMSF met all the costs associated with purchasing the property from existing fund assets;
  • the loan is interest-free;
  • the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so;
  • the term of the loan is 25 years;
  • the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust; and
  • the loan agreement is in writing.

The ATO considers that this LRBA has not been established or maintained on arm’s-length terms according to the view set out in ATO ID 2015/27 and ATO ID 2015/28. As such, the ATO believes that the income earned from the property (rented to an unrelated party) gives rise to NALI.

To avoid having to report NALI for the 2015–2016 year (and earlier years), the SMSF trustees have the following three options.

Option one: alter loan terms to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet the safe harbour conditions for real property. To bring the terms of the loan into line with the safe harbour rules, the ATO says the trustees of the SMSF must ensure that:

  • The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used). Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of the principal as soon as practical before 30 June 2016.
  • The loan term cannot exceed 11 years from 1 July 2015. The SMSF must recognise that the loan commenced four years earlier. An additional 11 years would not exceed the maximum 15-year term.
  • The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed five years. The loan must convert to a variable interest rate loan at the end of the nominated period.
  • The interest rate of 5.75% per annum applies from 1 July 2015 to 30 June 2016. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take into account the opening balance of $500,000, the remaining term of 11 years and the timing of the $49,900 capital repayment.
  • After 1 July 2016, the new LRBA must continue under terms that comply with the ATO’s guidelines relating to real property at all times. For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option two: refinance through commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015–2016 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s-length dealing and that the relevant amounts of principal and interest are paid to the original lender. The SMSF may choose to apply the terms set out under the safe harbour rules to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015–2016 year.

Option three: pay out the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015–2016 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s-length dealing, and the relevant amounts of principal and interest are paid to the original lender. The SMSF may choose to apply the terms set out under the safe harbour rules to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015–2016 year.

Date of effect

Practical Compliance Guideline PCG 2016/5 applies to LRBAs commenced both before and after 6 April 2016.

Source: ATO, Practical Compliance Guideline PCG 2016/5, 6 April 2016, https://www.ato.gov.au/law/view/pdf/cgl/pcg2016-005.pdf.

ATO’s data-matching net widens

The ATO has gazetted notices announcing details of various data-matching programs. Most of the notices announce extensions to existing data-matching programs. Records will be electronically matched with ATO data holdings to identify non-compliance with registration, lodgment, reporting and payment obligations under taxation laws. Details are as follows.

Commonwealth electoral roll details

The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian Electoral Commissioner. This data will be collected on an ongoing basis and refreshed every three months.

Details to be collected include the name, residential address, date of birth, and occupation of the registered voter. It is estimated that records for 15 million individuals will be obtained each quarter.

 

 

The ATO has said the program aims to:

  • identify taxpayers who are not registered with the ATO when they are required to be;
  • locate taxpayers who may have outstanding taxation and superannuation lodgment, correct reporting or payment obligations;
  • identify potential instances of taxation or superannuation fraud; and
  • assist with the administration of Australia’s Foreign Investment Framework.

Source: Commonwealth Gazette, “Notice of a data matching program – Commonwealth electoral roll details”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00501.

Contractor payments 2016–2019

The ATO will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016–2017, 2017–2018 and 2018–2019 financial years.

Data to be collected includes the:

  • Australian Business Number (ABN) of the payer business;
  • ABN of the payee business (contractor);
  • name, address and contact details of the contractor;
  • dates of payment to the contractor; and
  • amounts paid to the contractor (including details of whether the payments included GST).

It is estimated that records for 25,000 entities will be obtained, including the records of 12,500 individuals.

The program aims to:

  • assess the integrity of the information held on the Australian Business Register to assist the Registrar in developing educational and compliance strategies;
  • obtain intelligence to identify risks and trends about contractors who may not be complying with their taxation obligations;
  • ensure compliance with registration, lodgment, correct reporting and payment of taxation and superannuation obligations;
  • promote voluntary compliance and better tailor educational products and services.

This program has been ongoing since the 2008–2009 financial year and has resulted in improved compliance with obligations, and additional income tax, GST and PAYG withholding liabilities being raised.

Source: Commonwealth Gazette, “Notice of a data matching program – Contractor Payments – 2016–19”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00502.

Merchants: specialised payment systems 2014–2017

The ATO will acquire data related to electronic payments made to merchants through specialised payment systems for the 2014–2015, 2015–2016 and 2016–2017 financial years. This program is designed to obtain data on electronic payments received by businesses that complement data obtained from the ongoing credit and debit card data-matching program (see below). Transactions processed through the specialised payment systems in this program cover those transactions either not included or not visible at the “end merchant” level in the ATO’s merchant credit and debit card data collection.

The ATO said data will be initially obtained from the following specialised payment system facilitators:

  • Debitsuccess Pty Ltd;
  • Ezidebit Pty Ltd;
  • Ezypay Pty Ltd;
  • FFA Paysmart Pty Ltd;
  • Integrapay Pty Ltd;
  • Flexi Online Pty Ltd (T/A Paymate);
  • PayPal Australia Pty Ltd;
  • Southern Payment Systems Pty Ltd (T/A Pin Payments); and
  • Stripe Payments Australia Pty Ltd.

 

 

The data items to be obtained are personal details of:

  • merchants using the services of a specialised payment system to take electronic payments; and
  • the amount and quantity of the transactions processed.

It is estimated that records for 300,000 entities will be obtained, including around 50,000 for individuals.

The ATO said this program will be the second collection of specialised payment systems data. The first collection revealed discrepancies between electronic payments received and information declared in businesses’ tax returns, and the ATO is investigating these discrepancies.

The ATO said the data will be used to:

  • detect unreported income through discrepancy matching;
  • identify those operating a business but failing to meet their registration, lodgment or payment obligations;
  • identify liquidated or de-registered businesses that are continuing to trade (phoenix operators);
  • identify “cash only” businesses, by exception; and
  • support analytical models to detect high-risk activity and cases for administrative action.

From 1 July 2017, providers of specialised payment systems will be required to report details to the ATO as part of the Government’s legislated compliance measure on improving compliance through third-party reporting, announced in the 2013–2014 Budget.

Source: Commonwealth Gazette, “Notice of a data matching program – Specialised Payment Systems 2014–17”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00503.

Credit and debit cards 2014–2015

In August 2015, the ATO announced it will request and collect data relating to credit and debit card payments to merchants for the period 1 July 2014 to 30 June 2015 from 11 specified financial institutions. The ATO has now also advised that it will collect data from Suncorp-Metway Ltd as part of that data-matching program.

The purpose of the data-matching program is to ensure that merchants are correctly meeting their taxation obligations in relation to their business income. These include registration, lodgment, reporting and payment responsibilities.

Source: Commonwealth Gazette, “Notice of a data matching program – Credit & Debit Cards 2014–15 – Addendum”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00504.

Further details

Additional details of the data-matching programs, and details of other programs, are available on the ATO website at https://www.ato.gov.au/General/Gen/Data-matching-protocols/.

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Client Alert (June 2016)

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Tax incentives to promote innovation

Innovative companies with an interest in getting involved in the “ideas boom” need to be aware of the Government’s proposed tax incentives to help promote innovation. The Government has released draft legislation to implement more of the proposed tax measures announced as part of its National Innovation and Science Agenda (released in December 2015).

One of the tax measures will allow companies that have changed ownership to access past year tax losses if they satisfy a similar business test. Under the current law, companies that have changed ownership must satisfy the same business test to access past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities to return to profitability.

The other measure proposes to allow taxpayers the choice to either self-assess the effective life of certain intangible depreciating assets (such as patents or copyrights) or use the statutory effective life. The current law only provides an effective life set by statute. According to the Government, changing the tax treatment for acquired intangible assets will make startups’ intellectual property and other intangible assets a more attractive investment option.

Car expenses and special arrangements for the 2016 FBT year

The ATO has released guidance about using the cents per kilometre basis for claiming car expenses and making fringe benefits calculations.

From 1 July 2015, separate rates based on the size of the engine no longer apply. Taxpayers can use a single rate of 66 cents per kilometre for all motor vehicles for the 2015–2016 income year. The Tax Commissioner will determine the rate for future income years. However, the ATO acknowledges that there has been uncertainty about the correct rate to apply for the 2016 FBT year, and has advised of a special arrangement for 2016 whereby it will also
accept 2016 FBT returns based on the 2014–15 rates (which are 65, 76 or 77 cents per kilometre depending on the engine capacity of the employee’s car).

TIP: For future FBT years, which end on 31 March, the ATO said employers should use the rate determined by the Commissioner for the income year that ends on the following 30 June. For example, for the FBT year ending 31 March 2017, employers should use the basic car rate the Commissioner determines for the 2016–2017 income year.

Holiday homes: tax considerations

Australians who let their holiday homes for only part of the year should be aware of the ATO’s compliance focus on excessive holiday home deduction claims.

The ATO has released guidance on claiming deductions in relation to holiday homes. If a taxpayer rents out their holiday home, they can only claim expenses for the property based on the proportion of the income year when the property was rented out or was genuinely available for rent. Notably, the new guidance indicates what is meant by “genuinely available for rent”. According to the ATO, factors that may indicate a property is not genuinely available for rent include that:

  • it is advertised in ways that limit its exposure to potential tenants (for example, the property is only advertised by word of mouth);
  • the location of, condition of or accessibility to the property mean that it is unlikely tenants will seek to rent it;
  • there are unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out; or
  • interested people are turned away without adequate reasons.

TIP: Although it is always prudent to check things over before tax time, holiday home owners may particularly want to take the opportunity to review their circumstances and ensure that any deduction claims are made correctly before “the taxman cometh”.

Individuals caught in “Panama Papers” leak

The ATO has advised that it is investigating more than 800 individuals after a leak of taxpayer data in relation to a Panamanian law firm.

Deputy Commissioner Michael Cranston said that since the completion of the offshore disclosure initiative “Project DO IT”, the ATO has ramped up its compliance work to deal with taxpayers who have failed to disclose offshore income and assets.

Mr Cranston said the ATO has been analysing the latest data against information these taxpayers had reported and against the information the ATO already has. The information the ATO received regards some taxpayers who it had previously investigated, as well as a small number of taxpayers who disclosed their arrangements to the ATO under Project DO IT. The information also regards a large number of taxpayers who have not previously come forward, including high-wealth individuals, and Mr Cranston said the ATO is already taking action on those cases.

ATO safe harbour for SMSF borrowings

The ATO has released guidelines that set out the
“safe harbour” terms on which trustees of self managed superannuation funds (SMSFs) may structure related-party limited recourse borrowing arrangements (LRBAs) consistent with an arm’s-length dealing. The ATO generally takes the view that an SMSF may derive non-arm’s length income (taxable at 47%) if the terms of an LRBA are not consistent with an arm’s-length dealing. If an LRBA is structured in accordance with the ATO’s guidelines, it will accept that the non-arm’s length income (NALI) rules do not apply.

TIP: The ATO previously announced a grace period whereby it will not select an SMSF for review provided that arm’s-length terms for its LRBA are implemented by 30 June 2016, or the LRBA is brought to an end before that date. Importantly, the ATO’s guidelines require arm’s-length payments of principal and interest to be made for 2015–2016 (including where the arrangement is brought to an end). If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not on
arms’-length terms. Rather, trustees who do not
meet the safe harbour terms will need to otherwise demonstrate that their arrangement was entered into and maintained consistent with arm’s-length terms.


ATO’s data-matching net widens

The ATO has announced details of its various data-matching programs. Most of the announcements regard extensions to existing data-matching programs. Records obtained through the programs will be electronically matched with ATO data holdings to identify non-compliance with registration, lodgment, reporting and payment obligations under taxation laws. The following are key points:

  • The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian Electoral Commissioner. This data-matching program aims to identify taxpayers who are not registered with the ATO when they are required to be.
  • The ATO will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016–2017, 2017–2018 and 2018–2019 financial years. This program aims to obtain intelligence to identify risks and trends about contractors who may not be complying with their taxation obligations.
  • The ATO will acquire data relating to electronic payments made to merchants through specialised payment systems for the 2014–2015, 2015–2016 and 2016–2017 financial years. This data will be used to detect unreported income and to identify those operating a business but failing to meet their registration, lodgment and payment obligations.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.