Draft legislation on lower corporate tax rate eligibility released

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Treasury has released exposure draft legislation that will generally exclude passive investment companies from accessing the lower corporate tax rate from the 2016/17 income year.

Currently, the corporate tax rate for qualifying small corporate tax entities has been reduced to 27.5% for small business entities with a turnover threshold of $10m in the 2016/17 income year. From the 2017/18 income year, access to this rate will be expanded to apply to “base rate entities” with the turnover threshold increasing progressively to $50m in the 2018/19 income year. Under the Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 it is proposed that the lower corporate tax rate will be extended to all corporations by the 2023/24 income year.

The exposure draft legislation proposes to amend the Income Tax Rates Act 1986 to ensure that a corporate tax entity will be eligible for the lower corporate tax rate only if it is a base rate entity, ie:

  • the corporate tax entity carries on a business in the income year
  • the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold for that income year, and
  • the corporate tax entity does not have passive income for that income year of 80% or more of its assessable income for that income year.

The amendments will commence from 1 July 2016, and apply to the 2016/17 and later income years.

Reference: http://www.iknow.cch.com.au/document/xatagnewsUio2898230sl875561242/draft-legislation-on-lower-corporate-tax-rate-eligibility-released

Crowd-sourced equity funding for proprietary companies Bill introduced

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Crowd-sourced equity funding is an innovative type of fundraising that allows a large number of individuals to make small financial investments in exchange for an equity stake in the company.

Legislation to create a crowd-sourced equity funding regime for public companies will commence on 29 September 2017. Extending the crowd-sourced equity funding framework to proprietary companies will allow these companies to access an alternative form of finance with additional obligations that will protect investors.

The amendments extend the crowd-sourced equity funding regime to proprietary companies by:

  • expanding the eligibility for the crowd-sourced equity funding regime to proprietary companies that meet eligibility requirements
  • providing that proprietary companies with shareholders who acquire shares through a crowd-sourced equity funding offer are not subject to the takeovers rules
  • adding special investor protection provisions for proprietary companies accessing the crowd-sourced equity funding regime, and
  • removing the temporary corporate governance concessions in the Corporations Amendment (Crowd-sourced Funding) Act 2017 for proprietary companies that convert to or register as public companies to access the crowd-sourced equity funding regime.

The special investor protection provisions that will apply to proprietary companies accessing the crowd-sourced equity funding regime include requirements to:

  • maintain a minimum of two directors
  • prepare annual financial and directors’ reports in accordance with accounting standards
  • have their financial reports audited once they raise $3m or more from crowd-sourced equity funding offers, and
  • comply with the existing related party transaction rules that apply to public companies.

Eligible companies are able to raise A$5 million through CSF.

 

Reference: http://www.iknow.cch.com.au/document/xatagnewsUio2894474sl873925854/crowd-sourced-equity-funding-for-proprietary-companies-bill-introduced

The ATO has issued a statement on mental health issues for business owners

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One in five people in the workplace experience some sort of mental health condition. Stress, depression or anxiety can take a toll on your ability to run your business as well as your overall quality of life.

To mark World Mental Health Day on 10th October and National Mental Health week, the Australian Taxation Office (ATO) encourage you to reflect on your mental wellbeing, and the wellbeing of those around you.

If you find yourself struggling with your mental health and are having difficulties meeting your tax and super commitments, contact them early so they can work with you.

They can help you:

  • organise a payment plan
  • delay a lodgement or payment
  • request priority processing of your tax return refund
  • book an after-hours call back
  • register for personalised business assistance.

You can call us directly or you can ask someone to speak with us on your behalf.

To find out more about how they can help, and to learn about some of the common warning signs that suggest you should reach out for support, visit their web page or watch their video on https://www.ato.gov.au/Newsroom/smallbusiness/General/Looking-after-your-mental-health-/?sbnews20171003

Small business owners experiencing mental health issues:

Having a mentally healthy workplace is important. Stress, depression or anxiety can have a negative impact on your quality of life and ability to run your business. This can affect the people who are involved with your business including employees, contractors, partners and clients.

Your mental health is important, so it’s good to learn how to recognise warning signs or ‘red flags’ that may suggest you need to reach out for support. Common warning signs include:

  • finding it hard to concentrate
  • avoiding necessary day-to-day tasks and obligations
  • feeling irritable, stressed or teary
  • constantly thinking of work, even during personal time
  • being unable to sleep
  • disconnecting from friends and family
  • changing eating and/or drinking habits.

The ATO understand these circumstances can affect meeting your tax and super obligations. If you’re having difficulty paying your tax, they encourage you to contact them as early as possible. You can speak with them directly, or ask someone to speak with them on your behalf. They want to work with you to solve the problem before the situation escalates; it’s never too late to speak with them.

Next step:

  • Contact the ATO on 13 11 42 or contact Hurley & Co on 02 9954 3843 for further guidance.

The 2017 SMSF return: are you up for the challenge?

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This article is reprinted from Acuity Magazine.

Under the new super rules, this year’s SMSF returns are going to be very complex and it’s important that practitioners are up to speed.

In Brief

  • There’s no such thing as simple super anymore.
  • The changes are the most significant in a decade and all details must be considered.
  • There are now three options to be looked at.

Changes to Capital Gains Tax (CGT) rules require practitioners to carefully explore the full range of options, says Tony Negline, Superannuation Leader, Chartered Accountants ANZ.

Trustees of SMSFs eligible for CGT relief need to know there are other options besides simply uplifting the cost base of growth assets and deferring capital gains, says Negline.

Consider an SMSF eligible for CGT relief with one member who has over $1.6m in pension phase and another member in accumulation phase. The fund was unsegregated – that is, using the proportional method – for tax for the 2017 tax year and holds three parcels of shares in a Big Four bank. 

1
Once the fund calculates the asset gain or loss position at 30 June 2017, there are three options:

  1. Electing no CGT relief
  2. Electing relief, but no deferral of capital gains and capital losses
  3. Electing relief, but deferral of capital gains only (Source: ATO Law Companion Guideline 2016/8)

Under Option One, the fund trustees may elect no relief for any CGT assets, as it may be difficult to justify the cost of CGT relief analysis and deliver certain value to clients.  

If Option Three is chosen for assets with unrealised capital gains, the fund commits to book a deferred tax liability and defer the capital gains until the asset is sold. However, “This may not be desirable, if the accumulation member will soon move to pension phase,” says Negline.

For assets with unrealised capital losses at 30 June 2017, trustees may choose Option Two and match these against actual or deemed capital gains which arise from choosing CGT relief which practically means going forward with a cost base lower than the actual buying price for some assets.

In addition, if the fund sells 1,000 bank shares during 2017/18 (say for $2.50 per share), the trustees can decide which of the three parcels is sold. If the sales occur before lodging the 2016/17 return, this may have a big impact on CGT relief planning.

For example, if the sale is deemed to be parcel 2 shares, and Option one (no relief) is chosen for these shares, a gross capital loss in the 2017/18 year of $5,000 will arise. The trustee would still need to decide what to do with parcels one and three.   

Some of the risks in the above scenario for SMSF practitioners include:

  • Not knowing all these options are available
  • Accepting CGT relief options that software seems to pre-empt
  • Spending too much time on this type of analysis and finding little or negligible benefit for the client

People’s knowledge of the biggest changes to super in a decade will be tested over the next year and it is important to take into account all the detail so that clients can be assisted.

 

Reference: https://www.acuitymag.com/finance/the-2017-smsf-return-are-you-up-for-the-challenge?ecid=O~E~Newsletter~Acuity~201709

 

 

Occupation-specific guides

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There have been a lot of discussions regarding work related deductions in the present. The ATO has published a guide as follows.

When completing your tax return, you’re entitled to claim deductions for some expenses, most of which are directly related to earning your income.

To claim a work-related deduction:

  • you must have spent the money yourself and weren’t reimbursed
  • it must be directly related to earning your income
  • you must have a record to prove it.

Occupation-specific guides are clearly explained for your understanding on what you can and can’t claim as work-related expenses.

The information is categorized under different deduction labels, including:

  • car expenses
  • home office expenses
  • clothing expenses
  • self-education or professional development expenses.

The guides are available for the following occupations:

  • construction worker
  • retail worker
  • office worker
  • Australian Defence Force
  • sales and marketing
  • nurse, midwife or carer
  • police officer
  • public servant
  • teacher
  • truck driver

Reference: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-deductions/Deductions-for-specific-industries-and-occupations/

Please call us on (02) 9954 3843 to get advice on occupation specific deductions to maximize your refund.

Catching the wave of SMSF opportunities

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This is a reprinted report of an article posted by Class, Australia’s leading cloud-based SMSF administration software.

Kevin Bungard, CEO of Class, shares insights into how the advance in technology is driving a revolution in the competitive SMSF landscape.

In brief

  • Accountants involved in SMSFs know change is occurring
  • Online access is expected for SMSFs

Every accountant and adviser involved with SMSFs knows that their industry is undergoing profound change. The super reforms have been capturing the headlines but they are just the latest development.  The rapid advance of technology is helping drive a rapid revolution in the competitive landscape for SMSFs.

With about 25% of all SMSFs in Australia (140,000 funds) administered on their software platform, Class has a unique view of many of these changes. Kevin Bungard, CEO outlines the key trends that accountants and advisers in the SMSF space need to be aware of, so that they can “catch the wave” currently breaking over their industry.

The growing importance of online access for SMSFs

Online access is increasingly expected by Australians for their SMSFs, much like the way they already access bank accounts, share trading and other financial services. Class saw the need for providing ease of access and visibility for trustees, and developed its client view feature and mobile app.

The market share of online SMSF administrators has roughly doubled from 8% to 15% in the past five years, driven by competitive fees and user-friendly online access for trustees. Despite this Kevin claims that, “Accountants sometimes tell me that their clients are not greatly interested in online access to their SMSF, but could it simply be that clients who want online access are not choosing them for their administration?”

SMSF administrators in the cloud grow faster than their peers

The typical SMSF practice using Class grew at 17% per annum in the five years to November 2016, compared with an industry growth rate of 5%.

The right cloud-based SMSF software is highly automated and has audited, direct-connect data feeds to maximise processing efficiency. These make an SMSF business easily scalable and gives it the capacity to service more SMSFs without taking on more staff. It also gives directors more time to focus on business strategy.

Opportunities in DIY SMSFs and outsourced administration

There is a trend towards general accounting practices outsourcing their back of office administration, so they can focus on tax lodgement and the client relationship. There is a growth opportunity here for efficient administrators, since practices with 25 SMSFs or less still make up 11% of the market and are typically doing their administration with Excel. Class software can be easily white-labelled so multiple businesses can be administered under the one brand.

The huge pool of wealth waiting for you outside super

Despite a fall in growth of SMSF numbers last financial year, Kevin Bungard believes there will be a bounce-back once the sector has digested the super reforms. However, it’s highlighted the fact that SMSFs are not the be all and end all of wealth accumulation.

“Accountants should not ignore the huge opportunities in their clients’ non-super investments: an estimated $3 trillion of investable assets (excluding the family home). This includes trusts, companies and individual portfolios.”

Class developed its Class Portfolio product to help advisers and accountants administer these types of funds.

 

Our office is a user of Class Software for all superannuation reporting aspects. Please call us on (02) 9954 383 if you need any support regarding your SMSF fund.

 

Client Alert Explanatory Memorandum (October 2017)

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Bills for increase in Medicare levy to 2.5%

The Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 has been introduced into Parliament to implement the Government’s 2017–2018 Budget announcement to increase the Medicare levy by 0.5% to 2.5% from 1 July 2019 in order to help finance the National Disability Insurance Scheme (NDIS). Nine other Bills have been introduced to increase the following rates that are linked to the top personal tax rate:

  • the FBT rate for the 2019–2020 and later FBT years will be 47.5%;
  • the Medicare levy component of the rate of income tax on no-TFN contributions income will be 2.5% for the 2019–2020 and later income years;
  • the superannuation excess non-concessional contributions tax rate will be 47.5% for the 2019–2020 and later financial years;
  • the Medicare levy component of the superannuation excess untaxed roll-over amounts, and the Medicare levy component of the income tax (TFN withholding tax (ESS)) tax rate will be 2.5% for the 2019–2020 and later income years;
  • the family trust distribution tax rate will be 47.5% for the 2019–2020 and later income years;
  • the trustee beneficiary non-disclosure tax rate will be 47.5% for the 2019–2020 and later income years;
  • the untainting tax rate will be 48.5% for the 2019–2020 and later income years.

Budget changes to foreign resident CGT: draft legislation

Treasury has released draft legislation to implement 2017–2018 Federal Budget measures relating to the CGT liability of foreign residents and these measures are set out in more detail below.

The measures, which will generally apply from 9 May 2017:

  • remove the entitlement to the CGT main residence exemption (MRE) for foreign residents that have dwellings that qualify as their main residence; and
  • ensure that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an associate inclusive basis.

Main residence exemption

  • Individuals who are foreign residents at the time a CGT event happens, to a dwelling in which they have an ownership interest, will not be entitled to the MRE.
  • A trustee of a deceased estate will not be entitled to the MRE in respect of an ownership interest in a dwelling of a deceased individual if the deceased was a foreign resident at the time of death. A beneficiary of a deceased estate will not be entitled to the MRE in respect of an ownership interest in a dwelling of a deceased individual if the deceased was a foreign resident at the time of death.

The amendments will not apply to a capital gain or loss from a CGT event that occurs to a dwelling if the CGT event occurs on or before 30 June 2019:

  • if an individual or trustee of a special disability trust held an ownership interest in the dwelling to which the CGT event relates at all times from immediately before the application time until immediately before the CGT event happens; or
  • if an individual acquired the property as a beneficiary of a deceased estate and at all times from immediately before the application time until immediately before the CGT event happens to the dwelling that individual, the deceased person, the trustee of the deceased estate of the deceased person, the trustee of a special disability trust on behalf of a principal beneficiary or a combination of these entities held the ownership interest in the dwelling.

Principal asset test

Under the foreign resident CGT regime, a capital gain or capital loss made by a foreign resident in respect of a membership interest will be disregarded unless both the non-portfolio interest test and the principal asset test are satisfied in relation to the interest.

Foreign resident CGT withholding: early recognition of tax credit

The Commissioner has made a determination to modify the time at which the vendor is entitled to a tax credit in respect of an amount withheld under the foreign resident CGT withholding rules.

The modification, applicable in respect of transactions entered into on or after 1 July 2016, ensures that, where a settlement period for a transaction that is subject to Subdiv 14-D covers more than one income year for the vendor, the credit entitlement will be available in the same year as that in which the transaction giving rise to the payment to the ATO is recognised for tax purposes for the vendor.

Example

In February 2017 Ms Nguyen entered into a contract for the sale of her Australian residential investment property for AUD$3m.

Ms Nguyen was not able to obtain a clearance certificate (as she is not an Australian tax resident) or a variation to the withholding tax.

The contract settled in August 2017. At that time the purchaser paid AUD$300,000 in withholding tax to the Commissioner.

Before 31 October 2017 Ms Nguyen lodged her 2016–2017 Australian tax return thereby complying with her tax obligations. She included the capital gain from the sale of the property and any income generated from the property during the 2016–2017 income year.

Without the modification to the crediting provisions, the tax credit for the withholding tax is available in the year in which the withholding tax is paid by the purchaser. This means that Ms Nguyen could not claim the credit in her 2016–2017 tax return in which she is required to include the capital gain. She would have to wait until she lodges her 2017–2018 Australian tax return to claim the credit.

Further guidance for tax losses: new “similar business” test

The ATO has released Law Companion Guideline LCG 2017/D6 on how the ATO will apply the new “similar business test” to supplement the existing “same business test” used for testing whether a company can utilise an earlier year tax loss.

The draft guideline says the similar business test will operate in a way that is comparable to the same business test, and that the overall business of a company must satisfy the similar business test to access losses. In this context, “similar” does not mean similar “kind” or “type” of business. The focus remains on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income. Accordingly, it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time.

The draft says that the following four factors must be taken into account, weighed up against each other, to establish whether the business satisfies the similar business test:

  • The extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time.
  • Comparison of the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously.
  • Comparison of the current identity of the business with that of the business carried on before the test. Where new activities have not resulted in an identity change the draft says this will suffice.
  • An assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business. In the interests of encouraging innovation, the ATO says such changes will not, in themselves, cause a business to be considered dissimilar.

ATO increases its scrutiny on work-related expenses

Despite wide publicity on the issue, the ATO has reminded taxpayers that it is increasing its attention, scrutiny and education on work-related expenses. Last year over 6.3 million people made a work-related expense claim for clothing and laundry expenses, totalling almost $1.8 billion. Claims for clothing and laundry expenses have increased by around 20% over the last five years.

Common mistakes the ATO has seen include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

While over 1.6 million taxpayers claim a deduction of exactly $150 for clothing, laundry and dry-cleaning, the ATO expects many of these claims to be legitimate, although the results of random audits show that people are making mistakes.

For example, a public servant made a number of claims including $150 for work-related clothing, laundry and dry-cleaning. When reviewing her claim, the ATO asked for details of the expenses, such as a letter from her employer confirming she needed to wear occupation-specific clothing or a uniform, details of how the laundry cost was calculated, and records to support her other expenses. The public servant’s tax agent advised that the claim was a “standard claim of $150” and could not provide any supporting evidence. The claim was disallowed in full because there was no indication the public servant was required to wear a uniform or had spent the money she was claiming as a deduction.

Lodging nil activity statements in advance

The ATO says nil activity statements can be generated early in some cases. Under normal bulk processes, activity statements generally issue from the ATO by the end of the month. However, the ATO says there may be a specific reason for a business to access its activity statements early, including the following:

  • if people are going to be absent from their place of business before the end of the reporting period and the business will not be trading during that period;
  • if a person is a short-term visitor, eg, an entertainer or sports person and will be leaving the country before generation of the activity statement;
  • if the entity is under some form of administration;
  • if the business has ceased;
  • if a person will be travelling (either within Australia or overseas) and therefore will not be able to obtain their activity statement if generated under normal bulk processes.

Activity statements can be generated for up to six months in advance for either six-monthly activity statements, or two-quarterly activity statements.

Non-concessional contributions funded by downsizing – draft legislation

Treasury has released draft legislation to implement the 2017–2018 Federal Budget announcement to allow people 65 or over to make additional non-concessional contributions up to $300,000 from the proceeds of selling their home from 1 July 2018. The measure will apply to capital proceeds received from the disposal of an ownership interest in a dwelling that is a main residence for CGT purposes and has been held, either by the individual or their spouse, for a minimum of ten years.

The downsizer contribution cap of $300,000 will be in addition to the existing caps. It will also be exempt from the contribution rules for people 65 and older and the restrictions on non-concessional contributions for people with total superannuation balances above $1.6 million.

The downsizer contribution must come from the capital proceeds of the sale price. For example, if a couple sells their home for $500,000, their combined downsizer contributions are limited to $500,000 (in any combination, but no more than $300,000 for either of them). If an individual sells a home for $250,000, the downsizer contribution is limited to $250,000.

The contribution must be made within 90 days after the home changes ownership.

While the family home is totally exempt from the age pension assets test, any sale proceeds contributed to superannuation will count toward the assets test.

GST: simplified accounting for food retailers

The ATO has released a draft determination on the choice available to food retailers to use a simplified accounting method (SAM) to help work out their net amount by estimating their GST-free sales and GST-free acquisitions of trading stock.

There are three SAMs available to assist food retailers to estimate their GST-free trading sales and/or GST-free trading acquisitions:

  • the business norms method;
  • the stock purchases methods; and
  • the snapshot methods.

The Draft SAM is substantially the same as the previous determination it replaces. If a taxpayer was eligible to use a particular SAM specified in the previous determination, they will continue to be eligible to use that SAM under the draft Determination.

Super system reforms: APRA’s approach to enhanced prudential powers

Australian Prudential Registration Authority (APRA) has written to RSE licensees setting out its approach to the Government’s super system reforms aimed at enhancing APRA’s prudential powers to improve member outcomes.

APRA Deputy Chairman, Helen Rowell, said the regulator will consult on potential amendments to its prudential framework consistent with the draft legislation released in July and according to the ultimate legislated timetable.

Under the proposed reforms, the current “scale test” (s 29VN of the Superannuation Industry (Supervision) Act 1993) will be replaced with an “outcomes test” requiring MySuper trustees to attest to outcomes promoting the financial interests of members on a broader range of indicators. APRA said it will consider issuing prudential guidance to support RSE licensees to comply with this expanded obligation.

Actuaries blast ATO view on segregated current pension assets

The Actuaries Institute has warned that tens of thousands of self managed super funds (SMSFs) could be at risk of incorrectly claiming exempt current pension income (ECPI) under the ATO’s approach to segregated current pension assets.

Essentially, the ATO’s view is that funds that are “fully in pension phase” are deemed to have “segregated current pension assets”, and cannot use the proportionate method for all of its assets for the whole of that tax year to determine its “exempt current pension income” (ECPI).

The Actuaries Institute says the ATO’s approach is at odds with the long-standing industry practice that, unless a fund is solely in pension phase for an entire income year, the trustee can elect to use either the segregated method or the proportionate method, or both. Except where a fund is solely in pension phase for the whole income year, the Institute says the segregated method is more administratively complex and requires multiple sets of accounts. Given the uncertainty that this is causing, the Institute has also called for the ATO to clarify that it will not require funds to comply with this view for the 2017 and later income years. If the ATO believes that there is no alternative interpretation than its current view, the Institute suggests that the law be amended.

Draft legislation for First Home Super Saver Scheme

Treasury has released draft legislation to implement the 2017–2018 Federal Budget superannuation measures aimed at improving housing affordability by the establishment of the First Home Super Saver Scheme (FHSSS). The FHSSS will allow voluntary superannuation contributions made from 1 July 2017 to be withdrawn for a first home deposit starting from 1 July 2018. The scheme provides for up to $15,000 per year (and $30,000 in total) to be withdrawn from superannuation. Compulsory mandated employer contributions and contributions in respect of a defined benefit interests are not eligible for the FHSSS. Likewise, first home savers cannot withdraw existing pre-July 2017 super savings.

Withdrawals of eligible FHSSS released amounts (and associated earnings) will be allowed from 1 July 2018 onwards. The maximum FHSS releasable contributions amount is:

  • 85% of concessional contributions (reflecting the 15% contributions tax paid by the fund); or
  • 100% of any non-concessional (after-tax) contributions.  

An FHSSS released amount of concessional contributions and associated earnings will be included in the individual’s assessable but subject to a 30% tax offset (non-refundable). For released amounts of non-concessional contributions, only the associated earnings are included in assessable income (with a 30% tax offset).

An individual will receive the FHSSS released amounts after applying to the ATO and declaring eligibility to purchase or construct residential premises. The ATO will issue a FHSS determination and release authority specifying the maximum amount to be released to the ATO. The ATO will then withhold an amount of tax before releasing the FHSS amount to the individual. The amount withheld will reflect the ATO’s best estimate of the individual’s tax payable. If the ATO cannot make an estimate, it will withhold 17% of the FHSS released amount.

FHSSS eligibility

To be eligible to use the FHSSS, a person must be 18 years or over, have not used the FHSSS before and never owned real property in Australia.

A person will have 12 months after releasing the FHSSS amount to sign a contract to purchase or construct residential premises (including vacant land to be built and occupied as a residence). The ATO may extend this period by up to 12 months. It is necessary to occupy the premises as soon as practicable, and for at least six months of the first 12 months after it is practicable to do so. The person will have 28 days to notify the ATO in the approved form after they enter into a contract to purchase or construct residential premises. If the person does not buy a home (or fails to notify the ATO within 28 days of a purchase) they will be required to re-contribute the amount or pay an additional 20% FHSS tax (due within 21 days of an assessment). The GIC will also apply to the unpaid tax.

Example

Eric receives an FHSSS determination from the ATO during 2020–2021. The FHSSS maximum release amount is $28,000, comprised of $25,500 of concessional contributions and $2,500 of associated earnings.

If Eric requests the entire $28,000 to be released in 2020–2021, ($25,500 + $2,500) will be included in his assessable income. Eric will be entitled to an offset of $8,400 (30% of $28,000).

Assuming that Eric is on the 32.5% marginal tax rate (income between $37,000 and $87,000), he will effectively pay $1,400 in tax, being 5% of the $28,000 released amount. The 5% withdrawal tax is based on Eric’s marginal rate, plus Medicare levy (2.5% proposed from 1 July 2019), less 30% offset. If Eric was on the 37% marginal rate (income between $87,000 and $180,000) he would pay $2,660 in tax.

Super assets total $2.3 trillion at June 2017

APRA has released its Quarterly Superannuation Performance publication and the Quarterly MySuper Statistics report for the June quarter 2017. As at 30 June 2017, superannuation assets totalled $2.324 trillion (up 10% from $2.113 trillion in June 2016).

Total assets in MySuper products amounted to $595bn (up 25.5% from $474bn in June 2016). Self-managed super fund (SMSF) assets totalled $697bn (up 9.8% from $635bn in June 2016) held in over 596,000 SMSFs, representing 30% of all super assets.

Trustee removal held valid in death benefit dispute – SMSF

In a death benefit dispute, the Supreme Court of Queensland has ruled that a trustee of an self-managed super fund (SMSF) was validly removed, and another trustee was validly appointed, in accordance with the trust deed: Perry v Nicholson [2017] QSC 163, Boddice J, 1 August 2017.

Background

The deceased, Mr Maurice, died in March 2017. He was survived by his adult daughter (the applicant) and his adult son. He was also survived by his de facto spouse (the respondent).

The deceased had established a single-member SMSF in September 2009 with himself and the applicant as trustees. In April 2015, the fund’s accountants prepared a number of duly signed documents to remove the applicant as a trustee and appoint the respondent. The documents included minutes of a meeting of the trustees, a confirmation of resignation as trustee, an application to become a member and a document giving consent to appointment as trustee.

In January 2017, the deceased signed a binding death benefit nomination directing the trustees to pay 100% of any death benefit to the respondent.

Following the death of Mr Maurice, the applicant sought a declaration that she had not been validly removed as a trustee. This in turn called into question the validity of the nomination and whether it had been given to the trustee in accordance with the SIS Regs.

Decision

The Court held that the applicant was validly removed as a trustee and the respondent validly appointed as trustee. The Court considered that the minutes of the meeting, signed by the deceased, the applicant and the respondent, constituted a removal of the applicant as a trustee of the fund. As the minutes were signed by the deceased, the Court considered that the minutes also recorded that the deceased as the other trustee was advised immediately, as required by the trust deed.

SMSFs looking to accountants for more advice: Vanguard report

The 2017 Vanguard/Investment Trends SMSF Report said the percentage of SMSF trustees who currently use a financial planner has marginally increased this year, while the number of SMSFs using an accountant for investment advice has reached 86,000, up from 73,000 last year. The number of SMSFs using accountants for tax advice only was slightly down to 214,000.

Notably, the number of SMSF trustees reporting that they had unmet financial advice needs continued to grow in 2017, with well over half of all SMSF trustees saying they need further advice.

Planning for tax and contributions strategies and retirement planning continue to be areas of high demand for advice, with 52% of trustees likely to turn to a financial planner for advice, and 48% more likely to use an accountant.

Single Touch Payroll: ATO clarification

The ATO has responded to media reports regarding the implementation of Single Touch Payroll, in particular in relation to changes to the process when an employee starts a job. Under the changes, individuals have the option of completing their TFN declaration and Superannuation Standard Choice forms online using myGov, or through their employer. Rather than being a way of tracking businesses, the ATO asserts its aim is to streamline processes.

The ATO has sought to clarify what it said are some misleading assertions made in the media commentary:

  • The ATO said it was incorrect that new employees may be “pressed” to use the online employee commencement form to choose a super fund. The online service is optional.
  • The ATO said it was incorrect that new employees could be pushed into nominating a super fund without enough information, and without the reassurance of a default safety net.
  • It was incorrect to say that employee commencement forms fail to allow for account consolidation. The ATO says once an employee has successfully entered the information to be sent to their new employer, they are prompted to view and consolidate any existing accounts.

Financial adviser banned for SMSF geared property advice

The Australian Securities and Investments Commission (ASIC) has banned a financial adviser for three years for allegedly breaching the Future of Financial Advice (FoFA) best interests duty by advising clients to purchase property via an SMSF using borrowed funds.

ASIC alleged that the Perth-based authorised representative provided advice to clients to establish a SMSF and use limited recourse borrowing arrangements to purchase real property. In providing this advice, ASIC alleged that the adviser failed to act in the best interests of 4 clients in breach of the Corporations Act 2001.

ASIC said it was not satisfied that the adviser had identified the subject matter of the advice, or conducted a reasonable investigation into the financial products that might achieve the objectives and meet the needs of the client. Note that the adviser has the right to appeal to the AAT for a review of ASIC’s banning order.

TPB recognises cyber security awareness training

The Tax Practitioners Board (TPB) has released updated guidance related to cyber security for all registered tax practitioners.

One way that tax practitioners can protect themselves is to consider whether they should take out additional PI insurance cover to assist with first party losses arising from a cyber-attack. Such losses can include a “denial of service” attack or the costs of rectifying harm done, such as repairing and restoring systems that have been damaged by malicious acts.

The TPB also recognises that cyber security awareness training can assist tax practitioners protect themselves from a cyber-attack. As a result, the TPB now specifically recognises cyber security training for continuing professional education/development purposes.

Client Alert (October 2017)

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Bill to increase Medicare levy

The Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 has been introduced to implement the Government’s 2017–2018 Budget announcement to increase the Medicare levy by 0.5% to 2.5% from 1 July 2019 in order to help finance the National Disability Insurance Scheme (NDIS). Nine other Bills have been introduced to increase the following rates that are linked to the top personal tax rate.

TIP: Think you may be affected by personal tax rate changes? Contact us to find out more.

Budget changes to foreign resident CGT: draft legislation

Draft legislation has been released to implement 2017–2018 Federal Budget measures relating to the CGT liability of foreign residents. The measures, which applied from 9 May 2017:

  • remove the entitlement to the CGT main residence exemption (MRE) for foreign residents that have dwellings that qualify as their main residence; and
  • ensure that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an associate inclusive basis.

Foreign resident CGT withholding: early recognition of tax credit

The Commissioner has made a determination to modify the time at which the vendor is entitled to a tax credit in respect of an amount withheld under the foreign resident CGT withholding rules.

The modification, applicable for transactions entered into on or after 1 July 2016, ensures that, where a settlement period for a transaction covers more than one income year for the vendor, the credit entitlement will be available in the same year as that in which the transaction giving rise to the payment to the ATO is recognised for tax purposes for the vendor.

Further guidance for tax losses via a new “similar business” test

The ATO has released a draft guideline on how they will apply the new “similar business test” to supplement the existing “same business test” used for testing whether a company can utilise an earlier year tax loss.

The draft guideline says the similar business test will operate in a way that is comparable to the same business test, and that the overall business of a company must satisfy the similar business test to access losses. The focus remains on the identity of a business, as well as continuity of business activities to generate assessable income.

ATO increases its scrutiny on work-related expenses

Despite wide publicity on the issue, the ATO has reminded taxpayers that it is increasing its scrutiny on work-related expenses. Last year over 6.3 million people made a work-related expense claim for clothing and laundry expenses, totalling almost $1.8 billion. Common mistakes the ATO has seen include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

Tip: Unsure about what you can claim as work-related expenses? Talk to us to avoid making a mistake.

Activity statements can now be lodged in advance

The ATO says nil activity statements can be generated early in some cases. Under normal bulk processes, activity statements generally issue from the ATO by the end of the month.

However, the ATO says there may be a specific reason for a business to access its activity statements early, such as: if you are a short-term visitor (for example, you are an entertainer or sports person and will be leaving during the relevant period); or know that you will be travelling when an activity statement is due.

Tip: Activity statements can be generated for up to six months in advance.

New downsizing cap available

If you are aged 65 or over, your home is your main residence for CGT purposes and you have owned it for a minimum of ten years, you could benefit from new draft legislation. You will be able to make additional non-concessional contributions, up to $300,000, from the proceeds of selling your home from 1 July 2018.

The downsizer contribution cap of $300,000 will be in addition to existing caps; the capital must come from the proceeds of the sale price and application must be made within 90 days after the home changes ownership. There will also be exemption from the contribution rules for people aged 65 and above, and the restrictions on non-concessional contributions for people with total super balances above $1.6 million.

Tip: Thinking of downsizing? Speak to us about what this could mean for you in terms of tax concessions.

GST: simplified accounting for food retailers

The ATO has released a draft determination on the choice available to you, if you are a food retailer, to use a simplified accounting method (SAM) to help you to work out your net amount by estimating your GST-free sales and GST-free acquisitions of trading stock.

The Draft SAM is substantially the same as the previous determination it replaces. If you were eligible to use a particular SAM specified in the previous determination, you will continue to be eligible to use that SAM under the draft determination.

Tip: Are you a food retailer? We can help you to use the simplified accounting method for your business.

Super system reforms

Australian Prudential Registration Authority (APRA) has written to RSE licensees setting out its approach to the Government’s super system reforms aimed at enhancing APRA’s prudential powers to improve member outcomes. Under the proposed reforms, the current “scale test” will be replaced with an “outcomes test” requiring MySuper trustees to attest to outcomes promoting the financial interests of members on a broader range of indicators.

Segregated current pension assets

A warning has been issued from the Actuaries Institute that tens of thousands of self-managed super funds (SMSFs) could be at risk of incorrectly claiming exempt current pension income (ECPI) under the ATO’s approach to segregated current pension assets.

First Home Super Saver Scheme – draft legislation

Treasury has released draft legislation to implement the 2017–2018 Federal Budget superannuation measures aimed at improving housing affordability by the establishment of the First Home Super Saver Scheme (FHSSS).

The FHSSS will allow voluntary superannuation contributions made from 1 July 2017 to be withdrawn for a first home deposit starting from 1 July 2018. The scheme provides for up to $15,000 per year (and $30,000 in total) to be withdrawn from superannuation.

Tip: To be eligible to use the FHSSS, a person must be 18 years or over, have not used the scheme before and never have owned property before in Australia.

Super assets total $2.3 trillion at June 2017

APRA has released its Quarterly Superannuation Performance publication and the Quarterly MySuper Statistics report for the June quarter 2017. As at
30 June 2017, superannuation assets totalled $2.324 trillion (up 10% from $2.113 trillion in June 2016).

Total assets in MySuper products amounted to $595 billion (up 25.5% from $474 billion in June 2016).

Self-managed super fund (SMSF) assets totalled $697 billion (up 9.8% from $635 billion in June 2016) held in over 596,000 SMSFs, representing 30% of all super assets.

TAX CHANGES FOR SMALL BUSINESS – UPDATES

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Instant deductibility threshold extended

Budget 2017-18 has extended the instant deduction for depreciating business assets costing less than $20,000 until 30 June 2018.

Please note that this provision only lets small businesses to claim a tax deduction earlier. It does not offer any additional tax deduction measured over the life of the asset.

With the extended definition of small business, businesses with group turnover under $10 Million can benefit from this provision for assets bought after 1 July 2016.

Tightening of small business Capital Gains Tax concessions

There are a number of concessions available to small businesses that can defer, reduce or remove liability to Capital Gains Tax.

The government has announced changes to the rules that will limit the concessions to assets that are used by a small business or ownership interests in a small business. This will prevent the concessions applying to non-business assets owned by an entity that carries on a small business.

It will also prevent structuring so that ownership interests in larger businesses pass the eligibility tests.

The extended definition of small business does not apply to the Capital Gains Tax concessions. The existing tests of group turnover under $2 Million or group assets under $6 Million still apply.

Payments reporting extended to couriers and cleaners

Taxable Payments Annual Reports currently have to be lodged by businesses in the construction industry.

Businesses have to lodge annual reports with the ATO providing details of payments made to contractors.

This requirement will be extended to the courier and cleaning industries from the 2018-2019 financial year, with the first annual reports due in August 2019.

Small Business Entity definition changed

As already mentioned, the Government has managed to pass the extended definition of small business. The change applies to the current financial year (from 1 July 2016).

If your business has a group turnover under $10 Million you can benefit from most Small Business Entity concessions. These include the simplified depreciation rules, the $20,000 immediate deduction limit, the immediate deduction for prepaid expenses, and accounting for GST on a cash basis, among others.

The extended definition of small business does not apply to the Capital Gains Tax concessions, and nor does it apply to the Small Business Income Tax Offset. The Small Business Income Tax Offset effectively provides a tax cut to unincorporated businesses with a group turnover under $5 Million.

Company tax rate reduced

The Government has also managed to pass the reduction in company tax rate to 25% by 2026-27. However, they were forced to amend the original plan in order to get the legislation through parliament.

Larger companies and companies that do not carry on business (such as investment companies and “bucket companies”) will continue to pay a 30% rate of tax.

The tax rate reductions will be phased in:

From 1 July 2016 to 30 June 2024 the reduced company tax rate will be 27.5%. In 2016-2017 it will apply to companies with group turnover under $10 Million. In 2017-2018 it will apply to companies with group turnover under $25 Million.

From 2018-2019 it will apply to companies with group turnover under $50 Million.

  • In 2024-25 the reduced company tax rate will become 27%.
  • In 2025-26 the reduced company tax rate will become 26%.
  • And from 2026-27 the reduced company tax rate will be 25%.

From 2016-17 (the current financial year) dividends paid by a company can only be franked at the rate of tax applicable to that company. For example, Dividend paid by small business entities in the 2016/17 income year now attract a franking credit of only 27.5%.

Super Contribution

Please note that the super contribution is now limited to $25,000.00 per person per annum. Clients should remember to adjust their salary sacrifices arrangements if applicable.

Client Alert Explanatory Memorandum (September 2017)

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Work-related expense claims under scrutiny

The ATO has warned taxpayers to avoid making incorrect claims for work-related expenses at tax time this year. This year, the ATO is using real-time data to compare taxpayers with others in similar occupations and income brackets, to identify higher-than-expected claims related to expenses for work vehicles, travel, internet and mobile phones, and self-education.

Many taxpayers do not have a good understanding of what deductions they can claim, and believe they can claim for items which they in fact cannot. For example, some taxpayers think they can make a standard claim of $300 without having spent the money. This isn’t true! While receipts are not needed for claims up to $300, taxpayers must have actually spent the money claimed, and be able to show the ATO how they worked out their deductions if asked. Deductions for work uniforms are a common area of confusion for employees at tax time.

Commissioner flags work-related expense claims as a problem area

In a wide-ranging address to the National Press Club in Canberra, ATO Commissioner Chris Jordan recently stated that the next big challenges for the ATO are influencing community attitudes about paying tax and minimising “tax gaps”.

No tax system has, or ever will have, zero gaps, but the challenge is to minimise them, he said. For large corporates, the ATO believes that the tax gap is around $2.5 billion – equivalent to about 6% of collections. Mr Jordan said the gap suggests that the ATO is collecting around 94% of the corporate tax that it should be getting from this market, with 91% coming in voluntarily and 3% through compliance interventions. This $2.5 billion gap is well below the figure of $50 billion thrown around by various commentators, he said. However, the ATO considers that the tax gaps for small business and individuals are likely to be bigger than those for the large market.

For individuals, Mr Jordan said the risks of non-compliance are mainly around work-related expenses, with over $22 billion in claims for 2014–2015. Random and risk-based audits are showing many errors and over-claims for work-related expenses, stemming from legitimate mistakes and carelessness through to recklessness and fraud, Mr Jordan said.

The ATO is also concerned about the large number of incorrect claims made for work-related clothing and laundry expenses and the cents-per-kilometre method for car expenses. In 2014–2015, around 6.3 million people made claims against clothing expenses, totalling almost $1.8 billion. On that basis, the Commissioner said that almost half of the individual taxpayer population was required to wear a uniform, protective clothing or had special requirements for items like sunglasses and hats. While many of these claims would be legitimate, Mr Jordan wondered how many people have assumed that they can just claim $150 regardless of whether they have spent that amount on the required items. Similarly, he said some individuals are claiming for car expenses but their employers have told the ATO there is no requirement for the employees to use their car for work, or individuals are making claims that are excessive, with the assumption that no explanation is required.

Appeal case: work-related expenses partly allowed

In a recent appeal case, the Administrative Appeals Tribunal (AAT) has partly allowed a taxpayer’s claims for work-related motor vehicle expenses, work-related travel expenses, self-education expenses and other work-related expenses for the year ended 30 June 2012: Amin and FCT [2017] AATA 1042.

During the relevant year, the taxpayer was a vendor relationship manager at a company that provided infrastructure management services. He claimed various amounts for work-related motor vehicle expenses, work-related travel expenses, self-education expenses and other work-related expenses which the Commissioner disallowed.

The AAT said the only substantive tax issues for it to decide were whether the taxpayer was entitled to the deductions for the following:

  • Work-related motor vehicle expenses: the AAT found that the taxpayer failed to prove the legitimacy of his $36,079 Based on the limited evidence before the AAT, it was not convinced that the taxpayer was required to travel as part of his employment in the relevant year and did not any claim for work-related car expenses. Among other things, the AAT noted that the taxpayer apparently “claimed to be using his Maserati vehicle 100% of the time for work purposes. This was contrary to the log book, to the extent that was reliable, that referenced some private usage”.
  • Work-related travel expenses: the taxpayer had claimed $7,185. The AAT allowed the full cost of air fares for the taxpayer’s US trip for a work-related conference and meetings (the Tribunal held that the costs could not be apportioned), but held that accommodation expenses should be apportioned (as they were charged separately).
  • Work-related self-education expenses: the Tribunal allowed some, but not all, of the $21,944 in self-education expenses that the taxpayer had claimed.
  • Other work-related expenses: The taxpayer had claimed an additional $8,371 of expenses. The AAT allowed depreciation on a computer, which it was satisfied it was used in gaining or producing the taxpayer’s assessable income, but disallowed the other claimed work-related expenses.

Employee travel expense deductions and allowances

The ATO has released Draft Taxation Ruling TR 2017/D6 on the deductibility of employee travel expenses. This lengthy draft ruling covers transport expenses as well as expenditure incurred when travelling away from home (accommodation, meal and incidental expenses). The draft ruling sets out general principles for determining if a travel expense satisfies the requirements in s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997): that is, whether the expense is incurred in gaining or producing assessable income and whether it is non-private, non-domestic expenditure.

These general principles are that:

  • a transport expense is not deductible where the travel is to start work or depart after work is completed (ie ordinary home-to-work travel);
  • a transport expense is deductible if the travel is undertaken in performing the employee’s work activities; factors to consider include:
  • whether the work activities require the employee to undertake the travel;
  • whether there is payment to undertake the travel;
  • whether the employee is subject to the employer’s direction and control for the period of the travel; and
  • whether these factors have been contrived to give a private journey the appearance of work travel;
  • employee expenditure for accommodation, meal and incidentals is not deductible unless the work requires the employee to be away from home – this will be the case where it is reasonably necessary to incur the expense because of “special demands” or “co-existing work locations” travel undertaken in performing the employee’s work, but such expenditure is only deductible to the extent that the work requires the employee to sleep away from home; and
  • relocation expenses (both travel and accommodation) are not deductible.

The draft ruling defines “special demands” travel as travel between home and a regular work location where the journey, or part of it, is included in the activities for which the employee is paid under the terms of employment, and this is reasonable because of the special demands of the work (eg due to the remoteness of the work location). “Co-existing work locations” travel involves travel that can be attributed to the employee needing to work in more than one location, and the travel is directly between work locations, or between home and an alternative work location. Further, it must be reasonable to conclude that the travel is undertaken in performing the employee’s work activities because of the requirement to work in multiple locations.

Reasonable travel and overtime meal allowance amounts for 2017–2018

Taxation Determination TD 2017/19 sets out the amounts the ATO will treat as reasonable for the 2017–2018 income year in relation to employee claims for:

  • overtime meal expenses – the reasonable amount is $30.05;
  • domestic travel expenses – reasonable amounts are provided at three salary levels for:
  • accommodation at daily rates;
  • meals (breakfast, lunch and dinner); and
  • deductible expenses incidental to travel;
  • domestic travel expenses for employee truck drivers who have received a travel allowance and are required to sleep (take their major rest break) away from home – the reasonable amount is $55.30 per day; and
  • overseas travel expenses – reasonable amounts are shown for cost groups to which a country has been allocated. Where travel is to a country that is not listed, the employee can use the reasonable amount for Cost Group 1 in the table for the relevant salary range. Reasonable amounts are provided at three salary levels for:
  • meals (breakfast, lunch and dinner); and
  • deductible expenses incidental to travel.

Working holidaymakers and tax returns for 2017

New arrangements, commonly known as the “backpacker tax changes” came into place from 1 January 2017 for employers of working holidaymakers. For the 2017 year, employers will need to issue two payment summaries to a working holidaymaker who is employed both up until 31 December 2016 and after 1 January 2017. This is to ensure that the working holidaymaker pays the right amounts of tax on their working holidaymaker income.

The ATO says that where an employer issues a payment summary for income earned from 1 January 2017, they need to include a code H on that payment summary. Code H indicates that it is working holidaymaker income. All employers are required to use the new code if they have employed working holidaymakers from 1 January, irrespective of whether they have registered with the ATO. If tax practitioners know that the income was derived on or after 1 January 2017 and there is no code H on the payment summary, they should ensure that a code H is placed at the appropriate place at Income 1 on the income tax return.

If employers have only provided one payment summary for income derived from both pre- and post-1 January 2017 periods, practitioners should work with them to determine the amounts to be apportioned to each period, and show the two amounts on the income tax return. The post-1 January income needs to display the code H.

Small business asset write-offs: be careful not to under-claim

Small businesses with a turnover of less than $10 million can write off assets costing less than $20,000 each in their 2016–2017 return. All simplified depreciation rules will apply to assets when choosing this method.

The ATO has observed that some tax agents have under-claimed by not applying all of the simplified depreciation rules. To use simplified depreciation rules correctly, the business must:

  • write off eligible assets costing less than $20,000 each;
  • pool most other depreciating assets that cost $20,000 or more;
  • write off the small business pool balance if it is less than $20,000 at the end of an income year; and
  • only claim a deduction for the portion of the asset used for business or other taxable uses.

The $20,000 write-off threshold now applies until 30 June 2018.

Small businesses with tax debts: setting up a payment plan

The ATO reminds small businesses that if they have a tax debt of $100,000 or less, they can take advantage of the ATO’s self-help service to set up a payment plan in two easy steps:

  • Use the payment plan estimator to work the options.
  • With their Tax File Number (TFN) or Australian Business Number (ABN) on hand, set up a payment plan by either phoning the ATO’s automated service on 13 72 26 or using the online services for sole traders and individuals on their myGov account.

In some circumstances, the ATO says, a business may be eligible for interest-free payment plans for activity statement debts. To find out about eligibility, phone the ATO on 13 11 42.

If a business pays its tax debt late or by instalments, interest accrues on the unpaid debt. And even where a business has a payment plan, the ATO says it still needs to lodge all of its ongoing activity statements and tax returns on time, even if the business cannot pay by the due date.

To deal with tax debts of more than $100,000, businesses can phone the ATO on 13 11 42.

Federal Court rules on arrangement to avoid PAYG deductions

The Federal Court has dismissed the taxpayers’ appeals against an Administrative Appeals Tribunal (AAT) decision. The AAT had ruled against one of the taxpayers (a company as trustee of a trust) concerning an alleged sham arrangement, input tax credits denied, GST shortfall penalties, a penalty for not withholding and remitting pay as you go (PAYG) tax amounts, and certain income tax deductions. Two additional taxpayers (a couple) were also unsuccessful before the AAT in a consequential matter – amended assessments had increasing their taxable incomes due to an increase in trust income and shortfall penalties.

Mr E operated a business providing casual labour for orchardists and vignerons through a company (Alper Harvesting Contractors Pty Ltd) which had engaged employees and accounted for PAYG deductions and payroll tax. In June 2011, the operation changed: Sunraysia Harvesting Contractors Pty Ltd was incorporated. It acted as trustee of a discretionary trust – Sunraysia Harvesting Contractors Trust – for which Mr and Mrs E were the beneficiaries. It was argued that Sunraysia no longer engaged employees, but instead subcontracted three companies (Danood, Jameron and Kigra) that engaged the employees, and those companies (not Sunraysia) were required to account for PAYG deductions and payroll tax, if necessary.

After a tax audit, the Commissioner concluded that the arrangements between Sunraysia and Danood, Jameron and Kigra were “a sham”. The Commissioner disallowed input tax credits Sunraysia had claimed on supplies it said those companies had made to it between 1 July 2011 and 31 December 2013. The Commissioner also imposed GST shortfall penalties.

The taxpayers appealed to the AAT, which said the circumstances pointed to the conclusion that the three companies concerned “were part of a façade created by [a third party] to permit Sunraysia to avoid remitting PAYG deductions”. It said the arrangements between Sunraysia and the three companies “were never intended to create any legally enforceable obligation”. The taxpayers then appealed to the Federal Court.

The Federal Court said that, “[i]n design, the structure … looks to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the ‘bottom of the harbour’ behaviours of a generation ago) with ‘phoenix’ successors. Whatever fiscal efficacy that had depended on [Mr E adopting it]. As it happened, he failed to show that he ever intended the key legal elements of the structure to take effect … The appeal must be dismissed, with costs.” (Sunraysia Harvesting Contractors Pty Ltd (Trustee) v FCT [2017] FCA 694, Federal Court.)

Default assessments confirmed for undisclosed income of property business

A taxpayer has been unsuccessful in proving that default assessments were excessive or otherwise incorrect: Peter Sleiman Investments Pty Ltd as Trustee for The Sleiman Family Trust v FCT [2017] AATA 999.

PSI Pty Ltd (PSI) was the trustee of a discretionary family trust. PSI lodged income tax returns in its capacity as trustee for the years ended 30 June 2000 to 30 June 2004. For the years ended 30 June 2005 to 30 June 2007, it lodged forms indicating that “returns were not necessary”. For the years ended 30 June 2008, 30 June 2009 and 30 June 2010, it did not lodge income tax returns nor “returns not necessary” forms.

In June 2013, the Commissioner issued income tax assessments to PSI for the 2008, 2009 and 2010 income years totalling just over $3.7 million in tax and $3.3 million in penalties.

PSI contended that it did not do more than own and derive rental income from properties it owned in Sydney. It contended that its total income was significantly less than the ATO had assessed. To use one year as an example, it said its income for 2008 was $225,547, while the ATO had assessed it at over $983,000. PSI further argued that the office for its rental business consisted of no more than a desk and a computer. On this basis, it challenged the default assessments.

The Administrative Appeals Tribunal (AAT) agreed with the Commissioner’s assessments. The AAT said PSI had not shown that the assessments were excessive or otherwise incorrect, and had not proven what its actual taxable income should have been. These requirements would not be satisfied by identifying errors that the ATO might have made in its approach to particular items.

The taxpayer comprehensively failed in its quest. It was unable to produce any evidence to support its contentions. Indeed, the evidence it tendered worked very much against the taxpayer. The depreciation schedules showed significant outgoings on capital assets, indicating business activities well beyond the passive holding and rental of commercial and residential property. The outgoings included purchases of over 30 motor vehicles, plus firearms and fitness equipment. There was also expenditure on a “bomb dog”, which the taxpayer somewhat reluctantly agreed had nothing to do with a business of owning property and deriving rent.

Other evidence included bank statements with repeated references to “consultation fees”, “gun licences” and a “security industry register”. There was a loan application form which pointed to PSI having earnings more than 20 times the rental income it asserted. There was also evidence the taxpayer had provided significant loans to related parties, but no indication of any income or returns derived from those activities.

The AAT concluded that the contemporaneous material did not, at any level, support the taxpayer’s contention that it solely derived income from rent. Rather, it strongly suggested that income was derived from providing financial services to other related companies and “very likely” from involvement in other industries, such as security and hospitality. The AAT concluded, somewhat bluntly, that the taxpayer had not even “come close” to demonstrating that the assessments were excessive. There was a “myriad of discrepancies” between what PSI contended and what the evidence showed. The AAT also held that the 75% penalty tax was appropriate given the taxpayer’s deliberate and inexplicable behaviour in not lodging the relevant returns. The ATO sought to increase the penalty by a further 20% for the 2009 and 2010 income years, against which the taxpayer argued unsuccessfully. The ATO was allowed the capacity to impose the additional penalty.

ASIC takes action on super fund websites failing to make disclosures

The Australian Securities and Investments Commission (ASIC) has recently intervened in relation to 21 superannuation trustees that failed to adequately disclose transparency information on their super fund websites.

Under s 29QB of the Superannuation Industry (Supervision) Act 1993 (SIS Act), each super fund must disclose transparency information (TI) on a website and keep it up to date at all times. TI comprises remuneration, governance and other fund information such as fund trust deeds and product disclosure statements, a summary of significant event notices and a summary of how the trustee voted in the last financial year in relation to its listed shares.

ASIC expects super fund websites to be easily found by searching the fund’s name using an internet search engine, and to have a homepage that prominently points to the TI. An ASIC review, however, revealed transparency deficiencies by 21 super funds, two of which were large funds with assets exceeding $10 billion, including:

  • not having a super fund website (10 funds);
  • displaying no TI on the fund website (four funds);
  • providing no remuneration information (five funds); and
  • disclosing remuneration in bands, rather than for each individual executive officer (two funds).

ASIC wrote to the trustees of the 21 super funds, representing 15% of the trustee population, asking them to address these transparency failures. As a result, seven trustees disclosed the required information, five made it easier to find the information and trustees of two small funds that did not have websites sought relief from TI obligations. ASIC also said that seven trustees transferred fund members to another fund before winding up the fund, while two trustees improved their procedures for ensuring TI is up to date.

AASB says more companies should consider reporting tax liabilities ahead of new guidance

The Australian Accounting Standards Board (AASB) says that more Australian companies could be recognising amounts in dispute with the ATO in financial reports, under new guidance from the IFRS Interpretations Committee (IFRIC). The IFRIC guidance will be issued by the AASB shortly.

On 7 June 2017, the International Accounting Standards Board (IASB) issued IFRIC 23 Uncertainty over Income Tax Treatments to specify how to reflect uncertainty in accounting for income taxes. It is effective from 1 January 2019. The IFRS said it may be unclear how tax law applies to a particular transaction or circumstance, or whether a taxation authority will accept a company’s tax treatment. IAS 12 Income Taxes specifies how to account for current and deferred tax, but not how to reflect the effects of uncertainty. IFRIC 23 provides requirements that add to the requirements in IAS 12 by specifying how to reflect the effects of uncertainty in accounting for income taxes.

The AASB says company directors are now required to continually assess the aggressiveness of tax positions taken. They must assume the tax authority has full knowledge of all the relevant facts, regardless of whether their companies have had or are likely to have a tax audit, or are likely to be issued an amended assessment.

If it is probable that the tax authority will not accept the company’s treatment, the AASB says a tax liability for the expected settlement amount must be recognised in the Statement of Financial Position, with an associated tax expense. Even if it is probable that the tax authority will accept the treatment, directors still need to assess whether disclosure of a contingent liability is necessary.

While the new guidance is not effective until 1 January 2019, the AASB recommends that all companies reassess whether to record a tax liability in their 2017 reporting.

Revenue Minister Kelly O’Dwyer has said that tax is a key Government focus, “so it is good to see an increased emphasis on encouraging clearer disclosures by corporates of areas of tax uncertainty in their financial statements”.

AASB Chair Kris Peach said, “The probability threshold is now being applied at an earlier point and could result in more tax liabilities being recognised. Previously, a tax liability was only recognised if the directors assessed it was probable that the entity would be required to pay additional tax.”

ATO Deputy Commissioner Jeremy Hirschhorn said that in applying the new rules, companies should consider the ATO’s public guidance about what it is likely to dispute, as well as the ATO’s success in determining the likely resolution of matters when it does raise disputes.

Mr Hirschhorn said that thanks to the ATO’s improved management of disputes, it “has a success rate in matters that ultimately go to litigation of more than 75%, and a recent track record in settled matters of recovering about 75% of the disputed tax on average”. When companies are in doubt as to their tax positions, he said, the ATO strongly encourages them to engage with it to obtain certainty “rather than be exposed to significant uncertain positions, which rarely improve with time”.