Tax planning

With the end of the 2018 income tax year rapidly approaching, this issue of Client Alert draws attention to year-end tax planning strategies and compliance issues that taxpayers need to consider to ensure they are in good tax health. It focuses on the most important issues for small to medium businesses and individuals to consider so as to increase their tax refund or minimise their tax liability in respect of the 2018 income tax year.

One interesting procedural matter this year is that 30 June 2018 falls on a Saturday, meaning that ATO payments or lodgments due on that day or on Sunday 1 July can be made on Monday 2 July 2018 without incurring a general interest charge. However, where practically possible, all actions, payments or lodgments should be undertaken before Friday 29 June 2018.

This “date shuffling” conundrum should be kept in mind when reference is made to actions to be undertaken by 30 June 2018.

Common tax planning techniques include deferring the derivation of assessable income and bringing forward deductions. It is equally important to consider any pending changes to the tax legislation, and to specifically take note of any commencement dates and transitional provisions.

Deferring derivation of income

Businesses that recognise income on an accruals basis (ie when an invoice is raised) may consider delaying the raising of invoices for services rendered until after 30 June and thereby delay deriving assessable income until after the 2018 income tax year.

For example, if cash flow permits, businesses could delay raising some invoices in respect of work in progress (WIP). Also note that service income received in advance (eg where amounts are received before 30 June 2018 but services are only provided after 30 June 2018) may only be assessable income in the 2019 income tax year.

If income is derived on the cash basis (eg interest, royalties, rent and dividends), businesses may consider deferring the receipt of certain payments until after 30 June 2018 (eg set term deposits to mature after 30 June 2018 rather than before 30 June 2018).

Companies with a turnover of between $25 million and $50 million may want to defer the recognition of income to the 2019 income tax year, to ensure that the lower tax rate of 27.5% applies (rather than 30% in 2018).

 

Bringing forward tax-deductible expenses through prepayments

To qualify for deductions in the 2018 income tax year, taxpayers may bring forward upcoming expenses (ie incur the expenses before 30 June 2018) or small businesses and individual non-business taxpayers may prepay expenses up to 12 months ahead (ie pay tax-deductible expenses relating to the 2019 income year before 30 June 2018). This should only be done subject to available cash flow and where there is a commercial basis for the prepayment.

Business expenses that may be prepaid include:

• short-term consumables such as office supplies and stationery;
• unpaid workers’ compensation insurance premium instalments; and
• superannuation guarantee payments (only due in July).

Also note that bonuses and directors’ fees that are confirmed and committed to by 30 June (as evidenced in Board minutes) may be deductible in 2018, even if these payments are only made after 30 June 2018.

Expenses that individuals may prepay include:

• investment property expenses such as insurance, rates, repairs and maintenance and strata fees;
• subscriptions to professional journals and memberships to professional associations;
• interest on investment loans (eg for share portfolios and investment properties); and
• income protection insurance.

 

Business planning issues

Lower company tax rates and imputation

As illustrated in the following table, company tax rates are falling in Australia.

Income tax year	Turnover less than	Company tax rate
2016	$2 million	28.5%
2017	$10 million	27.5%
2018	$25 million	27.5%
2019–2025	$50 million	27.5%
2026	$50 million	26%
2027	$50 million	25%

Under the law current at the time of writing, companies that are carrying on a business and have turnover of less than $25 million will be subject to company tax at a rate of 27.5% in 2018 (ie company tax will only be at the rate of 30% in 2018 if turnover is $25 million or more, or the company is not carrying on a business).

The rate at which dividends will be franked in 2018 will depend on whether the company’s turnover in the previous year (2017) was less than the current year’s turnover benchmark ($25 million for 2018).

That is:

• if the 2017 turnover was less than the 2018 turnover benchmark, the 2018 dividend will be franked at 27.5%; and
• if the 2017 turnover was equal to or more than the 2018 turnover benchmark, the 2018 dividend will be franked at 30%.

Company profits may therefore be taxed at different rates from the rate at which dividends are franked. This disparate tax treatment can lead to either:

• over-franking of dividends (eg if company profits are taxed at 27.5% but franking is done at a rate of 30%), in which case certain actions need to be taken to avoid the imposition of franking deficit tax; or
• under-franking of dividends (eg if company profits are taxed at 30% but franking is done at 27.5%), in which case franking credits may become trapped and may not be usable.

Further amendments, contained in the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017, may soon affect the way companies and shareholders receiving dividends are taxed and how franking will be done. The Bill proposes to amend the tax law to ensure that a company will not qualify for the lower company tax rate if more than 80% of its assessable income is passive income (such as interest, dividends or royalties). The amendments would modify the requirements that must be satisfied for a corporate tax entity to qualify as a base rate entity, replacing the “carrying on a business” test with a “passive income” test. The Bill has been passed by the House of Representatives and is before the Senate at the time of writing.

 

Deductions for small business entities

Businesses that are small business entities (companies, trusts, partnerships or sole traders with total turnover of less than $10 million) will qualify for the following raft of tax concessions in the 2018 income tax year:

• the $20,000 instant asset write-off – an immediate deduction when buying and installing depreciating assets that cost less than $20,000.
• the simplified depreciation rules – accelerated depreciation rates of 15% or 30% for depreciable assets that cost $20,000 or more;
• the small business restructure rollover;
• an immediate deduction for start-up costs;
• an immediate deduction for certain prepaid expenses;
• the simplified trading stock rules – removing the need to do an end-of-year stocktake if the value of the stock has changed by less than $5,000;
• the simplified PAYG rules – the ATO will calculate PAYG instalments;
• cash basis accounting for GST – the ATO will calculate the GST instalment payable and annual apportionment for input tax credits for acquisitions that are partly creditable;
• the FBT car parking exemption (from 1 April 2017); and
• the ability for employees to salary-sacrifice two identical portable electronic devices, such as laptops (from 1 April 2016 to align with the FBT year).

These concessions are very powerful for small businesses, and if applied correctly, can lead to substantial tax savings.

Tip: The $10 million turnover threshold does not apply for the small business CGT concessions. To qualify for the small business CGT concessions, businesses must still have an annual turnover of less than $2 million, or satisfy the $6 million “net asset value” test.

$20,000 instant asset write-off

Small business entities that make eligible purchases of less than $20,000 and use or install the new or second-hand depreciating asset ready for use before 30 June 2018 will be able to instantly claim a tax deduction for the cost of that asset in the 2018 income tax year.

Assets costing $20,000 or more can be pooled in a general small business pool, treated as a single depreciating asset and depreciated at:

• 15% for such assets acquired during the 2018 income tax year; and
• 30% for the 1 July 2017 opening written-down value balance of the assets in such a pool.

Whether GST should be included in working out whether the $20,000 threshold is met depends on whether the purchaser is registered for GST:

• If the purchaser is registered for GST, the GST-exclusive amount is the cost of the asset.
• If the purchaser is not registered for GST, the GST-inclusive amount is the cost of the asset.

Originally, 2018 was to have been the last year taxpayers could claim the $20,000 instant asset write-off. However, in its 8 May 2018 Federal Budget the Government has proposed to extend this write-off by another year. This means that from 1 July 2019 the instant asset write-off threshold will revert to $1,000 a year.

Immediate deductibility of start-up costs

Small businesses started this year will be entitled to an immediate deduction for all start-up costs (eg lawyer and accountant fees, costs of company constitutions or trust deeds) incurred in the 2018 income tax year.

Small business restructure rollover

Small business entities can restructure their operations (eg changing the business structure from a company to a trust, or from a sole trader to a trust) without income tax consequences (ie no income tax consequences on transferring depreciating assets, revenue assets, trading stock or CGT assets between the different restructured entities).

The most appropriate structure for a small business (company, trust, sole trader, partnership or any combinations of these) may change over time, so this new rollover is welcome and will help businesses seamlessly restructure to suit their needs.

 

Claiming small business CGT concessions can be tricky

Broadly, if a business is being sold that has an aggregated turnover of less than $2 million (ie it is a CGT small business entity) or the value of its net CGT assets is $6 million or less (ie it satisfies the $6 million “net asset value” test), the business may qualify for the small business CGT concessions.

Depending on the particular circumstances, if the business is expanding rapidly and may be at risk of breaching the $6 million net asset value threshold, the owner may consider selling the business before this breach occurs, while the sale of the business is still eligible for the small business CGT concessions.

The small business CGT concessions include:

• a 15-year exemption – no CGT is payable;
• a 50% active asset reduction – a 50% CGT discount in addition to the 50% general discount;
• the retirement exemption – up to $500,000 lifetime tax-free limit; and
• the active asset rollover – minimum two years’ deferral.

At the time of writing, the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 is before the House of Representatives. It proposes to restrict access to the small business CGT concessions from 1 July 2017 onwards to only the sale of:

• assets that were actually used in the small business – meaning no CGT concession on the sale of assets not used in the business; or
• shares or units in companies or trusts that are also small businesses – meaning no CGT concession on the sale of shares or units in an entity that is not a small business.

Taxpayers who intend to claim the small business CGT concessions in 2018 will need to consider whether they would be eligible for the concessions under the new law, if it is enacted.

 

General business issues

Beware of private company loans and unpaid trust distributions

The shareholders of companies operating businesses sometimes treat their companies as their own piggybank by making drawings from the companies to either fund other business interests or their private lifestyle.

Such cash advances need to be documented with a complying loan agreement that requires minimum principal and interest repayments at the benchmark interest rate by 30 June; otherwise they will give rise to a deemed dividend under Div 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Care must also be taken when a private company makes a loan or payment or forgives a debt of a shareholder (or a shareholder’s associate) or if a trust declares a distribution to a private company without the cash payment to the company; such unpaid present entitlements (UPEs) made after 16 December 2009 by a trust to a company may be treated as either a loan by the company to the trust or remain a UPE (if put on sub-trust).

Apply look-through treatment to earnout rights

If a business was sold in the 2018 income tax year subject to an earnout arrangement where the sale price is paid in instalments (if future performance markers are satisfied), the capital gains are recognised in the income year that the business was sold. This look-through approach not only defers the taxation of the capital gain on the earnout, but may also allow the financial benefit arising from the earnout to potentially qualify for the small business CGT concessions (ie the instalments paid after the sale will form part of the same CGT event as the original sale).

Review trust deeds and make trust resolutions

Trustees must make valid distribution resolutions before 30 June (or an earlier date if specified in the trust deed) to distribute trust income to eligible beneficiaries. If trustees fail to make valid distribution resolutions before 30 June, the trustee can potentially be assessed on all of the trust’s net income at the top marginal tax rate (45%).

Tip: Beneficiaries must quote their tax file number (TFN) to trustees before a trust makes a distribution to them for the first time. Failure to do so will result in the trustee withholding tax of 47% (the top marginal rate plus the Medicare levy) from all future distributions to the beneficiary.

To ensure that valid trustee distribution resolutions are made, the terms of the trust deed must be complied with.

For example, if the trust deed defines trust net income as equal to taxable net income, but the trustee resolves to distribute only accounting income to beneficiaries, this resolution may not be an effective distribution of trust income (in part or whole) – and it may result in the trustee being assessed at the top marginal tax rate (45%).

Since the exact trust net income will not be known by 30 June, trust distribution resolutions should be made distributing different percentages to beneficiaries (adding up to 100%), or distributing specified dollar amounts to certain beneficiaries and the balance to a default beneficiary.

Review bad debts and obsolete plant and machinery

Unpaid debts should be reviewed to determine the likelihood of not receiving payment of these debts and whether attempts to recover the debts will be successful. It is important to keep documentation as evidence where the debt is considered to be non-recoverable. If the debt is irrecoverable and income is reported on an accruals basis, the debt can be regarded as a bad debt for which a tax deduction may be claimed. This process must occur before 30 June.

It should be ensured that these bad debts have not been forgiven – forgiven debts do not qualify as bad debts.

This same methodology should be applied for plant and machinery. Review asset registers to identify obsolete plant and machinery, and be sure to scrap it (ie physically dispose of it). A deduction can be claimed for the written-down value of such assets.

Value trading stock at the lower of cost, market value or replacement value

The valuation of trading stock at year-end may impact on the amount to be included in assessable income for the 2018 income tax year. Because a lower closing value for trading stock may result in a lower taxable income, taxpayers have the choice of valuing trading stock on hand at 30 June at the lower of cost, market value or replacement value.

 

Individual planning issues

No more Budget repair levy

The Budget repair levy of 2% on the part of an individual’s taxable income that exceeds $180,000 no longer applies in 2018. Therefore, the top marginal rate for 2018 (including the 2% Medicare levy) will be 47%, as opposed to 49% in the 2017 income tax year. The FBT rate is also 47% for the 2018 FBT year.

Review salary packaging arrangements

Review any salary packaging arrangements (eg for motor vehicles) to ensure they were entered into before the services have been performed by employees or before salary review time, so that they will be effective.

With the lowering of the concessional superannuation contributions cap to $25,000 for everyone from 1 July 2017 (as opposed to either $30,000 or $35,000 for the 2017 income tax year, depending on the age of the individual), ensure that salary sacrifice agreements are reviewed to ensure there are no excess concessional contributions in 2018.

Manage exposure to CGT

Individuals may consider delaying the exchange of contracts to sell an appreciating capital asset until after 30 June 2018. That way, the capital gain will only be assessable in the 2019 income tax year.

If a capital gain has already been made this year, it may be possible to crystallise capital losses (eg by selling shares that have declined in value) to reduce the capital gain. However, when adopting this strategy, taxpayers must take care to ensure they are not engaging in “wash sales”, where shares are sold shortly before 30 June solely to realise the capital loss and then bought back shortly after 30 June.

A capital gain realised in 2018 will be eligible for the 50% CGT general discount to the gross gain if the asset was held for at least 12 months before it was sold (ie before the CGT event occurred).

Deduct work-related expenses

Although a myriad of tax law considerations are involved when claiming work-related expenses, there are three main rules:

• Only claim a deduction for money actually spent (and not reimbursed).
• The work-related expense must directly relate to the earning of income.
• An employee must have a record to prove the expense.

For example, a claim for work-related expenses will not be allowed if deductions are claimed for private expenses (eg travel from home to work and not required to transport bulky equipment), reimbursed expenses (eg an employee is reimbursed for the cost of meals, accommodation and travel) or if no records are kept.

Tip: Taxpayers who are overclaiming deductions for work-related expenses such as vehicles, travel, internet and mobile phones and self-education are on the ATO’s hitlist. Taxpayers must keep evidence to substantiate such claims.

Other practical issues to consider when claiming work-relates expenses include the following:

• When claiming work-related expenses relating to a vehicle, travel, internet, self-education or a mobile phone, taxpayers should ensure that the amount claimed for these expenses is reasonable and verifiable. The ATO is using real-time data to compare deductions claimed by taxpayers in similar occupations and income brackets, so it can identify higher-than-expected or unusual claims.
• When claiming deductions up to $300 (allowable without a receipt), taxpayers must still be able to substantiate the deductions claimed if they are questioned by the ATO.
• When claiming deductions for work uniforms, taxpayers should ensure they only claim for uniforms that are unique and distinctive (eg with the employer’s logo and specific to the taxpayer’s occupation) and not clothing for everyday use (eg plain suits worn by office workers).

Taxpayers working from home may be able to deduct a pro rata portion of water and electricity costs as well as depreciation for office equipment, provided they keep a diary of the hours worked at home to substantiate their claims.

An individual may claim the amount incurred on self-education expenses as a tax deduction, provided the expenses were incurred to maintain or improve the individual’s skill or knowledge necessary to perform the individual’s current job (as opposed to securing a new job). For example, an accountant attending an accounting seminar, conference or workshop to stay up to date with the latest accounting developments could claim the expenses as a deduction.

Make donations count for tax

Donations of $2 or more to deductible gift recipients are tax deductible. Donations of property to such recipients may also be tax deductible. However, donations to overseas charities may not be tax deductible.

Use negative gearing where appropriate

An investment property is negatively geared if the rental income is less than interest and other costs of maintaining the property. In such a case, the loss on the investment property can be offset against other income to reduce taxable income.

Because individuals on higher tax rates will gain a greater tax benefit from the loss deduction compared to individuals on lower tax rates, a possible strategy (provided CGT consequences and other circumstances have been considered as well) with married couples is to have the negatively geared property in the name of the spouse who earns the highest income. Of course, the benefit of this strategy reverses when the property yields a net income. Therefore, investment properties that are positively geared (ie when rental income exceeds the costs associated with the investment property) may be held in the name of the spouse with the lower taxable income. This also applies for interest-bearing deposits such as term deposits.

Pay superannuation contributions before 30 June

From 2018, both employees and self-employed individuals can claim a tax deduction annually to a maximum of $25,000 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2018 and the individual has provided their superannuation fund with a “notice of intention to claim” document.

Taxpayers must be aware of exactly how long a superannuation contribution takes to reach a superannuation fund – for example, if a superannuation contribution is made one day before 30 June, but the payment is received in the superannuation fund’s bank account two days later (ie after 30 June), no tax deduction will be allowed in the 2018 income tax year.

Tip: If the employer is utilising the ATO small business clearing house, their super guarantee contributions are counted as being paid on the date the clearing house accepts them (provided the fund does not reject the payments).

An easy way to prevent any late payment issues is to pay superannuation contributions at the beginning of June each year.

 

Take note of 1 July 2017 superannuation changes

Fundamental changes to the superannuation landscape have occurred from 1 July 2017 (ie for the 2018 income tax year).

The following table gives a short summary of the most important superannuation rates and caps that apply.

CGT cap for non-concessional contributions	$1.445 million
Concessional contributions cap	$25,000
Non-concessional contributions cap	$100,000 (or $300,000 under the three-year bring forward rule)
Superannuation guarantee	9.5%
General transfer balance cap	$1.6 million
Total superannuation balance threshold	$1.6 million

Because the ability to contribute money to superannuation is severely curtailed from 1 July 2017, individuals may wish to consider alternative investment strategies outside of superannuation (eg family trusts, innovation companies, etc).

Innovation incentive

From 1 July 2016, some investors in certain small Australian innovation companies will basically qualify for two incentives for investments made on or after 1 July 2016:

• when they make the investment, a 20% non-refundable carry-forward tax offset on their investment (capped at $200,000); and
• when they dispose of the investment, a CGT exemption if the disposal occurs after holding the investment for more than one year but less than 10 years.

Regarding the $200,000 cap: there is no limitation on the amount sophisticated investors (ie investors with net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000) may invest, although the maximum amount of offset will remain at $200,000. However, non-sophisticated investors (eg “mum and dad” investors) may only invest a maximum of $50,000 a year in such companies.

 

Property ownership issues

There have been recent changes to:

• the tax treatment associated with residential rental properties (eg travel deduction and depreciation changes);
• withholding tax obligations for purchasers of property:
• 5% CGT withholding applies on the sale of any property for $750,000 or more, unless the vendor has a tax clearance certificate evidencing the vendor’s Australian tax residency;
• 10% GST withholding applies on the sale of new residential premises (from 1 July 2018);
• superannuation measures impacting home ownership (eg the first home super saver scheme and the superannuation downsizer incentive); and
• stamp duty and land tax issues – note that these are different in each state.

There is also a proposal to abolish the main residence CGT exemption for taxpayers who are no longer Australian tax residents. If it is enacted, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018, which passed the House of Representatives without amendment and is before the Senate at the time of writing, will change the tax law so that any individual vendor that is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer qualify for the full or partial main residence exemption, regardless of how long the home has actually been used as a main residence. This is causing some serious concerns. The time from which this measure would apply depends on the time when the home was acquired.

Furthermore, foreign investors need permission from the Foreign Investment Review Board (FIRB) before purchasing residential properties (excluding some new dwellings) or agricultural land in Australia.

Changes affecting residential rental properties in 2018

From 1 July 2017, individuals, discretionary trusts and self managed superannuation funds (SMSFs) will no longer be able to claim travel expenses (eg motor vehicle expenses, taxi or car hire costs, airfares or public transport costs, or costs for meals and accommodation related to the travel) incurred to inspect residential rental properties. Such disallowed travel deductions will also not be included in the cost base or reduced cost base of the rental property.

However, taxpayers may still claim travel expenses to inspect commercial premises and residential premises used to carry on a business (eg premises used as a retirement village). Property management expenses paid to real estate agents (which may involve real estate agents incurring travel expenses to inspect the residential rental property) will still be deductible.

Also from 1 July 2017, the depreciation on plant and equipment (eg washing machines and refrigerators) in residential rental units will be severely limited depending on whether:

• the plant and equipment was acquired before or after 9 May 2017;
• the plant and equipment have been previously used;
• the plant and equipment have been used in the taxpayer’s residence before; or
• whether the plant and equipment is installed in new residential premises.

Taxpayers who owned a rental property, or entered into a contract to purchase their rental property before 7.30pm on 9 May 2017, can continue to claim depreciation deductions for assets that were in the rental property before that date. It doesn’t matter whether the depreciating asset installed in the property was new or used, or whether the property was new. However, if a rental property was purchased at or after 7.30pm on 9 May 2017, the taxpayer cannot claim deductions for second-hand or used depreciating assets, whether they are bought with the property or separately. They also cannot claim depreciation deductions if they have used an asset for private purposes before installing it in the rental property.

Where a taxpayer buys a newly built property, or buys a property that has been substantially renovated, they will be entitled to claim depreciation deductions for new depreciating assets if no one previously claimed any depreciation deductions on the asset and either:

• no one lived in the property when the taxpayer acquired it; or
• if anyone lived in the property after it was built or renovated, the taxpayer acquired it within six months of the property being built or renovated.

Changes to the foreign resident CGT withholding rule

For the 2018 income tax year, a 12.5% non-final withholding tax applies when a non-resident sells property in Australia for more than $750,000 (in 2017 the CGT withholding rate was 10% and the sale price benchmark was $2 million). Therefore, in 2018, a non-resident vendor will only be paid 87.5% of the sale price, because 12.5% must be withheld by the purchaser and paid to the ATO as a prepayment of tax on behalf of the foreign vendor.

This measure will result in extra compliance requirements (eg tax resident vendors will also be subject to these rules unless they obtain ATO tax clearance certificates), but carve-outs from this rule are available (eg for purchases of Australian real property valued at less than $750,000 in 2018).

Tax resident vendors who are able to obtain ATO tax clearance certificates can avoid application of the 12.5% withholding rule when they sell a residential property for $750,000 or more. A tax clearance certificate – basically an ATO certificate confirming that the vendor is an Australian tax resident – provided to the purchaser before the settlement date would enable such a vendor to receive 100% of the purchase price from the purchaser.

If more than one vendor is involved, each vendor must apply separately for a tax clearance certificate. If any of the vendors fails to provide such a tax clearance certificate to the purchaser, the purchaser must withhold 12.5% of the purchase price (in proportion to each vendor’s interest in the property).

New GST withholding rule on sale of new residential premises

For the 2018 income tax year, purchasers of new residential premises pay a GST-inclusive amount to the seller (ie GST is included in the purchase price, so the purchaser pays GST to the seller and the seller must remit the GST to the ATO).

However, from 1 July 2018, under a recently enacted law, purchasers of new residential premises will have to pay the GST component of the purchase price directly to the ATO:

• For sale contracts signed on or after 1 July 2018, the purchaser will be required to withhold and pay 10% GST to the ATO on the day the consideration is provided (ie at instalment dates or at settlement if there is a lump sum at settlement).
• For sale contracts signed before 1 July 2018, the 10% GST withholding rule will only apply to payments made on or after 1 July 2020 (ie GST withholding will not apply to consideration provided in this two-year transitional period).

This new GST withholding regime does not apply to the sale of used (ie not new) residential properties or the sale of new or used commercial premises.

Superannuation measures impacting home ownership

First home super saver scheme

From 1 July 2017, a first home buyer can salary sacrifice a maximum of $15,000 a year  to save for a deposit to buy a first home. The maximum amount that can be saved in such a way is $30,000. Provided the buyer’s partner does not already own their first home, the couple can put in a maximum of $60,000 ($30,000 × 2) to buy a first home.

TIP: These salary sacrificed amounts will count towards the annual $25,000 concessional contributions limit. Individuals need to take care not to breach the cap when making use of the first home super saver scheme.

Money saved in this way can only be withdrawn from the superannuation fund from 1 July 2018, with strict rules applying for the use of the withdrawn amount – for example, the ATO must be notified and the taxpayer must buy a home within a certain period after the withdrawal.

Super downsizer incentive available from 1 July 2018

The superannuation downsizer incentive only applies from 1 July 2018, but we include the following information because taxpayers who will qualify may decide not to sell their homes before 30 June 2018.

Broadly, under this incentive, an individual aged 65 or above may make a $300,000 non-concessional contribution (and with a spouse, the total contribution can be $600,000) from the proceeds of selling their home, provided the home was owned for the last 10 years up to the date of disposal and would have qualified for either a full or partial main residence CGT exemption.

Individuals need not buy a replacement residence or satisfy the “work test” (ie working for at least 40 hours over 30 consecutive days) to be able to make a downsizer contribution to their superannuation fund. Each person will only be able to access this incentive once.

The biggest drawcard here is that non-concessional contributions made under this incentive will not be subject to the $1.6 million total superannuation balance cap. Therefore, individuals that already have more than $1.6 million in superannuation may use the super downsizer incentive to contribute an additional $300,00 ($600,000 for couples) to superannuation.

Foreign residents and the CGT main residence exemption

Currently, any individual (regardless of their tax residency status) who sells their home can qualify for either:

• the full main residence CGT exemption – if the residence has been used as a main residence throughout the whole ownership period, whether through actual use or imputed use (various main residence extension rules, such as the six-year absence rule, impute main residence use to taxpayers for certain periods where a home was not used as a main residence); or
• the partial main residence CGT exemption – if the residence has been used partly as a main residence and partly for income-producing purposes during the ownership period.

However, if the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 is enacted, any individual vendor who is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer be able to qualify for the full or partial main residence exemptions, regardless of how long the home has actually been used as a main residence.The main residence exemptions will not be available for non-residents signing a contract of sale to sell their home:

• after 9 May 2017, for homes acquired after 9 May 2017; and
• after 30 June 2019, for homes acquired on or before 9 May 2017.

Assuming the Bill becomes law in its current format, a non-resident who disposes of their main residence in the 2018 income tax year will not qualify for the main residence exemption if the dwelling was purchased after 9 May 2017.

 

Tax compliance and developments

Keep relevant documents and make timely elections

Taxpayers must keep all relevant documents, usually for five years, to show that they have incurred the expense for which they are claiming a tax deduction. If a taxpayer needs to make an election to have a specific concession apply (eg for the small business CGT concessions, or family trust and FBT elections), they should ensure such an election is made by the relevant deadline.

Tip: Generally, only a taxpayer who directly incurs an expense (and derives the related income) may claim the tax deduction.

Single Touch Payroll

From 1 July 2018, employers with 20 or more employees (as determined by the number of employees an employer has on 1 April 2018) will have to run their payroll and pay their employees through accounting and payroll software that is Single Touch Payroll (STP) ready. It is a major reporting change for employers, and means employers will report payments such as salaries and wages and allowances, PAYG withholding and super information to the ATO directly from their payroll solution at the same time they pay their employees.

Employers need to have done a head count on 1 April 2018 to determine if they are a “substantial employer” and will therefore be required to use STP. This count has to include full-time and part-time employees, casual employees who are on the payroll on 1 April 2018 and worked any time during March 2018, any employee absent or on leave, seasonal employees and overseas employees. Not included are casual employees who did not work in March 2018, independent contractors and company directors.

GST on low value imported goods

From 1 July 2018, overseas vendors with a GST turnover of AUD$75,000 or more in Australian sales will have to account for GST on sales of low value goods (ie imported goods costing AUD$1,000 or less) to consumers in Australia (ie purchasers not registered for GST, or GST-registered purchasers that acquire the goods solely for private purposes).

Payments to contractors in building and construction

Businesses in the building and construction industry must report the total payments they make to contractors on a taxable payments annual report by 28 August 2018.

Currently, there are proposals to extend this taxable payment reporting regime to cleaners and couriers (from 1 July 2018) and to security providers, road transport and computer design services (from 1 July 2019). These measures are in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018, which has passed the House of Representatives at the time of writing.

 

 

ATO closely examines work-related car expenses

The ATO has announced that it will be closely examining claims for work-related car expenses in 2018 tax returns. The ATO is concerned about taxpayers making mistakes or deliberately lodging false claims in relation to work-related car expenses. Last year, around 3.75 million people made a work-related car expense claim, totalling about $8.8 billion.

ATO Assistant Commissioner Kath Anderson said that this year, the ATO will be particularly focused on people “claiming things they’re not entitled to”. This will include people claiming things like home-to-work travel or other private trips, trips they didn’t actually undertake, or expenses their employer has already paid for or reimbursed.

The ATO also uses analytics to identify claim patterns. For example, Ms Anderson said the ATO knows that around 870,000 people claim exactly 5,000 kilometres of travel under the cents-per-kilometre method each year. While the ATO says it is not suggesting that all of those claims are wrong, “it is something that we’ll be able to look into”.

The Assistant Commissioner said the best way for taxpayers to avoid mistakes is to make sure they follow “the three golden rules”, only making a car claim if:

• you paid for the expense yourself and you weren’t reimbursed;
• it’s directly related to earning your income – in other words, your employer required you to make the trips as part of your job; and
• you have a record to support your claim.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-driven-to-scrutinise-car-claims-this-tax-time/.

Data matching finds taxpayers with unnamed Swiss bank accounts

Minister for Revenue Kelly O’Dwyer has announced that more than 100 Australians have been identified as “high risk” and requiring further ATO investigation because they have links to Swiss banking relationship managers alleged to have actively promoted and facilitated tax evasion schemes.

The Minister confirmed that following a joint international investigation, the ATO and other Serious Financial Crime Taskforce (SFCT) agencies have identified 578 Australians as holding unnamed numbered accounts with a Swiss bank.

“While the ATO has found the majority of Australians identified in the data to have complied with their tax obligations, a range of immediate compliance actions are being taken against 106 taxpayers, and one is under assessment by the Government’s cross-agency Serious Financial Crime Taskforce”, Minister O’Dwyer said.

She said the ATO is investigating whether those taxpayers are using a sophisticated system of numbered accounts to conceal and transfer wealth anonymously to evade their tax obligations in Australia.

In working with the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Minister said, the ATO has identified that these 106 taxpayers have had 5,000 cross-border transactions worth over $900 million in the past 10 years. The transaction amounts range from as little as $25 up to $24 million.

Ms O’Dwyer said information releases are becoming more regular, with the ATO and other government agencies receiving large data sets “reasonably regularly”. The ATO constantly receives intelligence from a range of sources which it cross-matches against existing intelligence holdings through its “smarter data” technology.

“I encourage anyone who believes they may have undeclared offshore income to come forward and contact the ATO to make a voluntary disclosure”, Minister O’Dwyer concluded. The SFCT comprises the Australian Federal Police, ATO, Attorney General’s Department, Australian Criminal Intelligence Commission, Australian Border Force, Commonwealth Department of Public Prosecutions and ASIC.

Source: http://kmo.ministers.treasury.gov.au/media-release/046-2018/.

CGT main residence exemption to disappear for non-residents

A person’s Australian tax residency status is about to assume a whole new meaning. Currently, both residents and non-residents qualify for the capital gains tax (CGT) main residence exemption, but if a Bill before Parliament becomes law, that will change.

As the law stands right now, any individual (regardless of their tax residency status) who sells their home can qualify for either:

• the full CGT main residence exemption (eg if the residence has been used as a main residence throughout the whole ownership period, whether through actual use or imputed use) – there are various main residence extension rules that impute main residence use to taxpayers even where a home was not used as a main residence in the particular time (eg the six-year absence rule); or
• the partial CGT main residence exemption (eg if the residence has been used partly as main residence and partly for income-producing purposes during the ownership period).

However, if the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018, currently before the Senate (having passed the House of Representatives without amendment), is enacted, any individual vendor that is a non-resident (for tax purposes) at the time they sign a contract to sell their home will no longer be able to qualify for the full or partial main residence exemption – regardless of how long the home has actually been used as a main residence. This is causing some serious concerns.

The time from when this proposed measure will apply depends on the time when the home was acquired.

When will the proposed changes apply?

The full or partial main residence exemption will not be available for non-residents signing a contract of sale to sell their homes:

• after 9 May 2017, for homes acquired after 9 May 2017; and
• after 30 June 2019, for homes acquired on or before 9 May 2017.

These measures could have a profound effect on individuals who have used their post-CGT home as a main residence for a substantial period of time, seeing the value of the property increase substantially, and then eventually sell the residence (ie sign the contract for sale) when they are non-residents for tax purposes.

For example, take an individual who bought property in 1986 (post-CGT and before 9 May 2017) and has been using the property as their main residence since that time. In July 2018, the individual leaves Australia permanently and establishes a permanent place of abode overseas. This and other facts and circumstances indicate that the individual has become a non-resident for tax purposes.

If the non-resident individual were now to sell the residence and the date the sale contract is signed is:

• on or before 30 June 2019, no tax would be payable because the non-resident individual seller would still qualify for the main residence exemption; but
• after 30 June 2019, tax would be payable because the non-resident individual seller would not qualify for the main residence exemption.

Note: The practicalities can get complicated and “messy”. From 8 May 2012 (when the CGT discount was abolished for non-residents), non-residents selling CGT assets can no longer qualify for the CGT discount. The discount is apportioned for sales after 8 May 2012 where CGT assets were acquired before 8 May 2012. So, if the non-resident signs a contract of sale (for property acquired before 9 May 2017) of the main residence after 30 June 2019, the capital gain will be taxable and only qualify for a partial CGT discount.

There are also flow-on effects for estate planning purposes (eg whether a beneficiary of a deceased estate who sells a property that was the deceased’s main residence would qualify for the main residence exemption when the beneficiary sells the house – this would depend on the residency status of both the deceased and the beneficiary).

What other issues arise from the proposed changes?

Individuals who are non-residents at the time of signing the sale contract to sell their property that has been used as both a main residence and an investment property will lose their ability to:

• apportion the main residence exemption (for a home that was first used as an investment property and then used as a main residence); or
• get a step-up in cost base (for a home that was first used as a main residence and then used as an investment property.

Concerns about the changes

While the Senate Economics Legislation Committee has recommended that the amending Bill be passed, the Committee said it received evidence expressing concerns about how the changes would affect Australians living and working overseas. Those concerns included the following:

• The Bill seeks to retrospectively remove the CGT main residence exemption for non-residents from the time the property became the taxpayer’s main residence, instead of from the time they became a non-resident.
• It has been argued that it was unreasonable to effectively penalise Australians for departing Australia for work or personal reasons by revoking their right to a CGT exemption on their family home.
• There was concern that the change could impose significant tax bills on Australian citizens and permanent residents covering periods not only when they are non-residents for tax purposes, but also when they were tax residents, paying their Australian tax obligations.
• The denial of the CGT main residence exemption for non-residents is based on their tax residency status at the time of the CGT event (ie generally when a taxpayer enters into the contract to sell the dwelling), irrespective of the use of the dwelling or the taxpayer’s residency status during the ownership period of the dwelling. The Bill retrospectively changes the application of the exemption to as far back as 20 September 1985, when the CGT provisions first commenced.
• It was submitted that there should be a difference between a “foreign resident” (ie a foreign citizen) who buys property in Australia and treats it as their main residence, but remains a non-resident for tax purposes, and an Australian citizen or permanent resident who has always lived here but has relocated overseas and becomes a non-resident, then sells the dwelling that was their home.
• It was submitted that the Bill should include grandfathering provisions to ensure that Australian citizens who were foreign residents (not Australian resident for tax purposes) when the changes were announced (on 9 May 2017) should continue to be able to access the “CGT absence concession” under current rules, regardless of where they presently reside, on eligible properties they owned on 9 May 2017.
• Australian citizens living abroad should also be able to access time apportionment so that they would continue to have access to the main residence exemption for that part of the ownership period during which they lived in the home and were resident of Australia.

Despite these concerns, and those made in submissions by several affected Australian citizens, the Committee recommended that the Bill be passed and that the Government ensure that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they can plan accordingly.

Further thoughts

At the time of writing, the proposed changes are not yet law.

However, once (and if) these proposed changes do become law, it will be very important for vendors to determine their tax residency status before they sign a contract to sell a property that would potentially qualify for the full or partial main residence exemption.

It is important to note that there will be no apportionment of the time the individual used the home as a main residence – the only test is residency status at the time of signing the contract of sale.

This “all or nothing approach” may lead to catastrophic consequences for individuals who have used their properties as main residences for an extended period of time but sell their properties (ie sign the contract to sell the properties) when they are non-residents for tax purposes.

Residential rental property travel expense deductions: ATO guidance

With effect from 1 July 2017, the Treasury Laws Amendment (Housing Tax Integrity) Act 2017 introduced s 26-31 into the Income Tax Assessment Act 1997 (ITAA 1997) to disallow deductions for non-business travel costs incurred by individuals, self managed superannuation funds (SMSFs) and “private” trusts and partnerships in relation to residential rental properties. Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.

Draft Law Companion Ruling LCR 2018/D2, issued by the ATO on 2 May 2018, seeks to supplement the Explanatory Memorandum to this legislation by providing further guidance on the following matters:

• the meaning of “residential premises”;
• the meaning of “carrying on a business” for the purposes of the business exclusion in s 26-31(1)(b), and
• the application of s 26-31 to travel expenditure that serves more than one purpose.

Residential premises

Section 26-31 of ITAA 1997 refers to the “use of residential premises as residential accommodation”. The expression “residential premises” takes its meaning from the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which is land or a building that is occupied, or is intended to be and is capable of being occupied, as a residence or for residential accommodation. The ATO’s views on what constitutes “residential premises” for GST purposes are set out in GST Ruling GSTR 2012/5. Draft LCR 2018/D2 mirrors the GST Ruling by providing that:

• the premises must be fit for human habitation and must provide shelter and basic living facilities;
• the term of occupation or intended occupation is not determinative;
• the actual use of the premises as a residence or for residential accommodation is relevant to satisfying the first limb of the definition (concerning actual occupation);
• the second limb of the definition (concerning intended occupation) refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. This is demonstrated through the physical characteristics of the premises; and
• the premises may be in any of a number of forms, including single rooms or suites of rooms within larger premises.

Carrying on a business of property investing

A deduction for travel expenses is not denied under s 26-31 of ITAA if the expenditure is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The draft states (as the legislation’s explanatory memorandum did) that this exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO then refers to the indicia of business identified by the courts and listed in Ruling TR 97/11 (on carrying on a business of primary production).

In determining whether a business of letting residential properties is being carried out, the draft states that the following additional factors may be particularly relevant:

• the number of residential properties being rented out;
• the hours per week spent actively engaged in managing the properties;
• the skill and expertise exercised in undertaking these activities; and
• whether professional records are kept and maintained in a business-like manner.

The draft adds that it is more difficult for individuals to demonstrate that they are carrying on a business of property investing than it is for companies (which are specifically exempt from s 26-31 anyway). In the ATO’s preliminary view, “the receipt of income by an individual from the letting of property to a tenant, or multiple tenants, will not typically amount to the carrying on of a business as such activities are generally considered a form of investment rather than a business”.

Apportionment if travel expenditure serves mixed income-producing purposes

The expenditure made non-deductible by s 26-31 is a loss or outgoing “insofar as it is related to travel”. According to the draft, the use of the word “insofar” means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to make a fair and reasonable assessment of the extent to which the amount relates to each purpose. When apportioning an indiscriminate sum, factors that may need to be taken into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose, the draft says.

Government to increase civil penalties for white-collar crime

On 4 May 2018, the Government released its response to the Senate Economics References Committee report into penalties for corporate and financial misconduct (white-collar crime), and agreed to increase the civil penalties in the Corporations Act 2001 (Corporations Act) for both individuals and bodies corporate. In doing so, the Government agreed that civil penalties for white-collar offences should be set as a multiple of the benefit gained (or loss avoided) and allow for disgorgement of profits.

The Government also released its response to the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce report, and agreed to set the maximum civil penalties in ASIC-administered legislation at:

 

 

• for individuals, the greater of 5,000 penalty units (currently $1.05 million) or three times the value of benefits obtained (or losses avoided); and
• for corporations, the greater of 50,000 penalty units (currently $10.5 million) or three times the value of benefits obtained (or losses avoided); or 10% of annual turnover in the 12 months preceding the contravening conduct, but not more than one million penalty units ($210 million).

The Government also agreed to expand the use of ASIC infringement notices for a broader range of the financial services and managed investments provisions of the Corporations Act. In this respect, the Government accepted the recommendation of the Taskforce to include as infringement notice provisions an extra 70 provisions of the Corporations Act and the National Consumer Credit Protection Act 2009 (Credit Act). To improve the transparency of ASIC banning and disqualification orders, the Government said it is also considering the modernisation of the ASIC Business Registers.

Lowering of evidentiary standard rejected

Importantly, the Government rejected the recommendation calling for reforms that would reduce the evidentiary standards and rules for civil penalty proceedings involving white-collar offences. While the Government supported the Committee’s observation about the difficulty in proving certain civil offences, it said this does not necessarily mean evidentiary standards should be lowered. Furthermore, the Government noted the Full Federal Court’s decision in ASIC v Whitebox Trading Pty Ltd [2017] FCAFC 100, which has provided some clarity around the standard of proof and the application of “fault” elements in civil proceedings.

Source: https://treasury.gov.au/publication/p2018-282438-2/; https://treasury.gov.au/publication/p2018-282438/.

Businesses need to be ready: GST on low value goods from 1 July 2018

From 1 July 2018, GST will be imposed on the supply of goods valued at equal to or less than A$1,000 (ie low value goods) from outside of Australia to Australian consumers. Australia is the first jurisdiction in the Asia-Pacific region to move ahead with such changes and it is a fundamental shift from the current approach, which excluded supplies of low value goods into Australia by offshore merchants from the GST net. Businesses need to be ready for this change.

Summary of new regime and impacts on online merchants and operators of electronic distribution platforms

Broadly, the regime imposes a GST liability on merchants who sell goods valued at equal to or less than A$1,000 to an Australian consumer (ie a customer who is not registered for GST). This applies where the merchant delivers or facilitates the delivery of those goods into Australia. Sales made on a business-to-business (B2B) basis (ie where the recipient is registered for GST) are excluded from the regime.

The regime also provides special deeming rules where the low value goods are supplied through an electronic distribution platform (eg an online marketplace). If these deeming rules operate, the GST liability shifts to the operator of the platform rather than the merchant of the goods. Additionally, in some cases, a redeliverer may be taken to have the liability and responsibility to register and report the GST.

A registration requirement for those impacted by the regime will only arise where the taxpayer meets the annual GST turnover registration threshold of A$75,000. Further, a simplified GST registration system has been put in place that minimises the registration administrative burden through a streamlined application process via an online portal and reduced identification requirements for entities and related individuals (for instance, directors are not required to provide a certified copy of their passport). Entities registered under the simplified system are required to report and pay GST on a quarterly basis, regardless of GST turnover.

The new low value goods regime does not disturb the operation of existing provisions in relation to taxable importations, meaning that practically, the regime creates a tiered system where:

• the overseas merchant, electronic distribution platform operator or redeliverer may be liable for GST on goods valued at equal to or less than A$1,000 imported into Australia; and
• GST will continue to be payable at the border by the importer of record (typically the consumer in business-to-consumer cross-border sales) on goods valued at more than A$1,000 imported into Australia.

Preparing for the regime

In preparing for the start date of the regime (1 July 2018), those affected should consider:

• how their current systems can manage the imposition of GST – for example, whether they collect sufficient information to determine customer location, GST registration status and the amount of GST payable on a supply;
• if terms and conditions of store websites and platforms are required to be amended – for electronic distribution platform operators, this may include reviewing whether existing merchant terms and conditions allow the recovery of GST;
• compliance with Australian consumer law requirements on the display of pricing;
• the impact on customs compliance formalities and potential for double taxation – changes to the Integrated Cargo System (ICS) will mean that logistics providers and freight forwarders may begin to collect additional information on merchant and platform operator’s GST registration details and whether a consignment is being shipped to an entity exempt from the low value goods regime (eg by virtue of being a GST-registered business) to avoid the double imposition of GST at the border; and
• whether additional paid services charged by the merchant or platform operator (such as shipping and gift wrapping) are captured by regime.

ATO compliance and enforcement guidance

On 4 April 2018, the ATO released additional guidance on how it intends to approach compliance activities in relation to the low value goods regime.

In this guidance, the ATO reiterated that it may seek to impose potentially significant administrative penalties, which can be substantial for “significant global entities” (entities or groups with global turnover of greater than A$1 billion), and have several mechanisms to approach collection of GST and penalty amounts for non-compliant entities. These include:

• intercepting funds from Australia that are destined for the overseas merchant or platform operator – this may include the issuance of garnishee notices to banks and financial institutions located in Australia;
• registering the debt in a court in the overseas merchant or platform operator’s country; and
• requesting the taxation authority in the overseas merchant or platform operator’s country to recover the debt on the ATO’s behalf.

As an allowance to overseas merchants and platform operators, the guidance from the ATO provides for a concessionary penalty regime for entities that make efforts to comply with the new low value goods regime. Where an entity makes a genuine effort to comply with the regime, the ATO will not seek to impose penalties on mistakes made after the introduction of the regime (1 July 2018) for the first year of operation. Further non-imposition of penalties will be considered on a case-by-case basis after that date.

The ATO confirms that it will leverage multiple sources of information to identify non-compliant behaviour, including:

• tracking financial data and the flow of funds from purchasers to overseas suppliers – from 1 July 2017, payment system entities operating in Australia have been required to report transaction information to the ATO (the first annual report is due 1 July 2018); thus, administrative systems are already in place to capture transaction information;
• obtaining information from other jurisdictions under information-sharing agreements and tax treaties;
• online investigations to identify websites and businesses that supply goods to consumers in Australia; and
• customs data on the entry of imports into Australia – as already mentioned, the ICS data fields have been amended to capture more GST-related information on consignments entering Australia, although these fields have not yet been made mandatory.

Time to prepare

The idea for the regime has been around for some time and the Bill to implement it was introduced in February 2017, so businesses have been on notice. However, the 1 July start date is now rapidly approaching and the time to prepare is well at hand.

It is interesting to note that late last year, the Productivity Commission released a report designed to check that the legislated model is the best available collection model. The report said that while the legislated model has limitations and carries significant uncertainty about levels of compliance and the reactions of electronic distribution platforms, the Commission does not have sufficient sound evidence to recommend an alternative collection model at this stage. The Commission therefore recommended that the Government should conduct a comprehensive review of the collection of GST on low value imported goods five years after the commencement of the legislated model, unless exceptional circumstances – such as extremely low compliance, unintended impacts on consumers or significant trade policy issues – warrant an earlier review. Affected businesses will no doubt inform this review.

New Zealand proposes GST on low value goods

The New Zealand Government is proposing to levy GST on low value goods under NZ$400. A discussion document was released on 1 May 2018. Revenue Minister Stuart Nash said that currently, “foreign companies are not required to collect GST on goods under NZ$400. We are now calling for feedback on a system to register these suppliers for GST.”

Currently, New Zealand GST is collected at the border for goods valued at over NZ$400, but Customs Minister Meka Whaitiri said the Government proposes making offshore suppliers collect GST on low value goods at the moment of sale, and in turn, buyers of these goods will no longer pay New Zealand Customs tariffs or border security and biosecurity fees. This is designed to simplify compliance and administration costs at the border, she said. There would be no change to the tax treatment of goods valued above NZ$400, where the current process for collecting GST and tariff duty at the border will continue.

Offshore retailers (suppliers) would be required to register and collect GST if their total sales to New Zealand consumers exceed NZ$60,000 per annum (ie in a 12-month period). In certain circumstances, marketplaces and redeliverers may also be required to register. The offshore supplier registration is the same threshold that applies to domestic businesses and to offshore suppliers of cross-border services and intangibles (ie ebooks, digital downloads and software), which has applied from 1 October 2016.

This new regime is also broadly in line with recent international developments. For example, Australia has legislated rules to apply GST on all imported goods valued at or below A$1,000 from 1 July 2018. The European Commission announced in December 2016 that European Union Member States would use a variant of an offshore supplier registration system to collect value-added tax (VAT) on low value imported goods from outside the European Union by 2021.

The changes to New Zealand’s GST system would take effect from 1 October 2019. Comments on the discussion document are due by 29 June 2018.

Source: www.beehive.govt.nz/release/gst-loophole-closed-offshore-companies.

Financial Complaints Authority takes shape

Minister for Revenue and Financial Services Kelly O’Dwyer has announced the authorisation of Australian Financial Complaints Limited to operate the new financial dispute resolution scheme – the Australian Financial Complaints Authority (AFCA) –  which will start accepting complaints from 1 November 2018. AFCA is intended to be a “one-stop shop”, having the expertise to deal with all financial disputes, including superannuation and small business lending disputes, with higher monetary limits and compensation caps.

The Minister also announced the appointment of four AFCA board members: Ms Claire Mackay, Mr Andrew Fairley, Ms Erin Turner and Mr Alan Wein. Ms O’Dwyer said one of the first priorities of the AFCA board (including its independent chair Helen Coonan) will be to consult on the AFCA terms of reference and interim funding model.

All Australian financial services (AFS) licensees, Australian credit licensees, superannuation trustees and other financial firms required to become members of AFCA by law will need to do so by 21 September 2018. AFCA will, in the coming months, outline the process for applying for membership. Until 31 October 2018, the Minister said consumers can to still lodge complaints with the existing Financial Ombudsman Service (FOS), Credit and Investments Ombudsman (CIO) and Superannuation Complaints Tribunal (SCT). The SCT will continue to operate beyond AFCA’s commencement to resolve the existing complaints it has on hand.

Source: http://kmo.ministers.treasury.gov.au/media-release/044-2018/; http://kmo.ministers.treasury.gov.au/media-release/045-2018/.

Banking Royal Commission wraps up evidence on financial advice

The Banking Royal Commission has wrapped up its two weeks of hearings focused on financial advice. Counsel Assisting, Rowena Orr SC, summed up the gruelling evidence of misconduct and conduct falling below community standards and expectations in relation to the provision of financial advice by employees and authorised representatives of financial services entities. Ms Orr said this conduct has occurred in the context of fees being charged for no service, platform fees, inappropriate advice, improper conduct, and the disciplinary regime.

In her closing address on 27 April 2018, Ms Orr set out the details of each of the case studies where Counsel Assisting considered there was evidence leaving it open for the Commissioner to find that the conduct of the relevant individuals and entities might have amounted to misconduct. Ms Orr also set out various instances where it would be open for the Commissioner to find that the individuals and entities may have breached statutory obligation under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001. Commissioner Kenneth Hayne also permitted the parties to the case studies to make written submissions (not exceeding specified page lengths) about the findings.

The Royal Commission has adjourned until 21 May 2018, when it will begin its third round of hearings with a focus on small and medium enterprises (SMEs). The Commission is expected to provide an interim report by 30 September 2018, with a final report due by 1 February 2019.

Source: https://financialservices.royalcommission.gov.au/public-hearings/Pages/default.aspx.

ATO assessments issued for excess super pension balances

The ATO has started issuing excess transfer balance (ETB) tax assessments to self managed super fund (SMSF) members, or their agents, who had previously received an ETB determination and rectified the excess.

The ATO said these paper ETB tax assessments are sent to SMSF members (or their professionals), and not to the fund. It’s then up to the member to decide how to cover the ETB liability for exceeding their $1.6 million pension transfer balance cap. The ATO said individuals can use assets from outside super, or they can access their super and either:

• take a lump sum from any accumulation interest they hold;
• make an additional commutation of their income stream; or
• make a larger than usual one-off pension payment.

As the member has prima facie met a condition of release, the ATO said it doesn’t need to issue a special release authority to super funds to allow the individual to access their super.

The ATO warned that SMSF members may receive an ETB assessment even if they didn’t receive an ETB determination. If they have rectified the excess before they were assessed for a determination, they are still liable for the ETB tax, the ATO said. However, SMSF members who were covered by the transitional rules for excesses not exceeding $100,000, and rectified in full by 31 December 2017, will not receive an ETB tax assessment.

ETB tax is due and payable 21 days after the assessment is issued. A general interest charge will accrue if any amount remains unpaid after the due date. ETB tax is calculated on the ETB earnings from when the individual started to have an ETB to when they are no longer in excess. The tax rate is set at 15% for an ETB in 2017–2018, but will increase to 30% from 1 July 2018 for second time offenders.

A person who receives an ETB assessment (or determination) should first ensure that their pension transfer balances have been correctly reported to the ATO before electing to access their super to pay their ETB liability. The ATO has also recently reported that it has identified a duplication error in its systems which can result in an incorrect total superannuation balance (TSB) being displayed on ATO Online for some people.

If a taxpayer needs to access their superannuation to pay the ETB liability, it would generally make sense to first access a lump sum from any accumulation interest they hold. Subject to the individual’s circumstances, making an additional commutation of an existing income stream would generally be better than taking a larger than usual one-off pension payment. This is because a commutation will generate a debit for the pension balance account, while an additional pension payment will not result in a credit.

As always, consider the underlying tax components if an individual has multiple superannuation interests. While super pensions and lump sums are received tax-free from age 60, there may be estate planning benefits from first accessing the interest with the largest taxable component (subject to the individual’s other circumstances). Also note that, unlike superannuation benefits released pursuant to a release authority, super benefits accessed to pay an ETB liability will be subject to the proportioning rule.

Source: www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/ATO-starts-issuing-ETB-tax-assessments/.

PERSONAL TAXATION

Personal tax rates: staged seven-year reform plan starting from 2018–2019

In the 2018–2019 Budget, the Government announced staged tax relief for low and middle income earners. The Government is proposing a major seven-year, three-step plan to reform personal income tax.

Step 1 will see a new, non-refundable low and middle income tax offset from 2018–2019 to 2021–2022, designed to provide tax relief of up to $530 for each of those years. The offset will be delivered on assessment after an individual submits their tax return, and will be in addition to the existing low income tax offset (LITO).

The low and middle income tax offset will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000 of taxable income, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333 of taxable income, the offset will phase out at a rate of 1.5 cents per dollar.

Step 2 will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In 2022–2023, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.

Step 3: from 1 July 2024, the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, removing the 37% tax bracket completely. Taxpayers will pay the top marginal tax rate of 45% from taxable incomes exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

The Government says this means that around 94% of all taxpayers are projected to face a marginal tax rate of 32.5% or less in 2024–2025.

Medicare levy, 2017–2018 tax rates unchanged

The Government had proposed to increase the Medicare levy from 2% to 2.5% from 1 July 2019, but has decided not to proceed with this. Presumably the Bills to do this, which are currently before Parliament, will be removed. In an address on 26 April 2018 to the Australian Business Economists in Sydney, the Treasurer said that, due to the improving economy and fiscal position, the Government is “now in a position to give our guarantee to Australians living with a disability and their families and carers that all planned expenditure on the National Disability Insurance Scheme (NDIS) will be able to be met in this year’s Budget and beyond without any longer having to increase the Medicare levy”.

At the same time, it has been reported that Shadow Treasurer Chris Bowen has announced that Labor will not proceed with its proposal to increase the Medicare levy by 0.5% (to 2.5%) on those earning above $87,000.

The tax rates and thresholds for the 2017–2018 year remain unchanged.

BUSINESS TAXATION

$20,000 instant asset write-off for SBEs extended by 12 months

The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities (SBEs) by 12 months to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million.

The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off or other simplified depreciation rules (eg horticultural plants and in-house software).

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current “lock out” laws for the simplified depreciation rules (which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2019.

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

While the extension of the write-off will be welcomed, SBEs of course need to have the cash-flow to enable them to spend the $20,000 in the first place.

Anti-avoidance rules: family trust circular distributions

The Government will extend specific anti-avoidance rules that apply to other closely held trusts that engage in circular trust distributions to family trusts.

Currently, where family trusts act as beneficiaries of each other in a round-robin arrangement, a distribution can ultimately be returned to the original trustee in a way that avoids any tax being paid on that amount. The measure will allow ATO to pursue family trusts that engage in these arrangements and impose tax on such distributions at a rate equal to the top personal rate plus the Medicare levy.

This measure applies from 1 July 2019.

Deductions disallowed for holding vacant land

The Government will disallow deductions for expenses associated with holding vacant land. Where the land is not genuinely held for the purpose of earning assessable income, expenses such as interest costs will be denied. It is hoped this measure will reduce the tax incentives for land banking which limit the use of land for housing or other development.

The measure will apply to both land held for residential and commercial purposes. However, the “carrying on a business” test would generally exclude land held for a commercial development. It will not apply to expenses associated with holding land that are incurred after:

• a property has been constructed on the land, it has received approval to be occupied and available for rent; or
• the land is being used by the owner to carry on a business, including a business of primary production.

Disallowed deductions will not be able to be carried forward for use in later income years. Expenses for which deductions will be denied could be included in the cost base if it would ordinarily be a cost base element (ie borrowing costs and council rates) for CGT purposes. However, if the denied deductions are for expenses would not ordinarily be a cost base element, they cannot be included in the cost base.

This measure applies from 1 July 2019.

Partnerships: enhancing integrity of concessions

Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.

The Government said this measure will prevent taxpayers, including large partnerships, inappropriately accessing the CGT small business concessions in relation to their assignment to an entity of a right to the future income of a partnership, without giving that entity any role in the partnership.

There are no changes to the small business CGT concessions themselves. The concessions will continue to be available to eligible small businesses with an aggregated annual turnover of less than $2 million or net assets less than $6 million.

These measures will apply from 7:30PM (AEST) on 8 May 2018.

TAX COMPLIANCE AND INTEGRITY

No tax deduction for non-compliant PAYG and contractor payments

Measures will be enacted to ensure that taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, despite the PAYG withholding requirements applying.

Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again despite the withholding requirements applying).

These measures were recommended by the Black Economy Taskforce.

The revenue expectations linked with this expenditure is quite modest – “a small unquantifiable gain to revenue over the forward estimates period”.

The measures will commence on 1 July 2019.

Cash payments limit: payments made
to businesses

The Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services.

This measure will require transactions over a threshold to be made through an electronic payment system or by cheque. Logically it would seem that this threshold amount should be $10,000, but this is not spelt out in the Budget papers or the media release.

The rules will not apply to transactions with:

• financial institutions; or
• consumer-to-consumer non-business transactions.

This measure was recommended by the Black Economy Taskforce. It is designed to support other measures designed to counter the black economy. There is no revenue impact associated with it.

The limit will apply from 1 July 2019. The Government will consult further as part of the implementation process.

Reportable payments system extended: security providers, road freight transport and computer design

The Government will extend the taxable payments reporting system (TPRS) to the following industries:

• security providers and investigation services;
• road freight transport; and
• computer system design and related services.

This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018, to the cleaning and courier industries under measures contained in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018.

The reporting requirements will apply from 1 July 2019, with the first annual report required in August 2020.

SUPERANNUATION

SMSF member limit to increase from four to six

The Budget confirmed that the maximum number of allowable members in new and existing self managed superannuation funds (SMSFs) and small APRA funds will be expanded from four to six members from 1 July 2019. This measure was originally flagged on 27 April 2018 by the Minister for Revenue and Financial Services, Kelly O’Dwyer.

The proposed increase to the maximum number of SMSF members seeks to provide greater flexibility for large families to jointly manage retirement savings. Given the growth in the sector to date, Ms O’Dwyer said the measure will ensure SMSFs remain compelling retirement savings vehicle. The Government is expected to ask the ATO to work with industry on the design and implementation of this measure. It is not expected to have a revenue impact.

Extra SMSF members to provide flexibility

Currently, s 17A(1)(a) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires an SMSF to have fewer than five members. In addition, each member must be a trustee of the fund (or a director of the corporate trustee). This seeks to ensure that all members are fully involved and equally responsible for fund decisions and investments.

The Government’s proposal to allow up to six SMSF members may assist those with larger families to implement intergenerational solutions for managing long-term, capital intensive investments, such as commercial property and business real property. For example, allowing an extra two members provides an opportunity to improve a fund’s cash flow by using the contributions of the younger members to make pension payments to the members in retirement phase, without needing to sell a long-term investment.

As each member must be a trustee of the fund, a decision to add extra members should not be taken lightly as it can add complexity to the fund’s management and investment strategy. A change to the membership of an SMSF will alter the trustee arrangements which can impact who controls the fund in the event of a dispute. This is especially relevant in the event of the death of a member, as the surviving trustees have considerable discretion as to the payment of the deceased’s super benefits (subject to any binding death benefit nomination).

Labor’s dividend imputation policy

Allowing up to six SMSF members may assist some SMSFs to implement strategies to guard against Labor’s proposal to end cash refunds of excess franking credits from 1 July 2019. SMSFs in tax-exempt pension phase are expected to feel the brunt of Labor’s proposal, although an exemption was subsequently announced for SMSFs with at least one Government pensioner or allowance recipient before 28 March 2018.

To avoid wasting non-refundable franking credits, Labor’s proposal would create an incentive for SMSFs in pension phase to add additional accumulation phase members (eg adult children) who could effectively make some use of the excess franking credits within the fund. That is, the excess franking credits would be used to absorb some of the 15% contributions tax in relation to the accumulation members. For example, the proposal to increase the maximum number of SMSF members from four to six would enable a typical two-member fund in pension phase to admit up to four adult children as members. If those adult children are making concessional contributions up to the maximum of $25,000 per year, the fund could use the excess franking credits to offset up to $15,000 (four x $25,000 x 15%) in contributions tax each year for the adult children.

This strategy would essentially replicate, to the extent possible, the position of large APRA funds under Labor’s policy. APRA funds typically have more contributing members and diverse income sources (beyond franked dividends) that can usually fully absorb the franking credits.

As already noted, a decision to add additional members to an SMSF may add complexity to the management and control of the fund. This would require professional advice for the specific circumstances of the fund and its members.

Superannuation work test exemption for contributions by recent retirees

The Government will introduce an exemption from the work test for voluntary superannuation contributions by individuals aged 65–74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements.

Currently, the work test in reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) restricts the ability to make voluntary superannuation contributions for those aged 65–74 to individuals who self-report as working a minimum of 40 hours in any 30-day period in the financial year. The measure will give recent retirees additional flexibilities to get their financial affairs in order in transition to retirement. It will apply from 1 July 2019.

SMSF audit cycle of three years for funds with good compliance history

The annual audit requirement for SMSFs will be extend to a three-yearly cycle for funds with a history of good record-keeping and compliance.

The measure will apply to SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

This measure will start on 1 July 2019. The Government said it will undertake consultation to ensure a smooth implementation.

Super fees to be capped at 3% for small accounts, exit fees banned

Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts from 1 July 2019. These measures form part of the Government’s Protecting Your Super Package.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, said there were around 9.5 million super account with a balance less than $6,000 in 2015–2016. To avoid these small accounts from being eroded, the Government will cap the administration and investment fees at 3% annually, Ms O’Dwyer said.

The Government will also ban exit fees on all superannuation accounts. Exit fees of around $37 million were charged to members in 2015–2016 to simply close an account with a super fund. The proposed ban on exit fees will also benefit members looking to rollover their super accounts to a different fund, or who hold multiple accounts and see exit fees as a barrier to consolidating accounts.

 

With nearly two million low and inactive accounts belonging to women, the Minister said these measures will help to protect the hard-earned super savings of women from undue erosion. These changes will take effect from 1 July 2019.

Superannuation insurance opt-in rule for younger and low-balance members

The Government will change the insurance arrangements for certain cohorts of superannuation members from 1 July 2019. Under the proposed changes, insurance within superannuation will move from a default framework to be offered on an opt-in basis for:

• members with low balances of less than $6,000;
• members under the age of 25 years; and
• members with inactive accounts that have not received a contribution in 13 months.

These changes seek to protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of. The Minister for Revenue and Financial Services, Kelly O’Dwyer, said around 5 million individuals will have the opportunity to save an estimated $3 billion in insurance premiums by choosing to opt-in to this cover, rather than paying for it by default.

The changes also seek to reduce the incidence of duplicated cover so that individuals are not paying for multiple insurance policies, which they may not be able to claim on in any event. Importantly, these changes will not prevent anyone who wants insurance from being able to obtain it. That is, low balance, young, and inactive members will still be able to opt in to insurance cover within super.

In addition, the Government said it will consult publicly on ways in which the current policy settings could be improved to better balance the priorities of retirement savings and insurance cover within super.

The changes will take effect on 1 July 2019. Affected superannuants will have a period of 14 months to decide whether they will opt-in to their existing cover or allow it to switch off.