Archive for year: 2019

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Foreign Resident CGT Regime

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The government had announced that Australia’s foreign resident CGT regime would be extended to deny foreign and temporary tax residents access to the CGT main residence exemption in May 2017.

Following consultation, the government had also amended the change to the main residence exemption to ensure that only Australian residents for tax purposes could access the exemption. Thus, temporary tax residents who are Australian tax residents would be unaffected by the change.

A new Bill, Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019, was introduced into parliament on 23 October 2019.  The changes impact certain foreign residents as follows:

  • for properties held before 9 May 2017, the CGT main residence exemption will only be able to be claimed for disposals that happen up until 30 June 2020, provided they satisfy the other existing requirements for the exemption. For disposals of these properties that happen from 1 July 2020, at the time of the CGT event, they will no longer be entitled to the exemption unless any of the following life events occur within a continuous period of six years of the individual becoming a foreign resident:
    • either the foreign resident, their spouse, or their child who was under 18 years of age, has a terminal medical condition
    • their spouse, or their child who was under 18 years of age at the time of their death, dies
    • the CGT event involves the distribution of assets between the foreign resident and their spouse because of their divorce, separation or similar maintenance agreements.
  • for properties acquired at or after 9 May 2017, the CGT main residence exemption will no longer apply to disposals from that date unless certain life events (listed above) occur within a continuous period of six years of the individual becoming a foreign resident.

Explanatory Memorandum – November 2019

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Getting the benefit of your business tax losses

Made a tax loss? If you’re a sole trader or individual partner, you may be able to apply the loss against other income like salary or investment income, or carry the loss forward to a future year.

When you’re starting a new business venture, it may take some time before the business becomes profitable. And there may be other situations where an established business operates at a loss in a particular year. So, what does this mean tax-wise? When your deductions in an income year are greater than your assessable income, you have a “tax loss”. You generally can’t receive a refund for a tax loss, but you can use it in other ways.

Using losses against other income

If you’re a sole trader or individual partner, you may be able to use your business tax loss to offset other assessable income you earn personally. This includes salary and wages from employment and income from personal investments.

But watch out: if the loss is “non-commercial”, you can’t use it immediately to offset your other income. Instead, you must defer it (explained below). To pass the non-commercial loss rules, you generally must meet two requirements. First, your adjusted taxable income must be less than $250,000. For these purposes, you ignore your business losses, but must add any reportable fringe benefits, salary sacrifice or personal super contributions, and total net investment losses.

Second, you must pass one of the following four tests, which are designed to measure whether your business activities are sufficiently “commercial”:

  • your assessable income from your business activity is at least $20,000;
  • your business has made a tax profit in three out of the past five years (including the current year);
  • you use real estate valued at $500,000 or more in your business on a continuing basis; or
  • the value of “other assets” (excluding vehicles and real estate) you use in your business on a continuing basis is at least $100,000.

If you don’t pass any of these tests (or fail the $250,000 income requirement), you must defer the loss for use in future. You’ll be able to apply the deferred loss against future business income when the business starts making a profit, or alternatively against other income sources when you start satisfying the non-commercial loss rules. Your losses can be deferred indefinitely until this happens.

The Commissioner of Taxation can use his discretion to allow you to apply the loss in the current year, but only in “special circumstances” or where the nature of your business is such that there will be a lead time before the business activities become profitable or sufficiently commercial.

There are also special rules for primary production and professional arts businesses. If your income from other sources (excluding any net capital gain) is less than $40,000, you can use your business tax loss against that income and you don’t need to worry about the non-commercial loss rules.

Offsetting future income

What if you satisfy the non-commercial loss rules but don’t have income against which you can offset your tax loss?

Sole traders and individual partners can carry forward tax losses to a later year to apply against future income. While losses can be carried forward indefinitely, you must use them to offset income at the first opportunity.

Source: https://ato.gov.au/business/income-and-deductions-for-business/losses/.

Downsizer super contributions: getting it right

“Downsizer” contributions let you contribute some of the proceeds from the sale of your home into superannuation – but there are several important eligibility requirements.

Are you thinking about selling the family home in order to raise funds for retirement? Under the “downsizer” contribution scheme, individuals aged 65 years and over who sell their home may contribute sale proceeds of up to $300,000 per member as a “downsizer” superannuation contribution (which means up to $600,000 for a couple).

These contributions don’t count towards your non-concessional contributions cap and can be made even if your total superannuation balance exceeds $1.6 million. You’re also exempt from the “work test” that usually applies to voluntary contributions by members aged 65 and over.

The government reports that as at June 2019 over 4,000 people around Australia had taken advantage of the scheme in its first year, representing total superannuation contributions of over $1 billion.

The downsizer scheme is a good opportunity for many Australians to boost their retirement savings, but you must ensure you’re eligible before making a contribution. If you don’t qualify, your contribution could count as a non-concessional contribution and cause you to breach your contributions cap. Here are some areas where the ATO is seeing mistakes with the eligibility rules:

The 10-year ownership requirement

In order to qualify, you, your spouse or a former spouse must have owned the property for the 10 years prior to the sale.

The ATO explains that it’s not necessary for the same person to hold the property during those 10 years, as long as it was held by some combination of the person, their spouse and/or former spouse throughout the 10 years.

However, there’s an additional requirement: the property must be owned by you or a current spouse (not a former spouse) just before you sell. This means, for example, that where a couple divorces and the property is transferred to one spouse under the property settlement, when that spouse eventually sells the property they can potentially make a downsizer contribution, but their ex-spouse cannot.

Another thing to watch is the 10-year ownership period. The ATO says that the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale. If you signed a contract to purchase “off the plan” and the settlement occurred much later, be aware that the ownership period for downsizer purposes only starts upon settlement.

The main residence exemption requirement

Another key requirement is that the capital gain from the sale must be wholly or partially exempt from capital gains tax (CGT) under the “main residence exemption”. If your home is a “pre-CGT asset” (ie acquired before 20 September 1985 and therefore not subject to CGT), it must be the case that the capital gain would hypothetically qualify for the main residence exemption, in whole or in part, if it had been acquired on or after 20 September 1985.

You won’t qualify for any main residence exemption where you’ve never used the property as your main residence – perhaps because it’s a rental property permanently leased to tenants, or your holiday home.

But thankfully, even a partial main residence exemption will allow you to make downsizer contributions. Common situations giving rise to a partial exemption include using your home to generate income (in addition to living there); where the land adjacent to your home’s dwelling exceeds two hectares; or where you’ve only lived on the property for part of the ownership period.

The main residence requirement is not related to the 10-year ownership requirement, so it’s not necessary that the property was your main residence during that 10-year period. It’s only necessary that you have (or would have) at least a partial main residence exemption.

Source: https://ato.gov.au/Individuals/Super/Growing-your-super/Adding-to-your-super/Downsizing-contributions-into-superannuation/.

Health insurance and your tax: uncovered

If you don’t hold private hospital cover – or are thinking about dropping it – make sure you understand the financial consequences. You could be hit with an extra tax surcharge of up to 1.5% or cost yourself extra premiums in future.

Levies, surcharges and loadings – the terminology around health insurance and tax can be bewildering! But if you don’t hold private hospital cover, you need to understand how this may affect your tax.

Medicare levy surcharge

The Medicare levy surcharge (MLS) is a tax penalty you must pay if you earn above a certain amount and don’t take out a sufficient level of private hospital cover for you and all of your dependants. It’s designed to give you a financial incentive to insure privately. The MLS is applied by the ATO at tax time and included in your assessment.

If you’re a very high-income earner, holding private hospital cover to avoid the MLS makes tax sense.

If your income is lower but still above the relevant singles or families threshold (outlined below), you may want to shop around more carefully for a policy that suits your budget. Bear in mind that it’s hospital cover that’s required to avoid the MLS, not extras (so “extras only” policies are not sufficient). Of course, you also need to factor in the other non-tax benefits of holding private health insurance.

So how much extra tax does the MLS mean? It depends on your income. Your income for these purposes is not just your taxable income – it also includes things like reportable fringe benefits, extra salary sacrifice super contributions you make (or personal super contributions) and total net investment losses.

Income for MLS purposes Rate of MLS
Singles Families
$90,000 or less $180,000 or less nil
$90,001 – $105,000 $180,001 – $210,000 1%
$105,001 – $140,000 $210,001 – $280,000 1.25%
$140,001 or more $280,001 or more 1.5%

If you have two or more dependent children, the families thresholds above increase by $1,500 for the second and subsequent children.

Note that the MLS is separate to the “Medicare levy”, a 2% levy on your taxable income that most Australians must pay – regardless of whether they have private health cover. So, if you have an MLS liability, you’ll pay this in addition to the Medicare levy.

Lifetime health cover loading and the rebate

Lifetime health cover (LHC) loading encourages Australians to maintain private health cover from an early age. If you don’t take out private hospital cover by the year you turn 31, you’ll be penalised with LHC loading if and when you eventually take out cover in future. You’ll pay an extra 2% of your premium for every year that you’re aged over 30, and this is charged annually until you’ve had 10 years of continuous cover.

For example, if you first take out private cover at age 45, you’ll pay annual loading of 30% (ie 2% x 15) for 10 years. (Note, the maximum possible loading rate is 70%.)

LHC loading isn’t a tax, but it can affect your tax return. This is because any LHC loading portion of your premium doesn’t attract the private health insurance rebate. The rebate is available to singles with income for MLS purposes of $140,000 or less and families with income of $280,000 or less. The percentage rebate available ranges from approximately 8% to 25% of your premiums, depending on your exact income level. You can receive your rebate as either reduced premiums from your insurer or a refundable tax offset from the ATO at tax time.

So, if you’re over 30 and don’t have private hospital cover, it’s time to consider how much each year that you remain uninsured may end up costing you in future premiums.

Source: https://ato.gov.au/Individuals/Medicare-levy/Private-health-insurance-rebate/.

Small business CGT concessions: when do I qualify?

The small business CGT concessions are a great tool for business owners to transfer wealth into super. Here, we break down the two essential requirements you must first meet in order to access any of the concessions.

Have you considered the powerful tax and superannuation planning opportunities that the small business CGT concessions can offer your business? These concessions allow you to reduce – or in some cases, completely eliminate – the capital gain from the sale of a business asset, whether it’s held directly by your business entity or in another related structure.

What’s more, the concessions also allow you to make extra super contributions – sometimes up to $1,515,000 – in connection with the sale of business assets. This is an attractive opportunity for many small business owners heading for retirement, especially given the restrictive annual contributions caps that usually apply.

There are various concessions available, each with their own eligibility rules. However, there are two basic conditions you must meet before you can access any of the concessions.

Business size

The first requirement tests whether your business is “small” enough to qualify. There are two alternative tests: a turnover test and a net assets test.

The turnover test is met where you carry on a business and have annual “aggregated turnover” under $2 million.

This includes not just your business turnover, but also the business turnover of any entities that are “connected” or “affiliated” with you, which broadly means related entities that you control or influence. So, if you have another trust or company that carries on a separate business, its turnover will often be taken into account.

In terms of timing, you’ll satisfy the test if your aggregated turnover last income year was under $2 million. Alternatively, it’s also sufficient if your aggregated turnover this year is likely to be under $2 million, provided it was not $2 million or more in the previous two years.

What if you, the asset owner, don’t carry on a business but passively hold the asset and it’s used by another of your entities in its business? You can still qualify, provided that entity is sufficiently related to you and it passes the turnover test itself.

The alternative test is the net assets test. You meet this test if the combined net assets of you and certain assets of your “connected” and “affiliated” (i.e. related) entities is no more than $6 million in total. Being a “net” assets test, you can subtract the liabilities related to the assets. You can also ignore assets like your main residence (provided it’s not used to produce income), personal use assets, superannuation entitlements and shares or units in your related entities.

Asset requirements

The second major requirement is that the capital gain must arise from the sale (or other CGT event) of an “active” asset. This means it must have been used or held in a business carried on by you or one of your “connected” or “affiliated” entities for the following time periods:

  • if you owned the asset for 15 years or less – for at least half the ownership period; or
  • if you owned it for more than 15 years – for at least 7.5 years.

What about property you hold in another structure and lease to your business? Property can be tricky because of a rule that specifically excludes assets where the asset owner’s main use is to derive rent or other passive income. However, where the property is used by your “connected” or “affiliated” entity in its business, it will generally qualify as an active asset.

If you’re planning to sell shares in a company (or interests in a trust), talk to your adviser about the special rules that apply to these types of assets.

Source: https://ato.gov.au/Business/Small-business-entity-concessions/Concessions/CGT-concessions/.

Unpaid super: important amnesty update for employers

Unpaid super is a big problem, and the compliance landscape is changing. If you’re an employer, now is the time to take action and protect yourself against penalties.

The government is getting tough on unpaid compulsory super guarantee (SG) contributions, but fortunately for businesses it has recently announced a revised “grace period” to rectify past non-compliance. All businesses should review their super compliance to consider what action they may need to take.

How big is the unpaid super problem?

Estimates of the problem vary. Official ATO figures place the annual unpaid super “gap” at $3.26 billion (based on 2015–2016 data) before factoring in ATO intervention, or 5.7% of the super that should be paid by employers. However, some argue the problem is bigger, with Industry Super Australia placing the gap closer to $6 billion, affecting 2.85 million workers.

The extent of the problem can be obscured by “black economy” activity where workers are paid cash-in-hand, and also “sham contracting” where workers are misclassified as independent contractors to avoid paying entitlements like super contributions.

Compliance changes for businesses

The launch of Single Touch Payroll (STP) will dramatically improve the ATO’s ability to monitor employers’ compliance with compulsory super laws moving forward. This electronic reporting standard is now mandatory for all Australian businesses, and gives the ATO fast access to income and superannuation information for all employees.

What about past unpaid super you might already owe? You may have previously heard about an “amnesty” for coming forward and voluntarily disclosing historical underpayments of SG contributions without incurring penalties. After many hiccups with implementing this policy in 2018 and 2019, the returned Coalition government has finally taken steps to relaunch the policy. Under proposed legislation currently before parliament, the amnesty will work as follows:

  • The scheme applies to any unpaid super you still owe dating back to 1992 until the quarter starting on 1 January 2018.
  • To qualify, you must not only disclose but also pay the outstanding contributions – including interest.
  • You must make this disclosure to the ATO before it begins a compliance audit of your business (or informs you it intends to audit you).
  • If you qualify, the ATO will waive certain penalties that would usually apply. You will also be able to deduct your catch-up payments, provided they are made before the amnesty ends.

If you don’t come forward and you’re later caught out, the ATO will be required to apply a minimum penalty of 100% on top of the amount of unpaid super you owe (although this can be as high as 200%). Additionally, catch-up payments made outside of (or after) the amnesty are not deductible.

The timing of your disclosure is important. The proposed new amnesty will cover both previous disclosures made since 24 May 2018 (under the old amnesty scheme that the government failed to officially implement) and, importantly, disclosures made up until six months after the proposed legislation passes parliament.

While there’s a risk that the amnesty legislation may never pass parliament – which would mean the protections against ATO penalties for disclosing businesses wouldn’t be guaranteed by law – businesses do face significant penalties if they’re caught by the ATO, with or without an amnesty in place.

Even in the event that the amnesty does not become law, the ATO would still look favourably upon businesses who make voluntary disclosures. This may be a basis for negotiating a partial waiver of penalties.

Source: http://ministers.treasury.gov.au/ministers/jane-hume-2019/media-releases/extending-superannuation-guarantee-amnesty-reunite-members.

Selling shares: how does tax apply?

Did you know that when you sell your shares, the size of your capital gains tax bill is affected by how long you’ve held the shares, and how you offset your capital gains and losses? Knowing the tax rules can help you plan ahead.

Whether you own just a few listed shares or have an extensive portfolio, understanding how capital gains tax (CGT) applies when you sell your shares can help you plan your trades effectively. If you trade shares on a scale that amounts to a business of share trading, talk to your tax adviser about the different tax regime that applies.

Each time you sell a parcel of shares, you trigger a “CGT event” and you must work out whether you’ve made a capital gain on that parcel (where the proceeds you receive exceed the cost base) or capital loss (where the cost base exceeds the proceeds). You also trigger a CGT event if you give the shares away as a gift – perhaps to a family member. For tax purposes, you’re deemed to have disposed of the shares at their full market value.

Here’s how the CGT rules work: all of your capital gains for the income year are tallied and reduced by any capital losses.

This includes your gains and losses from all of your assets that year, not just shares. If you have an overall “net capital gain”, this is included in your assessable income and taxed at your marginal tax rate. If you have a “net capital loss”, you can’t offset this against ordinary income like salary or rental income. Instead, a net capital loss can be carried forward to future years to apply against future capital gains.

The 12-month discount rule

As an individual, you can reduce your capital gain by 50% if you’ve held the shares for at least 12 months. This “discount” is also available to trusts (also 50%) and superannuation funds, including SMSFs (33.3%), but not companies. This is an important consideration when you’re deciding what structure to hold investments in.

There’s a further detail that may make a big difference if you have multiple gains and losses: the 50% discount is only applied after you subtract any capital losses for the year (and any capital losses carried forward from earlier years). Importantly, you can choose which gains to offset losses against. So, if you have any gains that don’t attract the discount because you held the asset for less than 12 months, it’s often best to subtract your losses against these non-discountable gains first in order to maximise the benefit of the 50% reduction to the discountable gains.

If you bought the shares before 21 September 1999, you have an alternative option of applying an indexation factor to increase the cost base (rather than applying the 50% discount). Your tax agent can help you determine which choice gives you a better tax outcome.

Working out the “cost base”

Where you bought the shares at market value, your cost base includes what you paid for the shares and also incidental costs like brokerage fees (for both the purchase and sale). Watch out for special situations like dividends you chose to reinvest as additional shares – the amount of reinvested dividends is included in those shares’ cost base.

If you received the shares as a gift, you’re deemed to have received them at market value on the date of the gift. What if you inherited them from a deceased estate? If the deceased acquired the shares before 20 September 1985, you must adopt the market value on the date of death. But if the deceased acquired the shares after that date, you inherit the deceased’s own cost base for the shares as at the date of death.

Source: https://ato.gov.au/Individuals/Investing/In-detail/Investing-in-shares/Shares—helping-you-to-avoid-common-mistakes/.

ATO to scrutinise every return for tax time 2019

The ATO has announced that it will scrutinise every tax return lodged during Tax Time 2019 as part of its ongoing focus on “closing tax gaps”.

Assistant Commissioner, Karen Foat, said taxpayers who have done the wrong thing may be subject to an audit, even if the over-claim of deductions is minor. Third party data indicating under reported income, and deductions that appear high compared to people with a similar job and income level, tend to raise concerns, Ms Foat said.

While the ATO contacts around two million people each year about their returns, in most cases, Ms Foat said an audit is not the ATO’s first action. If the ATO does decide to conduct an audit, it will contact the taxpayer and/or their tax agent to make further enquiries of evidence to support the claims in question. The ATO may also request information from third parties (ie employers) to verify expenses, and depending on the behaviour of the taxpayer, it may apply penalties or seek to prosecute.

Once the ATO has been in contact with a taxpayer to review claims, “it is important to be honest and get the matter resolved quickly”. The ATO notes that taxpayers are more likely to face penalties if they aren’t honest. If a taxpayer thinks they may have made a mistake, or there is an error in their tax return, the best thing to do is “fess up” as soon as possible, Ms Foat said.

Most of the time the ATO will be looking for documentation or evidence to support your deductions or claims. It may even contact third parties such as your employer to verify certain deductions (i.e. clothing/uniform, possible reimbursed expenses, or whether the expense was related to earning your income). Therefore, good record keeping throughout the year is essential to defend against any audit.

You may be wondering why the ATO is targeting such small fry when multinational companies get away with paying minimal tax. According to the ATO, it understands that most taxpayers over-claim by a little, but small amounts of overclaiming by a large number of people adds up to $8.7bn less each year in revenue collected. So, by its thinking, it really is a case of a every little bit counts.

If you’re subject to an audit, it’s not always doom and gloom. In some cases, you may get a higher deduction if the ATO discovers that you haven’t claimed something you’re entitled to. For example, you may be entitled to a deduction for depreciation on a laptop or other technology used for work but had incorrectly calculated the claim or omitted it altogether.

In the event of an audit and you’re found to have over-claimed, the ATO may apply penalties depending on your behaviour. If you’re found to have over-claimed based on a genuine mistake, for example, if you’ve claimed the costs which are private and domestic in nature that are sometimes used for work or study (ex. sports backpack or headphones), the ATO may choose not to apply penalties.

However, in cases of fraudulently claimed deductions, the ATO will apply penalties in addition to requiring the repayment of any refunds issued. It notes in extreme cases, prosecution through the courts may be pursued. The ATO gives an example where a taxpayer was convicted of making false and misleading statements in their tax return which resulted in the repayment of the refunds totalling $45,000, a fine of $3,000, penalties totalling $20,000 as well as court costs. The claims related to travel, clothing, and work-related expenses which were paid by the employer, as well as charitable donations to an organisation that was not registered as a DGR.

Source: https://ato.gov.au/Media-centre/Media-releases/Stress-less-if-you-have-nothing-to-confess/.

Beware of insurance changes in superannuation

You may have heard a lot recently about super funds providing either opt-in or opt-out insurance and have wondered how will affect you and your retirement savings. Perhaps you’ve heard horror stories about super funds cancelling people’s insurance. Don’t fret, in most cases cancellation of insurance only happens in limited instances, and your fund will most likely notify you before any cancellation occurs. As for opt-in and opt-out insurance, the changes are coming, but not until 1 April 2020, so if you’re affected, you’ll have plenty of time to prepare.

Insurance within superannuation has always been a mixed blessing, good for some who enjoy having cheaper insurance, while others see as an erosion of their super balances. It doesn’t matter which camp you fall into, the recent changes to the way super funds provide insurance may impact you depending on your super balance, age, and when your last contribution was.

Since July this year, super funds have been required to cancel insurance on accounts that have not received any contributions for at least 16 months unless the member elects to continue the cover. In addition, inactive super accounts with balances of under $6,000 will either be automatically consolidated by the ATO with other accounts you may hold or transferred to the ATO. If your super is transferred to the ATO, any insurance will also be cancelled.

This applies to life insurance, total and permanent disability (TPD) insurance and income protection (IP) insurance that you may have with your super fund. Before cancelling your insurance, your super fund will most likely notify you, although if you’re worried about your insurance being cancelled, you can contact your super fund to discuss your options.

Remember, once your insurance is cancelled, you can no longer make a claim and it doesn’t matter how long you had held the policy previously. Whilst this change is designed to stop people from paying unnecessary insurance premiums, it can have unintended consequences for those on longer periods of leave such as parental leave and long-term sick leave. The best thing to do is to engage with your super fund regularly to ensure that an adequate level of insurance is maintained and you’re not paying too much for insurance cover you don’t need.

Another change coming to super funds in the not too distant future of 1 April 2020 is opt-in insurance for members under 25 years old and those with account balances of less than $6,000. From that date, members under 25 who start to hold a new choice or MySuper product will need to explicitly opt-in to insurance. Currently, the onus is on the member to opt-out of insurance if they do not want it. This change is designed to protect younger people on their first jobs from super balance erosion stemming from unnecessary insurance but may disadvantage those who assume that they will automatically have insurance based on previous rules.

For members with active super account balances less than $6,000, super funds will be required to notify them of the change in the opt-in insurance requirements by 1 December 2019. This will give members plenty of opportunity to opt-in to the relevant insurance policies by 1 April 2020 if they choose to do so.

However, if you work in a “dangerous occupation” such as a member of the police force, fire service or ambulance service, among other occupations, the change in the opt-in insurance requirement will not apply to you even if you’re under 25 years or have balances below $6,000.

The insurance changes may be good for some and not so for others, it is difficult to strike the right balance between the two camps. The best thing you can do for yourself is have an awareness of your superannuation, including fees, insurance and other outgoings. After all, it is your hard-earned money and you want it to be working hard for your retirement.

Source: https://aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6331.

 

Client Alert – November 2019

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Getting the benefit of your business tax losses

When you’re starting a new business venture, it may take some time before the business becomes profitable. And there may be other situations where an established business operates at a loss in a particular year. So, what does this mean tax-wise? When your deductions in an income year are greater than your assessable income, you have a “tax loss”. You generally can’t receive a refund for a tax loss, but you can use it in other ways.

If you’re a sole trader or individual partner, you may be able to use your business tax loss to offset other assessable income you earn personally. This includes salary and wages from employment and income from personal investments.

But watch out: if the loss is “non-commercial”, you can’t use it immediately to offset your other income. Instead, you must defer it.

Downsizer super contributions: getting it right

“Downsizer” contributions let you contribute some of the proceeds from the sale of your home into superannuation – but there are several important eligibility requirements.

Are you thinking about selling the family home in order to raise funds for retirement? Under the “downsizer” contribution scheme, individuals aged 65 years and over who sell their home may contribute sale proceeds of up to $300,000 per member as a “downsizer” superannuation contribution (which means up to $600,000 for a couple).

These contributions don’t count towards your non-concessional contributions cap and can be made even if your total superannuation balance exceeds $1.6 million. You’re also exempt from the “work test” that usually applies to voluntary contributions by members aged 65 and over.

Health insurance and your tax: uncovered

If you don’t hold private hospital cover – or are thinking about dropping it – make sure you understand the financial consequences. You could be hit with an extra tax surcharge of up to 1.5% or cost yourself extra premiums in future.

Levies, surcharges and loadings – the terminology around health insurance and tax can be bewildering! But if you don’t hold private hospital cover, you need to understand how this may affect your tax.

The Medicare levy surcharge (MLS) is a tax penalty you must pay if you earn above a certain amount and don’t take out a sufficient level of private hospital cover for you and all of your dependants. It’s designed to give you a financial incentive to insure privately. The MLS is applied by the ATO at tax time and included in your assessment.

Small business CGT concessions: when do I qualify?

CGT concessions allow you to reduce – or in some cases, completely eliminate – the capital gain from the sale of a business asset, whether it’s held directly by your business entity or in another related structure.

What’s more, the concessions also allow you to make extra super contributions – sometimes up to $1,515,000 – in connection with the sale of business assets. This is an attractive opportunity for many small business owners heading for retirement, especially given the restrictive annual contributions caps that usually apply.

There are various concessions available, each with their own eligibility rules. There are two basic conditions you must meet before you can access any of the concessions. The first requirement tests whether your business is “small” enough to qualify. There are two alternative tests: a turnover test and a net assets test. The second major requirement is that the capital gain must arise from the sale (or other CGT event) of an “active” asset.

Unpaid super: important amnesty update for employers

The launch of Single Touch Payroll (STP) will dramatically improve the ATO’s ability to monitor employers’ compliance with compulsory super laws moving forward. This electronic reporting standard is now mandatory for all Australian businesses and gives the ATO fast access to income and superannuation information for all employees.

The government is getting tough on unpaid compulsory super guarantee (SG) contributions, but fortunately for businesses it has recently announced a revised “grace period” to rectify past non-compliance. All businesses should review their super compliance to consider what action they may need to take.

The timing of your disclosure is important. The proposed new amnesty will cover both previous disclosures made since 24 May 2018 (under the old amnesty scheme that the government failed to officially implement) and, importantly, disclosures made up until six months after the proposed legislation passes parliament.

Selling shares: how does tax apply?

Whether you own just a few listed shares or have an extensive portfolio, understanding how capital gains tax (CGT) applies when you sell your shares can help you plan your trades effectively. If you trade shares on a scale that amounts to a business of share trading, talk to your tax adviser about the different tax regime that applies.

Each time you sell a parcel of shares, you trigger a “CGT event” and you must work out whether you’ve made a capital gain on that parcel (where the proceeds you receive exceed the cost base) or capital loss (where the cost base exceeds the proceeds). You also trigger a CGT event if you give the shares away as a gift – perhaps to a family member. For tax purposes, you’re deemed to have disposed of the shares at their full market value.

All of your capital gains for the income year are tallied and reduced by any capital losses. This includes your gains and losses from all of your assets that year, not just shares. If you have an overall “net capital gain”, this is included in your assessable income and taxed at your marginal tax rate. If you have a “net capital loss”, you can’t offset this against ordinary income like salary or rental income. Instead, a net capital loss can be carried forward to future years to apply against future capital gains.

ATO to scrutinise every return for tax time 2019

The ATO has announced that it will scrutinise every tax return lodged during Tax Time 2019 as part of its ongoing focus on “closing tax gaps”.

Assistant Commissioner, Karen Foat, said taxpayers who have done the wrong thing may be subject to an audit, even if the over-claim of deductions is minor. Third party data indicating under reported income, and deductions that appear high compared to people with a similar job and income level, tend to raise concerns, Ms Foat said.

If you’re subject to an audit, it’s not always doom and gloom. In some cases, you may get a higher deduction if the ATO discovers that you haven’t claimed something you’re entitled to. For example, you may be entitled to a deduction for depreciation on a laptop or other technology used for work but had incorrectly calculated the claim or omitted it altogether.

In the event of an audit and you’re found to have over-claimed, the ATO may apply penalties depending on your behaviour. If you’re found to have over-claimed based on a genuine mistake, for example, if you’ve claimed the costs which are private and domestic in nature that are sometimes used for work or study (eg sports backpack or headphones), the ATO may choose not to apply penalties.

Beware of insurance changes in superannuation

Since July this year, super funds have been required to cancel insurance on accounts that have not received any contributions for at least 16 months unless the member elects to continue the cover. In addition, inactive super accounts with balances of under $6,000 will either be automatically consolidated by the ATO with other accounts you may hold or transferred to the ATO. If your super is transferred to the ATO, any insurance will also be cancelled.

This applies to life insurance, total and permanent disability (TPD) insurance and income protection (IP) insurance that you may have with your super fund.

Another change coming to super funds in the not too distant future of 1 April 2020 is opt-in insurance for members under 25 years old and those with account balances of less than $6,000. From that date, members under 25 who start to hold a new choice or MySuper product will need to explicitly opt-in to insurance. Currently, the onus is on the member to opt out of insurance if they do not want it.

 

Explanatory Memorandum – October 2019

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Small business income tax gap: ATO update

New figures released by the ATO estimate that almost 90% of income tax from small businesses is paid voluntarily or with little intervention from the ATO.

“This shows that the vast majority of small businesses in the tax system are trying to do the right thing,” Deputy Commissioner Deborah Jenkins said. “Considering how much small businesses have on their plate, we’re grateful for the level of work they put in to get their tax right.”

The ATO has estimated the 2015–2016 income tax gap for the small business sector to be approximately 12.5%, or $11.1 billion, with over $7 billion (or over 64% of the total value of the gap) being attributed to black economy behaviour. To measure this income tax gap, the ATO used findings from its random enquiry program to estimate the difference between what the ATO expected to collect, and what was actually collected for the given year. The ATO’s research program measures tax performance across all market segments, which helps to measure the effectiveness of the tax system.

Tax gap estimates are an important feature of the performance and accountability story of any modern tax authority. Small business tax gaps that have been released overseas range from 9% to 30%.

The ATO says that around 90% of small businesses use a registered tax professional to help them comply with their income tax obligations. “We recognise the important role that tax professionals have in helping small businesses get their tax right and we would not have been able to achieve this result without the support of our tax professionals”, Ms Jenkins said.

The ATO’s research shows a small percentage of businesses are deliberately avoiding their tax obligations, but by dollar value this adds up to a significant portion of the gap. This behaviour could be motivated by a desire to avoid tax, limit impacts on welfare payments, or to avoid law enforcement.

The black economy

Since 1 July 2018, the ATO has coordinated an extensive program of work to tackle the black economy. This program of work includes a multi-faceted approach, addressing issues such as:

  • deliberate under-reporting income and over-claiming expenses;
  • ensuring businesses meet their employer obligations – so they don’t pay employees or contractors cash in hand, underpay wages, fail to withhold tax or fail to contribute to superannuation;
  • addressing illegal phoenixing (deliberate liquidation and reforming of businesses to avoid obligations);
  • preventing tax fraud;
  • dealing with illicit tobacco, duty and excise evasion; and
  • targeting intermediaries and agents who enable black economy behaviour.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-reveals-almost-90–of-income-tax-paid-by-small-business-is-paid-voluntarily/; www.ato.gov.au/taxgap.

ATO sets its sights on undisclosed foreign income

Do your clients have any amounts of offshore income they haven’t declared to the ATO – perhaps interest from a foreign bank account? Even if it seems like a small amount, it must be declared. International data-sharing arrangements are making taxpayers’ overseas financial affairs increasingly transparent, so don’t let your clients get caught out.

The ATO is reminding taxpayers about their obligation to report foreign income, and it’s keen to emphasise that its techniques for detecting offshore amounts are becoming increasingly effective. Cross-border cooperation between different tax jurisdictions means Australians’ financial information is being shared more than ever before – increasing the odds of your clients’ affairs being uncovered by the ATO.

Failing to report foreign income can attract penalties and ATO scrutiny of a taxpayer’s broader tax affairs.

How is foreign income taxed?

If your client is an Australian resident for tax purposes, they’re taxed on their worldwide income. This means they must declare all foreign income sources in their return. You should ask them to consider whether they’ve earned any amounts from:

  • investments held overseas, such as dividends, rental income from properties and interest from bank deposits;
  • overseas pensions;
  • overseas employment, including salary and directors’ fees; and
  • the sale of offshore assets (ie capital gains).

Remember, if someone has already paid tax on this kind of income overseas, they still need to declare it to the ATO. They may be able to claim an offset (subject to a certain limit if the claim exceeds $1,000) for the tax already paid in order to prevent double taxation.

All foreign income figures must be converted to Australian dollars according to particular exchange rate rules, and amounts that were earned in countries that don’t have an income year ending 30 June may need to be apportioned.

Is your client a “resident”?

Your clients will only be subject to Australian tax on their foreign income if they are an Australian resident for tax purposes. If they are a non-resident, they will generally only pay tax on their Australian-sourced income.

Being an Australian resident for tax purposes is different to immigration concepts of residency, and nationality is generally not relevant. So even if your client isn’t an Australian citizen or permanent resident, they could be a resident for tax purposes.

The main test for tax residency is whether someone “resides” in Australia. There’s no single factor that determines whether this test is met. Instead, it requires a weighing up of all relevant circumstances, including things like the the person’s intentions, their family and living arrangements, business and employment ties, and so on.

However, even if someone doesn’t currently “reside” in Australia for tax purposes, they may still be a resident for tax purposes under several alternative tests (including where both their “domicile” and permanent place of abode are maintained in Australia).

Making a voluntary disclosure

If your client thinks they may have omitted some foreign income from a previous tax return, you can help them to make a voluntary disclosure to the ATO and arrange for them to pay any tax owed. Voluntary disclosures will often result in a reduction of the ATO penalties and interest that would otherwise apply – and the outcome is generally much more favourable if the disclosure is made before the ATO commences an audit of thee taxpayer’s affairs. Given the ATO’s increased powers to detect offshore amounts, taxpayers with unreported income should think seriously about the benefits of proactive disclosure.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-watching-for-foreign-income-this-Tax-Time/; www.ato.gov.au/individuals/income-and-deductions/income-you-must-declare/foreign-income/.

ATO announces “Better as Usual” program to improve your experience

ATO Commissioner Chris Jordan has announced the launch of “Better as Usual”, a new ATO program aimed at improving the client experience with the tax system. In his opening remarks at the Council of Small Business Organisations Australia (COSBOA) National Small Business Summit in Melbourne on 29 August 2019, Mr Jordan said that “Better as Usual” includes the following four parts, to be led by Jeremy Hirschhorn, Second Commissioner of Client Engagement:

  • Whole-of-system experience: the series of interactions (or the “pipeline”) a client has with the ATO that forms their whole-of-system experience. This aspect seeks to address the frustration felt by some taxpayers who may see many faces of the ATO, and sometimes feel like they have to start all over again when dealing with a new ATO area or different people. Mr Jordan said the ATO is committed to ensuring that every time a client deals with it, the ATO understands the end-to-end experience the client has. This covers lodgment to disputes and debt management, and perhaps most importantly, extends to the particular client’s lodgments and interactions in future years.
  • Quality of feedback loops: in a number of objections or complaints there is a story – something that has gone a little bit off track or been misunderstood; a mistake rather than purposeful recklessness. By better understanding and documenting past experiences, the ATO believes it can make better decisions in the future. “We have to better distinguish between things getting off track and reckless indifference or blatant evasion”, Mr Jordan said.
  • Complex cases team: the ATO has created a dedicated team to work on the most complex cases. This team will be able to devote the time and the resources necessary to deal with “prickly and complicated” affairs that fall outside the ATO’s normal processes. Businesses that are “just struggling to survive” will be treated with more empathy than those purposefully not doing the right thing, Mr Jordan said.
  • Procedural and cultural safeguards: these will be introduced to reduce (and ultimately eliminate) any cases where ATO mistakes could have a severe impact on the client. “We know this is something that is particularly needed in the small business market, and we will focus our initial efforts in this area”, Mr Jordan said.

Source: www.ato.gov.au/Media-centre/Speeches/Commissioner/Commissioner-s-speech-to-COSBOA-Summit-2019/.

Salary sacrificing loopholes: are you receiving your full benefits?

Salary sacrifice strategies are a great way to boost retirement savings. But unwelcome loopholes in the law mean some workers may be getting less than they bargained for. Fortunately, the government is taking action to fix this, but in the meantime salary-sacrificing workers should be across this issue to keep an eye on their arrangement and ensure they’re not being short-changed.

Most workers understand that their employer must make compulsory super guarantee (SG) contributions of 9.5% of their salary and wages. However, things get a little tricky when an employee chooses to salary sacrifice – and it could have unintended consequences.

Under current laws, employees who sacrifice some of their salary in return for additional super contributions may end up receiving less than they expected because of the following two legal loopholes:

  • Employers may choose to count the salary sacrifice contributions they make towards satisfying their obligation to make minimum SG contributions of 9.5%.
  • Additionally, employers may calculate their 9.5% contributions liability based on the employee’s reduced salary after deducting sacrificed amounts, rather than the pre-sacrifice salary.

The following example demonstrates how this can adversely affect a worker’s savings strategy:

Example

Kayla earns $100,000 per annum from her employer. This means she’s entitled to compulsory SG contributions of 9.5% of her $100,000 salary (ie $9,500). She therefore earns total remuneration of $109,500.

Kayla now arranges to salary sacrifice $10,000 of her salary as extra contributions, reducing her salary to $90,000. But under current laws, her employer is now only required to make compulsory SG contributions of 9.5% of $90,000 (not $100,000); that is, $8,550.

Another problem is that Kayla’s $10,000 salary sacrifice contributions can count towards her employer’s obligation to pay SG contributions. She could receive only $10,000 in total contributions plus $90,000 salary (meaning total remuneration of $100,000) and her employer wouldn’t be in breach of SG laws.

When Kayla entered this arrangement she was expecting to receive contributions of $9,500 plus $10,000, a total of $19,500, while maintaining total remuneration of $109,500 (ie $90,000 salary plus $19,500 contributions). Clearly, the current laws produce a bad outcome for Kayla.

These loopholes possibly exist because salary sacrificing was not a widespread strategy when the SG laws were written.

In practice, many employers aren’t taking advantage of the loopholes and are instead honouring the employee’s intended contributions strategy. However, evidence suggests some employers are applying the rules differently. They may even do this inadvertently through their payroll processes.

A fix is on the way

Proposed new laws before Parliament will close the loopholes by requiring employers to pay compulsory SG contributions at 9.5% of the pre-sacrifice amount of salary (that is, the salary actually paid to the employee plus any sacrificed salary). Further, any salary sacrifice contributions will not count towards satisfying the employer’s obligation to make compulsory SG contributions.

What should workers and employers do?

If passed, the proposed new laws will only apply to quarters beginning on or after 1 July 2020. All salary-sacrificing workers should check their arrangements now to ensure they’re receiving the full intended benefit of the arrangement. They may need to specifically check the amounts going into their fund.

Employers should also anticipate the passage of the proposed laws and ensure their payroll will be compliant from 1 July 2020.

Source: www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6369; www.ato.gov.au/General/New-legislation/In-detail/Super/Superannuation-Guarantee—Salary-sacrifice-integrity/.

Claiming work trips for business owners

Your clients who are business owners can deduct the cost of work trips they need to take for business. But what happens when they mix business with some hard-earned time for relaxation? Be ready to answer their questions about how major expenses like airfares and accommodation are treated when taking mixed-purpose business trips.

When a trip is clearly for business purposes only, the rules for deducting expenses are fairly straightforward. The taxpayer can claim airfares, taxis and car hire (and fuel). They can also deduct accommodation costs for overnight travel if the business requires them to be away from their permanent home overnight. Meals are also deductible when it is a requirement to be away overnight.

The following FAQs summarise the general tax treatment approach for more mixed-purpose situations; for example, when someone has planned a holiday to coincide with their work trip, or they also see the sights or catch up with family or friends while travelling for business.

Can I claim my full return airfares?

What is the tax deductibility of airfares when you combine business and private travel? Let’s assume you travel to London for a two-week trade show and stay a few extra days for sightseeing. The ATO says that if the primary purpose of the trip is for business, you can claim the whole cost of the return airfares as a business deduction, as well as related costs like travel to and from the airport. In this London example, the additional sightseeing is just incidental.

If you’re undertaking a significantly longer holiday – so that the primary purpose of the trip is not just the business activity – you may need to apportion your airfares. And if the primary purpose is clearly private with some merely incidental work activities (eg you attend a half-day work event while you happen to be on an extended personal holiday), you generally couldn’t deduct the airfares.

How is accommodation treated?

Your deductions for accommodation are limited to those nights that you’re required to be away for the business purpose. This will depend on the facts of your trip. In the London example, you couldn’t deduct your accommodation costs for the few extra nights you stayed for sightseeing. (Similarly, any meals and transport around London would not be deductible for the days you spent sightseeing.) This is the case even though you could deduct your full airfares.

On the other hand, if you have to be away for an extended period and some days don’t involve work activities, you may still be able to claim your full accommodation costs. The ATO gives the example of being interstate for two full weeks to complete a project on-site for a client. Your accommodation costs on the middle weekend (when you’re not working at the client’s site) would still be deductible. Of course, private weekend activities like sightseeing, entertainment and having dinner with friends would not be deductible.

What is definitely not deductible?

The following expenses (among others) are not allowed as deductions:

  • travel before you start carrying on your business;
  • visas, passports and travel insurance; and
  • the costs of bringing family members (eg a spouse) along with you.
Record-keeping requirements

Sole traders and partners must keep a travel diary if they travel for six or more consecutive nights. This must detail each business activity undertaken, the location, the date and time it began and how long it lasted.

If your business is run through a company or trust structure, the ATO says it’s not compulsory to keep a diary, but it’s strongly recommended. And if you’re a company, be careful about your business paying for any private part of your travel as this could have consequences under the Division 7A “deemed dividend” rules about benefits for shareholders and their associates.

Thinking about setting up an SMSF?

For many people, SMSFs are a great option for building retirement savings, but they may not be suitable for everyone. The following sets out some of the important differences between SMSFs and other types of funds that your clients may need information about to help them make informed decisions about their super.

Management

While public offer funds are managed by professional licensed trustees, SMSFs are considerably different because management responsibility lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company).

This is an advantage for those who want full control over how their superannuation is invested and managed. However, it also means the members are responsible for complying with all superannuation laws and regulations – and administrative penalties can apply for non-compliance. Being an SMSF trustee therefore means you need to be prepared to seek the right professional advice when required.

If you intend to move overseas for some time (eg for a job posting), an SMSF could be problematic because it may be hit with significant tax penalties if the “central management and control” moves outside Australia.

On the other hand, members of public offer funds can move overseas without risking these penalties because their fund continues to be managed by a professional Australian trustee.

Costs

Costs are a key factor for anyone considering their super options. Fees charged by public offer funds vary, but are generally charged as a percentage of the member’s account balance. Therefore, the higher your balance, the more fees you’ll pay. This is an important point to remember when weighing up a public offer fund against an SMSF.

SMSF costs tend to be more fixed. As well as establishment costs and an annual supervisory levy payable to the ATO, SMSFs must hire an independent auditor annually. Additionally, most SMSF trustees rely on some form of professional assistance, which may include accounting/taxation services, financial advice, administration services, actuarial certificates (in relation to pensions) and asset valuations.

These costs may be a more critical factor for those with modestly sized SMSFs. This year, a Productivity Commission inquiry found that larger SMSFs have consistently delivered higher net returns compared with smaller SMSFs, and that SMSFs with under $500,000 in assets have relatively high expense ratios (on average). The Commission’s report has attracted some criticism that it has overstated the true costs of running an SMSF, but in any case, anyone considering an SMSF needs to think carefully about the running costs involved and make an informed decision about whether an SMSF is right for them. For members with modest balances, an SMSF will often be more expensive than a public offer fund, but this needs to be weighed up against the other benefits of an SMSF.

Investment flexibility

A major benefit of an SMSF is that the member-trustees have full control over their investment choices. This means they can invest in specific assets, including direct property, that would not be possible in a public offer fund. For example, a business owner wishing to transfer their business premises into superannuation would need an SMSF to achieve this. SMSFs can also take advantage of gearing strategies by borrowing to buy property or even shares through a special “limited recourse” borrowing arrangement.

However, with control comes responsibility. SMSF trustees must create and regularly update an “investment strategy” that specifically addresses things like risk, liquidity and diversification. And of course, the SMSF’s investments must comply with all superannuation laws. In particular, transactions involving related parties (eg leases and acquisitions) can give rise to numerous compliance traps, so SMSF trustees must be prepared to seek advice when required.

Insurance

It’s possible to hold various types of insurance through your superannuation fund, including death, total and permanent disablement (TPD) and temporary incapacity.

For many Australians, using superannuation benefits to pay insurance premiums makes insurance more accessible and convenient.

While you can purchase insurance within an SMSF, large funds can generally offer cheaper premiums because of the group discounts these funds can access. Another possible advantage of large funds is that members are automatically accepted for a certain level of coverage without needing a medical exam or detailed personal information, which is more likely to be required for an SMSF-held policy. For these reasons, some SMSF members choose to keep a separate account in a public offer fund just to access the insurance.

If you’re an SMSF trustee, you’re in charge, so there are a few things to keep in mind in relation to insurance:

  • As part of your SMSF’s investment strategy, you’re required to consider (and regularly review) whether the fund should hold insurance cover for its members.
  • Not every type of insurance can be held in superannuation. For example, trauma policies aren’t allowed, and there are restrictions on some types of TPD policies. Seek professional advice before choosing your policies.
  • You should also seek advice about the tax consequences of holding insurance in the fund, including deductibility of premiums and how life insurance proceeds might affect the taxation of your death benefits.

If you’re a member of a public offer fund, it’s important to check what insurance you’re signed up to and assess whether you’re getting value for money. Many members are signed up for insurance on a default (opt-out) basis, and may be unaware they’re paying for duplicate policies across multiple accounts or unnecessary coverage as part of a bundled arrangement.

Dispute resolution

What happens when you’re not happy with the trustee of your fund? Perhaps your claim for benefits has been mishandled, or the trustee has made an error? Members of public offer funds can complain to the Australian Financial Complaints Authority (AFCA), a free dispute resolution service that has the power to make binding decisions in order to resolve your matter.

However, dispute resolution is an entirely different matter for SMSFs. SMSF trustees may complain to AFCA about financial services problems they encounter with third parties (eg an insurance company or bank), but AFCA cannot hear a complaint about the decision or conduct of an SMSF trustee. This means that SMSF members cannot complain to AFCA about decisions that the other trustees have made (and similarly, potential beneficiaries of a deceased member’s death benefits cannot complain to AFCA about how the trustees have paid out the benefits).

In these cases, the parties would need to go through the legal system to resolve the matter. This could mean alternative dispute resolution, or even court, but it must be privately funded. The SMSF’s governing rules may outline dispute resolution procedures that bind the trustees, so it’s worth giving this some thought in advance to ensure the trustees are as prepared as possible for any disagreement.

SMSF status will change if annual returns are lodged late

The ATO has warned that from 1 October 2019, if an SMSF is more than two weeks overdue on any annual return lodgment due date, and hasn’t requested a lodgment deferral, the ATO will change the SMSF’s status on Super Fund Lookup (SFLU) to “Regulation details removed”.

The ATO says it is taking this approach because non-lodgment of SMSF returns, combined with disengagement, indicates that retirement savings may be at risk. This status will remain until any overdue lodgments have been brought up to date.

The ATO also noted that having a status of “Regulation details removed” means APRA funds won’t roll over any member benefits to the SMSF. In addition, employers won’t make any super guarantee (SG) contribution payments to that SMSF.

Source: www.pc.gov.au/inquiries/completed/superannuation/assessment/report; www.ato.gov.au/Super/Self-managed-super-funds/Thinking-about-self-managed-super/; www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf.

 

Client Alert – October 2019

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Small business income tax gap: ATO update

New figures released by the ATO estimate that almost 90% of income tax from small businesses is paid voluntarily or with little intervention from the ATO.

“This shows that the vast majority of small businesses in the tax system are trying to do the right thing”, Deputy Commissioner Deborah Jenkins said. “Considering how much small businesses have on their plate, we’re grateful for the level of work they put in to get their tax right.”

The ATO estimates the 2015–2016 income tax gap for the small business sector to be approximately 12.5%, or $11.1 billion, with over $7 billion attributable to “black economy” behaviour.

ATO sets its sights on undisclosed foreign income

Do you have any amounts of offshore income you haven’t declared to the ATO – perhaps interest from a foreign bank account? Even if it seems like a small amount, you must declare it. International data-sharing arrangements are making your overseas financial affairs increasingly transparent, so don’t get caught out.

The ATO is keen to emphasise that its techniques for detecting offshore amounts are becoming increasingly effective. Cross-border cooperation between different tax jurisdictions means your financial information is being shared more than ever before.

If you’re an Australian resident for tax purposes, you’re taxed on your worldwide income. This means you must declare all foreign income sources in your return.

If you’re a non-resident, you generally only pay tax on your Australian-sourced income.

What if you’ve already paid tax on the income overseas? You still need to declare it to the ATO. However, you may be able to claim an offset for the tax already paid in order to prevent double taxation.

Got any amounts you’ve overlooked? Now is a great time to get help from your tax adviser with making a voluntary disclosure. You’ll often receive a reduction in ATO penalties and interest that would otherwise apply – and the outcome is generally much more favourable if you make a disclosure before the ATO commences an audit of your tax affairs.

ATO announces “Better as Usual” program to improve your experience

ATO Commissioner Chris Jordan has announced the launch of “Better as Usual”, a new ATO program aimed at improving people’s experience with the tax system. The program will include four parts:

  • Whole-of-system experience: looking at the end-to-end experience to address people’s frustration at sometimes feeling like they have to start all over again when dealing with a new ATO area or staff member.
  • Quality of feedback loops: better understanding and documenting people’s past experiences and actions (eg mistakes versus evasion) to make better ATO decisions in the future.
  • Complex cases team: a dedicated team to work on the most complex cases, devoting the time and resources necessary to deal with complicated affairs that fall outside the ATO’s normal processes.
  • Procedural and cultural safeguards: established to reduce (and ultimately eliminate) any cases where ATO mistakes could have a severe impact on taxpayers.

Salary sacrificing loopholes: are you receiving your full benefits?

Most workers understand that their employer must make compulsory super guarantee (SG) contributions of 9.5% of their salary and wages. However, things can get a little tricky when you choose to salary sacrifice.

Under current laws, employees who sacrifice some of their salary in return for additional super contributions may end up receiving less than they expected because of two legal loopholes. Employers may:

  • count the salary sacrifice contributions towards satisfying their obligation to make minimum SG contributions of 9.5%; or
  • calculate their 9.5% contributions liability based on the employee’s salary after deducting sacrificed amounts, rather than the pre-sacrifice salary.

Proposed new laws will close the loopholes by requiring employers to pay compulsory SG contributions at 9.5% of the pre-sacrifice amount of salary (that is, the salary actually paid to the employee plus any sacrificed salary). Further, any salary sacrifice contributions will not count towards the compulsory SG contributions. If passed, the new laws will apply to quarters beginning on or after 1 July 2020.

Claiming work trips for business owners

As a business owner, do you sometimes take work trips? When a trip is clearly for business purposes only, the rules for deducting your expenses are fairly straightforward. But what happens when you’ve planned a holiday or to catch up with family or friends while you’re travelling?

Airfares

Assume you travel to London for a two-week trade show and stay a few extra days for sightseeing. If business is the primary purpose of the trip, you can claim the whole cost of the return airfares as a business deduction, because the sightseeing is just incidental. If you have a significantly longer holiday, so the primary purpose of the trip is not just business, you may need to apportion your airfares. And if the primary purpose is clearly private with some incidental work activities, you generally can’t deduct airfares.

Accommodation

Accommodation deductions are limited to the nights that you’re required for the business purpose. In our London example, you couldn’t deduct your accommodation costs for the nights you stayed for sightseeing. This applies even though you could deduct the full airfares.

Record-keeping

Sole traders and partners must keep a diary if they travel for six or more consecutive nights, detailing each business activity, the location, the date and time it began and how long it lasted.

If your business runs through a company or trust structure, it’s not compulsory to keep a diary, but it’s strongly recommended.

Thinking about setting up an SMSF?

SMSFs can be a great option for building retirement savings, but they may not be suitable for everyone. Before you jump in, make sure you understand the differences between SMSFs and other types of funds to help you make an informed decision. Here are a few issues to consider.

Management

While public offer funds are managed by professional licensed trustees, for SMSFs the management responsibility lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company). This is an advantage if you want full control over how your super is invested and managed, but it means the members are responsible for complying with all superannuation laws and regulations – and administrative penalties can apply for non-compliance.

Costs

Fees charged by public offer funds vary, but they are generally charged as a percentage of the member’s account balance. Therefore, the higher your balance, the more fees you’ll pay.

SMSF costs tend to be more fixed. As well as paying establishment costs and an annual supervisory levy, SMSFs must hire an independent auditor annually. Most SMSFs also need professional assistance, such as accounting services, financial advice, administration services and asset valuations. An SMSF can sometimes be more expensive than a public offer fund.

Investment flexibility

A major benefit of SMSFs is that the member-trustees have full control over investment choices. This means you can invest in specific assets, including direct property, that wouldn’t be possible in a public offer fund. SMSFs can also take advantage of gearing strategies by borrowing to buy property or even shares through a special “limited recourse” borrowing arrangement. However, with control comes responsibility. SMSF trustees must create and regularly update an “investment strategy” that specifically addresses things like risk, liquidity and diversification.

 

SG amnesty resurfaces in Parliament

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The proposed SG amnesty is now back on the table after more than a year of uncertainty around the proposed policy.

On Wednesday, the government introduced Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 into Parliament, picking off from the previously lapsed bill that had sought to introduce the SG amnesty.

The SG amnesty provides for a one-off amnesty to encourage employers to self-correct historical SG non-compliance dating from 1 July 1992 to the quarter starting on 1 January 2018.

It will allow employers to claim tax deductions for payments of SG charge or contributions made during the amnesty period to offset SG charge, as well as remove the administrative component and the Part 7 penalty that may otherwise apply in relation to historical SG non-compliance.

Should the bill pass without amendments, the amnesty period will start from 24 May 2018 and end six months from the date it receives royal assent.

Higher penalties after amnesty ends

The new bill will also impose minimum penalties on employers who fail to come forward during the amnesty period by limiting the commissioner’s ability to remit penalties below 100 per cent of the amount of SG charge payable.

“It seems like that particular change is limited in that it only seems to apply to quarters that would otherwise qualify for the amnesty, so that wouldn’t necessarily apply to every SG problem moving forward; it seems like it is specifically aimed at quarters that could have been fixed under the amnesty,” Mr Carruthers added.

The SG amnesty was previously announced by then Minister for Revenue and Financial Services Kelly O’Dwyer on 24 May 2018, but it failed to go through before the federal election was called.

The hold-up of the previous version of the SG amnesty had previously caused confusion in the industry, with the ATO revealing that it had seen a “10 to 15 per cent” increase in employers coming clean, and had waived the Part 7 penalty for them, despite the bill failing to be passed.

Source : www.smsfadviser.com/news

Non-compliant payments to workers: is your tax deduction at risk?

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Recent changes to tax law give employers greater reason than ever to be extremely careful in complying with their tax withholding obligations.

The changes were made by the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 – and, as the name suggests, the new rules are primarily designed to target businesses operating off-grid in the black economy.

From 1 July 2019, the ATO will deny a tax deduction for certain payments if the associated tax withholding obligations have not been satisfied.  This could potentially apply to payments:

  • to an employee, director or religious practitioner for work and services under the PAYG withholding regime;
  • to a contractor for a supply of services, if the payee has not quoted its ABN; and
  • to employees or contractors for non-cash benefits, if a withholding obligation would have applied if the benefit were instead paid in cash.

These payments are no longer deductible if the payer had an obligation to withhold an amount from a payment and has failed to:

  • withhold any amount; or
  • report to the ATO the amount required to be withheld.

Since the rules mainly target the black market, mere errors by normally-compliant employers will not generally be a problem.  For example, if an amount is withheld and reported, but the employer calculated the withholding incorrectly, then the payment will not be rendered non-deductible by reason of that error.  Deductibility will also be preserved if, before the commencement of an ATO investigation, the employer voluntarily discloses to the ATO its failure to withhold or report.

Exceptions to non-deductibility also apply if a payment is made to a person (or agent of that person) who is working as a contractor and has quoted an ABN.  This is designed to protect an employer that honestly believes the worker is a contractor.  However, there is some ambiguity in the provisions about how the ATO will deal with a situation in which an employer has paid a company (which has quoted an ABN) that purports to employ the worker, when as a matter of fact and law the worker is really employed by the employer. As always, employers should be extremely cautious about how they treat a ‘contractor’, and really consider whether the worker in question should more properly be treated as an employee.  As well as the potential issue of non-deductibility, in a sham contracting arrangement the employer (of course) also potentially faces liability for employment entitlements, superannuation and payroll tax.

Source : Article by Jeffery Chang and Nicholas Dodds (Thomson Geer Lawyers) – http://www.tglaw.com.au/employment-blog/2019/09/13/non-compliant-payments-workers-tax-deduction-risk/

Super “Opt Out” Choice For High Earners

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Are you a medical professional or company director hired by multiple organisations who make compulsory super guarantee (SG) contributions on your behalf? Or perhaps you’re simply a high-income professional with an extra employment arrangement on the side, like a university teaching gig or consulting arrangement? If you have more than one “employer” for super purposes, you may benefit from changes to how the SG is administered for high income-earners.

What’s the issue?

A person’s concessional contributions (CCs) are capped at $25,000 per annum and include:

  • compulsory SG contributions
  • any additional salary-sacrifice amounts
  • any personal contributions made by the member for which they claim a deduction.

Unfortunately, a problem arises when an individual has multiple employers and inadvertently breaches their $25,000 CC cap because they receive compulsory contributions from each of these employers.

While an employer is only required to make compulsory contributions of 9.5% on the worker’s earnings up to $55,270 per quarter (or $221,080 per financial year), this applies on a per employer basis. An employer must make contributions up to these thresholds regardless of how many other compulsory contributions the employee receives from other employers.

Example: Susan, a doctor, earns $215,000 p.a. from employer A, and $85,000 p.a. from employer B. Both employers must make contributions of 9.5% on all of Susan’s earnings because both salaries are below the $221,080 p.a. ceiling. This means Susan has total CCs of $28,500 ($20,425 + $8,075), and has breached her $25,000 CC cap.

If you contribute above the $25,000 cap, you will personally incur penalty tax on the excess amount at your marginal tax rate less a 15% offset, plus interest charges.

New opportunity to “opt out”

Fortunately, under proposed new laws before Parliament, affected employees will be able to “opt out” of receiving compulsory contributions from a particular employer by obtaining a certificate from the Commissioner of Taxation. The certificate will name a particular employer and a particular quarter of the financial year, and will exempt that employer from having to make SG contributions.

This is welcome news for high income-earners who may be at risk of breaching their CC cap. Here are some key requirements to know:

  • You’ll need to apply for a certificate at least 60 days before the beginning of the relevant quarter.
  • The Commissioner will only be able to issue you a certificate if you’re likely to have excess CCs if the certificate is not issued. To make this assessment, the Commissioner can rely on evidence such as past tax return data, employer payroll data and information provided in your application.
  • You’ll be able to apply for certificates for multiple employers. However, you must always have at least one employer who’s required to make SG contributions for you.
  • Once issued, a certificate cannot be varied or revoked.

If you choose to take advantage of this opt-out, you’ll be able to negotiate with the exempted employer to receive additional remuneration in lieu of super contributions (and you won’t need to show evidence of this to the Commissioner). The employer will still be allowed to make SG contributions (ex. if negotiations for additional salary fail), but having the certificate in place means the employer will not be penalised if they don’t make contributions.

Start planning now

The legislation to enable the opt-out is likely to pass this year, creating some opportunities for 2020 planning. If you’re receiving SG contributions from multiple sources, contact us to begin your remuneration planning and to explore whether the opt-out may benefit you.

 

Explanatory Memorandum – September 2019

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Warning to watch out for myGov and ATO tax scams

The government’s Stay Smart Online website (www.staysmartonline.gov.au) warns taxpayers that there is a surge in scammers impersonating trusted bodies like myGov and the ATO to trick people into giving them money or personal details. These scams can take the form of emails, text messages and fake myGov login pages.

In June 2019, the ATO received 6,444 reports of tax-time scams that impersonated the ATO. Emails with links to fake myGov login pages were the most widespread email scam in that month.

The trend in scammers demanding ‘debt’ payments via gift cards is also on the rise, with Australians aged 18–44 years making the majority of iTunes payments to scammers ($94,420 in June alone), closely followed by Google Play cards ($27,993).

If someone is unsure about the validity of a tax-related message or phone call, they can contact the ATO Scam Hotline on 1800 008 540.

Stay Smart Online reminds that:

  • myGov will never send anyone a text, email or attachment with links or web addresses that ask a person for their login or personal details. Do not click on links in emails or text messages claiming to be from myGov.
  • People should always log into their official myGov account to check their tax, lodge their return and check if they owe a debt or are due a refund. Do this by manually typing https://my.gov.au/ into the internet browser.
  • Unfortunately, ATO and other scams continue well beyond the 30 October deadline for tax returns, as scammers know many people are waiting for a refund or debt owed. It’s important to watch out for scams throughout the year.

Source: www.staysmartonline.gov.au/alert-service/watch-out-mygov-tax-scams

Tax time updates

ATO has refunded $10 billion so far

The ATO says that $10 billion has been refunded to Australian taxpayers so far this tax time, an increase of over $2 billion from the same time last year, with most returns being processed in under two weeks.

ATO Assistant Commissioner Karen Foat has highlighted that the ATO seeks to process returns as soon as possible, announcing that over four million refunds have already been sent out, compared to over three million refunds issued this time last year.

“Of course, the ATO works around the clock to quickly get refunds in peoples’ hands”, she said. “However, there are some things that taxpayers should take care with to ensure their return is not unnecessarily delayed.

“Firstly, it’s important to check your bank account details are correct, and if you’ve changed accounts recently, take a moment to update your details.

“When refunds get sent to incorrect bank accounts, redirecting them to your new account will take more time. This tax time, we’ve seen some people who are really keen to get their refund, having missed this important step.”

Another big obstacle getting between some people and their return is forgetting to declare some income. Common things people forget to include are rental income, bank interest and government allowances or payments. This is particularly a risk if your tax return was lodged before the ATO’s pre-fill was available.

Source: www.ato.gov.au/Media-centre/Media-releases/$10-billion-back-in-your-hands/.

ATO watching for undisclosed foreign income

The ATO has reminded taxpayers who receive any foreign income from investments, family members or working overseas to make sure they report it this tax time.

New international data-sharing agreements allow the ATO to track money across borders and identify individuals who are not meeting their reporting obligations.

“This year, the ATO has received records relating to more than 1.6 million offshore accounts holding over $100 billion, and is now using data-matching and sophisticated analytics to identify foreign income that has not been reported”, Assistant Commissioner Karen Foat has said.

Under the new Common Reporting Standard (CRS), the ATO has shared data on financial account information of foreign tax residents with over 65 foreign tax jurisdictions across the globe. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets and other income.

“Australians that deliberately move cash overseas in an attempt to hide it should be concerned. Hiding your assets and income offshore is pointless. ‘Tax havens’ are becoming a less effective model as international agreements improve transparency. You can no longer hide money behind borders.”

The ATO also states that apart from a small number of individuals deliberately engaging in tax avoidance, it is concerned about a large number who are unsure of how to meet their obligations.

“If you’re an Australian resident for tax purposes, you are taxed on your worldwide income, so you must declare all of your foreign income no matter how small the amount may be. This may include income from offshore investments, employment, pensions, business and consulting, or capital gains on overseas assets”, Ms Foat said.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-watching-for-foreign-income-this-Tax-Time/.

Unusual claims disallowed

The ATO has published information about some of the most unusual claims it has disallowed. For example, around 700,000 taxpayers claimed almost $2 billion of “other” expenses including non-allowable items such as dental costs, child care and even Lego sets.

Assistant Commissioner Karen Foat has said a systematic review of claims has found, and disallowed, some very unusual expenses. “These claims add up to a lot of money”, she said. “If the deduction isn’t directly related to earning income, we can’t allow it.”

“A couple of taxpayers claimed dental expenses, believing a nice smile was essential to finding a job, and was therefore deductible. It isn’t!”

“Another taxpayer claimed the Lego sets they bought as gifts for their children. Unsurprisingly, this claim was disallowed.”

The “other” deductions section of the tax return is for expenses incurred in earning income that don’t appear elsewhere on the return – such as income protection and sickness insurance premiums. However, the ATO’s review found some taxpayers were incorrectly claiming a range of private expenses such as child support payments, private school fees, health insurance costs and medical expenses, all of which are not allowable.

“Where people make genuine mistakes, we simply disallow the claim. But when people are deliberately making dishonest claims, particularly for large sums, we will disallow the claim and may impose a penalty”, Ms Foat said.

Finally, the ATO reminds taxpayers that in order to claim an “other” deduction, the expenses must be directly related to earning your income, and you need to have a receipt or record of the expense. If the expense relates to your employment, it should be claimed at the “work-related expenses” section of the return.

Source: www.ato.gov.au/Media-centre/Media-releases/No-smiles-as-dental-expenses-rejected/.

ATO contacting small employers about Single Touch Payroll

From 1 July 2018, employers with more than 20 employees were required to provide real-time reports to the ATO of salary and wage payments, super guarantee contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this Single Touch Payroll (STP) reporting system has extended to all employers.

The ATO has announced it will soon write to small employers (those with up to 19 employees) who have not yet started reporting or applied for a deferral, to remind them of their STP obligations.

Small employers have until 30 September 2019 to start reporting or apply for extra time to get ready. The ATO will grant deferrals to any small employer who requests additional time to start STP reporting.

There will be no penalties for mistakes, or missed or late reports, for the first year, and employers experiencing hardship or who are in areas with intermittent or no internet connection will be able to access exemptions.

The basics of STP reporting
  • Each employer needs to report their employees’ tax and super information to the ATO on or before each payday, or authorise a third party such as a registered agent or payroll service provider to report on their behalf. They need to send the information from STP-enabled payroll software.
  • When STP reporting is in place, employers no longer need to provide payment summaries to their employees for the payments reported and finalised through STP. Payments not reported through STP, such as employee share scheme (ESS) amounts, still need to be reported on a payment summary.
  • Employers no longer need to provide payment summary annual report (PSARs) to the ATO at the end of the financial year for payments reported through STP.
  • Employees can view their year-to-date payment information using the ATO’s online services, accessible through their myGov account. They can also request a copy of this information from the ATO.
  • Employers need to complete a finalisation declaration at the end of each financial year. The information reported through STP will not be tax-ready for employees or their tax agents until the employer makes this declaration.
  • Employers need to report employees’ superannuation liability information – as usually provided to the employees on their payslips – for the first time through STP. Super funds will then report to the ATO when the employer pays the super amounts to employees’ funds.
  • From 2020, the ATO will pre-fill activity statement labels W1 and W2 for small to medium withholders with the information reported through STP. Employers that currently lodge an activity statement will continue to do so.

Sources: www.ato.gov.au/Tax-professionals/Newsroom/Digital-interaction-with-us/Contacting-small-employers-about-STP/; www.ato.gov.au/Media-centre/Articles/Transition-to-Single-Touch-Payroll-for-small-employers/; www.ato.gov.au/stpsolutions.

Disclosing business tax debt information: ATO consultation

The ATO has released a consultation paper, The ATO’s administrative approach to the disclosure of business tax debt information to credit reporting bureaus.

In its Mid-Year Economic and Fiscal Outlook in 2016–2017, the Federal Government announced that it would change the law so the ATO could report business tax debt information to credit reporting bureaus (CRBs) where a business consistently does not engage with the ATO to manage a tax debt. It is not currently authorised to report information about tax debt avoidance, because the law contains strict confidentiality requirements for ATO-held taxpayer information.

The ATO has said it “recognises the important role businesses play in the Australian economy [but] when an entity avoids paying its tax debts it can have a significant impact on other businesses, employees, contractors and the wider community.”

The new paper aims to facilitate the consultation process between the ATO, businesses and CRBs, and focuses on the administrative approach the ATO proposes to take once the legislative changes are in place. It also helps explain some aspects of the changes under the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 (which has passed the House of Representatives without amendment and is currently before the Senate) and the draft legislative instrument, the Draft Taxation Administration (Tax Debt Information Disclosure) Declaration 2019).

If passed in its current form, the Bill will amend the Taxation Administration Act 1953 (TAA 1953) to allow taxation officers to disclose information about business tax debts to CRBs when certain conditions and safeguards are satisfied. The business in question would need to have debt of at least $100,000 overdue by more than 90 days, and have not effectively engaged with the ATO to manage that debt.

The consultation paper sets out the following key practical points:

  • Implementation – Under the ATO’s phased implementation approach, the changes will be implemented gradually to ensure that systems, safeguards and processes are robust.
  • Whose tax debt may be reported? – The ATO will be permitted, but not required, to report tax debt information about an entity to CRBs where it meets all of the following criteria:
  • the entity has an ABN and is not an excluded entity (the ABN and excluded entity test);
  • the entity has one or more tax debts totalling at least $100,000, and the amount has been due and payable for (overdue by) more than 90 days (the debt threshold test);
  • in determining whether the entity has debts that meet the debt threshold test, the ATO must exclude tax debt amounts that the entity has engaged with the ATO to manage (the effective engagement test); and
  • the entity must not have an active complaint with the Inspector-General of Taxation concerning the proposed reporting or reporting of the tax debt information.
  • How will businesses be notified? – If all of the reporting criteria are met and the ATO intends to report an entity’s tax debt information to CRBs, the ATO will notify the business in writing at least 21 days before reporting its tax debt information for the first time. This is to allow an additional 21 days for the business to take action (e.g. by engaging with the ATO and/or paying the debt) to prevent its tax debt information from being reported.
  • What will be reported? – If a business’s tax debt information is reported to CRBs, the ATO will provide the CRBs with the following:
  • unique identifiers for the entity, such as the ABN and legal name;
  • the balance of the entity’s overdue tax debts at the time of first reporting;
  • regular updates on the balance of the entity’s overdue tax debt until the entity no longer meets the reporting criteria; and
  • a notification when the entity no longer meets the reporting criteria.

Source: www.ato.gov.au/General/Gen/Consultation-paper–ATO-s-approach-to-disclosure-of-business-tax-debts/.

Cross-border recovery of tax debts

The ATO has recently updated and reissued Practice Statement Law Administration PS LA 2011/13 Cross border recovery of taxation debts. This practice statement outlines the options available in relation to recovering a tax debt where the debtor is outside Australia, and sets out how the ATO deals with requests from other countries for assistance in recovering a tax debt owing to the other country.

It covers:

  • the ATO’s ability to require payment under Australian tax legislation from debt-holders who are overseas (ie the ATO’s garnishee powers);
  • trustees’ and liquidators’ ability to recover debts in a foreign jurisdiction, and how the ATO can assist;
  • the ATO’s ability to obtain judgment in a foreign jurisdiction to recover debts in that jurisdiction;
  • the ATO’s ability to request assistance from foreign jurisdictions.

The ATO may use an exchange of information (EOI) to assist domestic information-gathering and decide which recovery method to use. This can be used when:

  • the ATO has no visibility over a debtor’s offshore affairs, and
  • the ATO has exhausted domestic options to source the information or verify the debtor’s claims.

The ATO can request assistance from foreign jurisdictions in regard to debt recovery through:

  • bilateral treaties with individual jurisdictions that allow for assistance with collection; and
  • the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI BEPS), to which multiple jurisdictions are signatories.

The practice statement was originally issued on 14 April 2011, and the updated version is effective from 15 August 2019.

Source: www.ato.gov.au/law/view/document?docid=PSR/PS201113/NAT/ATO/00001.

ATO superannuation focus areas

The ATO has released its presentation to the 2019 Association of Superannuation Funds of Australia (ASFA) National Policy Roadshow outlining emerging superannuation focus areas for 2019–2020. Topics covered included:

  • the taxation of compensation received by super funds;
  • pension tax bonuses;
  • successor fund transfers; and
  • the treatment of inactive low-balance accounts.

The ATO also noted the following real-life examples of people interacting with their super in 2018–2019:

  • compassionate release of super – the ATO processed more 53,000 applications for the early release of super on compassionate grounds to members who required the money for critical purposes such as medical care and treatment, and it released $456 million as a result;
  • Aboriginal and Torres Strait Islander assistance – ATO representatives visited Darwin, Kununurra and Broome with the First Nations Foundation and helped find $4.37 million in lost super for members of those communities;
  • downsizer contributions – 4,900 individuals aged 65 and over made super contributions from the proceeds of selling their home, to a total value of $1.1 billion;
  • first home super saver (FHSS) scheme – in the first year of the FHSS scheme’s operation, 3,300 people obtained a release of money from their super to purchase their first home, to a total value of $39.4 million.
Lost super

The ATO noted that at 2 July 2019 it held 5.39 million super accounts worth $3.98 billion. Of this money, the ATO estimates it will be able to reunite $473 million with 485,000 fund members using the Protecting Your Super measures (which have been enacted under the recently passed Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019).

The ATO encourages fund members to find out about their lost and unclaimed super through ATO Online via myGov. In 2018–2019, fund members consolidated or transferred over 537,000 accounts worth $4.38 billion using myGov.

Pension cap indexation

The ATO flagged that the pension transfer balance cap (TBC) of $1.6 million could increase on 1 July 2020 or 1 July 2021, depending on when the consumer price index (CPI) number reaches 116.9 (its level was 114.8 as at June 2019). The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 provides that the general TBC is indexed in increments of $100,000 when the indexation rate reaches a prescribed figure (which is calculated using a formula set out in the law).

While the ATO does not expect indexation to occur until at least 1 July 2021, it is important to consider what the TBC increase this may mean for funds and members. Once the indexation takes place, there will no longer be a single personal TBC that applies to all super members with a retirement phase income stream. Instead, there could be a personal TBC for each member, depending on their individual situation and arrangements. The ATO said it will advise as soon as possible if indexation will apply on 1 July 2020.

Source: https://www.ato.gov.au/Media-centre/Speeches/Other/Superannuation—a-system-in-transition/.

Compassionate release of super only available in limited cases

The ATO has recently seen a significant increase in calls from individuals who were encouraged by their super funds to contact the ATO because they were ineligible for compassionate release of super (CRS). However, in the majority of cases, the individuals concerned were ineligible because they were looking to use their super to pay for general expenses. It is important to note that CRS is only an option for the following expense types:

  • medical treatment and transport costs;
  • palliative care costs;
  • a loan payment to prevent the loss of one’s home;
  • costs of modifying a home or vehicle, or buying disability aids, needed because of a severe disability; or
  • expenses associated with the death, funeral or burial of a dependant.

The expense must not yet have been paid (eg using a loan, a credit card or money borrowed from family or friends), and the amount of super a person can withdraw is limited to what they reasonably need. There are a range of eligibility conditions for each expense type, set out in detail on the ATO website. Any amounts released early on compassionate grounds are paid and taxed as normal super lump sums.

Source: www.ato.gov.au/Super/APRA-regulated-funds/In-detail/News/Five-grounds-for-compassionate-release-of-super/; www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Access-your-super-early/?page=2#Access_on_compassionate_grounds.

Personal services income rules: unrelated clients test

The Federal Court has set aside an Administrative Appeal Tribunal (AAT) decision that income derived by a business analyst through a company was subject to the personal services income (PSI) rules: Fortunatow v FCT [2019] FCA 1247 (Federal Court, Griffiths J, 12 August 2019).

Background

The taxpayer was a business analyst and the sole director of Fortunatow Pty Ltd. He provided his services through the company to various large organisations such as government departments, universities, banks and utilities. In the 2012 and 2013 income years, the company disclosed income of approximately $166,000 and $121,000 respectively from the provision of his personal services to eight different clients. The company did not pay him any remuneration and he returned no income in his personal tax returns for those years.

The company transferred income generated by the taxpayer’s personal services to a family trust, characterising the amounts as “management fees”. These fees were claimed as tax deductions, effectively reducing the company’s taxable income to nil. The trust income was offset against the trust’s rental losses. As a result, the taxpayer, the company and the family trust all paid zero tax on the income generated by the personal services the taxpayer supplied as a business analyst in 2012 and 2013.

The ATO concluded that the PSI rules in Div 86 of the Income Tax Assessment Act 1997 (ITAA 1997) applied to include all of the income received by the company in the taxpayer’s assessable income for 2012 and 2013. The taxpayer, however, argued that Div 86 did not apply because the unrelated clients test in s 87-20 was satisfied, and therefore the income was from conducting a personal services business.

Under s 87-20 of ITAA 1997, the relevant services must be provided as a direct result of the individual or personal services entity (PSE) – the company, in this case – making offers or invitations (eg by advertising) to the public to provide the services. The individual (or PSE) “is not treated … as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity” (s 87-20(2)).

The AAT (in Fortunatow and FCT [2018] AATA 4621) decided, in favour of the ATO, that the work the taxpayer obtained and carried out in the relevant years was through an intermediary. According to the AAT, the taxpayer was not operating a genuine business as an independent contractor because he, in effect, received referrals from intermediaries (recruitment companies) and allowed those intermediaries to take responsibility for obtaining and dealing with customers.

The issues for determination on appeal were whether the taxpayer made any offers or invitations to the public at large or to a section of the public to provide his services (the fourth element of the unrelated clients test) and, if so, whether the services to the unrelated entities were provided as a direct result of the taxpayer making those offers or invitations (the fifth element of the unrelated clients test).

The taxpayer argued he met the fourth element because of his active profile on LinkedIn and his marketing by word-of-mouth at industry functions. Although the AAT accepted that the taxpayer’s advertising on LinkedIn constituted the making of an offer or invitation to the public, it concluded that the law operates in a way that means the fourth element (and therefore the fifth element) was not satisfied.

Decision

The Federal Court held that the AAT had misconstrued s 87-20(2) of ITAA 1997 and misapplied its interaction with s 87-20(1)(b). In the Court’s view, the exclusion or exception in s 87-20(2) did not apply where there was evidence that the taxpayer (or the company) advertised his services to the public or a segment of the public through a forum such as LinkedIn, and also obtained work through the involvement of an intermediary.

According to the Court, simply because an individual or PSE is able to provide services through an intermediary, such as a recruitment or similar agency, does not constitute the making of an offer or invitation for the purposes of s 87-20(1)(b). More than that is required for the purposes of the unrelated clients test. But that does not mean that the exclusion in s 87-20(2) necessarily applies, as found by the AAT, where an individual or PSE is in fact available to provide personal services through such an intermediary and there is evidence (as in this case) that the individual or PSE has taken other steps to make offers or invitations to the public at large or a section of the public to provide the services.

The Court remitted the matter to the AAT for further reconsideration according to law, as it was not appropriate for the Court itself to resolve the issues remaining in dispute. It said the issues were not straightforward and there was uncertainty about the extent to which the misconstruction may have affected the AAT’s fact-finding.

Client Alert – September 2019

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Warning to watch out for myGov and ATO tax scams

The government’s Stay Smart Online website warns there has been a surge in scammers impersonating myGov and the ATO to trick people into giving them money or personal details. These scams can take the form of emails, text messages and fake myGov login pages.

In June 2019, the ATO received 6,444 reports of tax-time scams impersonating the ATO. Emails with links to fake myGov login pages were the most widespread email scam.

The myGov system will never send texts, emails or attachments with links or web addresses that ask for your login or personal details. Never click on links in emails or text messages claiming to be from myGov.

Always log into your official myGov account to lodge your return and check if you owe a debt or are due a refund. You can do this by typing https://my.gov.au/ into your internet browser’s address bar.

Unfortunately, ATO and other scams continue well beyond the 30 October deadline for tax returns, as scammers know many people are waiting for a refund or information about debts. It’s important to watch out for scams throughout the year.

Tax time updates

ATO has refunded $10 billion so far

The ATO says that $10 billion has been refunded to Australian taxpayers so far this tax time, an increase of over $2 billion from the same time last year, with most returns processed in under two weeks. The ATO aims to process returns as soon as possible, and has announced that over four million refunds have already been sent out, compared to over three million refunds issued this time last year.

ATO watching for undisclosed foreign income

The ATO has reminded Australians who receive any foreign income from investments, family members or working overseas to make sure they have reported it this tax time.

New international data-sharing agreements allow the ATO to track money across borders and identify people who aren’t meeting their obligations. Under the new Common Reporting Standard (CRS), the ATO has shared data on financial account information with over 65 tax jurisdictions across the globe. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets, and other income.

Unusual claims disallowed

The ATO has published information about some of the most unusual claims it has disallowed. Around 700,000 Australians have claimed almost $2 billion of “other” expenses, including non-allowable items such as child care and even Lego sets.

Assistant Commissioner Karen Foat says a systematic review of claims found and disallowed some very unusual expenses. “A couple of taxpayers claimed dental expenses, believing a nice smile was essential to finding a job, and was therefore deductible. It isn’t!”

ATO contacting small employers about Single Touch Payroll

From 1 July 2018, employers with more than 20 employees have been required to provide real-time reports to the ATO of salary and wage payments, super guarantee contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this Single Touch Payroll (STP) reporting system has extended to all employers.

The ATO is now writing to small employers who haven’t yet started reporting or applied for a deferral, to remind them of their STP obligations.

There will be no penalties for mistakes, or missed or late reports, for the first year, and employers experiencing hardship or who are in areas with intermittent or no internet connection will be able to access exemptions.

Disclosing business tax debt information: ATO consultation

In its Mid-Year Economic and Fiscal Outlook in 2016–2017, the government announced it would change the law to let the ATO report business tax debt information to credit reporting bureaus (CRBs) where a business consistently avoids engaging with the ATO to manage a tax debt.

The ATO has said it “recognises the important role businesses play in the Australian economy [but] when an entity avoids paying its tax debts it can have a significant impact on other businesses, employees, contractors and the wider community.” It has released a consultation paper to facilitate consultation between the ATO, businesses and CRBs.

If passed in its current form, the amended law would allow taxation officers to disclose information about business tax debts when certain conditions are met. A business would need to have debts of at least $100,000 overdue by more than 90 days, and have not effectively engaged with the ATO to manage that debt.

Cross-border recovery of tax debts

The ATO has also reissued Practice Statement Law Administration PS LA 2011/13 Cross border recovery of taxation debts. This statement outlines options available for the ATO to recover a tax debt where the debtor is outside Australia, and sets out how the ATO deals with requests from other countries for assistance in recovering tax debts owing to the other country.

ATO superannuation focus areas

Lost super

As at July 2019, the ATO held 5.39 million super accounts worth $3.98 billion. It will aim to reunite $473 million with 485,000 fund members using the new Protecting Your Super measures.

Pension cap indexation

The pension transfer balance cap (TBC) of $1.6 million could increase on 1 July 2020 or 1 July 2021, depending on movement in the consumer price index (CPI). The general TBC is indexed in increments of $100,000 when the indexation rate reaches prescribed figures (calculated using a formula set out in Australian tax law). Once indexation happens, there will no longer be a single TBC that applies to all super members with a retirement phase income stream. Instead, there could be a personal TBC for each member, depending on their individual situation and arrangements.

Compassionate release of super only available in limited cases

The ATO has recently seen a significant increase in queries about compassionate release of super (CRS). In most cases, the people concerned were ineligible because they were looking to use their super to pay for general expenses.

CRS is an option only for very specific unpaid expenses such as medical treatment and transport costs, palliative care costs, loan payments to prevent the loss of your home, the costs of home or vehicle modifications related to a severe disability and expenses associated a dependant’s death.

Personal services income rules: unrelated clients test

The Federal Court has set aside an Administrative Appeal Tribunal decision that income a business analyst derived through a company was subject to the personal services income (PSI) rules.

According to the Court, simply because an individual or personal services entity is able to provide services through an intermediary, such as a recruitment or similar agency, this does not constitute the making of an offer or invitation for the purposes of the relevant legislation. More than that is required for the purposes of the unrelated clients test.

 

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