Reforming The Taxation Of Discretionary Trusts

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A key feature of discretionary trusts is the ability to distribute income on a “discretionary” basis, which means no beneficiary has a particular entitlement to any income or capital assets in the trust and the trustees can make distributions at their discretion.

Importantly, distributions are generally taxed at the individual marginal tax rate of the beneficiaries, enabling tax-effective “income splitting” strategies to direct income to those on lower marginal tax rates. While this offers considerable planning flexibility, there are some concerns about the taxation advantages obtained through the use of these trusts, and certain corners of the community are agitating for reform.

A recently released report authored by RMIT University and commissioned by the ATO, Current issues with trusts and the tax system, highlights the extent of trust use in Australia. According to the report, the number of trusts in Australia increased by almost 700% between 1990 and 2014. Notably, around 33% of all Australian trusts are discretionary trusts engaged in trading (business) activities, which the report says is unique compared with most other countries. Another 40% are discretionary trusts used for holding investments.

The report identifies three key risk areas posed by trusts that may adversely affect tax revenues and undermine community confidence in the tax system:

  • A fundamental design issue in our trust tax laws where the calculation of tax liabilities relies on concepts that can sometimes be manipulated by the trustees simply by exercising certain powers in the trust deed, giving those trustees the legal ability to influence the tax outcome.
  • Related to the above point, mismatches between the economic benefits actually received by beneficiaries and the tax outcomes. This does not accord with the general principle that tax outcomes should follow economic benefits.
  • Administrative challenges for authorities in identifying trusts and tracing trust income.

The report also focuses on risks associated with “complex distributions”, which may involve arrangements such as multiple trust structures (or “chains” of trusts) that make it difficult to identify ultimate beneficiaries, and questionable distributions to entities such as low-taxed or tax-preferred entities where someone other than that beneficiary receives the actual benefit of the distribution.

Is change on the horizon?

There has been talk for a number of years about the need to reform trust taxation, and change may finally be afoot. The Labor party announced in mid-2017 that, if elected, it would introduce a standard 30% minimum tax rate on all discretionary trust distributions to adult beneficiaries in a bid to curb “aggressive tax minimisation” strategies. Where a higher tax rate would apply under the normal marginal tax scales, the higher rate would apply. This reform would only apply to discretionary trusts (not “fixed” trusts) and there would be specific exclusions for certain types of trusts such as farm trusts, charitable trusts and testamentary (deceased estate) trusts.

Although the full technical detail of this proposal is not yet known, the introduction of a minimum 30% rate on distributions clearly presents a crack-down on the income-splitting strategies that are so popular today.

Do you operate a discretionary trust?

As we approach a federal election, it will be crucial to stay abreast of any further policy announcements on trusts, including any transitional arrangements that might apply should Labor win government and implement its reforms. In that event, we can assist businesses and investors who operate in discretionary trusts to consider their structuring options, taking into account the full detail of the new laws, the beneficiaries’ needs for asset protection and succession planning, and the tax implications of transferring to any new structure. Contact our office at any time to discuss tax planning for your structures.

Fairer dealings at the ATO, especially for small business

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IN BRIEF

  • ATO Second Commissioner Andrew Mills says the ATO has listened to criticisms and is promoting a “culture of fairness” in how it deals with taxpayers, especially SMEs.
  • The recently implemented Independent Review for Small Business allows small business owners who have been audited by the ATO to ask for a review of the outcome before the assessment is finalised.
  • The ATO has evolved its dispute resolution process to put distance between the assessment and appeals sections within the tax office.
  • The Australian Taxation Office (ATO) has not only listened to suggestions about how to improve its handling of disputes, it’s implemented almost all of them, the agency’s second commissioner Andrew Mills says. The ATO’s aim now is to promote what he calls a “culture of fairness”.

It’s understandable that Mills would be keen to return fire. The agency has taken some direct hits on the public relations battlefield over the past few years.

There was the Cranston Affair that erupted in May 2017, when the ATO commissioner, Chris Jordan, was on leave and Mills was in the hot seat as acting commissioner. Former ATO deputy commissioner Michael Cranston faced charges of abusing his office to obtain information after his son, Adam, was allegedly involved in a conspiracy in which subsidiaries of Plutus Payroll were used to skim off millions of dollars owed to the ATO.

There was the ABC Four Corners program in February 2018, titled “Mongrel Bunch of Bastards”, that portrayed the ATO as heartless and aggressive in its dealings with small business.

This all follows the public relations fallout from major IT outages in December 2016 and July 2017.

Mills says that if trust in the tax system falls then so does compliance. He says the level of trust is ultimately determined by the quality of the everyday experiences of people as they interact with the ATO, and that quality can in turn be gauged by their perception of fairness in disputes.

Source: www.acquitymag.com/business.

 

New “work test” exemption for recent retirees

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Many superannuation members are surprised – and sometimes frustrated – to learn that Australia’s superannuation system places tight restrictions on who can make contributions after age 65. Generally, individuals aged between 65 and 74 years must satisfy a “work test” in order to make:

  • non-concessional contributions (i.e. personal contributions for which the member does not claim a deduction); and
  • concessional contributions above mandatory employer superannuation guarantee contributions (e.g. personal contributions for which the member claims a deduction or extra salary-sacrificed employer contributions).

The work test requires that the person is “gainfully employed” for at least 40 hours in any 30-day consecutive period during the financial year in which the contributions are made. A person is “gainfully employed” if they are employed or self‑employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

To assist these members with their superannuation planning, the government has recently created a new 12-month exemption from the work test for recent retirees aged between 65 and 74 years with a total superannuation balance below $300,000. This measure will be available from 1 July 2019. For qualifying individuals, the exemption applies for 12 months following the end of the financial year in which the individual last met the work test, giving these retirees an extra year in which to boost their superannuation savings.

To assist these members with their superannuation planning, the government has recently created a new 12-month exemption from the work test for recent retirees aged between 65 and 74 years with a total superannuation balance below $300,000.

Some important points to consider include:

  • The $300,000 balance threshold is tested on 30 June of the previous financial year.
  • The exemption is only available for one 12-month period in an individual’s lifetime. If a member utilises the exemption and later returns to work, they cannot utilise the exemption a second time when they subsequently retire again. However, if they did not rely on the exemption to make any contributions the first time, they stopped working, they are entitled to utilise the exemption the next time they retire.
  • The exemption is not available to members aged 75 and over. These members are subject to separate (and much more restrictive) rules about making contributions.

So, how much can a member contribute during the 12-month grace period? Fortunately, the individual may make contributions up to the usual concessional and non-concessional contributions caps for the particular year ($25,000 and $100,000 respectively). Also, members who turn 65 during the year in which they utilise the work test exemption may benefit from accessing “bring forward” arrangements (still in draft form) to make non-concessional contributions of up to three times the usual annual cap (currently $300,000, i.e. three times the $100,000 cap).

Want to optimise your retirement planning?

The contributions rules are complex, but with the right planning and advice you can maximise your contributions into superannuation at the right time. You should also consider other measures that may be available to you, such as “downsizer” contributions (certain contributions of proceeds from the sale of your home) and “catch-up” concessional contributions (accessing unused concessional cap space from prior years).

Deemed Dividend Rules: New 10-Year Loan Model

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Division 7A is a long-standing tax integrity measure that treats certain payments by private companies to shareholders or their associates as unfranked “dividends” for tax purposes. Those deemed dividends are then assessable income of the recipient and taxed at the recipient’s marginal tax rate.

Current laws include an important exception to these rules: a payment is not treated as a dividend if it is converted into a loan that meets certain requirements, including a minimum statutory interest rate, certain minimum annual repayments and a maximum loan term of either 25 years for a loan secured by a registered mortgage over real estate, or seven years in any other case.

To simplify the rules for Division 7A-compliant loans and better align them to commercial practice, the government proposes to reform the laws from 1 July 2019 so that a compliant loan would instead be required to meet the following:

  • a maximum loan term of 10 years – regardless of whether the loan is secured;
  • a different benchmark interest rate that is considerably higher than the current benchmark; and
  • annual repayments of both principal (in equal annual instalments over the term of the loan) and interest.

The government also proposes transitional rules to help companies with existing loans transition to the new 10-year model. These would operate as follows:

  • All existing seven/25-year loans in place at 30 June 2019 would need to adopt the new, higher benchmark interest rate after that date.
  • Existing seven-year loans would retain their existing loan term and mature as originally planned.
  • Existing 25-year loans would need to convert to a 10-year term prior to the lodgement day of the company’s 2020-2021 tax return. However, it is not yet clear whether a 25-year loan with fewer than 10 years remaining as at 2021 would need to adopt a 10-year term.
  • Pre-December 1997 loans would become subject to Division 7A and need to convert to a 10-year loan by the 2020-2021 lodgement day.

The proposals have attracted criticism that a 10-year loan model and higher interest rate would create cashflow problems for those who rely on their corporate structures to access funds. For example, it may be difficult to convert an existing 25-year loan to a 10-year loan because the outstanding balance must be repaid over a much shorter period of time. Outstanding loans that are not converted to meet the new requirements would give rise to a deemed dividend.

Taxpayers in this situation will therefore need to decide whether to convert or pay out the loan by the deadline.

All taxpayers with existing Division 7A loans (regardless of the loan term) will also need to consider the impact of the reforms on their cashflow, given the higher interest rate that could apply from 1 July this year.

Now is also a good time to consider any planning opportunities. For example, if an existing 7-year loan is voluntarily converted to a 25-year loan before the proposed laws take effect on 1 July 2019, it would then convert to a 10-year loan after 2021 – creating a total effective term of more than 10 years. However, the parties would need to be able to arrange real estate as security in order to initially convert to a 25-year loan.

Review your corporate structures now 

While these proposals are not yet final and some aspects may change, the government has signalled a clear intention to cut the maximum term of compliant loans and introduce a higher benchmark interest rate. Businesses should not wait to consider the impacts. Talk to us today to start identifying possible consequences for your structures and to discuss strategies for managing future cashflow or restructuring.

 

Super Guarantee Compliance: Time To Take Action

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The government is getting tough on employers who fail to make compulsory superannuation guarantee (SG) contributions. A host of measures are being implemented, ranging from improved reporting systems through to proposed employer penalties of up to 12 months’ imprisonment. Here, we examine two particular initiatives that will require some businesses to take action in the next few months.

New reporting standard

On 1 July 2018, Single Touch Payroll (STP) reporting became mandatory for employers with 20 or more employees. STP is a real-time electronic reporting system that requires employers to submit payroll information such as salaries, wages, allowances, PAYG withholding and superannuation contributions to the ATO directly through their payroll software (or third-party service provider) at the time they pay their employees.

Importantly for small businesses, the government wants to extend STP reporting to all employers from 1 July 2019. It says that mandatory STP reporting for all businesses, regardless of their size, will improve the ATO’s ability to monitor compliance and take action when required.

Although the legislation to implement this measure is still before Parliament, we should assume the changes will proceed and plan early. Businesses should ask their current payroll solution provider what software updates (or new products) are required in order to become STP-compliant.

Small businesses without any current payroll software should not panic. The ATO says that over 30 software providers propose to release a low-cost STP solution (costing less than $10 per month) from early 2019, which may include simple solutions such as mobile apps or portals.

Amnesty for underpayments

The government is proposing a 12-month “amnesty” to allow employers to voluntarily disclose and correct any historical underpayments of SG contributions for any period up to 31 March 2018 without incurring penalties or the usual administration fee ($20 per employee per quarter). This is provided the ATO has not already commenced (or given notice of) a compliance audit of that employer. Additionally, employers will be entitled to claim deductions for the catch-up payments they make under the amnesty. (Under the usual rules, such payments are not deductible.) Employers will, however, still need to pay the usual interest charges.

While these are welcome incentives for employers to make a disclosure, there is one problem: legislation to enable the amnesty is still before Parliament, with the amnesty slated to apply from 24 May 2018 to 23 May 2019. There is no guarantee the legislation will pass, so what does this mean for employers wishing to take advantage of the amnesty?

If an employer discloses now and the amnesty legislation is not passed, the ATO will be required to administer the usual laws. This means catch-up payments will be non-deductible and penalties and administration fees will apply. However, the ATO may view the employer’s prompt disclosure favourably when deciding whether to use its discretion to reduce the penalties.

On the other hand, taking a “wait and see” approach carries considerable risks. The ATO says “employers who do not disclose their SG shortfalls during the amnesty period may face harsher penalties if they are audited in the future”. There is also a risk the ATO could commence an audit while the employer waits, particularly if an employee contacts the ATO about outstanding SG contributions owed to them. This would disqualify the employer from the amnesty (if it became law).

Ensure your business is SG-compliant

Now is an important time for businesses to get their SG affairs in order. Talk to us today to ensure your small business is ready for STP reporting. For any employer with outstanding underpayments of SG contributions, we can assist with the careful process of making a voluntary disclosure to the ATO.

 

Explanatory Memorandum February 2019

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Tax clinic trial to reduce tax regulatory burden

To help reduce the regulatory burden on businesses, including the tax burden, Assistant Treasurer Stuart Robert has announced that the Federal Government has allocated $1 million to set up 10 tax clinics under a trial program based on the Curtin University Tax Clinic.

Each clinic will receive up to $100,000 for 12 months to support unrepresented individual or small business taxpayers by providing general taxation advice and helping them with their tax obligations and reporting requirements. The clinics, through identifying issues and building greater understanding of the tax system in operation, are also designed to improve the interactions that small businesses and individual taxpayers have with the ATO. The clinics will cover advice, representation, education and advocacy.

The 10 clinics will be established in major and regional universities across the country that already have complementary courses and faculties, providing broad coverage across Australia. The shortlisted universities are: ANU, Charles Darwin University, Curtin University, Griffith University, James Cook University, University of Adelaide, University of Melbourne, UNSW, University of Tasmania and the University of Western Sydney.

While this trial includes 10 universities to keep the size manageable, the government wants broad involvement, and to work with other universities as well in future. This could include looking at partnership models, small grants, research proposals and fresh ideas.

Mr Robert said the government hopes the trial tax clinics will “fill a gap in the market for those individuals and small businesses that may not be able to afford proper advice and representation”.

The tax clinics are also designed to build practical experience for students who are the future of the tax profession. The trial will offer student volunteers the opportunity to work with unrepresented taxpayers under the direct supervision of qualified tax professionals.

The tax clinics are expected to be up and running by March 2019, and the trial will wind up by December 2019.

Source: http://srr.ministers.treasury.gov.au/speech/001-2019/.

New “work test” exemption for recent retirees

The Federal Government has created a new opportunity for some recent retirees to make additional superannuation contributions. From 1 July 2019, a 12-month exemption from the “work test” for newly retired individuals aged between 65 and 74 years with a total superannuation balance below $300,000 means many older Australians will now have an extra year in which to boost their superannuation savings. If you wish to take advantage of this measure, you should plan carefully to manage the relevant timing issues, your contributions caps and interaction with other contributions measures that may be available to you.

Many superannuation members are surprised – and sometimes frustrated – to learn that Australia’s superannuation system places tight restrictions on who can make contributions after age 65. Generally, people aged between 65 and 74 years must satisfy a “work test” in order to make:

  • non-concessional contributions (ie personal contributions for which the member does not claim a deduction); and
  • concessional contributions above mandatory employer superannuation guarantee contributions (eg personal contributions for which the member claims a deduction or extra salary-sacrificed employer contributions).

The work test requires that the person is “gainfully employed” for at least 40 hours in any 30-day consecutive period during the financial year in which the contributions are made.

A person is “gainfully employed” if they are employed or self‑employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Satisfying the test can be difficult for retirees who want to build their superannuation savings. Passive income (eg rent or dividends) and unpaid work are not considered to be “gainful employment”. Frustratingly, even those engaged in paid work may not meet the work test if their work is more irregular than the “40-hours-in-30-days” rule permits.

To assist these members with their superannuation planning, the government has recently created a new 12-month exemption from the work test for recent retirees aged between 65 and 74 years with a total superannuation balance below $300,000.

This measure will be available from 1 July 2019. For qualifying individuals, the exemption applies for 12 months following the end of the financial year in which the person last met the work test, giving these retirees an extra year in which to boost their superannuation savings.

Here are some important points to consider:

  • The $300,000 balance threshold is tested on 30 June of the previous financial year.
  • The exemption is only available for one 12-month period in an individual’s lifetime. If a person utilises the exemption and later returns to work, they cannot utilise the exemption a second time when they subsequently retire again. However, if they did not rely on the exemption to make any contributions the first time they stopped working, they are entitled to utilise the exemption the next time they retire.
  • The exemption is not available to members aged 75 and over. These members are subject to separate (and much more restrictive) rules about making contributions.

So, how much can a member contribute during the 12-month grace period? Fortunately, the individual may make contributions up to the usual concessional and non-concessional contributions caps for the particular year ($25,000 and $100,000 respectively). Also, people who turn 65 during the year in which they utilise the work test exemption may benefit from accessing “bring forward” arrangements (still in draft form) to make non-concessional contributions of up to three times the usual annual cap (currently $300,000, ie three times the $100,000 cap).

Source: https://www.legislation.gov.au/Details/F2018L01682.

ATO issuing excess super contributions determinations

The ATO has begun issuing determinations for excess concessional contributions (ECC) of superannuation for the 2017–2018 financial year. The ATO said it will be issuing a higher volume of ECC determinations for 2017–2018 compared to previous years, following the reduction in the concessional contributions cap to $25,000 for all taxpayers.

Taxpayers who receive an ECC determination should also expect an amended tax assessment, as ECCs are automatically included in an individual’s assessable income (and subject to a 15% tax offset). An ECC charge (4.96% for July to September 2018) is also payable to take account of the deferred payment of tax.

Electing to release excess contributions

Individuals who receive a determination then have 60 days to elect to release up to 85% of their excess contributions from their super fund to the ATO as a “credit” to cover the additional personal tax liability.

Once made, the election cannot be revoked. Therefore, taxpayers should ensure that their super fund has correctly reported their contributions to the ATO for the correct person and financial year before making an election to release any excess contributions.

Electing to release an amount of ECCs can also be important for some taxpayers who wish to prevent the automatic operation of the bring-forward rule for non-concessional contributions.

The proportioning rule does not apply to a release authority payment, so such an amount paid from a super fund will always reduce the taxable component of a superannuation interest in accumulation phase. Therefore, a taxpayer with multiple superannuation interests should consider nominating the release amount to be paid from the interest with the largest taxable component. However, take care if looking to maintain an unrestricted non-preserved component – any benefit payment from a particular superannuation interest will be cashed out first from the unrestricted non-preserved component.

Release authorities

The ATO says tax practitioners and super funds should be prepared for increased numbers of calls from clients about ECC determinations, and funds should anticipate the receipt of release authorities that will require prompt action.

From 1 July 2018, the ATO issues release authorities directly to the taxpayer’s super fund so that the individual is no longer involved in releasing such amounts (apart from requesting that the ATO issues a release authority to a specific super fund). The fund must then pay the amount to the ATO within 20 business days (this period has been temporarily extended from 10 business days).

Defined benefit funds

Determinations for taxpayers with a constitutionally protected fund or defined benefit fund will issue at a later time. Determinations for excess non-concessional contributions and assessments for Div 293 tax also began issuing throughout December 2018.

Source: www.ato.gov.au/Super/APRA-regulated-funds/In-detail/News/CRT-Alerts/2018/CRT-Alert-083/2018—Expected-increase-in-ECC-determinations/.

Reviewing the tax treatment of granny flats

Assistant Treasurer Stuart Robert says the Federal Government has asked the Board of Taxation to undertake a review of the tax treatment of “granny flat” arrangements, and to recommend potential changes. This request for review is in response to the 2017 Australian Law Reform Commission’s report Elder abuse: a national legal response, which identified the development of formal and legally enforceable family agreements as a measure to prevent elder abuse.

Under current tax laws, homeowners may have to pay CGT where there is a formal agreement for a family member to reside in their home – for example, when an older parent lives with their child, either in the same dwelling or a separately constructed dwelling (ie a granny flat). In some cases, the tax consequences have deterred families from establishing a formal and legally enforceable family agreement, which leaves no protection of the rights of the older person if there is a breakdown in the agreement.

The Board of Taxation’s review will consider and make recommendations on the appropriate tax treatment of these arrangements, taking into account the interactions between the current tax laws and treatment of “granny flat interests” under the social security rules. In making the recommendations, the review will consider how any changes could raise awareness and provide incentives for older people and their families to enter formal and legally enforceable family arrangements.

The Board is expected to commence the review in early 2019, including broad consultation with stakeholders, with a final report due to the government in the second half of 2019.

Source: http://srr.ministers.treasury.gov.au/media-release/047-2018/.

Resolving tax disputes: government to help small businesses

In late 2018, Assistant Treasurer Stuart Robert announced that the Federal Government intends to make it easier, cheaper and quicker for small businesses to resolve tax disputes with the ATO. The government will establish a Small Business Concierge Service within the Australian Small Business and Family Enterprise Ombudsman’s office to provide support and advice about the Administrative Appeals Tribunal (AAT) process to small businesses before they make an application.

The government will also create a dedicated Small Business Taxation Division within the AAT, with key features including:

  • a case manager supporting them throughout the process;
  • a standard application fee of $500;
  • fast-tracked decisions, to be made within 28 days of a hearing; and
  • where the ATO appeals the AAT decision to the Federal Court, it will pay the small business reasonable costs.

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

Small business tax offset: avoiding errors when claiming

The ATO has issued tips for avoiding common errors when reporting net small business income and claiming the small business income tax offset for unincorporated small businesses.

While the aggregated turnover threshold to qualify as a small business entity is $10 million, the threshold for accessing the small business income tax offset is $5 million. The offset (up to $1,000) is worked out by the ATO on the proportion of income tax payable on an individual’s taxable income that is net small business income. For 2018–2019 and 2019-2020 the rate of offset is 8%; this will increase to 13% for 2020–2021 and 16% for 2021–2022 onwards (to complement the reductions in the company tax rate for base rate entities).

ATO tips

To avoid errors when reporting net small business income in a tax return, the ATO offers the following tips:

  • Item 13: Include net income derived by the small business partnership or trust at either item 13D or 13E, not at 15A. The amounts to include at item 13D or 13E are the: (i) share of net small business income from a small business partnership (in which they are a partner); and (ii) share of net small business income from a small business trust (in which they are a beneficiary). The amounts reported at these items must be reduced for any related deductions, such as landcare operations, decline in value for water facilities and prior year deferred non-commercial losses of partners claimed this year. The ATO says it uses these labels to calculate the offset but they are not counted towards the taxpayer’s taxable income. This means that a distribution from a partnership or a share of net income from a trust must be included at the relevant item – 13N, 13L, 13O or 13U.
  • Item 15A: Don’t include the following types of income at item 15A, as they are not eligible for the offset: (i) personal services income – this is reported at item 14A (although income from carrying on a personal services business is included at item 15A); (ii) salary, wages or directors fees; (iii) dividend income of directors. Also, don’t include any share of net small business income from partnerships and trusts at item 15A. This is reported at item 13D or 13E.
  • Complete all relevant fields: Enter the taxpayer’s net small business income from sole trading activities at item 15A so the ATO can calculate the offset. This item does not contribute towards their taxable income. This means that sole trader business income must be included at item 15A, as well as at P8 (Business income and expenses) and 15B or 15C (Net income or loss from business).
  • Net income, not gross income: Include the taxpayer’s net small business income at item 15A for sole traders (and share of net small business income at item 13D or 13E for partnerships and trusts). Do not use gross income.

Source: www.ato.gov.au/Tax-professionals/TP/Claiming-the-small-business-income-tax-offset/.

Home office running expenses and electronic device expenses

On 16 January 2019, the ATO released an updated version of Practice Statement PS LA 2001/6, its guidance on calculating and substantiating home office running expenses and electronic device expenses. PS LA 2001/6 has been significantly rewritten, as follows:

  • the basic principles (prerequisites for deductions) have been amended to emphasise that a taxpayer must actually incur the expense and that there must be a real connection between the use of the home office or device and the taxpayer’s income-producing work;
  • the requirement that the income-producing use must be substantial and not merely incidental has been removed;
  • there is new commentary on what type of evidence needs to be kept;
  • the cents per hour rate for home office running expenses has been increased from 45 cents to 52 cents per hour, effective from 1 July 2018;
  • there is new commentary on claiming up to $50 for all device usage charges where work use is incidental and detailed documentation is not kept;
  • there is some change in terminology (eg from “home office expenses” to “home office running expenses” and from “business” to “work-related”);
  • the ATO specifically refers to cleaning expenses and the decline in value of furnishings as examples of home office running expenses;
  • PS LA 2001/6 now specifies what it does not apply to (computer consumables, stationery, home office occupancy expenses and the decline in value of electronic devices); and
  • commentary on ATO benchmarks and safe harbours has been removed.
Evidence of expenditure and extent of deductibility

PS LA 2001/6 now states that the level of evidence required to prove that expenditure has been incurred is less than that needed to substantiate the expense. In particular, the ATO accepts that bank and credit card statements can be used to demonstrate that expenditure has been incurred. For example, a bank statement in the taxpayer’s name clearly showing a payment to a gas provider is acceptable evidence that gas expenditure has been incurred.

The ATO says that taxpayers can substantiate their deductible (work) use proportion by providing:

  • evidence of the proportion of deductible use for the whole income year, such as itemised supplier records which have the taxpayer’s work use proportion for the applicable period marked on each record as evidence of their annual claim for deduction;
  • records showing their detailed usage pattern over a representative period (eg a diary record of use over a representative four-week period) – although the ATO warns that taxpayers can only use a representative period if they have one; or
  • a reasonable estimate, but only in relation to a small claim for home office running expenses where the taxpayer can demonstrate that the estimate was reasonably likely under the given circumstances.
Special rules for home office running expenses

The ATO says that taxpayers can use one of two methods to calculate their home office running expenses:

  • keep records and written evidence to determine their work-related proportion of actual expenses incurred, or
  • use a rate of 52 cents per hour – this method incorporates all of the items that can be claimed as home office running expenses, including lighting, heating, cooling, cleaning costs and decline in value of home office items such as furniture and furnishings in the area used for work. The ATO says that taxpayers only need to keep a record to show how many hours they work from home. They can do this over the course of the income year, or if the work-from-home hours are regular and constant, by keeping a record for a representative four-week period.
Device usage expenses

Similarly, taxpayers can use one of two methods to calculate their device usage expenses:

  • keep records and written evidence to determine their work-related proportion of actual expenses – expenses can be apportioned on a time basis or data basis; or
  • claim up to $50 in total for all device usage charges where detailed written evidence is not kept. The ATO says this method is appropriate where work use is incidental. Taxpayers can keep basic records that are based on rates of 25 cents per work call from a landline, 75 cents per work call from a mobile and 10 cents per work-related text message.

Genuine redundancy payments: alignment with Age Pension age

The Federal Government has announced that it will amend the law to extend the concessional tax treatment for genuine redundancy payments and early retirement scheme payments to align with the Age Pension qualifying age.

Currently, an individual must be below age 65 at the time their employment is terminated to qualify for a tax-free component on a genuine redundancy payment or an early retirement scheme payment. Genuine redundancy payments are made when a job is abolished, and early retirement scheme payments are made when a person retires early, or resigns, as part of a scheme put in place by an employer. Where an individual is under age 65 and meets the other requirements in Subdiv 83-C of the Income Tax Assessment Act 1997, they receive tax-free a base amount of $10,399 (for 2018–2019), plus $5,200 for each whole year of service.

The government said it will amend the law to align genuine redundancy and early retirement scheme payments with the Age Pension qualifying age from 1 July 2019. The Age Pension age will be 66 on 1 July 2019, rising to 67 by 1 July 2023. The change will mean that all individuals aged below the Age Pension qualifying age will be able to receive a tax-free component on the payment they receive from their employer in these circumstances.

Take, for example, a 65-year old with 10 years of service whose job is abolished, and who receives a $100,000 redundancy payment. Currently, as they are aged over 65 years, they would not receive a tax-free component and would pay $15,000 tax. Under the proposed changes, the individual would pay $5,640 in tax, saving $9,360.

Source: http://jaf.ministers.treasury.gov.au/media-release/073-2018/.

GST on property developments involving government

In late 2018, the ATO released Taxpayer Alert TA 2018/3 GST implications of certain development lease arrangements.

The ATO says it is reviewing arrangements involving property developers acquiring land from government entities, specifically where the developer provides development works to the government entity as payment for the land.

The ATO is concerned that some developers and government entities are not reporting the value of their supplies under these arrangements in a consistent manner, resulting in GST being underpaid.

One of the scenarios under review has the following features:

  • A government entity agrees to supply land to a property developer. The agreement requires the developer to pay an amount of money, and also to do certain development works, as payment for the supply of land.
  • The developer pays the amount of money to the government entity.
  • The government entity may grant the developer a short-term lease, or licence, to allow the developer to complete the development works on the land.
  • Upon completing the development works, the developer invoices the government entity for the value (including GST) of the development works.
  • The government entity then supplies the land to the developer by granting the developer a long-term lease, or transferring title, over the land.

Following from this, when reporting their GST obligations in their activity statements:

  • The government entity claims an input tax credit for the amount of GST included on the developer’s invoice for the supply of development works. However, the government entity only reports the monetary payment received for the land, not including the value of the development works the developer provided as payment for the land.
  • The developer does not report the supply of the development works it invoiced to the government entity. This results in the developer not paying GST on the development works provided to the government entity, despite having claimed input tax credits on all the acquisitions it used in completing those development works.
  • The developer may include the value of all the development works completed on the land (including those it invoiced to the government entity) in the cost of the development when applying the margin scheme. This significantly reduces the amount of GST the developer pays on its supply of the property (as vacant land or a residential unit) to a customer.

The ATO is engaging with taxpayers and government entities to examine the issues of concern and ensure that all parties correctly account for their GST and income tax obligations in such situations. Fraud or evasion provisions “may be considered” where there is a change in how the arrangement is accounted for after the fact, so as to gain an advantage due to the lapse of the statutory periods for amending activity statements.

Source: www.ato.gov.au/law/view/document?docid=tpa/ta20183/nat/ato/00001.

 

Client Alert February 2019

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Tax clinic trial to reduce tax regulatory burden

To help reduce the regulatory burden on businesses, including the tax burden, the government has allocated $1 million to set up 10 tax clinics across Australia under a trial program based on the Curtin University Tax Clinic.

Each clinic will receive up to $100,000 for 12 months to support unrepresented individual or small business taxpayers by providing general taxation advice and helping them with their tax obligations and reporting requirements. The clinics, through identifying issues and building greater understanding of the tax system in operation, are also designed to improve the interactions that small businesses and individual taxpayers have with the ATO.

The clinics will cover advice, representation, education and advocacy, and will offer students training in the profession the opportunity to work with taxpayers, under the direct supervision of qualified tax professionals.

New “work test” exemption for recent retirees

The Federal Government has created a new opportunity for some recent retirees to make additional superannuation contributions. From 1 July 2019, a 12-month exemption from the “work test” for newly retired individuals aged between 65 and 74 years with a total superannuation balance below $300,000 means many older Australians will now have an extra year to boost their superannuation savings.

The work test requires that a person is “gainfully employed” for at least 40 hours in any 30-day consecutive period during the financial year in which the contributions are made.

The contributions rules are complex, but with the right planning and advice you can maximise your contributions into superannuation at the right time.

ATO issuing excess super contributions determinations

The ATO has begun issuing determinations to people who exceeded their concessional superannuation contributions cap for the 2017–2018 financial year. These determinations will also trigger amended income tax assessments and additional tax liabilities. Individuals can elect for the ATO to withdraw their excess contributions from their super fund to pay any additional personal tax liability.

You have 60 days from receiving an ECC determination to elect to release up to 85% of your excess concessional contributions from your super fund to pay your amended tax bill. Otherwise, you will need to fund the payment using non-superannuation money.

Reviewing the tax treatment of granny flats

The Federal Government has asked the Board of Taxation to undertake a review of the tax treatment of “granny flat” arrangements, recommending potential changes that take into account the interactions between tax laws and the social security rules. This request for review is in response to the 2017 Australian Law Reform Commission’s report Elder abuse: a national legal response.

Currently, homeowners may have to pay capital gains tax (CGT) where there is a formal agreement, for example, for an older parent to live with their child, either in the same dwelling or a separate granny flat. This may deter families from establishing a formal and legally enforceable agreement, leaving no protection of the rights of the older person if there is a breakdown in the informal agreement.

Resolving tax disputes: government to help small businesses

The Federal Government intends to make it easier, cheaper and quicker for small businesses to resolve tax disputes with the ATO. It will establish a Small Business Concierge Service within the Australian Small Business and Family Enterprise Ombudsman’s office to provide support and advice about the Administrative Appeals Tribunal (AAT) process to small businesses before they make an application. The government will also create a dedicated Small Business Taxation Division within the AAT.

Small business tax offset: avoiding errors when claiming

The ATO has provided new tips for avoiding common errors when reporting net small business income and claiming the small business income tax offset for unincorporated small businesses. These include tips on reporting amounts in the right sections of your tax return, providing all of the relevant information, and using net income (not gross income) in your calculations.

The offset (up to $1,000) is worked out by the ATO on the proportion of income tax payable on an individual’s taxable income that is net small business income. For 2018–2019 and 2019–2020 the rate of offset is 8%.

Home office running expenses and electronic device expenses

The ATO has released an updated version of Practice Statement PS LA 2001/6, its guidance on calculating and substantiating home office running expenses and electronic device expenses that are claimed as tax deductions.

The basic principles have been amended to emphasise that you must actually incur the expenses you claim, and that there must be a real connection between your use of a home office or device and your income-producing work. On the other hand, the requirement that your income-producing use must be substantial – not merely incidental – has been removed.

There is new information on what type of evidence you need to be keep, and the cents per hour rate you can claim for eligible home office running expenses has increased from from 45 cents to 52 cents per hour, effective from 1 July 2018.

Genuine redundancy payments: alignment with Age Pension age

The Federal Government has announced that it will amend the law to extend the concessional tax treatment for genuine redundancy payments and early retirement scheme payments to align with the Age Pension qualifying age.

Currently, an individual must be aged below 65 at the time their employment is terminated to qualify for a tax-free component on a genuine redundancy payment or an early retirement scheme payment.

Where an individual is under age 65 and meets the requirements of the Income Tax Assessment Act 1997, they receive tax-free a base amount of $10,399 (for 2018–2019), plus $5,200 for each whole year of service.

The government says it will amend the law to align genuine redundancy and early retirement scheme payments with the Age Pension qualifying age from 1 July 2019.

GST on property developments involving government

The ATO says it is reviewing arrangements involving property developers acquiring land from government entities, specifically where the developer provides development works to the government entity as payment for the land.

The ATO is concerned that some developers and government entities are not reporting the value of their supplies under these arrangements in a consistent manner, resulting in GST being underpaid.

 

New SMS scam ‘spoofs’ ATO number

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ATO assistant commissioner Karen Foat said the agency has been following the development of a new scam that sends SMS messages under the guise of a phone number that appears to be sent from the tax office.

The tactic, known as “spoofing”, is a common technique used by scammers in an attempt to make their interactions with taxpayers appear legitimate.

The new scam is a carryover from reports in 2018 where scammers “spoofed” phone calls in a bid to trick taxpayers.

“We are seeing the emergence of a new scam, where scammers are using an ATO number to send fraudulent SMS messages to taxpayers asking them to click on a link and hand over their personal details in order to obtain a refund,” said Ms Foat.

“This scam is not just targeting your money, but is after your personal information in an attempt to steal your identity.

“Taxpayers should be wary of any phone call, text message, email or letter about a tax refund or debt, especially if you weren’t expecting it.”

Ms Foat said that while the ATO regularly contacts taxpayers via phone calls, emails, and SMS, there were some key tell-tale signs that differentiated them from scammers.

For example, the ATO would never send taxpayers an email or SMS asking them to click on a link to provide login, personal or financial information, or to download a file or open an attachment.

Further, the tax office will not use aggressive or rude behaviour, or threaten you with arrest, jail or deportation, nor request payment of a debt via iTunes or Google Play cards, pre-paid Visa cards, cryptocurrency or direct credit to a personal bank account.

It will also not request a fee in order to release a refund owed to a taxpayer.

If you receive a scam call, you can hang up and call your tax agent independently.

 

Source: Article by Jotham Lian – www.accountantsdaily.com.au

 

Instant asset write-off threshold upped to $25k

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The government has increased the threshold for the instant asset write-off to $25,000 as it looks to entice the small business sector ahead of a federal election.

Announced yesterday, Prime Minister Scott Morrison has pledged to increase the small business instant asset write-off to $25,000 from $20,000.

The write-off will be available for small business with an annual turnover of less than $10 million and will apply until 30 June 2020.

The government will be seeking to legislate the change when Parliament resumes on 12 February.

This measure is estimated to have a cost to revenue of $750 million over the forward estimates period, with an estimated 3 million small businesses eligible to access the write-off.

“The $25,000 instant asset write-off will improve cash flow by bringing forward tax deductions, providing a boost to small business activity and encouraging more small businesses to reinvest in their operations and replace or upgrade their assets,” Mr Morrison’s office told Accountants Daily.

The government’s decision to raise the threshold comes after Labor announced that it would introduce the Australian Investment Guarantee, a permanent feature which will allow businesses to immediately deduct 20 per cent of any new eligible asset worth more than $20,000.

Source: Article by Jotham Liam – www.accountantsdaily.com.au

 

 

ATO flags common errors with contribution deductions

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With greater numbers of clients now eligible to claim deductions for personal superannuation contributions, the ATO has identified some common errors that practitioners and their clients should avoid.

 For many super members, the 2017–18 financial year was the first opportunity they had to claim a deduction for personal super contributions, with the strategy previously only available to the self-employed.

Prior to 1 July 2017, the 10 per cent test applied, which meant that individuals were only eligible to claim a tax deduction for personal super contributions if less than 10 per cent of their income was earned from employment.

In an online update, the ATO said that the removal of the 10 per cent maximum earnings condition means that more taxpayers may now be eligible to claim a personal super contribution deduction, but warned there are some common errors to watch out for.

Before lodging the 2018 tax return, it is important to check that you are eligible to claim and that you have made personal (after tax) super contributions directly to your super fund before 30 June 2018.

In order to be eligible for deductions on contributions made on or after 1 July, the contributions cannot have been made to a Commonwealth public sector superannuation scheme in which you have a defined benefit interest, a constitutionally protected fund, or a super fund that notified the ATO before the start of the income year that it had elected to treat all member contributions as non-deductible.

You also need to meet the age restrictions. Clients aged between 65 and 74 may be eligible to use this strategy if they meet the work test.

It is important to ensure that you have sent a notice of intent to claim or vary a deduction for personal super contributions to your super fund and received an acknowledgement.

It also noted that members can only claim deductions for their after-tax personal super contributions and not from before-tax income such as the superannuation guarantee, salary sacrifice or reportable employer super contributions shown on their payment summary.

Source: www.smsfadviser.com