Pre-lodgement Compliance Review: What You Need To Know

As a part of the ATO’s concerted efforts to engage taxpayers earlier and identify risks before they become an issue, Pre-lodgement Compliance Reviews (PCRs) are increasingly being used.

PCRs have previously exclusively been in the domain of higher consequence taxpayers such as public companies, international groups and other large businesses. However, the ATO may now be extending these reviews to all other business taxpayers in situations where timely compliance assurance is considered necessary.

 

“The aim of the PCR is to assure the right tax outcomes, and identify and manage material tax risks through early, tailored and transparent engagement. PCRs support our approach of raising and resolving potential compliance concerns as they arise – that is, prevention before correction.”

 

Put simply a PCR is an agreement between the ATO and a business to communicate and share information about significant transactions, tax positions taken, and potential tax disclosures. If the ATO deems that timely compliance assurance is necessary for your business and you become a part of the PCR process, there will be initial discussions to establish the framework in which it will be conducted.

 

Once the framework is established, the ATO will then have additional discussions with you throughout the income year, usually every quarter, where it can raise identified issues for discussion and your business can make disclosures of required information. The information you provide will be used in analysis to identify issues and make recommendations.

 

In terms of the actual tax return, PCR will allow businesses to have the opportunity to have a discussion with the ATO about the details of what will be included in their tax return as well as the tax preparation process. Where there is a point of conflict between your business and the ATO during the pre-lodgement period, alternative dispute resolution principles are available.

 

Although the PCR doesn’t provide the same level of certainty to businesses involved as an annual compliance arrangement, post lodgement conversations allow businesses to discuss issues identified in the return and seek resolution. An amount of certainty can also be provided through other mechanisms, such as requesting a ruling as a part of the PCR process.

 

Each PCR covers one financial or income tax year, however, it usually runs for around 2 years, depending on the timing of disclosures and the resolution of issues. The 2-year period allows for the conclusion of the lodgement of tax return and a period of time after the lodgement, up to 5 months, to allow for analysis and discussion of outstanding issues where necessary.

Want to avoid PCR?

If you want to make sure your business avoids getting dragged into the PCR process, we can help you meet your compliance obligations in a timely manner. Remember, the PCR process may be applied to income tax as well as GST so don’t neglect any part of your compliance obligations.

Client Alert Explanatory Memorandum (October 2015)

This issue of Client Alert takes into account all developments up to and including 17 September 2015.

Excessive deduction claims on holiday homes on ATO hit list

The ATO is increasing its focus on holiday home investors and, in particularly, whether they are correctly claiming deductible expenses. The ATO has recently advised that it will send letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent.

Note: If a property is rented at below market rates, for example to family or friends, deduction claims must be limited to the income earned while rented.

The ATO is of the view that holiday home investors may be misinterpreting the rules regarding tax deductions for rental properties and may therefore be over-claiming on tax deductions for periods when the property is not being rented out. There are suggestions that the confusion among taxpayers as to what constitutes personal use or reasonable (or realistic) efforts to lease out a holiday home has resulted in homes that are not genuinely available for rent. The ATO has indicated that it will focus on the following:

  • excessive deductions claimed for holiday homes;
  • properties that are located in remote locations, with limited rental period and minimal income;
  • the use of risk detection data models and market analysis to identify and investigate claims where taxpayers have unusual rental income and deductions patterns compared to other investors in similar locations;
  • writing to owners to remind them of what they cannot claim; and
  • jointly owned holiday homes where husband and wife unequally divide the income and deductions.

It is important that the ATO continues to educate rental property owners on what they can and cannot claim. Taxpayers may have negatively geared investment properties giving rise to significant deductions and it is therefore inevitable that the need for review and monitoring arises.

Having said that, it should be noted that there is no clear guidance as to what constitutes “reasonable”, “genuine” or “realistic” in the context of making all the relevant attempts to rent out a holiday home. There is also a concern that investors may have to prove that efforts were undertaken to rent out the holiday home, perhaps by demonstrating that they have advertised the property for rent, engaged rental agents and so forth.

If the ATO were to commence a review or audit on a holiday home rental property, it is hoped that the ATO would not make any conclusions regarding the use of the holiday home or the intention of the taxpayer prior to objectively considering all the available evidence. This is especially the case if the holiday home is subject to seasonal demand.

Source: ATO media release, 31 August 2015, https://www.ato.gov.au/Media-centre/Media-releases/Helping-taxpayers-get-it-right-this-tax-time-on-rental-properties/.

Foreign property investors – reduced penalty period ending

The ATO has reminded foreign investors of a reduced penalty period if they disclose possible breaches of Australia’s foreign investment rules for purchases of Australian real property. The reduced penalty period is only available until 30 November 2015. To apply for the reduced penalty period, foreign investors must complete the reduced penalty disclosure form (available at http://compliance.firb.gov.au/personal-circumstances/).

From 1 December 2015, new criminal and civil penalties will apply. The ATO has also reminded foreign investors with an existing interest in agricultural land that they must notify it of their interests by 31 December 2015 and that the obligation to register exists regardless of the value of the land.

Note that a package of Bills to tighten Australia’s foreign investment framework has been introduced (see article below).

Source: ATO publication, “Foreign investors need to report”, 25 August 2015, https://www.ato.gov.au/Tax-professionals/Newsroom/Income-tax/Foreign-investors-need-to-report/.

Foreign investment framework rules to be tightened: Bills introduced

The Treasurer said the “legislative package shall ensure Australia maintains a welcoming environment for investment – but one that ensures that the investment is not contrary to our national interest”. Mr Hockey said the “reforms shall ensure that from 1 December 2015, Australia’s foreign investment framework is more modern, simple and effective.” The Bills are:

–        introduce civil penalties and additional stricter criminal penalties to ensure foreign investors and intermediaries do not profit from breaking the rules. Mr Hockey said the criminal penalties will be increased from $90,000 to $135,000 for individuals and will be supplemented by civil pecuniary penalties and infringement notices for less serious breaches of the residential real estate rules. Third parties such as real estate agents, migration agents, conveyancers and lawyers who knowingly assist a foreign investor to breach the rules will also be subject to both civil and criminal penalties. Note the ATO is administering a reduced penalty period for those who self-report non-compliance before 30 November 2015 (see above);

–        transfer to the ATO the responsibility of regulating foreign investment in residential real estate. The Treasurer noted the Government has provided $47.5 million over four years to the ATO to improve compliance and enforcement of the rules. In this regard, Mr Hockey noted the ATO’s data-matching abilities. Note that in May 2015, the ATO had announced that it will require details of foreign investors that apply to the Foreign Investment Review Board (FIRB) to purchase residential or agricultural land in Australia for the 2010–2011 to 2015–2016 financial years;

–        enable the lowering of screening thresholds for investments in Australian agriculture. Since 1 March 2015, the screening threshold for foreign purchases of agricultural land has been lowered from $252 million to $15 million based on the cumulative value of agricultural land owned by that investor. The Government is also introducing a $55 million threshold for direct interests in agribusinesses from 1 December 2015; and

–        reduce red tape by removing routine cases and better aligning the foreign investment framework with other corporate legislation. For example, Mr Hockey said the substantial interest threshold will be raised from 15% to 20% to better align the foreign investment rules with the takeover rules in the Corporations Act 2001. This means investors acquiring a stake of less than 20% will no longer need foreign investment approval.

  • Foreign Acquisitions and Takeovers Fees Imposition Bill 2015
    (http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5515%20Recstruct%3Abillhome) – introduces fees on all foreign investment applications to fund the costs of administration and enforcement of the new regime. For residential and agricultural properties valued at $1 million or less, foreign investors will pay a fee of $5,000. Higher fees apply to more expensive residential and agricultural properties as well as commercial real estate and business applications.
  • Register of Foreign Ownership of Agricultural Land Bill 2015
    (http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5516%20Recstruct%3Abillhome) – establishes a register of foreign ownership of agricultural land operated by the ATO. On 1 July 2015, the Government established a register of foreign ownership of agricultural land operated by the ATO. All existing holdings must be registered with the ATO by 31 December 2015 and any new interests registered within 30 days. The ATO is collecting information such as the location and size of the property and size of the interest acquired. The Government has previously advised that the data will be made available to the public from 2016. The Government is also working with the states and territories to use their land titles data to expand the register in the future.

Note the Bills were still before the House of Reps at the time of writing.

Source: Treasurer’s second reading speech, “Foreign investment reform package”, 20 August 2015, http://jbh.ministers.treasury.gov.au/speech/026-2015/.

Payroll tax grouping – know the rules

The payroll tax grouping rules are complex and many employers across Australia are not aware of their existence or their obligations under these rules.

The payroll tax grouping rules require employers to group their payroll tax liabilities with other businesses that they control and have the effect of deeming businesses to be a single entity for payroll tax purposes.

Under the payroll grouping rules, wages of these related businesses are then added together, and the calculation of their payroll tax liability is based on the group’s total wages.

Further, all members of the group become liable for the payroll tax debts of the group which are incurred while they are members of that group. This means that if one member defaults in the payment of tax, that amount may be recovered from any of the other group members.

This article provides a basic overview of the rules.

Payroll tax – background

Payroll tax is a state or territory based tax payable by employers as a percentage of total wages paid to employees.

Although payroll tax is a state tax, different jurisdictions have different payroll tax rates and general deduction thresholds. New South Wales, Northern Territory, South Australia, Tasmania and Victoria have substantially identical payroll tax legislation and Queensland has legislation to align to these states and territories.

Payroll tax is calculated on wages and salaries paid (or payable) by an employer to its employees and deemed employees at the following rates:

State/territory Payroll tax rate 2015–2016
ACT 6.85%
NSW 5.45%
NT 5.5%
Qld 4.75%
SA 4.95%
Tas 6.1%
Vic 4.85%
WA 5.5%

Payroll tax only becomes payable by an employer (or group – see below) when the total of all wages paid exceeds a general deduction threshold. The annual thresholds are different in each state and territory and are as follows:

State/territory General deduction threshold 2015–2016
ACT $1,850,000
NSW $750,000
NT $1,500,000
Qld $1,100,000
SA $600,000
Tas $1,250,000
Vic $550,000
WA $800,000 (phases out to $7,500,000)

Each state and territory also has a monthly threshold which, with the exception of New South Wales and Tasmania (which have different thresholds for 28-day, 30-day and 31-day months), is 1/12th the annual threshold.

For New South Wales and Tasmania, the monthly thresholds are as follows:

  New South Wales 2015–2016 Tasmania 2015–2016
29-day month $59,426 $99,044
30-day month $61,475 $102,459
31-day month $63,525 $105,874

Generally, employers are required to self-assess their liability to payroll tax on a monthly basis, which is then reconciled at the end of each financial year. Employers are required to register for payroll tax if during any one month their total Australian wages (or the group’s total Australian wages) exceed the relevant monthly deduction threshold level.

For payroll tax purposes the definition of wages is very wide and includes:

  • normal wages;
  • staff allowances;
  • staff commissions and bonuses;
  • employer (pre-tax) superannuation contributions including super guarantee payments, monetary and non-monetary salary sacrifice contributions and contributions to defined benefit funds;
  • the aggregate grossed up (using type 2 factor) amount fringe benefits;
  • the value of shares and options;
  • payments made to certain contractors;
  • certain payments made by employment agencies in relation to employment agency contracts;
  • director payments; and
  • termination payments and paid-out accrued leave.

There are, however, a number of payments that are specifically exempted from payroll tax such as:

  • maternity or adoption leave paid in addition to normal leave entitlements;
  • payments made under the Commonwealth Government’s Paid Parental Leave scheme;
  • contributions made by employers to a non-fringe benefit portable long service leave scheme or a redundancy or severance scheme;
  • the reimbursements of business expenses incurred by employees for expenses incurred in the course of the employer’s business but only where the precise amount is reimbursed;
  • the income tax free portion of redundancy or early retirement payments; and
  • certain payments made by an insurer, and compulsory Workers Compensation payments.

Illustrative example 1

ABC Pty Ltd has employees in both Victoria and Tasmania and in a 31-day month, the monthly wages paid for all of those employees is $50,000. As ABC Pty Ltd has businesses in more than one Australian jurisdiction, it will need to calculate its payroll tax liability in both states.

Victoria

The monthly Victorian general deduction threshold is $45,833 (based on $550,000/12 months). ABC Pty Ltd would therefore need to register for payroll tax in Victoria as it has exceeded the monthly Victorian general deduction threshold of $45,833.

Tasmania

The monthly Tasmanian general deduction threshold is $105,874 (the specific threshold for a 31-day month). Given that ABC Pty Ltd pays its employees $50,000, it would not need to register for payroll tax in Tasmania as it has not exceeded the monthly Tasmanian threshold.

The nexus test for payroll tax

The payroll tax legislation has provisions to determine in which Australian jurisdiction a payroll tax liability arises in situations where the employees of a business work in more than one state or territory. The nexus provisions look at a number of factors in order to determine the state or territory most closely connected with the employee’s services. These factors are considered in the following order:

  • the state or territory where the employee’s principal place of residence is;
  • where the employee has no principal place of residence, the state or territory where the address of the Australian Business Number of the employer is registered;
  • where the employer does not have an Australian Business Number or has more than one, the jurisdiction where the employer has their principal place of business;
  • if none of the above can apply, the state or territory jurisdiction where the wages, or the majority of the wages, are paid or payable. This would generally be the jurisdiction in which the employee has their bank account; and
  • if none of the above apply, the state or territory where the majority of the employee’s work occurs.

The nexus test is also important when considering the available general deduction thresholds because if a business pays wages in more than one state or territory the threshold is calculated as a proportion equal to the ratio of wages paid in a particular state or territory.

For example, if the wages paid in Victoria were 25% of the total Australian wages paid, then the relevant threshold for Victoria would be 25% of the full threshold of $550,000, ie $137,500.

Payroll tax grouping – basic rules

The grouping provisions have the effect of deeming businesses to be related and include these businesses in a group for payroll tax purposes.

Businesses will be grouped for payroll tax purposes if there is a common link between them. That is, if the grouping definitions are met, businesses are obliged to form a group unless they can obtain the relevant exemption.

Where payroll grouping occurs, a single threshold deduction applies to the group as if it were a single entity.

Nonetheless, each group member has to register for payroll tax and lodge a separate return but the calculation of their payroll tax liability is based on the group’s total wage.

When will grouping occur?

A payroll tax group will occur in the following circumstances:

1.         Related companies

All corporations that meet the Corporations Act 2001 definition of “related companies” are grouped. In that definition companies are taken to be related if two or more companies are:

  • a holding company and a subsidiary; or
  • both subsidiaries of the same holding company.

This applies even if the common ownership is by virtue of an overseas holding company.

It should also be noted that the potential exemption from grouping referred to above is not available at all to companies grouped under the related companies’ provisions.

2.         Use of common employees

Businesses will be required to be grouped when any services agreement between two or more businesses results in the employees of one business performing duties as an employee for another business.

Not all service agreements will trigger this provision. In order for this to apply the service agreement must set out the specific duties to be performed by the employees of a business for the other business.

Illustrative example 2

Alpha Pty Ltd and Beta Pty Ltd are related companies. During recent times, Beta Pty Ltd has been struggling to meet increased demand from customers and requires additional administrative support at its head office located in NSW.

As a result, Alpha Pty Ltd enters into a service agreement with Beta Pty Ltd under which Alpha will provide two of its employees to Beta. The employees will undertake specific receptionist, secretarial and administrative duties at Beta Pty Ltd for a period of six months.

This arrangement would be considered to be the provision of employees for specific duties connected with the business and a grouping requirement between the two businesses would arise.

Alpha Pty Ltd and Beta Pty Ltd will therefore be required to form a tax group for payroll tax purposes.

3.         Commonly controlled businesses

Where two or more businesses are controlled by the same person or persons there is a requirement to group for payroll tax purposes. For these purposes a person includes individuals or a trustee or a corporate entity.

Businesses are considered to be commonly controlled where a person or persons control more than 50% across different entities. For example:

  • One person is the sole business owner (whether or not as trustee).
  • Joint owners, together as trustees, are the sole business owners.
  • A person or set of persons are entitled to exercise more than 50% of the voting power at directors’ meetings or more than 50% of voting rights attached to voting shares that the company has issued.
  • A person or set of persons constitute or control more than 50% of the board of management of a business entity.
  • A person or set of persons own more than 50% of the capital of a partnership or are entitled to more than 50% of the profits.
  • A person or set of persons are a beneficiary of more than 50% of the value of a trust. (Under a discretionary trust, all beneficiaries are deemed to have a controlling interest).
  • An entity has a direct, indirect or aggregate interest of more than 50% in any corporation.

With the exception of entities grouped for payroll tax under the related companies’ provision, a business may apply for an exclusion from grouping. This may be granted where the relevant state or territory is satisfied the business is conducted independently and not connected with any other group member.

Only one member of a payroll tax group can claim the group’s threshold entitlement. The net effect is therefore, a reduction in the availability of the threshold(s).

Take home message

A careful examination of the implications of the payroll tax grouping provisions should be made for all business structures. In particular, the application of the grouping provisions may vary for each state or territory, so the applicable provisions should be reviewed. The potential eligibility for exclusion from the rules should also be assessed. Furthermore, as business conditions may change and as part of the overall management of a business, it may be prudent to regularly examine your business’s payroll tax obligations.

No GST credits for mining accommodation

In a succinct nine-paragraph decision, the Full Federal Court has dismissed the taxpayer’s appeal from the decision in Rio Tinto Services Ltd v FCT [2015] FCA 94 that it was not entitled to input tax credits (ITCs) for acquisitions relating to mining accommodation (employee/contractor housing) in the Pilbara.

Background

This was a test case on whether the definition of “creditable purpose” in s 11-15 of the GST Act contains a principal purpose test. Section 11-15(2)(a) provides that a thing is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. The provision of residential accommodation is an input taxed supply under s 40-35.

The taxpayer, Rio Tinto Services Ltd, was the representative member of the Rio Tinto Ltd GST group, which carried on a large scale mining enterprise in outback Australia. The group provided and maintained residential accommodation for its workforce in various locations, comprising some 2,300 houses and apartments. This was operated at a considerable loss, eg in 2010 the taxpayer received $6.1 million in rent but the associated costs exceeded $38.8 million.

The case was conducted as a test case for GST paid in October 2010 on expenditure including construction and purchase of new housing, repairs, cleaning and landscaping. The taxpayer claimed it was entitled to input tax credits of nearly $600,000 for acquisitions made by group members in providing and maintaining residential accommodation for the group’s workforce in the Pilbara region.

The taxpayer argued that the acquisitions were made wholly for a creditable purpose because the supply was not an “end commercial objective” in itself but was a necessary and essential part of its mining operations. The taxpayer said it was not in the business of providing residential accommodation. Rather, it provided housing at a loss in order to attract workers who would provide the labour necessary to carry on its mining enterprise. In other words, the taxpayer sought to link the acquisitions to its general operations (which were taxable and/or GST-free), so that an input tax credit could be claimed.

The Commissioner accepted that the provision of residential accommodation was a necessary and essential part of the group member’s business. However, the taxpayer’s ITC claims were rejected on the basis that they came within the terms of s 11-15(2)(a) of the GST Act.

Decision at first instance

In Rio Tinto Services Ltd v FCT [2015] FCA 94, Davies J rejected the taxpayer’s construction of s 11-15, holding that s 11-15(2)(a) prevented input tax credits from being claimed in relation to the supply of residential accommodation.

Davies J followed the view that s 11-15(1) is a “positive test”, while s 11-15(2)(a) is a “negative test” or “blocking provision”. According to her Honour, s 11-15(2)(a) is concerned with the objective relationship between an acquisition and making supplies which would be input taxed, not the “moving cause or principal purpose” behind the acquisition. Her Honour noted that something may be acquired in carrying on an enterprise but nonetheless wholly or partly relate to making supplies that would be input taxed. The words “relate to” denote that there must be a relationship or connection between an acquisition and the making of input taxed supplies, not that a principal purpose must be determined, the Court said.

In this case, Davies J found there was a direct and immediate connection between the acquisitions and the provision of the leased accommodation, and this triggered s 11-15(2)(a). Her Honour also rejected the taxpayer’s alternative argument that the input tax credits should be apportioned by applying the same proportion that mining product revenue formed to total revenue (in this case, 99.88%).

The taxpayer appealed to the Full Federal Court.

Full Federal Court decision

The Full Federal Court gave an ex tempore (“at the time”) judgment, unanimously holding that the terms of s 11-15(2)(a) of the GST Act do not depend on the reason or purpose for making the supply or acquisition. Rather, the Court said, they turn on characterising the extent to which the acquisition relates to the subsequent supply. This requires the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. Where an acquisition relates wholly to input taxed supplies, it is not to be apportioned merely because that supply may also serve some broader commercial objective of the supplier.

In this case, the Full Federal Court said it was clear from the facts that all of the acquisitions related wholly to making supplies of rental residential accommodation. Although the supplies of accommodation were for the broader business purpose of carrying on the taxpayer’s mining operations, this did not alter the fact that the acquisitions all related to supplying premises by way of lease, which were input taxed supplies.

Accordingly, the Full Federal Court dismissed the taxpayer’s appeal.

Rio Tinto Services Ltd v FCT [2015] FCAFC 117, Full Federal Court, Middleton, Logan and Pagone JJ, 24 August 2015, http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/117.html.

ATO’s proportionate compliance approach to SMSFs

From 1 July 2014, the ATO has had three new regulatory compliance powers to deter and address SIS Act contraventions by self-managed superannuation fund (SMSF) trustees: education directions, rectification directions and administrative penalties. The new laws were introduced to give the ATO more flexible and proportionate powers to deal with the various levels of non-compliant behaviour by trustees. ATO Assistant Commissioner, SMSF Segment, Superannuation, Kasey Macfarlane, recently delivered a speech covering how the new regime works, its interaction with the ATO’s existing enforcement and other powers, how the ATO was applying the regime, and how it works for individual versus corporate trustees.

Some key points from the speech:

Identifying risk

The ATO selects SMSFs for audit and review using risk models, intelligence or referrals from other state or commonwealth departments and law enforcement agencies. The ATO has two primary automated risk models – when an SMSF is established and when an SMSF is operation.

In the SMSF establishment model, the ATO will, among other things, focus on the compliance history of the trustees/directors (eg if they have previously been part of another SMSF the ATO has had issues with). The ATO will also approach trustees by telephone and asks them questions about key obligations and concepts (eg sole purpose test). Depending on the answers, the ATO may allow registration or put conditions in place. Once the SMSF is in operation, the ATO will look at the income tax and regulatory history of the SMSF – this includes the SMSF annual return, auditor contravention reports, and other data sources. In addition, the ATO receives “dob-ins” from the general public and related parties of SMSF trustees and directors and the ATO manually reviews alerts and information in databases like RP data and AUSTRAC.

Rectifying contraventions

Many SMSF professionals use the Super P2P service. Ms Macfarlane said the ATO expects that in most cases where a trustee or auditor finds an issue or contravention, they can rectify it without ATO assistance. She said the auditor would likely report the contravention and the rectification and this would “generally be enough” to satisfy the ATO. Ms Macfarlane said the ATO encourages all trustees and their advisors to adopt this type of approach, ie to take steps to rectify a breach as soon as it is identified. She said in these circumstances, the ATO would be “unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose”.

Enforcement outcomes

The ATO reported the following enforcement outcomes for 2014–2015: 361 accepted enforceable undertakings; 54 education directions given (new power); 27 rectification directions given (new power); 92 funds made non-compliant, with trustees receiving a notice of non-compliance; 662 disqualified trustees; and 44 SMSFs wound-up due to compliance action.

Education and rectification directions

Ms Macfarlane made the following points:

  • Education directions – When a contravention of the SIS Act or regulations occurs due to a lack of knowledge or understanding by the trustee, an education direction may be appropriate. A trustee may be directed to undertake education in addition to other compliance action. For example, they could be directed both to undertake education and to rectify the contravention, and potentially also have an administrative penalty imposed.
  • Rectification directions – For contraventions of the SIS Act or regulations that occurred on or after 1 July 2014, the ATO can now direct the trustees to rectify a contravention with specified action and to provide the ATO with evidence of compliance with the direction. Generally, the ATO allows six months to rectify an issue, but in limited circumstances a slightly longer period may apply. This doesn’t prevent the ATO considering whether to accept an enforceable undertaking from a trustee if offered. These arrangements rely on SMSF trustees initiating the undertaking with the ATO before it issues the rectification direction (and this may be more practical for the trustees).

When considering whether to issue a direction, the ATO will take into account: any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction; the nature and seriousness of the contravention; and any other relevant circumstances.

  • Failure to comply with rectification direction – If the trustee fails to comply with the rectification direction within the specified period, then they have committed an offence of strict liability and are liable for a penalty of $1,800 (10 penalty units). The trustee or director may also be disqualified or issued with a notice of non-compliance. A trustee may request the terms of the rectification direction be varied, for example more time to complete the rectification. Requests must be made in writing, be received on or before the end of the period specified, be signed and dated, and set out the reasons for making the request. The ATO must make a decision on the request within 28 days or they will be taken to have refused the request. The trustee may object to the ATO decision to: give a rectification direction; or refuse to vary a rectification direction.

Administrative penalties

Where a trustee contravenes a specific provision of the SIS Act, an administrative penalty will automatically be imposed, as set out in s 166 of the SIS Act. From 31 July 2015, the Commonwealth penalty unit increased from $170 to $180. In the case of contraventions by a corporate trustee of an SMSF, the directors are jointly and severally liable for the one administrative penalty imposed whereas individuals will each receive a separate administrative penalty. Where there is more than one trustee, Ms Macfarlane said it’s expected each trustee will have the penalty imposed on them individually unless there are exceptional circumstances supporting the imposition on specific trustees only. The burden will be on the trustee to prove, for example that another trustee committed fraud against them. Ms Macfarlane made the following points re penalty remission:

  • When considering remission, the ATO will take into account: compliance history; rectification action; and any other relevant circumstances.
  • Trustees may object to the ATO’s decision not to remit, or not to remit in full, the administrative penalty. However, Ms Macfarlane said it is unlikely that a trustee will be given more than one penalty remission as multiple breaches demonstrate poor compliance history.
  • As the rules are new, so far the ATO has either remitted the penalty or are considering a remission request. However, Ms Macfarlane said that as the ATO audits more SMSFs for breaches made since 1 July 2014, people can expect to see increasing application of SMSF administrative penalties over the next 18 months, with requests for remission being denied in instances of serious and/or repeated non-compliance.
  • The ATO needs to confirm a contravention before it will apply a penalty. Ms Macfarlane said the ATO does not intend to automatically apply penalties to all contraventions reported to it. “We must impose the SMSF administrative penalty when we confirm an eligible breach during an ATO audit, so it’s best to avoid the audit by taking steps to rectify the breach before we get involved,” she said.

Approach to new powers

Ms Macfarlane said the ATO uses “the new powers and penalties to drive compliance, not to increase revenue”. “So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences,” she said. However, Ms Macfarlane also reminded people of the purpose of SMSFs to provide retirement benefits for members. “Those people looking to ‘play the system’ and receive a present-day tax benefit in their personal or business affairs are on notice; regulatory and income tax breaches related to the same transaction or arrangement will no longer be treated in isolation. If we find an aggressive taxation approach coupled with a regulatory breach we will definitely look to disqualify the trustee,” she said.

Ms Macfarlane also discussed four case studies illustrating how the new regime will operate. The following case study (Case study 4) illustrates a scenario where the ATO considers an education direction, a rectification direction and remission of administrative penalties:

Case Study 4

The Northern Super Fund, a regulated SMSF was established on 4 May 2011. John and Martha are members of this SMSF. The trustee is Vineyard Video Pty Ltd with John and Martha as directors. The fund’s total assets as at 30 June 2014 are $400,000. The fund lodged all SMSF annual returns on time with no prior contraventions reported.

The 2014–2015 SMSF annual return was due on 28 February 2016. An ATO audit of the 2014–2015 income year starts on 1 April 2017 as the SMSF annual return has still not been lodged and no extension to lodge has been requested.

The directors admit to the ATO case officer that they have not lodged because they are behind in the administration of the SMSF. For the 2014–2015 income year, it is found that the trustee has failed to: prepare the accounts and statements of the fund; appoint an approved SMSF auditor within the prescribed timeframe, and lodge the SMSF annual return.

Accordingly, in the 2014–2015 income year the trustee has contravened ss 35B, 35C and 35D of the SIS Act. As the contravention occurred after 1 July 2014, an education direction can be considered. Although an education direction may not be the most appropriate tool in this instance, as the trustee has lodged all previous annual returns on time, it appears that the trustee has knowledge of and is aware of the requirements.

It may be appropriate to issue a rectification notice to prepare the accounts and statements for the 2014–2015 income year, to provide the accounts and statements to an SMSF auditor and to lodge the 2014–2015 SMSF annual return.

Under s 166(1), the body corporate is liable for administrative penalties of $1,700 (10 penalty units) for contravening s 35B. Additionally the trustee is also liable for a failure to lodge penalty.

The trustee has lodged all other SMSF annual returns on time and has no prior contraventions. This is a first contravention and may warrant full remission of the administrative penalty.

Source: ATO speech, “The new administrative penalty regime: the ATO’s new stick”, Address to the Tax Institute National Superannuation Conference, Doltone House, Sydney, 20 August 2015, https://www.ato.gov.au/Media-centre/Speeches/Other/The-new-administrative-penalty-regime–the-ATO-s-new-stick/.

Find your small lost superannuation accounts

The Tax and Superannuation Laws Amendment (2015 Measures No 4) Bill 2015 has been introduced. It proposes to amend the Superannuation (Unclaimed Money and Lost Members) Act 1999 to increase the account balance threshold below which small lost member accounts will be required to be transferred to the Commissioner of Taxation, ie from $2,000 to $4,000 from 31 December 2015, and from $4,000 to $6,000 from 31 December 2016.

Other amendments

The Bill also proposes the following amendments:

  • CGT scrip-for-scrip rollover integrity – makes amendments to improve the integrity of the scrip-for-scrip rollover in Subdiv 124-M of the ITAA 1997. Date of effect: applies in relation to CGT events that occur after 7.30pm (AEST) on 8 May 2012.
  • Government employees delivering overseas assistance – amends the income tax law by removing an income tax exemption which applied to employees of an Australian government agency who work overseas for not less than 91 continuous days in the delivery of Official Development Assistance. These employees will no longer be able to claim an income tax exemption on the income they earn while overseas. Date of effect: applies from 1 July 2016.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 4) Bill 2015 awaiting Royal Assent, before the House of Reps at the time of writing, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5517%20Recstruct%3Abillhome.

TaxWise Budget 2015-16

TaxWise® 2015-16 FEDERAL BUDGET EDITION

The 2015-16 Federal Budget was handed down on 12 May 2015.

The intention of this Budget is to support small businesses and grow jobs, support families and ensure fairness of tax and benefits. At the same time, national security is being ensured as well as steadily repairing the budget in a measured way. The Treasurer, the Hon. Joe Hockey MP, stated that the Government is taking steps to continue to repair the budget “with sensible savings and a prudent approach to spending”.

The Budget mainly focuses on small businesses with aggregated turnover of less than $2 million and large businesses with global revenue of at least $1 billion. The main measures likely to affect you are outlined below. To ensure you know precisely how you may be affected by one or more of these measures, you should consult your tax adviser.

Budget measures affecting Individuals and Families

 

Medicare levy low-income thresholds for singles, families and single seniors and pensioners increased

With effect from the 2014-15 year, the Medicare levy low-income thresholds for singles, families and single seniors and pensioners will be increased per the table below:

2014-15 2013-14
Singles $20,896 $20,542
Couples (no children) $35,261 $34,367
Single seniors and pensioners $33,044 $32,279

The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156 for 2013-14).

The increase in these thresholds takes into account movements in the Consumer Price Index (CPI). This is to ensure that generally low-income taxpayers continue to be exempted from paying the Medicare levy.

Families package: reforms to child care system

The Budget contains a package of reforms to child care details of which are set out below.

Child Care Subsidy

From 2014-15, the Government will provide an additional $3.2 billion over five years to support families with child care needs. This is to help with getting parents back to work, to stay in work, and to undertake education and training or other recognised activities.

From 1 July 2017, a new Child Care Subsidy will be introduced to support families where both parents work. Families meeting the ‘activity test’ with annual incomes up to $60,000 will be eligible for a subsidy of 85% of the actual fee paid, up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.

No annual cap will apply for families with annual incomes below $180,000. However, the Child Care Subsidy will be capped at $10,000 per child per year for families with incomes of $180,000 or more.

Parents must also do a minimum of eight hours a fortnight of work, study or training to qualify for any child care support.

The income threshold for the maximum subsidy will be indexed by CPI with other income thresholds aligned accordingly. Eligibility will be linked to the new ‘activity test’ to better align receipt of the subsidy with hours of work, study or other recognised activities.

The hourly fee cap in 2017-18 will be set at $11.55 for long day care, $10.70 for family day care, and $10.10 for outside school hours care. The hourly fee caps will also be indexed by CPI.

Also, a new Interim Home Based Carer Subsidy

Programme will subsidise care provided by a nanny in a child’s home from 1 January 2016. The pilot programme will extend fee assistance to the parents of approximately 10,000 children. Families selected to participate will be those who are having difficulty accessing child care with sufficient flexibility.

Support for families will be based on the Child Care Subsidy parameters, but with a fee cap of $7.00 per hour per child.

The Child Care Subsidy replaces the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance payments that will cease on 30 June 2017.

Child Care Safety Net

Additional support will be provided to eligible families through a Child Care Safety Net, providing targeted support to disadvantaged or vulnerable families to address barriers to accessing child care. This will be funded by $327.7 million over four years from 2015-16.

The Child Care Safety Net consists of three programmes:

  • the Additional Child Care Subsidy;
  • a new Inclusion Support Programme; and
  • the Community Child Care Fund.
  • The Child Care Safety Net replaces the Inclusion and Professional Support Programme (ceasing on 30 June 2016) and the Community Support Programme (ceasing on 30 June 2017).

Immunisation requirements for eligibility to Government payments

From 1 January 2016, children will have to fully meet immunisation requirements, that is be up-to-date with all childhood immunisations, before their families can access subsidised child care payments or the Family Tax Benefit Part A end-of-year supplement.

Exemptions will only apply for medical reasons.

Accessing parental leave pay from both employer and Government

From 1 July 2016, individuals will no longer be able to access Government assistance in the form of the existing Parental Leave Pay (PLP) scheme, in addition to any employer-provided parental leave entitlements.

Currently, individuals are able to ‘double-dip’ and access Government assistance in the form of PLP as well as any employer-provided parental leave entitlements.

The Government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage). This will save the Government $967.7 million over four years through this measure.

End of Family Tax Benefit Part A large family supplement

From 1 July 2016, the Family Tax Benefit (FTB) Part A large family supplement will cease.

Families will continue to receive a ‘per child’ rate of FTB Part A for each eligible child in their family.

Family Tax Benefit Part A reduced portability

From 1 January 2016, families will only be able to receive Family Tax Benefit (FTB) Part A for six weeks in a 12-month period while they are overseas.

Currently, FTB Part A recipients who are overseas are able to receive their usual rate of payment for six weeks and then the base rate for a further 50 weeks.

Portability extension and exception provisions which allow longer portability under special circumstances will continue to apply.

Pension reforms not proceeding

The Government will not be proceeding with elements of the 2014-15 Budget measure “Maintain eligibility thresholds for Australian Government payments for three years” that relate to the pension income test free areas and deeming thresholds.

The Government proposal was to change how it deems the return from a person’s financial assets for the purposes of the pension active test. The deeming thresholds were to be reset from $46,000 to $30,000 for single pensioners and from $77,400 to $50,000 for pensioner couples from 1 September 2017. Instead, the pension income test free areas and deeming thresholds will continue to be indexed annually by CPI.

Modernising the methods used for calculating work-related car expense deductions

The methods of calculating work-related car expense deductions will be modernised from the 2015-16 income year.

This involves removing:

  • the ‘12% of original value method’; and
  • the ‘one-third of actual expenses method’

as these methods are used by less than 2% of those who claim work-related car expenses.

Remaining methods

The ‘cents per kilometre method’ will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply for all motor vehicles, with the Commissioner of Taxation responsible for updating the rate in following years.

The ‘logbook method’ of calculating expenses will be retained.

These changes will not affect leasing and salary sacrifice arrangements and will better align car expense deductions with the average costs of operating a motor vehicle.

Zone tax offset to exclude “fly-in fly-out” and “drive-in drive-out” workers

From 1 July 2015, the zone tax offset will exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ (FIFO) workers where their normal residence is not within a ‘zone’.

The zone tax offset is a concessional tax offset available to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified locations.

The specified remote areas of Australia covered by the zone tax offset are comprised of two zones, Zone A and Zone B. In general, Zone A comprises those areas where the factors of isolation, uncongenial climate and the high cost of living are more pronounced and Zone B comprises the less badly affected areas. The tax offset for ordinary Zone A residents is accordingly higher than the tax offset for ordinary Zone B residents. A special category of zone allowances is available to taxpayers residing in particularly isolated areas (‘special areas’) within either zone.

Eligibility is based on defined geographic zones and residing or working in a specified remote area for more than 183 days in an income year. However, it is estimated around 20% of claimants do not actually live full-time in the zones.

The changes will better target the zone tax offset to taxpayers who have taken up genuine residence within the zones. This will align the zone tax offset with the original policy intent, which was to support genuine residents of zones. For those FIFO workers whose normal residence is in one zone, but who work in a different zone, they will retain the zone tax offset entitlement associated with their normal place of residence.

Changes to tax residency rules for temporary working holiday makers

From 1 July 2016, the tax residency rules will be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.

Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax-free threshold, the low income tax offset and the lower tax rate of 19% for income above the tax-free threshold up to $37,000.

Income tax relief for Australian Defence Force personnel deployed overseas

Income tax relief will be provided for Australian Defence Force personnel deployed on Operations AUGURY and HAWICK.

A full income tax exemption will be provided to personnel on Operation AUGURY, and the overseas forces tax offset will be available to personnel on Operation HAWICK.

Removal of Government employee income tax exemption

From 1 July 2016, the income tax exemption that is currently available to Government employees who earn income while delivering Official Development Assistance overseas for more than 90 continuous days will be removed.

This measure will remove the inconsistent taxation of Government employees delivering Official Development Assistance overseas by ensuring that their foreign earnings are treated as assessable income in Australia.

Australian Defence Force and Australian Federal Police personnel and individuals delivering Official Development Assistance for a charity or private sector contracting firm will remain eligible for the exemption.

The ‘Small Business’ package of Budget measures

Small business tax rate cuts

There are cuts to the tax rate for small businesses which will apply from the 2015-16 income year.

Incorporated Entities

The tax rate for companies with an aggregated annual turnover of less than $2 million will be reduced by 1.5% (ie from 30% to 28.5%) from the 2015-16 income year. However, the maximum franking credit rate for a distribution will remain at 30%.

Unincorporated entities

For sole traders and individuals who earn business income from a partnership or trust with an aggregated annual turnover of less than $2 million, a 5% tax discount (provided as a tax offset) will be introduced and capped at $1,000 per individual.

Small business accelerated depreciation changes

From Budget Night (starting 7.30pm (AEST) 12 May 2015), the threshold below which small businesses can claim an immediate deduction for the cost of an asset they start to use or install ready for use will be temporarily increased from $1,000 to $20,000. This will apply to assets acquired and installed ready for use from Budget Night through to 30 June 2017.

Only small businesses with an aggregated annual turnover of less than $2 million are eligible.

Assets valued at $20,000 or more that cannot be immediately deducted can be included in the entity’s small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter, in the same way the rules currently apply for assets costing $1,000 or more.

Also, the balance in the small business simplified depreciation pool will be able to be immediately deducted if it is less than $20,000 (including an existing pool).

The rules currently preventing a small business using the simplified depreciation regime for five years if it opts out of the regime will also be suspended until 30 June 2017.

While small businesses can access the simplified depreciation regime for a majority of capital assets, certain assets are not eligible (such as horticultural plants and in-house software) for which specific depreciation rules apply.

  • Note that from 1 July 2017, the $20,000 threshold for the immediate deduction of assets and the value of the pool will revert back down to $1,000.

Immediate deduction for business establishment costs

From the 2015-16 income year, an immediate deduction will be available for professional expenses that are associated with starting a new business, such as professional, legal and accounting advice or legal expenses to establish a company, trust or partnership.

Under the current laws, these expenses can only be deducted over a five year period.

CGT relief reforms for small business restructures

From the 2016-17 income year, small businesses with an aggregated turnover of $2 million or less may change the legal structure of their business without attracting a capital gains tax (CGT) liability. This measure recognises that new small businesses may initially choose a legal structure that no longer suits them once their business is more established. They will be able to change their legal structure without being hampered by potential CGT implications.

Currently, CGT roll-over relief is only available to individuals, trustees or partners in a partnership who incorporate. This new measure provides CGT relief to many more entities.

Broader FBT exemption for portable electronic devices

The fringe benefits tax (FBT) exemption for work-related portable electronic devices used primarily for work purposes will be expanded from 1 April 2016.

Small businesses with an aggregated annual turnover of less than $2 million that provide their employees with more than one qualifying work-related portable electronic device will be able to access the FBT exemption even if the additional items have substantially similar functions as the first device.

The current FBT exemption may only apply to more than one portable electronic device if the devices perform substantially different functions. This measure should help alleviate the confusion around which device is eligible for exemption from FBT where there is an overlap of functions (for example between a tablet and a laptop).

Measures encouraging new businesses

In order to encourage new businesses and entrepreneurship:

  • business registration processes will be streamlined with a single online portal (business.gov.au) developed for business and company registration, making it much easier to register a new business.

A new business will no longer need an Australian Company Number or business Tax File Number. It will be able to use its Australian Business Number to interact with the ATO and ASIC. The new portal (expected to be implemented by mid-2016) will provide all the relevant information clearly and will have integrated customer support; and

  • a regulatory framework to facilitate the use of crowd-source equity funding will be implemented, including simplified reporting and disclosure requirements, to help small businesses access innovative funding sources.

Employee share schemes: further changes

With effect from 1 July 2015, further minor technical changes will be made to the taxation of employee share schemes (ESS) to make ESS more accessible, by:

  • excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • providing the CGT discount to ESS interests that are subject to the start-up concession where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
  • allowing the Commissioner of Taxation to exercise discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

Accelerated depreciation for water facilities, fodder storage and fencing helping farmers prepare for drought

All primary producers will be able to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills for income years commencing on or after 1 July 2016.

Primary producers will also be allowed to depreciate over three years all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed. Currently, the effective life for fences is up to 30 years, water facilities is three years and fodder storage assets is up to 50 years.

The measure is aimed at improving resilience for those primary producers who face drought, assisting with cash flow and reducing red tape by removing the need for primary producers to track expenditure over time. It will form part of the Government’s White Paper on Agricultural Competitiveness.

Changes to Superannuation

Lost and unclaimed superannuation

From 1 July 2016, the Government will implement a package of measures to reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining administrative arrangements for lost and unclaimed superannuation. The cost of implementing the measures will be met from within the existing resources of the ATO.

 

Release of superannuation for a terminal medical condition

From 1 July 2015, terminally ill patients will be able to access superannuation early.

Currently, patients must have two medical practitioners (including a specialist) certify that they are likely to die within one year to gain unrestricted tax-free access to their superannuation balance.

The Government will change this period to two years, giving terminally ill patients earlier access to their superannuation.

Supervisory levies to increase

The Government will raise additional revenue of $46.9 million over four years from 2015-16 by increasing the supervisory levies paid by financial institutions. This should fully recover the cost of superannuation activities undertaken by the ATO and the Department of Human Services, consistent with the Government’s cost recovery guidelines.

Changes to GST

GST extended to offshore supplies of services and intangibles to Australian consumers

From 1 July 2017, offshore supplies of services and intangibles to Australian consumers will be subject to GST.

Exposure Draft legislation was released on Budget Night which extends the scope of the GST to offshore supplies of services and intangibles to Australian consumers. That is, all supplies of things other than goods or real property will be ‘connected with the indirect tax zone’ (ie Australia) where they are made to Australian consumers. This will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier.

The purpose of this measure is to ensure Australia’s GST revenue base does not erode over time as the number of foreign digital suppliers rises.

Responsibility for GST liability arising under the amendments may be shifted from the supplier to the operator of an electronic distribution service in certain circumstances where the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. Shifting responsibility for GST liability to operators is aimed at minimising compliance costs as operators are generally better placed to comply and ensure that digital goods and services sourced in a similar manner are taxed in a similar way. These amendments are broadly modelled on similar rules currently in operation in the European Union and Norway.

A modified GST registration and remittance scheme for entities making supplies that are only connected with the ‘indirect tax zone’ as a result of the amendments will also be implemented.

This change will require the unanimous agreement of the States and Territories before enactment of legislation.

Reverse charge rules for going concerns and farmland sales not proceeding

The previously announced measure to replace the current GST-free treatment for supplies of going concerns and certain farmland sales with a reverse charge mechanism will not proceed.

This measure was intended to reduce the compliance burden for taxpayers. However, during design of the implementation of this measure, it became apparent that proceeding with this measure would have resulted in adverse consequences for taxpayers.

FBT and Meal Entertainment

FBT: meal and entertainment for not-for-profit employees

From 1 April 2016, a separate, single grossed-up cap of $5,000 will be introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees of not-for-profits. Meal entertainment benefits exceeding the separate grossed-up cap of $5,000 can also be counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap. All use of meal entertainment benefits will become reportable.

Currently, employees of public benevolent institutions and health promotion charities have a standard $30,000 FBT exemption cap (this will be $31,177 for the first year of the measure, due to the Temporary Budget Repair Levy that is currently in place) and employees of public and not-for-profit hospitals and public ambulance services have a standard $17,000 FBT exemption cap (this will be $17,667 for the first year).

In addition to these FBT exemptions, these employees can salary sacrifice meal entertainment benefits with no FBT payable by the employer and without it being reported. Employees of rebatable not-for-profit organisations can also salary sacrifice meal entertainment benefits, but the employers only receive a partial FBT rebate, up to a standard $30,000 cap ($31,177 for the first year).

The aim of this measure is to improve integrity in the tax system by introducing a limit on the use of these benefits.

 

Luxury Car Tax change

Luxury car tax exemption for endorsed public museums and art galleries

Public museums and public art galleries that have been endorsed by the Commissioner of Taxation as deductible gift recipients will be allowed to acquire cars free of luxury car tax. The measure will only be in respect of cars acquired for the purpose of public display, consigned to the collection and not used for private purposes. This measure will have effect from the date of Royal Assent of the enabling legislation.

 

Cutting ‘red tape’ and funding the IGT

ATO reforms to cut ‘red tape’

An additional $130.9 million will be provided to the ATO over four years (including capital of $35.6 million) to deliver an improved experience for clients.

Red tape will be reduced and future administrative savings delivered through investment in three initiatives:

  • a digital-by-default service for providing information and making payments;
  • improvements to data and analytics infrastructure; and
  • enhancing streamlined income tax returns through the MyTax system for taxpayers with more complex tax affairs.

Additional funding for the Inspector-General

The Government will provide at least $14.6 million over five years to the Inspector-General of Taxation’s (IGT) office to support its operations. This funding is in addition to the 2014-15 Budget funding to the IGT in relation to the transfer of tax complaints handling.

 

Budget measures affecting Large Businesses

A raft of measures affecting large businesses were also announced in the Budget. These are summarised below:

For companies with global revenue of $1 billion or more

  • A targeted multinational anti-avoidance law will be introduced into the general anti-avoidance provisions.
  • The maximum administrative penalties that apply to companies that enter into tax avoidance and profit shifting will be doubled.
  • The OECD’s new transfer pricing documentation standards will be implemented from 1 January 2016.

Other measures combatting multinational tax avoidance

  • A voluntary corporate disclosure code will be developed to facilitate greater compliance with the tax system.
  • The Government will also tackle treaty abuse in its treaty practices, consult on the development of anti-hybrid rules, exchange information with other countries on harmful tax practices, and further fund the ATO’s profit-shifting investigations.

Other measures

  • The reforms to modernise the Offshore Banking Unit (OBU) regime and targeted integrity measures will proceed.
  • The start date of the new managed investment trusts (MITs) regime has been deferred to 1 July 2016 but MITs can choose to apply the new regime from 1 July 2015.

TaxWise® News is distributed by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

Client Alert – Federal Budget Edition (May 2015)

PERSONAL TAXATION

Personal tax rates: budget deficit levy not to be extended

The 2015–2016 Budget did not make any changes to the current personal tax rates, although in the lead-up to the Budget, the Treasurer indicated that the 2% budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years.

The levy was announced in last year’s Budget and applies for three years from 1 July 2014. It is due to cease at the end of the 2016–2017 financial year.

Work-related car expenses simplified

The Budget confirmed that the 12% of original value and one-third of actual expenses incurred methods would be discontinued. That means only the cents per km and logbook methods remain. The Government will set 66 cents per kilometre as the rate for using the cents per km method, irrespective of a car’s engine size. The changes will apply from the 2015–2016 income year.

Medicare levy low-income thresholds for 2014–2015

From the 2014–2015 income year, the Medicare levy low-income threshold for singles will be increased to $20,896 (up from $20,542 for 2013–2014). For couples with no children, the threshold will be increased to $35,261 (up from $34,367 for 2013–2014). The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156).

For single seniors and pensioners, the Medicare levy low-income threshold will be increased to $33,044 (up from $32,279). This threshold applies to those entitled to the seniors and pensioners tax offset (SAPTO).
The measure will apply from 1 July 2014.

Temporary working holiday makers – tax residency rules to change

The Government will change the tax residency rules to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.

This measure will apply from 1 July 2016.

 

SMALL BUSINESS

Tax rate cut to 28.5%

The Government announced, with effect from the 2015–2016 income year (ie from 1 July 2015), a 1.5% cut in the company tax rate applying to small businesses (turnover less than $2 million), reducing the tax rate to 28.5%. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income. The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies.

Tax discount for unincorporated small businesses

The Government said that with effect from 1 July 2015 individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity, and will be capped at $1,000 per individual for each income year.

Small business asset accelerated depreciation write-off

Small businesses would be able to immediately write off assets they start to use or install ready for use, provided the asset costs less than $20,000. This will apply for assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool. The Government will also suspend the current “lock out” laws for the simplified depreciation rules until 30 June 2017.

From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert to existing arrangements.

Immediate deductibility for professional expenses re start-ups

The Government will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. The measure will be available to businesses from the 2015–2016 income year.

CGT rollover relief for change to entity structure

The Government has confirmed that it will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point.

The measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established, for example a sole trader changing its business structure to a trust. The measure will be available from the 2016–2017 income year.

No FBT on work-related electronic devices

From 1 April 2016, ie the start of the 2016–2017 FBT year, the Government will allow an FBT exemption for small businesses that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions.

Further ESS changes

Significant changes to the employee share schemes (ESS) rules were announced in October 2014. Additional changes announced in the Budget will:

  • exclude eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • provide the CGT discount to employee share scheme interests that are subject to the start-up concession, where options are converted into shares and the resulting shares are sold within
    12 months of exercise; and
  • allow the Commissioner to exercise a discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

These changes will take effect from 1 July 2015.

 

GST

“Netflix tax” to start 1 July 2017

The Government has announced that it will impose GST on offshore intangible supplies to Australian consumers with effect from 1 July 2017. The measure has been cited in the media as the “Netflix” tax. The Government released draft legislation which contains the details of the changes.

The key concept in determining if a supply is made to an Australian consumer is determining if the entity is an Australian resident. Broadly, for individuals, the term takes its ordinary meaning. Similarly, a company will be an Australian resident if the company is incorporated in Australia or if it is effectively owned or controlled by Australian residents.

 

CHILD CARE AND PENSION/WELFARE MEASURES

Major childcare payments revamp

The Government announced it will establish a new and simpler mainstream Child Care Subsidy from 1 July 2017. Key points include the following:

  • Abolition of the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programmes.
  • A single means tested Child Care Subsidy for all families, subject to a new activity test, for up to 100 hours of subsidised care per child per fortnight.

Child care subsidies will remain linked to immunisation requirements strengthened, from 1 January 2016, under the Government’s “no jab, no pay” policy.

Paid parental leave – no double-dipping

The Treasurer said the Government will stop people from claiming parental leave payments from both the Government and their employers – he said this was effectively double dipping. This would apply from
1 July 2016.

Age Pension assets test: threshold increased, taper rate tightened

The Government confirmed that the Age Pension assets test threshold for a single homeowner will be increased to $250,000 (up from $202,000) and $375,000 for a homeowner couple (up from $286,500) from January 2017. The assets test threshold (or assets free area) for non-homeowners will be increased to $450,000 (single) and $575,000 (couple).

The assets test taper rate at which the Age Pension begins to phase out will be increased from $1.50 of pension per fortnight to $3.00 of pension for each $1,000 of assets over the relevant assets test threshold. The measures will commence from
1 January 2017.

The Government will also be dropping its 2014 Budget proposal to index the Age Pension to CPI.

 

SUPERANNUATION

Defined benefit super schemes: Government to close loophole

The Government confirmed that a 10% cap will apply to the “deductible amount” for pension income received from a defined benefit superannuation scheme for the purposes of the social security income test. Recipients of Veterans’ Affairs pensions and defined benefit income streams paid by military superannuation funds are exempt from this measure. In addition, the measure will not affect the means test treatment of income streams purchased for retail providers of these products. The measure will apply from 1 January 2016.

 

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

A general thinker’s tips for entrepreneurs

Giuffre, Remo. ‘A General Thinker’s Trips For Entrepreneurs’. Acuity 2.3 (2015): 40. Print.

THERE ARE GOOD, bad and ugly things about being an entrepreneur. It’s a sporadically very rewarding but often very hard life.

Financial security is rarely a feature. Superannuation? What’s that?

If, as an entrepreneur, you could choose another life, maybe you would. But generally the fact of the matter is you have no choice. It’s in the blood.

If that’s you, then here are my top eight tips for entrepreneurs.

  • Passion

Consider three factors. There’s what you love to do. There’s what you’re objectively good at. And finally, there’s what will enable you to earn enough money to live.

If you’re not already in the place of equilibrium where those three factors intersect, then you should be heading there with all due haste. But, start with passion. Love what you do. Life is too short to spend time doing work that doesn’t bring joy to yourself and others.

  • Vision

Clarity of vision is critical. If you don’t know what it’s all about, your employees and customers have no hope.

It’s always better when people understand why they are doing what they are doing, and ideally why those reasons are worthwhile. Being able to give people context and a shared sense of purpose is an important part of being an effective leader.

  • Travel hopefully

Be optimistic. Hope is paramount.

To quote Robert Louis Stevenson: “To travel hopefully is a better thing than to arrive, and the true success is to labour.” A feeling of optimism about the future delivers a high quality of life in the present. The outcomes of your endeavours are actually irrelevant to the quality of the life you live in the present.

  • Instinct and cool

Some things are really quite wonderful, but you can’t always know why.

Listen to your inner voices. Hone and trust your own instincts. Quiet confidence is cool.

  • Creativity

Find your own path. Create your own world and value. Celebrate your differences.

Also, be mindful of the value of systems for the creative process.

Having a system in place enhances your capacity to be creative.

It’s like knowing that the bars of the jungle gym are solid and sturdy. When that’s the case you will feel able to swing more confidently and higher.

  • Networks

The golden thread connecting my . projects over many years has been the design, development and nurturing of passionate and engaged customer or member networks. A networked structure really is a better mousetrap for any customer-facing business.

Not B2C. B=C. THEM=US. The community is the brand.

That way, your customer network becomes both your development and marketing engines for the new business.

  • Do good work

Good work is its own reward. The best marketing is a delighted customer.

So, focus on developing the best possible product or experience that you possibly can. Give it 100%.

  • Persistence

The critical ingredient for all entrepreneurs is persistence. Seek and ye shall eventually find. You win some. You lose some.

Rejection is actually the norm. The important thing is to keep trying. Don’t be defeated by rejection. Vision + Hope + Persistence = Success.

Future Tech

Adam Ferguson. (2015). Future Tech. Acuity. 2 (1), p36-p38.

THE RAPID GROWTH

of cloud services and products and the adoption of the technology among the small business community has created a raft of benefits for industry and the economy.

In the first quarter of this year, just under a third of SMEs in Australia and New Zealand reported using cloud products and services in the MYOB Business Monitor Digital Nation report. According to the report, businesses that are using the latest technology tend to be earning more, as well as enjoying more sales and a greater level client engagement.

But, as with any new technology, it pays to be aware of any potential downsides for business clients – especially where their most valuable data is concerned.

Data security and the cloud

Data security is one of the most common concerns for SMEs considering a move to the cloud. For businesses, the loss of data can be disastrous, especially if it includes tax records or sensitive client information. For many business owners, keeping data in-house just feels safer. They take comfort in knowing information is stored on a server on the premises. However, in truth, keeping your data in a cloud server with a reputable and reliable vendor is, most often, far more secure than storing it on an internal system. Cloud storage means data can be backed up across multiple, world-class data centres, with an array of fail safes and backups in place.

The security systems offered by reputable providers are also far more comprehensive than most businesses can afford. In addition, they are constantly monitored and updated – not just when there is a reported issue, but as part of a constant improvement cycle.

In saying this, it is important to be aware that standards in the field are not always consistent. A good example of this in the online accounting field is the practice of screen scraping to collect bank data. Employed by some providers, this practice can put both the security and accuracy of clients’ data at risk.

Screen scraping is collecting screen data from one application and translating it to another. It is useful for capturing data from older applications so it can be displayed using more modern interfaces.

In MYOB’s experience, the bank feeds feature is one of the most popular on the cloud platform. It allows bank transactions to be automatically imported and matched to the correct accounts in the business’ accounting software. This process saves the accountant, bookkeeper and/or business owner many hours of tedious data entry and significantly reduces errors through incorrect coding or recording of figures.

MYOB recommends the bank- authorised data collection system provided by BankLink, which provides secure bank transaction data via direct feeds from financial institutions, without the need for a client to share bank login details.

The data is supplied in a “read only” format, ensuring it cannot be changed and the owner retains full control of it. The entire process complies with the stringent Payment Card Industry Data Security Standard for the safe handling of transaction data and meets the requirements of more than 100 financial institutions.

Who owns your info? Data sovereignly and the cloud

Another key concern for clients, particularly if they want to take advantage of services that offer a better price or range of features, is the control they maintain over their data.

The concept of data sovereignty is one that has become more widely discussed with the growth of the cloud and internet-based services in general. This covers three broad areas:

  • who has access to data?
  • who controls the data?
  • how will that data be made available if the client wants to switch providers?

Although control of access is an important issue, it’s what happens when a business leaves a cloud service that makes questions of data sovereignty so relevant. Before a business signs up to any cloud provider, it’s important they have a clear picture of the form in which their data will be returned, and how long it will take to get it all back. In particular, businesses or their advisers need to find out if they will get their data back in a useable form – one that will allow them to continue to work offline – or if they will just be given a report on their data. This is, of course, a real concern not only because of the impact it can have on the day-to-day running of a business, but also in terms of any government regulations around record keeping.

One or many – who is responsible?

One of the areas that can make understanding both security and sovereignty issues more complex is where a provider bases its service on multiple add-on solutions. When using these services, rather than a single provider, businesses need to be aware of the standards and practices of every provider. For example, if one of them stops trading, who is responsible for managing any disruption, retrieving data and providing any required support?

Ultimately, the onus of managing these relationship is likely to fall on the businesses themselves, making it very important they understand the implications of using a range of providers, and ensuring they have adequate backup in place to cover any eventuality.

Evaluating a cloud provider

High standards of security and access should be a given for leaders in the technology industry. For businesses to evaluate their chosen provider, however there are a range of other elements to consider that will provide a more comprehensive picture of the provider they are choosing to handle their vital business data.

  • Reputation: This is likely to be the first thing that most businesses consider, but it is important to get an objective view on the provider that can meet a business’ evolving needs over the long term
  • Cost: When evaluating cost, it is important to consider whether a business is getting everything it needs for the advertised price, or whether add-on solutions will be required, increasing the overall cost of choosing a particular provider.
  • Transparency: When it comes to protecting and managing data, nothing is worse than a surprise. So it’s important businesses choose a cloud vendor who is as transparent as possible, especially about the terms of any service level agreement, or about important metrics like availability, frequency of outages and exit terms.
  • Backups: Businesses should also be clear on their process for creating backups if data is lost. Is this something that is provided automatically or do they need to do it themselves?
  • Availability: This is an important metric as it measures how often the cloud solution that businesses will be using is available. No system is perfect, but a really good provider should be able to guarantee 99% availability.
  • Support: When something goes wrong, most businesses want to know that their cloud provider is going to provide them with the support they need. It’s particularly worth considering the benefits of a provider that offers real time phone support over those that offer email support, or live chat.

Client Alert – FBT Return Checklist (March 2015)

Rate of tax

  Yes No
Are you aware the FBT rate for the FBT year ending 31 March 2015 has increased to 47%?Note the FBT rate will rise to 49% for the FBT years ending 31 March 2016 and 31 March 2017. The rate was 46.5% for the FBT year ending 31 March 2014.    

Gross-up rates

  Yes No
Are you entitled to a GST refund on the provision of the fringe benefit?If yes, Type 1 gross-up rate applies: 2.0802. If no, Type 2 gross-up rate applies: 1.8868.When the FBT rate rises to 49% for the 2015–2016 and 2016–2017 FBT years, the Type 1 and Type 2 gross-up rates will be 2.1463 and 1.9608, respectively.    
Are fringe benefits that are reportable on employees’ pay-as-you-go (PAYG) payment summaries grossed-up using the Type 2 gross-up rate?Reportable fringe benefits are grossed-up using the Type 2 rate, regardless of the gross-up rate used in calculating the FBT payable on a benefit.    

Types of benefits

  Yes No
Car fringe benefits
Was a vehicle made available to an employee (or an employee’s associate) for private use where the vehicle is owned or leased by you, an associate of yours or a third party pursuant to an agreement with you?If yes, a car fringe benefit may arise.    
Was the vehicle designed to carry less than one tonne or fewer than nine passengers?If yes, a car fringe benefit may arise. If no, the fringe benefit may be a residual benefit.    
Was the vehicle provided a taxi, panel van, utility truck or non-passenger road vehicle designed to carry a load of less than one tonne?If yes, an exemption from FBT may apply if the private use is limited to: travel between home and work; travel incidental to travel in the course of performing employment-related travel; or non-work-related use that is minor, infrequent and irregular.    
Did the employee contribute to the running costs of the vehicle?The value of the benefit is reduced by the employee’s contribution if appropriate evidentiary documents have been maintained.    
Has an election been made to use either the statutory formula method or the operating costs method?The statutory formula method must be used unless an election has been made to use the operating costs method. However, even if such an election has been made, the statutory formula method applies if it results in a lower taxable value.    
Has the valuation method been switched from the previous year?If the statutory formula method was used in the previous year and the operating costs method has been elected in this current year, has a logbook been maintained?    
Statutory formula method
Have you identified car benefits provided after 7.30pm AEST on 10 May 2011 that will be subject to the flat 20% rate? Transitional provisions may need to be flagged.For those using the statutory formula method, the 20% flat statutory rate has gradually phased in. From the 2014–2015 FBT year, the FBT statutory rate is 20% no matter how far the car is driven. See “Car fringe benefits statutory formula rates” on page 6.    
Were any non-business accessories (eg window tinting and rust-proofing) fitted to the vehicle during the FBT year?If yes, the base value of the car is increased by the (GST-inclusive) cost price of the accessories.    
How long has the vehicle been owned?If owned for more than four years, the cost base of the vehicle is reduced by one-third. However, this reduction does not apply to non-business accessories fitted after the acquisition of the vehicle.    
Were there any days during the FBT year when the vehicle was unavailable for private use?The taxable value of the car benefit is reduced by the number of days during the FBT year in which the vehicle was not used or available for private use by the employee (or the employee’s associate).    
Operating costs method
Was the vehicle acquired during the FBT year?If yes, has a log book been kept for a minimum continuous period of 12 weeks?    
What were the opening and closing odometer readings for the vehicle?The readings must be recorded to enable total kilometres travelled for the year to be calculated.    
Have you made a reasonable estimate of the business kilometres travelled and the business use percentage?This must be in writing, which is normally evident by maintaining a log book.    
Was the vehicle replaced during the FBT year?If the vehicle was replaced, the previously established business percentage may be transferred to the replacement vehicle, provided the percentage had not changed.    
What is the written-down value of the vehicle as at 1 April 2014?The deemed depreciation and deemed interest is calculated based on the written-down value of the vehicle as at 1 April 2014.    
Have you determined the total operating costs of the vehicle for the FBT year?Deemed depreciation and deemed interest must also be included in the operating costs of the vehicle.    
Car parking fringe benefits
Does your business meet the requirements to be classified as a small business entity (SBE) for income tax purposes?An exemption from car parking fringe benefits arises if your business is an SBE and the car parking is provided (ie not a commercial car park). An SBE is essentially an entity with an aggregated turnover of less than $2 million.    
Did you meet the costs, or part thereof, of the car parking expenses of an employee, where the car being parked is designed to carry a load of less than one tonne or fewer than nine passengers and the following conditions are present:•       the car is parked on the business premises;•       the car is used by the employee to travel between home and work and is parked at or in the vicinity of employment;•       the car is parked for periods totalling more than four hours between 7.00am and 7.00pm; and•       a commercial car parking station is located within one kilometre of the premises where the car is parked and the operator of the parking station charges more than $8.26 for all-day parking?

A car parking benefit potentially arises if the answer is yes.

   
Has an election been made for calculating the number of car parking benefits provided: actual usage records method, statutory formula method, or 12-week register method?If no election is made, the actual usage records method must be used.    
Has an election been made for calculating the value of car parking benefits provided: commercial parking station method, market value basis, or average cost method?The commercial parking station method will automatically apply if no election has been made.    
Living-away-from-home allowances
Has an allowance been paid to an employee by their employer to compensate the employee for additional non-deductible expenses and/or other additional disadvantages incurred because the employee’s employment duties require them to live away from their normal residence (or, for LAFHA benefits provided in respect of a period commencing before 1 October 2012, the employee’s usual place of residence)?A LAFHA fringe benefit may arise if the answer is yes. Note the treatment of LAFH allowances and benefits has been significantly overhauled, narrowing the scope for eligibility. Among other things, there is an increased requirement to ensure LAFH payments are properly tracked, categorised and substantiated.    
Meal entertainment fringe benefits
Has an election been made to use either the 50/50 split method or the 12-week register method?If no election is made, the taxable value is based on actual expenditure incurred.    
If using the 12-week register method, is the register still valid?A register is only valid for the FBT year in which the register period ends and the next four FBT years, provided that the total GST-inclusive entertainment costs do not vary by more than 20% between each FBT year.    
Did the employee (or their associate) contribute to the provision of the benefit?The taxable value of the benefit is reduced by any contributions.    
Loan fringe benefits
Was a loan made to an employee (or their associate) during the FBT year?A fringe benefit may potentially exist. A “loan” includes an advance of money, the provision of credit, the payment of money on account of another if there is an obligation to repay, or any other transaction that is a loan in substance.    
Was the interest rate charged on the loan lower than the notional FBT interest rate (5.95%)?The taxable value of the benefit is the amount by which the notional interest rate calculated on the loan for the year exceeds the amount of interest that has actually accrued on the loan during the year.    
Was the interest on the loan paid at least every six months?If interest is not paid at least every six months, a new loan equivalent to the deferred interest component will arise.    
Did the employee use the loan for income-producing purposes, which means they would therefore be entitled to a deduction (in their personal tax return) in respect of the interest incurred?The taxable value of the benefit is reduced by the amount to which the employee would be entitled to a deduction, provided a declaration has been given setting out particulars of the use to which the loan was put.    
In-house fringe benefits
Were any benefits that are similar or identical to those provided to your customers or clients provided to an employee (or an associate of an employee)?If yes, the first $1,000 of the aggregate of the taxable values of in-house fringe benefits (ie in-house expense payments, in-house property and in-house residual fringe benefits) provided to the employee during the year is exempt from FBT. However, the $1,000 reduction will not apply to an in-house benefit provided on or after 22 October 2012 under a salary packaging arrangement.    
Airline transport fringe benefits
Were any airline transport benefits provided?The ATO has reminded employers about airline transport fringe benefits. Changes have been made in respect of airline transport fringe benefits provided after 7.30pm AEST on
8 May 2012. Under these changes, there is no longer a separate category of fringe benefit for airline transport fringe benefits. Airline transport fringe benefits are now taxed under the in-house benefit provisions and the way the taxable value is calculated has been changed.
The changes apply for the FBT year ended 31 March 2014 and later years, so the 2015 year will be only the second year they have applied. The ATO has reminded affected taxpayers that – because airline transport fringe benefits provided after the above date are taxed under the in-house benefit provisions – for the year ended 31 March 2014 onwards, airline transport fringe benefits will be included under the Property or Residual categories in the Details of fringe benefits provided item on the FBT return.
   
Property fringe benefits
Was any property provided (free or at a discount) in respect of an employee’s employment?Property includes all tangible and intangible property. Examples of property are goods, shares and real property. The ATO considers the provision of Bitcoin to be a property fringe benefit since the definition of intangible property includes any other kind of property other than tangible property.    
Have employer-provided property (in-house property fringe benefits) and those provided from other sources (external property fringe benefits) been identified?The taxable values for the former and latter are calculated differently.    
If the benefit is an in-house property fringe benefit, has the $1,000 exemption for “in-house benefits” been considered?The taxable value of in-house property fringe benefits may qualify for the general exemption of up to $1,000 for “in-house” benefits. However, the $1,000 reduction will not apply to an in-house benefit provided on or after 22 October 2012 under a salary packaging arrangement.    
Have in-house property fringe benefits accessed by way of salary packaging arrangements been identified?If an in-house property fringe benefit is provided on or after 22 October 2012 under a salary packaging arrangement, the taxable value of the benefit is an amount equal to the notional value of the benefit at the time it is provided. The notional value is the amount that the employee could reasonably be expected to pay under an arm’s length arrangement.    
If the benefit was an external property fringe benefit, were you dealing with the external party at arm’s length?If the property is acquired under an arm’s length transaction by the employer or an associate of the employer, the taxable value of the benefit is the cost price of the property reduced by the amount (if any) paid by the employee. This rule applies if the property is provided to the employee around the time it was acquired by the employer or associate etc.    
Would the employee have been entitled to a once-only deduction if he or she had incurred the relevant expenditure?The taxable value of the property fringe benefit is effectively reduced by the deductible amount (the “otherwise deductible” rule).    
Is an employee declaration required?The otherwise deductible rule requires an employee declaration setting out details sufficient to establish the connection between the property provided and the income-producing activities of the employee. However, if the property was provided exclusively in the course of the employee’s employment, a declaration is not required.    
Expense payment fringe benefits
Did you pay or reimburse an employee (or their associate) for any expenses incurred by them?Potentially, an expense payment fringe benefit arises. Examples include electricity, gas and telephone expenses, school fees, property rates, mortgage payments, and road tolls.    
Would the employee have been entitled to a once-only deduction if he or she had incurred the relevant expenditure?The taxable value of the expense payment fringe benefit is effectively reduced by the deductible amount (the “otherwise deductible” rule).    
Is an employee declaration required?A declaration, in an approved form, setting out particulars of the expense and the extent to which expenditure would have been otherwise deductible in earning the employee’s income, is required to reduce the taxable value of the expense payment fringe benefit.    
Have exempt expense payment benefits been identified?    
Work-related items
Did you provide an employee with any of the following work-related items: a portable electronic device (eg a laptop, mobile or GPS navigation device); an item of computer software; an item of protective clothing; a briefcase; or a tool of trade?If yes, an exemption from FBT may be available. Note there are different rules for items provided before 7.30pm AEST on 13 May 2008.    
Were the items provided primarily for use in the employee’s employment?If yes, an exemption from FBT applies.    
Did you provide the employee more than one each of the items listed above (except where the item is a replacement item)?If yes and the additional item has substantially identical functions to the original item (and is not a replacement item), the additional item will not be exempt from FBT. Note the ATO accepts that an iPad does not have substantially identical functions to a laptop computer.    
Minor, infrequent and irregular benefits
Were there any infrequent and irregular benefits with a notional taxable value of less than $300 per benefit being provided?A benefit with a notional taxable value of less than $300 does not automatically attract an exemption from FBT unless it is infrequent and irregular.    

 


FBT rates and thresholds

  FBT year ending 31 March 2015 FBT year ending 31 March 2014
FBT tax rate 47.0% 46.5%
Type 1 gross-up rate (ie entitled to a GST credit for the provision of a benefit) 2.0802 2.0647
Type 2 gross-up rate (ie not entitled to a GST credit for the provision of a benefit) 1.8868 1.8692
Reportable fringe benefits threshold (ie a total gross-up value exceeding $3,773)2 $2,0001 $2,0001
Car parking threshold $8.26 $8.03
Cents per kilometres for motor vehicle (where the benefit is a residual benefit):    
                Engine capacity Rate per kilometre Rate per kilometre
                0–2,500cc 50 cents 49 cents
                Over 2,500cc 60 cents 59 cents
                Motorcycles 15 cents 15 cents
Deemed depreciation rate (operating cost method) for car fringe benefits:    
                Date of car purchase Depreciation rate Depreciation rate
                On or after 10 May 2006 25% 25%
                From 1 July 2002 to 9 May 2006 18.75% 18.75%
                Up to and including 30 June 2002 22.5% 22.5%
Benchmark interest rate3 5.95% 6.45%
Minor and infrequent benefits threshold4 $300 $300
Record keeping exemption threshold $7,965 $7,779

(1)         Threshold is based on the total taxable value of fringe benefits provided to an employee.

(2)         The actual reportable fringe benefits amount shown on a PAYG summary is always grossed-up using the Type 2 gross-up rate.

(3)         The benchmark interest rate is used to calculate the taxable value of a loan benefit and the deemed interest of a car fringe benefit where an employer chooses to use the operating cost method.

(4)         Threshold is based on the taxable value of a benefit and applies to each benefit provided during the FBT year.

Car fringe benefits statutory formula rates

Below are the statutory car rates for car fringe benefits provided prior to 7.30pm AEST on 10 May 2011, or where you have a pre-existing commitment1 in place to provide the car after this time:

Kilometres travelled Statutory rate
Less than 15,000 26%
15,000–24,999 20%
25,000–40,000 11%
Above 40,000 7%

(1)         For those with pre-existing commitments (contracts entered into prior to 10 May 2011), the old statutory rates will continue to apply. The commitments need to be financially binding on one or more of the parties. However, where there is a change to pre-existing commitments, the new rate will apply from the start of the following FBT year. Changes to pre-existing commitments include refinancing a car and altering the duration of an existing contract. Changing employers will cause the new rate to apply immediately for the new employer.

Statutory rates for “new contracts” entered into after 7.30pm AEST on 10 May 2011 have been phased in as follows:

Kilometres travelled From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
Less than 15,000 20% 20% 20% 20%
15,000–24,999 20% 20% 20% 20%
25,000–40,000 14% 17% 20% 20%
Above 40,000 10% 13% 17% 20%

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