Explanatory Memorandum – March 2020

Super guarantee loophole closed

A superannuation guarantee loophole that allowed employers to use salary sacrificed contributions to make up part of their required super guarantee contributions has been closed. From 1 January 2020, employers must make the full amount of mandatory super guarantee contributions and cannot use salary-sacrificed amounts to reduce those mandatory contributions. Depending on the types of employment agreements between employees and employers, this could mean more money for employees’ retirement.

The concept of super guarantee – the requirement for employers to contribute 9.5% of an employee’s salary or wages into a nominated super account – should be familiar to everyone, particularly anyone who is an employee, as it makes up the bulk of future retirement income. Employees may also be salary-sacrificing amounts of their salary and wages to put extra into their super.

Before this year, a loophole in the law meant that an employee’s salary-sacrificed amounts could be counted towards employer contribution amounts. This allowed a potential reduction in employers mandated super guarantee contributions – essentially working against the employee’s intention to add extra to their super. In addition, employers were able to calculate their super guarantee obligations on the lower, post-sacrifice earnings base.

Depending on the type of employment agreement between an employee and employer, this meant that if the employee salary-sacrificed an amount equal to or more than the super guarantee amount the employer was required to pay, the employer could have chosen to not contribute any non-sacrifice amount and the legal requirements of the super guarantee would still be met. It’s important to note that this was not the original intention of the law, and not all employers would make the choice to exploit this loophole; however, where they did, employees who salary-sacrificed could be short-changed and end up with lower super contributions as well as a lower salary overall.

The law has now been changed specifically to close this loophole. From 1 January 2020, amounts that an employee salary-sacrifices to superannuation cannot be used to reduce the employer’s super guarantee charge, and do not form part of any late contributions the employer makes that are eligible for offset against the super guarantee charge. To avoid any possible shortfall in their mandatory super guarantee contribution payments, employers must now contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying super fund. The OTE base consists of the employee’s OTE and any amounts they sacrifice into superannuation that would have been OTE if the salary-sacrifice arrangement wasn’t in place.

The following simple example illustrates the effect of the old law versus the new law for an employee with an OTE base of $15,000.

Old law New law
Employee’s OTE $15,000 $15,000
Super guarantee entitlement ($15,000 × 9.5%) $1,425 $1,425
Salary-sacrifice contribution $1,000 $1,000
Minimum compliant employer contribution $425 $1,425
Total super contributions
(including salary-sacrificed amount)
$1,425 $2,425

Source: Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Act 2019.

ATO tackling international tax evasion

Australian tax residents are taxed in Australia on their worldwide income. While most do the right thing and declare all their income, some try to avoid paying tax by exploiting secrecy provisions and the lack of information-sharing between countries. As the world becomes more interconnected and barriers are broken down, it is inevitable that there are fewer places for the unscrupulous to hide from tax.

With the rise of the global economy and easy flow of money across borders, no country is immune to international tax evasion and money laundering. A recent coordinated effort with Joint Chiefs of Global Tax Enforcement (J5) shows that member countries, including Australia, are doing all they can to protect their tax revenue. This most recent investigation yielded evidence of tax evasion by Australians using an international institution located in Central America.

Tax chiefs from the J5 countries met in Sydney on 17–21 February 2020 to share information about common mechanisms, enablers and structures that are being exploited to commit transnational tax crime. The J5 was initially formed in 2018 to fight global tax evasion and consists of the tax and revenue agencies of Australia, United Kingdom, United States, Canada and the Netherlands. The countries share intelligence on international tax crime as well as money laundering.

The current international investigation started on information obtained by the Netherlands, which led to a series of investigations in multiple countries and concerned an international financial institution located in Central America whose products and services are believed to be facilitating money laundering and tax evasion for customers across the globe.

J5 members believe that through this institution, a number of clients may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime. The enforcement action consisted of evidence, intelligence and information-collecting activities such as search warrants, interviews and subpoenas.

According to the ATO, several hundred Australians are suspected of participating in these arrangements. The ATO is currently proceeding with multiple investigations with support from the Australian Criminal Intelligence Commission (ACIC). In addition, it is encouraging anyone with information about the scheme or other similar arrangements to contact the ATO.

ATO Deputy Commissioner and Australia’s J5 Chief, Will Day, has said, “this multi-agency, multi-country activity should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime”.

While the J5 is a powerful tool, it is by no means the only one in the ATO’s arsenal. The ATO also has a network of international tax treaties and information exchange agreements with over 100 jurisdictions, and uses them to identify facilitators such as banks, lawyers and financial advisers. Once a pattern has been identified, such as a practitioner with a large number of clients using the same methods to avoid or evade tax, the ATO is likely to look closely at the entire client base.

In recent years over 2,500 exchanges of information have occurred, enabling the ATO to raise additional tax liabilities of $1 billion. The message from the ATO is that anyone with offshore income or assets is better off declaring their interests voluntarily. Those who do so may have administrative penalties and interest charges reduced.

It’s important to keep in mind that holding offshore assets is not just for the wealthy. Australians with migrant backgrounds may not even know they hold offshore assets in some cases, but those assets are still subject to tax law. For example, grandparents or other relatives may start a bank account in an Australian’s name in another country to make contributions celebrating a holiday, birthday or other life event.

Source: www.ato.gov.au/Media-centre/Media-releases/Global-tax-chiefs-undertake-unprecedented-multi-country-day-of-action-to-tackle-international-tax-evasion/.

New measures to combat illegal phoenixing

New laws are now in place to target illegal phoenixing of companies, which by some estimates costs businesses, employees and governments more than $2 billion a year.

While there is no Australian legislative definition of “illegal phoenixing” or “phoenixing activity”, at its core it is understood as the use of serial deliberate insolvency as a business model to avoid paying company debts. To combat this, the new laws target a range of behaviours, including preventing property transfers to defeat creditors, improving accountability of resigning directors, allowing the ATO to collect estimates of anticipated GST liabilities and authorising the ATO to retain tax refunds.

Property transfer to defeat creditors

New criminal offences and civil penalty provisions will apply to company officers who fail to prevent the company from making “creditor-defeating dispositions”, and to other persons (including pre-insolvency advisers, accountants, lawyers and other business advisers) who facilitate a company making a “creditor-defeating disposition”. Liquidators and the Australian Securities and Investments Commission (ASIC) can seek to recover the assets for the company’s creditors, and in some cases creditors can recover compensation from a company’s officers and other persons responsible for making a “creditor-defeating disposition”.

A “creditor-defeating disposition” is defined as disposing of company property for less than its market value (or less than the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. To ensure legitimate businesses aren’t affected by this wide definition, safe harbour has been maintained for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement.

Accountability of resigning directors

In order to reduce the instances of unscrupulous directors using loopholes to shift the blame, the new laws seek to prevent abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight. Practically, under the new laws, a director cannot resign or be removed by a resolution of company members if doing so would leave the company without a director (unless the company is being wound up).

In addition, if the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation is deemed to take effect from the day it is reported to ASIC. However, a company or director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.

Collection of anticipated GST liabilities

Under the new laws, the ATO can now collect estimates of anticipated GST liabilities, including luxury car tax (LCT) and wine equalisation tax (WET) liabilities. The ATO can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities.

Retaining refunds

The new laws also allow the ATO to retain a refund to a taxpayer where that taxpayer has other outstanding lodgements or needs to provide important information.

Source: Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth).

Insurance payouts: are they taxable?

In recent months, parts of Australia have been battered by a combination of fire and floods. As people try to piece their lives together in the aftermath, insurance payouts can go a long way in helping rebuild homes and replace lost items. However, if you receive an insurance payout in relation to your business, home business or rental property you need to be aware there may be associated tax consequences.

For example, if you rent out your home or a portion of your home on a short stay website, you may be subject to capital gains tax (CGT) if you receive an insurance payout in relation to that home. Businesses that receive an insurance payment may be subject to varying tax consequences depending on what the payment is designed to replace.

Insurance payouts relating to personal property (including household items, furniture, electrical goods, private boats and cars) and your main residence are not taxed. If you keep a home office or run a business from home and you receive an insurance payout in relation to the property being damaged or destroyed, there may be CGT consequences.

Similarly, if you have a rental property or rented out a room of your main residence which later becomes damaged or destroyed and is subject to an insurance payout, you will need to include the insurance payout amount when you work out whether you have a capital gain or loss. This applies even if you were casually renting out a room, your home or (part of) your farm as short-stay accommodation.

For those operating a business, the tax consequences of an insurance payout are even more complicated depending on what the money received is for. For example, destroyed business premises come with CGT consequences, while any insurance amount you receive for repair of damage will need to be included in your assessable income.

If an amount is received in relation to damaged or destroyed trading stock, it must be included as assessable income. For any depreciating assets used in generating assessable income (eg office equipment), you will need to calculate the difference between the amount received from insurance and the asset book value of the asset at the time it was destroyed. Any excess needs to be included as assessable income, while a deduction can be claimed for any losses.

For depreciating assets in the low-value pool, you will need to reduce the closing pool balance by the amount of insurance payment you receive. In addition, the tax treatment will need to be modified if an asset was partly used to produce assessable income and in a low-value pool.

The tax treatment of insurance payments for work cars is similar to that of depreciating assets, except if you used the logbook method for claiming car expenses. If you used the logbook method, the balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.

Businesses that correctly informed their insurer of their GST status when they took out the insurance don’t have to pay GST on insurance payout amounts and may be entitled to GST credits for purchases made with those amounts. Small businesses may also be entitled to CGT concessions.

Source: www.ato.gov.au/individuals/dealing-with-disasters/damaged-or-destroyed-property/.

Australia’s independent tax complaints investigator

Do you know who to turn to when you have a complaint about the ATO? Whether you’re an individual or business, the Inspector-General of Taxation and Taxation Ombudsman (IGTO) should be your first port of call. The department has two distinct, yet intertwined, functions.

As the Taxation Ombudsman, the IGTO provides all taxpayers with an independent complaints investigation service. One of the main roles of the IGTO is that it must investigate complaints by taxpayers (or their representatives) where a tax official’s actions or inactions, decisions or systems have affected them personally. As the Inspector-General of Taxation, it also conducts reviews and provides independent advice and recommendations to government, ATO and other departments.

The difference between the two functions is that the Taxation Ombudsman’s investigations and recommendations are likely to be made privately, whereas when the office conducts reviews (not in response to a complaint) as the Inspector-General of Taxation, the investigations and recommendations are public and aimed at improving administration of the tax law.

In the first quarter of 2019–2020 the IGTO received 909 complaints – a 14% increase over the number for the same period in 2018–2019. Of the complaints received so far this year, 82.4% of the complaints received were from self-represented individuals, of whom approximately 10-12% were small business taxpayers. Taxpayers who had a representative were largely represented by a family member or friend, although around a third were represented by an accountant or a tax practitioner.

The top five issues raised in complaints for the quarter remain largely the same as the previous year, covering debt collection, payments to the taxpayer, lodgement and processing, communication, and audit and review. According to the IGTO, issues surrounding debt collection have featured consistently among the complaints lodged since the assumption of the Tax Ombudsman service.

While the IGTO has direct access to ATO officers, records and systems, it cannot investigate how much tax needs to be paid, provide advice regarding structure of tax affairs or assist with decisions made by other government agencies apart from the Tax Practitioners Board. The IGTO can investigate and assist taxpayers with issues including:

  • extensions of time to pay;
  • the ATO’s debt recovery action;
  • delays with processing tax returns;
  • delays in ATO communication and responses;
  • information the ATO has considered regarding taxpayers’ matters;
  • understanding the ATO’s actions and decisions; and
  • identifying available options and other relevant agencies that can help.

Taxpayers can approach the IGTO at any stage of their dispute with the ATO, although it is recommended that they first approach the ATO officer/manager assigned to their case, followed by the ATO complaints section, before lodging a formal IGTO complaint.

Complaints can be made online and via phone or post, and services are offered in languages other than English as well as for people who are hearing, sight or speech impaired. The IGTO will require:

  • basic personal information including the taxpayer’s tax file number (TFN);
  • the main facts, relevant dates and supporting documents;
  • an explanation of how ATO actions have caused concern and how those actions have affected the taxpayer; and
  • information about what the taxpayer or their representative has done to try to resolve the complaint, the result to date, and the desired outcome from the complaint.

Source: www.igt.gov.au/.

ATO scrutiny on car parking fringe benefits

The ATO has started contacting certain employers that provide car parking fringe benefits to their employees to ensure that all fringe benefits tax (FBT) obligations are being met. Generally, car parking fringe benefits arise where the car is:

  • parked on the business premises of the entity providing the benefit;
  • used by the employee to travel between home and their primary place of employment and is parked in the vicinity of that employment;
  • parked for periods totalling more than four hours between 7 am and 7 pm; and
  • a commercial parking station located within 1 km of the premises charges more than the car parking threshold amount.

Employers that meet these conditions are providing parking benefits and have a choice of three methods to calculate the taxable value of the benefits: the commercial parking station method, the average cost method and the market value method.

The method currently under ATO scrutiny is the market value method, which states that the taxable value of a car parking benefit is the amount that the recipient could reasonably be expected to have to pay if the provider and the recipient were dealing with each other under arm’s length conditions. When using this method, the employer must obtain a valuation report from an independent valuer who has expertise in the valuation of car parking facilities and is at arm’s length from the employer.

At a minimum, the ATO requires a valuation report to be in English and to detail the following:

  • the date of valuation;
  • a precise description of the location of the car parking facilities valued;
  • the number of car parking spaces valued;
  • the value of the car parking spaces based on a daily rate;
  • the full name of the valuer and their qualifications;
  • the valuer’s signature; and
  • a declaration stating the valuer is at arm’s length from the valuation.

In addition to the valuation report, an employer also needs a declaration relating to each FBT year that includes the number of car parking spaces available to be used by employees, the number of business days, and the daily value of the car parking spaces.

Source: www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Valuing-car-parking-fringe-benefits/.

Foreign residents and the main residence exemption

Laws limiting foreign residents’ ability to claim the capital gains tax (CGT) main residence exemption are now in place. This means that if you’re a foreign resident at the time of disposal of the property that was your main residence, you may not be entitled to an exemption and may be liable for tens of thousands in CGT. Some limited exemptions apply for “life events”, as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.

The restrictions apply to any person who is not an Australian resident for tax purposes at the time of disposal (ie when the contract is signed to sell the property).

According to the ATO, a person’s residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.

For current foreign residents, there may still be time to act. You can still claim the CGT main residence exemption if, when the CGT event happens to your property, you were a foreign resident for tax purposes for a continuous period of six years or less and during that time one of the following “life events” happened:

  • you, your spouse, or your child under 18 had a terminal medical condition;
  • your spouse or your child under 18 died; or
  • the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreement.

Further, if you purchased your main residence before 7:30 pm (AEST) on 9 May 2017, you may still be entitled to the exemption provided you sell your home on or before 30 June 2020, subject to satisfying other existing requirements for the exemption. If you miss the 30 June window for disposal of the property in 2020, you will not be entitled to the main residence exemption unless one of the listed “life events” occurs within a continuous period of six years of becoming a foreign resident.

Similarly, for properties acquired at or after 7:30 pm (AEST) on 9 May 2017, the CGT main residence exemption will not apply to disposals from that date unless certain “life events” occur within a continuous period of six years of the individual becoming a foreign resident.

It’s important to note that these changes apply even if you die – if you’re a foreign resident for tax purposes at the time of your death, the same foreign resident restrictions will apply to your legal personal representatives, the trustees and beneficiaries of deceased estates, any surviving joint tenants and special disability trusts.

Since this law change is retrospective, the ATO requires foreign residents who acquired property at or after 7:30 pm (AEST) on 9 May 2017 to review their positions back to the 2016–2017 income year and seek tax return amendments where necessary. Foreign residents who purchased their property before 7:30 pm (AEST) on 9 May 2017 and who then dispose of their property after 30 June 2020 will only need to review their positions to the 2020–2021 income year.

The ATO has said it will not apply shortfall penalties and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. Additionally, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend their assessments within a reasonable timeframe of the law cming into force.

Source: www.ato.gov.au/general/capital-gains-tax/international-issues/Foreign-residents-and-main-residence-exemption/.

 

Client Alert – March 2020

Super guarantee loopholes closed

The concept of a superannuation guarantee – the legal requirement for your employer to contribute 9.5% of your salary into a nominated super account – should be familiar to everyone, as it makes up the bulk of most people’s future retirement income. You may also salary-sacrifice amounts of your salary to put extra into your super.

Until recently, loopholes in the law meant that your employer could count your salary-sacrificed amounts towards their super guarantee contribution amounts – essentially working against your intention to boost your super. Employers could also calculate their super guarantee obligations based on your post-sacrifice earnings rather than on your full pre-sacrifice earnings.

Depending on your employment agreement, these loopholes meant that if you salary-sacrificed an amount equal to or more than your employer’s super guarantee amount, your employer could choose to not contribute any amount and the legal requirements of the super guarantee would still be met.

The good news is that the law has now been changed. From 1 January 2020, amounts that you salary-sacrifice to super can’t be used to reduce your employer’s super guarantee obligations, and employers must calculate their super guarantee obligations based on all of your ordinary time earnings (OTE), including any amounts you sacrifice into superannuation that would have otherwise been OTE.

ATO tackling international tax evasion

Australian tax residents are taxed in Australia on their worldwide income. While most do the right thing and declare all their income, some people and businesses try to avoid paying tax by exploiting secrecy provisions and information-sharing gaps between countries.

A recent coordinated effort by the Joint Chiefs of Global Tax Enforcement (J5) has yielded evidence of tax evasion by Australians. The J5 consists of the tax and revenue agencies of Australia, the United Kingdom, the United States, Canada and the Netherlands and was initially formed in 2018 to fight global tax evasion. The countries share intelligence on international tax crime as well as money laundering.

According to the ATO, several hundred Australians are suspected of participating in arrangements with an international financial institution in Central America whose products and services are believed to be facilitating worldwide money laundering and tax evasion. Multiple investigations are currently under way, and anyone with information about the scheme or other similar arrangements is encouraged to contact the ATO.

The ATO has a network of international tax treaties and information exchange agreements with over 100 jurisdictions. In recent years over 2,500 exchanges of information have occurred, enabling the ATO to identify unpaid tax amounts totalling $1 billion.

New measures to combat illegal phoenixing

New laws are now in place to target illegal phoenixing of companies in Australia.

Phoenix activity is when a new company is created – “rising from the ashes” of another company that was in debt and has been deliberately liquidated – to continue the business of the old company while avoiding having to pay its debts. Recent estimates are that illegal phoenix activity directly costs Australian businesses, employees and governments between $2.85 billion and $5.13 billion each year.

To combat this type of debt and tax evasion, the new laws target a range of behaviours, including preventing property transfers to defeat creditors, improving the accountability requirements for resigning company directors, allowing the ATO to collect estimates of anticipated GST liabilities and authorising the ATO to retain tax refunds where lodgements are outstanding.

Insurance payouts: are they taxable?

In recent months, parts of Australia have been battered by a combination of fire and floods. As people try to piece their lives together in the aftermath, insurance payouts can go a long way in helping rebuild homes and replace lost items.

However, if you receive an insurance payout in relation to your business, home business or rental property you need to be aware there may be associated tax consequences. For example, if you keep a home office or run a business from home, or make money from renting out your home on a short-stay website, you may be subject to capital gains tax (CGT) when receiving an insurance payout on the home.

Businesses that receive an insurance payment may be subject to varying tax consequences depending on what the payment is designed to replace.

Australia’s independent tax complaints investigator

Do you know who to turn to when you have a complaint about the ATO? Whether you’re an individual or business, the Inspector-General of Taxation and Taxation Ombudsman (IGTO) should be your first port of call.

As the Taxation Ombudsman, the IGTO provides all taxpayers with an independent complaints investigation service. As the Inspector-General of Taxation, it also conducts reviews and provides independent advice and recommendations to government, ATO and other departments.

The IGTO can investigate and assist with issues including extensions of time to pay; the ATO’s debt recovery actions; delays with processing tax returns; delays in ATO communication and responses; information the ATO has considered regarding taxpayers’ matters; understanding the ATO’s actions and decisions; and identifying available options and other relevant agencies that can help.

Complaints can be made online and via phone or post, and services are offered in languages other than English as well as for people who are hearing, sight or speech impaired.

ATO scrutiny on car parking fringe benefits

The ATO has started contacting certain employers that provide car parking fringe benefits to their employees to ensure that all fringe benefits tax (FBT) obligations are being met. Generally, car parking fringe benefits arise where the car is parked on the business premises of the entity, used by the employee to travel between home and their primary place of employment and is parked for more than four hours between 7 am and 7 pm, and where a commercial parking station located within 1 km of the premises charges more than the car parking threshold amount.

Employers have a choice of three methods to calculate the taxable value of the benefits: the commercial parking station method, the average cost method and the market value method. The method currently under ATO scrutiny is the market value method, which states that the taxable value of a car parking benefit is the amount that the recipient could reasonably be expected to have to pay if the provider and the recipient were dealing with each other under arm’s length conditions.

Foreign residents and the main residence exemption

Laws limiting foreign residents’ ability to claim the CGT main residence exemption are now in place. This means that if you’re a foreign resident for tax purposes at the time you sign a contract to sell a property that was your main residence, you may be liable for tens of thousands of dollars in CGT. Some limited exemptions apply for “life events”, as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.

According to the ATO, a person’s residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.

 

Explanatory Memorandum – February 2020

ATO backs down from controversial time limit ruling

In 2018, the ATO issued a controversial draft ruling which took a very strict stance on the four-year time limit for claiming input tax credits and fuel tax credits. The ruling had been used by the ATO to deny input tax credits and fuel tax credits where the Commissioner makes a decision on an objection or amendment request outside the four-year period. However, a recent observation by a judge ruling on a related matter has put the ATO’s strict stance in doubt and as a result, the ruling has been withdrawn.

The ATO has recently withdrawn Draft Miscellaneous Taxation Ruling MT 2018/D1 on the time limit for claiming input tax credits and fuel tax credits. Generally, under s 93-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the right to claim an input tax credit expires after four years and commences on the day on which the entity was required to lodge a return for the tax period to which the input tax credit would be attributable. Section 47-5 of the Fuel Tax Act 2006 has a similar provision which limits claims to four years after the date on which taxpayers were required to give the ATO a return.

The withdrawn draft ruling created much controversy for its strict stance on the four-year time limit rules for claiming the credits. It stated that a tax credit would not be taken into account in an assessment when the taxpayer lodges an objection or requests an amendment, even if the objection or amendment request is made within the four-year entitlement period. Therefore, the effect of the draft ruling was that if the ATO’s decision on an objection or amendment request was made outside the four-year period (but the request by the taxpayer was lodged within the four-year period), the taxpayer would not have been entitled to the tax credits even if the decision was favourable to the taxpayer.

After the draft was issued, however, the Federal Court did not quite agree with the ATO’s stance (Coles Supermarkets Australia Pty Ltd v Federal Commissioner of Taxation [2019] FCA 1582). The Court accepted Coles’ submissions that s 47-5 of the Fuel Tax Act is only intended to prevent an ongoing entitlement to claim credits in a later return where a return has not been lodged or credits have not been claimed.

The Court noted that once a return has been lodged and objected to, there is no scope for the operation of s 47-5 to disentitle a taxpayer to fuel tax credits, because the rights of the Commissioner and taxpayer are protected by various sections of the Tax Administration Act 1953 (TAA).

In a decision impact statement following the judgment in the Coles case, the ATO acknowledged that the Court’s observations were contrary to its own views. Subsequently, it withdrew the ruling, conceding that the views expressed in MT 2018/D1 was no longer current. While the Coles decision only refers to fuel tax credits, given the similarity of the provisions between fuel tax credits and the GST Act, and the Court’s observations regarding the rights of the Commissioner and taxpayer being protected by the TAA, it stands to reason it would also apply to input tax credits. Thus, the ATO is planning to issue a new ruling in early 2020 that takes into account the Federal Court’s observations.

In the meantime, what this means for affected taxpayers is that, where the ATO makes a decision on an objection or a request for amendment in relation to input tax credits and/or fuel tax credits outside the four-year period (with the initial objection or amendment request lodged within the time limit), the taxpayer will no longer be automatically denied the credits in situations where the decision is favourable. As a result, any taxpayer that the draft ruling has affected (ie who has had input tax credits or fuel tax credits denied because objections or amendment decisions had been made outside the four-year time limit) is encouraged to contact the ATO.

Source: www.ato.gov.au/law/view/pdf/dis/dis_coles_supermarkets_australia.pdf.

ATO extends bushfire assistance: lodgements deferred

On 20 January 2020 the ATO announced an extension of the tax assistance package for people impacted by the 2019–2020 bushfires in New South Wales, Victoria, Queensland, South Australia and Tasmania.

Commissioner of Taxation Mr Chris Jordan said the 3.5 million businesses, individuals and self-managed super funds (SMSFs) in the impacted local government areas will have until 28 May 2020 to lodge and pay BASs and income tax returns. This additional time is on top of the two-month extension previously granted.

Additionally, the ATO said it will fast-track any refunds that are due to taxpayers in the impacted regions. For example, businesses expecting a refund as a result of GST credits due to large purchases to replace stock are encouraged to lodge their activity statements at the first opportunity. The ATO will also remit any interest and penalties applied to tax debts since the commencement of the bushfires. Mr Jordan said taxpayers or their agents in the affected areas do not need to apply for a deferral, a faster refund or remission of interest or penalties. This will be done by the ATO automatically (except for large PAYG withholders). Affected taxpayers are also able to vary their income tax instalments to nil without penalties. This also applies if taxpayers end up in a tax payable situation for that quarter once they have lodged their tax return.

For taxpayers with a tax debt or outstanding obligation, the ATO will not initiate debt recovery action until at least 28 May 2020. Taxpayers can also request payment arrangements for outstanding debts. The ATO will also consider releasing individuals and businesses from income tax and FBT debts if they are experiencing serious hardship. However, employers still need to meet their ongoing super guarantee (SG) obligations for their employees.

A complete list of the impacted areas is available on the ATO website at www.ato.gov.au/individuals/dealing-with-disasters. Those affected by the 2019–2020 bushfires with a postcode not currently in the identified list can contact the ATO Emergency Support Infoline for tailored help; phone: 1800 806 218.

The ATO will recognise the ongoing effects of this disaster, such as cash flow problems for business owners who have suffered reduced trade. This includes businesses that are not located in the identified regions. The ATO also recognises that there may be situations where additional support or extensions may be required on a case-by-case basis beyond the automatic deferrals announced.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-extends-tax-relief-and-assistance-for-people-impacted-by-bushfires/.

Better protection for consumers: new ASIC powers

In response to the recommendations of the Banking and Financial Services Royal Commission and the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce Report, the government has proposed new enforcement and supervision powers for ASIC to restore consumer confidence in the financial system, particularly in relation to financial advice. These new powers include enhanced licensing, banning, warrant and phone tap powers, all designed to ensure that avoidable financial disasters uncovered during the Royal Commission are never repeated.

While the Banking and Financial Services Royal Commission seems long ago in the minds of many, the people who have been financially affected will no doubt carry the scar of mistrust for life. This is why the government has introduced new laws which will give ASIC new enforcement and supervision powers in relation to the financial services sector to weed out the “bad apples” and restore consumer confidence.

The new measures seek to strengthen ASIC’s licencing powers by replacing the current Australian financial services (AFS) licence requirement that a person be of “good fame and character” with a new ongoing requirement that they be a “fit and proper person” at both the time of application and subsequently. This applies to all officers, partners, trustees and controllers of the applicant applying for the AFS licence. The “fit and proper person” requirement will also apply to existing AFS licensees to ensure that ASIC can monitor the controllers of existing AFS licensees, request relevant information and carry out enforcement action as required.

In working out whether someone is a “fit and proper person”, ASIC will consider matters including whether the person has been convicted of an offence in the last 10 years, whether they’ve had an AFS licence or Australian credit licence suspended or cancelled, and whether a banning or disqualification order has previously been made.

ASIC’s banning powers will also be expanded to situations where they have reason to believe that a person is “not a fit and proper person” or is “not adequately trained or is not competent” to:

  • provide financial services;
  • perform functions as an officer of an entity that carries on a financial services business; or
  • control an entity that carries on a financial services business.

In addition, under these new powers, ASIC may also make a banning order against a person that is insolvent under administration, has, at least twice, been an officer of a corporation that was unable to pay its debts, or has, at least twice, been linked to a refusal or failure to give effect to an Australian Financial Complaints Authority (AFCA) determination.

To support these enforcement functions, ASIC’s warrant and phone tap powers have been beefed up. It is no longer required to forewarn those under investigation that it may apply for a search warrant. It is also no longer required to specify the exact books or evidential material that can be searched and seized.

Interception agencies (ie police, ASIO, and anti-corruption bodies) will be able to provide ASIC with lawfully intercepted telecommunications information in some instances and ASIC staff will be able to use and record the received information as well as communicate the information to another person in investigations and prosecutions.All of this means there will be a decreased risk of evidence destruction or alteration.

If these measures become law, ASIC’s ability to launch and progress investigations to protect consumers from dodgy practitioners will be greatly enhanced.

Source: https://treasury.gov.au/consultation/c2019-40503.

Expansion of Tax Avoidance Taskforce activity

The ATO has expanded its Tax Avoidance Taskforce activity to include top 500 private groups, high wealth private groups, and medium and emerging private groups. Perhaps the most interesting is the inclusion of medium and emerging private groups, covering around 97% of the total private group population. These consist of Australian resident individuals who, together with their associates, control wealth between $5 million and $50 million, and businesses with an annual turnover of more than $10 million. Business captured will be receive a notification letter of the next steps.

The Tax Avoidance Taskforce was originally conceived in 2016 to ensure that multinational enterprises, large public and private business pay the right amount of tax. The Taskforce’s main role is to investigate what the ATO considers to be aggressive tax avoidance arrangements, including profit shifting, and to work with partner agencies in other jurisdictions to achieve this goal. In the 2019–2020 Federal Budget, the taskforce was provided with $1 billion over four years – this is in addition to the $679 million provided in 2016 – to extend the operation of the taskforce to the 2022–2023 income year and expand the range of entities it investigates.

As a part of the expansion, the ATO now has three “programs” for private groups under the Taskforce’s umbrella: top 500 private groups, high wealth private groups, and medium and emerging private groups. The expansion that will perhaps affect the most taxpayers will be the program covering medium and emerging private groups.

Businesses or groups that are captured under these programs will be sent a notification letter detailing what needs to be done to prepare for ATO engagement. Characteristics that may attract further ATO scrutiny include tax or economic performance not comparable to similar businesses, low transparency of tax affairs, large/one-off or unusual transactions (eg shifting wealth), aggressive tax planning, lifestyle exceeding after-tax income, accessing business assets for tax-free private use, and poor governance/risk management.

Medium and emerging groups

This program includes private groups linked to Australian resident individuals who, together with their associates, control wealth between $5 million and $50 million, and businesses with an annual turnover of more than $10 million that are not public or foreign owned and are not linked to a high wealth private group. The ATO estimates this would cover around 97% of the total private group population.

The ATO will use data matching and analytic models to identify wealthy individuals and link them to associated entities, which will then be grouped and looked at as a whole. The main aim of the program is to understand the businesses and the operating environments to identify trends and specific risks that will be used to mitigate tax risks. For example, once an issue has been identified, the ATO may contact individual companies about its concerns, or it may publish public advice or guidance on the issue if it is an issue that affects a large proportion of businesses.

Aside from the general advice, the ATO has also flagged using early engagement and pre-lodgement agreements with businesses in this category for commercial deals to provide certainty on significant transactions and events. Of course, the ATO will continue to conduct risk-based reviews and audits where it deems appropriate. Initially, the ATO will focus on larger and “higher risk” private groups, those experiencing rapid growth, looking to expand offshore, or where the controlling individuals are transitioning to retirement.

High wealth private groups program

This program includes Australian resident individuals who, together with their associates, control wealth of more than $50 million. The ATO will take a one-on-one tailored engagement approach to mitigate tax risks.

Top 500 private groups

This program focuses on Australia’s largest private groups and involves regular one-on-one engagements to understand the business, drivers and risk position.

Source: www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Expansion-of-the-Tax-Avoidance-Taskforce-for-private-groups/.

No-cost strategies to increase your super

With all the pandemonium of the new year, your super is probably the last thing on your mind. However, this is precisely the right time to think about implementing some strategies to increase your super for the coming year. With some simple, no-cost strategies such as finding your lost super, consolidating your super accounts and making sure you’re in a fund that’s performing well, you will be well on your way to a comfortable retirement.

Now is the perfect time to put some resolutions in place to increase your super for 2020. After all, it is what we’ll be relying on in retirement, and even small improvements now could mean extra luxuries later.

Currently, 5.8 million individuals in Australia (36% of the population) have two or more super accounts. Every year the ATO launches its postcode “lost super” campaign to help raise community awareness of lost super. As a consequence of the 2018 campaign, more than 66,000 people consolidated over 105,000 accounts worth over $860 million. For the 2019 campaign, the ATO has created tables of lost and unclaimed super per state and postcode that anyone can access. If you think you’ve got lost super, you can then log into myGov to claim it and have it consolidated with your active account.

Finding and consolidating your lost super with your active account means you’ll pay fewer management fees and other costs, saving you in the long term. Between 1 July 2014 and 30 June 2019, 2.6 million accounts to the value of $15 billion have been consolidated by fund members using ATO online services. The figures indicate that more and more people are taking advantage of this no-cost strategy to grow their super in the long term.

Another easy way to grow your super is to make sure the super fund that you’re putting your money into is performing well. Recently, the regulator of super funds, the Australian Prudential Regulation Authority (APRA), released “heatmaps” that provide like-for-like comparisons of MySuper products across three key areas: investment performance, fees and costs, and sustainability of member outcomes. The heatmap uses a graduating colour scheme to provide clear and simple insights that unlike a sea of numbers on a spreadsheet, will send a clear and strong message to users.

For example, MySuper products delivering outcomes below the relevant benchmarks in relation to investment performance and fees and costs will be depicted from pale yellow to dark red. The sustainability measures provide an indication of a trustee’s ability to provide quality member outcomes and address areas of underperformance. While the ultimate purpose of the heatmap is to have trustees with areas of underperformance take action to address it, they can also be an invaluable resource in choosing the right super fund.

Source: www.ato.gov.au/Forms/Searching-for-lost-super; www.apra.gov.au/mysuper-product-heatmap.

SMSF sole purpose test and fractional investments

Previously, it was thought that any benefit provided directly or indirectly to members or related parties of a self managed super fund (an SMSF) from an investment would contravene the sole purpose test. However, a Full Federal Court decision has reframed the sole purpose test which will provide some flexibility to trustees on certain investments. Notwithstanding this decision, investments in SMSFs remain a complex area with many pitfalls.

To be eligible for superannuation fund tax concessions, SMSFs are required to be maintained for the sole purpose of providing retirement benefits to members. This is known as the sole purpose test: s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Failing the test could expose trustees to civil and criminal penalties in addition to the SMSF losing concessional tax treatment. Therefore, it is important when making SMSF investments that the investment does not provide a benefit directly or indirectly to members or related parties.

Whether a fund’s investment contravenes the sole purpose test by providing a benefit directly or indirectly to members or related parties depends entirely on the circumstances of each case. Recently, the Full Federal Court decided that an SMSF investment in a fund to acquire a fraction interest in a property to be leased at market rent to the member’s daughter did not breach the sole purpose test (Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122).

The Full Court said s 62 of the SIS Act does not suggest that an SMSF will not be maintained solely for the core and/or ancillary purposes simply because the trustee enters into a transaction with a related party. It noted that the property was to be leased at market rent therefore there was no current day financial benefit to be obtained by either the member or his daughter. The only benefit would be some comfort or convenience, which was considered to be merely incidental.

However, the Full Court said if the lease was not at market rent, then an inference could readily be drawn that the fund was being maintained for a collateral purpose of providing discounted housing to a relative, which would contravene the sole purpose test.

In response to the Court’s decision, the ATO noted that a trustee of an SMSF could potentially breach the sole purpose test by investing in the fund mentioned in the case if the facts and circumstances indicate that the SMSF was maintained for the collateral purpose of providing accommodation to a related party. Which will be determined by considering all the facts and circumstances surrounding the trustees’ behaviour.

Nevertheless, to provide certainty for the investors in this particular fractional property investment, the ATO said it will not take compliance action if the trustee signs a declaration (the sole purpose test declaration) that avoids:

  • entering into an investment based on its potential to provide related-party accommodation;
  • influencing the fractional property investment fund or a relevant property manager to engage a related party as a tenant of the property; and
  • influencing a related party to become a tenant of the property.

In addition, a copy of this declaration must be retained and provided to approved auditors. The ATO must also not find evidence that indicates the trustee has acted inconsistently with the terms of the signed declaration.

Source: www.ato.gov.au/Super/Self-managed-super-funds/Investing/Sole-purpose-test/Fractional-property-investment—ATO-guidance-on-approach/.

$10,000 cash payment limit: the facts

The government-proposed $10,000 economy-wide cash payment limit has understandably elicited some confusion. Chief among the questions is to what extent personal transactions will be included in the limit. To dispel some of the confusion, the government has released information outlining the circumstances in which the limit would not apply in relation to personal or private transactions. While this proposal is not yet law, once enacted it will be a criminal offence for certain entities to make or accept cash payments of $10,000 or more.

Among other categories, payments that will not be subject to the $10,000 limit include those relating to personal or private transactions (excluding transactions involving real property). The exemption only includes payments that satisfy one of the following:

  • payments solely for supplies or acquisitions that are not made in the course of an enterprise;
  • payments that are made or received by an entity in circumstances where that entity reasonably believes that the payment is solely for supplies or acquisitions that are not made in the course of an enterprise;
  • payments that are made as or as part of a gift (not in the course of an enterprise); or
  • payments that are made or received by an entity as a gift (or part of a gift) in circumstances where that entity reasonably believes that the payment is not made or received in the course of an enterprise.

The term “enterprise” in this context has the same broad meaning as in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), meaning that an entity will be undertaking an enterprise if, for example, it carries on a business (or in the form of a business), offers real property for rent, is a charity, political party (or candidate) or other recipient of gifts that are deductible for income tax, operates a super fund, or is the Commonwealth, a state or a territory or an entity established for public purposes under an Australian law. In essence, the only circumstance in which an entity will not be carrying on an enterprise is where the entity is acting in a wholly private or personal capacity.

Therefore, cash gifts to family members (as long as they are not donations to regulated entities such as charities) and inheritances are likely to be exempt. In other words, it is unlikely that you will be prosecuted for a criminal offence if you give your family members a lavish cash wedding gift or help your kids with a house deposit that happens to be over $10,000.

However, if you occasionally sell private assets (eg a used car) you may need to be careful and take reasonable steps to ascertain whether the other party is acting in the course of an enterprise. For example, if you sell your car to another individual and you believe the car will be acquired for private use after undertaking reasonable inquiries such as searching the Australian Business Register, then the exemption for personal/private transactions will apply.

On the other hand, if you did not undertake “reasonable inquiries”, and incorrectly believe that the other party is not acting in the course of an enterprise, then it is possible you may be prosecuted for a criminal offence. In general, whether a belief is reasonable will depend on the circumstances of the transaction and the parties. However, a reasonable belief must be a belief about the facts and does not protect those ignorant of the law or the legal implications of the facts. In other words, you cannot claim that you didn’t know about the rules surrounding the cash payment limit.

Source: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019/Public_Hearings

 

Client Alert – February 2020

ATO backs down from controversial time limit ruling

In 2018, the ATO issued a controversial draft ruling which took a very strict stance on the four-year time limit for claiming input tax credits and fuel tax credits. The ruling had been used by the ATO to deny input tax credits and fuel tax credits where the Commissioner of Taxation made a decision outside the four-year period on an objection or amendment request, even where the objection or request was made within the period. However, a recent observation by a judge ruling on a related matter has put the ATO’s strict stance in doubt and as a result the ruling (Draft Miscellaneous Taxation Ruling MT 2018/D1) has been withdrawn.

Where the Commissioner makes a decision on an objection or requests for amendment in relation to input tax credits and/or fuel tax credits outside the four-year period but the initial objection or amendment request was lodged within the time limit, the taxpayer will no longer be automatically denied the credits in situations where the decision is in the taxpayer’s favour.

As a result, any taxpayer that the draft ruling has affected is encouraged to contact the ATO.

ATO extends bushfire assistance: lodgements deferred

On 20 January 2020 the ATO announced an extension of the tax assistance package for people impacted by the 2019–2020 bushfires in New South Wales, Victoria, Queensland, South Australia and Tasmania.

Commissioner of Taxation Mr Chris Jordan said the 3.5 million businesses, individuals and self-managed super funds (SMSFs) in the impacted local government areas will have until 28 May 2020 to lodge and pay BAS and income tax returns. This additional time is on top of the two-month extension previously granted.

Additionally, the ATO said it will fast-track any refunds that are due to taxpayers in the impacted regions. For example, businesses expecting a refund as a result of GST credits due to large purchases to replace stock are encouraged to lodge their activity statements at the first opportunity. The ATO will also remit any interest and penalties applied to tax debts since the commencement of the bushfires.

Better protection for consumers: new ASIC powers

In response to the recommendations of the Banking and Financial Services Royal Commission and the ASIC Enforcement Review Taskforce Report, the government has proposed new enforcement and supervision powers for ASIC to restore consumer confidence in the financial system, particularly in relation to financial advice. These new powers include enhanced licensing, banning, warrant and phone tap powers, all designed to ensure that avoidable financial disasters uncovered during the Royal Commission are not repeated again.

While the Banking and Financial Services Royal Commission seems long ago in the minds of many, the people who have been financially affected by dubious practitioners will no doubt carry the scar of mistrust for life. This is precisely why the government has introduced new laws which will give ASIC new enforcement and supervision powers in relation to the financial services sector: to weed out the “bad apples” and restore consumer confidence.

Expansion of Tax Avoidance Taskforce activity

The ATO has recently expanded its Tax Avoidance Taskforce activity to include top 500 private groups, high wealth private groups, and medium and emerging private groups.

The Tax Avoidance Taskforce was originally conceived in 2016 to ensure that multinational enterprises, large public and private business pay the right amount of tax. The Taskforce’s main role is to investigate what the ATO considers aggressive tax avoidance arrangements, including profit shifting.

As a part of the expansion, the ATO now has three “programs” for private groups under the Taskforce’s umbrella: top 500 private groups, high wealth private groups, and medium and emerging private groups. The expansion that will perhaps affect the most taxpayers will be the program covering medium and emerging private groups. This program includes private groups linked to Australian resident individuals who, together with their associates, control wealth between $5 million and $50 million, and businesses with an annual turnover of more than $10 million that are not public or foreign owned and are not linked to a high wealth private group. The ATO estimates this will cover around 97% of the total private group population.

No-cost strategies to increase your super

With all the pandemonium of the new year, your super is probably the last thing on your mind. However, this is precisely the right time to think about implementing some strategies to increase your super for the coming year.

Currently, 5.8 million people in Australia have two or more super accounts. Every year the ATO runs a postcode “lost super” campaign to help raise community awareness. As a consequence of the 2018 campaign, more than 66,000 people consolidated over 105,000 accounts worth over $860 million. For the latest campaign, the ATO has created tables of lost and unclaimed super per state and postcode that anyone can access.

Finding and consolidating your lost super with your active account means you’ll pay fewer management fees and other costs, saving you in the long term.

Another easy way to grow your super is to make sure the super fund that you’re putting your money into is performing well. Recently, the regulator of super funds, the Australian Prudential Regulation Authority (APRA), released “heatmaps” that provide like-for-like comparisons of MySuper products across three key areas: investment performance, fees and costs, and sustainability of member outcomes. While the ultimate purpose of the heatmap is to have trustees with areas of underperformance take action to address it, they can also be an invaluable resource in choosing the right super fund.

SMSF sole purpose test and fractional investments

To be eligible for superannuation fund tax concessions, self-managed super funds (SMSFs) must be maintained for the sole purpose of providing retirement benefits to members. This is known as the sole purpose test. Failing the test could expose trustees to civil and criminal penalties in addition to the SMSF losing concessional tax treatment.

Previously, it was thought that any benefit provided directly or indirectly to members or related parties of an SMSF from an investment would contravene the sole purpose test. However, a recent Full Federal Court decision will provide some flexibility to trustees on certain investments. The Court decided that an SMSF investment in a fund to acquire a fraction interest in a property to be leased at market rent to the member’s daughter did not breach the sole purpose test.

While the Full Court found the SMSF had not breached the sole purpose test, it ultimately ruled against the trustee, finding that the investment was an in-house asset and breached the 5% limit. Crucially, the ATO warned it may still apply compliance resources to scrutinise whether an SMSF investment in fractional property investments contravenes other legal requirements.

$10,000 cash payment limit: the facts

The proposed $10,000 economy-wide cash payment limit has understandably elicited some confusion. While the proposal is not yet law, once enacted it will be a criminal offence for certain entities to make or accept cash payments of $10,000 or more. This is intended to combat the use of cash in black economy activities.

Chief among the questions is to what extent personal transactions will be included in the limit. The government has now released information outlining the circumstances in which the limit would not apply in relation to personal or private transactions.

Among other categories, payments relating to personal or private transactions (excluding transactions involving real property) would not be subject to the limit. Cash gifts to family members (as long as they are not donations to regulated entities such as charities) and inheritances are likely to be exempt. In other words, it is unlikely you will be prosecuted if you give your family members a lavish cash wedding gift or help your kids with a house deposit that happens to be over $10,000.

However, if you occasionally sell private assets (e.g. a used car) you may need to be careful and take reasonable steps to ascertain whether the other party is acting in the course of an enterprise.

 

Foreign Resident CGT Regime

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

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

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

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

Explanatory Memorandum – November 2019

Getting the benefit of your business tax losses

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

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

Using losses against other income

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

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

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

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

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

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

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

Offsetting future income

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

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

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

Downsizer super contributions: getting it right

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

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

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

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

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

The 10-year ownership requirement

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

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

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

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

The main residence exemption requirement

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

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

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

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

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

Health insurance and your tax: uncovered

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

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

Medicare levy surcharge

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

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

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

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

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

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

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

Lifetime health cover loading and the rebate

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

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

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

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

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

Small business CGT concessions: when do I qualify?

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

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

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

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

Business size

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

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

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

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

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

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

Asset requirements

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

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

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

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

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

Unpaid super: important amnesty update for employers

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

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

How big is the unpaid super problem?

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

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

Compliance changes for businesses

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

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

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

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

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

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

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

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

Selling shares: how does tax apply?

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

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

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

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

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

The 12-month discount rule

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

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

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

Working out the “cost base”

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

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

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

ATO to scrutinise every return for tax time 2019

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

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

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

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

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

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

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

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

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

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

Beware of insurance changes in superannuation

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

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

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

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

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

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

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

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

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

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

 

Client Alert – November 2019

Getting the benefit of your business tax losses

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

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

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

Downsizer super contributions: getting it right

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

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

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

Health insurance and your tax: uncovered

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

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

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

Small business CGT concessions: when do I qualify?

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

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

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

Unpaid super: important amnesty update for employers

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

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

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

Selling shares: how does tax apply?

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

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

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

ATO to scrutinise every return for tax time 2019

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

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

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

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

Beware of insurance changes in superannuation

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

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

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

 

Explanatory Memorandum – October 2019

Small business income tax gap: ATO update

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

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

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

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

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

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

The black economy

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

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

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

ATO sets its sights on undisclosed foreign income

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

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

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

How is foreign income taxed?

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

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

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

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

Is your client a “resident”?

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

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

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

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

Making a voluntary disclosure

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

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

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

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

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

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

Salary sacrificing loopholes: are you receiving your full benefits?

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

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

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

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

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

Example

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

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

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

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

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

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

A fix is on the way

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

What should workers and employers do?

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

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

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

Claiming work trips for business owners

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

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

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

Can I claim my full return airfares?

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

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

How is accommodation treated?

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

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

What is definitely not deductible?

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

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

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

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

Thinking about setting up an SMSF?

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

Management

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

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

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

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

Costs

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

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

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

Investment flexibility

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

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

Insurance

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

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

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

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

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

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

Dispute resolution

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

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

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

SMSF status will change if annual returns are lodged late

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

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

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

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

 

Client Alert – October 2019

Small business income tax gap: ATO update

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

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

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

ATO sets its sights on undisclosed foreign income

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

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

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

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

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

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

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

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

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

Salary sacrificing loopholes: are you receiving your full benefits?

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

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

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

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

Claiming work trips for business owners

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

Airfares

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

Accommodation

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

Record-keeping

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

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

Thinking about setting up an SMSF?

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

Management

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

Costs

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

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

Investment flexibility

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

 

SG amnesty resurfaces in Parliament

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

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

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

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

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

Higher penalties after amnesty ends

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

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

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

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

Source : www.smsfadviser.com/news