Can’t Buy Me Love: Conscientious Coupling and Binding Financial Agreements

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The breakdown of a relationship is frequently ranked second, after the death of a loved one, as one of life’s most stressful events. With a third of all Australian marriages ending in divorce, and similar statistics in other countries, it’s little wonder that “conscious uncoupling” has become the ideal divorce strategy (and not just for celebrities). But the reality for many of us is quite different. So, what if there were ways of limiting the emotional and financial fallout of a relationship split?

In fact, there is: by having a financial agreement in place before getting married or moving into together.

Romantic? Not really. It’s true that a discussion about the relationship’s possible end isn’t exactly at the top of any couple’s list when planning a life together. But there are many pluses to having an agreement, and it’s unarguably a pragmatic move.

Love tops the charts as the most popular song theme, but money ranks a close second – and of course the two are intrinsically linked, in pop culture and in life.

A prenuptial (prenup) or cohabitation agreement can benefit you both, fostering better upfront communication about financial matters and helping you to budget and plan a financial future as a couple.

It can also provide a hefty ballast for your future financial stability as individuals.

In 2016, the Senate Economics Committee undertook a study of gender disparity in financial security and concluded that “a husband is not a retirement plan”. Clearly, a relationship breakdown can leave either party, or both – regardless of their genders – poorer than their married or single counterparts.

So, how can we help you to plan for a “conscientious coupling”?

What does this type of agreement include?

A prenup or cohabitation agreement typically covers:

  • assets – what will be treated as marital or defacto assets, such as jointly owned real estate, and what will be treated as non-marital assets (for example, this could be an asset that one party owned before the marriage or cohabitation);
  • division of assets – which assets each person would be entitled to, and in what proportion, if the relationship ended;
  • financial arrangements on the death of one spouse – this can be useful for blended families and where, for example, you want an inheritance to go to a person or an entity other than your relationship partner;
  • Future changes – whether the terms will change, for example, if children are involved; whether they are to inherit assets, etc.

Traditionally, these types of agreements are popular where one partner has significantly more assets than the other, or where the partners or their parents have businesses or an inheritance that they wish to retain if the relationship ends. An agreement can help ensure these important things are protected.

How do you make the agreement legal?

A prenup needs to be approved by the Family Court of Australia and both parties must have sought independent legal advice. For defacto agreements, we suggest you speak to a lawyer about the possibility of registering your agreement with the Family Courts in the form of consent orders.

What about tax?

We recommend that you and your partner each engage lawyers in the drafting of your agreement, but we can help with financial and tax strategy, particularly in more complex areas of tax law, which require some flexibility and skillful forward-planning. Here’s a snapshot of some of the areas to consider.

Stamp duties

If property ownership transfer is part of an agreement, then no stamp duty is payable if the property is transferred from one partner to another or sold.

Superannuation

Superannuation held by each partner, whether you are entering a marriage or defacto relationship, can also be split by agreement. Self-managed superannuation funds (SMSFs) have more flexibility for restructuring than funds regulated by the Australian Prudential Regulation Authority (APRA).

Capital gains tax roll-over relief

Capital gains tax (CGT) roll-over relief may also apply. As a general rule, CGT is payable on all changes of asset ownership occurring on or after 20 September 1985. However, if you transfer an asset to your partner as a result of the breakdown of your relationship, there is automatic roll-over relief from CGT in certain cases. This can include transferring assets into or out of a family trust as part of a settlement, as seen most recently in the case of Sandini Pty Ltd v FCT [2017] FCA 287 (22 March 2017).

Future and estate planning

Binding financial agreements provide another way to ensure your long-term financial planning goals are not destroyed by a failed relationship, helping to protect your business or inherited family assets. They can be useful in estate planning, too, as they can help achieve some security for people in second marriages or who have children from previous relationships. Provisions for children can be written into an agreement.

Need to talk it over?

While it might be an unwelcome topic to think about before it happens, the end of a relationship often forces people into making financial decisions at the worst time. We can help you minimize the possible negative consequences by helping you to plan your agreement with a solicitor and the ongoing management of your tax affairs

Client Alert: November 2018

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Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on “Administration issues under the transfer balance cap” at the Tax Institute Sixth National Superannuation Conference.

Ms McLachlan highlighted several issues regarding common superannuation events that will need to be reported to the ATO (such as the start of new pensions that began to be in retirement phase on or after 1 July 2017), multiple transfer balance events, excess transfer balance determinations and more.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognize that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector, so this work must be ongoing”, said IPA CEO Professor Andrew Conway.

The Paper covers a range of topics, including productivity, regulation and workplace relations, and makes several tax reform recommendations relevant to small businesses and personal income tax.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 people could miss out on a tax refund this year because they haven’t lodged a tax return.

Assistant Commissioner Kath Anderson has said that many salary and wage earners end up with a tax refund, but some are missing out because they fail to lodge on time.

Taxpayers had until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESSTs) and that relate to people or businesses with Australian tax obligations are now legally banned under recent changes to the law.

ESSTs come in many forms, such as:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that’s part of a POS system or software.

These tools generally misrepresent or hide income by deleting or changing electronic transaction information, and falsifying sales or POS records.

People and businesses may face penalties of up to $1 million if they produce, supply, possess or use an ESST or knowingly assist others to do so.

Super work test exemption for recent retirees

The Government has released draft legislation and regulations to provide a one-year exemption from the work test for superannuation contributions by recent retirees aged 65–74 who have a total superannuation balance of less than $300,000. This proposal was announced in the 2018–2019 Budget.

Currently, people aged 65–74 must pass the “work test” – working at least 40 hours in any 30-day period during the financial year – in order to make voluntary super contributions.

Bringing forward small business tax cuts by five years

The Prime Minister has announced that the Government will bring forward its planned tax cuts for small business by five years. The Labor Party has also indicated it supports bringing forward the tax cuts.

This means businesses with a turnover below $50 million will pay a tax rate of 25% in 2021–2022, rather than from 2026–2027 as currently legislated.

Corporate tax rates and small business tax offset changes

The Bill to accelerate the reduced tax rates for base rate entities has passed through Parliament and will soon become law. Under the new law, the corporate tax rate will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years.

The new law also increases the small business income tax offset rate to 13% for 2020–2021. The offset will then increase to 16% for 2021–2022 and later income years.

Residential rental property travel expenses: ATO guidance

Since 1 July 2017, people, self managed super funds (SMSFs), “private” trusts and partnerships have not been permitted to claim non-business travel costs connected to residential rental properties as tax deductible. These costs also cannot form part of the cost base or reduced cost base of a capital gains tax (CGT) asset.

The ATO has released new guidance about this, including details about the legal meanings of “residential premises” and “carrying on a business”.

Tax on compensation received for inappropriate advice

On the heels of the banking and financial services Royal Commission, the ATO has published information about how tax applies for people who receive compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, and the compensation amount may count as part of your assessable income if it’s a refund of adviser fees that you’ve already claimed as a tax deduction.

ATO set to issue excess super contribution determinations

The ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. Superannuation fund members will receive these ECC determinations if they have made super contributions above the concessional cap amount for 2017–2018.

Fund members may also receive an amended income tax return assessment together with the ECC determination, and may need to pay additional amounts to the ATO. This is because any super contributions you make over the concessional cap need to be included in your assessable income for the financial year, and an interest charge applies.

 

Explanatory Memorandum November 2018

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Transfer balance cap: ATO highlights admin issues

On 30 August 2018, ATO Assistant Commissioner Superannuation Tara McLachlan gave a speech on Administration issues under the transfer balance cap at the Tax Institute Sixth National Superannuation Conference. She highlighted the following:

  • Common events that will need to be reported include:
  • the start of new pensions which began to be in retirement phase on or after 1 July 2017; and
  • full and partial commutation of pensions on or after 1 July 2017, regardless of whether or the commutation was paid out as a lump sum, retained in accumulation phase or rolled over to another super fund.
  • Self-managed superannuation funds (SMSFs) do not need to report:
  • pension payments made on or after 1 July 2017;
  • investment earnings and losses that occurred on or after 1 July 2017;
  • when an income stream ceases because the capital has been exhausted; or
  • the death of a member – although if the member’s pension was reversionary, reporting of the pension may be required.
  • Individuals can use myGov online to see what amounts have been credited to their transfer balance account.
  • As multiple transfer balance events occur when individuals have multiple pensions paid from the same fund, it’s important to cancel incorrect events before reporting the correct information, otherwise a duplication can occur.

Other issues mentioned during the speech concerned the treatment of excess transfer balance (ETB) determinations, commutation authorities, partial commutations and minimum pension requirements.

Source: www.ato.gov.au/Media-centre/Speeches/Other/Administration-issues-under-the-transfer-balance-cap/.

Australian Small Business White Paper: tax reform a key

After more than 18 months of extensive research and consultation, the Institute of Public Accountants (IPA) and the IPA Deakin SME Research Centre have released the second edition of the Australian Small Business White Paper.

“Numerous policy recommendations have been adopted from the first edition which was launched in 2015. However, we recognise that the state of our economy is reliant on the productivity, growth and prosperity of the small business sector so this work must be ongoing”, said IPA chief executive officer Professor Andrew Conway.

The White Paper covers a range of topics, including productivity, regulation, taxation, SME financial markets and workplace relations. On taxation, it makes several recommendations:

  • Broaden the base and lift the rate of GST (subject to appropriate equity measures).
  • Cut direct taxes.
  • Undertake a zero-base design of a thoroughly modern taxation system.
  • Reform and simplify the personal income tax scale.
  • Standardise the company tax rate at 25%.

It also poses a number of thought-provoking questions, including:

  • What would it look like if Australia’s GST rate rose to 15% and personal income taxes were slashed or removed for a new entrepreneur’s first five years in business?
  • What does a tax system look like that rewards rather than punishes people under the age of 50 for saving for their retirement?
  • Why do we have excess contributions taxes for those wanting to remove the burden from the state in their retirement?
  • What about a tax rate that applied a tax-free threshold at $30,000 per annum and 15% for minimum wage earners?

Source: www.publicaccountants.org.au/news-advocacy/media-releases/australian-small-business-white-paper-released.

ATO expects 200,000 to miss out on refunds by failing to lodge

The ATO expects that 200,000 individuals could miss out on a tax refund this year by failing to lodge a return.

So far this tax time, the ATO says over 2.7 million taxpayers have already lodged their income tax returns via myTax, while another 4.3 million taxpayers have lodged via a tax agent. Assistant Commissioner Kath Anderson says many salary and wage earners end up with a tax refund but some are missing out because they haven’t lodged.

Taxpayers have until 31 October to either lodge their own return, or ensure they are on an agent’s books, Ms Anderson said. Failing to lodge by the deadline can attract a penalty of $210 for every 28 days that the return is overdue, up to a maximum of $1,050.

The ATO believes that some taxpayers may not lodge a return, even if they are due a refund, because they don’t realise they need to. For example, where they are on a low income or haven’t worked recently. Ms Anderson said others might be worried about lodging because they haven’t lodged for several years and suspect that they may have a debt, which often causes them stress and anxiety. For self-preparers, the payment is due on 21 November whether or not a return is lodged. Ms Anderson said the ATO will help people who may have difficulties paying a tax debt, and tailor a payment plan to the taxpayer’s circumstances. The ATO is also alert to some people who are deliberately not lodging in an attempt to avoid their child support obligations.

The ATO also reminds that taxpayers who have already lodged, but realise that they have made a mistake, should make an amendment using myTax or by contacting their tax agent. Not correcting errors may mean the ATO has to contact the taxpayer, which may cause unnecessary processing delays. More information on making an amendment is available on the ATO’s website at www.ato.gov.au/fixamistake.

Source: www.ato.gov.au/Media-centre/Media-releases/Are-you-missing-out-on-a-tax-refund-/.

Black economy: electronic sales suppression tools now banned

Activities involving electronic sales suppression tools (ESST) and that relate to people or businesses with Australian tax obligations are now legally banned, effective from 4 October 2018. This is part of the measures under the recently passed Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018. People or entities may be liable for criminal and administrative penalties if they produce, supply, possess or use an ESST or knowingly assist others to do so.

The ATO has noted that ESSTs can come in different forms and are constantly evolving. For example, an ESST can be:

  • an external device connected to a point of sale (POS) system;
  • additional software installed into otherwise-compliant software; or
  • a feature or modification, like a script or code, that is a part of a POS system or software.

An ESST may allow income to be misrepresented and under-reported by:

  • deleting transactions from electronic record-keeping systems;
  • changing transactions to reduce the amount of a sale;
  • misrepresenting a sales record, for example by allowing GST taxable sales to be re-categorised as GST non-taxable sales; or
  • falsifying POS records.

It is now an offence to produce or supply an ESST, possess an ESST or incorrectly keep records using an ESST. A court may impose a criminal penalty up to a maximum of 5,000 penalty units (currently $1,050,000). Otherwise, the ATO may impose an administrative penalty of 60 penalty units (currently $12,600).

The ATO has found cases of taxpayers using such software to deliberately not report all their cash income, falsely report regular losses and/or manipulate their employee obligations.

However, businesses may have inadvertently purchased software with a suppression function. The ATO has advised there will be a transitional grace period for these businesses – if the software was purchased before 9 May 2017 (the date the measures were announced), the business has until 3 April 2019 to advise the ATO and apply for the transitional arrangements.

The ATO has reiterated the need for taxpayers to keep detailed records of every transaction.

Source: www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Ban-on-electronic-sales-suppression-tools/.

Super work test exemption for recent retiree contributions

The Government has released draft legislation and regulations to give effect to its 2018–2019 Federal Budget measure to provide a one-year exemption from the work test for superannuation contributions made by recent retirees aged 65–74 who have total superannuation balances less than $300,000. Currently, individuals aged 65–74 must work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the work test) in order to make voluntary contributions.

The draft regulation proposes to amend reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 to allow these recent retirees to make voluntary contributions to their superannuation for 12 months from the end of the previous financial year in which they last met the work test.

The member’s total superannuation balance will be assessed for eligibility against the $300,000 threshold at the end of the previous financial year. Once eligible, there will be no requirement for individuals to remain below the $300,000 balance cap for the duration of the 12-month period.

The existing annual caps for concessional contributions and non-concessional contributions ($25,000 and $100,000 respectively) will continue to apply to contributions made under the proposed one-year exemption from the work test. However, the proposal would allow individuals to access the first year of the bring-forward arrangements in a particular financial year if their non-concessional contributions exceed their general non-concessional contributions cap ($100,000). Individuals would also be able to access unused concessional cap space to contribute more than $25,000 under existing concessional cap carry-forward rules during the 12 months.

The amendments would apply to eligible contributions made from 1 July 2019.

Source: https://treasury.gov.au/consultation/c2018-t331580/.

Bringing forward small business tax cuts by five years

Prime Minister Scott Morrison has announced that the Government will bring forward its planned tax cuts for small business by five years. He said the Government would introduce the necessary legislation in Parliament during mid-October 2018. Labor has indicated it will support the bring-forward of the tax cuts, thereby ensuring quick passage of the legislation through Parliament.

As shown in the following tables, this means businesses with a turnover below $50 million will have a tax rate of 25% in 2021–2022 rather than from 2026–2027 as currently legislated. Similar timing changes will apply to the roll-out of the 16% tax discount for unincorporated businesses.

Mr Morrison said this means that a small business that makes $500,000 profit will have an additional $7,500 in 2020–2021 and $12,500 in 2021–2022.

Company tax rates
2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Corporate (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 27.5 27.5 27.5 27.5 27.5 27.5 27 26 25
Fast-tracked rates 27.5 27.5 26 25 25 25 25 25 25

 

2018–2019 2019–2020 2020–2021 2021–2022 2022–2023 2023–2024 2024–2025 2025–2026 2026–2027
Unincorporated (%) (%) (%) (%) (%) (%) (%) (%) (%)
Existing legislated rates 8 8 8 8 8 8 10 13 16
Fast-tracked rates 8 8 13 16 16 16 16 16 16

Source: www.pm.gov.au/media/fast-tracking-tax-relief-small-and-medium-businesses.

Business tax rates and small business tax offset changes

The Treasury Laws Amendment (Lower Taxes for Small and Medium Businesses) Bill 2018 was introduced into and passed by the House of Representatives on 16 October 2018 and passed by the Senate on 18 October 2018. The Bill implements the proposal to accelerate reduction of the tax rate for base rate entities (ie corporate tax entities that derive no more than 80% of their income in passive forms and have an aggregated turnover of less than $50 million).

Corporate tax rate

Under the measures, the corporate tax rate for base rate entities will reduce from 27.5% to 26% in 2020–2021, before being cut to 25% for 2021–2022 and later income years. This means eligible taxpayers will have a tax rate of 25% in 2021–2022, rather than from 2026–2027 as previously legislated. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 27.5 27.5
2019–2020 27.5 27.5
2020–2021 26 27.5
2021–2022 25 27.5
2022–2023 25 27.5
2023–2024 25 27.5
2024–2025 25 27
2025–2026 25 26
2026–2027 on 25 25

Note that the tax rate for corporate tax entities which do not qualify as base rate entities remains unchanged at 30%.

Unincorporated businesses’ tax offset

In addition, the Bill increases the small business income tax offset rate to 13% of an eligible individual’s basic income tax liability that relates to their total net small business income (ie unincorporated businesses) for 2020–2021. This offset rate will then increase to 16% for 2021–2022 and later income years. This is summarised in the following table.

Year Revised rate Previously legislated
(%) (%)
2018–2019 8 8
2019–2020 8 8
2020–2021 13 8
2021–2022 16 8
2022–2023 16 8
2023–2024 16 8
2024–2025 16 10
2025–2026 16 13
2026–2027 on 16 16

Note that the small business income tax offset continues to be capped at $1,000 per individual per year.

The changes will commence in 2020–2021. The measure was previously announced by the Government on 11 October 2018. The speedy passage demonstrates that tax legislation can in fact pass through Parliament promptly, if it is deemed politically expedient.

 

Residential rental property travel expenses: ATO guidance

From 1 July 2017, non-business travel costs incurred by individuals, self managed super funds (SMSFs) and “private” trusts and partnerships in relation to residential rental properties are not deductible (s 26-31 of the Income Tax Assessment Act 1997). Such expenditure is also excluded from forming part of the cost base or reduced cost base of a CGT asset.

Law Companion Ruling LCR 2018/7, issued by the ATO on 10 October 2018, provides guidance on the following matters:

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

LCR 2018/7 applies from 1 July 2017. It finalises Draft LCR 2018/D2 and contains the same views as the draft.

Residential premises

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

LCR 2018/7 mirrors the GST ruling by providing that:

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

Carrying on a business of property investing

A deduction is not denied under s 26-31 for travel expenditure necessarily incurred in carrying on a business. This exclusion covers taxpayers carrying on a business of property investing or a business of providing retirement living, aged care, student accommodation or property management services. The ATO may take the following matters into account in determining whether a business of letting residential properties is being carried out:

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

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

Apportionment if travel expense serves mixed income-producing purposes

The expenditure made non-deductible by s 26-31 is a loss or outgoing “insofar as it is related to travel”. The ATO says that the use of the word “insofar” means that an apportionment is required if there are mixed income-producing purposes for the travel costs. If a single outlay of travel expenditure is incurred partly for producing income from the use of residential premises as residential accommodation and partly for other income-producing purposes (eg business or employment), the ATO expects the taxpayer to fairly and reasonably assess how much of the amount relates to each purpose. Factors to take into account include floor-area ratio, rental income and travel time spent attending to each income-producing purpose.

Source: www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCR20187%2FNAT%2FATO%2F00001%22.

Tax on compensation received for inappropriate advice

The ATO has recently provided information about how the tax system applies for someone who receives compensation from a financial institution that provided inappropriate advice and/or did not provide advice it should have. This can include compensation for the loss of an investment, or a refund of fees or interest.

Capital gains tax comes into play, because CGT event A1 happens when an individual, disposes off an investment. The capital gain or loss made from a CGT event is to be reported in the same financial year as the event occurs.

Compensation may be paid to a person in connection with an investment they have already disposed of. This type of compensation payment can be treated as additional capital proceeds associated with the disposal. If more than one investment is associated with a compensation payment, the ATO says the additional capital proceeds need to be apportioned among the disposed-of investments.

If a person has been compensated for investments they still own, they need to reduce either the cost base or the reduced cost base by the compensation amount they receive, depending on whether they make a loss or gain when they later dispose of the investments. Again, the compensation amount needs to be apportioned if it relates to more than one investment.

A compensation payment may also include an amount that is a refund or reimbursement of adviser fees. If the compensated person claimed a deduction for the adviser fees in a tax return, the amount they receive as a refund or reimbursement will form part of their assessable income in the year they receive it. If they did not claim a deduction for the adviser fees, the refund or reimbursement does not form part of their assessable income. However, where the adviser fees were included in the cost base or reduced cost base of any investments, the cost base and reduced cost base must be reduced by the amount of the refund or reimbursement. When the person later disposes of the investment, these reductions will be used to calculate the capital gain or loss they make.

Source: www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Compensation-paid-from-financial-institutions/.

ATO set to issue excess super contribution determinations

From mid-October 2018, the ATO has started issuing excess concessional contributions (ECC) determinations for the 2017–2018 financial year. At the Superannuation Administration Stakeholders Group (SASG) meeting on 12 September 2018, the ATO said super funds should prepare for an influx of engagement and queries from members who receive these ECC determinations in relation to contributions above the $25,000 concessional cap for 2017–2018.

A taxpayer may also receive an amended income tax return assessment together with the ECC determination. This is because any excess concessional contributions are included in the taxpayer’s assessable income for the corresponding financial year (and subject to an interest charge). The taxpayer is also entitled to a 15% tax offset for the tax already paid by the super fund.

A taxpayer has 60 days from receiving an ECC determination to elect to release up to 85% of their excess concessional contributions from their super fund. However, they should first ensure that their super fund has correctly reported their contributions to the ATO before making an irrevocable election to withdraw any excess contributions.

Upon receipt of a valid election to release, the ATO will provide a release authority to the taxpayer’s relevant super fund requiring the amount specified to be paid to the ATO. The taxpayer will receive a credit equal to the amount released to the ATO. The ATO will use any money released from the individual’s super funds to first pay any tax or government debts before refunding any remaining balance to the individual. Accordingly, most taxpayers (below the top marginal rate) should have no tax debt on the released excess concessional contributions included in their assessable income.

Non-concessional contributions determinations

The ATO also started issuing excess non-concessional contributions (ENCC) determinations for 2017–2018 from mid-to-late October 2018. The non-concessional cap from 2017–2018 is $100,000 (or $300,000 over three years for those under 65), provided that they have a total superannuation balance of less than $1.6 million at 30 June of the prior year.

Taxpayers who exceed the non-concessional cap for the year and receive an ENCC determination can elect within 60 days to withdraw the excess non-concessional contributions (plus 85% of the associated earnings) from their super fund. The full amount of the earnings (100%) are then included in the taxpayer’s assessable income (and subject to a 15% tax offset). If an individual does not withdraw the excess contributions, they will be taxed at the top marginal tax rate (plus Medicare levy).

 

The ATO has previously suggested that for “most people” who exceed the non-concessional cap it is “easiest to do nothing”. If a taxpayer does not make an irrevocable election within 60 days of receiving an ENCC determination, the ATO says it will ask the taxpayer’s super funds to release and send excess amounts to the ATO. It will also amend the taxpayer’s income tax assessment to include the associated earnings, which will be taxed at the individual’s marginal tax rate (plus Medicare levy). While the ATO suggests that it is “easiest to do nothing” for “most people” who exceed the non-concessional cap, each taxpayer needs to consider the tax implications for their own circumstances.

Source: www.ato.gov.au/General/Consultation/Consultation-groups/Stakeholder-relationship-groups/Superannuation-Administration-Stakeholder-Group/.

Top mistakes Aussies make when setting up an SMSF

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In a speech given earlier this month, ATO assistant commissioner Dana Fleming highlighted seven key mistakes SMSF trustees make when establishing their funds.

Despite the continued growth in SMSF membership, key mistakes are still being made when it comes to the set-up of funds, the ATO has revealed.

Ms Fleming said that common errors include inaccurate registration; failing to meet sole-purpose testing; prohibited loans; lending, leasing or investing more than 5 per cent of in-house assets; separating assets; borrowing money and administration issues.

In her speech, Ms. Fleming said the two most common mistakes made during the registration phase are: failure to properly establish the SMSF trust before applying for an ABN and the omission of member, trustee or director details.

Another area where trustees are experiencing problems is around sole-purpose testing. Ms. Fleming emphasized that any investment that issues current-day benefits to members or parties related to the fund violates the sole-purpose test.

SMSF trustees have also been found to breach rules barring the loaning of fund monies or assets to members of the SMSF or their relatives, while others lent, invested or leased more than the allowed 5 per cent of the fund’s total assets to related parties of the SMSF. In fact, some failed to ensure bank accounts and other such assets where actually held in the fund’s name.

Trustees were also discovered to have borrowed money, despite this being prohibited, and a number struggled in administrative areas. This included mistakes in drafting and updating the trust deed, an inability to maintain the investment strategy or meet lodgement obligations, not possessing a valid bank account or electronic service address, and failing to manage the annual audit process.

Such mistakes reflect relevant findings, with ASIC’s report 576 Member Experiences with Self-Managed Superannuation Funds, released in June this year, uncovering many members lack a basic understanding of their SMSF and their legal requirements as trustees.

Despite most respondents opting to set up SMSF accounts in order to gain control of their investments and superannuation, many admitted to relying on “financial experts” to file their paperwork, offer advice on investments and control the day-to-day running of their SMSFs.

This is particularly perplexing, as it was also found that some surveyed members did not check the credentials of their trusted “financial experts” and relied heavily on “gut feel” or the personal recommendation of a family member, friend or colleague when choosing financial advice.

In spite of such lack of understanding, there were more than 1.1 million SMSF members by March 2018, accounting for 595,840 accounts. This is up from 1.07 million members as of June 2016.

In light of this, the ATO has again asserted the importance of ensuring the fund is set up correctly. This is necessary to ensure the trustee is eligible for tax concessions, can receive contributions and can easily manage the fund’s operations.

 

Catch-up Concessional Contribution Caps

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The ATO has released details of Catch-up concessional contribution caps to the effect from 1 July 2018.

New concessional contribution ‘catch-up’ measure

From 1 July 2017,  the maximum amount of concessional contributions you can put into your account each year will be $25,000 per annum for all age groups. Then commencing 1 July 2018, there is a new catch-up provision available for members with a superannuation balance of less than $500,000 just before the start of the financial year.

If your total superannuation balance is less than $500,000 amounts not paid up to the $25,000 cap each year will be able to be paid over the following five years. You can start catching up any unused concessional contributions from 1 July 2018. For example:

2018/19 2019/20 2020/21 2021/22 2022/23 2023/24
Concessional Contributions $10,000 $10,000 $10,000 $70,000 $10,000 $10,000
Available unused cap $15,000 $15,000 $15,000 – $15,000 $15,000
Cumulative available unused cap $15,000 $30,000 $45,000 – $15,000 $30,000

 

What it means for you

If your superannuation balance is less than $500,000 you may want to seek financial advice on your future contribution options.

 

 

Setting Up Your SMSF

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If you’re thinking of setting up your own self-managed super fund (SMSF), to take charge of your retirement and be able to make investment decisions, there are some important steps you have to take before you seek registration with the ATO such as choosing between individual trustees or a corporate trustee, creating the trust and trust deed appointing trustees or directors, setting up a bank account, obtaining an electronic service address, and preparing a windup strategy.

Itis a complex process with the ATO as the gatekeeper ensuring that only genuine trustees are allowed into the SMSF sector. This is achieved by conducting pre-registration checks on newly registered SMSFs and new members added to existing SMSFs, as well as maintaining the Super Fund Lookup (SFLU) which is a public register of super funds that third-party funds and employers can use to determine if they can pay rollovers or contributions to an SMSF.

The ATO uses analytical risk models that look at a number of factors and data related to new SMSFs or new members to determine the risk of illegal early release of funds or non-compliance.

This consists of the trustees’ financial history and behaviour including: bankruptcy; debts owed to the ATO; outstanding lodgements; poor lodgement or payment compliance history; ability to maintain an ongoing super fund; and whether the individual has been linked to any other SMSFs of concern.

When a risk is identified during the pre-compliance check, the ATO will usually undertake further checks and interviews with the trustees involved to ensure that they are genuine in wanting to establish an SMSF and understand all the obligations and consequences of failing to comply with super laws, as well as having received adequate professional advice or have had appropriate education.

Where there are still concerns with the registration of the SMSF even after speaking to the trustees, the ATO will withhold registration and trustees will need to seek a review of the decision and address any concerns raised during the new registration check. In the 2017-18 income year, there were around 26,000 SMSF registrations and approximately 2,100 were subject to further review. Of those reviewed, 29% had their ABN cancelled and a further 16% had their registration details withheld from SFLU.

Therefore, it is important that the SMSF be set up correctly for the sole purpose of providing retirement benefits for its members. Even at the set-up stage, it is important to look ahead for life events such as marriage, divorce, or death which may impact on an SMSF. While some of these issues may be unpleasant and a conversation involving them unwelcome, it is important to note that an SMSF is a long-term retirement vehicle and it is prudent to ensure from the beginning that there is a strategy to deal with unexpected events and wind up the SMSF if necessary.

Need professional help?

We can advise you on various aspects of setting up an SMSF. We can cast our experienced accounting and taxation eye over your current fund.

Improvements To GST Risk Assessment

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The Inspector-General of Taxation (IGT) has recently released his review into the verification of GST refunds by the ATO. The review was initially conducted as a response to concerns raised by taxpayers which had their GST refunds delayed as a part of the ATO risk assessment program to verify certain details before refunds are issued.

Broadly, the ATO’s risk assessment system uses BASs as input data and automatically selects a number of cases where retention of refund and further checking should be considered. The selection is then further refined by manual intervention. The review conducted by the IGT examined the end-to-end process involved in refund verification including from initial case selection through to the review and audit activities.

Overall, the IGT found that the ATO’s administration of GST refunds operated efficiently with the vast majority of refunds released without being stopped for verification, while those refunds that were stopped were processed and released within 14 or 28 days. 

Even though that was the case, the IGT identified an opportunity to enhance ATO’s automated risk assessment tools which have only been achieving a strike rate of 26.7% (approximately 1 in 4 cases), which may be no better than random selection.

In addition to the opportunities to improvement, the IGT also made 5 recommendations aimed at the ATO to:

  1. develop a framework for continuous improvement of its automated risk assessment tools;
  2. streamline guidance to staff and implementing tools to assist them in complying with their statutory obligations;
  3. enhance its information requests to taxpayers and providing a channel for pre-emptive provision of such information;
  4. improve notification of when taxpayers’ objection rights to the retention of refunds has been triggered and assisting them to lodge such objections effectively; and
  5. raise awareness of staff and taxpayers about financial hardship issues, appropriately considering them and enabling automated partial release of refunds.

The ATO has agreed to the majority of the recommendations. Although it notes that activity statements are processed through a system which does not allow for automatic alerts to notify ATO officers whether retention of a refund has been made within the statutory period. However, the ATO said it is looking to migrate activity statement processing to another internal system which may provide opportunities for alerts.

In addition, the ATO partially disagreed with recommendation 3 as it says taxpayers and Tax Agents who lodge electronically already have the option to supply supporting information through various portals and allowing taxpayers to send additional information may cause additional compliance costs, particularly where the refund is not subject to verification activities.

Perhaps the most interesting recommendation that the ATO partially disagreed with is 5. According to the ATO, system limitations prevent the automated partial release of refunds in certain situations. It notes that the manual process which is currently in place is considered to be adequate.

So, what does it mean for your business?

The review has raised several issues which may mean improvements in service for business owners seeking refunds going forward. With the enhancement of the ATO’s risk assessment model, businesses may no longer need to be inconvenienced by an unnecessary delay in obtaining their GST refund. If you’re having issues with your activity statements or a GST issue in general, contact us today.

 

Tax Return Lodgement Due Soon

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With the 31 October fast approaching, so is the deadline for lodging your tax returns. If you’re making the last-minute scramble to gather all your tax documentation, keep in mind there are some changes in this year’s tax return particularly in relation to rental properties and superannuation.

If you own rental property, you should be aware that you are no longer able to claim a deduction for depreciation of second-hand assets in relation to the property in this year’s tax return. The denial of deduction applies to second hand assets acquired at or after 7.30pm on 9 May 2017 (unless it was acquired under a contract entered into before this time), and second-hand assets acquired before 1 July 2017 but not used to earn income in the 2016-17 income year. In addition, travel expenses related to residential investment properties are no longer deductible.

In relation to superannuation, from 1 July 2017, the spouse income threshold for the tax offset has increased, meaning that more people will be able to claim the offset in this year’s tax return. You may be able to claim an offset of $540 if you made a contribution to your spouse’s super fund in the income year and your spouse’s income is less than $37,000. If your spouse’s income is between $37,000 and $40,000, a part offset may be available.

In addition to the changes in the tax return, the ATO has also outlined 5 of the most common mistakes that they have seen, which are:

  • leaving out income from temp jobs or money earned from sharing economy;
  • claiming deductions for personal expenses, such as home to work travel, normal clothes, or personal phone calls;
  • no records or receipts kept of expenses;
  • claiming for something that wasn’t paid for or was reimbursed;
  • claiming personal expenses for rental properties including deductions for the private use of property or interest on loans used to buy personal assets.

Assistant Commissioner Kath Anderson said: “[t]his time we will be paying close attention to claims for private expenses like home to work travel, plain clothes, and private phone calls. We will also be paying attention to people who are claiming standard deductions for expenses they never paid for.”

According to the ATO, around half of the adjustments they make to tax returns are due to the taxpayer having no records or poor-quality records. For those taxpayers who are putting in claims, especially work claims without any evidence, the ATO says it will be checking all the data, either by data-matching against other taxpayers in similar industries to find discrepancies or by contacting the taxpayer’s employer when a “red flag” is raised.

Need help with your return?

If you’re just getting started on your return now and need some help maximising the deduction you’re entitled to or untangling complex tax affairs, we can help. If you don’t think you will make the 31 October deadline, you may be able to get a concessional lodgement date if you lodge your return with us. Alternatively, we can help you apply for a deferral and give you more time to sort out your affairs.

 

Director changes tabled, $1m fines for non-compliance

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Treasury Laws Amendment (Registries Modernisation and Other Measures) Bill 2018 sets out the legal framework for the introduction of DINs – a unique identifier that will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identities.

To date, current application to become a company director requires only a name, an address and a date of birth, with no requirement for a person to prove their identity.

The proposed DIN regime will aim to combat phoenix activity, as well as reduce time and cost for administrators and liquidators during the insolvency process by providing a more streamlined tracking of directors and their corporate history.

Under the new requirements, new directors will have 28 days to apply for a DIN from the date they are appointed a director unless they are provided an exemption or extension by the registrar.

Directors who are currently in place will be afforded transitional provisions of 15 months to apply for a DIN from the application days of the new requirement.

Failure to comply with the DIN regime will see a maximum penalty of $200,000 for individuals or $1 million for a body corporate.

BDO national tax director Lance Cunningham said the new measure was a step in the right direction and would help regulators and creditors readily identify individuals involved in failed companies, and flag higher-risk individuals and entities.

“The introduction of DINs will help curb potential phoenix by improving data integrity and security, including by allowing directors to be identified by a number rather than by other more personally identifiable information, such as their name and address,” said Mr Cunningham.

“While it will require some additional regulation, it should not be seen as just an additional layer of red tape. It will offer more effective tracking of directors and their corporate history, which will reduce time and cost for administrators and liquidators, thus improving the efficiency of the insolvency process.

“Mandatory training in director responsibilities will be required, which will be costly. However, these costs will be outweighed by the reduced time and costs and other efficiencies. From a practical perspective, the new obligations will require all companies to incorporate the DIN registration process as an additional step in appointing directors.”

However, Mr Cunningham believes rogue operators might still be able to bypass the measures and has joined calls to increase prosecution powers to deter such activity.

“Companies can structure themselves in ways that dodge the new provisions and directors can still exploit the proposed new rules by misstating information,” said Mr Cunningham.

“Contravention of the proposed new legal obligations constitutes both a civil penalty provision and a criminal offence. However, paradoxically, prosecution under criminal law is difficult to prove as the criminal standard of beyond reasonable doubt is a high bar.”

Business owners, however, have been much more vocal against the proposal.

The pervading concern from the business community is that yet another form of identification, on top of existing ABNs and ACNs, will do little to actually address the problem of phoenix activity while simply adding more cost and red tape onto SMEs.

“Why create a whole new set of ID numbers when we already have one in Tax File Numbers. Who cares that there [sic] original intended purpose was to track interactions with the ATO. The ATO is a federal government agency, ASIC is a federal government agency – why reinvent the wheel,” said one My Business reader after it was suggested the DIN should be rolled out to all company officials, not just directors.

“Besides, I would have thought the ATO would want access to this information itself anyway (i.e. keeping track of the number of companies a person is director of and the financial state of those companies & the individual).”

Source : https://www.mybusiness.com.au/management/5017-director-changes-tabled-1m-fines-for-non-compliance?utm_source=MyBusiness&utm_campaign=04_10_18&utm_medium=email&utm_content=1

 

Explanatory Memorandum October 2018

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Claiming work-related expenses: ATO guides and toolkits

This year, the ATO has launched its biggest ever education campaign to help taxpayers get their tax returns right. The ATO says the campaign, which is running throughout tax time, includes direct contact with over three million selected taxpayers, as well as specialised guides and toolkits for taxpayers, agents, employers and industry bodies. A key component of the campaign is simple, plain English guidance for the most common occupations, like teachers, nurses, police officers and hospitality workers.

ATO Assistant Commissioner Kath Anderson said that last year work-related expenses totalled a record $21.3 billion, “and we have already flagged that over-claiming of deductions is a big issue”. The most popular topics this year include car, clothing, travel, working from home and self-education expenses, and the guides for tradies, doctors, teachers, office workers and IT professionals have been a big hit, Ms Anderson said.

The ATO reminds taxpayers that a number of expense types cannot be claimed as work-related deductions, including:

  • Teachers cannot claim the costs of home-to-work travel, costs of gifts or prizes they buy for students, or costs of attending functions.
  • Police cannot claim the costs of haircuts, grooming, weight-loss programs or supplies, even though they may be covered by specific occupational regulations. They also cannot claim costs associated with attending social functions or fitness expenses unless their employment depends on maintaining a level of fitness well above ordinary police standards, such as special operations.
  • Hospitality workers cannot claim the costs of ordinary clothes, like black pants or a white shirt, even if their employer told them to wear those clothes, and even if they only wear them for work. They can, however, claim the cost of uniforms that are unique and distinct to their employer or occupation-specific (like chef’s pants). They cannot generally claim the cost of trips between home and work, even if they live a long way from their usual workplace or have to work outside normal business hours (e.g. public holidays or night shifts).
  • Truck drivers who receive a travel allowance from their employer are not automatically entitled to a deduction. They still need to show that they were away overnight, that they spent the relevant money themselves and that the travel was directly related to earning their income.
  • Retail workers cannot claim a deduction for ordinary clothes or makeup that their employer tells them to wear (e.g. clothing from the latest fashion line), even if they work in a store that sells those items. They also cannot generally claim the cost of home-to-work travel, even if they have to work outside of normal business hours (e.g. late-night shopping shifts).
  • Nurses and carers cannot claim the costs of home-to-work travel, ordinary clothes they wear to work (like closed-toe shoes or black pants), or of study that is not directly related to their current job.
  • Building and construction workers usually cannot claim the costs of home-to-work travel, nor costs of clothes or shoes that are not uniforms or are not designed to provide them with sufficient protection from the risk of injury at their worksite, even where items are called “workwear” or “tradie wear” by the supplier.
  • Flight attendants cannot claim a deduction for costs like hairdressing, cosmetics, hair and skincare products, even though they may be paid an allowance for grooming and be expected to be well groomed. Grooming product costs are considered by the ATO to be private expenses.

Source: www.ato.gov.au/Media-centre/Media-releases/What-can-you-claim-if-you-re-a-flight-attendant,-police-officer-or-a-nurse-/

Illegal phoenix activity: public examinations in Federal Court matter

The ATO has announced that public examinations started in a Federal Court matter on 27 August 2018 in relation to a group of entities connected to a pre-insolvency advisor. The examinations will focus on the suspected promotion and facilitation of phoenix activities and tax schemes.

More than 45 service providers, clients and employees of pre-insolvency advisors, as well as alleged “dummy directors” of phoenix companies, will be examined, ATO Deputy Commissioner Will Day confirmed. He also said that the ATO has funded court-appointed liquidators, Pitcher Partners, to investigate the affairs and conduct of these entities before any further legal action by the Commonwealth is considered.

Source: www.ato.gov.au/Media-centre/Media-releases/Public-examinations-to-identify-phoenix-activity-commence/; www.comcourts.gov.au/file/Federal/P/VID282/2018/actions.

Banking Royal Commission: possible super contraventions

On 24 August 2018, the Royal Commission into banking, superannuation and financial services misconduct released the closing submissions setting out possible contraventions by certain superannuation entities. The evidence surrounding these alleged breaches was revealed during the fifth round of public hearings (conducted 6–17 August 2018). During that time the Counsel Assisting, Ms Rowena Orr QC and Mr Michael Hodge QC, grilled high-level executives of some of the largest superannuation funds about practices that may involve misconduct or fall below community expectations.

Superannuation hearings

Mr Hodge QC opened the super hearings on 6 August 2018 by asking the underlying question, “What happens when we leave these trustees alone in the dark with our money? Can they be trusted to do the right thing?”

Unlike the Royal Commission’s earlier hearings, which exposed horror stories about the personal devastation suffered by some individuals who received inappropriate financial advice, this fifth round of hearings focused on evidence about corporate governance and structural failures within the super system. While they lacked the drama of the earlier hearings, which brought home the human cost of misconduct and poor business practices, the fifth round of hearings was more about extracting evidence to make findings on structural issues that equally undermine outcomes for super fund members.

The Commission heard evidence about fees-for-no-service conduct and conflicts of interests which hamper some trustees from ensuring that they always act in the best interests of members. Counsel Assisting was particularly interested in how trustees supervise the activities of a fund and respond to queries from the regulators. Executives were also quizzed on how they justified expenditure on advertisements and sporting sponsorships as being in the best interests of members. Finally, the Commission turned its attention to the effectiveness of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) as regulators.

Alleged breaches by super entities

The 222 pages of closing submissions, published on 24 August 2018, set out the relevant evidence in relation to each of the 17 superannuation entities that were the subject of the case studies before the Royal Commission. The submissions go on to address specific findings about misconduct (or conduct falling short of community expectations) that Counsel Assisting contend are open to Commissioner Hayne. This includes allegations that some of the entities may have breached various provisions of the Superannuation Industry (Supervision) Act 1993 (the SIS Act), the Corporations Act 2001 (the Corporations Act) and the Australian Securities and Investments Commission Act 2001 (the ASIC Act) in relation to the alleged conduct. For example, Counsel Assisting said that the fee-for-no-service conduct admitted by certain entities may have breached ss 1041H and 912A(1)(c) of the Corporations Act, s 12DA of the ASIC Act and ss 29E(1)(a) and 52(2) of the SIS Act. Other entities may have breached ss 29E(1)(a) and 52(2) of the SIS Act in relation to the use of tax surpluses and the transition to MySuper.

Counsel Assisting also made salient observations about ASIC and APRA in relation to the cultural and governance practices in the super industry. Importantly, at least one of the case study entities (EnergySuper) was totally cleared by Counsel Assisting, which concluded that it was not open to make any findings of misconduct or conduct falling short of community expectations.

Political advertising by super funds

In relation to AustralianSuper’s investment in The New Daily, and its political advertising campaign (the “Fox and Henhouse”), Counsel Assisting said it was not open to the Commissioner to find that any of the conduct by AustralianSuper constituted misconduct or conduct falling short of community expectations. However, Counsel Assisting said there was a broader policy question about whether political advertising is consistent with the intention behind s 62 of the SIS Act, and whether a legislative amendment was warranted. Counsel Assisting also submitted that there is a policy question about whether there is identifiable detriment (or benefit) to consumers from advertising by super funds or particular advertising (such as the “Fox and Henhouse” campaign).

Insight from leading practitioners

While the mass media has provided saturation coverage of the Royal Commission, perhaps the most insightful and refreshing observations, from a practitioner’s perspective, have come from Michelle Levy, Andrew Maher and Simun Soljo, partners at Allens Linklaters. Commenting on the closing submissions by Counsel Assisting, Ms Levy said it was significant that the submissions do not contain any legal analysis to support these very serious allegations. “Counsel Assisting seems to be saying that the conduct speaks for itself”, she said.

Ms Levy noted that the laws that have allegedly been breached “are not easy to interpret, and some of them have never or rarely been considered by a court”. “These are not matters that can be determined on the facts alone in the same way that, say, a breach of a driving speed limit might be”, she said. According to the partners at Allens Linklaters, the interpretation that Counsel Assisting has presumably given the provisions, in some cases, appears inconsistent with the courts’ interpretations of them. No doubt subsequent submissions from the impacted parties may provide some assistance to the Commission on these important matters.

In terms of the Commission’s focus on the best interests duty, Allens Linklaters have observed that the witnesses were often asked how certain conduct was in the best interests of beneficiaries. However, the legal obligation of a superannuation trustee to comply with the best interests duty in s 52(2)(c) of the SIS Act is concerned more with “process not outcome”: Breen v Williams (1996) 186 CLR 71. Asking a witness how their conduct was “in the best interests of beneficiaries” is clearly not a question that invites an answer about proper process, Ms Levy said.

Interim report due by September 2018

The Royal Commission’s interim report is due by the end of September 2018, with the sixth round of public hearings taking place on 10–21 September 2018. This round of hearings is investigating conduct in the insurance industry by reference to case studies involving certain entities. To help inform these hearings, the Royal Commission has released four background papers covering life insurance, group life insurance, reforms to general and life insurance (Treasury) and features of the general and life insurance industries.

Source: https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-5-hearings.aspx#closing-submissions.

SMSF issues update: ATO speech

ATO Assistant Commissioners Superannuation Tara McLachlan and Dana Fleming recently spoke at the Self-Managed Superannuation Fund (SMSF) Association Technical Days in various capital cities. The speech was mainly about practical considerations to be taken into account when setting up a new SMSF and during the first year of its operation. Other issues raised included:

  • SMSF registrations: For 2017–2018 there were about 26,000 SMSF registrations, with 2,100 of these, subject to further review. Of those reviewed, 621 (29%) had their Australian Business Number (ABN) cancelled and 336 (16%) had their details withheld from Super Fund Lookup.
  • SMSF annual return lodgements: By the deferred deadline of 30 June 2018, 90% of SMSFs (as at 30 July 2018) had lodged their 2016–2017 SMSF annual return, and 3% had received a deferral based on the particular circumstances of the fund. Around 44,000 SMSFs made an election in their annual return to apply the transitional capital gains tax (CGT) relief in relation to the pension reforms.
  • SuperStream for SMSFs: The ATO is working with industry on implementing the 2018–2019 Budget proposal to extend SuperStream to include SMSF rollovers. The measure is expected to start in late 2019.
  • Exempt current pension income and actuarial certificates: 2016–2017 was a transitional year for exempt current pension income (ECPI), as some SMSFs went from using the segregated method to using the proportionate method (requiring an actuarial certificate). From 2017–2018 there will generally only be a few circumstances where an SMSF needs to get an actuarial certificate to claim ECPI, as follows:
  • when the SMSF is paying a pension that is not an account-based pension;
  • where the SMSF is required to use the proportionate method because a member has a total super balance above $1.6 million; and
  • where the SMSF has a mix of accumulation and retirement-phase interests and chooses not to use the segregated method.

Source: www.ato.gov.au/Media-centre/Speeches/Other/Fledgling-SMSFs—the-first-18-months-of-an-SMSF-s-life/.

ATO data analytics and prefilling help tax return processing

The ATO reports that a record number of tax returns were finalised in the first two months of tax time this year, thanks to the ATO’s data prefilling arrangements and correction of mistakes using analytics and data-matching. Over $11.9 billion has been refunded to taxpayers, and errors worth more than $53 million were detected and corrected before refunds were issued, Assistant Commissioner Kath Anderson has reported.

The ATO has prefilled over 80 million pieces of data from banks, employers, health funds and government agencies to make tax time easier for taxpayers and agents. However, some people are still getting it wrong. Ms Anderson said the ATO’s advanced analytics allow it to scrutinise more returns than ever before, and make immediate adjustments where taxpayers have made a mistake.

Mistakes in returns

In the first half of tax time, the ATO automatically adjusted more than 112,000 tax returns to correct mistakes in returns, totalling more than $53 million. Most of the income adjustments made by the ATO were for simple mistakes, like leaving out bank interest or salary and wages. But for some, the ATO suspects, peoples’ priority was on generating a refund rather than getting it right, as they deliberately ignored the prefill information that was available at the time of lodgment, Ms Anderson said.

The ATO welcomes that so many people are confident to lodge early, but reminds them to use the prefilled data available. Taxpayers who may be tempted to bend the rules and deliberately leave out income (or over-claim deductions) should remember that the ATO’s analytics and data-matching setup is likely to pick that up, Ms Anderson said, warning that penalties between 25% and 75% can apply. Anyone who realises that they have made a mistake or left something out should lodge an amendment online or via a tax agent to minimise any penalties and interest charges.

Deductions for insurance premiums

Insurance premium deductions have also become a focus area for the ATO after it identified some taxpayers who were over-claiming deductions. “Just to be clear”, Ms Anderson said, “premiums for income protection insurance are tax deductible, but premiums for other insurances like life, permanent disability and trauma are not”.

While life and permanent disability insurance premiums are not deductible for individual taxpayers, certain death and disability insurance premiums are deductible for complying superannuation funds (ss 295-460 and 295-465 of the Income Tax Assessment Act 1997).

Tax time numbers

According to the ATO, young people seem to be getting in early, with 17% of returns coming from 18- to 24-year-olds and the majority using myTax:

  • 5,775,000 taxpayers or their agents lodged a tax return in July and August;
  • 977,000 (17%) were aged between 18 and 24 years old;
  • almost 5,155,000 refunds have been issued, totalling more than $11.9 billion.

Source: www.ato.gov.au/Media-centre/Media-releases/Data-and-analytics-generating-faster-refunds-this-tax-time/.

Parliamentary committee recommends standard tax deduction, “push return” system

The report of the House of Representatives Standing Committee on Tax and Revenue into Taxpayer Engagement with the Tax System has been tabled. This is a significant report, also covering issues that have been canvassed in previous tax reform reports such as the Australia’s Future Tax System Review and the Henry Review.

In its inquiry, the Committee examined the ATO’s points of engagement with taxpayers and other stakeholders, and reviewed the ATO’s performance against advances made by revenue agencies in comparable nations. The inquiry asked what taxpayers should now expect from a modern tax service which is largely or partly automated.

During the inquiry, the Committee received extensive evidence from the ATO about its “reinvention” as a modern automated tax administration system. However, the inquiry also raised alarms that the Committee said it was compelled to explore. In particular, the Committee was concerned that complexity in Australia’s tax system is impeding the ATO’s transformation into a fully automated and intuitive service. Australia’s complex system for claiming workplace-related deductions, for example, was highlighted during the inquiry as being out of step with approaches in most other advanced nations, which had almost universally standardised their approach. The Committee concluded that, under Australia’s self-assessment model, more should be done to make tax obligations easier for taxpayers to understand and simpler to comply with.

Recommendations

In its 242-page report, the Committee made 13 recommendations, including:

  • that a review of Australia’s tax system should be undertaken before 2022, with the purpose of making recommendations on how to simplify the present tax system, in order to both reduce the quantum of tax law and improve comprehension and compliance by people without expertise in taxation law;
  • more immediate tax reform to close up tax loopholes, and to meet new challenges evolving with the increase in freelance and contracting work – in particular, the Committee called for introduction of a standard workplace expenses deduction scheme (as proposed by the Australia’s Future Tax System Review), with individuals allowed to claim above the set amount by providing full substantiation through a tax return process;
  • that the ATO should continue to expand availability of technical initiatives such as prefilling, simplified electronic lodgement systems for business and individuals, and online assessment tools to facilitate Australia’s transition to a “push return” tax system – the Committee supports these developments, but wishes to uphold individuals’ choices to manage their own tax affairs, using ATO or commercial products, and to seek professional advice from tax professionals enabled by efficient online lodgement services;
  • based on the New Zealand system, that Treasury should consider an Australian Business Number (ABN) withholding tax system at source for all industries, with the potential for industry-specific rates;
  • that the ATO should adopt a roadmap for the abolition of paper-based returns, including testing and trialling with user groups, although for the foreseeable future the Committee recommends that the ATO maintains the paper-based return service on request;
  • that the ATO should review the functionality of the contactor assessment tool for accuracy and utility to taxpayers by reference to the functionality of the tool deployed in the United Kingdom, and report to the Committee on its progress;
  • that the ATO should continue to deploy behavioural insights approaches to increase taxpayer engagement;
  • that the ATO should make greater use of behavioural insights techniques – such as randomised controlled trials – before full implementation of new initiatives, to determine if such changes are indeed better than current practices, and which changes are the most effective;
  • that the ATO should conduct a comprehensive review of its high-level mission statements to devise a single, cohesive and easily understood framework – “a regulatory philosophy” – that clearly and simply outlines the rights and obligations of both the ATO and taxpayers in the tax engagement process; and
  • that the ATO should engage with all service providers according to the principle of competitive neutrality, allowing taxpayers the ultimate choice of which channel of access or service to use, and which channel is in their own best interests.

Other points from the report

Among other things, the report also noted the following:

  • While the trend towards electronic payments and “tap-and-go” contactless cards in Australia is strong, some jurisdictions overseas are more advanced in implementing financial technology developments that support the shift away from cash. For example, Sweden has mandated for implementation of certified cash registers to provide real-time information to the Swedish Taxation Authority (STA) on sales transactions.
  • Australia has one of the highest levels of reliance on tax practitioners of any OECD country. At hearings, the ATO advised that Australia’s reliance on agents is second only to Italy’s – in Australia, 74% of all tax entities (individuals and businesses) employ a tax professional to help them comply with their obligations.
  • Mr Graeme Davis, Treasury’s Acting Division Head, Tax Framework Division, conjectured that tax complexity may be one cause for Australia’s very high reliance on tax agents compared with other nations. However, he emphasised that “there doesn’t seem to be a direct correlation” between tax complexity and agent usage, citing the lower tax agent usage in the United States, which is not known for having a simple tax system.
  • The Australian tax system supports the use of taxation intermediaries (tax practitioners), as it provides taxpayers with a deduction for the cost of managing tax affairs (irrespective of complexity). The Committee heard evidence that this was inefficient, and that the calibration of the tax system towards overpayment of taxes with refunds provided for workplace deductions, for example, is fuelling a costly “refund churn” while supporting late lodgement and late payment of tax obligations.

Source: www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/completed_inquiries.

12-month extension of $20,000 instant asset write-off

The Treasury Laws Amendment (Accelerated Depreciation for Small Business Entities) Bill 2018 has now passed through both houses of Parliament without amendment. This uncontroversial and widely supported Bill was originally introduced on 24 May 2018, so it is unusual that the process has taken almost four months.

The Bill amends the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 to extend the period during which small business entities can access expanded accelerated depreciation rules for assets costing less than $20,000 by another 12 months, to 30 June 2019 (the threshold amount was due to revert to $1,000 on 1 July 2018).

Among other things:

  • Small business entities will be able to claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm (ACT legal time) on 12 May 2015, and first used or installed ready for use on or before 30 June 2019. Depreciating assets that do not meet these timing requirements continue to be subject to the $1,000 threshold.
  • Small business entities will be able to claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2019.
  • Further, small business entities will be able to claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm (ACT legal time) on 12 May 2015, and on or before 30 June 2019. Costs that are incurred outside of these times continue to be subject to the $1,000 threshold.

Currently, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets, can be allocated to a small business entity’s general small business pool and deducted at a specified rate for the depletion of the pool. This does not change.

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, welcomed the passing of the Bill but said, “We will still continue to push for embedding the instant asset write-off in legislation and raising the threshold to at least $100,000”. She said that for capital-intensive businesses the $20,000 threshold is too low; for example, if you’re a farmer and you want to buy an asset like a tractor, “you’re not going to get one for anywhere near the $20,000 threshold”.

Ms Carnell said small businesses and family enterprises need to remember that this is a tax deduction, not a rebate – so they need to make a profit to be eligible to claim the benefit.

Source: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar6118%20Recstruct%3Abillhome.

Cyptocurrency and tax: updated guidelines

The ATO says that for those carrying on a business that involves transacting with cryptocurrency, the trading stock rules apply, rather than the capital gains tax (CGT) rules.

The ATO’s guidelines on the tax treatment of cryptocurrencies have recently been updated, following feedback from community consultation earlier this year. The ATO has provided additional guidance on the practical issues of exchanging one cryptocurrency for another, and the recordkeeping requirements. The ATO received about 800 pieces of individual feedback and submissions.

Through the feedback, the ATO identified the five most frequently raised issues and its current response to these issues, as follows:

  • Issue 1: In many situations, cryptocurrency transactions cannot reasonably be accounted for on a transaction-by-transaction basis, and the only reasonable approach is taxing on a fiat-in and fiat-out basis.

ATO response: The normal recordkeeping rules under the tax laws apply to cryptocurrency transactions as with any other transactions involving the disposal of property. As part of the ATO’s research, it discovered low-cost software solutions that can both record each cryptocurrency transaction (including cryptocurrency-to-cryptocurrency transactions) and convert the value of the proceeds into Australian dollars.

  • Issue 2: High fluctuations in values make it difficult to value cryptocurrency.

ATO response: The ATO heard that high fluctuations in value could create large changes in the “paper” value of cryptocurrency portfolios, compared to realised gains. As cryptocurrencies are generally CGT assets, any gains are not realised until the time of disposal. This is an issue in all investments, and managing this risk falls into the realm of tax planning.

  • Issue 3: Records have not been kept, and we can’t reconstruct them now.
  • Issue 4: It is hard to keep records of high volume trades, particularly in ascertaining value for each trade.
  • Issue 5: There is difficulty in accessing the data required for proper recordkeeping.

ATO response to issues 3, 4 and 5: The normal recordkeeping rules under the tax laws apply to cryptocurrency transactions, as with any other transactions involving the disposal of property. As part of the ATO’s research, it discovered low-cost software solutions that can both record each cryptocurrency transaction (including cryptocurrency-to-cryptocurrency transactions) and convert the value of the proceeds into Australian dollars. The software can take information directly from the exchange or a digital wallet and do the calculations, which helps alleviate the issues with recording trades and accessing data. This type of software may be suitable for cryptocurrency recordkeeping. In most cases, it may be possible to reconstruct records through historical information available from digital currency exchanges, wallet transactions or even normal bank account transactions. Market values of various cryptocurrency can also be obtained from a reputable online exchange.

Source: www.ato.gov.au/Business/Large-business/In-detail/Business-bulletins/Articles/Cyptocurrency-and-tax/.

The ATO as SMSF regulator: observations

In the opening address to the Chartered Accountants Australia and New Zealand National Self-Managed Superannuation Fund (SMSF) Conference in Melbourne on 18 September 2018, James O’Halloran, ATO Deputy Commissioner, Superannuation, shared some observations and advice from the ATO’s perspective as regulator for the SMSF sector. The address included the following points:

  • The ATO aims to address behaviour that seeks to take advantage of the closely held and concessionary nature of an SMSF or seeks to undermine the retirement system by accessing savings in circumstances not allowed under the law.
  • The role of trustees is a crucial one. For example, they must act honestly in all matters concerning the fund, must act in the best interests of all fund members when making decisions and must manage the fund separately from their own affairs.
  • The ATO estimates that about 1,900 SMSFs reported reserves in their 2016–2017 annual returns, totalling $375 million.
  • As at 30 July 2018, some 90% of SMSF returns for the 2016–2017 financial year were lodged on time.
  • Some 27,000 registered SMSFs have not lodged since their establishment, including some 8,900 funds that registered in the 2016–2017 financial year and have not yet lodged their 2016–2017 return.
  • Events likely to attract close scrutiny from the ATO include any unexplained increase in new reserves, increases in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase.
  • Where an SMSF does have reserves, the ATO will be looking to see whether they’re being maintained by a trustee in line with the sole-purpose test.
  • Another emerging issue is the use of multiple SMSFs to manipulate tax outcomes. Given the recent introduction of the transfer balance cap and disregarded small fund assets provisions, the ATO will closely scrutinise arrangements where an individual with multiple SMSFs acts within these funds to circumvent the intended outcomes of these measures. At a baseline level, the ATO believes there are some 13,600 trustees who have more than one SMSF, and 35 trustees who have more than five SMSFs.

Source: www.ato.gov.au/Media-centre/Speeches/Other/Trust-and-confidence-in-self-managed-superannuation-funds–our-common-purpose/.