ATO closely examines work-related car expenses

The ATO is concerned about taxpayers making mistakes or deliberately lodging false claims for work-related car expenses, and has announced it will be closely examining claims for these expenses in 2018 tax returns. Last year, around 3.75 million people made a work-related car expense claim, totalling about $8.8 billion.

The best way for to avoid mistakes is to make sure you follow “the three golden rules”, only making a car claim if:

• you paid for the expense yourself and you weren’t reimbursed;
• it’s directly related to earning your income – in other words, your employer required you to make the trips as part of your job; and
• you have a record to support your claim.

TIP: We can help you avoid mistakes and understand what you’re entitled to claim this tax time. Contact us about your tax return today.

Data matching finds taxpayers with unnamed Swiss bank accounts

More than 100 Australians have been identified as “high risk” and will be subject to ATO investigation because they have links to Swiss banking relationship managers who are alleged to have actively promoted and facilitated tax evasion schemes.

The ATO constantly receives intelligence from a range of local and international sources which it cross-matches against existing intelligence holdings through its “smarter data” technology.

Australians who may have undeclared offshore income are encouraged to contact the ATO with that information – if penalties or interest apply, the amounts will generally be reduced (by up to 80%) if you make this kind of voluntary disclosure.

TIP: It’s important for Australia tax residents to declare all of their worldwide income to the ATO. Australia has many international tax agreements that work to avoid double taxation for people who are resident in Australia but make income from offshore sources.

CGT main residence exemption to disappear for non-residents

A person’s Australian tax residency status may be about to assume a whole new meaning. Currently, both residents and non-residents qualify for a full or partial exemption from capital gains tax (CGT) when they sell a property that is their home (main residence). But if a Bill that is currently before Parliament is passed, that will change, and any individual who is a non-resident for tax purposes at the time they sign a contract to sell their home – for example, if they have moved overseas before signing the sale contract – will no longer qualify for the full or partial main residence exemption, regardless of how long the home was actually their main residence when they were an Australian tax resident.

TIP: If you’re considering selling your home and moving or travelling overseas, talk to us to find out how this could affect your Australian tax residency and CGT costs.

Residential rental property travel expense deduction changes

Recent changes to Australian tax law mean that individuals, self managed superannuation funds (SMSFs) and “private” trusts and partnerships can longer claim tax deductions for non-business travel costs related to their residential rental properties. Such costs also cannot form part of the cost base or reduced cost base of a CGT asset.

The ATO has issued guidance to make it clear that tax deductions are only permitted for taxpayers who incur this kind of travel expense as a necessary part of
carrying on a business such as property investing, or providing retirement living, aged care, student accommodation or property management services.

TIP: The ATO will consider a range of factors, such as number of properties leased, time and expertise needed for their maintenance, and taxpayer record-keeping, when deciding if someone carries on a business that requires travel expenditure related to their residential properties.

Government to increase civil penalties for white-collar crime

In response to recent Senate Economics References Committee and Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce reports, the Federal Government has agreed to increase the civil penalties for corporate and financial misconduct (white-collar crime), for both individuals and bodies corporate. ASIC infringement notices will also be expanded to cover a broader range of financial services and managed investments infringements.

The new maximum civil penalties will be set at:

• for individuals, the greater of 5,000 penalty units (currently $1.05 million) or three times the value of the benefits obtained or losses avoided; and
• for corporations, the greater of 50,000 penalty units (currently $10.5 million) or three times the value of the benefits obtained or losses avoided, or 10% of annual turnover in the 12 months before the misconduct, up to a total of one million penalty units ($210 million).

Businesses, get ready: GST on
low value goods

From 1 July 2018, GST will be imposed on the supply low value goods from outside of Australia to Australian consumers. Businesses need to be ready for this change.

tip: Businesses must register for Australian GST once their annual turnover reaches $75,000, but registering is optional for businesses with lower turnover. The low value goods changes will apply from 1 July 2018 for all businesses registered for GST, whether their registration was required or they chose to register.

Under the low value goods regime, businesses that sell goods valued at A$1,000 or less to an Australian consumer (who is not registered for GST) will be liable to pay GST on those sales. GST will also apply where the business delivers or facilitates delivery of the goods into Australia.

tip: If your business will be affected, now is the time to make sure your systems are ready to collect GST on low value sales, that your online terms and conditions are up to date, and that your website meets Australian consumer law requirements for displaying prices.

Business-to-business (B2B) sales, where a business sells low value goods to a recipient business that is registered for GST, are excluded from the regime.

Tip: The New Zealand Government has also recently proposed to levy GST on goods valued under the country’s current threshold of NZ$400.

Financial Complaints Authority takes shape

Minister for Revenue and Financial Services Kelly O’Dwyer has announced the authorisation of the new financial dispute resolution scheme, the Australian Financial Complaints Authority (AFCA), which will start accepting complaints from 1 November 2018. AFCA is intended to be a “one-stop shop”, having the expertise to deal with all financial disputes, including superannuation and small business lending disputes, with higher monetary limits and compensation caps.

All Australian financial services (AFS) licensees, Australian credit licensees, superannuation trustees and other financial firms legally required to join AFCA will need to do so by 21 September 2018.

Banking Royal Commission wraps up evidence on financial advice

The Banking Royal Commission has wrapped up its two weeks of hearings focused on financial advice.

The hearings have included gruelling evidence of misconduct in financial services entities’ provision of financial advice, occurring in the context of fees being charged for no service, platform fees, inappropriate advice, improper conduct and the disciplinary regime.

The Royal Commission has adjourned until 21 May 2018, when it will begin its third round of hearings with a focus on small and medium enterprises (SMEs). The Commission’s final report is due by 1 February 2019.

ATO assessments issued for excess super pension balances

The ATO has started issuing excess transfer balance (ETB) tax assessments to self managed super fund (SMSF) members, or their agents, who had previously received an ETB determination and rectified the excess. These ETB tax assessments are sent to SMSF members (or their professionals), and not to the fund. It’s then up to the member to decide how to cover the ETB liability for exceeding their $1.6 million pension transfer balance cap.

The ATO warns that SMSF members may receive an ETB assessment even if they didn’t receive an ETB determination. If they rectified the excess before they were assessed for a determination, they are still liable for the ETB tax. However, SMSF members who were covered by the transitional rules for excesses not exceeding $100,000 and rectified in full by 31 December 2017, will not receive an ETB tax assessment.

CURRENCY:

This issue of Client Alert takes into account developments up to and including 14 February 2018.

Bill to implement housing affordability CGT changes

As part of the 2017–2018 Budget, the Federal Government announced a range of reforms intended to reduce pressure on housing affordability. Legislation – the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 – has now been introduced into Parliament. It proposes to:

• remove the entitlement to the capital gains tax (CGT) main residence exemption for foreign residents; and
• modify the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an “associate inclusive” basis.

When the Bill has passed, both of these measures will apply from 9 May 2017. At the time of writing, the Bill is before the House of Representatives.

Main residence exemption

The main residence exemption disregards a capital gain or loss for CGT purposes if the taxpayer is an individual and the gain or loss came from selling or disposing of a dwelling that was their main residence throughout the ownership period. A partial exemption is available if the dwelling was their main residence for only part of the period or was also used in part to produce assessable income.

For this exemption, a dwelling includes:

• a building (eg a house) or part of a building (eg an apartment or townhouse) that consists wholly or mainly of accommodation;
• a caravan, houseboat or other mobile home; and
• any land immediately under the unit of accommodation; and
• adjacent land that, together with the land under the dwelling, does not exceed two hectares, and adjacent structures (eg a storeroom, shed or garage) used mainly for domestic or private purposes.

The main residence exemption may also apply to:

• an individual beneficiary in, or entity that is a trustee of, the deceased estate of a person who used the dwelling as a main residence; and
• the trustee of a special disability trust where the dwelling was the main residence of the individual principal beneficiary of the trust, or the main residence of another beneficiary who inherited the dwelling upon the principal beneficiary’s death.

Principal asset test

Under the foreign resident CGT regime, a capital gain or capital loss that a foreign resident makes in respect of a membership interest is disregarded unless both the non-portfolio interest test and the principal asset test are satisfied for the interest.

The principal asset test’s purpose is to determine when an entity’s underlying value is principally derived from TARP. A membership interest that a foreign resident holds in another entity will pass the principal asset test if the total market value of the entity’s TARP assets is greater than the total market value of its non-TARP assets.

Capital gains discount for affordable housing

The Bill also proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to provide an additional discount on CGT for affordable housing. The discount of up to 10% will apply if a CGT event happens to an ownership interest in residential premises that has been used to provide affordable housing.

This measure will apply to capital gains that investors realise from CGT events that occur on or after 1 January 2018, for affordable housing tenancies that start before, on or after 1 January 2018.

Changes to small business CGT concessions

Treasury has released draft legislation aimed at ensuring that taxpayers will only be able to access the small business capital gains tax (CGT) concessions for assets that are used (or held ready for use) in the course of a small business or are an interest in a small business.

This measure was announced in the 2017–2018 Federal Budget. The amendments include additional conditions that must be satisfied from 1 July 2017 to apply the small business CGT concession for capital gains that arise in relation to a share in a company or an interest in a trust (the “object entity”).

Broadly, these conditions require that:

• if the taxpayer does not satisfy the maximum net asset value (MNAV) test, the relevant CGT small business entity must have carried on a business just before the CGT event;
• the object entity must have carried on a business just before the CGT event;
• the object entity must either be a CGT small business entity or satisfy the MNAV test (applying a modified rule about when entities are “connected with” other entities); and
• the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The consultation period for the exposure draft ends on 28 February 2018.

Maximum net asset value test

To satisfy the MNAV test, the total net value of CGT assets owned must not exceed $6 million just before the relevant CGT event. The limit is not indexed for inflation.

When calculating the total, you must include the net value of CGT assets owned by the taxpayer, any connected entities, any of the taxpayer’s affiliates and entities connected with the affiliates.

Asset values contribute to the total only if the assets are used (or held ready for use) in a business carried on by the taxpayer or a connected entity. An asset doesn’t count towards the total if it is used in the business of an entity that is connected with the taxpayer only because of the taxpayer’s affiliate.

Bill to change residential property GST arrangements

A Bill has been introduced to amend the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and related legislation, requiring purchasers of new residential premises and new subdivisions of potential residential land to remit the GST on the purchase price directly to the ATO as part of the settlement process. Under the current law, the supplier of the property (eg the developer) is responsible for remitting the GST to the ATO upon lodging a business activity statement (BAS) up to three months after settlement.

The new measure was announced in the 2017–2018 Federal Budget to deal with developers dissolving their business and setting up a new entity to avoid paying GST to the ATO. In late 2017, the ATO reported that it had identified more than 3,700 people using this type of “phoenixing” activity to avoid their tax obligations over the previous five years.

When the Bill is passed, GST withholding by purchasers will commence on 1 July 2018. There is a two-year transition window for contracts that were executed before that date and will settle before 1 July 2020. After that date, GST withholding will apply to all residential sales.

The withholding amount is 1/11th of the contract price for fully taxable sales (reduced to 7% for margin scheme sales). Settlement adjustments are ignored and the withholding is based on the stated contract price only.

Purchasers will have two options in relation to the withheld GST:

• remit it to the ATO on or before settlement; or
• give the vendor a bank cheque on settlement (made out to the ATO).

All vendors of residential premises/residential land (including developers, investors and private home owners) will need to provide a notice to the purchaser before settlement advising whether GST withholding applies. Failure to do so will be a strict liability offence, attracting a fine of $21,000 for individuals and $105,000 for companies.

At the time of writing, the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 is before the House of Representatives.

Moving to combat the black economy

The black economy includes people who don’t correctly report and meet their tax obligations, and people who operate entirely outside the tax and regulatory system. The Government and the ATO consider the black economy a significant economic and social problem. The Australian Bureau of Statistics estimated in 2012 that the black economy could be as large as 1.5% of Australia’s gross domestic product, or around $25 billion.

The Black Economy Taskforce

The Federal Government established the Black Economy Taskforce in 2017 “to develop an innovative, forward-looking whole-of-government policy response to combat the black economy in Australia, recognising that these issues cannot be tackled by traditional tax enforcement measures alone”. In its Interim Report (released May 2017) the taskforce noted that a range of trends, vulnerabilities and other considerations suggest that the black economy could be larger today, and made a number of initial recommendations based on the experience of foreign jurisdictions, extensive consultation with stakeholders and the anecdotal evidence that the taskforce received.

The Government has now introduced the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 into Parliament. It proposes to combat the black economy by:

• prohibiting the production, distribution and possession of sales suppression tools;
• prohibiting the use of electronic sales suppression tools to incorrectly keep tax records; and
• requiring entities that have an ABN and that provide courier or cleaning services to report to the ATO (from 1 July 2018) information about transactions that involve engaging other entities to undertake those services for them.

At the time of writing, the Bill is before the House of Representatives.

Sales suppression tools

One of the taskforce’s recommendations for immediate action was to prohibit sales suppression technology and software. The Government announced its acceptance of this move in the 2017–2018 Federal Budget’’.

Transaction data recorded by point-of-sale (POS) systems is a key component of sales and accounting systems for modern business. This data provides a clear record of transactions against which accounts and tax returns can be audited. The importance of POS systems data for tax auditing has led to some people developing and using tools – known as ‘electronic sales suppression tools –’ that facilitate tax evasion by suppressing or falsifying POS records of transactions.

Currently, Australia’s tax law (namely the Taxation Administration Act 1953 [TAA 1953]) contains a variety of offences and penalties related to tax evasion and incorrect recordkeeping. These include penalties for providing false or misleading information to the ATO and for incorrectly keeping records with the intent of misleading the ATO.

Although these offences may apply to businesses that use electronic sales suppression software to incorrectly keep their records, the Government believes the TAA 1953 penalties aren’t high enough to reflect the seriousness of using tools to intentionally misrepresent a business’s tax position.

The Criminal Code in Sch 1 to the Criminal Code Act 1995 (CCA 1995) also contains offences related to forgery and providing false documents. Manufacturing electronic sales suppression tools may come under the offence for possessing, making or adapting a device for making forgeries, which can be punishable by imprisonment for up to 10 years. However, for the CCA 1995 provisions to apply, the device must be possessed, made or adapted specifically with the intention to commit forgery. The provisions also only apply to Commonwealth documents; this means, broadly, a document purporting to be made by a Commonwealth entity or official.

These requirements can be difficult to satisfy in the case of electronic sales suppression tools. Electronic POS records generally aren’t Commonwealth documents. And even where an electronic sales suppression tool that was developed overseas is used to falsify records kept for Australian tax purposes, it’s likely to be difficult to demonstrate that the tool was made or supplied with the intention of defrauding the Commonwealth specifically.

Third-party reporting

Another of the taskforce’s recommendations for immediate action was to extend the taxable payments reporting system (TPRS) to apply to contractors in the courier and cleaning industries. The Government also announced its acceptance of this move in the 2017–2018 Federal Budget.

The TPRS is a transparency measure that currently applies to the building and construction industry. It requires businesses in that industry to report to the ATO all payments that they make to contractors for building and construction services. The TPRS appears to have improved tax compliance in this area, and has the potential to do the same for the courier and cleaning industries, which are similarly high-risk sectors where tax evasion is concerned. 

Corporate tax avoidance: latest ATO targets

The ATO has provided a comprehensive update on its latest compliance projects and focus areas aimed at mitigating corporate tax avoidance.

Manipulation of thin cap rules

The ATO is investigating the possible manipulation of the thin capitalisation rules by 27 taxpayers in relation to asset revaluations totalling $78 billion.

The ATO had anticipated the amount of debt deductions disallowed would increase as a result of the safe harbour debt test thresholds reducing from 75% to 60% in 2014. However, it suspects that some taxpayers have responded by undertaking revaluations of certain assets to increase the value of their total assets. This has limited the impacts of the safe harbour thresholds reductions.

Intellectual property offshore

The ATO is investigating arrangements that result in the migration or artificial allocation of intangible assets, and rights in those assets, to offshore related parties by multinationals. These arrangements present a risk as multinationals implement non-arm’s length arrangements that:

• migrate or artificially allocate Australian generated intangibles to offshore related parties;
• involve the use of intangible rights or assets, where the value of these rights and assets is derived from, or maintained by, the activities and operations of Australian entities – particularly research and development (R&D) activities; and/or
• dispose of or allocate Australian generated intangible assets to offshore related parties and subsequently grant rights in these assets back to Australian entities.

Oil and gas industry

The ATO’s main focus in the oil and gas industry is on the treatment of labour costs (revenue versus capital) associated with the construction of high-value assets. The ATO is seeing taxpayers challenge the capital treatment of these costs. It is also concerned about the treatment of other “general” indirect costs associated with the construction of assets.

Pharmaceutical industry

The ATO will examine arrangements to determine whether Australian subsidiaries and their offshore related parties are operating under arm’s length conditions, such that the income declared reflects the economic contribution of the Australian operation to the Australian and global value chain. The ATO has refined its tax risk concerns to reflect the intricacies of the Australian pharmaceuticals industry and its subdivisions; for example, patented pharmaceuticals, generic pharmaceuticals, medical devices and over-the-counter vitamins and supplements.

Tax professionals and promoters

The ATO is also working to identify tax professionals and advisers who are promoting unacceptable tax planning. It is taking steps to deal with some advisers, including those who seek to cloak the promotion of unacceptable tax planning via inappropriate claims for legal professional privilege.

E-commerce

In the e-commerce industry, the ATO finalised 11 cases in 2017, issued amended assessments worth over $1 billion, collected tax of over $800 million and estimated future company tax revenue effects of over $500 million. It is still looking at another 20 major e-commerce players.

Social security means testing of lifetime retirement income streams

The Department of Social Services (DSS) has released its proposed means testing rules for pooled lifetime retirement income streams.

The pension standards in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) were amended from 1 July 2017 to allow for a broader range of tax-exempt lifetime superannuation income stream products that enable the pooling of risk to manage longevity risk. Lifetime pensions and annuities that meet these new standards qualify for concessional tax treatment.

It is proposed that such pooled lifetime income streams would be assessed for social security means test purposes as follows:

• income test: 70% of all income paid from such products; and
• assets test: 70% of the nominal purchase price of the product until life expectancy at purchase, and 35% from then on.

The DSS says this approach should still provide a sufficient incentive to support take-up of lifetime products. It is expected that pensioners who allocate a proportion of their superannuation (eg up to 30%) to a pooled lifetime product will experience a similar outcome under the income test in the early years of retirement, compared to holding an account-based income stream and drawing the minimum payments.

Compared to the current means test rules for lifetime products, the DSS believes that assessing 70% of the nominal purchase price until life expectancy balances the up-front concessionality with a more consistent asset test assessment over time. It is also considered that maintaining this asset value until life expectancy will help mitigate the risk of lifetime products being used to shield assets from assessment. Once a person reaches life expectancy (as measured at the time they purchased the product), the assessable asset value will be reduced to 35%. DSS says this will help to address the risk of punitive asset test outcomes later in life, while still recognising an asset value for the product.

Deferred income streams

The new rules propose that deferred superannuation income stream products will receive the same asset test assessment as products that commence payments immediately. However, the proposed income test rules will only assess deferred products once payments commence.

Death and surrender values

Where new products offer surrender values or death benefits above the limits imposed by the “capital access schedule” in the SIS Regs, the assets test will assess the maximum value of:

• the amount determined under the proposed new rules (70% of the purchase price until life expectancy age, and then 35%);
• the value of the lump sum amount that is payable if a person withdraws from the product; or
• the highest death benefit payable under the product.

ATO now issuing excess transfer balance determinations

The ATO has advised that is now sending out excess transfer balance (ETB) determinations to individuals who have exceeded their superannuation transfer balance cap and not rectified the excess.

Transfer balance cap

The transfer balance cap, which has applied from 1 July 2017, is a new limit on the total amount of superannuation that can be transferred into the retirement phase. An individual can continue to make multiple transfers into the retirement phase as long as the total amount transferred remains below the cap.

The transfer balance cap has initially been set at $1.6 million, and will be indexed periodically in $100,000 increments in line with the consumer price index (CPI). The amount of indexation an individual is entitled to will be calculated proportionally based on the difference between their transfer balance total and the cap amount. If an individual’s transfer balance meets or exceeds the cap, they will not be entitled to indexation.

Excess transfer balance tax

Self managed superannuation fund (SMSF) members that had exceeded their transfer balance cap by $100,000 or less on 1 July 2017 had until 31 December 2017 to commute the excess capital. If they didn’t do so by that date, they will have to commute the excess capital and excess transfer balance earnings, and also pay excess transfer balance tax.

If an SMSF member receives an ETB determination from the ATO and the trustee has not already reported information to the ATO for that member, they must do so promptly so the ATO has all the required information about the member’s circumstances. The member can request an extension of time if needed, but should do this as soon as possible. The sooner the member removes the amount set out in the ETB determination from retirement phase, the lower the amount of excess transfer balance tax they will pay.

Windfarm grant was an assessable recoupment

The Full Federal Court has dismissed a taxpayer’s appeal and held that a Commonwealth grant of almost $2.5 million for the establishment of a windfarm was an assessable recoupment: Denmark Community Windfarm Ltd v FCT [2018] FCAFC 11.

Background

In May 2011, the taxpayer was given a renewable energy grant in respect of 50% of the project costs it had incurred in constructing two wind turbines. The grant was payable in instalments on the completion of identified project milestones.

The ATO issued a private ruling stating that the grant would be assessable income under s 20-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997). In response, the taxpayer argued that the grant was:

• not assessable under s 20-20(2) because it was not received by way of an “indemnity”; and
• not an assessable recoupment within the meaning of subs 20-20(2) or s 20-20(3) because those provisions required the relevant deduction to have been claimed for a “loss or outgoing”, which, it said, was not the case for deductions claimed for depreciation.

At first instance the Federal Court held that the grant was an assessable recoupment under subs 20-20(2) and 20-20(3). The primary judge found that the grant was received as compensation for an “expense” the taxpayer had incurred, which fell within the meaning of “indemnity”.

Decision

The Full Federal Court dismissed the taxpayer’s appeal and held that the amounts received under the grant were assessable recoupments under s 20-20(2) of ITAA 1997. The Full Court rejected the taxpayer’s argument that the depreciation deductions it claimed were not “for the loss or outgoing” under s 20-20(2)(b). Rather, the Full Court considered that the phrase “for the loss or outgoing” was sufficiently broad to pick up a depreciation deduction under Div 40 or Subdiv 328-D where the relevant outgoing was the cost of the depreciating asset. In such circumstances, the depreciation deduction may properly be regarded as a deduction “for the loss or outgoing”.

Thomson Reuters would like to hear from you

Subscribers are invited to submit topics for articles for future publication. Information should be sent to:

Publisher – Client Alert

Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668
PO Box 3502, Rozelle NSW 2039

Tel: 1800 074 333

Email: contentfeedback@thomsonreuters.com

Website: www.thomsonreuters.com.au

ATO rethink on guidelines for profit allocation within professional firms

In reviewing its guidelines on Everett assignments and the allocation of profits within professional firms, the ATO has become aware that the guidelines are being misinterpreted in relation to certain arrangements that go beyond the guidelines’ scope. The ATO has found a variety of arrangements that exhibit high risk factors are not specifically addressed within the guidelines, including the use of related-party financing and self managed superannuation funds (SMSFs).

As a result, the ATO has suspended the application of the guidelines with effect from 14 December 2017.

Practitioners contemplating entering into new arrangements after the cut-off date should pursue an “early engagement discussion” with the ATO under its private rulings processes.

Practitioners who have entered into arrangements before the cut-off date that comply with the guidelines and do not exhibit high risk factors can rely on those guidelines. Pre-14 December 2017 arrangements that exhibit any of the high risk factors may be subject to review. The ATO says it encourages anyone who is uncertain about how the law applies to their existing circumstances “to engage with us as soon as possible”.

The ATO will consult with interested stakeholders on replacement guidelines and the application of any required transitional arrangements.

Housing affordability measures now law

Legislation to implement the 2017–2018 Federal Budget measures aimed at improving housing affordability has now been passed.

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Act 2017 and the First Home Super Saver Tax Act 2017 implement the following measures (both of which start on 1 July 2018):

• the First Home Super Saver (FHSS) Scheme, which provides concessional tax treatment for amounts released from superannuation in order to purchase or construct a first home (starting from 1 July 2018); and
• an exemption for “downsizing” super contributions up to $300,000 when individuals aged 65 and over sell a home that they have owned for at least 10 years.

Note that as result of a Senate amendment during passage of the legislation, an exemption from meeting the “first home” requirement is now available. The exemption will apply if the ATO determines that the taxpayer has suffered financial hardship (the circumstances of which will be determined by regulation). It is envisaged that regulations would refer to circumstances where a taxpayer has limited savings, is currently renting and had an interest in a home many years ago that was in a cheaper real estate market or when the taxpayer was in a relationship that has since broken down. Taxpayers will still be limited to one withdrawal of their voluntary superannuation in their lifetime and it must be for their only home.

Fringe benefits tax: determining private use of vehicles

The ATO has issued employer guidance regarding how to determine an employee’s private use of a vehicle for the purposes of the car-related FBT exemptions.

Draft Practical Compliance Guideline PCG 2017/D14 is the ATO’s response to feedback that the application of the car exemptions is a compliance burden for employers and requires an overly detailed understanding of each vehicle’s use. The draft guideline has been issued to provide more certainty and transparency about the circumstances in which the ATO will not apply compliance resources to determine if private use of a vehicle meets the car-related FBT exemptions.

Eligible employers who rely on the guideline do not need to keep records to prove that an employee’s private use of a vehicle is minor, infrequent and irregular, and the ATO will not devote compliance resources to reviewing the employers’ access to car-related exemptions for that employee.

Eligible employers

An employer can rely on the guideline if:

• the employer provides an eligible vehicle to an employee for performance of their work duties;
• the employer takes all reasonable steps to limit private use of the vehicle and has measures in place to monitor such use;
• the vehicle has no non-business accessories;
• when the vehicle is acquired, its GST-inclusive value is under the luxury car tax threshold;
• the vehicle is not provided as part of a salary packaging arrangement, and the employee cannot elect to receive additional remuneration in lieu of using the vehicle; and
• the employee uses the vehicle to travel between home and work, and
• any diversion adds no more than 2 km to the ordinary length of that trip;
• no more than 750 km of travel in total for each FBT year for multiple journeys is for a wholly private purpose; and
• no single, return journey for a wholly private purpose exceeds 200 km.

Employers will need to assess their eligibility to rely on the guideline on a yearly basis.

Examples included in the guideline involve:

• incidental travel (regularly stopping at a newsagent) and wholly private travel (taking a relative to school 10 times during the FBT year) – the employer can rely on the guideline;
• travel to attend seasonal weekly football training, which adds more than 2 km to the journey from home to work – the employer cannot rely on the guideline;
• an employee who travels a total of 20,000 km and whose private use of the vehicle involves taking domestic rubbish to a tip (100 km return trip) and moving house three times (200 km in total) – the employer can rely on the guideline; and
• private travel, including a single return trip of 300 km – the employer cannot rely on the

When it is finalised, the guideline will apply to car and residual benefits provided from the 2017-18 FBT year, ie from 1 April 2017.

ATO ruling: tax consequences of trust vesting

The ATO has issued a long-awaited ruling which sets out its views about the vesting of a trust, changing the trust’s vesting date and the income tax consequences of vesting (Draft Taxation Ruling TR 2017/D10).

A trust’s “vesting date” is the day on which the beneficiaries’ interests in the trust property become “vested in interest and possession”. The trust deed will specify the vesting date and the consequences of that date being reached (eg that the trust property will be held from that date for the takers on vesting in equal shares absolutely). The ATO notes that vesting does not, of itself, ordinarily cause the trust to come to an end or cause a new trust to arise. In particular, the underlying trust relationship will continue while the trustee holds property for the takers on vesting.

The key points made in the draft ruling are that:

• before vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising a power to nominate a new vesting date);
• it is too late to change the vesting date once it has passed (and the ATO says it is unlikely that a court would agree to do so); and
• continuing to administer a trust in a way that is inconsistent with the vesting terms can have significant tax consequences (eg potentially, CGT event E1, creation of a new trust).

Capital gains tax consequences of trust vesting

The draft ruling considers whether various CGT events may occur on vesting or  after vesting, noting that the terms of the trust deed are particularly relevant. The ATO says the following:

• CGT event E1 (creation of a new trust) “need not happen merely because a trust has vested”, as vesting does not, of itself, cause the trust to come to an end and settle property on the terms of a new trust. However, E1 may occur if the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement (see the example below).
• CGT event E5 (beneficiary becoming absolutely entitled) may occur if the vesting results in the takers becoming absolutely entitled as against the trustee to CGT assets of the trust.
• CGT event E7 (disposal to a beneficiary to end a capital interest) may happen on actual distribution of CGT assets to beneficiaries, but it will not occur to the extent that the beneficiaries are already absolutely entitled to the CGT assets as against the trustee.

Taxation of trust net income after the vesting date

The draft ruling notes that, in the income year of vesting, different beneficiaries may be presently entitled to trust income derived before and after the vesting date. For example, the trustee of a discretionary trust may, prior to vesting, exercise a discretion to appoint pre-vesting income among those entitled to benefit under the trust. By contrast, the takers, on vesting, will be presently entitled to post-vesting income (usually in proportion to their vested interests in the trust property). In this situation, the ATO will accept a “fair and reasonable” allocation of trust income into pre-vesting and post-vesting trust income.

The draft ruling also states that:

• in the income year after vesting, all of the trust income will flow to the takers on vesting according to their entitlements, so the trustee will not be assessed on any net income; and
• a post-vesting payment or other purported distribution by the trustee will be void if it is not consistent with the vested beneficiaries’ fixed interests, and the deemed present entitlement rules in ss 101 and 95A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply.

Example

A discretionary trust holding several rental properties had a vesting date of 30 September 2016.

On 1 June 2017, the trustee became aware that the vesting date had passed and, with the acquiescence of the takers on vesting, continued to manage the trust as if the trust had not vested.

On 29 June 2017, the trustee executed a deed of extension that purported to extend the trust’s vesting date to 30 September 2057.

This subsequent execution of a deed of extension is void and ineffective to change a vesting date that has already passed. Any power of the trustee to extend the vesting date ceased on 30 September 2016.

If, once it is realised that the deed of extension is ineffective to change the trust’s vesting date, all of the takers on vesting agree that the trust assets should continue to be held on a new trust on the same terms as the original trust, and this is effective to create such a new trust over the assets by declaration or settlement, CGT event E1 would happen in relation to trust assets.

Disclosure of business tax debt information to credit agencies

The Federal Government has released draft legislation and a draft legislative instrument that, if passed, will authorise the ATO to disclose businesses’ tax debts to registered credit reporting bureaus (CRBs) where the businesses have not effectively engaged with the ATO to manage their debt.

The draft legislation intends to place tax debts on a similar footing as other debts, to encourage timely payment or engagement with the ATO for businesses that want to avoid having their debt information affect their creditworthiness. Disclosure to CRBs will only be permitted if the ATO has given the taxpayer at least 21 days’ notice beforehand.

The draft legislative instrument specifies the following criteria for the type of taxpayer that can be subject to the new disclosure arrangements:

• registered on the ABR;
• has a tax debt, and at least $10,000 of the debt is overdue for more than 90 days;
• is not a deductible gift recipient, not-for-profit entity, government entity or complying superannuation entity;
• is not effectively engaging to manage the tax debt; and
• the ATO has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity.

According to the draft legislative instrument, an entity is not effectively engaging to manage its tax debt unless any of the following conditions are met:

• it has entered into an arrangement with the ATO to pay the debt by instalments;
• it has objected against a taxation decision to which the tax debt relates;
• it has applied to the Administrative Appeals Tribunal for review or appealed to the Federal Court against a decision made by the Commissioner to which the tax debt relates.

The disclosure provisions will apply in relation to records and disclosures of information on or after the first 1 January, 1 April, 1 July, or 1 October to occur after the day the Bill receives assent (regardless of when the information was acquired).

Tax treatment of dividend equivalent payments under employee share schemes

The ATO has stated that a dividend equivalent payment made under an employee share scheme (ESS) is assessable to an employee as remuneration when they receive the payment in respect of services they provide as an employee, or where the payment has a sufficient connection with the recipient’s employment (Determination TD 2017/26).

The term “dividend equivalent payment” refers to a cash payment made by a trustee of a trust to an employee participant of an ESS (who is also a beneficiary of the trust), where the payment is funded from dividends (or income from other sources) on which the trustee has been assessed in previous income years because no beneficiary of the trust was presently entitled to the income. See below for an example taken from the determination.

A trustee that makes such a dividend equivalent payment is required to withhold an amount from the payment (even though the trustee is not an employer of the employee who receives the payment).

The ATO regards the following factors as indicative of a dividend equivalent payment being for, or in respect of, services as an employee:

• it is agreed that the payment is consideration for services rendered by the employee;
• the payment arises from a contract, an arrangement or a plan established by the employer to enable or facilitate the delivery of employment benefits (eg ESS interests) to the employee;
• the employer is able to make the payment;
• the payment is conditional on the employee meeting individual or specific employment-related targets;
• the payment depends on the employee’s continued employment with the employer and is forfeited on cessation of employment; or
• the payment is provided at the discretion of the employer or trustee (based on the employer’s direction or recommendations).

However, the determination offers a safe harbour from such payments being treated as remuneration where all of the following conditions apply:

• the trustee is not an associate of the employer;
• the payment is made because the employee is a beneficiary of the trust;
• the trustee exercises its power under the trust deed to make the payment, independent of any direction or wishes of the employer;
• the payment is not made in relation to:
• the employee’s continued employment with the employer;
• the employee meeting individual employment-related targets; or
• termination, redundancy or retirement;
• the payment does not arise from a contractual agreement to which the employee and employer are party;
• the payment cannot be made by the employer, in lieu of the trustee making the payment; and
• the trustee was assessed on the dividends (or other trust income) that the payment is calculated on in the income year the dividends or other income were received.

Example

A Co is an Australian resident company that carries on a business.

A Co establishes a trust for the purpose of providing shares (ESS interests) under an ESS to eligible Australian resident employees.

A Co makes a contribution to the trustee of the trust so the trustee can purchase and hold shares in A Co under the terms of the trust deed, plan handbook and invitation to the employees (together ESS agreement).

Under the terms of the ESS agreement an eligible employee is a beneficiary of the trust and has an interest in the trust that is a right to acquire the shares being held by the trustee. This interest does not entitle the employee to any income generated by the shares over the course of the ESS until such time as the employee satisfies certain conditions set by A Co that are specific to the employee’s performance and their continuous employment with A Co being three years (performance conditions).

Upon satisfying the performance conditions the employee is entitled to own the shares held by the trustee of the trust. In addition, the employee is entitled to receive from the trustee an amount reflecting the dividends (post-tax) the employee would have earned had the employee owned the shares from the day the employee received their interest in the trust. The trustee funds this payment from trust capital. According to the ESS agreement, this payment can be made by the trustee or the employer.

As the dividend equivalent payment will be made to the employee because the employee has satisfied certain performance conditions, these payments are made to the employee for, or in respect of, services provided by the employee (they are, in substance, a reward for performance). They are assessable to the employee under s 6-5 of the Income Tax Assessment Act 1997. While the quantum of the payment reflects a dividend equivalent that may have been received had the employee acquired the shares at the outset of the arrangement, this is merely a calculation mechanism and does not reflect the character of the payment in the recipient’s hands. The character of the payment in the employee’s hands is remuneration.

Before TD 2017/26 was issued, it had been industry practice to treat the employee as not being assessable on a dividend equivalent payment, on the basis that the trustee had borne the tax under s 99A of the Income Tax Assessment Act 1936 (ITAA 1936). The ATO apparently considers that this practice was adopted on the basis of an inappropriate reliance on Class Ruling CR 2013/151. While noting that CR 2013/151 applied only to the entities specified in that ruling, the ATO has effectively conceded that TD 2017/26 constitutes a change in its view on the issue, and has allowed limited grandfathering in its application.

The determination applies to dividend equivalent payments paid under the terms and conditions attached to ESS interests granted on or after 1 January 2018. Where a taxpayer is granted an ESS interest before that date and the terms and conditions attached to the interest include eligibility to receive a dividend equivalent payment, the ATO’s general administrative practice will be to treat such dividend equivalent payments as not assessable as ordinary or statutory income. This is conditional on the dividends or other income (that the dividend equivalent payment is calculated on) being assessed to the trustee under s 99A of ITAA 1936 in the income year when the dividends (or other income) were received.

Superannuation: progress on new integrity measures

The Government has released a consultation paper and exposure draft legislation to give effect to the following superannuation taxation integrity measures it announced in the 2017–2018 Federal Budget:

• the non-arm’s length income (NALI) rules in s 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) for related-party superannuation fund transactions will be expanded from 1 July 2018 to also include expenses not incurred that would normally be expected to apply in a commercial arm’s length transaction (eg reduced interest expenses, brokerage, accountancy fees or legal costs); and
• a member’s share of the outstanding balance of a limited recourse borrowing arrangement (LRBA) will be included in the member’s “total superannuation balance” (TSB) for new LRBAs entered into on or after 1 July 2018.

The measures are designed to ensure that related-party transactions with super funds and LRBAs cannot be used to circumvent the reduced contribution caps operating from 1 July 2017. The changes should generally not affect LRBAs entered into with unrelated third parties for commercial rates of interest (and other expenses).

Non-arm’s length income to include expenses not incurred

The current NALI rules address non-commercial arrangements that could potentially shift income from a related party to a super fund (where the amounts would be taxed concessionally). The new non-arm’s length expense rules aim to prevent an increase in a fund’s capital by not incurring arm’s length expenses.

Under the proposed amendments to s 295-550 of ITAA 1997, non-arm’s length expenses incurred by a superannuation fund in gaining or producing assessable income would result in such income being taxed as NALI, at the top marginal rate of 45%. This will be the case for expenses of a capital or revenue nature.

Example

A self managed super fund (an SMSF) acquired a commercial property from a third party at its market value of $1 million on 1 July 2015. The SMSF derives rental income of $1,500 per week ($78,000 per annum) from the property. The SMSF financed the purchase of the property under an LRBA from a related party on terms consistent with s 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The LRBA was entered into on terms that include no interest, no repayments until the end of the 25-year term and borrowing of the full purchase price of the commercial real property (ie 100% gearing). The SMSF was in a financial position to enter into an LRBA on commercial terms with an interest rate of approximately 5.8%.

The proposed amendments to s 295-550 of ITAA 1997 would make it clear that, as the SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income, that income will be NALI. The income (less deductions attributable to the income) will form part of the SMSF’s non-arm’s length component and would be taxed at 45%.

For the NALI rules to apply to non-arm’s length expenses, there must also be a sufficient nexus between the expenses and the income. That is, the expenditure must have been incurred “in” gaining or producing the relevant income. The amendments are also likely to require some sort of determination as to the expenses that a fund “might have been expected to have incurred” if the parties had been dealing with each other at arm’s length.

LRBAs to count towards total super balance

An individual’s TSB is used to determine eligibility for various super concessions, including the $1.6 million balance cap for making non-concessional contributions, transfer balance account reporting (TBAR) and whether an SMSF can apply the segregated method.

The definition of “total superannuation balance” in s 307-230 of ITAA 1997 will be amended to take into account the outstanding balance of an LRBA entered into by an SMSF.

An individual member’s TSB will be increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests. This proportion would be based on the individual’s share of the total superannuation interests supported by the asset that is subject to the LRBA. This will ensure that SMSF members who have attained a condition of release cannot circumvent the caps by withdrawing lump sums and re-contributing the funds as a loan.

For an LRBA-related increase in the individual’s TSB, the SMSF must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time at which the total superannuation balance is determined.

This asset–member interest connection is determined by considering the way the fund has allocated its assets to meet its current and future liabilities in relation to each member’s interests. This test will require the SMSF trustee to determine which of its LRBA assets support which members’ interests, as well as the extent to which those interests are supported.

The outstanding balance of an LRBA is the amount still owing under the LRBA. Where an individual has a superannuation interest that is supported by an asset that is subject to an LRBA, the increase to their TSB is based on their share of this outstanding balance.

Including the proportion of the outstanding balance in a member’s TSB seeks to prevent double-counting of the outstanding balance from occurring where more than one member has an interest supported by an asset that was acquired through an LRBA. While an individual’s TSB can generally be measured “at a time”, it is generally only relevant at the end of a particular income year on 30 June.

Example

Laura is the sole member of her SMSF, which holds $2 million in accumulation phase. Laura takes a lump sum of $500,000 from the SMSF on 1 June 2019, which reduces her TSB as at 30 June 2019 to $1.5 million. On 30 June 2019, Laura lends the $500,000 on commercial terms back to her SMSF under an LRBA. The SMSF uses $1 million of its existing assets and the borrowed $500,000 to acquire a $1.5 million investment property.

Under the current law, Laura’s TSB as at 30 June 2019 is $1.5 million, comprising the net value of the property of $1 million ($1.5 million purchase price less the $500,000 LRBA) as well as the other assets valued at $500,000. As her TSB is below $1.6 million, Laura can make further non-concessional contributions of up to $100,000 in the year ending 30 June 2020. As the SMSF repays the LRBA, the net value of the fund will increase and Laura’s TSB will approach the $1.6 million threshold. However, just prior to reaching the $1.6 million threshold, she could withdraw another lump sum and enter into a new LRBA to acquire another income-producing asset. This would reduce her TSB again, allowing more contributions to be made to the SMSF.

Under the changes proposed in the Draft Bill, Laura’s TSB at 30 June 2019 will be $2 million, comprising the net value of the property of $1 million, the other assets valued at $500,000 and the $500,000 outstanding loan balance under the LRBA. As her TSB exceeds $1.6 million, Laura would not be able to make non-concessional contributions in the year ending 30 June 2020. Entering into a new LRBA arrangement with the SMSF would no longer increase Laura’s capacity to make non-concessional contributions for that year. The trustee could continue to repay the LRBA but could not use non-concessional contributions to do so.

Guidance for self managed super funds on reporting transfer balance events

The ATO has released further guidance on when self managed superannuation funds (SMSFs) need to report events affecting their members’ transfer balance accounts (by making a transfer balance account report, or TBAR) for the purposes of the $1.6 million pension cap.

Transfer balance account reporting timeframes

From 1 July 2018, SMSFs that have any members with a total superannuation balance (TSB) of $1 million or more must report events impacting that member’s transfer balance account (TBA) within 28 days after the end of the quarter in which the event occurs.

SMSFs in which all the members have TSBs less than $1 million can choose to report events which impact their members’ transfer balances at the same time that the fund lodges its annual return.

If an SMSF member was receiving a pre-existing income stream on 30 June 2017 (and it has continued in retirement phase on or after 1 July 2017), a TBAR must be lodged with the ATO by 1 July 2018. TBAR events that that occur during 2017–2018 should be reported at the same time the first TBAR form is due. That is, by:

• 28 October 2018 (for those reporting quarterly); or
• at the time the SMSF annual return is lodged (for those reporting annually where all of the SMSF members have total super balances less than $1 million).

Testing the $1 million threshold

The $1 million total threshold will be tested as at 30 June in the financial year before a fund’s first TBAR becomes due. If an SMSF member was receiving a retirement phase superannuation income stream from the fund just before 1 July 2017, the members’ TSB is measured at 30 June 2017.

If an SMSF member enters retirement phase for the first time after 1 July 2018, the ATO says that the SMSF will need to assess its position, in relation to the $1 million threshold, on 30 June immediately before the start of the relevant income stream. If the $1 million threshold is triggered at the first time an SMSF member starts an income stream, the SMSF will be locked into the quarterly TBAR reporting regime. A fund will not move between annual and quarterly TBAR reporting due to subsequent fluctuations to any of its members’ balances.

It would appear that if one member of an SMSF has TSBs of $1 million or more across all their funds (not just the SMSF), all of the other SMSF members will be dragged into the into the quarterly TBAR reporting net.

Reporting events

Superannuation funds are required to report events for retirement phase income streams that result in a credit or debit in an individual’s TBA. Common reportable events include:

• income streams that a member was receiving just before 1 July 2017 (and that continued to be paid on or after 1 July 2017 in the retirement phase);
• new retirement phase income streams (including death benefit income streams);
• commutations of retirement phase income streams (partially or fully); and
• converting a transition to retirement pension into a retirement phase superannuation income stream.

Events to be reported sooner

If a member exceeds their transfer balance cap of $1.6 million, they must report the following events sooner:

• commutations (in response to an excess transfer balance determination issued by the ATO to an SMSF member) must be reported 10 business days after the end of the month in which the commutation occurs; and
• commutation authorities – the response must be reported within 60 days of the date the commutation authority was issued.

Consultation paper: combating phoenix activities

The Federal Government has released a consultation paper on company and tax law reforms to combat phoenix activities. Phoenixing occurs when individuals or entities strip assets from an indebted company and transfer them to another company to avoid paying the first company’s liabilities.

The following proposals are under consideration:

• The ATO, or whichever agency is best placed to do so, could operate a singular “phoenix hotline” so that any information reported by the community about phoenix concerns could be shared with all members of the Government’s Phoenix Taskforce.
• It is proposed to amend the Corporations Act 2001 to establish a specific phoenix offence, prohibiting the transfer of property from one company to another if the main purpose of the transfer was to prevent, hinder or delay the process of that property becoming available for division among the first company’s creditors. Rebuttable presumptions of insolvency would apply, and such a transaction would be void against a liquidator (so that the assets could be clawed back in liquidation).
• The promoter penalty laws could be extended to apply to promoters of illegal phoenix activity to assist in disrupting the phoenix business model, and in particular to facilitators who advise or aid and abet illegal phoenix activity. One option would be to expand the scope of the promoter penalty law to apply not just to “tax exploitation schemes”, but also to activities designed to avoid taxation obligations, including by rendering a company unable to pay its obligations. Another option is to create a new provision outside of the existing promoter penalty laws, similar to the provision on the promotion of illegal early release of superannuation benefits.
• The director penalty notice regime could be extended to include companies’ outstanding GST obligations. Directors of these companies would be personally liable to pay a penalty equivalent to the amount of unpaid GST. The proposed expansion would apply to all directors.
• There could be a limitation on a sole director’s ability to resign from office without either first finding a replacement director or winding up the company’s affairs. This could be enacted by amending the Corporations Act to deem such a resignation ineffective.

New passive income test for lower corporate tax rate

The recently introduced Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 ensures that a company will not qualify for the lower company tax rate if more than 80% of its assessable income is passive income.

The Bill modifies the requirements that must be satisfied for a corporate tax entity to qualify as a “base rate entity” by replacing the “carrying on a business” test with a passive income test. More specifically, the Bill amends the Income Tax Rates Act 1986 to ensure that, from the 2017–2018 income year, a corporate tax entity will qualify for the lower corporate tax rate for an income year if:

• no more than 80% of the its assessable income for that income year is base rate entity passive income; and
• the corporate tax entity’s aggregated turnover for the income year is less than the aggregated turnover threshold for that income year.

The amendment will apply from the 2017–2018 income year. In the 2016-2017 income year, a company will need to be carrying on a business and have a turnover under $10 million to qualify for the 27.5% tax rate.

Meaning of “passive income”

An amount of assessable income will be considered “base rate entity passive income” if it is:

• a distribution by a corporate tax entity (other than a non-portfolio dividend);
• franking credits attached to such a distribution;
• a non-share dividend;
• interest;
• a royalty;
• rent;
• a gain on a qualifying security;
• a net capital gain; or
• an amount that is included in the assessable income of a partner in a partnership or a beneficiary of a trust estate to the extent that the amount is referable to another base rate entity passive income amount.

An amount that flows through a trust to a corporate tax entity (ie directly from the trust to the corporate tax entity) will retain its character for the purposes of determining whether the amount is base rate entity passive income of the corporate tax entity. That is:

• if an amount derived by a trust is, for example, a dividend (other than a non-portfolio dividend) which passes directly from the trust to a beneficiary that is a corporate tax entity, then the amount will be base rate entity passive income of the corporate tax entity because the trust distribution is directly referable to the dividend of the trust;
• if an amount derived by a trust is, for example, trading income which passes directly from the trust to a beneficiary that is a corporate tax entity, then the amount will not be base rate entity passive income of the corporate tax entity because the trust distribution is directly referable to the trading income of the trust.

Imputation changes

The Bill makes consequential amendments to the operation of the dividend imputation system.

Under the imputation system, the amount of franking credits that can be attached to a distribution cannot exceed the “maximum franking credit” for the distribution. The maximum franking credit is worked out with reference to the “corporate tax gross-up rate” and the “corporate tax rate for imputation purposes”.

Corporate tax entities usually pay distributions to members for an income year during that income year. However, a corporate tax entity will not know its aggregated turnover, the amount of its base rate entity passive income, or the amount of its assessable income for an income year until after the end of that income year. The Bill therefore provides that a corporate tax entity must assume, for the purposes of working out its corporate tax rate for imputation purposes for an income year, that:

• its aggregated turnover for the income year is equal to its aggregated turnover for the previous income year;
• its base rate entity passive income for the income year is equal to its base rate entity passive income for the previous income year; and
• its assessable income for the income year is equal to its assessable income for the previous income year.

If the corporate tax entity did not exist in the previous income year, its corporate tax rate for imputation purposes for an income year will be the lower corporate tax rate of 27.5%.

ATO guidance: what is “carrying on a business”?

The ATO has issued Draft Ruling TR 2017/D7 to give guidance on whether a company is carrying on a business for the purpose of s 23AA of the Income Tax Rates Act 1986.

Section 23AA defines a “base rate entity” as an entity that carries on a business and has an aggregated turnover below the relevant threshold ($25 million for 2017–2018). A company that satisfies this definition is entitled to the reduced corporate tax rate (27.5% for 2017–2018).

The draft ruling addresses whether a company incorporated under the Corporations Act 2001 (other than a company limited by guarantee) carries on a business in a general sense. It emphasises that it is not possible to definitively state whether a company is carrying on a business for s 23AA purposes. As this is a question of fact, the ATO says the answer ultimately turns on an overall impression of the company’s activities, having regard to the indicators of carrying on a business.

However, the ATO is prepared to state that limited companies and no-liability companies are likely to be carrying on a business if they:

• are established and maintained to make a profit for their shareholders; and
• invest their assets in gainful activities that have both a purpose and prospect of profit.

Importantly, the draft says that a limited or no-liability company can be carrying on a business even if its activities are relatively limited and primarily consist of passively receiving rent or returns on its investments and distributing them to its shareholders.

The draft provides the following examples of companies that the ATO accepts as carrying on a business:

• a property investment company that lets out and manages a commercial property;
• a share investment company;
• a family company with income consisting only of an unpaid trust entitlement, which it reinvests – the ATO says if the company does not reinvest the unpaid present entitlement (UPE) or receives its entitlement in cash, it will not be carrying on a business;
• a company that leases multiple boats to unrelated parties; and
• a holding company that only holds shares in a subsidiary, where it invests the shares and also manages the company group.

On the other hand, the following example companies are not considered to be carrying on a business:

• a dormant company with retained profits, on which it derives small amounts of interest; and
• a company engaged solely in the preliminary activity of investigating the viability of carrying on a particular business.

Total superannuation balances: reporting obligation modified

The ATO has agreed to modify the reporting obligation for total superannuation balances, in recognition that some funds may not be in a position to report the correct accumulation phase value (APV) for 30 June 2017.

The concept of an individual’s “total superannuation balance” is used to determine eligibility for various super concessions, including the $1.6 million balance limit for making non-concessional contributions, Government co-contributions, the spouse contributions tax offset, carry-forward of unused concessional contributions and the self managed superannuation fund (SMSF) segregation method. An individual’s total superannuation balance at a particular time is broadly the sum of the APV, an adjusted balance for any pension transfer balance account and roll-over superannuation benefits in transit, less any structured settlement contributions.

Modified reporting obligation

The ATO notes that the APV is net of exit and administration fees payable on accessing the superannuation interest, and therefore needs to be taken into account in the valuation. However, some funds will not be in a position to report the correct APV for 30 June 2017 because they cannot exclude exit and administration fees from the reported value. This is due to varying interpretations of APV within the industry based on historical member account balance reporting. These fees are generally not material amounts. If the 30 June balance reported in the member contribution statement (MCS) is not the APV, the ATO says that funds should report the APV separately in a transfer balance account report (TBAR) around the same time as MCS lodgment.

Therefore, the ATO will provide a modified reporting obligation for the 30 June 2017 APV in the TBAR for the transition year. Funds will not be required to report an APV for 30 June 2017 if the difference between MCS account balance and APV is limited to the sum of exit and administration fees that would apply if the account was to cease at 30 June 2017.

Pension transfer balance account reports: due dates

A legislative instrument registered on 27 September 2017 sets out the way in which superannuation providers (and life insurance companies) are required to report transactions to enable the ATO to determine if an individual has exceeded their $1.6 million pension transfer balance cap.

Due date for reporting TBAR events

The instrument requires a transfer balance account report (TBAR) to be lodged no later than 10 business days after the end of the month in which the relevant reporting event occurred, or by such later date as the Commissioner may allow.

Self managed super fund admin concession until 1 July 2018

The explanatory statement to the instrument notes that an ATO administrative concession will be provided for self managed superannuation funds (SMSFs) to support their transition to event-based transfer balance cap reporting. To this end, the ATO released a position paper for consultation on 18 August 2017, proposing to allow SMSFs to defer their reporting until 1 July 2018. Going forward from that date, the position paper has put forward two options for how often SMSFs should report such events. The Commissioner also intends to provide an administrative concession for all other providers to allow them to lodge their first TBAR no later than 14 December 2017.

Reporting events

Superannuation funds and life insurance companies are required to report the following events for retirement phase income streams that result in a credit or debit in an individual’s transfer balance account:

• superannuation income streams in existence just before 1 July 2017;
• superannuation income streams that commence or begin to be in the retirement phase on or after 1 July 2017;
• commutations;
• compliance with a commutation authority issued by the Commissioner;
• certain limited recourse borrowing arrangement payments;
• personal injury (structured settlement) contributions;
• superannuation income streams that stop being in the retirement phase; and
• any other relevant transactions.

Fringe benefits tax: should an Uber be treated as a taxi?

The ATO has released a discussion paper on the FBT meaning of “taxi” in light of the Federal Court decision (Uber BV v Federal Commissioner of Taxation [2017] FCA 110) that UberX drivers are required to be registered for GST on the basis that they supply taxi travel.

The taxi travel FBT exemption, which was introduced in 1995, limited exempt travel to taxis to ensure that the travel was provided by an arm’s length supplier at commercial rates. The ATO’s current position is that the exemption is limited to travel in a vehicle licensed by the relevant state or territory to operate as a taxi. It does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi.

However, as a result of the Uber decision and proposed changes to licensing regulations in a number of states and territories, the ATO considers it appropriate to review its interpretation of the definition of “taxi” in the Fringe Benefits Tax Assessment Act 1986 (FBT Assessment Act).

The ATO’s discussion paper poses a number of consultation questions, including:

• Should a “motor vehicle that is licensed to operate as a taxi” be interpreted to mean a motor vehicle that is statutorily permitted to transport a passenger at his or her direction for the payment of a fare that will often, but not always, be calculated by reference to a taximeter?
• Should the FBT definition of “taxi” be interpreted to include not just vehicles licensed to provide taxi services, including rank and hail services, but [also] ride-sourcing vehicles and other vehicles for hire?

The ATO accepted comments on the discussion paper until 24 October 2017.

Tax treatment of long-term construction contracts

Draft Taxation Ruling TR 2017/D8 explains the methods that taxpayers can use to return income derived, and recognise expenses incurred, in long-term construction projects (that is, projects that straddle two or more income years). TR 2017/D8 is a “refresh” of IT 2450 (the original ruling on this matter) and makes no changes to the ATO’s views.

One of two methods of accounting may be adopted.

The first method is the basic approach, which is essentially the accruals method. Under this method, assessable income for an income year includes all progress and final payments received in the year, plus any amounts billed or billable to customers in the year for work carried out and certified as acceptable for payment. Amounts retained under a retention clause should not be included in assessable income until the taxpayer either receives them or is entitled to receive them from the customer. Losses or outgoings incurred during the income year are deductible to the extent permitted by law.

The second method is the estimated profits basis. This method is similar to the one laid out in AASB 15 Revenue from Contracts with Customers, which will be compulsory from 1 January 2018. Under the estimated profits basis, the ultimate profit or loss on a project can be spread over the years required to complete the contract. However, the ATO requires the basis of spreading to be fair and reasonable and in accordance with accepted accountancy practices. The “ultimate profit or loss” is in effect the notional taxable income expected to arise under the contract, which can be adjusted from year to year according to expectations existing at the close of each income year. Only those costs that are identified as likely to be incurred over the period of the contract and which are properly deductible may be taken into account in calculating notional taxable income.

Once a particular method is chosen, the ATO expects the taxpayer to apply it consistently for the duration of the contract. The same method should also be applied to all similar contracts that the taxpayer enters into.

Accounting methods that are not acceptable to the Commissioner include the “completed contracts” basis (which brings profits and losses to account on completion of a contract) and the “emerging profits” basis.

Foreign equity distributions to corporate entities

The ATO has issued two taxation determinations on the application of the foreign equity distribution rules in Subdiv 768-A of the Income Tax Assessment Act 1997 (ITAA 1997) where the recipient is a corporate partner in a partnership or a corporate beneficiary of a trust.

Under Subdiv 768-A, a foreign equity distribution is treated as non-assessable, non-exempt income (NANE income) if the recipient is an Australian corporate tax entity that holds a participation interest of at least 10% in the foreign company making the distribution. This treatment applies whether the distribution is received directly from the foreign company or indirectly through interposed partnerships or trusts.

The ATO’s view is that a partnership or trust can hold a direct control interest in a foreign company for Subdiv 768-A purposes, so that an Australian corporate tax entity can have an indirect participation interest in the foreign company via the partnership or trust.

Specifically, TD 2017/21 states that a corporate partner in a partnership can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test.

Similarly, TD 2017/22 provides that a corporate beneficiary of a trust can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test. This aspect of TD 2017/22 differs from the draft (TD 2016/D7), which expressly stated that a corporate beneficiary of a discretionary trust can have a participation interest in a foreign company. However, the finalised determination notes that because a discretionary trustee will usually only exercise its discretion concerning the trust income and corpus at the end of the income year, a beneficiary would not have an entitlement at the test time if the foreign equity distribution is made before year-end.