Higher education HELP changes announced
The Government has announced a package of reforms to higher education – the Higher Education Reform Package – to take effect generally from 1 January 2018. Under the package the maximum student contribution will increase from 1 January 2018, but there will be no up-front fees and no deregulation of fees.
A new set of repayment thresholds will be introduced from 1 July 2018, affecting all current and future Higher Education Loan Program (HELP) debtors by changing the timing and quantity of their repayments as shown in the following table.
| HELP repayment income |
Repayment rate
(% of HELP repayment income) |
| Below $55,874 |
Nil |
| $55,874–$62,238 |
4% |
| $62,239–$68,602 |
4.5% |
| $68,603–$72,207 |
5% |
| $72,208–$77,618 |
5.5% |
| $77,619–$84,062 |
6% |
| $84,063–$88,486 |
6.5% |
| $88,487–$97,377 |
7% |
| $97,378–$103,765 |
7.5% |
| $103,766 and above |
8% |
Maximum student contributions will also be increased, phasing in by 1.8% each year between 2018 and 2021 to cumulate in a 7.5% total increase.
From 1 July 2019, the indexation of HELP repayment thresholds, currently linked to Average Weekly Earnings (AWE), will be changed to align to the Consumer Price Index (CPI).
Super reforms: SMSF commutation requests to stay within $1.6 million pension cap
The ATO has released Practical Compliance Guideline PCG 2017/5, which outlines the circumstances where the ATO will not conduct compliance reviews for pension commutation requests made before 1 July 2017 by a member of a self managed superannuation fund (an SMSF) to avoid exceeding the $1.6 million pension transfer balance cap.
Rolling back excess pension balances before 1 July 2017
The Guideline notes that SMSF members may need to take action before 1 July 2017 to ensure they do not exceed the $1. 6 million transfer balance cap. They can do this by requesting that the trustee of the SMSF commute some or all their income streams, to be rolled over as an accumulation interest within the SMSF or withdrawn from the SMSF as a lump sum.
The ATO acknowledges that SMSF members may not be in a position on 30 June 2017 to know precisely the value of the superannuation interests that support their superannuation income streams. This is especially the case for SMSFs that need to wait a few months after year-end to receive tax statements from managed funds to finalise their accounts. Other small funds tend not to finalise their accounts until much closer to the time that their tax return is due under their tax agent’s lodgment program.
Therefore, PCG 2017/5 accepts that it is a valid strategy for the member to make a request, which is subsequently accepted by the trustee of the SMSF, to commute their income streams by the amount that exceeds $1.6 million on 30 June. Whether and at what time a valid commutation takes effect is a question of fact. It must be clear that some or all of the member’s right under the trust deed to receive future income stream benefits has been exchanged for a right to receive a lump sum.
Requirements for commutation requests
The ATO will not conduct a compliance review in relation to such a strategy where the commutation request and acceptance:
- are both made in writing before 1 July 2017 – the agreement by the trustee may be documented as a trustee resolution;
- specify a methodology that allows the precise quantum of the amount commuted to be calculated (although the amount may be ascertained at a later time);
- specify the superannuation income stream that will be subject to the commutation; and
- do not conflict with a similar agreement to commute that the member has agreed to with a trustee of a different super fund. However, the ATO accepts that entering into an agreement with the trustee of one fund in conjunction with the commutation of a specific amount from another fund does not in itself cause a conflict.
A request to commute the excess amount must be made in writing before 1 July 2017 and cannot be revoked. The amount of the commutation must also be reflected in the SMSF’s financial accounts for the year ended 30 June 2017, no later than the due date of the SMSF’s annual return.
The Guideline states that the concessional ATO compliance approach will not apply where:
- the request is dependent on the later exercise of a discretion by either the member or trustee of the SMSF with respect to the amount or income stream that will be commuted;
- the request and/or whether the amount is to be commuted are subject to certain actions occurring after the date the SMSF trustee accepts the request;
- the request does not provide sufficient certainty to identify the income streams it concerns; and
- the request and/or the amount to be commuted depend on a decision or an exercise of discretion by a different fund’s trustee. For example, where the member specifies the amount to be commuted is the excess amount over the member’s $1.6 million pension transfer balance cap, taking into account all income streams the member has in multiple funds, and the member provides a similar request to commute to a trustee of a different fund. In this situation, the ATO says that neither request specifies a methodology that allows precise calculation of the commutation amount.
Example
On 1 May 2017, Jim has the following three superannuation interests supporting superannuation income streams in his SMSF:
• income stream A, valued at $100,000;
• income stream B, valued at $1,200,000, and
• income stream C, valued at $600,000.
Jim requests in writing that the trustee of his SMSF commute amounts on 30 June 2017 in excess of $1.6 million, based on the value of the interests supporting his income streams valued at 30 June 2017. The trustee accepts the documented request. The trustee works out the amount of the commutation and ensures it is reflected in the SMSF’s financial accounts for the year ended 30 June 2017 by the date that the SMSF’s annual return is due.
In such a case the ATO says it will not review the commutation, provided that the commutation request specifies the income streams subject to the agreement to commute and the order in which the income streams will be commuted. |
Super reforms: capped life expectancy and market-linked pensions
Law Companion Guideline LCG 2017/1 deals with how defined benefit income cap rules will apply to non-commutable life expectancy pensions and market-linked products as part of the super reforms legislation.
Capped defined benefit income streams
As with other types of superannuation income streams, the value of “capped defined benefit income streams” will count towards an individual’s pension transfer balance cap of $1.6 million from 1 July 2017. However, capped defined benefit income streams cannot, of themselves, result in an excess transfer balance for an individual. This is because capped defined benefit income streams generally cannot be commuted and cashed as a lump sum. The modified rules apply to achieve an equivalent tax outcome for defined benefits.
Special value for MLIS and life expectancy pensions
If a pension or annuity from a life expectancy or market-linked income stream (MLIS) product is payable to an individual, a credit arises in their transfer balance account equal to the “special value” of the superannuation interest that supports the income stream.
The special value of a superannuation interest that supports a life expectancy or market-linked pension or annuity is calculated by multiplying the “annual entitlement” by the product’s “remaining term”; that is, number of years remaining in the period that superannuation income stream benefits are payable under a product (rounded up to the next whole number).
If a life expectancy or market-linked pension or annuity is payable before 1 July 2017, the credit is equal to the special value of the superannuation interest that supports that income stream just before 1 July 2017. The credit arises in the individual’s transfer balance account on 1 July 2017. This will be calculated based on the first superannuation income stream benefit the person is entitled to receive on or after 1 July 2017.
Example
Just before 1 July 2017, Victoria has a market-linked pension. The first benefit she is entitled to receive from her pension just after that time is her fortnightly payment of $2,301.37, due on 4 July 2017. The remaining term in Victoria’s pension just before 1 July 2017 is 9.75 years.
Victoria’s “annual entitlement” just before 1 July 2017 is $60,000, which is worked out as the first payment amount divided by the number of days in the period, and multiplied by 365 = $2,301.37/14 x 365 = $60,000.
The remaining term in Victoria’s pension just before 1 July 2017 is rounded up from 9.75 years to 10 years (the next whole number). The special value of Victoria’s pension just before 1 July 2017 is $600,000 ($60,000 x 10 years). A credit arises in Victoria’s transfer balance account on 1 July 2017 for this amount. |
Additional income tax
The guideline also explains the additional income tax consequences for an individual with defined benefit pension income that exceeds the defined benefit income cap ($100,000 per annum) for a financial year. In a taxed fund, 50% of the excess capped defined benefit income stream payments will be included in the recipient’s assessable income and taxed at the marginal rates to the extent they exceed $100,000 per annum. For untaxed defined benefit arrangements, the 10% tax offset will be limited to the first $100,000 per annum of defined benefit income the individual receives from 1 July 2017. Pay as you go (PAYG) withholding obligations will also apply to these amounts, which will be subject to taxation from 1 July 2017.
Super reforms: death benefits and the $1.6 million pension cap
Law Companion Guideline LCG 2017/3 explains the tax and regulatory treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap from 1 July 2017.
Where a deceased fund member’s superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account: s 294-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The amount and timing of a transfer balance credit arising for a death benefit income stream will depend upon whether the recipient is a reversionary or non-reversionary beneficiary.
Transfer balance credit: reversionary pension
For a reversionary death benefit income stream, a credit will arise in the reversionary beneficiary’s transfer balance account 12 months from the date of the original superannuation member’s death. If the reversionary income stream commenced before 1 July 2017, the credit will arise on the later of 1 July 2017 and 12 months from the date of the original member’s death.
The credit that will arise in the reversionary beneficiary’s transfer balance account is equal to the value of the superannuation interest on the starting day when it first becomes payable to the reversionary beneficiary (ie, at the date of the death), or just before 1 July 2017 if the income stream commenced before that time.
Example
Larissa commences a pension on 1 October 2000. The rules of the pension allow for it to revert to a dependant beneficiary. Larissa dies on 1 January 2017. Brad is Larissa’s spouse and is the reversionary beneficiary of her pension. As Brad is a reversionary beneficiary, Larissa’s pension automatically becomes payable to Brad on the date of Larissa’s death (1 January 2017). The value of the superannuation interest that supports the reversionary pension just before 1 July 2017 is $1 million.
A transfer balance credit arises in Brad’s transfer balance account 12 months from the day that the reversionary income stream first became payable to Brad (1 January 2018). The transfer balance credit that arises is equal to the value of the superannuation interest that supports the reversionary pension just before 1 July 2017 ($1 million) and not the value of the superannuation interest when the transfer balance credit arises (1 January 2018). |
Transfer balance credit: non-reversionary pension
For a non-reversionary death benefit income stream, a credit will arise in the recipient’s transfer balance account on the later of 1 July 2017 and when the dependant beneficiary becomes entitled to be paid the income stream. The credit is the value of the superannuation interest at the time the dependant beneficiary becomes entitled to payment (or the value just before 1 July 2017, if it commenced before that time).
The ATO notes that this value for non-reversionary death benefit pensions may include any investment earnings that accrued to the deceased member’s interest between the date of death and the date the dependant beneficiary becomes entitled to be paid the death benefit income stream. It may also include other amounts – for example from the deceased member’s accumulation interest or an amount paid under a life insurance policy – if the trustee has made a decision to pay these amounts out as a death benefit income stream.
Example
Nathaniel commences a pension worth $1.4 million on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel’s death. Nathaniel dies on 1 January 2018. At the time of Nathaniel’s death, the value of the superannuation interest supporting the pension is $1.3 million. Nathaniel has no other super interests.
Malena is Nathaniel’s spouse and the only beneficiary. On 15 June 2018 she becomes entitled to all of Nathaniel’s remaining superannuation interest, to be paid as a death benefit income stream. During the period between Nathaniel’s death (on 1 January 2018) and when Malena becomes entitled to be paid the death benefit income stream (on 15 June 2018), $1,000 of investment earnings accrued to the superannuation interest, bringing its value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream on 15 June 2018 is $1,301,000. A transfer balance credit arises in Malena’s transfer balance account on 15 June 2018 in respect of the death benefit income stream equal to the value of the superannuation interest that supports the death benefit income stream on 15 June 2018 ($1,301,000). |
Reversionary versus non-reversionary pensions
A reversionary death benefit income stream is an income stream that reverts to the reversionary beneficiary automatically upon the fund member’s death. That is, the income stream continues, with the entitlement to it passing from one person (the member) to another (the dependant beneficiary) pursuant to the rules of the fund.
According to the ATO, the superannuation income stream reverts in this manner because the governing rules or the agreement/standards under which it is provided expressly provide for reversion, as opposed to the trustee exercising a power or discretion to determine a benefit in the beneficiary’s favour: see Taxation Ruling TR 2013/5. That is, the preconditions necessary for an income stream to revert must exist within the rules governing the superannuation income stream before the member’s death. If this is not the case, then the ATO says that the income stream ceases on the member’s death. However, the ATO accepts that administrative steps, such as confirming that the reversionary beneficiary is a dependant beneficiary and obtaining bank account details or other account information about the dependant beneficiary, do not preclude an income stream from being reversionary. Also, a binding death benefit nomination does not , by itself, make a superannuation income stream reversionary.
On the other hand, a non-reversionary death benefit income stream is a new superannuation income stream created and paid to a dependant beneficiary where the trustee has the power or discretion to determine:
- to whom the death benefit is paid;
- the form in which the death benefit will be paid (eg as a lump sum or income stream); or
- the value of the death benefit paid.
However, the ATO accepts that a death benefit income stream is not precluded from being reversionary if the rules under which the superannuation income stream is provided limit the value of the reversionary income stream to a set percentage (eg 75%) of the amount that was payable to the deceased member.
Commutation of excess transfer balance
To reduce an excess transfer balance so that it does not exceed the general transfer balance cap, an individual can choose to either commute (fully or partially):
- the death benefit income stream; or
- a superannuation income stream that the individual already has in retirement phase.
If an individual chooses to commute their own existing superannuation income stream, the commuted amount can remain within the superannuation system as an accumulation interest. However, if the individual chooses to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest, but must be cashed out as a lump sum death benefit.
Rules for death benefits
The guideline notes that a deceased fund member’s superannuation benefits must be “cashed” (ie paid out) by the fund trustee as soon as practicable after the death. While superannuation death benefits can be cashed in the form of a lump sum or pension/annuity, a death benefit income stream can only be paid to a dependant beneficiary of the deceased member. For this purpose, a dependant beneficiary includes a:
- spouse;
- child under 18 years;
- financially dependent child under 25;
- child with a prescribed disability (irrespective of their age); or
- person who was in an interdependency relationship with the deceased.
Where a deceased member’s superannuation interest is paid to a dependant beneficiary as a death benefit income stream, the compulsory cashing requirement is met as long as the income stream continues to be in the “retirement phase” (which is subject to the recipient’s pension transfer balance).
Roll-over of death benefits
From 1 July 2017, the definition of a “roll-over superannuation benefit” allows a superannuation lump sum death benefit for dependant beneficiaries to be rolled over. Only superannuation death benefits paid to dependant beneficiaries of the deceased member qualify as a roll-over superannuation benefit. The ATO says that qualifying as a roll-over superannuation benefit does not enable the amount to remain in an accumulation phase interest or be mixed with the dependant beneficiary’s own superannuation interest. As the compulsory cashing rules still apply, the interest must be cashed as soon as practicable, either as a lump sum or death benefit income stream (where permitted).
Draft legislation: LRBA integrity measures for pension cap
Exposure draft legislation has been released proposing integrity measures for limited recourse borrowing arrangements (LRBAs) as part of the Government’s super reform legislation.
The exposure draft, Treasury Laws Amendment (2017 Measures No 2) Bill 2017, proposes the inclusion of LRBAs in a fund member’s total superannuation balance and the $1.6 million pension transfer balance cap. The proposed changes seek to address concerns about self managed superannuation fund (SMSF) members’ ability to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not currently captured by the transfer balance cap regime. Importantly, the amendments will only apply in relation to borrowings entered into on or after the Bill commences.
Pension balance credit for LRBA repayment
The draft legislation will amend the transfer balance cap rules to create an additional transfer balance credit. This credit will arise where the repayment of an LRBA shifts value between an accumulation phase interest and a retirement phase superannuation income stream interest in an SMSF. The amount of the credit that an individual member receives will be equal to the increase in the value of their retirement phase interests. The credit will arise at the time of the repayment.
Note that a repayment of an LRBA sourced from assets that support the same superannuation interest will not increase the value of that interest. This is because the reduction in the LRBA liability is offset by a corresponding reduction in cash. Therefore, repayments made under these conditions will not give rise to a transfer balance credit, as there is no increase in the value of the income stream interest. However, if the repayment is sourced from other assets (eg assets that support separate accumulation interests that the individual has in the fund), then there will be no offsetting decrease in the value of the retirement phase superannuation interest, meaning that its overall value will be increased by the repayment amount. In such cases, the transfer from the other assets would not result in a credit to the transfer balance account under the current transfer balance credit items in s 294-25 of the Income Tax Assessment Act 1997 (ITAA 1997). The proposed new transfer balance credit for LRBA repayments seeks to addresses this gap by ensuring that the transfer balance cap takes into account the increase in value occurring through the repayment.
The proposed transfer balance credit for LRBA repayments will only apply to SMSFs and other funds with fewer than five members (such as small APRA funds). It will not apply to larger super funds, which are unlikely to have a direct connection between a specific asset of the fund and the superannuation interests of an individual member. Note also that the transfer balance credit is not intended to directly affect the borrowing arrangements that a fund can enter into, or the manner in which it repays any such arrangements.
LRBAs counted towards total superannuation balance
The draft legislation will also amend the “total superannuation balance” definition in s 307-230 of the ITAA 1997 to take into account the outstanding balance of an LRBA that an SMSF enters into. From 1 July 2017, an individual’s total superannuation balance will be used to determine eligibility for various super concessions, including the $1.6 million balance limit for making non-concessional contributions and whether an SMSF can apply the segregated method.
The proposed changes will result in an individual member’s total superannuation balance being increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests. This proportion will be based on the individual’s share of the total superannuation interests that are supported by the asset that is subject to the LRBA. While an individual’s total superannuation balance can generally be measured “at a time”, it is generally only relevant at the end of a particular income year on 30 June.
Connection between LRBA asset and member
For the increase to apply to an individual’s total superannuation balance, 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 the total superannuation balance is determined.
The connection between an asset of a fund and an individual member’s superannuation interests is determined in relation to how the fund has allocated its assets to meet its current and future liabilities in relation to the 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.
LRBA outstanding balance
The outstanding balance of an LRBA is the amount still owing under the LRBA. Where an individual has a superannuation interest supported by an asset that is subject to an LRBA, the increase to their total superannuation balance is based on their share of this outstanding balance.
In contrast to the pension transfer balance credit for repayments of an LRBA, there is no requirement that particular superannuation interests be in the retirement phase for the increase to total superannuation balance to apply. This is because the total superannuation balance assigns an appropriate value to all of an individual’s superannuation interests in a fund, irrespective of whether those interests are in the retirement phase.
SMSF annual return due date extended
The ATO has extended the due date for lodgment of 2015–2016 self managed superannuation fund (SMSF) annual returns from 15 May to 30 June 2017. The extension is in response to feedback from many accounting and advisory firms that are stretched with meeting their SMSF lodgment commitments this year, especially in light of additional obligations for SMSF advisers providing advice to clients about the major super reforms set to start on 1 July.
Under the existing tax agent lodgment program, annual SMSF returns would generally be due by 15 May 2017, provided that the SMSF return was not required to be lodged earlier (and the fund is not eligible for the 5 June lodgment concession date).
Deductions for super funds: major ruling update
The ATO has issued the long-awaited Addendum to Taxation Ruling TR 93/17 to clarify and update the Commissioner’s views on the deductions available for superannuation funds.
In common with other taxpayers, superannuation funds are generally restricted to claiming deductions under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that they are incurred in producing assessable income.
Apportioning deductions for partly non-assessable income
The Addendum sets out the acceptable methods for super funds to apportion tax deductions for expenses incurred in partly gaining non-assessable income (eg exempt current pension income from earnings on fund assets set aside to pay pensions). Six examples have been added to illustrate the apportionment methods, including:
- an acceptable/unacceptable method of apportionment;
- an acceptable method of apportionment involving a service provider;
- an expense of a capital nature (creating a new in house reporting system);
- an expense of a revenue nature (enhancing an existing in house reporting system); and
- an expense of a revenue nature (additional services received from external provider).
Mergers
The Commissioner accepts that current practices involving the treatment of administrative expenses incurred as a result of a merger are different from those expressed in the Addendum. The Commissioner does not propose to allocate compliance resources to examining the treatment of administrative expenses incurred as a result of a merger that took place before or during the financial year ended 30 June 2016 (or equivalent substituted accounting period).
Managing tax affairs
A deduction is available under s 25-5 of ITAA 1997 for an expense to the extent that it is for managing the fund’s tax affairs or complying with an obligation imposed on the trustee by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity. The Addendum notes that s 25-5 is a specific deduction provision. If an expense is deductible under s 25-5, the ATO says that the wording of that provision will determine the rules for deducting the particular expense. Unlike s 8-1, s 25-5 does not require a connection between the expense and the gaining or producing of an entity’s assessable income. Therefore, an expense that is deductible under s 25-5 does not need to be apportioned on account of producing any non-assessable income.
Fund establishment costs
As a general rule, the Addendum states that the costs incurred by a trustee in establishing a superannuation fund are not deductible because they are expenses of a capital nature. This includes:
- establishing a trust; or
- executing a new deed for an existing fund; or
- amending the fund’s trust deed to enlarge or significantly alter the structure or function of the fund.
However, the ATO accepts that deductions may be allowable to a super fund under s 40-880 of the ITAA 1997 in respect of certain “blackhole” business-related capital expenditure if the operations of the fund amount to carrying on a business.
Trust deed amendments
Costs associated with amending trust deeds will be deductible if the amendments simply make the administration of the fund more efficient and do not amount to a restructuring of the fund. That is, amendments of a trust deed which:
- facilitate day-to-day operations of a fund; and/or
- improve its ability to compete in the super fund market; and/or
- are not of a capital nature, where no new tangible or intangible asset is acquired or no new branch of the fund’s existing operations is created.
These indicators of whether trust deed expenditure is capital or revenue in nature also apply to trust deed amendments made in response to law changes relating to regulatory provisions. The fact that a trust deed is amended to reflect a change in regulatory law is a relevant factor that counts towards an assessment that the change is on revenue account. However, an amendment made in response to a regulatory law change which results in enduring changes to the super fund’s structure or function or creates a new asset, whether tangible or intangible, is capital in nature and the costs associated with the amendment are not deductible under s 8-1.
Blackhole expenses
While expenses connected with establishing, enlarging or replacing the income-yielding structure of a super fund are generally capital in nature and not deductible under s 8-1, the ATO acknowledges that such expenses could potentially be deductible under s 40-880 of ITAA 1997 for business-related capital expenditure, if the fund is carrying on a business. Of course, a fund carrying on a business would still need to satisfy the sole purpose test under the Superannuation Industry (Supervision) Act 1993 (SIS Act).
Bill to reduce corporate tax rate
The Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 amends the Income Tax Rates Act 1986 to progressively extend the lower 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year. The aggregated turnover thresholds required to qualify for the 27.5% rate would be:
- for the 2017–2018 income year, $25 million;
- for the 2018–2019 income year, $50 million;
- for the 2019–2020 income year, $100 million;
- for the 2020–2021 income year. $250 million;
- for the 2021–2022 income year, $500 million; and
- for the 2022–2023 income year, $1 billion.
The 27.5% rate will apply to:
- the taxable income of ordinary corporate tax entities;
- the standard component of taxable income of companies (other than life insurance companies) that are retirement savings account (RSA) providers;
- the amount that exceeds the pooled development fund (PDF) component of taxable income of companies that become PDFs during an income year;
- the ordinary class of taxable income of life insurance companies; and
- the taxable income of public trading trusts.
The corporate tax rate would then be cut, for all corporate tax entities (irrespective of turnover ie the turnover threshold would be abolished), to:
- for the 2024–2025 income year, 27%;
- for the 2025–2026 income year, 26%; and
- for the 2026–2027 and later income years, 25%.
Budget update: foreign owners of “ghost” property
The 2017–2018 Federal Budget announced that the Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. Currently, a $5,000 applies for acquiring an interest in residential land where the price of the acquisition is $1 million or less. This fee scales up to $91,300 for acquisitions up to $10 million (the ATO will supply a fee estimate for acquisitions over $10 million – fees are tiered per million).
Information from the Foreign Investment Review Board (FIRB) indicates that foreign persons who are purchasing in a development which has a New Dwelling Exemption Certificate (NDEC) will be subject to the annual charge where contracts were entered into after 7.30 pm (AEST) on 9 May 2017.
A property that is vacant for at least six months per year will be considered under-used. A property is considered to be “used” where it is rented out, used as a residence or otherwise occupied. The annual liability is assessed based on the date of the property settlement. The person who purchased the property does not have to be the person who uses or occupies the property. For example, a friend, relative or some other person can be the occupant and it is not required that a rental agreement is in place.
In the following circumstances, the FIRB says a property will also be considered used:
- for any period where the property has genuinely been made available for rent, including by advertising the property, engaging a leasing agent and setting the rent at a market rate; and
- during a construction period for the building of new dwellings or redeveloping existing dwellings – this is taken to be from the settlement of the property until a new dwelling has been completed.
The six-month period in which the property must be used does not need to be six consecutive months. As long as the property is not left vacant for a total of six months or more in a 12-month period, the charge will not apply.
The annual vacancy charge is not a condition of the foreign investment approval and does not impact any conditions in a foreign investment approval. The charge will no longer apply when a person ceases to be a foreign person.
Budget update: restricted foreign ownership
The 2017–2018 Federal Budget announced that a cap of 50% will be applied to foreign ownership in new developments through a condition on New Dwelling Exemption Certificates (NDECs).
The Foreign Investment Review Board notes that applications for NDECs that are received from 7.30 pm (AEST) 9 May 2017 and approved will be subject to a condition that the developer may only sell a maximum of 50% of the total dwellings in the development to foreign persons. This condition will not apply to existing approvals, or to applications received before that time that are still to be processed.
Developers (either Australian or foreign) can apply for an NDEC for a development if:
- it will consist of 50 or more dwellings (other than townhouses);
- they have development approval from the relevant government authority; and
- where applicable, foreign investment approval was given to purchase the land and relevant conditions are being met.
Budget update: tougher residency rules for pensioners
In the 2017–2018 Federal Budget, the Government announced that it would revise the residency requirements for claimants of the Age Pension and the Disability Support Pension (DSP). From 1 July 2018, claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or DSP unless they have either:
- 10 years’ continuous Australian residence, with five years of this during their working life (for ages 16 to Age Pension age); or
- 10 years’ continuous Australian residence, without having received an activity-tested income support payment for a cumulative period of five years.
Existing exemptions for DSP applicants who acquire their disability in Australia will continue to apply.
Transfer pricing: interest rate on borrowing not arm’s length
In a major transfer pricing judgment, the Full Federal Court has unanimously dismissed Chevron Australia’s appeal against the Federal Court’s rejection of its challenges to ATO transfer pricing determinations concerning the interest rate on borrowings from a subsidiary: Chevron Australia Holdings Pty Ltd v FCT [2017] FCAFC 62.
Background
The litigation revolved around draw-downs under a credit facility agreement entered into on 6 June 2003 between Chevron Texaco Funding Corporation (CFC, a US company) and the taxpayer, Chevron Australia Holdings Pty Ltd (CAHPL, CFC’s parent and an Australian resident, owned ultimately by Chevron Corporation (CVX or Chevron)). The funds were used to refinance external AUD-denominated debt that had been taken on to fund CAHPL’s acquisition of various operating entities.
The facility was for the “AUD equivalent” of US$2.5 billion. The interest rate was set at one-month AUD London Interbank Offered Rate (LIBOR) +4.14% (approximately equivalent to 9%). Payments were interest-only, payable monthly in arrears. The facility was for a term of five years with an option for early repayment by the borrower without penalty, and it could be terminated at any time by the lender. The facility was unsecured; there was no guarantee of performance given by any Chevron entities, and there were no operational covenants or financial ratio covenants.
CFC had borrowed the funds it advanced to its parent in USD in US financial markets at various rates (approximately 1.2%). After paying its own interest expense, CFC made sizeable profits and paid substantial dividends to CAHPL. These were not taxable to CAHPL because of s 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936).
The Commissioner argued the parties were not dealing at arm’s length. By determinations and assessments issued in 2010 and 2012, relying on Div 13 of ITAA 1936 for all years, on Subdiv 815-A of the Income Tax Assessment Act 1997 (ITAA 1997) for some years and Art 9 of the US Convention, the ATO denied a significant proportion of the interest deductions CAHPL claimed.
The Federal Court (Robertson J in Chevron Australia Holdings Pty Ltd v FCT (No 4) [2015] FCA 1092) ruled that CAHPL’s challenges to the amended assessments under Div 13 of ITAA 1936 failed and, in the alternative, that CAHPL’s challenges to the amended assessments under Div 815-A of ITAA 1997 also failed.
Full Court decision
Justice Pagone gave the main judgment of the Court. In dismissing the taxpayer’s appeal, points made by Pagone J included the following:
- The primary judge was correct in concluding that the relevant ATO officer’s lack of formal authority to make the Div 13 determinations did not render the assessments invalid.
- The relevant rights, benefits, privileges or facilities provided, or to be provided, to CAHPL under the credit facility agreement was the use of the funds advanced – not the consideration paid or given for the use of the funds by way of loan. The credit facility agreement conferred no rights upon CAHPL until CFC, in its absolute discretion, made advances.
- CAHPL gave its subsidiary no security for the loan, but the absence of security for what CAHPL got is not something that was “acquired” by CAHPL “under” the credit facility agreement. The lack of security was an absence in the consideration it was required to give for the funds it received, rather than part of what it obtained.
- CAHPL’s case was that what had to be priced was a loan without security or covenants to be given by a commercial lender to a borrower such as CAHPL.
- Section 136AD(3) presupposes, and can only operate, where it is possible and practical to ascertain an arm’s length consideration for the supply or acquisition in question. Expert reports CAHPL relied on were to the effect that a loan such as that obtained by CAHPL would not have been available to a hypothetical company with CAHPL’s credit worthiness as a standalone company. Robertson J found that the borrowing by CAHPL would not have been sustainable if obtained from an independent party.
- On CAHPL’s construction, it was submitted that the application of s 136AD(3) required pricing a hypothetical loan which a hypothetical CAHPL could obtain from a hypothetical independent party, on the assumption that the hypothetical CAHPL had the attributes of the actual CAHPL but was otherwise independent. However, Pagone J said that to apply s 136AD(3) in that way, “would be unrealistic and contrary to its purpose”.
- Div 13 is intended to operate in the context of real-world alternative reasonable expectations of agreements between parties and not in artificial constructs.
- The ultimate object of the task required by Div 13 is to ensure that the consideration deemed by s 136AD(3) is the reliably predicted amount which CAHPL might reasonably be expected to give by way of consideration, rather than a hypothetical consideration without reliable foundation in the facts or reality of the circumstances of the taxpayer in question. In this case, the property to be considered in the hypothetical agreement was a loan of US$2.5 billion for a term of years. What CAHPL obtained were the rights, benefits, privileges and facilities of a loan of US$2.5 billion in accordance with the credit facility agreement for a number of years, for a consideration which did not require it to give security. Robertson J found that an independent borrower like CAHPL dealing at arm’s length would have given security and operational and financial covenants to acquire the loan. Pagone J said there was no reason to depart from that conclusion.
- Pagone J considered that an alternative submission made by CAHPL had some force. The alternative submission was that the hypothetical acquisition would need to assume that CAHPL had paid a fee to its parent for the provision of security on the hypothetical loan. However, Pagone J said there was insufficient evidence on the case as conducted to warrant the conclusion that CAHPL might reasonably have been expected to pay a guarantee fee as part of the consideration that CAHPL might give in respect of the hypothetical loan.
- Robertson J considered a separate challenge to the assessments in relation to the 2006 to 2008 years, to the effect that any determination made under Div 13 ceased to be operative once the 2002 amended assessments were made under Div 815-A for those years. “The particular vice relied upon by CAHPL was that the retrospective effect of Div 815 was such that in the years in question, it was not aware, and could not have been aware, of the criteria that would many years later become those for liability under Div 815 in the earlier years.” Pagone J found that circumstance, however, was “inherent in the nature of retrospective legislation except, perhaps, in a practical sense of legislation purportedly validating acts taken in anticipation of legislation announced to be enacted”.
- In Pagone J’s view, Robertson J was correct to reject CAHPL’s submission that there had been no profits which had “not accrued” within the meaning of s 815-15(1)(c) or Article 9(1) of the US Convention. He said, “Section 815-15(1)(c) postulates that a consequence of the presence of the conditions in Article 9 was that ‘an amount of profits’ which might have been expected to accrue did not accrue. The word ‘profits’ in the provision and in Article 9 is used in a more generic sense than ‘taxable income’. The focus of the provision is the tax effect of a dealing not the overall income of a taxpayer. The specific focus in s 815-15(1)(c) is whether ‘an amount’ of profits had not accrued, just as the focus of Article 9(1) is whether ‘any profits’ had not accrued. There is no basis in the text of the provisions or in the policy they express to equate the profits referred to with the taxable income of the taxpayer. The fact that CAHPL received dividend income may be relevant in evaluating what might be expected to accrue in the particular facts in question but it does not result in the conclusion that there was no amount of profits which did not accrue by reason of the conditions mentioned in Article 9 for the purposes of s 815-15(1)(c). The condition was satisfied by reason of an amount of profits not accruing but for the conditions mentioned in Article 9.”
Transfer pricing: draft guideline on cross-border related-party financing
The ATO has released Draft Practical Compliance Guideline PCG 2017/D4, which sets out its compliance approach to the taxation outcomes associated with a financing arrangement or a related transaction or contract, entered into with a cross-border related party (a related-party financing arrangement).
The draft guideline makes no direct reference to the recent Chevron decision, but has clearly been produced as a risk assessment tool for entities engaging in broadly similar related-party financing arrangements.
The ATO says it uses the framework in the draft guideline and accompanying schedules to differentiate risk and tailor its engagement with taxpayers according to the features of their related-party financing arrangements, the profile of the parties to the related-party financing arrangement and the choices and behaviours of the taxpayer’s corporate group.
The tax risk associated with related-party financing arrangements is assessed with regard to a combination of quantitative and qualitative indicators. The ATO’s related-party financing arrangement risk framework is made up of six risk zones, ranging from white zone (arrangements already reviewed and concluded by the ATO) and green zone (low risk) to red zone (very high risk). The different zones reflect a cumulative assessment of the presence of various qualitative and quantitative risk indicators:
- If a related-party financing arrangement is rated as low risk under this framework, the taxpayer can expect the Commissioner will generally not apply compliance resources to review the taxation outcomes, in the relevant schedule, of the related-party financing arrangement, other than to fact-check the appropriate risk rating.
- If a related-party financing arrangement falls outside the low risk category, the draft guideline says the taxpayer can expect the Commissioner will monitor, test and/or verify the taxation outcomes of its related-party financing arrangement.
- The higher the risk rating, the more likely the arrangements will be reviewed as a matter of priority.
The draft guideline applies to any financing arrangement entered into with a related party that is not a resident of Australia. It applies to both inbound and outbound related-party financing arrangements.
Penalty remission amnesty
To encourage cooperative future compliance, for a limited period the Commissioner says he is willing to remit penalties and interest if certain preconditions are met. Specifically, the Commissioner undertakes that if a taxpayer makes a voluntary disclosure in relation to the back years and adjusts its pricing or level of debt to come within the green zone (low risk), the Commissioner will exercise his discretion to remit penalties and interest. This undertaking will remain in place for 18 months from either the date of the draft guideline’s publication (ie, until 16 November 2018) or the effective date for any schedule to the draft guideline.
Date of effect
The finalised guideline will have effect from 1 July 2017 and will apply to existing and newly created financing arrangements/structures/functions. Each schedule to the guidelines may have effect from a different date. Where this is the case, the date of effect will be stated in the relevant schedule.
Car expenses for transporting equipment disallowed
A taxpayer has been denied a deduction for car expenses incurred in transporting equipment to and from work, partly because the storage facilities at her workplace were adequate: Re Rafferty and FCT [2017] AATA 636, AAT No 2015/3723.
The taxpayer was employed as a stevedore. In the income year in question (2012–2013), she mostly drove a straddle (a piece of machinery used for lifting containers) or performed clerical work. She claimed a deduction of $22,147 for work-related car expenses, arguing that she was required to carry bulky tools and equipment (protective clothing and equipment provided by her employer; shirts and trousers) to and from work. The essence of her claim was that she took the clothing and equipment home for cleaning and maintenance. The Commissioner disagreed and issued an amended assessment disallowing the deduction and imposing an administrative penalty of 25% of the tax shortfall.
The taxpayer said that it was not uncommon for her to perform more than one role in a shift, nor was it uncommon for this to create the need to change clothing between tasks due to contamination from grease and sweat. She was therefore required to have a greater range of personal protective equipment, including wet weather gear, than might normally have been expected.
The Administrative Appeals Tribunal (AAT) decided that it was not necessary for the taxpayer to take home her hard hat, safety glasses, hearing protection or headlight in order to clean them. In addition, her overalls were laundered by the employer. Accordingly, she could only justify transporting her shirts, trousers and occasional wet weather gear. However, the shirts and trousers could not be considered bulky and the storage facilities at her workplace were adequate and secure. Accordingly, there was no need for the taxpayer to use her car to transport equipment to and from work. The car expenses were therefore not deductible.
As regards the shortfall penalty, the AAT agreed with the Commissioner that the taxpayer had failed to take reasonable care and that there was no justification for remitting the 25% penalty.
Draft legislation for financial complaints and dispute resolution
The Government has released exposure draft legislation to give effect to the Ramsay Review recommendation to overhaul the financial system’s external dispute resolution (EDR) and complaints framework.
Australian Financial Complaints Authority
As part of the 2017–2018 Budget, the Government announced that it would create a new one-stop shop for financial disputes – the Australian Financial Complaints Authority (AFCA) – to be established by 1 July 2018.
AFCA will replace the existing framework of the Financial Ombudsman Service (FOS), Credit and Investments Ombudsman (CIO) and Superannuation Complaints Tribunal (SCT). These existing bodies will continue to operate after 1 July 2018 to work through their existing complaints. Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.
Compensation caps
The Government has also released a consultation paper on a range of other EDR matters. For example, whether the compensation caps for certain financial products, such as mortgages and general insurance products, should move immediately to $1 million upon commencement of the new one-stop shop. Superannuation disputes will not be subject to a monetary limit, but a $1 million compensation cap will apply for non-superannuation consumer disputes and small business disputes. The Government is also seeking feedback on the implications of removing the requirement for credit representatives to be members of the new one-stop shop.
