Budget superannuation changes on the way

The Federal Government has been releasing exposure draft legislation intended to give effect to most of its 2016–2017 Budget superannuation proposals. The first and second tranches of exposure drafts were released for public consultation in September, with submissions due by 16 September 2016 for the first tranche and by 10 October 2016 for the second tranche.

First tranche of draft legislation

On 7 September 2016, the Federal Government released its first tranche of exposure draft legislation. This draft legislation includes:

• Exposure Draft: Superannuation (Objective) Bill 2016,
  https://consult.treasury.gov.au/retirement-income-policy-division/superannuation-reform-package/supporting_documents/Exposure_Draft_Superannuation_Objective_Bill.pdf;
• Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, https://consult.treasury.gov.au/retirement-income-policy-division/superannuation-reform-package/supporting_documents/Exposure_Draft_Omnibus_Superannuation_Bill_Tranche_1.pdf; and
• Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016, https://consult.treasury.gov.au/retirement-income-policy-division/superannuation-reform-package/supporting_documents/Exposure_Draft_Superannuation_Amending_Regulation.pdf.

The draft legislation proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) to implement the following Budget measures:

• Objective of superannuation: to be enshrined in stand-alone legislation. Namely, “to provide income in retirement to substitute or supplement the age pension”. According to the Government, enshrining the primary objective of the superannuation system in legislation, in combination with the subsidiary objectives, will provide a framework against which future superannuation policy proposals can be assessed.
• Deducting personal contributions: all individuals up to age 75 would be able to deduct personal superannuation contributions, regardless of their employment circumstances. This would be achieved by repealing the existing 10% test in s 290-160 of ITAA 1997, which requires that an individual earn less than 10% of their income from their employment-related activities in order to be able to deduct a personal superannuation contribution. Of course, such deductible contributions would still effectively be limited by the concessional contributions cap of $25,000 proposed from 1 July 2017.
• Work test: the work test for making contributions between the ages 65 and 74 would be removed from reg 7.04 of the SIS Regs. Consequential amendments would also amend the “Attaining age 65” condition of release in Sch 1 to the SIS Regs, allowing the release of amounts held in superannuation at any time after a member attains the age of 65. However, see also Revisions to super reforms in this issue of Client Alert.
• Spouse contributions tax offset: the low income threshold would be increased to $37,000 (phasing out up to $40,000) for a tax offset (up to $540). Proposed changes to s 290-230(4A) of ITAA 1997 would also mean taxpayers would not be entitled to a tax offset when making contributions for a spouse whose non-concessional contributions exceed the non-concessional contribution cap in the corresponding financial year.
• Low income superannuation tax offset: this would replace the government low income superannuation contributions. The tax offset (up to $500) would apply to concessional contributions for those with adjusted taxable income up to $37,000.

Date of effect

This draft legislation would generally come into effect on 1 July 2017.

Source: Treasury, Superannuation reform package, 7 September 2016, https://consult.treasury.gov.au/retirement-income-policy-division/superannuation-reform-package.

Revisions to super reforms

On 15 September 2016, the Federal Government announced that it will not proceed with its 2016–2017 Budget proposal for a $500,000 lifetime cap on non-concessional superannuation contributions (backdated for contributions since 1 July 2007). Instead, the Government has proposed a non-concessional contributions cap of $100,000 per annum (down from the current $180,000 cap). Individuals under age 65 would still be able to use the three-year “bring forward” rule for non-concessional contributions (ie to make $300,000 of contributions over a three-year period).

Individuals with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional (after tax) contributions from 1 July 2017. This limit will be tied and indexed to the proposed $1.6 million transfer balance cap for retirement accounts (ie pension phase). This $1.6 million eligibility threshold will be based on the individual’s superannuation balance as at 30 June the previous year. According to the Government, individuals will be able to contribute a total of $125,000 per year – that is, $25,000 of concessional contributions plus $100,000 of non-concessional contributions – until they reach $1.6 million. If a taxpayer takes advantage of the “bring forward” rule, total contributions of $325,000 could be made in any one year, the Treasurer said.

In addition, as part of the Coalition’s compromise on its superannuation package, it will not proceed with the Budget proposal to remove the work test for making contributions between ages 65 and 74. As such, people aged 64 to 75 will still need to satisfy the work test (ie undertake gainful employment for at least 40 hours in a 30-day period in the financial year) to make voluntary superannuation contributions. The Government also announced that the start date for the proposal to allow catch-up concessional contributions for superannuation balance less than $500,000 would be delayed to 1 July 2018 (instead of 1 July 2017).

Further details and fact sheets are available on the Treasury website at www.treasury.gov.au/Policy-Topics/SuperannuationAndRetirement/Superannuation-Reforms.

Source: Treasurer and Minister for Revenue, joint media release, 15 September 2016, http://sjm.ministers.treasury.gov.au/media-release/096-2016/.

Second tranche of draft legislation

On 27 September 2016, the Federal Government released the second tranche of its exposure draft legislation proposing to give effect to some of its 2016–2017 Budget superannuation proposals. Tranche two includes:

• Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016, https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2/supporting_documents/Treasury%20Laws%20Amendment%20Fair%20and%20Sustainable%20Superannuation%20Bill%202016.pdf;
• Exposure Draft: Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2/supporting_documents/Superannuation%20Excess%20Transfer%20Balance%20Tax%20Imposition%20Bill%202016.pdf; and
• Exposure Draft: Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulation 2016, https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2/supporting_documents/Treasury%20Laws%20Amendment%20Fair%20and%20Sustainable%20Superannuation%20Regulation%202016.pdf.

The draft legislation proposes to amend ITAA 1997, the Taxation Administration Act 1953 (TAA), the Superannuation Industry (Supervision) Act 1993 (SIS Act), the SIS Regs and related legislation to implement the following budget measures:

• Pension $1.6 million transfer balance cap: the total amount of accumulated superannuation an individual can transfer into retirement phase (where earnings on assets are tax-exempt) would be capped at $1.6 million from 1 July 2017. Those with pension balances over $1.6 million at 1 July 2017 would be required to “roll back” the excess amount to accumulation phase by 1 July 2017 (where it would be subject to 15% tax on future earnings).
• Concessional contributions cap: to be reduced to $25,000 for all individuals (regardless of age) from 1 July 2017. The concessional cap would be indexed in increments of $2,500 (down from $5,000). Contributions to constitutionally protected funds and untaxed or unfunded defined benefit superannuation funds would count towards an individual’s concessional contributions cap. However, any excess concessional contributions in respect of such funds would not be subject to tax, but instead limit an individual’s ability to make further concessional contributions.
• Division 293 contributions tax: the income threshold above which the additional 15% Division 293 tax cuts in for concessional contributions would be reduced from $300,000 to $250,000 from 1 July 2017. The notification requirements for Division 293 tax debt accounts in relation to defined benefit interests would also be simplified.
• Catch-up concessional contributions: individuals with total superannuation balances less than $500,000 would be allowed to make additional catch-up concessional contributions for unused cap amounts for the previous years. Unused cap amounts would be carried forward on a five-year rolling basis (starting from 1 July 2018). The draft legislation introduces the new concept of a “total superannuation balance” to ensure consistent treatment for the valuation of an individual’s total superannuation balance across various 2016–2017 Budget measures, including the $500,000 superannuation balance threshold.
• Transition to retirement income streams: the tax exemption on earnings for pension assets supporting transition to retirement income streams (TRIS) would be removed from 1 July 2017 (irrespective of when the pension commenced). As a result, earnings from assets supporting a TRIS would be taxed at 15% (instead of the current 0%). In addition, reg 995-1.03 of the Income Tax Assessment Regulations 1997 (ITA Regs) would be repealed so that individuals can no longer make an election to treat certain TRIS payments as lump sums for tax purposes.
• Retirement income products: a new category of tax-exempt pensions rules is proposed to remove tax barriers to the development of new retirement income products. The earnings tax exemption would be extended to cover a “deferred superannuation income stream” (which would include guaranteed annuities and group self-annuities).
• Anti-detriment deduction: s 295-485 of ITAA 1997 would be repealed so that complying superannuation funds will no longer be entitled to an anti-detriment deduction for paying certain lump sum death benefits to the spouse, former spouse or child of the deceased member.

Date of effect

This draft legislation would generally come into effect on 1 July 2017 (except for the catch-up provisions for concessional contributions, which would apply from 1 July 2018).

Source: Treasury, Superannuation reform package – tranche two, 27 September 2016, https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2.

More draft legislation to come

Exposure draft legislation for the changes to the non-concessional caps (ie tranche three) “will be released in the coming weeks”. The Treasurer said the Government remains on track to have its budget superannuation measures introduced into Parliament before the end of 2016. With the support of the Senate, there will be no impediment to this occurring, Mr Morrison said.

Source: Treasurer and Minister for Revenue, joint media release, 27 September 2016, http://sjm.ministers.treasury.gov.au/media-release/105-2016.

Primary producer income tax averaging

The Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016 has been introduced in the House of Representatives. The Bill proposes to amend ITAA 1997 to allow primary producers to access income-tax averaging 10 income years after choosing to opt out, instead of that opt-out choice being permanent.

If a primary producer wants to opt out again, they may still do so, but that choice to opt out is effective for 10 income years. After the 10-year opt-out period has ended, primary producers are effectively treated as new primary producers in applying the basic conditions.

The averaging adjustment applies again to a taxpayer’s assessment where the following conditions are satisfied:

• income-tax averaging has not applied to the taxpayer because they permanently opted out 10 or more income years ago;
• the taxpayer has been carrying on a primary production business for two income years in a row; and
• their basic taxable income in the first year (after the 10-year opt-out period has passed) is less than or equal to their basic taxable income in the following year.

If these basic conditions are not met, an averaging adjustment will not be made until they are met in a later income year.

This change would apply to the 2016–2017 income year and later income years.

Other amendments

The Bill also proposes the following amendments.

Remedial power for Commissioner

The Bill proposes to amend Sch 1 to the TAA by inserting a new Div 370 to establish a remedial power for the Commissioner of Taxation. This is intended to allow for more timely resolution of certain unforeseen or unintended outcomes in the taxation and superannuation laws. The power would allow the Commissioner to make, by disallowable legislative instrument, one or more modifications to the operation of a taxation law to ensure the law can be administered to achieve its intended purpose or object. This measure would commence on the day after Royal Assent, and would allow the Commissioner to make legislative instruments from that date to modify the operation of a taxation law.

Luxury car tax relief: cars for display

The Bill would amend the A New Tax System (Luxury Car Tax) Act 1999 to provide relief from luxury car tax (LCT) to certain public institutions that import or acquire luxury cars for the sole purpose of public display. The changes would apply to public museums, galleries and libraries that are registered for GST and that have been endorsed as deductible gift recipients (DGRs). The amendments would apply for luxury cars that are imported or acquired from the day after the Bill receives Royal Assent.

Source: Tax and Superannuation Laws Amendment (2016 Measures No 2) Bill 2016, still before the House of Representatives at the time of publication, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5685%20Recstruct%3Abillhome.

Research and development tax incentive rate changes

The Budget Savings (Omnibus) Bill 2016 received Royal Assent on 16 September 2016 as Act No 55 of 2016. The Act reduces the rates of the tax offset available under the research and development (R&D) tax incentive for the first $100 million of eligible expenditure by 1.5%. The higher (refundable) rate of the tax offset will be reduced from 45% to 43.5% and the lower (non-refundable) rates of the tax offset will be reduced from 40% to 38.5%. The changes apply from 1 July 2016.

The R&D tax incentive aims to boost competitiveness and improve productivity across the Australian economy by:

• encouraging industry to conduct R&D that may not otherwise have been conducted;
• improving the incentive for smaller firms to undertake R&D; and
• providing businesses with more predictable, less complex support.

The ATO and AusIndustry (on behalf of Innovation Australia) jointly administer the R&D tax incentive. Claimants’ R&D activities must be registered with AusIndustry before the tax offset is claimed, and the ATO determines if the expenditure claimed for R&D activities in the taxpayer’s tax return is eligible for the tax offset.

Other amendments in the Bill

The Bill also implements measures announced in the 2016–2017 Federal Budget and earlier budget updates, including:

• single touch payroll (STP) reporting for substantial employers (those with 20 or more employees) to automatically provide payroll and superannuation information to the Commissioner of Taxation at the time it is created;
• changed fringe benefits treatment under the income tests for family assistance and youth income support payments and for other related purposes;
• pension means testing for aged care residents;
• other family tax benefit (FTB) and welfare changes.

The Bill had previously been passed by the House of Representatives with 19 government amendments that:

• add a new schedule which provides an income limit of $80,000 on payment of the FTB Part A supplement. If an individual’s adjusted taxable income (which includes the adjusted taxable income of their partner if any) is more than $80,000 for the relevant income year, then the individual’s FTB Part A supplement in relation to that year will be nil;
• remove proposed amendments that would have stopped relevant social security payments to individuals undergoing psychiatric confinement because of serious offences;
• remove the Energy Supplement only for new recipients of FTB Part A, FTB Part B and the Commonwealth Seniors Health Card;
• restore funding to the Australian Renewable Energy Agency (ARENA) of $800 million over five years to 2021–2022; and
• remove proposed amendments to create a Child and Adult Public Dental Scheme.

Source: Budget Savings (Omnibus) Bill 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5707%20Recstruct%3Abillhome.

SMSF related-party borrowing arrangements

The ATO has issued Taxation Determination TD 2016/16, which sets out the Commissioner’s views on when it would be reasonable to conclude that a trustee of a self managed superannuation fund (SMSF) would enter into a “hypothetical” limited recourse borrowing arrangement (LRBA) with a related party on arm’s length terms for the purposes of s 295-550 of ITAA 1997.

Non-arm’s length income

Where the parties to a LRBA are not at arm’s length, the ordinary and statutory income of the SMSF generated from the LRBA asset will be taxed at 47%, as non-arm’s length income (NALI), if the income derived by the SMSF under the scheme is more than the amount it might have been expected to derive if the parties had been dealing with each other at arm’s length: s 295-550(1) of ITAA 1997.

To determine whether the NALI provisions apply, the ATO says it is necessary to identify both the steps of the relevant scheme and the parties. Section 295-550(1)(b) of ITAA 1997 then requires a determination of the amount of income that the SMSF “might have been expected to derive” if the same parties to the scheme had been dealing with each other on an arm’s length basis under each identified step of the scheme.

Hypothetical borrowing arrangement

According to the ATO, it is necessary to identify what the terms of the “hypothetical borrowing arrangement” may have been if the parties were dealing with each other at arm’s length. Where it is reasonable to conclude that the SMSF could not have, or would not have, entered into the hypothetical borrowing arrangement, the ATO says the SMSF will have derived more income under the scheme than it might have been expected to derive under the scheme with the hypothetical borrowing arrangement. In this instance, the income derived under the scheme is NALI (taxable at 47%).

Arm’s length terms

The ATO says it is necessary to identify what the terms of the borrowing arrangement would have been if those same parties had been acting on an arm’s length basis under a hypothetical borrowing arrangement in respect of the same steps of the scheme, without introducing any new steps or parties to the scheme. The terms of the borrowing arrangement to be considered include (but are not limited to):

• the interest rate;
• whether the interest rate is fixed or variable;
• the term of the loan; and
• the loan to market value ratio (LVR).

Consideration is then required as to whether it is objectively reasonable to expect that the SMSF trustee could have and would have entered into the hypothetical borrowing arrangement on those terms. While the “safe harbours” in Practical Compliance Guideline PCG 2016/5 (see also ATO “safe harbours”: PCG 2016/5 updated in this issue of Client Alert) may be applied to determine what the arm’s length terms of the borrowing arrangement would be, the ATO notes it is not mandatory to use the safe harbours if the SMSF trustee can otherwise demonstrate what the arm’s length terms would have been.

Relevant factors in considering whether an SMSF trustee could have and would have acquired the asset under the hypothetical borrowing arrangement include:

• the terms of the SMSF trust deed (eg any impediment to the SMSF acquiring the asset);
• whether the SMSF has sufficient capital, liquidity and cash flow to complete the purchase, subject to the arm’s length borrowing limits;
• the SMSF’s ability to service the arm’s length terms;
• any legislative impediments that might prevent the SMSF from acquiring the asset (eg s 52B of the SIS Act);
• the SMSF’s investment strategy;
• the optimal use of the SMSF’s money; and
• whether the asset acquired would be “earnings accretive”.

Example

TD 2016/16 includes an example of a related-party LRBA to acquire commercial property. The Commissioner’s approach essentially involves comparing the terms of the particular related-party LRBA with the ATO’s hypothetical borrowing arrangement.

Based upon the facts of the example ($1 million borrowing; 100% LVR; 0% interest rate; 25-year term; $0 monthly repayments), the ATO concluded that it was clear that the SMSF could not and would not have entered into the arm’s length hypothetical borrowing arrangement. The ATO essentially reached this conclusion based upon the particular facts that:

• the SMSF did not have sufficient funds available to reduce the level of borrowings to finance the purchase to a level that satisfies the maximum LVR of 70% (under the safe harbour rules in PCG 2016/5); and
• the hypothetical borrowing arrangement, taking into account the weekly rental and any future capital gains, would not be “earnings accretive”.

After concluding that the SMSF could not have, and would not have, acquired the commercial real property under the hypothetical borrowing arrangement, the ATO said that the income that the SMSF would be expected to derive from the scheme if the parties were dealing with each other at arm’s length was “nil”. According to the Commissioner, if the parties were dealing with each other at arm’s length in relation to the scheme, the investment in the commercial real property would not occur, as no arm’s length LRBA could have been entered into. Therefore, the ATO considered the $1,000 per week rental income the SMSF received under the LRBA as NALI (taxable at 47%).

Date of effect

The determination applies both before and after its date of issue.

Source: ATO, Taxation Determination TD 2016/16, 28 September 2016, https://www.ato.gov.au/law/view/pdf/pbr/td2016-016.pdf.

ATO “safe harbours”: PCG 2016/5 updated

On 28 September 2016, the ATO also released an updated version of Practical Compliance Guideline PCG 2016/5, which sets out the Commissioner’s “safe harbour” terms for LRBAs. The guideline has been amended to incorporate references to TD 2016/16 and the withdrawal of ATO ID 2015/27 and ATO ID 2015/28. If an LRBA is structured in accordance with PCG 2016/5, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the NALI provisions (47% tax) will not apply. Trustees who do not meet the ATO safe harbour terms will need to otherwise demonstrate that their LRBA was entered into and maintained consistent with arm’s length terms (ie in accordance with TD 2016/16).

PCG 2016/5 has also been updated to reflect the previously announced extension of the ATO grace period to 31 January 2017 (from 30 June 2016) for an SMSF to restructure its LRBA on terms consistent with the ATO’s safe harbour terms (or to bring the LRBA to an end before that date).

Source: ATO, Practical Compliance Guideline PCG 2016/5, 28 September 2016, https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20165%2FNAT%2FATO%2F00001%22.

ATO IDs withdrawn

The ATO has also withdrawn the following ATO IDs from 28 September 2016, as the issues are now covered in TD 2016/16:

• ATO ID 2015/27: Non-arm’s length income – related party non-commercial LRBA to acquire listed shares, https://www.ato.gov.au/law/view/view.htm?docid=%22AID%2FAID201527%2F00001%22; and
• ATO ID 2015/28: Non-arm’s length income – related party non-commercial LRBA to acquire real property, https://www.ato.gov.au/law/view/view.htm?docid=%22AID%2FAID201528%2F00001%22.

Travel expense and transport of bulky tools claim denied

The Administrative Appeals Tribunal (AAT) has affirmed the Commissioner’s decision to refuse a taxpayer’s deduction claim for certain work-related travel expenses.

Background

During the relevant year, the taxpayer worked as a first-class “sheet metal worker” and he was required to drive to the Alcoa Alumina Refinery at Wagerup WA, which was located 57.5 kms from his home, on a daily basis. He was also required to drive to the Alcoa Alumina Refinery at Oakley WA (near Pinjara), which was located 20.5 kms from his home, on one occasion.

The taxpayer drove his own vehicle and he was paid, according to payslips, a “travel allowance” and “overtime meal allowance” by his employer. For his 2012 income tax return, the taxpayer disclosed a taxable income of $102,277 after claiming various deductions for work-related travel, work-related clothing expenses, other work-related expenses, donations and the cost of managing his tax affairs, totalling $18,331. The Commissioner allowed the taxpayer’s claim for union fees, donations, the cost of managing his tax affairs, tools and overtime meals, but refused the other claims, thereby increasing the taxpayer’s taxable income to $118,756. The Commissioner also imposed 50% shortfall penalty for “recklessness”, totalling $3,255.

Before the AAT, the taxpayer conceded claims for overtime meals, work socks, work clothing, sun protection and mobile phone expenses. The Commissioner also conceded the claim for laundry expenses and that the penalty should be remitted in full. Therefore, the only issue before the AAT was whether the taxpayer was entitled to a deduction for work-related travel expenses. It was not in dispute between the parties that if the AAT allowed the deduction, the maximum deduction available was $5,444, and not $14,901 as previously claimed by the taxpayer.

The taxpayer argued that he was required by his employer to provide his own tools, that the tools were too bulky or awkward to be transported to work other than by car, and that the fact the occupation’s enterprise agreement provides reimbursement for tools stored at work that are lost during breaking and entering gave “rise to the doubt that the employer fully believed in their security”. Accordingly, a key issue was whether the employer provided a “secure” storage locker, which was a question of fact.

Decision

The AAT refused the taxpayer’s claim, finding the travel was private in nature. It found the taxpayer was not required by his employer to carry his bulky tools and equipment from home to work. In this regard, the AAT noted the ATO had contacted the taxpayer’s employer to verify details. It further noted the taxpayer’s own admission, that it was his own personal choice to transport his tools (various hand tools) out of security concerns, which the AAT said was “not supported by objective evidence”. Accordingly, the AAT affirmed the Commissioner’s decision, but allowed for the laundry expenses and remission of penalties in full as conceded by the Commissioner.

Re Reany and FCT [2016] AATA 672, www.austlii.edu.au/au/cases/cth/AATA/2016/672.html.

Personal middle income tax rate cut on the way

The Treasury Laws Amendment (Income Tax Relief) Bill 2016 (the Bill) has been introduced in the House of Representatives. It proposes to amend the Income Tax Rates Act 1986 to increase the third personal income tax threshold applying to personal income taxpayers. The rate of tax payable on individuals’ taxable incomes from $80,001 to $87,000 would fall from 37% to 32.5%. The non-resident tax schedule would also be amended to increase the first income tax bracket to $87,000. The rate of tax of 37% would apply to taxable income between $87,001 and $180,000, and the top marginal rate of tax would remain at 45% for taxable income over $180,000. This measure was announced in the 2016–2017 Federal Budget.

On 2 September 2016, Federal Treasurer Scott Morrison announced that the ATO will now issue the new PAYG withholding tax schedules to reflect the lower personal tax rate in the Bill.

Employers will be required to lower the amount of tax withheld for affected taxpayers to factor in the new lower tax rate effective from 1 October 2016, Mr Morrison said. Any tax overpaid beforehand will be refunded by the ATO on assessment after the end of the 2016–2017 financial year. “This means that contrary to suggestions in media reports […] all affected taxpayers will be able to obtain the benefit of the cut – not at the end of the year but within one month of new PAYG withholding tax schedules being published“, the Treasurer said.

Shortly following the Treasurer’s announcement, the ATO registered Taxation Administration Act Withholding Schedules October 2016 (2 September 2016). This instrument contains eight withholding schedules and applies from 1 October 2016.

Tax rates summarized

The currently legislated rates for 2015–2016 and the proposed new personal tax rates and thresholds for 2016–2017 (including the 2% temporary budget repair levy, but excluding the 2% Medicare levy) are shown in the following: tables.

Personal income tax rates and thresholds
	2015–2016		2016–2017
	Threshold ($)	Rate (%)	Threshold ($)	Rate (%)
First rate	0–18,200	0	0–18,200	0
Second rate	18,201–37,000	19.0	18,201–37,000	19.0
Third rate	37,001–80,000	32.5	37,001–87,000	32.5
Fourth rate	80,001–180,000	37.0	87,001–180,000	37.0
Fifth rate	180,001	47.0	180,001	47.0

With Medicare levy included, the top marginal rate is 49% from 1 July 2014 to 30 June 2017.

The following table shows the proposed rates for the 2016–17 year (including the 2% temporary budget repair levy, but excluding the 2% Medicare levy).

2016–2017
Taxable income ($)	Tax payable
0–18,200 18,201–37,000 37,001–87,000 87,001–180,000 180,001+	Nil Nil + 19% of excess over $18,200 $3,572 + 32.5% of excess over $37,000 $19,822 + 37% of excess over $87,000 $54,232 + 47% of excess over $180,000

Finally, the following table shows the proposed tax rates for non-residents (including the temporary budget repair levy) for the 2016–2017 year.

2016–2017
Taxable income ($)	Tax payable
0–87,000 87,001–180,000 180,001+	32.5% $28,275 + 37% of excess over 87,000 $62,685 + 47% of excess over $180,000

Date of effect

This measure applies to the 2016–2017 income year and later years.

Source: Treasury Laws Amendment (Income Tax Relief) Bill 2016, before the House of Representatives as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5683%20Recstruct%3Abillhome; Treasurer’s media release, “Tax relief for average full-time wage earners to be delivered within weeks”, 2 September 2016, http://sjm.ministers.treasury.gov.au/media-release/088-2016/; Taxation Administration Act Withholding Schedules October 2016, registered 2 September 2016, https://www.legislation.gov.au/Details/F2016L01380.

Small business tax breaks in the pipeline

The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) has been introduced in the House of Representatives. It proposes to:

• increase the small business entity turnover to $10 million from 1 July 2016;
• increase the unincorporated small business tax discount from 5% to 16% over a 10-year period; and
• increase the turnover threshold to qualify for the lower company tax rate and lower the company tax rate on a schedule over 11 income years, reaching a unified company tax rate of 25% in 2026–2027.

The proposal was announced as part of the 2016–2017 Federal Budget.

Corporate tax rate reduction

The Bill proposes to amend the Income Tax Rates Act 1986 to reduce the corporate tax rate to 27.5% for the 2016–2017 income year for corporate tax entities that are small business entities; that is, corporate tax entities that carry on a business and have an aggregated turnover of less than $10 million. This lower corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year. The corporate tax rate would then be cut to:

• 27% for the 2024–2025 income year;
• 26% for the 2025–2026 income year; and
• 25% for the 2026–2027 income year and later income years.

The 27.5% corporate tax rate would progressively be extended to all corporate tax entities by the 2023–2024 income year.

To achieve the progressive extension of the 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year, the 27.5% corporate tax would apply to a base rate entity from the 2017–2018 income year. A corporate tax entity would be a base rate entity if it carried on a business and had an aggregated turnover for the 2017–2018 income year of less than $25 million. The aggregated turnover threshold that would apply to determine whether a corporate tax entity was a base rate entity that qualified for the lower corporate tax rate would be raised annually, so that:

• in 2018–19, the annual aggregated turnover threshold would be $50 million;
• in 2019–2020, the annual aggregated turnover threshold would be $100 million;
• in 2020–2021, the annual aggregated turnover threshold would be $250 million;
• in 2021–2022, the annual aggregated turnover threshold would be $500 million;
• in 2022–2023, the annual aggregated turnover threshold would be $1 billion.

In the 2023–2024 income year, the aggregated turnover threshold test to qualify for the lower corporate tax rate would be removed. The corporate tax rate in that income year would therefore be 27.5% for all corporate tax entities. The corporate tax rate would then be further reduced in stages: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and later years.

In the period from the 2016–2017 income year until the 2022–2023 income year, the corporate tax rate would remain at 30% for companies that have an aggregated turnover equal to or exceeding the threshold for the income year.

Franking

The maximum franking credit that could be allocated to a frankable distribution paid by a corporate tax entity would be based on a tax rate of 27.5%. However, if the entity’s aggregated turnover for the prior income year was equal to or exceeded the aggregated turnover threshold for the current income year, then the maximum franking credit that could be allocated to a frankable distribution paid by the entity would be based on the headline corporate tax rate of 30%.

Carry forward tax offset rules

Sections 65-30 and 65-35 of the Income Tax Assessment Act 1997 (ITAA 1997) relate to the operation of the tax offset carry-forward rules. Consequential amendments would be made in particular income years to ss 65-30 and 65-35 to reflect the staged reduction in the corporate tax rate.

NFP companies

As the corporate tax rate for companies that are small business entities would be reduced to 27.5%, the shade-in limit for non-profit companies that are small business entities would be reduced to $832 for the 2016–2017 income year.

Life insurance companies

The rate of tax paid by life insurance companies on the ordinary component of the company’s taxable income would be reduced to 27.5% in the 2023–2024 income year (when the corporate tax rate would become aligned for all companies). Consistent with the treatment of other companies, the rate would then be cut: to 27% for the 2024–2025 income year, 26% for the 2025–2026 income year and 25% for the 2026–2027 income year and subsequent income years.

Date of effect

The corporate tax rate will be reduced from the 2016–2017 income year.

SME entity threshold increase

The Bill also proposes to amend the definition of “small business entity” in s 328 of ITAA 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million. The aggregated turnover threshold for access to the small business income tax offset would be limited to $5 million, and the current aggregated turnover threshold of $2 million would be retained for the small business CGT concessions. The proposal was announced as part of the 2016–2017 Federal Budget.

Small business entities with aggregated turnover of less than $10 million would be able to access a number of small business tax concessions, including:

• immediate deductibility for small business start-up expenses;
• simpler depreciation rules;
• simplified trading stock rules;
• rollover for restructures of small businesses;
• immediate deductions for certain prepaid business expenses;
• accounting for GST on a cash basis;
• annual apportionment of input tax credits for acquisitions and importations that are partly creditable;
• paying GST by quarterly instalments; and
• the FBT car parking exemption.

The Bill would also amend Subdiv 328-F to create a different aggregated turnover threshold of $5 million for the purposes of the small business income tax offset. It proposes to achieve this by modifying the meaning of “small business entity”. For the purposes of Subdiv 328-F, and therefore the small business income tax offset, an entity would work out whether it was a small business entity for the income year as if each reference in s 328-110 (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

Small business CGT concessions

The Bill proposes to amend Div 152 to retain the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions contained in that Division. It achieves this by replacing references to “small business entity” with the new defined term “CGT small business entity”. An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference in subs 328-110(1)(b) (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

Date of effect

The new thresholds would apply from the 2016–2017 income year. For the FBT car parking exemption, the new threshold would apply from the FBT year commencing on 1 April 2017.

Tax discount increase for unincorporated small businesses

The Bill also proposes to amend ITAA 1997 to increase the small business income tax offset to 16% of net small business income by the 2026–2027 income year. The proposal was announced as part of the 2016–2017 Federal Budget. In the 2025–2026 income year and earlier income years, lower rates of offset would apply as follows:

• For the 2016–2017 to 2023–2024 income years the offset would be 8% of net small business income.
• For the 2024–2025 income year the offset would be 10% of net small business income.
• For the 2025–2026 income year the offset would be 13% of net small business income.

The offset, introduced in the 2015–2016 income year, entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5% of their basic income tax liability that relates to their total net small business income, capped at $1,000. Although the proposed increases in the offset would increase the percentage of offset an eligible individual may claim, the offset amount would remain capped at $1,000.

Date of effect

The first increase to the offset would commence on 1 July 2016 and apply from the 2016–2017 income year.

Source: Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, before the House of Representatives as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5684%20Recstruct%3Abillhome.

Single touch payroll reporting legislative changes

The Budget Savings (Omnibus) Bill 2016 (the Bill) has passed through the House of Representatives. It seeks to achieve savings across multiple portfolios to contribute to budget repair. The Bill would implement measures announced in the 2016–2017 Federal Budget and earlier Budget updates.

The Bill creates a new reporting framework, Single Touch Payroll (STP), for substantial employers to automatically provide payroll and superannuation information to the Commissioner of Taxation at the time it is created. A number of related amendments aim to streamline employer payroll and superannuation choice processes by allowing the ATO to pre-fill and validate employee information. The framework would apply from the first quarter beginning on or after the day the Bill receives Royal Assent.

 

Key points include the following:

• Entities with 20 or more employees (substantial employers) would be required to report the following information to the Commissioner:
• withholding amount and associated withholding payment, on or before the day by which the amount was required to be withheld;
• salary or wages and ordinary time earnings information, on or before the day on which the amount was paid; and
• superannuation contribution information, on or before the day on which the contribution was paid.
• Employers that report these obligations (including those that voluntarily report) would not need to comply with a number of other reporting obligations under the existing law.
• For the first 12 months, reporting entities would not be subject to administrative penalties, unless first notified by the Commissioner.
• An employee may make a valid choice of superannuation fund by providing the relevant information to the Commissioner. In this situation, the Commissioner may disclose an employee’s TFN and protected information to the employer.
• An employee may make an effective TFN declaration by providing the declaration to the Commissioner. In this situation, the Commissioner may make available to the employer the information in the employee’s TFN declaration. Where the information has been provided by the employee to the Commissioner, the employer would not be required to send the declaration to the relevant Deputy Commissioner, nor would they be required to notify the Commissioner where no TFN declaration was provided to them by the employee. However, if an employee chose not to provide their TFN, the obligation would remain for the employer to notify the Commissioner.
• The Commissioner may provide employers with confirmation that a recipient’s information, including their TFN, matched or did not match the information held by the ATO about the recipient (positive and negative validation).
• In general, STP reporting would commence on 1 July 2018 for substantial employers and the related amendments would apply more broadly from 1 January 2017. In some cases, the Commissioner may defer these start dates by legislative instrument.

The ATO has release a consultation paper (available on the ATO website at: https://www.ato.gov.au/General/Consultation/What-we-are-consulting-about/Papers-for-comment/Single-Touch-Payroll–ATO-consultation-paper/) which seeks comments on the ATO’s proposed administration of STP reporting, including the form the ATO guidance may ultimately take.

Previous announcements

The proposal was first flagged by then Minister for Small Business Bruce Billson on 20 June 2014. The Government officially announced the proposal on 28 December 2014. The ATO then released a discussion paper in February 2015. Following feedback, the Government announced on 10 June 2015 that it would undertake further consultation.

As part of the Mid-Year Economic and Fiscal Outlook 2015–2016 (MYEFO), released on 15 December 2015, the Government announced a $100 non-refundable tax offset for expenditure on Standard Business Reporting enabled software for small businesses. The offset is not covered in the Bill’s amendments. The MYEFO also announced the timetable for piloting STP reporting.

Other important changes

Other important changes proposed by the Omnibus Bill include:

• Rates of research and development (R&D) tax offset – reducing the rates of the tax offset available under the R&D tax incentive for the first $100 million of eligible expenditure by 1.5%. The higher (refundable) rate of the tax offset will be reduced from 45% to 43.5% and the lower (non-refundable) rates of the tax offset will be reduced from 40% to 38.5%. Key points include the following:
• Eligible entities that have annual turnover of less than $20 million and are not controlled by an exempt entity or entities may obtain a refundable tax offset equal to 43.5% of the first $100 million of eligible R&D expenditure in an income year, and a further refundable tax offset equal to the amount by which the R&D expenditure exceeds $100 million multiplied by the company tax rate.
• All other eligible entities may obtain a non-refundable tax offset equal to 38.5% of the eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which the R&D expenditure exceeds $100 million multiplied by the company tax rate.
• The changes would apply from 1 July 2016.
• Fringe benefits – changing the treatment of fringe benefits under the income tests for family assistance and youth income support payments and for other related purposes. These proposed changes are also relevant for a number of income tax provisions. The meaning of “adjusted fringe benefits total” would be modified so that the gross rather than adjusted net value of reportable fringe benefits was used, except in relation to fringe benefits received by individuals working for public benevolent institutions, health promotion charities and some hospitals and public ambulance services. The changes would apply from the first 1 January or 1 July to occur after the day the Bill receives the Royal Assent.
• Indexation of private health insurance thresholds – pausing the income thresholds that determine the tiers for the Medicare Levy Surcharge (MLS) and the Australian Government Rebate (the Rebate) on private health insurance at the 2014–2015 rates until 2020–2021. This proposal was announced in the 2016–2017 Federal Budget.
• Indexation of family tax benefit and parental leave thresholds – making amendments to the family assistance indexation provisions to maintain the higher income free area for family tax benefit (FTB) Part A and the primary earner income limit for FTB Part B for a further three years. Under the current law, indexation of these amounts is paused until and including 1 July 2016. These amendments ensure that indexation does not occur on 1 July of 2017, 2018 and 2019. Similarly, amendments are proposed to ensure that the paid parental leave income limit is not indexed for a further three years, until 1 July 2020. These changes would apply from the date the Bill receives Royal Assent.
• Pension means testing for aged care residents – introducing the 2015–2016 MYEFO measure aligning the pension means testing arrangements with residential aged care arrangements. Key points include the following:
• The changes would amend the social security and veterans’ entitlements legislation to remove the pension income and assets test exemptions that are currently available to pensioners in aged care who rent out their former home and pay their aged care accommodation costs by periodic payments.
• The removal of the income test exemption is proposed to ensure that net rental income earned on the former principal residence of new entrants into residential aged care would be treated the same way under the pension income test as under the aged care means test, regardless of how the resident chooses to pay their aged care accommodation costs.
• The current indefinite assets test exemption of the former principal residence from the pension assets test, where the property is rented and aged care accommodation costs are paid on a periodic basis, would also be removed. A person who enters a residential or flexible aged care service after the commencement of changes could still benefit from provisions in the Social Security Act 1991 and Veterans’ Entitlements Act 1986 that treat a person’s former residence as their principal home for a period of up to two years from the day on which the person enters care (unless the home is occupied by their partner, in which case it continues to be exempt).
• The changes would only apply to pensioners who enter aged care on or after the commencement of the amendments. Existing aged care residents and those who entered aged care before the commencement date would be protected from the amendments. The changes would commence from the first 1 January or 1 July to occur after the day the Bill receives the Royal Assent.
• Minimum repayment income for HELP debts – establishing a new minimum repayment threshold for HELP debts of 2% when a person’s income reaches $51,957 in the 2018–2019 income year.
• Indexation of higher education support amounts – changing the index for amounts that are indexed annually under the Higher Education Support Act 2003, from the Higher Education Grants Index (HEGI) to the Consumer Price Index (CPI), with effect from 1 January 2018. The proposal was announced in the 2016–2017 Federal Budget.
• Removal of HECS-HELP benefit – discontinuing the HECS-HELP benefit from 1 July 2017. The proposal was announced in the 2016–2017 Federal Budget.
• Job commitment bonus – giving effect to the “cessation of the job commitment bonus” proposal announced in the 2016–2017 Federal Budget.
• Interest charge on debts of ex-welfare payment recipients – introducing the legislative amendments required for the 2015–2016 MYEFO proposal to apply a general interest charge to the debts of ex-recipients of social security and family assistance payments. The interest charge would apply to social security, family assistance (including child care), paid parental leave and student assistance debts. The rate of the proposed interest charge (approximately 9%) would be based on the 90-day Bank Accepted Bill rate (approximately 2%), plus an additional 7%, as is already applied by the ATO under the Taxation Administration Act 1953. The charge would apply from 1 January 2017.
• Debt recovery for welfare payment integrity – introducing the legislative amendments required for the 2015–2016 MYEFO proposal to expand debt recovery for enhanced welfare payment integrity. The changes would allow departure prohibition orders (DPOs) to be made to prevent targeted debtors from leaving the country. DPOs would be used for debtors who persistently fail to enter into acceptable repayment arrangements. The changes would also remove the six-year limitation on recovery of welfare debts. The amendments would apply from the later of 1 January 2017 and the day after the Bill receives Royal Assent.
• Parental leave payments – introducing the amendments required for the 2015–2016 MYEFO proposal to apply consistent treatment of Commonwealth parental leave payments for income support assessment. The changes would amend the social security and veterans’ entitlements legislation to ensure Commonwealth parental leave payments and dad and partner pay payments under the Paid Parental Leave Act 2010 would be included in the income test for Commonwealth income support payments. The changes would commence on the first 1 January, 1 April, 1 July or 1 October that occurs after the day the Bill receives Royal Assent.
• Carer allowance – aligning carer allowance and carer payment start day provisions by removing provisions that apply to backdate a person’s start day in relation to payment of carer allowance in certain circumstances. The general start day rules under Pt 2 of Sch 2 to the Social Security Administration Act 1999 would apply to determine the date of effect of a decision to grant carer allowance. The changes would commence on the later of 1 January 2017 and the day after the Bill receives the Royal Assent.
• Employment income – removing the exemption from the income test for FTB Part A recipients and the exemption from the parental income test for dependent young people receiving Youth Allowance and ABSTUDY living allowance if the parent is receiving either a social security pension or social security benefit and the fortnightly rate of pension or benefit is reduced to nil because of employment income (either wholly or partly). The change would commence on 1 July 2018.
• Other changes proposed in the Bill relate to the following:
• abolishing the National Health Performance Authority;
• aged care – creating civil penalties for approved providers that do not make required notifications;
• removing the family member exemption from the newly arrived resident’s waiting period;
• repealing student start-up scholarships; and
• creating a single appeal path under the Military Rehabilitation and Compensation Act 2004.

Watch for amendments

At the time of writing, the Bill had passed the House of Representatives with 19 Government amendments. The Government amendments to the Bill include:

• adding a new schedule which provides an income limit of $80,000 on payment of the FTB Part A supplement;
• removing proposed amendments that would have stopped relevant social security payments to individuals undergoing psychiatric confinement because of serious offences;
• removing the Energy Supplement only for new recipients of FTB Part A, FTB Part B and the Commonwealth Seniors Health Card;
• restoring funding to the Australian Renewable Energy Agency (ARENA) of $800 million over five years to 2021–2022; and
• removing proposed amendments to create a Child and Adult Public Dental Scheme.

Source: Budget Savings (Omnibus) Bill 2016, before the Senate at as at 14 September 2016, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5707%20Recstruct%3Abillhome.

Take care with work-related deduction claims, says ATO

The ATO has reminded individuals to make sure they get their deductions right this tax time. Assistant Commissioner Graham Whyte said the ATO has seen “claims for car expenses where logbooks have been made up and claims for self-education expenses where invoices were supplied for conferences that the taxpayer never attended”. While noting that most tax agents do the right thing, Mr Whyte said “sometimes the ATO identifies tax agents offering special deals, inflating claims to generate larger refunds”.

Mr Whyte said that in 2014–2015 the ATO conducted around 450,000 reviews and audits of individual taxpayers, leading to revenue adjustments of over $1.1 billion in income tax. Mr Whyte said “every tax return is scrutinized” and if a red flag is raised and the claims seem unusual, the ATO will check them with the claimant’s employer. In addition, Mr Whyte reminded taxpayers that this year the ATO has introduced “real-time checks of deductions for tax returns completed online”.

The ATO has prepared the following case studies.

Case study 1

A railway guard claimed $3,700 in work-related car expenses for travel between his home and workplace. He indicated that this expense related to carrying bulky tools, including large instruction manuals and safety equipment. The employer advised the equipment could be securely stored on their premises. The taxpayer’s car expense claims were disallowed because the equipment could be stored at work and carrying them was his personal choice, not a requirement of his employer.

Case study 2

A wine expert working at a high end restaurant took annual leave and went to Europe for a holiday. He claimed thousands of dollars in airfares, car expenses, accommodation and various tour expenses, based on the fact that he’d visited some wineries. He also claimed over $9,000 for cases of wine. All his deductions were disallowed when the employer confirmed the claims were private in nature and not related to earning his income.

Case study 3

A medical professional made a claim for attending a conference in America and provided an invoice for the expense. When the ATO checked, it found that the taxpayer was still in Australia at the time of the conference. The claims were disallowed and the taxpayer received a substantial penalty.

Case study 4

A taxpayer claimed deductions for car expenses using the logbook method. The ATO found the taxpayer had recorded kilometres in the logbook on days where there was no record of the car travelling on the toll roads, and further enquiries identified that the taxpayer was out of the country. The claims were disallowed.

Case study 5

A taxpayer claimed self-education expenses for the cost of leasing a residential property, which was not his main residence. The taxpayer claimed he had to incur the expense of renting the property as he “required peace and quiet for uninterrupted study which he could not have in his own home”. This was not deductible.

In addition to the rental expenses, the cost of a storage facility was claimed where “the taxpayer needed to store his books and study materials”. The taxpayer claimed he needed this because of the huge amount of books and study material associated with his course and had no space in his private or rented residence where these could be housed. This was not deductible.

The cost of renting the property was around $57,000, with additional expense of $7,500 for the storage facility. The actual cost of the study program he attended that year was only $1,200.

Source: ATO media release, “ATO exposes dodgy deductions”, 16 August 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-exposes-dodgy-deductions/.

ATO eye on SMSFs and income arrangements

The ATO is reviewing arrangements where individuals (at or approaching retirement age) purport to divert personal services income (PSI) to a self managed superannuation fund (SMSF) to minimise or avoid income tax obligations, as described in Taxpayer Alert TA 2016/6 Diverting personal services income to self managed superannuation funds.

Taxpayers who have entered into a similar arrangement are encourgaed to contact the ATO so it can help resolve any issues in a timely manner and minimise the impact on the individual and the fund. Where individuals and trustees come forward to work with the ATO on resolving issues, it anticipates that in most cases the PSI distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate.

The ATO will address issues affecting SMSFs on a case-by-case basis, but it will take individuals’ cooperation into account when determining final outcomes. Individuals and trustees who are not currently subject to ATO compliance action and who come forward before 31 January 2017 will have administrative penalties remitted in full. However, shortfall interest charges will still apply.

The ATO can be contacted by email at: SMSFStrategicCampaigns@ato.gov.au (with “TA 2016/6” in the subject line).

 

Taxpayer Alert 2016/6

On 29 April 2016, the ATO issued Taxpayer Alert TA 2016/6 to warn individuals about arrangements purporting to divert PSI to an SMSF to avoid paying tax at personal marginal rates.

Arrangements of concern

The ATO said it is reviewing arrangements whereby individuals (typically SMSF members at or approaching retirement age) perform services for a client but do not directly receive any (or adequate) consideration for the services. Rather, the client remits the consideration for the services to a company, trust or other non-individual entity (including an unrelated third party). That entity then distributes the income to the individual’s SMSF, purportedly as a return on an investment in the entity. The SMSF treats the income as subject to concessional tax (15%) or as exempt current pension income.

Other variations of the arrangement include the income being remitted by the entity to the SMSF via a written or an oral agreement between the entity and SMSF, instead of as a return on an investment. The SMSF may also record the income from multiple entities or through a chain of entities. Alternatively, the entity may distribute the income to more than one SMSF of which the individual or associates are members.

ATO’s view

The Commissioner considers that the arrangements may be ineffective at alienating income such that it remains the assessable income of the individual under s 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or PSI. The ATO also warns that Pt IVA may apply.

The amounts received by the SMSF may also constitute non-arm’s length income of the SMSF under s 295-550 of ITAA 1997, and therefore be taxable at 47%. Other compliance issues include:

• that the amounts received by the SMSF may be a contribution and generate excess contributions tax consequences for the individual; and
• superannuation regulatory issues – the arrangement may breach the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). Such breaches of the SIS Act may lead to the SMSF being made non-complying or to the disqualification of an individual as a trustee.

Source: ATO, Taxpayer Alert TA 2016/6, 29 April 2016, https://www.ato.gov.au/law/view/document?DocID=TPA/TA20166/NAT/ATO/00001.

Social welfare recipients data-matching program

The Department of Human Services (DHS) has released details of a data-matching program which will enable it to match income data it collects from social welfare recipients with tax return-related data reported to the ATO.

The data matching will assist DHS to identify social welfare recipients who may not have disclosed income and assets to it. In addition, data received from the ATO will be electronically matched with certain departmental records to identify noncompliance with income or other reporting obligations.

DHS expects to match each of the approximately seven million unique records held in its Centrelink database. Based on non-compliance criteria, DHS anticipates it will examine approximately 20,000 records in the first phase of the project.

The category of people who may be affected by the data-matching includes welfare recipients who have lodged a tax return with the ATO during the period 2011 to 2014.

DHS says the information will be used to:

• verify the information reported to it by social welfare recipients;
• identify social welfare recipients who may not have disclosed income to DHS;
• match and validate the tax return and the PAYG datasets;
• identify discrepancies in the income declared to DHS by social welfare recipients; and
• consider whether it will initiate compliance action in relation to particular social welfare recipients (including debt recovery or a referral to the Commonwealth Director of Public Prosecutions).

Source: Commonwealth Gazette, Notice of data matching project between Department of Human Services and Australian Taxation Office, 19 August 2016, https://www.legislation.gov.au/Details/C2016G01112

Share economy participants reminded of tax obligations

The ATO has reminded tax professionals to consider clients who may be involved in the share economy. Some individuals may not be aware they have tax obligations when earning income through the sharing economy. The types of goods or services taxpayers provide, and how much they provide, will determine what they need to do for tax. Taxpayers may be involved in renting out part or all of a house, providing ride-sourcing services or providing other goods or services.

Source: ATO, “Sharing economy reminder for your clients”, 9 August 2016, https://www.ato.gov.au/Tax-professionals/Newsroom/Income-tax/Sharing-economy-reminder-for-your-clients/.

The ATO has previously released information on view of the tax obligations of people who provide services in the sharing economy. The ATO’s view is that the tax laws apply to activities conducted in the sharing economy in the same way as they apply to activities conducted in a more conventional manner.

Some key points:

• Income tax obligations for providers: People who earn assessable income from providing sharing economy services need to keep records of income from that activity and any allowable deductions, which may need to be apportioned for private use.
• GST implications for providers: Where a person is already registered for GST for another purpose, the activities in their sharing economy enterprise must be included with their other activities. People providing “taxi travel” must be registered for GST regardless of their turnover amount. People conducting other activities need to register for GST if the annual turnover from their sharing economy enterprise is $75,000 or more.
• Taxi travel services through ride-sourcing: The ATO has previously released guidance for people providing taxi travel services through ride-sourcing (also known as ride-sharing or ride-hailing). This is available on the ATO website at: https://www.ato.gov.au/Business/GST/In-detail/Managing-GST-in-your-business/General-guides/Providing-taxi-travel-services-through-ride-sourcing-and-your-tax-obligations/. The ATO has confirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The existing tax law applies, and so drivers are required to register for GST regardless of their turnover. Other key points:
• GST must be calculated on the full fare, not the net amount received after deducting fees and commissions. For example, if a passenger pays $55 and the facilitator pays $44 (after deducting an $11 commission), the GST payable is $5 (not $4).
• GST credits can be claimed on business purchases, but must be apportioned between business and private use. For example, if a new car is bought for for $33,000 (including $3,000 GST), and the usage is 10% ride-sourcing and 90% private, the GST credit will be $300.
• For fares over $82.50 (including GST), drivers must provide their passengers with a tax invoice if they request one.
• The ATO previously allowed drivers until 1 August 2015 to obtain an ABN and register for GST. The ATO does not intend to apply compliance resources regarding drivers’ GST obligations before 1 August 2015, except if there is evidence of fraud or other significant matters.
• Renting out part of all of a home: The ATO has also previously released information for people renting out part or all of their home (available on the ATO website at: https://www.ato.gov.au/general/property/your-home/renting-out-part-or-all-of-your-home/). The rent money received is generally regarded as assessable income. Taxpayers must declare their rental income in their income tax returns; however, they can claim deductions for the associated expenses, such as part or all of the interest on a home loan. These people may not be entitled to the full CGT main residence exemption. The ATO also notes that GST does not apply to residential rents, meaning GST credits cannot be claimed for associated costs.

Itinerant worker claim denied, so travel deductions refused

A taxpayer has been unsuccessful before the AAT in relation to deduction claims for work-related car expenses and work-related travel expenses (meals and accommodation) for the 2011-12 income tax year.

Background

The taxpayer worked a variety of short-term jobs for various employers at different New South Wales country towns over the relevant year (eg bunker hand at Bellata and West Wyalong, chemical mixer at Moree, mixer/driver at Parkes and Moree, forklift driver at Ashley). The taxpayer and his wife had a house in Springfield; however, they travelled to the various work locations taking two vehicles (a car and a motorhome) and, except at Parkes, the taxpayer and his wife stayed in the motorhome at various caravan parks. The taxpayer claimed deductions for the two vehicles using the cents per kilometre method. The amounts disputed included $5,325 claimed for car expenses and $32,543 claimed for travel expenses (comprising $26,195 for meals and $6,348 for accommodation).

The taxpayer contended he was entitled to the deductions under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis that he was an itinerant worker and that he incurred the expenses in gaining or producing his assessable income. He also argued he was entitled to rely on Taxation Ruling TR 95/34 Income tax: employees carrying out itinerant work – deductions, allowances and reimbursements for transport expenses, and that, by virtue of s 357-60 of Sch 1 to the Taxation Administration Act 1953 (TAA), the Commissioner was bound to apply the ruling if the law turns out to be less favourable to him. That is, the taxpayer claimed to be protected from any adverse fiscal consequences because of the public ruling issued by the Commissioner.

Decision

The AAT affirmed the Commissioner’s decision that the taxpayer was not entitled to the deduction claims. The AAT found that the taxpayer was not an itinerant worker and his reliance on the Commissioner’s public tax ruling was “misplaced”.

In finding that the taxpayer was not an itinerant worker, the AAT noted that his duties did not involve him travelling from workplace to workplace, and that he was not required to travel to the different locations in the course of his employment; that is, he did not have a “web” of workplaces. The AAT regarded the employment arrangements at each location to be separate and discrete, noting that the taxpayer returned home at the end of each employment arrangement. It said each workplace could be regarded as a regular or fixed place of employment, even if there was some uncertainty about the length of time that he would be employed at each location because of the seasonal nature of the work.

The AAT held that the claimed expenses were not incurred in gaining or producing the taxpayer’s assessable income, but were private and domestic in nature. In addition, the AAT held the taxpayer was not entitled to claim the car expenses using the cents per kilometre method, as he was not the owner of the vehicles for the purposes of s 28-12(1) of ITAA 1997. He also did not clarify the quantum of his claim, namely, the number of kilometres travelled in his motorhome. The AAT rejected the taxpayer’s secondary argument that he was entitled to work-related travel expenses claims under TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses, noting that the ruling had no application. The AAT was of the view that the taxpayer chose to travel from Springfield to live in towns near his work locations. It also noted that none of his employers demanded that he live away from his usual place of residence, and he was not paid an allowance or reimbursement for any expense to live away from home.

In relation to the public ruling protection claimed by the taxpayer, the AAT noted his reliance on the hypothetical examples of Valerie the fruit picker and Ian the shearer contained in TR 95/34 (at paras 44 and 55). The AAT held the taxpayer was not entitled to public ruling protection as his factual circumstances were different to those in the hypothetical examples. It said Valerie had a “web” of workplaces and Ian’s travel was fundamental to his work. There was also a potential issue that the examples were under the “Explanations” heading and not the “Ruling” heading within TR 95/34; however, as no party raised the issue and because the AAT found that the examples did not apply to the taxpayer, the AAT decided not to address that issue.

Re Hill and FCT [2016] AATA 514, 21 July 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/514.html.

 

 

ATO flags retirement planning schemes of concern

The ATO has launched the Super Scheme Smart initiative (see: https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/) to inform people about retirement planning schemes that are of increasing concern. According to the ATO, individuals approaching retirement are the most at risk of becoming involved in problematic schemes that are “too good to be true”. This target category includes people aged 50 or over looking to put significant amounts of money into their retirement, particularly self managed superannuation fund (SMSF) trustees, self-funded retirees, small business owners, company directors and individuals involved in property investment.

While retirement planning schemes can vary, people should be aware of some common features that problematic schemes share. The ATO says the schemes of concern generally:

• are artificially contrived and complex, and usually connected with an SMSF;
• involve a lot of paper shuffling;
• are designed to leave the taxpayer paying minimal or no tax, or even receiving a tax refund; and/or
• aim to give a present-day benefit.

The ATO is concerned about the following scheme types.

Dividend stripping

In this type of arrangement, the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose is to strip profits from the company in a tax-free form (refer to Taxpayer Alert TA 2015/1).

In November 2015, the ATO made an offer to SMSF trustees who may have implemented a dividend stripping arrangement substantially similar to the one described in TA 2015/1. SMSF trustees were invited to make voluntary disclosures to correct the tax position resulting from such arrangements. The offer was opened in November 2015 and ended on 15 February 2016. In May 2016, the ATO said that while it was “happy with the response” it had received to date, it believed there may be many more SMSFs that have similar arrangements in place. Going forward, the ATO said it did not believe “trustees should be harshly punished when they think they have done the right thing”. It encouraged trustees who are uncertain to engage with the ATO and, if necessary, seek an “early resolution to any dispute”. Consideration will be given to reduced penalties in accordance with the ATO’s remission guidelines.

Non-arm’s length limited recourse borrowing arrangements

In this type of arrangement, an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s length dealing. For more information, see Practical Compliance Guide PCG 2016/5, which sets out the Commissioner’s “safe habour terms” for LRBAs. If an LRBA is structured in accordance with PCG 2016/5, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the non-arm’s length income (NALI) rules (47% tax) will not apply to the income generated from the LRBA asset.

On 30 May 2016, the ATO announced that it has extended until 31 January 2017 the deadline for SMSF trustees to ensure that any related-party LRBAs are on terms consistent with an arm’s length dealing. It had previously announced a grace period whereby it would not select SMSFs for review for the 2014–2015 or earlier years where arm’s length terms for LRBAs were implemented by 30 June 2016 (or LRBAs were brought to an end before that date). The deadline extension to 31 January 2017 follows the release of PCG 2016/5.

Diverting personal services income

In this type of arrangement, an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF, where it is concessionally taxed or treated as exempt from tax (refer to Taxpayer Alert TA 2016/6).

Taxpayers who have entered into a similar arrangement to that described in TA 2016/6 are encouraged to contact the ATO so it can help resolve any issues in a timely manner and minimise the negative impact on the individual and the fund. Individuals and trustees who are not currently subject to ATO compliance action, and who come forward before 31 January 2017, will have administrative penalties remitted in full. However, shortfall interest charges still apply.

ATO’s Super Scheme Smart initiative

The ATO has said the schemes of concern “are designed by their promoters solely to help you avoid paying tax by encouraging you to channel money inappropriately through an SMSF”. The ATO’s Super Scheme Smart initiative provides information for individuals and intermediaries, including Q&As, case studies and a PowerPoint presentation.

“While the schemes we are targeting under Super Scheme Smart may be complex, our message is not – if it looks too good to be true, it probably is”, said ATO Deputy Commissioner Michael Cranston.

Taxpayers who may have been caught up in a scheme can phone the ATO on 1800 177 006 or email: reportataxscheme@ato.gov.au for further information.

Source: ATO media release, Pre-retirees warned: avoid ‘too good to be true’ tax schemes, 28 July 2016, https://www.ato.gov.au/Media-centre/Media-releases/Pre-retirees-warned–avoid–too-good-to-be-true–tax-schemes/.

Deductibility for gifts to clients and airport lounge membership fees

On 27 July 2016, the ATO issued two Taxation Determinations. They apply for income years commencing both before and after their date of issue.

Deductibility of gifts to clients

Taxation Determination TD 2016/14 states that a taxpayer that carries on a business is entitled to a deduction under s 8-1 of ITAA 1997 for an outgoing incurred on a gift made to a former or current client, if the gift is made for the purpose of producing future assessable income. The ATO notes that a gift is not deductible if the outgoing is capital, relates to gaining non-assessable, non-exempt income, or is non-deductible under another provision.

The ATO provided the following examples.

Example 1

Sally is carrying on a renovation business. She gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months.

Sally expects the gift will either generate future business from the client or make them more inclined to refer others to her business. Although Sally got on well with her client, the gift was not made for personal reasons and is not of a private or domestic character.

The outgoing Sally incurred for the champagne is not of a capital nature.

Sally is entitled to a deduction under s 8-1 of ITAA 1997.

Example 2

Bernard is carrying on a business of selling garden statues. Bernard sells a statue to his brother for $200. Subsequently, Bernard gifts a bottle of champagne to his brother worth $170. Apart from his transaction, Bernard provides gifts only to clients who have spent over $2,500 during the last year.

The gift has been made for personal reasons, and is of a private or domestic character.

Bernard is not entitled to a deduction under ss 8-1 or 40-880 of ITAA 1997.

Deductibility of airport lounge membership fees for employers

Taxation Determination TD 2016/15 states that an employer taxpayer is entitled to a deduction under s 8-1 of ITAA 1997 for annual fees incurred on an airport lounge membership for use by its employees, where that membership is provided because of the employment relationship. The determination notes that the fees will not be deductible is if they are related to gaining or producing exempt income or non-assessable, non-exempt income. The determination indicates that the fees will be deductible in full even if there is substantial private use of the lounge membership by employees (eg while they are on holiday).

Changes to $500,000 lifetime super cap confirmed

The Federal Treasurer has confirmed there will be some changes to the Government’s May 2016 Budget proposal for a lifetime cap of $500,000 on non-concessional superannuation contributions. A number of exemptions will be available.

Scott Morrison said in a Radio 2GB interview on on 8 August 2016 that he had previously spoken about the changes and that draft legislation will be released soon, containing a number of changes to the original proposal. He said if someone gets a pay-out “as a result of an accident or something like that, then that is exempted from the $500,000 cap”. If someone had entered into a contract before Budget night to settle on a property asset out of their SMSF and they are using after-tax contributions to settle that contract, “that won’t be included” in the $500,000 cap either. Mr Morrison also said there would be “other measures that will be in the exposure draft legislation […] coming out shortly”.

The Treasurer effectively ruled out lifting the cap $500,000 cap, saying “the only people that would benefit are people who […] already on average have $2 million in their superannuation scheme, have already put $700,000 in after tax contributions […] Now, I don’t know too many people out there […] who are sitting there with a bag of $500,000 which they want to put in their superannuation fund. [… T]here are about 42,000 of them in the country and that is less than 1% of the superannuants in this country. [T]hey are on higher incomes, have higher balances, have already benefited significantly from the generous tax contribution and other concessions that exist from superannuation and the argument they are making is – I want more. I want to put more in so I don’t have to pay as much tax as someone else is on those earnings. So, look, I think [the cap] is a fair measure and I stand by the measure.”

Source: Radio 2GB interview transcript, 8 August 2016, http://sjm.ministers.treasury.gov.au/transcript/100-2016/.

The $500,000 lifetime super cap as announced on Budget night

As part of the 2016 Federal Budget, the Government introduced a lifetime non-concessional contributions cap $500,000 effective from 7.30 pm (AEST) on 3 May 2016 (Budget night). The lifetime non-concessional cap (indexed) will replace the existing annual non-concessional contributions cap of up to $180,000 per year (or $540,000 every three years under the bring-forward rule for individuals aged under 65).

Non-concessional contributions include contributions not included in the assessable income of the receiving superannuation fund, such as non-deductible personal contributions made from the member’s after-tax income (formerly known as undeducted contributions).

The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before the cap’s commencement cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after 7.30 pm AEST on 3 May 2016 will need to be removed or subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).

The Government believes this measure will provide people with flexibility regarding when they choose to contribute to their superannuation. It will apply for all Australians up to age 74. It is estimated to mean a gain to revenue of $550 million over the forward estimates period.

Example

Anne, aged 61, is planning for her retirement. Five years ago, Anne received an inheritance of $200,000 which she put into her superannuation. Anne now intends to sell her home and buy a smaller property. She is hoping to put the proceeds into her superannuation. Anne can contribute up to $300,000 more into her superannuation before she reaches the non-concessional cap.

Anne’s non-concessional contributions are in addition to the compulsory superannuation payments her employer makes and the additional salary-sacrificed contributions she elects to make from her salary.

Defined benefit schemes

After-tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefit fund exceeds the lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.

The amount that can be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007. Removal of contributions made to a defined benefit account will not be required. The Government will consult to ensure broadly commensurate and equitable treatment of individuals for whom no amount of post-1 July 2007 non-concessional contributions are available for removal. See also Budget Superannuation Fact Sheet 5 (http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/05-SFS-Defined_benefit_funds.pdf/).

Source: Budget Paper No 2, p. 27, http://www.budget.gov.au/2016-17/content/bp2/html/; Treasurer’s press release, 3 May 2016, http://sjm.ministers.treasury.gov.au/media-release/053-2016/; Budget Superannuation Fact Sheet 4, http://www.budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/04-SFS-NClifetime_cap.pdf/.

Home exempt from land tax for “world-traveller”

The Victorian Civil and Administrative Tribunal (VCAT) has set aside land tax assessments for the 2011 to 2015 land tax years issued to a taxpayer after finding that the principal place of residence (PPR) land tax exemption applied to his circumstances.

Background

In 2003, the taxpayer was left a property in Shoreham, Victoria in his mother’s will. After moving into that property, the taxpayer continued his interest of overseas travel, meeting and marrying his now wife, who continues to live in Canada. Broadly, for each tax year in question, the taxpayer spent a couple of months in Australia at the Shoreham property, with the balance spent mostly in Canada and other overseas destinations. The taxpayer submitted that he considered the Shoreham property his “home”, where he kept “all his personal treasures”, among other things. He also noted “significant and communal family ties” in Victoria (including his three children and eight grandchildren in Melbourne) and “financial ties” to Australia.

Decision

VCAT was satisfied, based on the evidence before it, that for each of the relevant tax years the taxpayer “always had the intention of returning to his home” in Australia and that the taxpayer’s absences from the property were “temporary” within the meaning of the legislation.

In this regard, the Tribunal said, “In this day and age, people are far more mobile than they have been previously and it is not unreasonable that someone should have a base at a particular place where they spent two or three months per year. It is clear that if a person has such a base as the [taxpayer] does in this case and he is away from that base but always intending to return as I find the [taxpayer] did, then it can be described that the [taxpayer’s] absence from the property was ‘temporary’ within the meaning of the legislation.”

VCAT was also satisfied that when the taxpayer returned home he had the intention to resume “occupation” of the property. Accordingly, it concluded that the taxpayer had made out the PPR exemption pursuant to s 54 and s 56(1)(a) and (b) of the Land Tax Act 2005 (Vic).

Ward v Commissioner of State Revenue [2016] VCAT 1307, 4 August 2016, http://www.austlii.edu.au/au/cases/vic/VCAT/2016/1307.html.

CURRENCY:

This issue of Client Alert takes into account all developments up to and including 13 July 2016.

ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses, updated for the 2013–2014 financial year. These benchmarks are a guide to help businesses compare their performance against similar businesses in the same industry. The benchmarks can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

The benchmarks:

• are calculated from income tax returns and activity statements from over 1.3 million small businesses and, according to the ATO, are verified as statistically valid by an independent organisation;
• account for businesses with different turnover ranges (up to $15 million) across more than 100 industries; and
• are published as a range to recognise the variations that occur between businesses due to factors such as location and business circumstances.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind. “If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

According to the ATO, if a business is reporting above the benchmarks, it may mean the expenses of the business are high relative to its sales. This may indicate that:

• there is high wastage;
• business competitors may be able to source inputs at lower cost;
• the volume of sales is too low (for rent and possibly labour);
• the mark-up is lower than business competitors’;
• not all sales have been recorded; and/or
• internal cash controls may need to be examined.

If a business is reporting below the benchmarks, it may mean the expenses of the business are low relative to its sales. This may indicate that:

• expenses may be recorded under the wrong label;
• some expenses may have not been recorded;
• the mark-up is higher than business competitors’; and/or
• there is less wastage.

 

 

When the ATO sees that a business is outside the key ratio for the industry, it may indicate something is unusual, prompting the ATO to obtain further information from the business, its suppliers or its customers.

The benchmarks are available on the ATO website at https://www.ato.gov.au/business/small-business-benchmarks/

Source: ATO media release, “ATO benchmarks helping build small business”, 24 June 2016, https://www.ato.gov.au/Media-centre/Articles/ATO-benchmarks-helping-build-small-business/.

ATO benchmarks in action

If a business doesn’t have evidence to support its return, the ATO may use the benchmarks to determine income that has not been reported. For each industry, the ATO will highlight the benchmark it will use to predict income or turnover.

The following recent Administrative Appeal Tribunal (AAT) case highlights the ATO’s use of industry benchmarks.

Income tax and GST and associated penalties broadly affirmed

The AAT has affirmed the Commissioner’s income tax and associated penalty decisions imposed on a taxpayer. However, it also decided to vary the GST and associated penalty decisions to reflect a reduced GST liability, as conceded by the Commissioner before the hearing.

Background

The taxpayer operated a milk bar and contended it also operated a business providing homestay accommodation for foreign students. Following an ATO audit, the Commissioner was not satisfied that the taxpayer had reported its true taxable income for the 2010–2011 and 2011–2012 income years, nor that the taxpayer had reported its true GST net amounts for the quarterly periods from 1 April 2010 to 30 June 2012. The evidence of sales and purchases manually kept in books and cash register roll totals did not reconcile to the taxable amounts reported, and were less than the amounts the Commissioner contended could be expected if industry norms or expectations were applied to the purchases reported.

In this case, the Commissioner applied the tobacco retailing industry benchmarking figures to determine the taxpayer’s business income. The Commissioner did not accept that the taxpayer operated a homestay business and excluded all reported income and expenses relating to homestay activities. The Commissioner also disallowed expenses relating to two cars, and purchases that were not supported by a valid tax invoice. The amounts in dispute before the AAT totalled some $27,000 (primary tax and penalties).

Decision

The AAT held the taxpayer had failed to discharge the onus of proving that the income tax and GST assessments and amended assessments were excessive. The AAT was of the view there was a lack of evidence to prove otherwise. It said, “The combination of the accounts book, invoices led in evidence, inconsistent cash register rolls and absence of commitment to amounts of taxable income and supplies, or particular sources from which these amounts can be determined with confidence, make determination of the [taxpayer’s] taxable income and supplies little, if at all, more than guesswork. This being the case, it is impossible to say by what amount the assessments are excessive.”

The AAT also affirmed the penalty imposed for failure to take reasonable care. Among other things, the AAT heard the taxpayer’s evidence that taxable income amounts were made up as it was told (allegedly) by its tax agent that the ATO did not like to see losses, so that would bring unwanted attention. In affirming the penalty decisions, the AAT said, “In circumstances where a fabricated income figure is used in relevant tax filings it is difficult to see how reasonable care could be demonstrated. Further, there being no evidence of what the tax agent did or did not do makes a finding that the tax agent took reasonable care impossible to make.” The AAT also concluded that there were no grounds for remission.

In making its decisions, the AAT noted the outcomes of the case should not be taken as acceptance of whether the taxpayer did (or did not) carry on a homestay business.

Accordingly, the AAT affirmed the income tax and associated penalty decisions noting the Commissioner’s “concession” to vary the GST and associated penalty decisions to allow further input tax credits in respect of a small range of acquisitions.

Re H J International Trade Group Pty Ltd and FCT [2016] AATA 450, http://www.austlii.edu.au/au/cases/cth/AATA/2016/450.html.

 

 

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service.

Each year, an approved SMSF auditor must audit the fund. The auditor is required to report certain regulatory contraventions to the ATO via the auditor/actuary contravention report (ACR). The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees and professionals to engage early with the ATO in relation to unrectified contraventions. SMSF trustees, SMSF auditors and SMSF professionals (such as tax agents, accountants, financial planners, lawyers and fund administrators acting on behalf of SMSF trustees) can use the service.

The ATO says the new disclosure service should only be used when it is clear there has been a contravention of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or regulations that remains unrectified at the time the SMSF auditor reports it to the ATO. Before using this service, the ATO says, trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure.

The SMSF auditor is still required to report regulatory contraventions via an ACR. However, the ATO says it will not commence an audit based on an ACR if the issue has been resolved through a voluntary disclosure, unless it receives additional information that requires further investigation.

The ATO warns that SMSFs should not use this service if they have already received notification of an ATO audit or review in relation to the contravention. The ATO also notes that where disclosures are made about contraventions that occurred in previous years, any outstanding SMSF annual returns must be lodged.

Source: ATO, SMSF early engagement and voluntary disclosure service, 26 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/SMSF-early-engagement-and-voluntary-disclosure-service/.

ATO case studies

The ATO has provided the following case studies to illustrate the benefits of its early engagement and voluntary disclosure service.

Example 1: overdrawn bank account

The Stephens Superannuation Fund bank account was overdrawn twice during the 2014–2015 financial year. After rectifying the breach, the trustee engaged an SMSF auditor and disclosed the breaches to ATO via the SMSF early engagement and voluntary disclosure process.

The ATO advised the trustees that, given that the contraventions were rectified, there was no need for them to use the service. By raising the breaches with their approved auditor they had discharged their reporting obligations. The trustees also put controls in place to prevent the fund bank account being overdrawn in the future.

Given it was a reportable contravention, the SMSF auditor lodged an ACR. As a result of the ACR, the ATO sent an education letter to the fund in relation to the breach.

Example 2: breach of LRBA rules

The approved auditor for trustees Emma and Jonas Klein identified a limited recourse borrowing arrangement (LRBA) breach in relation to the Klein Superannuation Fund for the 2014–2015 financial year.

The breach arose because the Klein Superannuation Fund entered into an LRBA that had not been structured correctly. A holding trust did not hold the property on trust for the fund trustees and the LRBA was with a non-related party. The trustees made a voluntary disclosure of the breach and provided all relevant facts and supporting documentation. They also provided a proposed undertaking to rectify the contravention within six months.

The trustees actively engaged with the ATO throughout the resolution process and lodged the outstanding returns. The Commisisoner accepted their undertaking to rectify the contravention. The terms of the enforceable undertaking were that the property was to be transferred into the holding trust within six months. SMSF administrative penalties were imposed and remitted in full, given that the trustees made a voluntary disclosure.

Example 3: money lost in investment scam

The trustees made an SMSF voluntary disclosure that the Okafor Superannuation Fund had not lodged annual returns for four years because all its money was lost in an investment scam. The trustees made their disclosure prior to the notification of an ATO SMSF review or audit and provided all relevant facts and

 

 

supporting documentation, including bank statements. The trustees provided an undertaking to wind up the fund and not to act as trustees of another SMSF in the future.

The trustees actively engaged with the ATO throughout the process and the ATO verified the investment scam claims. The Commissioner accepted the undertaking and the SMSF was wound up.

Source: ATO, “Early engagement and voluntary disclosure”, 27 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-case-studies/Early-engagement-and-voluntary-disclosure/.

New tax governance guide for SMSFs

When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and super laws. The ATO has released a new tax governance guide for use by SMSFs. The ATO says it has been working with businesses, tax advisers and agents to design the guide and help private groups with tax governance.

The ATO says SMSF trustees and professionals can use this guide to develop an effective governance framework and identify ways to improve existing governance practices within their SMSFs.

Issues covered in the guide include:

• corporate governance and tax governance;
• starting your business;
• business expansion;
• funding and finance;
• philanthropy;
• succession planning;
• exiting a business;
• retirement planning, including SMSFs and CGT small business concessions; and
• estate planning.

Among other things, the guide says that SMSF trustees must ensure that their funds meet the definition of an SMSF at all times and remain complying. This includes meeting requirements for fund structure, members and trustees; and governing fund compliance with rules for contributions, investments and payment of benefits. Where an SMSF auditor or other adviser identifies issues with a fund’s compliance, trustees should take immediate steps to correct them, the ATO warned.

The fund’s financial statements and regulatory compliance need to be audited before the SMSF annual return is lodged. An audit is required even if no contributions or payments are made in the financial year. The ATO recommends that trustees ensure all documents are provided to the SMSF auditor with sufficient time for the audit to be completed within the legislated period.

The ATO encourages trustees to work closely with their SMSF advisers and auditors. The auditor will give the trustee a report on their SMSF’s regulatory compliance, including any contraventions. Any material contraventions must be reported by the auditor to the ATO. Trustees should also periodically verify that their SMSF satisfies the requirements of a regulated super fund, including requirements around contributions, investments and paying out benefits.

The ATO suggests that trustees formulate an exit strategy so they are prepared should the time come that they no longer want an SMSF and need to wind it up. Matters such as disposal of assets, paying out or rolling over benefits, arranging the final audit, lodging the final SMSF annual return, paying outstanding tax, closing bank accounts and cancelling ATO registrations should be considered.

Source: ATO, “SMSF governance”, 31 May 2016, https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Tax-governance/Retirement-planning/Self-managed-super-funds/.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the AAT in arguing that a commercial property it acquired and developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit – despite the fact that the AAT indicated the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the CGT 50% discount.

 

 

In coming to this conclusion, the AAT noted that even though the taxpayer’s property development business involved purchasing properties for resale at a profit, the business carried on by the taxpayer involved far more than this. A “wide survey and an exact scrutiny of the activities” of the taxpayer showed that over a 40-year period they involved everything from the acquisition, development and sale of residential properties to the acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income. As a result, the AAT rejected the Commissioner’s basic claim that the taxpayer was carrying on “a business of the acquisition, development and disposal of properties for a profit”.

Moreover, the AAT found that in relation to the “discrete” transaction in question (which it was required to consider for the purpose of determining the issue), all the evidence pointed to the fact that the taxpayer intended to develop the original vacant car park into commercial property to lease to government agencies, for which there was growing demand at the time. This evidence included:

• the uncontradicted evidence of the father and son controllers of the business (who historically had adopted the approach of individually assessing the best profitable use of a particular property and then putting the property to that use);
• contemporaneous bank records (which noted that the building was to be “retained on completion for investment”);
• that a 15-year lease agreement was originally entered into; and
• that the intention to eventually sell (despite the father’s original resistance and his historical preference to generate income by rental returns) was because the offer to sell “was simply too good”.

In this regard, the AAT also noted that as part of the sale deal, the purchaser offered the taxpayer the opportunity to acquire substitute investment commercial properties – and that the three properties subsequently acquired by the taxpayer as part of this arrangement were still owned by the taxpayer, almost nine years after the relevant transaction. In arriving at its decision, the AAT noted that it is always possible that the owner of an asset will sell it, “but to elevate that possibility into an intention to make a profit by selling the property is to draw a long bow indeed” – particularly in the circumstances of this case and given the nature of the transaction in question.

Accordingly, the AAT found that while the transaction by which the property was disposed of was not a transaction undertaken in the ordinary course of the taxpayer’s business activities, having regard to the overall wide scope of its business activities, in terms of examining the specific transaction and its “discrete” nature, nor was the property acquired for the “purpose of profit-making by sale”. As a result, the AAT concluded that the profit from its sale was to be accounted for as a capital gain and not revenue profit.

Re FLZY and FCT [2016] AATA 348, , 27 May 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/348.html.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before the AAT in seeking to have excess concessional contributions for the 2014 financial year disregarded or reallocated pursuant to s 291-465 of ITAA 1997.

Background

The taxpayer was a full-time employee in the Victorian Public Service and also worked a number of part-time, casual jobs with approximately four employers. As at 30 June 2014, he was 56 years of age and his concessional superannuation cap was $25,000. He salary sacrificed $100 per week of his full-time earnings into one super fund and salary sacrificed all of his casual earnings with another super fund. The taxpayer did not check his super fund balances.

In June 2015, the taxpayer received a notice of amended assessment for the 2013–2014 financial year that included excess concessional contributions of $11,055. The amended assessment detailed the increase of taxable income from $88,075 to $99,130, an excess concessional contributions tax offset of $1,658 and an excess concessional contributions charge of $250. The taxpayer had previously received a notice of assessment for 2012–2013 financial year detailing excess concessional contributions of $7,656 and excess concessional contributions tax of $2,411.

The taxpayer submitted that he worked additional casual jobs and salary sacrificed his super to provide for his retirement and for his family. He did not have the predictability of knowing what he would earn through his casual jobs, which depended on having shifts allocated. The taxpayer submitted that the rules were difficult to comprehend and he had made an inadvertent mistake. Had he been aware he was approaching his concessional super contribution cap, the taxpayer submitted that he would have stopped the salary sacrifice arrangements, and that his ultimate tax bill would have been the same, albeit the tax bill would have been met by PAYG deductions over time.

Decision

The AAT said, “In a system where there are limits on what can be contributed to a superannuation fund while retaining concessional treatment, to waive compliance in this case would effectively provide [the taxpayer] with an advantage in the form of being allowed to contribute extra to his superannuation funds, and to enjoy the benefit of that without any cost associated with the excess, to the advantage of other taxpayers in the community who observe the limits.”

The AAT said that while the taxpayer’s “motives for working hard and stowing money away for retirement income are admirable, his predicament [did] not amount to a special circumstance”. It added that inadvertent mistakes were not special circumstances and that the “complexities of the system of taxation of retirement income and providing for retirement income are complexities the whole community has to deal with”. Accordingly, the AAT affirmed the Commissioner’s decision.

Monitoring the limits: taxpayer’s submission

During the hearing, the taxpayer suggested that the ATO might do more to advise what was required. The taxpayer suggested that in other settings there are apps available for use with modern technology that let people know their progressive use of facilities such as data volume downloaded from the internet, and something similar could be adopted in a taxation setting. The AAT said that submission was not for it to deal with; however, it suggested that it was “possibly one that the ATO might wish to explore for the future”.

Re Azer and FCT [2016] AATA 472, 4 July 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/472.html.

Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal (QCAT) in arguing that there was a “constructive trust” in relation to three properties.

Background

The taxpayer had purchased three residential properties, one for each of his three children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the properties would each be left to the respective child.

The Commissioner assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The taxpayer objected, arguing that he was the trustee of each property for each child and that land tax (if any) should be assessed separately in respect of each property. The Commissioner contended that there was no “constructive trust” as was argued by the taxpayer, and that the taxpayer – as “owner” of the land – was liable to land tax on an aggregate basis.

Decision

The QCAT affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, s 20(1) of the Land Tax Act 2010 (Qld) to separately assess trust land did not apply. However, in doing so, the QCAT hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or QCAT otherwise. It also noted the possibility of a future express declaration of trust with consequential changes to the wills, which could affect future land tax liabilities.

Harrison v Comr of State Revenue [2016] QCAT 150, http://archive.sclqld.org.au/qjudgment/2016/QCAT16-150.pdf.

 

 

 

 

 

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CURRENCY:

This issue of Client Alert takes into account all developments up to and including 27 April 2016.

Tax incentives to promote innovation

The Government has released draft legislation to implement more of the tax incentive measures announced as part of its National Innovation and Science Agenda (released in December 2015). The measures are designed to incentivise and reward innovation.

One of the measure will allow companies that have changed ownership to access past year tax losses if they satisfy a similar business test. Under the current law, businesses that have changed ownership must satisfy the same business test to access past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities for returning to profitability. (See Increasing access to company losses below for further details.)

The other measure will allow taxpayers the choice to either self-assess the effective life of certain intangible depreciating assets or use the statutory effective life. The current law only provides an effective life set by statute. According to the Government, the changes will better align the taxation treatment of these intangible depreciating assets with the actual period of time that the assets provide economic benefits. It will also align the treatment of intangible depreciating assets with that of tangible assets. (See Faster depreciation for intangible assets below for further details.)

Public consultation on the draft legislation closed on 22 April 2016.

At the time of writing, the Government has proposed to introduce the Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016 into the House of Representatives. It is understood the Bill would contain these two measures.

Increasing access to company losses

The draft legislation proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to supplement the existing same business test with a more flexible “similar business test” to improve access to losses for companies that have changed ownership. Under the proposed amendments, those companies would be able to deduct losses if they satisfy the similar business test, which is framed to allow companies to seek out opportunities to innovate and grow without losing access to losses.

The similar business test would also supplement the same business test for the other purposes to which the latter currently applies (such as working out whether a debt written off as bad can be deducted in an income year, and for certain purposes with respect to listed widely held trusts).

As with the same business test, the similar business test focuses on the identity of the business. It is not sufficient that the current business is of a similar “kind” or “type” to the former business. For example, it is not enough to say that the former business was in the hospitality industry and the current business is in the hospitality industry. Instead, the test looks at all of the commercial operations and activities that the former business carried on and compares them with all of the commercial operations and activities that the current business carries on, to work out if the businesses are similar.

Where a company has undergone a change of ownership or control, it may also access losses from years preceding that change if it passes the similar business test. A company passes the similar business test if its current business is a similar one to its former business. Under the proposed changes, in working out whether the business carried on throughout the business continuity test period (the “current business”) is similar to the business carried on immediately before the test time (the “former business”), three factors, which are not exhaustive, should be considered:

• Factor 1 – same assets used to generate income: the extent to which the assets (including goodwill) that are used in its current business to generate assessable income were also used in the company’s former business to generate assessable income;
• Factor 2 – assessable income generated from the same sources: the extent to which the sources from which the current business generates assessable income were also the sources from which the former business generated assessable income; and
• Factor 3 – changes to a similarly placed business: whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business. This factor requires taking a hypothetical business that is similarly placed to the company’s former business, and asking whether a reasonable person would expect the changes to be made to that business. Importantly, this factor looks at the business of the company, rather than the company itself. That is, it focuses on the commercial operations and activities that the company carries on, rather than the structure of the company itself.

Source: Treasury, “National innovation and science agenda: increasing access to company losses”, 6 April 2016, www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/NISA-increasing-access-to-company-losses.

Faster depreciation for intangible assets

The changes are proposed to apply for intangible depreciating assets, listed in the table in subs 40-95(7) of the ITAA 1997, that an entity starts to hold on or after 1 July 2016. That is, the current law continues to apply to these intangible depreciating assets that an entity holds before 1 July 2016.

Under the proposed changes:

• to calculate the decline in value of certain intangible depreciating assets, a holder of the asset has the choice to either self-assess the effective life or use the statutory effective life;
• unless the asset is copyright, a licence relating to copyright or in-house software, a subsequent holder of certain intangible depreciating assets must use the remaining statutory effective life, if the holder chooses to use the statutory effective life;
• if a subsequent holder of certain intangible depreciating assets self-assesses the effective life of the asset, the holder is not able to adjust the prime cost method formula;
• if in a later income year the effective life used for certain intangible depreciating assets is no longer accurate due to a change in circumstances relating to the nature of the use of the asset, a holder of the asset can recalculate the effective life;
• if the cost of the intangible depreciating asset increases by at least 10% in a later income year, a holder of the asset must recalculate the effective life; and
• a new holder must recalculate the effective life for the income year that they start to hold certain intangible depreciating assets, if the cost of the asset increases by at least 10% and the asset:
• is acquired from an associate;
• continues to be used by the former user; or
• has a new user who is an associate of the former user.

Source: Treasury, “National innovation and science agenda: intangible asset depreciation”, 1 April 2016, www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/NISA-intangible-asset-depreciation.

Car expenses and special arrangements for the 2016 FBT year

The ATO has updated information about use of the cents per kilometre basis for claiming car expenses and making fringe benefits calculations.

From 1 July 2015, separate rates based on the size of the engine no longer apply. Taxpayers can use a single rate of 66 cents per kilometre for all motor vehicles for the 2015–2016 income year. The Commissioner will determine the rate for future income years.

However, the ATO acknowledges there has been uncertainty about the correct rate to apply for the 2016 FBT year. Therefore, the ATO has advised of a special arrangement for 2016 whereby it will also accept 2016 FBT returns based on the 2014–2015 rates (which are 65, 76 or 77 cents per kilometre depending on the engine capacity of the employee’s car).

For future FBT years, which end on 31 March, the ATO says employers should use the rate determined by the Commissioner for the income year that ends on the following 30 June. For example, for the FBT year ending 31 March 2017, employers should use the basic car rate determined by the Commissioner for the 2016–2017 income year.

Source: ATO, “Cents per kilometre”, 30 March 2016, https://www.ato.gov.au/Business/Income-and-deductions-for-business/Business-travel-expenses/Motor-vehicle-expenses/Calculating-your-deduction/Cents-per-kilometre/.

Holiday homes: tax considerations

The ATO has released a publication concerning tax issues and holiday homes. It features eight worked examples and sets out key points that include the following.

“Genuine” availability for rent

Factors that may indicate a property is not genuinely available for rent include that:

• it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised by word of mouth;
• the location, condition of the property or accessibility to the property mean that it is unlikely tenants will seek to rent it;
• there are unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out; or
• interested people are turned away without adequate reasons.

Both rented out and used privately

The ATO notes that taxpayers who rent out their holiday home and also use it for private purposes cannot claim deductions for the proportion of expenses that relate to the private use. The ATO also makes the following key points:

• where the property is used for private purposes for part of the year, expenses are apportioned on a time basis;
• private purposes include use by the taxpayer, the taxpayer’s family, relatives and friends free of charge; and
• if the holiday home is rented out to family, relatives or friends below market rates, deductions are limited to the amount of rent received for the period(s).

Travel to inspect and repair

The ATO notes that taxpayers who rent out their holiday home can claim reasonable costs that relate to those people inspecting, maintaining and making repairs to their property.

However, the ATO also notes that where a taxpayer who is primarily visiting the property to have a holiday and undertakes repairs and maintenance during this period, they can only claim repair and maintenance costs based on the proportion of the income year for which the property was rented out or genuinely available for rent. The taxpayer cannot claim travel costs to and from the property.

Source: ATO, “Holiday homes”, 5 April 2016, https://www.ato.gov.au/General/Property/In-detail/Holiday-homes/.

Individuals caught in “Panama Papers” leak

The ATO has released a statement on the release of taxpayer data in relation to a Panamanian law firm.

The ATO said it recently received data in relation to the Panamanian law firm containing names of a significant number of Australian residents. It has identified over 800 individual taxpayers and has now linked over 120 of them to an associate offshore service provider in Hong Kong. These cases relate to the release of data by transparency or media organisations in Australia and overseas.

ATO Deputy Commissioner Michael Cranston said that since the completion of its offshore disclosure initiative “Project DO IT”, the ATO has ramped up its compliance work to deal with taxpayers who have failed to disclose offshore income and assets. Sharing information and coordinating action closely with other tax administrations is a large part of this work.

Mr Cranston said the ATO has been analysing the latest data against information these taxpayers had reported and the information the ATO already had. The ATO is also working closely with the Australian Federal Police, Australian Crime Commission and Australian Transaction Reports and Analysis Centre (AUSTRAC) to further cross-check the data and strengthen the ATO’s intelligence. Some cases may be referred to the Serious Financial Crime Taskforce, Mr Cranston said.

The information the ATO received regards some taxpayers it had previously investigated, as well as a small number who disclosed their arrangements to the ATO under Project DO IT. It also includes information about a large number of taxpayers who have not previously come forward, including high-wealth individuals, and the ATO is already taking action on those cases, Mr Cranston said.

Source: ATO, “ATO statement regarding release of taxpayer data”, 4 April 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-statement-regarding-release-of-taxpayer-data/.

ATO safe harbour for SMSF borrowings

The ATO has issued Practical Compliance Guideline PCG 2016/5, which sets out the “safe harbour” terms on which self managed superannuation fund (SMSF) trustees may structure related-party limited recourse borrowing arrangements (LRBAs) consistent with an arm’s-length dealing.

The ATO generally takes the view that an SMSF may derive non-arm’s length income (NALI) under s 295-550 of ITAA 1997 (taxable at 47%) if the terms of an LRBA are not consistent with an arm’s-length dealing: see ATO Interpretative Decisions ATO ID 2015/27 and ATO ID 2015/28.

If an LRBA under s 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) is structured in accordance with PCG 2016/5, the ATO accepts that the LRBA is consistent with an arm’s-length dealing and the NALI provisions will not apply to the income generated from the LRBA asset. While a practical compliance guideline (PCG) is not legally binding on the Commissioner, generally the ATO will not take action against a taxpayer who relies on a PCG in good faith.

Safe harbour terms: real property LRBAs

Where an SMSF uses an LRBA to acquire real property (including residential, commercial or primary production properties), the ATO will accept that the LRBA is consistent with an arm’s-length dealing if the following terms of the borrowing are established and maintained:

• Interest rate: 75% for 2015–2016; for 2016–2017 and later years, the interest rate must be set according to the Reserve Bank Indicator Lending Rates for banks providing standard variable housing loans for investors (the rate published for May immediately prior to the start of the relevant financial year; see www.rba.gov.au/statistics/tables/xls/f05hist.xls).
• Fixed/variable rate: the interest rate may be variable (using the applicable rate as set out above for each year of the LRBA) or fixed (but only up to a maximum of five years). The 2015–2016 rate of 5.75% may be used for existing LRBAs if the total period for which the interest rate is fixed does not exceed five years.
• Term of loan: cannot exceed 15 years.
• Loan-to-value ratio (LVR): a maximum 70% LVR applies for both commercial and residential property. The market value of the asset is established when the loan (original or refinancing) is entered into. Trustees of existing loans may use the market value at 1 July 2015.
• Repayments: must be made monthly. Each repayment is of both principal and interest.
• Security: a registered mortgage over the property is required.
• Personal guarantees: are not required.
• Loan agreement: must be in writing and properly executed.

Safe harbour terms: listed securities

Where an SMSF uses an LRBA to acquire a collection of listed securities (eg listed shares and listed units in a unit trust), the ATO will accept that the LRBA is consistent with an arm’s-length dealing if the following terms of the borrowing are established and maintained:

• Interest rate: the rate above for real property LRBAs, plus 2%; that is, 7.75% (5.75% + 2%) for 2015–2016. For 2016–2017 and later years, the interest rate must be set according to the Reserve Bank Indicator Lending Rates (as noted above for real property) plus 2%.
• Fixed/variable rate: the interest rate may be variable (using the applicable rate as set out above for each year) or fixed (but only up to a maximum of three years).
• Term of loan: cannot exceed 7 years.
• Loan-to-value ratio (LVR): a maximum 50% LVR applies for listed securities.
• Repayments: must be made monthly. Each repayment is of both principal and interest.
• Security: a registered charge/mortgage or similar security (that provides security for loans for such assets) is required; see the Personal Property Securities Register (PPSR) website: https://www.ppsr.gov.au/.
• Personal guarantees: are not required.
• Loan agreement: must be in writing and properly executed.

Failure to meet safe harbour rules

If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not on arm’s-length terms. It merely means that the SMSF trustee cannot take advantage of the certainty (provided under Practical Compliance Guideline PCG 2016/5) that the Commissioner will accept the arrangement is consistent with an arm’s-length dealing. Rather, trustees who do not meet the safe harbour terms need to otherwise demonstrate that their arrangement was entered into and maintained on terms consistent with an arms’-length dealing. For example, they may do so by documenting evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.

ATO grace period to 30 June 2016

The ATO has previously announced a grace period whereby it will not select an SMSF for review for the 2014–2015 year or earlier years provided that arm’s-length terms for its LRBA are implemented by 30 June 2016 (or the LRBA is brought to an end before that date).

Importantly, the ATO Compliance Guideline requires arm’s-length payments of principal and interest  to be made for the year ended 30 June 2016 (including where the arrangement is brought to an end before 30 June 2016). SMSF trustees who are concerned about their ability to make the required payments on commercial terms before 30 June 2016 can contact the ATO to discuss their particular circumstances: write to PO Box 3100, Penrith NSW 2740.

Accordingly, SMSF trustees should review the terms of their LRBAs before 30 June 2016 to ensure that each LRBA:

• is on terms that are consistent with an arm’s-length dealing (and arm’s-length payments of principal and interest have been made for 2015–2016); or
• is brought to an end (and the payments of principal and interest are made under LRBA terms consistent with an arm’s-length dealing).

The ATO states that SMSF trustees who satisfy these conditions and apply Practical Compliance Guideline PCG 2016/5 in good faith to revise the terms of their existing LRBAs before 30 June 2016 will not be subject to any further compliance action for 2014–2015 and earlier years.

Example: real property

The ATO compliance guideline sets out examples (for both real property and listed shares) illustrating how SMSF trustees can review and revise the terms of their LRBAs before 30 June 2016 to access the safe harbours.

The ATO example for real property involves a situation for a complying SMSF with borrowed money under an LRBA on terms consistent with s 67A of the SIS Act. The SMSF used the funds to acquire commercial property valued at $500,000 on 1 July 2011. Other facts include that:

• the borrower is the SMSF trustee;
• the lender is an SMSF member’s father (a related party);
• a holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid;
• the property was valued at $643,000 (at 1 July 2015);
• the SMSF has not repaid any of the principal since the loan commenced.

The loan has the following features:

• the total amount borrowed is $500,000;
• the SMSF met all the costs associated with purchasing the property from existing fund assets;
• the loan is interest-free;
• the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so;
• the term of the loan is 25 years;
• the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust; and
• the loan agreement is in writing.

The ATO considers that this LRBA has not been established or maintained on arm’s-length terms according to the view set out in ATO ID 2015/27 and ATO ID 2015/28. As such, the ATO believes that the income earned from the property (rented to an unrelated party) gives rise to NALI.

To avoid having to report NALI for the 2015–2016 year (and earlier years), the SMSF trustees have the following three options.

Option one: alter loan terms to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet the safe harbour conditions for real property. To bring the terms of the loan into line with the safe harbour rules, the ATO says the trustees of the SMSF must ensure that:

• The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used). Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of the principal as soon as practical before 30 June 2016.
• The loan term cannot exceed 11 years from 1 July 2015. The SMSF must recognise that the loan commenced four years earlier. An additional 11 years would not exceed the maximum 15-year term.
• The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed five years. The loan must convert to a variable interest rate loan at the end of the nominated period.
• The interest rate of 5.75% per annum applies from 1 July 2015 to 30 June 2016. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take into account the opening balance of $500,000, the remaining term of 11 years and the timing of the $49,900 capital repayment.
• After 1 July 2016, the new LRBA must continue under terms that comply with the ATO’s guidelines relating to real property at all times. For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option two: refinance through commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015–2016 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s-length dealing and that the relevant amounts of principal and interest are paid to the original lender. The SMSF may choose to apply the terms set out under the safe harbour rules to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015–2016 year.

Option three: pay out the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015–2016 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s-length dealing, and the relevant amounts of principal and interest are paid to the original lender. The SMSF may choose to apply the terms set out under the safe harbour rules to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015–2016 year.

Date of effect

Practical Compliance Guideline PCG 2016/5 applies to LRBAs commenced both before and after 6 April 2016.

Source: ATO, Practical Compliance Guideline PCG 2016/5, 6 April 2016, https://www.ato.gov.au/law/view/pdf/cgl/pcg2016-005.pdf.

ATO’s data-matching net widens

The ATO has gazetted notices announcing details of various data-matching programs. Most of the notices announce extensions to existing data-matching programs. Records will be electronically matched with ATO data holdings to identify non-compliance with registration, lodgment, reporting and payment obligations under taxation laws. Details are as follows.

Commonwealth electoral roll details

The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian Electoral Commissioner. This data will be collected on an ongoing basis and refreshed every three months.

Details to be collected include the name, residential address, date of birth, and occupation of the registered voter. It is estimated that records for 15 million individuals will be obtained each quarter.

 

 

The ATO has said the program aims to:

• identify taxpayers who are not registered with the ATO when they are required to be;
• locate taxpayers who may have outstanding taxation and superannuation lodgment, correct reporting or payment obligations;
• identify potential instances of taxation or superannuation fraud; and
• assist with the administration of Australia’s Foreign Investment Framework.

Source: Commonwealth Gazette, “Notice of a data matching program – Commonwealth electoral roll details”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00501.

Contractor payments 2016–2019

The ATO will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016–2017, 2017–2018 and 2018–2019 financial years.

Data to be collected includes the:

• Australian Business Number (ABN) of the payer business;
• ABN of the payee business (contractor);
• name, address and contact details of the contractor;
• dates of payment to the contractor; and
• amounts paid to the contractor (including details of whether the payments included GST).

It is estimated that records for 25,000 entities will be obtained, including the records of 12,500 individuals.

The program aims to:

• assess the integrity of the information held on the Australian Business Register to assist the Registrar in developing educational and compliance strategies;
• obtain intelligence to identify risks and trends about contractors who may not be complying with their taxation obligations;
• ensure compliance with registration, lodgment, correct reporting and payment of taxation and superannuation obligations;
• promote voluntary compliance and better tailor educational products and services.

This program has been ongoing since the 2008–2009 financial year and has resulted in improved compliance with obligations, and additional income tax, GST and PAYG withholding liabilities being raised.

Source: Commonwealth Gazette, “Notice of a data matching program – Contractor Payments – 2016–19”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00502.

Merchants: specialised payment systems 2014–2017

The ATO will acquire data related to electronic payments made to merchants through specialised payment systems for the 2014–2015, 2015–2016 and 2016–2017 financial years. This program is designed to obtain data on electronic payments received by businesses that complement data obtained from the ongoing credit and debit card data-matching program (see below). Transactions processed through the specialised payment systems in this program cover those transactions either not included or not visible at the “end merchant” level in the ATO’s merchant credit and debit card data collection.

The ATO said data will be initially obtained from the following specialised payment system facilitators:

• Debitsuccess Pty Ltd;
• Ezidebit Pty Ltd;
• Ezypay Pty Ltd;
• FFA Paysmart Pty Ltd;
• Integrapay Pty Ltd;
• Flexi Online Pty Ltd (T/A Paymate);
• PayPal Australia Pty Ltd;
• Southern Payment Systems Pty Ltd (T/A Pin Payments); and
• Stripe Payments Australia Pty Ltd.

 

 

The data items to be obtained are personal details of:

• merchants using the services of a specialised payment system to take electronic payments; and
• the amount and quantity of the transactions processed.

It is estimated that records for 300,000 entities will be obtained, including around 50,000 for individuals.

The ATO said this program will be the second collection of specialised payment systems data. The first collection revealed discrepancies between electronic payments received and information declared in businesses’ tax returns, and the ATO is investigating these discrepancies.

The ATO said the data will be used to:

• detect unreported income through discrepancy matching;
• identify those operating a business but failing to meet their registration, lodgment or payment obligations;
• identify liquidated or de-registered businesses that are continuing to trade (phoenix operators);
• identify “cash only” businesses, by exception; and
• support analytical models to detect high-risk activity and cases for administrative action.

From 1 July 2017, providers of specialised payment systems will be required to report details to the ATO as part of the Government’s legislated compliance measure on improving compliance through third-party reporting, announced in the 2013–2014 Budget.

Source: Commonwealth Gazette, “Notice of a data matching program – Specialised Payment Systems 2014–17”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00503.

Credit and debit cards 2014–2015

In August 2015, the ATO announced it will request and collect data relating to credit and debit card payments to merchants for the period 1 July 2014 to 30 June 2015 from 11 specified financial institutions. The ATO has now also advised that it will collect data from Suncorp-Metway Ltd as part of that data-matching program.

The purpose of the data-matching program is to ensure that merchants are correctly meeting their taxation obligations in relation to their business income. These include registration, lodgment, reporting and payment responsibilities.

Source: Commonwealth Gazette, “Notice of a data matching program – Credit & Debit Cards 2014–15 – Addendum”, 14 April 2016, https://www.legislation.gov.au/Details/C2016G00504.

Further details

Additional details of the data-matching programs, and details of other programs, are available on the ATO website at https://www.ato.gov.au/General/Gen/Data-matching-protocols/.

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

Product Manager – Steven Jones

Email: SupportANZ@thomsonreuters.com

Website: www.thomsonreuters.com.au