Small business Budget measures now law

The following small business tax measures announced in the 2015-16 Federal Budget have passed into law:

• Company tax rate cut – The tax rate for companies with an aggregated annual turnover of less than $2 million will be reduced by 1.5% (ie from 30% to 28.5%) from the 2015-16 income year.
• Increase to the instant asset write-off threshold to $20,000 – The threshold below which small businesses can claim an immediate deduction for the cost of assets will be temporarily increased from $1,000 to $20,000. This applies to assets purchased from Budget night (12 May 2015) until 30 June 2017.
• Small business simplified depreciation pool – Assets costing more than $20,000 will be able to be put in the small business simplified depreciation pool. If the pool balance falls below $20,000, it will be able to be written off immediately. The rules preventing small businesses from re-entering the simplified depreciation regime for five years after opting not to use it will also be temporarily suspended. This applies from Budget night onwards.
• Preparing for drought – Primary producers will be able to claim accelerated depreciation for water facilities, fodder storage and fencing from Budget night.

More small business Budget measures

More of the small business tax measures announced in the 2015-16 Federal Budget have recently passed through Parliament, including:

• Tax rate cut for other business entities – A 5% tax discount for individual taxpayers capped at $1,000 with business income from an unincorporated business with an aggregated annual turnover of less than $2 million will be introduced from the 2015-16 income year.

The amount of the tax offset is 5% of the income tax payable on the portion of an individual’s income that is small business income, that is 5% of the person’s “total net small business income”. An individual’s “total net small business income” is comprised of the “net small business income” they make as a small business entity, together with any share of the “net small business income” of a small business entity that is included in the individual’s assessable income.

In general terms, the net small business income of a small business entity (including an individual) is the assessable income of the entity that relates to the entity carrying on a business, less any deductions to which the entity is entitled to the extent the deductions are attributable to the income. Where an individual has a share of the net small business income of another entity included in his or her assessable income, the individual also reduces the share by any deductions to which the individual is entitled, to the extent the deductions are attributable to the share of the entity’s net small business income.

• Electronic devices and FBT – The fringe benefits tax exemption for portable electronic devices used primarily for work purposes will be expanded from 1 April 2016.

The exemption is extended to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Currently, a portable electronic device is not exempt from FBT if, earlier in the same FBT year, the employer has provided the employee, by way of an expense payment or property benefit, with an item that has substantially identical functions.

For small businesses, this limitation will be removed with respect to portable electronic devices. Small business employers will be allowed an FBT exemption for multiple portable electronic devices provided to the same employee in the same FBT year, even if those devices have substantially identical functions.

• Professional expenses – new businesses will be able to claim an immediate deduction for professional expenses (eg for the cost of advice from lawyers, accountants and other professionals) associated with starting a business from the 2015-16 income year.

This will include government fees and charges as well as costs associated with raising capital that are presently only deductible over five years.

For expenses to be immediately deductible, the entity claiming the deduction must be:

• a small business entity; or
• not carrying on a business and not connected with, or an affiliate of, an entity that carries on a business that is not a small business entity;

for the income year in which the deduction is claimed.

Immediate deductibility will be available for only two categories of expenditure:

• expenditure on advice or services relating to the structure or the operation of the proposed business (including costs associated with raising capital, whether debt or equity); and

• payment to an Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure.

The amendments do not apply to expenditure incurred in relation to an ongoing business or a business that has ceased to operate (including expenditure relating to the liquidation or winding up of an entity).

The amendments will apply to expenditure incurred in the 2015-2016 income year and later income years. The amendments will have retrospective application to a small group of taxpayers with substituted accounting periods for the 2015-2016 income year that commence before 1 July 2015.

Employee share schemes – proposed changes are now law

In previous editions of TaxWise Business, we noted the proposed changes to the taxation of employee share schemes which include:

• reversing some of the changes made in 2009 to the taxing point for rights for employees of all corporate tax entities;
• introducing a further taxation concession for employees of certain small start-up companies; and
• supporting the ATO to work with industry to develop and approve safe harbour valuation methods and standardised documentation that will streamline the process of establishing and maintaining an ESS.

These amendments have now become law. Despite these changes already being made, changes to further improve the taxation of employee share schemes may be coming shortly. Keep an eye out for further information in future editions of TaxWise Business.

ATO trusts letter campaign for SMSF clients

The ATO is reviewing the returns of self-managed superannuation funds (SMSFs) which have received distributions from a discretionary trust.

Distributions of income to SMSFs from discretionary trusts are considered to be non-arm’s length income, which is taxed at the highest marginal rate.

Trustees of SMSFs (or their advisors) will receive an ATO letter asking them to contact the trustee of the distributing trust and review the trust deed and any resolutions to determine whether the amount reported in the annual return is non-arm’s length income. Returns may need to be amended as a result of this review.

ATO focus on rental property deductions

The ATO says that it will have an increased focus on rental property deductions this Tax Time and is encouraging rental owners to double-check that their claims are correct before lodging their tax returns.

In particular, the ATO is paying close attention to:

• excessive deductions claimed for holiday homes;
• husbands and wives splitting rental income and deductions for jointly owned properties where such claims are not supported;
• claims for repairs and maintenance shortly after the property was purchased; and
• interest deductions claimed for the private proportion of loans.

While the ATO will be paying closer attention to these issues in 2015, it will also be actively educating rental property owners about what they can and cannot claim.

For example, the ATO will be writing to rental property owners in popular holiday locations, reminding them to claim only the deductions they are entitled to, for the periods the property is rented out or is genuinely available for rent.

Your tax adviser will be able to assist you with ensuring you make the correct claims against your rental property.

Receipt of individual interest in net income of partnership – draft TD 2015/D2

In June this year, the ATO issued a draft taxation determination TD 2015/D2 entitled “Income tax: if a retiring partner receives an amount representing their individual interest in the net income of the partnership for an income year, is the amount assessable under section 92 of the Income Tax Assessment Act 1936?”

The draft determination answers this question as ‘yes’. Subject to paragraph 3 of the draft determination, the amount is included in the partner’s assessable income for the income year under section 92 of the ITAA 1936.

This is the case regardless of:

• how the payment is labelled or described (including whether the payment is expressed to be consideration for something provided or given up by the partner); and
• the timing of the partner’s retirement (including whether the partner retires before the end of the income year); and
• the timing of the payment.

However, according to the draft determination, an amount is not assessable under section 92 to the extent that it represents net income of the partnership which is attributable to both a period when the partner was not a resident of Australia, and sources outside of Australia.

Single Touch Payroll – further consultation

In the previous edition of TaxWise Business, it was noted that the ATO had published a discussion paper on Single Touch Payroll. Since the last edition of TaxWise Business, the Government has announced that it will undertake further consultation with the business community on simplifying tax and superannuation reporting obligations through Single Touch Payroll. The Government acknowledges that a start date of July 2016 will not be achievable for many businesses.

The Government has therefore asked the Treasury and the ATO to continue to consult with the business community and the software industry on the scope and timing for the Single Touch Payroll initiative and the feasibility of conducting targeted pilots from July 2016.

The Government also recognises the cash-flow implications for business of real time payments, and will therefore only be consulting further on real time reporting and voluntary real time payments as an option.

Under Single Touch Payroll, employers’ accounting software will automatically report payroll information to the ATO when employees are paid.

This will eliminate the need for employers to report employee-related Pay As You Go Withholding (PAYGW) in their activity statements throughout the year and employee payment summaries at the end of the year.

In addition, the Government will streamline Tax File Number declarations and Super Choice forms by providing digital services to simplify the process of bringing on new employees.

Limiting fringe benefits tax concessions on salary packaged entertainment benefits

In late June 2015, exposure draft legislation was released for consultation in relation to the 2015-2016 Federal Budget measure that will limit the FBT concessions on salary packaged entertainment benefits.

The measure, which applies from 1 April 2016, will introduce a separate single grossed-up cap of $5,000 for salary packaged meal entertainment and entertainment facility leasing expenses (entertainment benefits) for employees of public benevolent institutions, health promotion charities and employees of public and not-for profit-hospitals and public ambulance services. Currently these employees can salary package entertainment benefits with no FBT payable by the employer and without the benefits being reported.

All salary packaged entertainment benefits will also become reportable fringe benefits.

Reasonable travel and overtime meal allowance expense amounts for 2015-2016 – TD 2015/14

On 1 July 2015 the ATO issued taxation determination TD 2015/14 “Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2015-16 income year?”

The determination sets out the amounts that the Commissioner considers are reasonable (reasonable amounts) for the substantiation exception in the income tax legislation for the 2015-2016 income year in relation to claims made for:

• overtime meal allowance expenses – for food and drink in connection with overtime worked and where a meal allowance has been paid under an industrial instrument;
• domestic travel allowance expenses – accommodation, food and drink, and incidentals that are covered by the allowance;
• travel allowance expenses for employee truck drivers – food and drink that are covered by the allowance; and
• overseas travel allowance expenses – food and drink and incidentals that are covered by the allowance.

SuperStream now applies to small businesses

Previous editions of TaxWise Business have noted that SuperStream was coming for small businesses. The ATO has issued a reminder that SuperStream has now started for small businesses. If business clients have 19 or fewer employees, it’s time for them to get ready.

Small employers have up to 12 months to implement SuperStream. There are a number of steps that employer clients need to take to be SuperStream compliant.

ATO warns about phony tax debt scam

The ATO is again warning the public to be aware of an aggressive phone scam circulating where fraudsters are intimidating people into paying a fake tax debt over the phone by threatening jail or arrest: ATO media release (6 July 2015).

Second Commissioner Geoff Leeper has said that the ATO is very concerned about taxpayer privacy and is reminding people of the key differences between a scam of this nature and a genuine call from the ATO.

“We make thousands of outbound calls to taxpayers a week, but there are some key differences to a legitimate call from the ATO and a call from a potential scammer” said Mr Leeper.

“We would never cold call you about a debt; we would never threaten jail or arrest, and our staff certainly wouldn’t behave in an aggressive manner. If you’re not sure, hang up and call us back on

13 28 69,” said Mr Leeper.

If people think they may have fallen victim to a phone scam, they should contact the ATO on

13 28 69.

For more information and examples of recent scams visit the ATO website or SCAMwatch.

Improving tax compliance – enhanced third party reporting, pre-filling and data matching

In July, exposure draft legislation was released to implement the 2013-2014 Budget measure Tax compliance – improving compliance through third party reporting and data matching.

Reporting by relevant third parties to the ATO of certain transactions will start from 1 July 2017. The reportable transaction types are:

• payments of grants and other financial benefits for services to government entities;
• transfers of securities; and
• business transactions made through electronic payment systems such as credit and debit cards and online payment methods.

In addition, the States and Territories will continue to report on a quarterly basis to the ATO regarding transfers of real property as they do now.

The ATO has also issued draft guidance related to these changes. The following may be of interest to businesses:

• Real property transfers – Draft record structure and Discussion guide; and
• Business transactions made through payment systems – Draft record structure and Discussion guide.

Work-related car expense deductions

• Modernising the calculation of work-related car expense deductions

Following the announcement in the 2015-16 Federal Budget, exposure draft legislation was released in July this year to “modernise and simplify” the calculation of work-related car expenses.

The four available methods will be reduced to two. The “cents per kilometre” and “logbook” methods will be retained and the “12 per cent of original value” and the “one-third of actual expenses” methods will be removed.

The “cents per kilometre” method will be amended so that the three current rates based on engine size will be replaced with one rate set at 66 cents per kilometre, which applies to all motor vehicles.

Revisions to the rate will be made by the Commissioner in future income years.

Though not law yet, this change applies from 1 July 2015.

2) PAYG withholding variation: allowances – cents per km car expenses

On 17 June 2015 the ATO made a legislative instrument which varies the amount of withholding required by a payer under the PAYG withholding system for allowance payments in certain circumstances: Taxation Administration Act 1953 – Pay as you go withholding – PAYG Withholding Variation: Allowances (legislative instrument F2015L01047; registered 30 June 2015).

The legislative instrument revokes and replaces the previous instrument, Taxation Administration Act 1953 – PAYG Withholding Variation: Allowances (legislative instrument F2013L00521; registered 21 March 2013). That instrument provided a variation to the rate of withholding from a number of allowances when certain conditions are met. Broadly, the variation applies in certain cases when the allowance is expected to be fully expended on tax deductible items and the payee would not be required to substantiate expenditure incurred in relation to the allowance.

The new instrument differs from the previous instrument in only one respect. The variation for cents per kilometre car expense payments has been adjusted because of the proposed change to the calculation rules noted above.

The variation for cents per kilometre car expense payments will now apply for up to 5,000 business kilometres at:

• 66 cents per kilometre for the year commencing on 1 July 2015, or
• the rate published by the Commissioner for later years.

Where the allowance for car expenses is no more than the published rate, then no withholding will be required for payments up to 5,000 kilometres for a financial year. Withholding will be required from payments for distances travelled beyond 5,000 kilometres in a financial year.

If the per kilometre rate paid exceeds the published rate withholding will be required from the amount of each payment which exceeds the amount calculated at the published rate.

GST on low-value overseas online transactions

At the Australian Leaders’ Retreat held in Sydney on 22 July 2015, the Prime Minister, First Ministers from each State and Territory, and the President of the Australian Local Government Association agreed to keep Commonwealth and State tax changes on the table including the GST and the Medicare levy: Australian Leaders’ Retreat Communiqué (23 July 2015).

As a first step, there was agreement in principle to broaden the GST to cover overseas online transactions under $1,000. This matter will be referred to the meeting of Treasurers that was to be held on 21 August 2015 to progress in detail.

At the time of writing, no further details on proposed changes to the $1,000 were available and the Treasurers’ meeting had not yet occurred.

Should the proposed changes be proceeded with, later issues of TaxWise Business will contain any necessary updates.

Dedicated tax support service for drought-affected communities

The Government launched a new service in July 2015 to help people in drought-affected communities to manage their tax affairs. The ATO and Department of Agriculture will work together to identify drought-affected taxpayers. Personalised assistance and customised support plans for business owners and communities in these areas will be provided.

Help options can include payment plans tailored to individual circumstances, including interest-free periods and extensions of time to pay tax bills or make lodgements.

There is a dedicated hotline for drought affected taxpayers on 13 11 42 (Select Option 3) so that taxpayers who need support can discuss their situation and available options to help them manage their tax obligations.

The ATO has also undertaken to get in contact with businesses in drought-affected communities to make sure they are aware of the options available to help them meet their obligations.

Small business tax discount on the way

The Tax Laws Amendment (Small Business Measures No 3) Bill 2015 (No 3 Bill) was introduced in the House of Representatives on 24 June 2015.

The No 3 Bill proposes to provide a tax offset (the small business income tax offset) to individuals who run small businesses (businesses with an aggregate annual turnover of less than $2 million) or who pay income tax on a share of the income of a small business. The amount of the tax offset will be 5% of the income tax payable on the portion of an individual’s income that is small business income. In addition to calculating the offset in this way, the maximum amount of the tax offset available to an individual in an income year will be capped at $1,000.

The tax offset will be available to individuals who are small business entities, individuals who are a partner in a partnership that is a small business entity, and individuals who are a beneficiary of a trust that is a small business entity. The small business tax offset is designed to apply to trusts that actively carry on a business as a small business entity. Such trusts are unlikely to have beneficiaries under a legal disability that relates to a physical or mental disability. However, in the event that a trustee is assessed on the income of a beneficiary under a legal disability, the offset could be obtained by the beneficiary if they lodged a tax return, or a return was lodged on their behalf. Where a trust has a beneficiary who is under a legal disability because they are a minor, that minor will not have access to the tax discount. The tax offset will, however, not be available to individuals in their capacity as trustees.

An individual’s “total net small business income” will comprise the “net small business income” they make as a small business entity together with any share of the “net small business income” of a small business entity that is included in the individual’s assessable income.

The small business tax offset for an income year is calculated by first determining the percentage of an individual’s taxable income for the income year that is “total net small business income”. This percentage is then applied to the individual’s basic income tax liability for the income year, with the amount of the tax offset being equal to 5% of the result of that calculation, up to a maximum amount of $1,000. For most individuals, total net small business income will be worked out by reference to their own net small business income, and their share of the net small business income of another entity.

In general terms, the net small business income of a small business entity (including an individual) is the assessable income of the entity that relates to the entity carrying on a business, less any deductions to which the entity is entitled, to the extent those deductions are attributable to the income. Where an individual has a share of the net small business income of another entity included in their assessable income, the individual also reduces the share by any deductions to which the individual is entitled, to the extent those deductions are attributable to the share of the entity’s net small business income. An individual’s total net small business income will not include a share of the net small business income of a corporate tax entity. The net small business income of a small business entity will not include assessable income that is a net capital gain or personal services income, unless the personal services income is produced from conducting a personal services business.

The “net small business income” of a small business entity will be calculated by working out the assessable income of the entity that relates to it carrying on a business, and subtracting from that assessable income the entity’s deductions, to the extent its deductions are attributable to that income.

Where an individual receives a share of an entity’s net small business income, the individual’s total net small business income will also be reduced by the deductions to which the individual is entitled, to the extent their deductions are attributable to that share.

An individual will be able to claim one small business tax offset for an income year, irrespective of the number of sources of small business income that individual has.

The small business tax offset will not be restricted to individuals who are Australian residents. To the extent that the Australian sourced income of a foreign resident satisfies the requirements for obtaining the offset, the offset will be available to that foreign resident. Similarly, the small business tax offset can apply to the foreign business income of an Australian resident.

Example

Adrian is a small business entity. For the 2015–2016 income year, his taxable income is $100,000, his basic income tax liability is $25,000 and his total net small business income is $50,000.

To work out the amount of his small business income tax offset for the 2015–2016 income year, Adrian first divides his total net small business income by his taxable income ($50,000/$100,000 = 0.5). The result of this calculation shows that half of Adrian’s taxable income relates to his total net small business income.

Adrian then multiplies the result of the first calculation by the amount of his basic income tax liability (0.5 × $25,000 = $12,500). The result of this second calculation shows that $12,500 of Adrian’s basic income tax liability is from his total net small business income.

Adrian’s small business tax offset is equal to 5% of the result of this second calculation (0.05 × $12,500 = $625). The full amount of his small business tax offset is therefore $625.

Adrian can claim the full amount of the small business tax offset for the 2015–2016 income year because it is less than $1,000.

Date of effect

The amendment will apply from the 2015–2016 income year.

Other important amendments

The Bill also proposes the following amendments:

• Immediate deductibility of start-up expenses: amendment of the ITAA 1997 to allow small businesses and individuals to immediately deduct certain costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital, which are presently only deductible over five years under s 40-880 of the ITAA 1997.
• Extension of the FBT exemption: this exemption applies to employers that provide employees with work-related portable electronic devices such as mobile phones, laptops and tablets. The amendments would extend the exemption to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

CGT restructure relief measure still to come

The Government, via Small Business Minister Bruce Billson, said the 5% tax discount, plus the start-up deduction measures and FBT red tape reduction measures, mean that five out of the six small business measures from the 2015–2016 Budget have been introduced. The Minister said the remaining measure, to enable small businesses to restructure without facing an immediate CGT liability, is scheduled to be introduced in the 2015 spring sittings (scheduled to run from 10 August to 3 December 2015).

Source: Tax Laws Amendment (Small Business Measures No 3) Bill 2015, which has passed all stages without amendment and is awaiting Royal Assent at the time of publication, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5494%20Recstruct%3Abillhome; Small Business Minister’s media release, 24 June 2015, http://bfb.ministers.treasury.gov.au/media-release/055-2015/.

Ride-sharing provider challenges ATO’s GST view

Uber BV has lodged an application in the Federal Court against the Commissioner of Taxation. The matter concerns the ATO’s view on GST in relation to ride-sharing drivers. In May 2015, the ATO released information on its website providing its view of the tax obligations of people providing services in the sharing economy. The ATO was of the view that people who provide ride-sourcing (or ride-sharing) services were providing “taxi travel” under the GST law, and were required to register for GST regardless of turnover, charge GST on the full fare, lodge BASs and report the income in their tax returns. The ATO had given ride-sourcing drivers until 1 August 2015 to obtain their ABN and be registered for GST.

ATO affirms view on ride-sharing services

Following the announcement of Uber’s court challenge, the ATO updated the guidance on its website (as at 5 August 2015). The ATO affirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The guidance also states that from 1 August 2015 the ATO expects all drivers involved in providing ride-sourcing services to be registered for GST.

The guidance refers to the current court challenge of the ATO’s advice. In this regard the guidance states: “Taxpayers often challenge the Commissioner’s view but this does not affect our continued administration of the GST law. Similarly, current legal proceedings do also not change the Commissioner’s view on our published guidance, therefore the ATO will continue to support and advise impacted drivers on how to demonstrate their compliance with the law and the ATO position.”

The guidance also sets out the ATO responses to “what the community is asking” it in relation to ride-sourcing services. In relation to passengers, the ATO notes that if a passenger is running a GST-registered business and the travel is part of running that enterprise, they can generally claim a GST credit for the fare charged. The ATO says that for fares over $82.50 a passenger must hold a tax invoice in order to claim a GST credit. If the passenger doesn’t get a tax invoice for a fare of more than $82.50, the ATO suggests that “it would be ideal if you captured the details of the car number plate and advised the ATO via the ‘Report a Concern’ function on the ATO’s mobile phone app.”

The ATO set out the following key issues and points in relation to “drivers”:

• ABN registration: Drivers can use business industry codes 46239 (Road Passenger Transport) or 46231 (Taxi Service Operation). The ATO also recommends drivers use “ride-sourcing” or “ride-sharing” as their business description.
• Employee or contractor: The ATO considers drivers to be independent contractors instead of employees.
• Small business concessions: In response to the question “Are ride-sourcing drivers eligible for all small business concessions and what deductions can be claimed?”, the ATO said, “If you are carrying on a business, and you bought an asset for less than $20,000 (excluding GST) on or after 1 July 2015, you would be entitled to claim an immediate deduction for the asset in your 2015–2016 tax return. If your purchase is used for both business and private use, you can only claim a GST credit or an income tax deduction for the part of the purchase relating to your business use. For example if you use your car 50% for your business, you can claim 50% of the GST on the fuel and other car-related expenses and 50% of the GST-exclusive cost as an income tax deduction. You need to keep records of the income and expenses and how you apportioned for private use.”

The ATO has also released a factsheet entitled “Ride-sourcing – the facts”, summarising key points on its view of the GST treatment of ride-sharing services. The factsheet is available on the ATO website at https://ato.gov.au/Media-centre/Articles/Ride-sourcing—the-facts/.

Source: ATO website “Providing taxi travel services through ride-sourcing and your tax obligations”, last modified 5 August 2015, https://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/.

Crowdfunding for small proprietary companies: consultation

Minister for Small Business Bruce Billson has released a consultation paper on facilitating crowd-sourced equity funding (CSEF, or equity crowdfunding) and reducing compliance costs for small businesses. In releasing the paper, the Minister said the Government was “committed to this important consultation as part of our $5.5 billion Growing Jobs and Small Business package in the 2015–2016 Budget.”

Public consultation closes on 31 August 2015.

Public companies

The consultation paper outlines for the first time the key elements of the Government’s proposed CSEF framework for public companies. Mr Billson said further details will be available in draft legislation that will be released for public comment later in the year. Introduction of legislation to Parliament is expected to follow in the spring sittings.

The key elements of the proposed framework for public companies cover issuers, intermediaries and investors. The following are some of the key points from the proposed framework:

• An issuer must be incorporated as a public company in Australia; limited to certain small enterprises that have not raised funds under existing public offer arrangements.
• An issuer may raise up to $5 million in any 12-month period, inclusive of any raisings under the small scale offerings exception but excluding funds raised under existing prospectus exemptions for wholesale investors.
• Intermediaries must hold an Australian financial services licence. Intermediaries would be responsible for monitoring compliance for investments made via their platform. They must provide generic risk warnings to investors.
• Investment caps for retail investors are $10,000 per offer per 12-month period and $25,000 in aggregate CSEF investment per 12-month period, self-certified by investors. Investors have an unconditional right to withdraw five days after accepting an offer.

Proprietary companies

Proprietary companies are subject to limitations on the ways they can raise funds, including that:

• they must not have more than 50 non-employee shareholders; and
• they must not, except in limited circumstances, offer shares to the general public or undertake other fundraising activities that would require the issue of a disclosure document to investors.

These limitations would make it difficult for proprietary companies to effectively use CSEF to raise funds from a large number of small shareholders.

The consultation paper seeks views on whether to extend the proposed CSEF framework to proprietary companies, and outlines a potential model. The paper seeks comments to identify which areas of the Corporations Act 2001 could be amended to reduce the burdens on small proprietary companies and make capital raising more flexible.

Mr Billson noted that the paper specifically discusses whether it may be possible to simplify:

• the requirement to make an annual solvency resolution;
• the requirement to maintain a share register;
• the execution of documents; and
• completion and lodgment of forms with the regulator.

Of particular interest to small businesses and entrepreneurs is the debate regarding the limit of 50 non-employee shareholders for proprietary companies and the “small scale offerings” exception to the disclosure requirements. Issues concerning these items are also discussed in the paper.

Next steps

The paper states that the Government will consider stakeholder feedback before making decisions on whether to proceed with CSEF for proprietary companies. However, the Government noted that regardless of whether the Government proceeds with CSEF for proprietary companies, it remains committed to facilitating CSEF for public companies.

Source: Treasury Consultation Paper, “Facilitating crowd-sourced equity funding and reducing compliance costs”, 4 August 2015, http://treasury.gov.au/ConsultationsandReviews/Consultations/2015/Facilitating-crowd-sourced-equity-funding; Minister for Small Business, 4 August 2015, http://bfb.ministers.treasury.gov.au/media-release/071-2015/.

SMSFs in pension phase need to exercise care

Kasey Macfarlane, ATO Assistant Commissioner, SMSF Segment, Superannuation, recently delivered a speech covering compliance issues in relation to self managed super funds (SMSFs). She said the ATO was of the view that most trustees and advisors “do the right thing”; however, a few areas of concern were highlighted. One area was low-cost audits. Ms Macfarlane said the ATO appreciated that auditors would likely have a sliding scale of costs for SMSF audits, based on complexity and the time involved. However, she said the ATO still considered low cost “a potential indicator of lack of quality and will review SMSF auditors whenever necessary in this regard”.

SMSFs in pension phase

Ms Macfarlane also discussed issues relating to SMSFs paying pensions, noting the growing number of people expected to receive a pension in the next 10 years. Key points included the following:

• Setting up and starting a pension: In the pension establishment phase, a fundamental but critical question that should not be overlooked is whether the member has reached preservation age. The ATO has reminded trustees that from 1 July 2015 the legislated rise in the preservation age came into effect – this affects people born after 30 June 1960. It is also necessary to consider whether there are any cashing restrictions applicable to the condition of release that the particular member has satisfied.
• Paying a pension: One of the most common reasons for an SMSF in pension phase not being entitled to applicable income tax exemptions under the exempt current pension income (ECPI) provisions is that the trustee fails to pay the required annual minimum pension amount to a member. This also has flow-on tax consequences for the individual member, because they are taken to have received lump-sum payments rather than pension payments throughout the whole income year. Also:

–        It is critical that trustees monitor and continually review the ongoing liquidity requirements of their SMSF from the outset when starting a pension, as well as throughout the life of the pension. For example, if the SMSF’s only asset is property, making a cash payment and thus meeting the minimum pension payment requirements can be extremely difficult. Ms Macfarlane said the ATO has seen SMSFs paying pensions where the net rental income was insufficient and there were no other liquid assets or contributions being made to the SMSF.

–        The ATO is starting to see liquidity problems associated with real property exacerbated for SMSFs in pension phase where the asset has been acquired under a limited recourse borrowing arrangement (LRBA). Ms Macfarlane said the ATO is finding that as income of the SMSF is diverted to meeting the loan obligations of the fund, there can be insufficient funds remaining to make the required pension payments. She further noted that there is an added level of complexity to LRBAs involving related parties where the trustees fall foul of the arm’s-length rules in an effort to try to overcome their liquidity issues.

–        The Commissioner has general powers of administration (GPA) allowing a catch-up pension payment as having been made in the relevant income year, so that a fund can continue to report ECPI even though the minimum payment requirements have not been satisfied. Trustees can self-assess for the treatment, or if they do not meet the criteria for self-assessment, they can apply to the ATO for exercise of the GPA. The Commissioner may exercise his powers to allow a fund to continue to report ECPI even though the minimum pension amount is not paid where an honest mistake by the trustee has resulted in a “small underpayment” of the minimum amount. Ms Macfarlane said there has been confusion that this “small underpayment” means the underpayment must total 1/12th or less of the minimum annual payment. To clarify, Ms Macfarlane said the Commissioner will consider the specific facts of each individual matter; in some cases a small underpayment that is due to an honest mistake and is a bit higher than 1/12th of the minimum annual payment, or that is a small amount in absolute dollar terms, may still satisfy the criteria for exercise of the GPA. However, she reaffirmed that the administrative concession is only for limited circumstances and that trustees should not rely on it as a “fix-it” for all pension underpayments.

–        The ATO has received a number of enquiries “recently” about whether an actuarial certificate is required in cases where a pension starts part way through an income year when the segregated method is applied. The ATO’s initial response has been that an actuarial certificate is required in those circumstances. However, Ms Macfarlane said that, following discussions with some professional and industry representatives, the ATO is working to get a better understanding of industry and commercial practice and expects to provide some “clearer guidance on this point in the near future”.

–        Since the release of Taxation Determination TD 2014/5 (about the circumstances when a bank account of a complying super fund is a segregated current pension asset), the ATO has received questions about the partial segregation of other asset types. The ATO view is that it is not possible to segregate part of an asset.

–        Ms Macfarlane noted ATO ID 2014/39 and ATO ID 2014/40, which set out the ATO’s view that the non-arm’s length provision applies to the non-commercial LRBAs involving related parties in those cases. She said the ATO’s position remains unchanged: it is likely to scrutinise related-party LRBAs where the terms of the loan, taken together, and the ongoing operation of the loan, are not consistent with a genuine arm’s-length arrangement (ie the type of arrangement you would expect to get dealing with a third party such as a bank). In this regard, the Assistant Commissioner urged trustees to review any arrangements which may not be on commercial terms. She said the ATO is “keen to work with trustees who may be concerned about their particular arrangements”. Depending upon the facts and circumstances of the case, she said this may involve refinancing the arrangement on a commercial arm’s-length basis.

–        Since the release of Taxpayer Alert TA 2015/1, the ATO has seen variations of the dividend stripping arrangements mentioned in the alert. Ms Macfarlane noted that even if a company (with retained earnings and franking credits) with business real property or residential property (leased to an unrelated party) transfers shares to an SMSF with a view to avoiding the stamp duty consequences that may otherwise arise if it transferred the property instead, this would not necessarily obviate the application of the dividend stripping provisions. Ms Macfarlane said the ATO will work with industry to develop an ATO view to support TA 2015/1 and provide further guidance and certainty to SMSF trustees and advisors.

–        A number of SMSFs continue to incorrectly claim expenses as a deduction, despite having some members in pension phase. As a general rule, a fund cannot claim a deduction for expenditure incurred in gaining or producing exempt income unless a specific deduction provision applies.

• Ceasing a pension: Ms Macfarlane said the ATO is seeing a range of issues relating to what happens in the unexpected event of a pensioner’s death. In cases where an SMSF is paying a pension and the pensioner dies, if there is an automatic reversionary beneficiary in place the pension does not stop on the pensioner’s death. It simply transfers to the nominated beneficiary and they continue to receive it on the same terms as the original pensioner. The fund’s ability to claim ECPI generally continues. However, Ms Macfarlane raised a number of issues in this regard, such as:

–        Firstly, is the nominated reversionary beneficiary entitled to receive a death benefit pension under the terms of the SMSF’s deed and the law? The concern here is that not all SIS dependants can receive a death benefit pension under the law, irrespective of the terms of the deed.

–        Secondly, in order to be able to report ECPI in the year of the death, the trustees must make sure that the annual minimum pension payment is still made. Although there is no requirement to adjust the minimum pension payment amount for the year of death, regardless of any difference in the minimum factors between the deceased pensioner and the reversionary beneficiary, there is still a need to make the full annual pension payment by 30 June. It is not until 1 July of the next financial year that the reversionary beneficiary’s relevant drawdown factor is required to work out the minimum pension calculation.

–        Thirdly, where the original pensioner was in receipt of a transition-to-retirement income stream, it is important for the trustees to recognise that the reversionary beneficiary’s benefit should be recorded as unrestricted non-preserved. This is important if the reversionary beneficiary wishes to access any lump sum amounts in future. This also means that the reversionary beneficiary will be in receipt of an ordinary account-based pension without the limitations imposed by a transition-to-retirement pension, regardless of their age.

Other compliance issues

The Assistant Commissioner also identified the following additional compliance focus areas in relation to SMSFs for the ATO “in the coming year”:

• inexplicable, significant and out-of-pattern changes in the value of an SMSF’s assets and/or an SMSF’s income; and
• related-party investments and/or transactions entered into on non-commercial terms.

Through monitoring of the SMSF sector, Ms Macfarlane said the ATO has also identified the following activities which have raised concerns:

• the marketing and selling of investment products such as real property investments via “cold calls”, where the primary focus is on enticing people to invest and then having them establish an SMSF to invest in the product. Individuals are often advised to establish an SMSF without regard to whether an SMSF is appropriate to their particular needs and circumstances;
• LRBA loans that are not structured correctly, including incorrect registration of the ownership of property acquired under an LRBA, and other SMSF assets in addition to the asset acquired under the LRBA being used as security for the loan – that is, the lender’s recourse is not appropriately limited to the underlying asset; and
• the promotion of arrangements that seek to gain a present-day benefit for the member (eg housing benefits, cosmetic surgery, holidays, etc).

Source: ATO speech, “What’s ahead for SMSFs? The ATO perspective”, last modified 28 July 2015, https://ato.gov.au/Media-centre/Speeches/Other/Whats-ahead-for-SMSFs-The-ATO-perspective/.

ATO data-matching: immigration visa holders

The ATO has announced that it will acquire names, addresses and other details of visa holders, their sponsors and their migration agents for the 2013–2014, 2014–2015, 2015–2016 and 2016–2017 financial years from the Department of Immigration and Border Protection. It is estimated that records relating to approximately a million individuals will be obtained.

Data items to be collected include:

• address history for visa applicants and sponsors;
• contact history for visa applicants and sponsors;
• all visa grants;
• visa grant status by point in time;
• migration agents (visa application preparer who assisted or facilitated the processing of the visa);
• address history for migration agents;
• contact history for migration agents;
• all international travel movements undertaken by visa holders (arrivals and departures);
• sponsor details (457 visa);
• education providers (educational institution where the student visa holder intends to undertake their study); and
• visa subclass name.

The records will be electronically matched with certain sections of ATO data holdings to identify non-compliance with tax obligations. The objectives of the data-matching program are to:

• improve intelligence on the overall level of compliance with taxation obligations by visa holders, sponsors and migration agents;
• test the veracity and strengths of existing risk detection models and treatment systems and identify areas for improvement in the ATO’s suite of compliance models and treatment systems and practices;
• improve the integrity of the data on the Australian Business Register by cancelling ineligible registrants;
• identify potentially new or widespread fraud methodologies and entities controlling or exploiting those methodologies;
• assist in developing and implementing administrative strategies to improve voluntary compliance by visa holders, sponsors and migration agents; and
• ensure compliance with registration, lodgment, correct reporting and payment of taxation and superannuation obligations.

Further information on the ATO’s data-matching program is available on its website at https://ato.gov.au/General/Gen/DIBP-Visa-Holders-Data-Matching-Program/.

Source: Notice of Data Matching Program – Immigration Visa Holders, Gazette – C2015G01255, 4 August 2015, https://comlaw.gov.au/Details/C2015G01255.

Work-related and rental property claims on ATO’s watch list

Tax time is in full swing and the ATO has highlighted areas of concern for individuals ahead of tax return lodgment time. High on the ATO’s watch list is work-related expense claims that are significantly higher than expected. In particular, the ATO will be paying particular attention to claims that have already been reimbursed by employers and expenses that are, in fact, private. These items are not deductible.

TIP: You are entitled to claim deductions for some expenses that are directly related to earning your income. The expenses must not be private, domestic or capital in nature. If the expense is both private and work-related, you can claim a deduction for the work-related portion.

The ATO will also keep a keen eye on rental property deductions. The ATO will be playing close attention to:

• excessive deductions claimed for holiday homes;
• husbands and wives splitting rental income and deductions inappropriately for jointly owned properties;
• claims for repairs and maintenance shortly after the property was purchased; and
• interest deductions claimed for the private proportion of loans.

TIP: You can claim expenses relating to your rental property but only for the period your property was rented or available for rent (eg advertised for rent). If part of your property is used to earn rent, you can claim expenses relating to that part of the property. You will need to work out a reasonable basis to apportion the claim. Please contact our office for assistance.

Share-economy service providers need to assess tax implications

New internet and mobile technologies have allowed people to consider enterprises such as letting a spare room, letting a car space, doing odd jobs or other activities for payment, or driving passengers in a car for a fare. However, the ATO has warned that individuals providing such share-economy services may have tax obligations, which may include declaring income and registering for GST.

TIP: It may be prudent for all share-economy service providers to assess whether they are meeting their tax obligations. Please contact our office for assistance.

The ATO has also confirmed that people who provide ride-sharing services are providing “taxi travel” under the GST law. It said the existing tax law applies and therefore drivers are required to register for GST regardless of their turnover. Affected drivers must also charge GST on the full fare, lodge BASs and report the income in their tax returns.

TIP: Recognising that some taxpayers may need to take corrective actions, the ATO is allowing drivers until 1 August 2015 to obtain an ABN and register for GST. The ATO said it does not intend to apply compliance resources regarding GST obligations for drivers prior to 1 August 2015 – except if there is evidence of fraud, or other significant matters.

Franked distributions funded by capital-raising under scrutiny

The ATO has cautioned companies about raising capital to fund franked distributions. The ATO is reviewing arrangements where companies raise new capital to fund franked distributions and release accumulated franking credits to shareholders.

In a typical case, the ATO is seeing companies issue rights to shareholders and use funds raised to make franked distributions via special dividends or an off-market share buy-back. The ATO said these arrangements are distinct from ordinary dividend reinvestment plans involving regular dividends.

ATO Deputy Commissioner Tim Dyce said the distributions are unusually large compared to ordinary dividends and occur at a similar time, and in a similar amount, to the capital raised. “So, a potentially large amount of franking credits is released with minimal net changes to the company’s economic position. There is also minimal impact on the shareholders, except in some cases they may receive refunds of franking credits and in the case of buy-backs they may also get improved capital gains tax outcomes,” he added.

The ATO considers that the arrangements may not be compliant with the tax law. In particular, the ATO has warned of the potential application of the general anti-avoidance rules. It has also warned that penalties may apply to participants.

“Contrived” dividend arrangements used by SMSFs flagged by ATO

The ATO is investigating arrangements where a private company with accumulated profits channels franked dividends to a self-managed super fund (SMSF) instead of to the company’s original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders (or individuals associated with the original shareholders) benefit as members of the SMSF from franking credit refunds to the SMSF.

The ATO was concerned that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax, in the SMSF because the relevant shares are supporting pensions. The ATO also warned the arrangement has features of dividend stripping which could lead the ATO to cancel any tax benefit for the transferring shareholder and/or deny the SMSF the franking credit tax offset.

Lump sum finalisation payment taxable

An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a matter concerning the tax treatment of a lump sum finalisation payment. The Tax Commissioner considered the payment was assessable as ordinary income. The taxpayer disagreed.

In 1995, the individual was diagnosed with a number of illnesses and was deemed unfit for work. She was paid monthly benefits under her employer’s salary continuance policy, which she declared as assessable income. When that scheme discontinued, she commenced participation in a government scheme which continued the monthly payments. In 2008, she was informed that the Commonwealth intended to finalise its obligations and pay a final lump sum in July 2008. Under a deed of release, the scheme made a final payment of just over $2 million to the taxpayer, less an amount of $931,119.40 (being tax withheld and remitted to the ATO).

The AAT concluded the final payment was “income according to ordinary concepts” under the tax law. It was therefore assessable income to be taken into account in assessing the taxpayer’s taxation liabilities for the year ended 30 June 2009.

“Nomad” had continuity of association with Australia

An individual has been unsuccessful before the AAT in arguing that he had “let go” of Australia in 1999 to pursue his “nomadic” working life abroad and that his base of operations was in the United Kingdom.

The taxpayer was born in the United Kingdom, and worked as a diver and diving supervisor for overseas companies at many places around the world.

However, the AAT held he was a resident of Australia for the 2006 to 2011 income years for tax purposes. The AAT noted that the taxpayer’s physical, emotional and financial ties to Australia in those years were very strong. In particular, he jointly owned a home in Australia with his wife of over 23 years and his emotional ties to her were “clearly the most significant in his life”.

The AAT also held the taxpayer did not satisfy the rules to have his foreign sourced income treated as exempt income, nor was he entitled to any foreign tax offset as he had not produce evidence of any foreign tax paid on his overseas earnings.

The AAT therefore affirmed amended tax assessments which increased the taxpayer’s tax liability by around $300,000 for the relevant income years.

The taxpayer has appealed to the Federal Court against the decision.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

CURRENCY:

This issue of Client Alert Explanatory Memorandum takes into account all developments up to and including 15 June 2015.

Small business company tax rate cut

The Tax Laws Amendment (Small Business Measures No 1) Bill 2015 has been introduced. It proposes to implement a 2015–2016 Budget measures by amending the Income Tax Rates Act 1986 to reduce the company tax rate from 30% to 28.5% for companies that are small business entities with an aggregated turnover of less than $2 million. The company tax rate for corporate unit trusts and public trading trusts that are small business entities will also be reduced to 28.5%. For all other companies that are not small business entities, the corporate tax rate will remain at 30%. Importantly, and as also announced in the Budget, the maximum franking credit that can be allocated to a frankable distribution will be unchanged, so the same rate of 30% will continue to apply to all companies.

The term “small business entity” takes its meaning from s 328-110 of ITAA 1997 and includes the requirement that an entity must have an aggregate turnover of less than $2 million in the previous year and be likely to come under the turnover threshold of $2 million for the current year.

Consequential amendments

Some consequential amendments flow from the rate reduction to 28.5%:

• Non-profit companies pay no tax on the first $416 of their taxable income. Tax is then shaded in at a rate of 55% of the excess over $416 until the tax on taxable income equals the corporate tax rate. Where the taxable income exceeds the shade-in limit, the full taxable income is effectively taxed at the corporate tax rate. The shade-in limit is currently $915 (reflecting the current 30% corporate tax rate). With the reduction in corporate tax rate to 28.5% for small business companies, it is proposed to reduce the shade-in limit to $863 for non-profit companies that are small business companies. As a result, the rates of tax payable by a non-profit company that is a small business company would be:

–        nil on the first $416 of taxable income;

–        55% on taxable income between $416 and $863; and

–        28.5% on taxable income above $863.

• Currently, the tax payable by a recognised medium credit union (ie a credit union with notional taxable income between $50,000 and $150,000) before any offsets or credits is limited to 45% of the amount by which the credit union’s taxable income exceeds $49,999. The 45% rate that applies to the taxable income of recognised medium credit unions reflects the current 30% corporate tax rate. As the corporate tax rate is being reduced to 28.5% for small business companies, this credit union rate would be reduced to 42.75% for medium credit unions that are small business companies.
• A number of consequential amendments will be made to various provisions in ITAA 1936 and ITAA 1997 that refer to a 30% rate, to ensure that the appropriate rate is applied for small business companies.
• Other consequential amendments would be made that:

–        ensure that the amount of the rebate allowed under the tax exempt infrastructure borrowing concessions in certain circumstances is calculated based on the corporate tax rate that applies to the entity;

–        ensure that when reducing a carried forward tax offset by any unused or net exempt income, the reduction is calculated based on the corporate tax rate that applies to the entity;

–        update examples which illustrate the operation of the company tax loss rules in certain circumstances to clarify that the company in the examples is not a small business entity;

–        update an example which illustrates the operation of capital gains tax discount rules for shareholders in listed investment companies to clarify that the company in the example is not a small business entity.

Date of effect

The amendments would apply for the first income year beginning on or after 1 July 2015 and for subsequent income years.

Previous announcement

The change was announced in the 2015–2016 Federal Budget.

Source: Tax Laws Amendment (Small Business Measures No 1) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5465%20Recstruct%3Abillhome .

[Postscript: At the time of publication, the Bill had passed all stages of Parliament without amendment and was effectively awaiting Royal Assent.]

Accelerated depreciation write-off for SMEs

The Tax Laws Amendment (Small Business Measures No 2) Bill 2015 has been introduced. It proposes to allow a short-term accelerated depreciation write-off up to $20,000 (up from the current $1,000 threshold) for assets acquired by small businesses, and to allow primary producers to claim an immediate deduction for capital expenditure on water facilities and fencing assets and deduct capital expenditure on fodder storage assets over three years.

$20,000 write-off

The Bill would amend the accelerated depreciation rules for small businesses (businesses with an aggregate annual turnover of less than $2 million) by temporarily increasing the threshold under which certain depreciating assets, costs incurred in relation to depreciating assets and general small business pools can be written off. The increased threshold of $20,000 would apply only to assets that were first acquired at or after 7:30 pm legal time in the ACT on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. From 1 July 2017, the threshold would revert to the existing $1,000. The increased threshold would be available to all small businesses (including those who previously opted out of the simplified depreciation rules).

Key features

• Small business entities can claim an immediate deduction (ie in their next tax return) for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the ACT, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Depreciating assets that do not meet these timing requirements would continue to be subject to the $1,000 threshold. The asset can be new or second-hand.

–        The write-off is for the taxable purpose proportion of the cost of an asset acquired for less than $20,000. The “taxable purpose proportion” of a depreciating asset is defined in s 328-205(3) and in general terms represents the proportion of an asset’s use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than $20,000 is claimed in the income year in which the asset was first used or installed ready for use.

• The requirement that an asset be “first acquired” at a particular time is not a feature of current Subdiv 328-D and is an additional requirement for the increased threshold to apply. This additional requirement limits access to the increased threshold to a small business entity’s “new” assets. Requiring a depreciating asset to have been “first” acquired by the small business entity is designed to ensure that assets cannot satisfy the acquisition requirement if they were previously acquired at an earlier time, temporarily disposed of, and then reacquired at or after the 7.30 pm start time.

–        Depreciating assets that are first acquired prior to the 7.30 pm start time would continue to be subject to the existing threshold, irrespective of when they are first used or installed ready for use. The existing $1,000 threshold would also apply to depreciating assets that are first acquired from the 7.30 pm start time but were not first used or installed ready for use on or before 30 June 2017.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2017

• Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets (eg an amount spent on improving or transporting a depreciating asset) that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the ACT, on 12 May 2015, and on or before 30 June 2017. Costs that are incurred outside of these times would continue to be subject to the $1,000 threshold.

–        As a result of the proposed amendments, if a small business entity incurs a cost of $20,000 or more that is included in the second element of a depreciating asset’s cost, and the depreciating asset has been written off in a previous income year, the asset in relation to which the cost was incurred will be treated as having a value equal to the amount that is included in the second element of its cost. The asset would then be allocated to the small business entity’s general small business pool, deducted at a rate of 15% in the income year in which the amount was incurred, and then deducted at a rate of 30% in subsequent income years as part of the general small business pool.

• Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2017.
• From 7.30 pm, by legal time in the ACT, on 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets, can be allocated to a small business entity’s general small business pool and deducted at a specified rate for the depletion of the pool.
• Assets and costs allocated to a general small business pool are deducted at a rate of 15% in the year they are allocated, and a rate of 30% in subsequent income years.
• If the balance of a small business entity’s general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and on or before 30 June 2017.
• If the balance of a small business entity’s general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2017, the small business entity can claim a deduction for the entire balance of the pool.

Five-year “lock out” rule

Under existing arrangements, a small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions for a later income year in which it satisfies the conditions to make this choice (that is, the entity “opted out”), is not able to apply the small business capital allowance provisions for a period of five income years, commencing from the first later year for which the entity could have made the choice to apply the provisions. This rule is contained in s 328-175(10), and is commonly referred to as the “lock out” rule.

Amendments in the Bill propose to alter the way the lock out rule applies in particular income years. Small business entities would not be required to apply the lock out rule to income years that end on or after 12 May 2015 but on or before 30 June 2017.

In other words, the increased threshold that applies between 12 May 2015 and 30 June 2017 applies to all small business entities, including those subject to the five-year lock out rule in that period because they previously opted out of the small business entity capital allowance provisions. For the purposes of applying the lock out rule to an income year after 30 June 2017, only the choice made in the in the last income year ending on or before 30 June 2017 is relevant.

Artificial or contrived arrangements to claim deduction

The Government says that, consistent with the objective of the increased threshold applying to newly acquired assets, it is not intended that assets acquired under artificial or contrived arrangements have access to the increased threshold, or for that matter to the existing arrangements. An example of an arrangement of this kind is one where a number of related small business entities that earned income from similar income sources sold their assets to one another in order to satisfy the “first acquired” requirement and write off the full value of those assets under the increased threshold.

While a specific provision has not been included under the amendments in the Bill for artificial or contrived arrangements, the Government says the general anti-avoidance provisions are intended to be applied to arrangements of that kind. The explanatory memorandum says: “In the event of evidence that small business entities systematically engaged in artificial or contrived arrangements designed to take advantage of the increased threshold and the general anti-avoidance provisions became too administratively difficult to apply, retrospective amendments to explicitly prohibit such behaviour would be considered to ensure that the integrity of the small business capital allowance provisions is maintained.”

Date of effect

The changes would apply only to assets first acquired at or after 7.30 pm, legal time in the ACT, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Assets that do not satisfy these timing requirements would continue to be subject to the existing $1,000 threshold.

Previous announcement

The changes were announced in the 2015–2016 Federal Budget

Primary producers

The Bill would amend ITAA 1997 to allow taxpayers carrying on a primary production business to claim an immediate deduction for capital expenditure on water facilities and fencing assets, and to deduct capital expenditure on fodder storage assets over three years.

Key features

• Primary producers may deduct capital expenditure on a fodder storage asset over three years. Previously, a primary producer could deduct the capital expenditure on a fodder storage asset over the effective life of the asset. The availability of accelerated depreciation would be limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia.

–        A repair of a capital nature or an alteration, addition or extension, to an asset or a structural improvement that is primarily and principally for the purpose of storing fodder will be a separate depreciating asset, ensuring that deductions for capital expenditure on those assets are not denied solely by the operation of ss 40-50 and 40-555.

• Primary producers may deduct capital expenditure on a “water facility” (which retains its existing meaning as defined in s 40-520) in the year in which the expenditure is incurred. Previously, primary producers and irrigation water providers could deduct capital expenditure on water facilities over three years.

–        These amendments apply to irrigation water providers in addition to primary producers. This continues the existing equivalence of treatment of irrigation water providers and primary producers for deductions of capital expenditure on water facilities.

• Primary producers may deduct capital expenditure on a fencing asset in the year in which the expenditure is incurred. A fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. The availability of accelerated depreciation would be limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fencing asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia.
• A primary production business includes a business to cultivate plants, maintain animals, conduct fishing operations or fell trees. The full definition is contained in s 995-1(1).
• The amendments will be included in Div 40-F and operate as an exception to the general rules applying to deductions of capital expenditure on depreciating assets contained in Div 40.

Date of effect

The amendments would apply to assets that an entity starts to hold, or to expenditure an entity incurs, at or after 7.30 pm, by legal time in the ACT, on 12 May 2015.

Previous announcement

The changes were announced in the 2015–2016 Federal Budget.

Source: Tax Laws Amendment (Small Business Measures No 2) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5466%20Recstruct%3Abillhome .

[Postscript: At the time of publication, the Bill had passed all stages of Parliament without amendment and was effectively awaiting Royal Assent.]

Dependent spouse tax offset to be abolished

The Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015 has been introduced. It proposes to amend ITAA 1936 and ITAA 1997 to:

• repeal the provisions providing an entitlement to the dependent spouse tax offset (DSTO), and associated cross references to the DSTO contained in other provisions in the tax law;
• expand the dependent (invalid and carer) tax offset (DICTO) by repealing the provision excluding spouses covered by the DSTO from being covered by DICTO;
• remove the DSTO and instead allow the DICTO to be claimed as a component of the zone tax offset (ZTO), overseas civilians tax offset (OCTO) and overseas forces tax offset (OFTO); and
• rewrite the notional tax offsets contained in ITAA 1936 covering children, students and sole parents (which are used for calculating components of ZTO, OCTO and OFTO) into ITAA 1997 and update cross references to reflect the rewrite.

Under the changes:

• a taxpayer who has a spouse who is genuinely unable to work due to invalidity or carer obligations will be eligible for DICTO (worth up to $2,471 [indexed]) if they contribute to the maintenance of the spouse and meet certain income tests and other eligibility criteria; and
• taxpayers eligible for the ZTO, OFTO or OCTO can receive a further entitlement of 50% or 20% of their DICTO entitlement as a component of ZTO, OFTO or OCTO depending on where they reside.

A number of technical amendments to the DICTO are proposed to ensure it operates as intended.

Date of effect

The amendments generally apply to the 2014–2015 income year and to all later income years. The technical amendments apply to the 2012–2013 income year, and to all later income years that align with the introduction of the DICTO.

Previous announcement

The measure was announced in the 2014–2015 Budget.

Other amendments

The Bill also proposes the following amendments:

• Finalisation of the Investment manager regime (IMR) – The Bill amends ITAA 1997 to implement the third and final element of the IMR reforms. In addition, these amendments make some changes to the existing regime. The IMR reforms are designed to attract foreign investment to Australia and promote the use of Australian fund managers by removing tax impediments to investing in Australia. The development and introduction of an IMR was a recommendation of the 2009 Australian Financial Centre Forum report, Australia as a Financial Centre: Building on our Strengths, commonly known as “the Johnson Report”.
• Modernisation of the Offshore banking unit (OBU) regime – The Bill makes a number of reforms to modernise the OBU regime. The reforms include measures implementing recommendations of the Johnson Report, and targeted amendments to address a number of integrity concerns with the existing regime.
• Income tax exemption for the Global Infrastructure Hub Ltd – The Bill amends ITAA 1997 to exempt the Global Infrastructure Hub Ltd from liability to pay income tax on ordinary income and statutory income.
• Cessation of the First Home Saver Accounts (FHSAs) Scheme – The Bill repeals the legislation providing for the FHSAs Scheme, including the related tax concessions.
• Update of deductible gift recipients (DGRs) list – The Bill amends ITAA 1997 to update the list of DGRs. The changes will extend the listing of the Australian Peacekeeping Memorial Project Incorporated and the National Boer War Memorial Association Incorporated.
• Miscellaneous amendments – The Bill makes a number of miscellaneous amendments to taxation, superannuation and other laws. These amendments include style and formatting changes, the repeal of redundant provisions, the correction of anomalous outcomes and corrections to previous amending Acts.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5454%20Recstruct%3Abillhome .

R&D tax incentive rate reduction back in spotlight

The Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015 has been introduced. It proposes to amend ITAA 1997 to:

• reduce the rates of the tax offset available under the R&D tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points. 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%. Under the changes:

–        eligible entities (i) with annual turnover of less than $20 million; and (ii) which are not controlled by an exempt entity or entities, may obtain a refundable tax offset equal to 43.5% of their first $100 million of eligible R&D expenditure in an income year and a further refundable tax offset equal to the amount by which their research and development expenditure exceeds $100 million multiplied by the company tax rate; and

–        all other eligible entities may obtain a non-refundable tax offset equal to 38.5% of their eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which their research and development expenditure exceeds $100 million multiplied by the company tax rate.

–        Date of effect: the changes will apply to income years starting on or after 1 July 2014.

• abolish the seafarer tax offset – would repeal Subdiv 61-N.

–        Date of effect: will apply to assessments for 2015–2016 and later income years.

Both measures were announced in the 2014–2015 Federal Budget.

In the 2015–2016 Budget, the Government reiterated its intention to change the rates of assistance under the R&D tax incentive to 43.5% for eligible entities with a turnover under $20 million per annum (and not controlled by an income tax exempt entity) and 38.5% for all other eligible entities.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5456%20Recstruct%3Abillhome .

Age Pension changes on the way

The Social Services Legislation Amendment (Fair and Sustainable Pensions) Bill 2015 has been introduced to give effect to several 2015–2016 Budget measures (and reintroduce some measures previously in 2014 Bills that are still before the Senate). In summary, the Bill proposes to amend the Social Security Act 1991, the Veterans’ Entitlements Act 1986, ITAA 1997 and other Acts as follows:

• Age Pension assets test – increase the assets test free areas from 1 January 2017 but tighten the assets test taper rate at which the Age Pension begins to phase out.
• Defined benefit schemes – introduce a 10% cap on the “deductible amount” of defined benefit income streams (excluding military super schemes) for the purposes of the social security income test from 1 January 2016.
• Age Pension while overseas – reduce from 26 weeks to six weeks the time for which Age Pension recipients will be paid their basic means-tested rate while outside Australia.
• Seniors Supplement – replace the Seniors Supplement with the Energy Supplement.
• Education Supplement – cease the pensioner education supplement and the education entry payment.

Age Pension assets test

The Bill will amend the Social Security Act 1991 and the Veterans’ Entitlements Act 1986 to increase the assets test threshold (or assets free area) for a single homeowner to $250,000 (up from $202,000) and $375,000 for a homeowner couple (up from $286,500) from 1 January 2017. The assets test threshold for non-homeowners will be increased to $200,000 more than homeowner pensioners; that is, $450,000 for a single and $575,000 for a couple.

Assets test taper rate

The assets test taper rate at which the Age Pension begins to phase out will be increased from $1.50 of pension per fortnight to $3.00 of pension for each $1,000 of assets over the relevant assets test threshold. This measure will essentially restore the $3.00 taper rate that was in place before 20 September 2007, when the then Government reduced it from $3.00 to $1.50 as part of the Simplified Superannuation measures.

The increased taper rate means that the maximum value of assets that a homeowner couple can hold to qualify for a part pension will be reduced from $1.151 million to approximately $823,000 from 1 January 2017 (or $547,000 for a single homeowner instead of the current $775,500). For a non-homeowner couple, the Age Pension will not phase out completely until $1.023 million (down from $1.298 million) or $747,000 (for a single non-homeowner instead of the current $922,000).

Note that indexation of the assets test free area will be paused for three years from 1 July 2017 under changes by the Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014. Accordingly, the Bill will repeal those provisions from the 2014 Budget Measures No 6 Act to ensure the assets limits for pensions are not paused.

Seniors Health card guaranteed

Those whose pension is cancelled as a result of the asset test changes from 1 January 2017 will automatically be issued with a Commonwealth Seniors Health Card (CSHC), or a Health Care Card for those under pension age. Veterans whose service pension is cancelled under this measure will retain their Veterans’ Affairs Gold Card. The usual income test applying to such cards will be disregarded for this purpose.

Pensioners who are overseas at 1 January 2017 but would otherwise qualify for a card will be automatically issued such a card upon their return, provided they return within 19 weeks of leaving Australia. Pensioners who are overseas at 1 January 2017 but return to Australia after 19 weeks will also qualify for a card if they have a nil rate of pension on 1 January 2017 as a result of these changes. However, the card will not be automatically issued. They will need to claim the card on their return.

 Date of effect

The changes would come into effect on 1 January 2017.

Previous announcement

The Age Pension assets test measures were previously announced by the Minister for Social Services on 7 May 2015 ahead of the 2015–2016 Budget. At that time, Mr Morrison said that more than 90% (or 3.7 million pensioners) who receive pension linked payments would either be better off or have no change to their arrangements under these proposals. Mr Morrison said that more than 170,000 pensioners with modest assets would have their pensions increased by an average of more than $30 per fortnight should the proposed measure come into effect from January 2017. This would include around 50,000 part pensioners who would now qualify for a full pension under the changed rules. However, 91,000 current part pensioners would no longer qualify for the pension and a further 235,000 would have their part pension reduced.

The Minister said that all couples who own their own home with additional assets of less than $451,500 would get a higher pension. Couples who don’t own their own home and have asset holdings up to $699,000 in January 2017 would be better off. For singles the maximum threshold point, below which pensioners would be better off, would be $289,500 for home owners and $537,000 for non-homeowners.

Defined benefit schemes: 10% cap on deductible amount

The Bill will amend ss 1099A and 1099D of the Social Security Act 1991 to put a 10% cap on the “deductible amount” for pension income received from a defined benefit superannuation scheme (excluding military super schemes) for the purposes of the social security income test. Currently, some defined benefit superannuants can have a large proportion of their superannuation income (ie the “deductible amount”) excluded from the pension income test. The deductible amount is calculated by reference to the tax-free component of the amount payable under the defined benefit income stream.

The proposed 10% cap seeks to close an unintended loophole that opened up in 2007 thanks to some legislative changes to ITAA 1997 which resulted in an increase to the tax-free component for some individuals. This had the effect of increasing the deductible amount for the purpose of the Social Security Act, resulting in individuals becoming entitled to income support payments.

Exclusions

Recipients of Veterans’ Affairs pensions and defined benefit income streams paid by military superannuation funds (ie “military defined benefit income streams”) would be exempt from this measure. In addition, the measure would not affect the means test treatment of income streams purchased for retail providers of these products. For example, AMP, AXA and funds of that nature, self managed superannuation funds (SMSFs) and small APRA funds do not operate in this way.

Date of effect

The measure would apply from 1 January 2016.

Previous announcement

The measure was previously announced by the Minister for Social Services on 7 May 2015 ahead of the 2015–2016 Budget. At that time, Mr Morrison said that this “loophole” was allowing around 48,000 high-income members from some public sector and large corporate defined benefits superannuation schemes to effectively fly “under the radar” on the income test for the pension. A defined benefit income stream is a pension paid from a public sector or other corporate defined benefit superannuation fund where the pension paid generally reflects years of service and the final salary of the beneficiary.

For most people with a defined benefit income stream, the Minister said that the gross income they receive from those schemes is subject to the income test for the pension. However, for those who are part of some large state government public sector schemes, significant portions of their income are disregarded in assessing their eligibility for a pension under the income test. The reason for that is to reflect what is seen as the voluntary after-tax contributions made when they were working. However, the amounts being deducted in these cases are in excess of those “notional contributions”, Mr Morrison said.

Age Pension access while overseas

The Bill proposes to reduce from 26 weeks to six weeks the length of time for which recipients of Age Pension (and a small number of other payments with unlimited portability) would generally be paid their basic means-tested rate while outside Australia. After six weeks’ absence from Australia, pensioners who have lived in Australia for less than 35 years would be paid at a reduced rate proportional to their period of Australian Working Life Residence (AWLR). The AWLR (known as the “35 years rule”) is the period a person has lived in Australia, as a permanent resident, between the age of 16 years and Age Pension age. To retain the basic means-tested rate while overseas, a person needs 35 years’ working life residence in Australia.

Date of effect

The amendments would commence from 1 January 2017 but only apply to absences starting on or after that date. Pensioners who are overseas on 1 January 2017 would continue to be allowed the full 26-week period of absence before their payment was potentially reduced.

Previous announcement

This measure was previously announced in the 2015–2016 Budget.

Energy Supplement replacing Seniors Supplement

The Bill proposes to cease payment of the Seniors Supplement for holders of the CSHC or Veterans’ Affairs Gold Card by reintroducing the measure in the Social Services and Other Legislation Amendment (Seniors Supplement Cessation) Bill 2014. Consequential amendments to ss 52-10, 52-40 and 52-65 of ITAA 1997 would also replace references to the tax-exempt Seniors Supplement with references to the Energy Supplement.

Date of effect

There would be a new start date of 20 June 2015 (meaning that the last quarterly payment of the Seniors Supplement would generally be made on 20 June 2015).

Education Supplement

The Bill reintroduces the measures from Sch 4 and Sch 5 to the Social Services and Other Legislation Amendment (2014 Budget Measures No 4) Bill 2014 to cease the pensioner education supplement and the education entry payment.

Date of effect

There would be a new start date of 1 January 2016.

Source: Social Services Legislation Amendment (Fair and Sustainable Pensions) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5485%20Recstruct%3Abillhome