Tax Tips for Small Business

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PRE-1 JULY 2019 TO-DO LIST
  • Make trust resolutions
  • Document the streaming of trust capital gains and franked dividends
  • Review private company loans
  • Consider deferring certain income, and bringing forward certain deductible expenses
  • Write-off bad debts
  • Pay employee bonuses and employee superannuation entitlements
RECORD-KEEPING TIPS
  • Record cash income and expenses
  • Account for personal drawings
  • Record goods for your own use
  • Separate private expenses from business expenses
  • Keep valid tax invoices for creditable acquisitions when registered for the goods and services tax (GST)
  • Keep adequate stock records
  • Keep adequate records to substantiate motor vehicle claims
MAXIMISE DEPRECIATION DEDUCTIONS

A key feature for small business in the 2019-20 Federal Budget on 2 April 2019 was the announcement that a small business entity (SBE) may potentially qualify for an asset write-off one under one of three varying caps during the year ended 30 June 2019.

A medium sized business entity (MSBE) will also be able to claim the instant asset write-off in respect of a depreciating asset that is both first acquired for a cost of less than $30,000 on or after 7.30pm on 2 April 2019 which is used or installed ready for use by 30 June 2020.

The write-off amount will depend on the date the asset is first used or installed ready for use for a taxable purpose. For businesses registered for GST, the threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.

Entity type   Data acquired Time depreciating asset first used or installed ready for use for a taxable purpose  Asset cost threshold 
Small business entity From 7.30pm 12 May 2015 1 July 2018 – 28 January 2019 $20,000
Small business entity From 7.30pm 12 May 2015 29 January 2019 – 7.30pm 2 April 2019 $25,000
Small business entity From 7.30pm 12 May 2015 7.30pm 2 April 2019 – 30 June 2020 $30,000

Where the cost of the asset is not available for the instant asset write-off deduction, it will be allocated to the general small business pool and depreciated at a rate of 15 per cent regardless of the date of acquisition during the 2019 year, provided the asset starts to be used or is installed ready for use during the year ended 30 June 2019.

For assets included in the pool at the start of the 2019 year, the opening pool balance will be depreciated at the rate of 30 per cent. Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.

However, where the closing balance of the SBE’s general small business pool is less than $30,000 as at 30 June 2019, the SBE will be entitled to a full deduction for the amount of the pool’s closing balance.

MAKE SURE YOU PAY THE CORRECT COMPANY TAX RATE AND APPLY THE CORRECT RATE FOR IMPUTATION

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 27.5 per cent in 2018-19. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income.

To qualify for the lower tax rate in 2018-19:

  • a company must have an aggregated turnover of less than $50 million, where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity
  • no more than 80 per cent of their assessable income is base rate entity passive income (replacing the requirement to be carrying on a business).

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.

As a corollary to the base rate passive entity income rules in determining the tax rate of a company, there have also been changes to the dividend imputation rules that apply to the franking of dividends by a company.

The company tax rate for franking distributions needs to assume that the aggregated turnover, assessable income, and base rate entity passive income is the same as 2017-18.
Where the company did not exist in the previous year, its corporate tax rate for imputation purposes will be deemed to be at the lower corporate tax rate of 27.5 per cent for that initial year.

These differential rates create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your registered tax agent is best placed to assist you with these issues.

SMALL BUSINESS INCOME TAX OFFSET

You will be entitled to the small business income tax offset for the year ended 30 June 2019 if you carry on business and your aggregated turnover for the 2019 year is less than $5 million. The offset rate is 8 per cent of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.

The ATO will work out the offset based on the net small business income earned as a sole trader and share of net small business income from a partnership or trust, as reported in the income tax return.

SMALL BUSINESS CGT CONCESSIONS

There are significant tax savings potentially available where an eligible active asset used in a business is sold for a profit and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year.

Additional conditions must now be met when a taxpayer disposes of an active asset being a share in a company or an interest in a trust on or after 8 February 2018.

Given the complexity of the small business CGT concessions, taxpayers should consult their registered tax agent for advice.

MAKE TRUST RESOLUTIONS BY 30 JUNE

As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2018-19 financial year by 30 June.

If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust’s accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

DOCUMENT THE STREAMING OF TRUST CAPITAL GAINS AND FRANKED DIVIDENDS TO BENEFICIARIES

Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

These streaming rules are complex, and taxpayers should consult their registered tax agent for advice.

CLAIM DEDUCTIONS FOR PROFESSIONAL ADVICE WHEN STARTING A BUSINESS

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over a five-year period as was the case previously.

If you established a business during the year, you should speak to your registered tax agent about claiming professional advice fees as an expense.

CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING

Small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.

This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

However, caution must be exercised – business restructuring is complex, so you should first speak to your registered tax agent.

REVIEW YOUR PRIVATE COMPANY LOANS

The income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:

  • a payment or a loan by a private company to a shareholder or an associate (like a family member)
  • the forgiveness of a shareholder’s or associate’s debt
  • the use of a company asset by a shareholder or their associate
  • the transfer of a company asset to a shareholder or their associate.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.

There are various things a private company can do before its 2018-19 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.

Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.

The rules around private company loans are complex and changing, therefore you should consult your registered tax agent on this.

PREVENT DEEMED DIVIDENDS IN RESPECT OF UNPAID TRUST DISTRIBUTIONS

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the unpaid trust distribution in 2018-19.

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2018-19 income tax return needs to be lodged.

Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.

Trustees and beneficiaries should consult their registered tax agent on the full implications of these very complex rules if applicable.

WRITE-OFF BAD DEBTS

Businesses can only obtain income tax deductions for bad debts when various conditions are met.

A deduction will only be available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.

The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.

Certain additional requirements must be met where the creditor is either a company or trust.

CHECK IF THE PERSONAL SERVICES INCOME RULES APPLY

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

If the PSI rules apply, they affect how you report your PSI to the ATO and the deductions you can claim.

PAYING EMPLOYEE BONUSES

If you pay staff bonuses and you want to bring expenses into the 2018-19 year, ensure they are quantified and documented in a properly authorised resolution – for example, board minutes – prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.

PAY ANY OUTSTANDING SUPERANNUATION ENTITLEMENTS

Ensure superannuation guarantee payments for employees are up-to-date, and report and rectify any missed payments to the ATO.

From 1 April 2019, there are new powers and offence penalties related to the payment of superannuation guarantee obligations.

Employers can also claim deductions for superannuation contributions made on behalf of their employees in the financial year they are made.

PREPARE FOR SINGLE TOUCH PAYROLL

Single touch payroll (STP) reporting has been extended to all employers from 1 July 2019. A number of options are available depending on the number of employees you have, whether they are closely held and whether you report via your tax or BAS agent.

Check with your payroll software provider to find out if your software is STP compliant.

If you don’t currently use payroll software, you should consult your registered tax agent for advice.

SEEK INDEPENDENT ADVICE ON INVESTMENT PRODUCTS PROMOTED AS BEING TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective.

If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source: https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/small-business.

 

 

TAX TIPS FOR INVESTORS

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RENTAL PROPERTIES

The ATO has received a large boost in funding to close the $8.7 billion individuals tax gap. Part of its focus is to ensure taxpayers are returning all rental income as well as claiming only the rental property expenses to which they are entitled. Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

The ATO receives details from Airbnb and other providers which will be data matched against tax returns. From this year, the ATO will receive details of your deductions data from your tax agent or myTax, and a multi-property rental schedule for individuals may be available this year and will be mandatory in 2020.

The ATO’s most recent random checks of rental claims found 90 per cent contained an error and it plans to double the number of audits on rental deductions.

Owners of rental properties that are being rented out or are ready and available for rent can claim immediate deductions for a range of expenses, such as:

  • interest on investment loans
  • land tax
  • council and water rates
  • body corporate charges
  • insurance
  • repairs and maintenance
  • agent’s commission
  • gardening
  • pest control
  • leases (preparation, registration and stamp duty)
  • advertising for tenants.

Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital works deductions spread over a number of years (for structural improvements, like re-modelling a bathroom).

Remember that landlords are no longer allowed travel deductions relating to inspecting, maintaining or collecting rent for a rental property.

Further, deductions for the depreciation of plant and equipment for residential real estate properties are limited to outlays actually incurred on new items by investors in residential real estate properties. For example, for properties acquired from 9 May 2017, landlords can no longer depreciate assets that were in the property at the time of purchase. However, should they purchase a new (not used or refurbished) asset, they can depreciate that asset.

Plant and equipment forming part of residential investment properties as of 9 May 2017 will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Ensure that interest expense claims are correctly calculated, rental income is correctly apportioned between owners, claims for costs to repair damage and defects at time of purchase are depreciated and that holiday homes are genuinely available for rent.

CAPITAL GAINS TAX PLANNING

Careful planning should be undertaken in planning the timing of the disposal of appreciating assets which may trigger a capital gain. In this context, it is important to recognise that CGT is triggered when you enter into a contract for the sale of a CGT asset rather than on its settlement.

This is particularly important where the entry and settlement of the contract straddle year-end. In these circumstances, it may be preferable from a cash flow perspective to defer the sale of the CGT asset to the subsequent year where other relief may be available, such as a capital loss sold on another asset.

Care should also be taken to ensure that an eligible asset is retained for the 12-month holding period required under the CGT discount, and to recognise that the CGT discount is not available to the extent that any capital gain accrued after 8 May 2012 and you were a foreign resident or temporary resident at any time after that date.

Keep proper records for all of your investments and ensure that you keep them for at least five years after a capital gains tax event occurred.

DO YOU HAVE FOREIGN INVESTMENTS?

If you are an Australian resident with overseas assets, you need to include any capital gains or capital losses you make on those assets in your tax return and may have to include income you receive from overseas interests in your tax return. You can ‘receive income’ even if it is held overseas for you.

If you receive foreign income that is taxable in Australia and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.

Please be aware that the ATO has information exchange agreements with revenue authorities in many foreign jurisdictions, and therefore is likely to receive data on any of your overseas investments and income.

Speak to your registered tax agent about your offshore investments and income.

INVESTMENT PRODUCTS PROMOTED AS TAX EFFECTIVE

The end of the financial year often sees the promotion of investment products that may claim to be tax effective. If you are considering such an investment, seek independent advice before making a decision, particularly from your registered tax agent.

Source : https://www.cpaaustralia.com.au/professional-resources/taxation/tax-tips/investors.

 

Tax Tips For Employees

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CLAIM WORK-RELATED DEDUCTIONS

Claiming all work-related deduction entitlements may save considerable income tax. Typical work-related expenses include employment-related mobile phone, internet usage, computer repairs, union fees and professional subscriptions that the employee paid themselves and for which they were not reimbursed.

Be aware that the ATO has received a large boost in funding that enables a stronger focus on ensuring taxpayers claim only the work-related expenses to which they are entitled.

Some of this additional funding will go to improving the checking of claims in real time, additional audits and prosecutions.

CLAIM HOME OFFICE EXPENSES

When you are an employee who regularly works from home and part of your home has been set aside primarily or exclusively for the purpose of work, a home office deduction may be allowable. Typical home office costs include heating, cooling, lighting and office equipment depreciation.

To claim the deduction, you must have kept a diary of the hours you worked at home for at least four weeks.

CLAIM SELF-EDUCATION EXPENSES

Self-education expenses can be claimed provided the study is directly related to either maintaining or improving current occupational skills or is likely to increase income from your current employment. If you obtain new qualifications in a different field through study, the expenses incurred are not tax deductible.

Typical self-education expenses include course fees, textbooks, stationery, student union fees and the depreciation of assets such as computers, tablets and printers.

Higher Education Loan Program (HELP) repayments are not deductible. You must also disallow $250 of self-education expenses, which can include non-deductible amounts such as child-care costs.

CLAIM DEPRECIATION

Immediate deductions can be claimed for assets that cost under $300 to the extent the asset is used to generate income. Such assets may include tools for tradespeople, calculators, briefcases, computer equipment and technical books purchased by an employee, or minor items of plant purchased by a landlord.

Assets costing $300 or more that are used for an income producing purpose can be written off over a period of time as a tax deduction.

The amount of the deduction is generally determined by the asset’s value, its effective life and the extent to which you use it for income-producing purposes.

MAXIMISE MOTOR VEHICLE DEDUCTIONS

If you use your motor vehicle for work-related travel, there are two choices of how you can claim.

If the annual travel claim does not exceed 5000 kilometres, you can claim a deduction for your vehicle expenses on the cents-per-kilometre basis. This figure includes all your vehicle running expenses, including depreciation.

The allowable rate for such claims changes annually; this year’s rate can be obtained from the ATO or your CPA Australia-registered tax agent.

You do not need written evidence to show how many kilometres you have travelled, but the ATO and therefore your tax agent may ask you to show how you worked out your business kilometres. The ATO has flagged concerns that taxpayers are automatically claiming the 5000-kilometre limit regardless of the actual amount travelled.

If your business travel exceeds 5000 kilometres, you must use the log book method to claim a deduction for your total car-running expenses.

You can contact your CPA Australia-registered tax agent to clarify what constitutes work-related travel and which of the above methods can be applied to maximise your tax position.

CLAIM DONATIONS

The ATO will pre-fill your tax return with the gifts and donations information they have received. Make sure to add in any donations not included where the receipt shows your donation is tax deductible.

If you made donations to an approved organisation through workplace-giving, you still need to record the total amount of your donations at this item.

Your payment summary, or other written statement from your employer showing the donated amount, is sufficient evidence to support your claim. You do not need to have a receipt.

CONSIDER SALARY SACRIFICE ARRANGEMENTS

You may wish to review your remuneration arrangements with your employer and forego future gross salary in return for receiving exempt or concessionally taxed fringe benefits and/or making additional superannuation contributions under a valid salary sacrifice arrangement.

You should consult a licensed financial planner to consider the merits of exploring these options.

SUPERANNUATION CONTRIBUTION LIMITS

Watch your superannuation contribution limits. You may wish to consider maximising your concessional or non-concessional contributions before the end of the financial year, but keep in mind the contribution caps were reduced from 1 July 2017.

The concessional contribution cap for the 2018-19 financial year is $25,000. Concessional contributions include any contributions made by your employer, salary sacrificed amounts and personal contributions claimed as a tax deduction by self-employed or substantially self-employed persons.

If you’re making extra contributions to your super, and breach the concessional cap, the excess contributions over the cap will be taxed at your marginal tax rate, although you can have the excess contribution refunded from your super fund.

Similarly, the annual non-concessional (post-tax) contributions cap is only $100,000 and the three-year bring forward provision is $300,000. Individuals with a balance of $1.6 million or more are no longer eligible to make non-concessional contributions.

High-income earners are also reminded that the contributions tax on concessional contributions is effectively doubled from the normal 15 per cent rate to 30 per cent if their combined income plus concessional contributions exceeds $250,000.

Importantly, don’t leave it until 30 June to make your contributions as your super fund may not receive the contribution in time and it will count towards next year’s contribution caps, which could result in excess contributions and an unexpected tax bill.

CLAIM A TAX DEDUCTION FOR YOUR SUPERANNUATION CONTRIBUTIONS

Claiming a tax deduction for personal superannuation contributions is no longer restricted to the self-employed. The rules changed on 1 July 2017 and anyone under the age of 75 will be able to claim contributions made from their after-tax income to a complying superannuation fund as fully tax deductible in the 2018-19 tax year.

Any contributions you claim a deduction on will count towards your concessional contribution cap. Such a deduction cannot increase or create a tax loss to be carried forward.

If you’re aged 65 or over, you will have to satisfy the work test to contribute and if you’re under 18 at 30 June you can only claim the deduction if you earned income as an employee or business owner. Other eligibility criteria apply.

To claim the deduction, you will first need to lodge a notice of intent to claim or vary a deduction for personal contributions form with your superannuation fund by the earlier of the day you lodge your tax return or the end of the following income year.

Source : www.cpaaustralia.com.au

Client Alert (November 2015)

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Unbundling phone and internet expense claims for work purposes

Individuals can claim deductions for mobile, home phone and internet expenses that have been incurred for work purposes. However, correct apportionment for work use is a key issue. According to the ATO, as there are many different types of plans available, taxpayers need to determine their work use using a reasonable basis.

For example, phone and internet services are often bundled. When a taxpayer is claiming deductions for work-related use of one or more services, they need to apportion their costs based on their work use for each service. If other household members also use the services, the taxpayer needs to take into account that use in their calculations.

TIP: If the taxpayer has a bundled plan, the ATO says they can identify their work use for each service over a four-week representative period during the income year. This will allow the taxpayer to determine their pattern of work use, which can then be applied to the full year. Please contact our office for assistance.

Student loan debt recovery from overseas

As part of the 2015 Federal Budget, the Government announced that Australians living and working overseas who have a Higher Education Loan Program (HELP) or Trade Support Loan (TSL) debt would soon be required to repay that debt in line with the obligations that apply for debtors who live and work in Australia.

The repayment obligations are expected to apply from 1 July 2017, based on income earned in the 2016–2017 financial year. The repayment obligations would only commence once the individual’s income reached the minimum repayment threshold. People heading overseas for more than six months would be required to register with the ATO, while those already overseas would have until 1 July 2017 to register.

TIP: The Government is intending to facilitate reciprocal arrangements with foreign governments. That is, the Government intends to share details of individuals to allow foreign governments to identify if their citizens with student loan debts are living and working here in Australia. At this stage New Zealand and the UK have been flagged for reciprocal arrangements.

TIP: Individuals can make voluntary repayments at any time to reduce their HELP debts. Currently, if you make a voluntary HELP repayment of $500 or more, you get a 5% bonus. If your HELP debt balance is less than $500 and you make a voluntary repayment to pay out the debt, you also get a 5% bonus. Voluntary payments are in addition to compulsory repayments. Any voluntary repayments you make are not tax deductible.

SMSF trustees warned to plan for cognitive decline

The ATO has highlighted the issue of cognitive decline, noting that dementia is on the rise and that it is important for trustees of self managed super funds (SMSFs) to have plans to ensure that financial matters will be effectively managed, if and when trustees no longer have the capacity to manage their funds.

“SMSFs are in reality usually managed by one trustee and require a high level of financial decision-making. While many trustees remain perfectly capable of effectively managing their financial affairs well past retirement age, there is a risk that some with diminished capacity to effectively manage their fund may nevertheless continue to do so. Most don’t have a plan for what to do if they get to this point”, said Kasey Macfarlane, ATO Assistant Commissioner, SMSF Segment, Superannuation.

In this regard, Ms Macfarlane said, it was essential that trustees “agree in advance about decision points and exit decisions, to have a will and appoint an enduring guardian and power of attorney”.

Tax debt release application refused

The Administrative Appeals Tribunal (AAT) has refused a couple’s application to be released from their tax debts after finding the couple (the taxpayers) would not suffer serious hardship if they were required to satisfy the liability. The tax debt the taxpayers sought to have released amounted to some $25,000. The taxpayers argued they should be released from the tax debts because their financial position was due to “serious family difficulties and problems”, which had distracted them from their tax affairs.

Although the AAT was sympathetic towards to the taxpayers, it concluded they had not discharged the onus of proving that they would suffer serious hardship if they were required to pay the relevant tax debts. The AAT reached this conclusion after calculating the taypayers’ fortnightly income and expenses. In this regard, the AAT noted the taxpayers were making more than the required minimum mortgage repayments and could draw down on their home loan.

Even if it were a case of serious hardship, the AAT said, it would not exercise the discretion to waive the debt. Among other things, the AAT noted that one of the taxpayers was a beneficiary in the estate of her mother and stood to receive approximately $200,000.

TIP: Serious hardship exists when payment of a tax debt would leave you unable to provide for basic living necessities for yourself and dependants. The Tax Commissioner has the discretion to release you from eligible tax debts; however, even if the Commissioner is satisfied that serious hardship would result from payment of the tax debt, he is not obliged to exercise the discretion in your favour.

Retiring partner’s individual interest in net income of partnership

According to a recent ATO Taxation Determination, where a retiring partner receives an amount representing his or her individual interest in the partnership net income, that amount is assessable under section 92 of the Income Tax Assessment
Act 1936. This is the case even if the partner retires before the end of the income year or the payment is received in a subsequent income year. Furthermore, the way the payment is labelled or described will not change the ATO’s conclusion that the receipt represents the partner’s share of partnership net income and needs to be brought to account under section 92.

The ATO notes that a partner’s individual interest in the net income of a partnership is essentially a question of fact in each case, to be determined by reference to the partnership agreement, the partnership’s accounting records and any other relevant documents. The ATO notes that its approach in the Determination is a departure from several private rulings, in which it took such receipts into account under the capital gains tax (CGT) rules. The ATO says that an amount representing an individual interest in partnership net income may also represent capital proceeds from a CGT event; however, any capital gain that would otherwise arise is reduced to the extent that it is assessable under other provisions.

TIP: The Taxation Determination applies to assessments made after 3 June 2015. The ATO says it will not seek to disturb favourable assessments made before that date.

ATO targeting ride-sourcing drivers and eBay online sellers

The ATO has announced that it will acquiring details of ride-sourcing drivers from ride-sourcing facilitators. The data will be matched electronically with ATO data holdings to identify people. The ATO said the aim of the data-match is to identify taxpayers that can be provided with tailored information to help them meet their tax obligations, or to ensure their compliance with the tax law. The ATO estimated that records relating to between 10,000 and 15,000 individuals will be matched.

TIP: The ATO has affirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The ATO has previously advised that it expects all drivers involved in providing ride-sourcing services to be registered for goods and services tax (GST). Please contact our office for information and assistance.

The ATO is also acquiring online selling data from eBay relating to registrants who sold goods and services to a value of $10,000 or more during the period 1 July 2014 to 30 June 2015. The data requested includes information that will enable the ATO to match online selling accounts to taxpayers, including names, addresses and contact information, as well as information on the number and value of transactions processed for each online selling account. It is estimated that records relating to between 15,000 and 25,000 individuals will be matched.

Client Alert Explanatory Memorandum (October 2015)

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This issue of Client Alert takes into account all developments up to and including 17 September 2015.

Excessive deduction claims on holiday homes on ATO hit list

The ATO is increasing its focus on holiday home investors and, in particularly, whether they are correctly claiming deductible expenses. The ATO has recently advised that it will send letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent.

Note: If a property is rented at below market rates, for example to family or friends, deduction claims must be limited to the income earned while rented.

The ATO is of the view that holiday home investors may be misinterpreting the rules regarding tax deductions for rental properties and may therefore be over-claiming on tax deductions for periods when the property is not being rented out. There are suggestions that the confusion among taxpayers as to what constitutes personal use or reasonable (or realistic) efforts to lease out a holiday home has resulted in homes that are not genuinely available for rent. The ATO has indicated that it will focus on the following:

  • excessive deductions claimed for holiday homes;
  • properties that are located in remote locations, with limited rental period and minimal income;
  • the use of risk detection data models and market analysis to identify and investigate claims where taxpayers have unusual rental income and deductions patterns compared to other investors in similar locations;
  • writing to owners to remind them of what they cannot claim; and
  • jointly owned holiday homes where husband and wife unequally divide the income and deductions.

It is important that the ATO continues to educate rental property owners on what they can and cannot claim. Taxpayers may have negatively geared investment properties giving rise to significant deductions and it is therefore inevitable that the need for review and monitoring arises.

Having said that, it should be noted that there is no clear guidance as to what constitutes “reasonable”, “genuine” or “realistic” in the context of making all the relevant attempts to rent out a holiday home. There is also a concern that investors may have to prove that efforts were undertaken to rent out the holiday home, perhaps by demonstrating that they have advertised the property for rent, engaged rental agents and so forth.

If the ATO were to commence a review or audit on a holiday home rental property, it is hoped that the ATO would not make any conclusions regarding the use of the holiday home or the intention of the taxpayer prior to objectively considering all the available evidence. This is especially the case if the holiday home is subject to seasonal demand.

Source: ATO media release, 31 August 2015, https://www.ato.gov.au/Media-centre/Media-releases/Helping-taxpayers-get-it-right-this-tax-time-on-rental-properties/.

Foreign property investors – reduced penalty period ending

The ATO has reminded foreign investors of a reduced penalty period if they disclose possible breaches of Australia’s foreign investment rules for purchases of Australian real property. The reduced penalty period is only available until 30 November 2015. To apply for the reduced penalty period, foreign investors must complete the reduced penalty disclosure form (available at http://compliance.firb.gov.au/personal-circumstances/).

From 1 December 2015, new criminal and civil penalties will apply. The ATO has also reminded foreign investors with an existing interest in agricultural land that they must notify it of their interests by 31 December 2015 and that the obligation to register exists regardless of the value of the land.

Note that a package of Bills to tighten Australia’s foreign investment framework has been introduced (see article below).

Source: ATO publication, “Foreign investors need to report”, 25 August 2015, https://www.ato.gov.au/Tax-professionals/Newsroom/Income-tax/Foreign-investors-need-to-report/.

Foreign investment framework rules to be tightened: Bills introduced

The Treasurer said the “legislative package shall ensure Australia maintains a welcoming environment for investment – but one that ensures that the investment is not contrary to our national interest”. Mr Hockey said the “reforms shall ensure that from 1 December 2015, Australia’s foreign investment framework is more modern, simple and effective.” The Bills are:

–        introduce civil penalties and additional stricter criminal penalties to ensure foreign investors and intermediaries do not profit from breaking the rules. Mr Hockey said the criminal penalties will be increased from $90,000 to $135,000 for individuals and will be supplemented by civil pecuniary penalties and infringement notices for less serious breaches of the residential real estate rules. Third parties such as real estate agents, migration agents, conveyancers and lawyers who knowingly assist a foreign investor to breach the rules will also be subject to both civil and criminal penalties. Note the ATO is administering a reduced penalty period for those who self-report non-compliance before 30 November 2015 (see above);

–        transfer to the ATO the responsibility of regulating foreign investment in residential real estate. The Treasurer noted the Government has provided $47.5 million over four years to the ATO to improve compliance and enforcement of the rules. In this regard, Mr Hockey noted the ATO’s data-matching abilities. Note that in May 2015, the ATO had announced that it will require details of foreign investors that apply to the Foreign Investment Review Board (FIRB) to purchase residential or agricultural land in Australia for the 2010–2011 to 2015–2016 financial years;

–        enable the lowering of screening thresholds for investments in Australian agriculture. Since 1 March 2015, the screening threshold for foreign purchases of agricultural land has been lowered from $252 million to $15 million based on the cumulative value of agricultural land owned by that investor. The Government is also introducing a $55 million threshold for direct interests in agribusinesses from 1 December 2015; and

–        reduce red tape by removing routine cases and better aligning the foreign investment framework with other corporate legislation. For example, Mr Hockey said the substantial interest threshold will be raised from 15% to 20% to better align the foreign investment rules with the takeover rules in the Corporations Act 2001. This means investors acquiring a stake of less than 20% will no longer need foreign investment approval.

  • Foreign Acquisitions and Takeovers Fees Imposition Bill 2015
    (http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5515%20Recstruct%3Abillhome) – introduces fees on all foreign investment applications to fund the costs of administration and enforcement of the new regime. For residential and agricultural properties valued at $1 million or less, foreign investors will pay a fee of $5,000. Higher fees apply to more expensive residential and agricultural properties as well as commercial real estate and business applications.
  • Register of Foreign Ownership of Agricultural Land Bill 2015
    (http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5516%20Recstruct%3Abillhome) – establishes a register of foreign ownership of agricultural land operated by the ATO. On 1 July 2015, the Government established a register of foreign ownership of agricultural land operated by the ATO. All existing holdings must be registered with the ATO by 31 December 2015 and any new interests registered within 30 days. The ATO is collecting information such as the location and size of the property and size of the interest acquired. The Government has previously advised that the data will be made available to the public from 2016. The Government is also working with the states and territories to use their land titles data to expand the register in the future.

Note the Bills were still before the House of Reps at the time of writing.

Source: Treasurer’s second reading speech, “Foreign investment reform package”, 20 August 2015, http://jbh.ministers.treasury.gov.au/speech/026-2015/.

Payroll tax grouping – know the rules

The payroll tax grouping rules are complex and many employers across Australia are not aware of their existence or their obligations under these rules.

The payroll tax grouping rules require employers to group their payroll tax liabilities with other businesses that they control and have the effect of deeming businesses to be a single entity for payroll tax purposes.

Under the payroll grouping rules, wages of these related businesses are then added together, and the calculation of their payroll tax liability is based on the group’s total wages.

Further, all members of the group become liable for the payroll tax debts of the group which are incurred while they are members of that group. This means that if one member defaults in the payment of tax, that amount may be recovered from any of the other group members.

This article provides a basic overview of the rules.

Payroll tax – background

Payroll tax is a state or territory based tax payable by employers as a percentage of total wages paid to employees.

Although payroll tax is a state tax, different jurisdictions have different payroll tax rates and general deduction thresholds. New South Wales, Northern Territory, South Australia, Tasmania and Victoria have substantially identical payroll tax legislation and Queensland has legislation to align to these states and territories.

Payroll tax is calculated on wages and salaries paid (or payable) by an employer to its employees and deemed employees at the following rates:

State/territory Payroll tax rate 2015–2016
ACT 6.85%
NSW 5.45%
NT 5.5%
Qld 4.75%
SA 4.95%
Tas 6.1%
Vic 4.85%
WA 5.5%

Payroll tax only becomes payable by an employer (or group – see below) when the total of all wages paid exceeds a general deduction threshold. The annual thresholds are different in each state and territory and are as follows:

State/territory General deduction threshold 2015–2016
ACT $1,850,000
NSW $750,000
NT $1,500,000
Qld $1,100,000
SA $600,000
Tas $1,250,000
Vic $550,000
WA $800,000 (phases out to $7,500,000)

Each state and territory also has a monthly threshold which, with the exception of New South Wales and Tasmania (which have different thresholds for 28-day, 30-day and 31-day months), is 1/12th the annual threshold.

For New South Wales and Tasmania, the monthly thresholds are as follows:

  New South Wales 2015–2016 Tasmania 2015–2016
29-day month $59,426 $99,044
30-day month $61,475 $102,459
31-day month $63,525 $105,874

Generally, employers are required to self-assess their liability to payroll tax on a monthly basis, which is then reconciled at the end of each financial year. Employers are required to register for payroll tax if during any one month their total Australian wages (or the group’s total Australian wages) exceed the relevant monthly deduction threshold level.

For payroll tax purposes the definition of wages is very wide and includes:

  • normal wages;
  • staff allowances;
  • staff commissions and bonuses;
  • employer (pre-tax) superannuation contributions including super guarantee payments, monetary and non-monetary salary sacrifice contributions and contributions to defined benefit funds;
  • the aggregate grossed up (using type 2 factor) amount fringe benefits;
  • the value of shares and options;
  • payments made to certain contractors;
  • certain payments made by employment agencies in relation to employment agency contracts;
  • director payments; and
  • termination payments and paid-out accrued leave.

There are, however, a number of payments that are specifically exempted from payroll tax such as:

  • maternity or adoption leave paid in addition to normal leave entitlements;
  • payments made under the Commonwealth Government’s Paid Parental Leave scheme;
  • contributions made by employers to a non-fringe benefit portable long service leave scheme or a redundancy or severance scheme;
  • the reimbursements of business expenses incurred by employees for expenses incurred in the course of the employer’s business but only where the precise amount is reimbursed;
  • the income tax free portion of redundancy or early retirement payments; and
  • certain payments made by an insurer, and compulsory Workers Compensation payments.

Illustrative example 1

ABC Pty Ltd has employees in both Victoria and Tasmania and in a 31-day month, the monthly wages paid for all of those employees is $50,000. As ABC Pty Ltd has businesses in more than one Australian jurisdiction, it will need to calculate its payroll tax liability in both states.

Victoria

The monthly Victorian general deduction threshold is $45,833 (based on $550,000/12 months). ABC Pty Ltd would therefore need to register for payroll tax in Victoria as it has exceeded the monthly Victorian general deduction threshold of $45,833.

Tasmania

The monthly Tasmanian general deduction threshold is $105,874 (the specific threshold for a 31-day month). Given that ABC Pty Ltd pays its employees $50,000, it would not need to register for payroll tax in Tasmania as it has not exceeded the monthly Tasmanian threshold.

The nexus test for payroll tax

The payroll tax legislation has provisions to determine in which Australian jurisdiction a payroll tax liability arises in situations where the employees of a business work in more than one state or territory. The nexus provisions look at a number of factors in order to determine the state or territory most closely connected with the employee’s services. These factors are considered in the following order:

  • the state or territory where the employee’s principal place of residence is;
  • where the employee has no principal place of residence, the state or territory where the address of the Australian Business Number of the employer is registered;
  • where the employer does not have an Australian Business Number or has more than one, the jurisdiction where the employer has their principal place of business;
  • if none of the above can apply, the state or territory jurisdiction where the wages, or the majority of the wages, are paid or payable. This would generally be the jurisdiction in which the employee has their bank account; and
  • if none of the above apply, the state or territory where the majority of the employee’s work occurs.

The nexus test is also important when considering the available general deduction thresholds because if a business pays wages in more than one state or territory the threshold is calculated as a proportion equal to the ratio of wages paid in a particular state or territory.

For example, if the wages paid in Victoria were 25% of the total Australian wages paid, then the relevant threshold for Victoria would be 25% of the full threshold of $550,000, ie $137,500.

Payroll tax grouping – basic rules

The grouping provisions have the effect of deeming businesses to be related and include these businesses in a group for payroll tax purposes.

Businesses will be grouped for payroll tax purposes if there is a common link between them. That is, if the grouping definitions are met, businesses are obliged to form a group unless they can obtain the relevant exemption.

Where payroll grouping occurs, a single threshold deduction applies to the group as if it were a single entity.

Nonetheless, each group member has to register for payroll tax and lodge a separate return but the calculation of their payroll tax liability is based on the group’s total wage.

When will grouping occur?

A payroll tax group will occur in the following circumstances:

1.         Related companies

All corporations that meet the Corporations Act 2001 definition of “related companies” are grouped. In that definition companies are taken to be related if two or more companies are:

  • a holding company and a subsidiary; or
  • both subsidiaries of the same holding company.

This applies even if the common ownership is by virtue of an overseas holding company.

It should also be noted that the potential exemption from grouping referred to above is not available at all to companies grouped under the related companies’ provisions.

2.         Use of common employees

Businesses will be required to be grouped when any services agreement between two or more businesses results in the employees of one business performing duties as an employee for another business.

Not all service agreements will trigger this provision. In order for this to apply the service agreement must set out the specific duties to be performed by the employees of a business for the other business.

Illustrative example 2

Alpha Pty Ltd and Beta Pty Ltd are related companies. During recent times, Beta Pty Ltd has been struggling to meet increased demand from customers and requires additional administrative support at its head office located in NSW.

As a result, Alpha Pty Ltd enters into a service agreement with Beta Pty Ltd under which Alpha will provide two of its employees to Beta. The employees will undertake specific receptionist, secretarial and administrative duties at Beta Pty Ltd for a period of six months.

This arrangement would be considered to be the provision of employees for specific duties connected with the business and a grouping requirement between the two businesses would arise.

Alpha Pty Ltd and Beta Pty Ltd will therefore be required to form a tax group for payroll tax purposes.

3.         Commonly controlled businesses

Where two or more businesses are controlled by the same person or persons there is a requirement to group for payroll tax purposes. For these purposes a person includes individuals or a trustee or a corporate entity.

Businesses are considered to be commonly controlled where a person or persons control more than 50% across different entities. For example:

  • One person is the sole business owner (whether or not as trustee).
  • Joint owners, together as trustees, are the sole business owners.
  • A person or set of persons are entitled to exercise more than 50% of the voting power at directors’ meetings or more than 50% of voting rights attached to voting shares that the company has issued.
  • A person or set of persons constitute or control more than 50% of the board of management of a business entity.
  • A person or set of persons own more than 50% of the capital of a partnership or are entitled to more than 50% of the profits.
  • A person or set of persons are a beneficiary of more than 50% of the value of a trust. (Under a discretionary trust, all beneficiaries are deemed to have a controlling interest).
  • An entity has a direct, indirect or aggregate interest of more than 50% in any corporation.

With the exception of entities grouped for payroll tax under the related companies’ provision, a business may apply for an exclusion from grouping. This may be granted where the relevant state or territory is satisfied the business is conducted independently and not connected with any other group member.

Only one member of a payroll tax group can claim the group’s threshold entitlement. The net effect is therefore, a reduction in the availability of the threshold(s).

Take home message

A careful examination of the implications of the payroll tax grouping provisions should be made for all business structures. In particular, the application of the grouping provisions may vary for each state or territory, so the applicable provisions should be reviewed. The potential eligibility for exclusion from the rules should also be assessed. Furthermore, as business conditions may change and as part of the overall management of a business, it may be prudent to regularly examine your business’s payroll tax obligations.

No GST credits for mining accommodation

In a succinct nine-paragraph decision, the Full Federal Court has dismissed the taxpayer’s appeal from the decision in Rio Tinto Services Ltd v FCT [2015] FCA 94 that it was not entitled to input tax credits (ITCs) for acquisitions relating to mining accommodation (employee/contractor housing) in the Pilbara.

Background

This was a test case on whether the definition of “creditable purpose” in s 11-15 of the GST Act contains a principal purpose test. Section 11-15(2)(a) provides that a thing is not acquired for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed. The provision of residential accommodation is an input taxed supply under s 40-35.

The taxpayer, Rio Tinto Services Ltd, was the representative member of the Rio Tinto Ltd GST group, which carried on a large scale mining enterprise in outback Australia. The group provided and maintained residential accommodation for its workforce in various locations, comprising some 2,300 houses and apartments. This was operated at a considerable loss, eg in 2010 the taxpayer received $6.1 million in rent but the associated costs exceeded $38.8 million.

The case was conducted as a test case for GST paid in October 2010 on expenditure including construction and purchase of new housing, repairs, cleaning and landscaping. The taxpayer claimed it was entitled to input tax credits of nearly $600,000 for acquisitions made by group members in providing and maintaining residential accommodation for the group’s workforce in the Pilbara region.

The taxpayer argued that the acquisitions were made wholly for a creditable purpose because the supply was not an “end commercial objective” in itself but was a necessary and essential part of its mining operations. The taxpayer said it was not in the business of providing residential accommodation. Rather, it provided housing at a loss in order to attract workers who would provide the labour necessary to carry on its mining enterprise. In other words, the taxpayer sought to link the acquisitions to its general operations (which were taxable and/or GST-free), so that an input tax credit could be claimed.

The Commissioner accepted that the provision of residential accommodation was a necessary and essential part of the group member’s business. However, the taxpayer’s ITC claims were rejected on the basis that they came within the terms of s 11-15(2)(a) of the GST Act.

Decision at first instance

In Rio Tinto Services Ltd v FCT [2015] FCA 94, Davies J rejected the taxpayer’s construction of s 11-15, holding that s 11-15(2)(a) prevented input tax credits from being claimed in relation to the supply of residential accommodation.

Davies J followed the view that s 11-15(1) is a “positive test”, while s 11-15(2)(a) is a “negative test” or “blocking provision”. According to her Honour, s 11-15(2)(a) is concerned with the objective relationship between an acquisition and making supplies which would be input taxed, not the “moving cause or principal purpose” behind the acquisition. Her Honour noted that something may be acquired in carrying on an enterprise but nonetheless wholly or partly relate to making supplies that would be input taxed. The words “relate to” denote that there must be a relationship or connection between an acquisition and the making of input taxed supplies, not that a principal purpose must be determined, the Court said.

In this case, Davies J found there was a direct and immediate connection between the acquisitions and the provision of the leased accommodation, and this triggered s 11-15(2)(a). Her Honour also rejected the taxpayer’s alternative argument that the input tax credits should be apportioned by applying the same proportion that mining product revenue formed to total revenue (in this case, 99.88%).

The taxpayer appealed to the Full Federal Court.

Full Federal Court decision

The Full Federal Court gave an ex tempore (“at the time”) judgment, unanimously holding that the terms of s 11-15(2)(a) of the GST Act do not depend on the reason or purpose for making the supply or acquisition. Rather, the Court said, they turn on characterising the extent to which the acquisition relates to the subsequent supply. This requires the precise identification of the relevant acquisition and a factual inquiry into the relationship between that acquisition and the making of supplies that would be input taxed. Where an acquisition relates wholly to input taxed supplies, it is not to be apportioned merely because that supply may also serve some broader commercial objective of the supplier.

In this case, the Full Federal Court said it was clear from the facts that all of the acquisitions related wholly to making supplies of rental residential accommodation. Although the supplies of accommodation were for the broader business purpose of carrying on the taxpayer’s mining operations, this did not alter the fact that the acquisitions all related to supplying premises by way of lease, which were input taxed supplies.

Accordingly, the Full Federal Court dismissed the taxpayer’s appeal.

Rio Tinto Services Ltd v FCT [2015] FCAFC 117, Full Federal Court, Middleton, Logan and Pagone JJ, 24 August 2015, http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/117.html.

ATO’s proportionate compliance approach to SMSFs

From 1 July 2014, the ATO has had three new regulatory compliance powers to deter and address SIS Act contraventions by self-managed superannuation fund (SMSF) trustees: education directions, rectification directions and administrative penalties. The new laws were introduced to give the ATO more flexible and proportionate powers to deal with the various levels of non-compliant behaviour by trustees. ATO Assistant Commissioner, SMSF Segment, Superannuation, Kasey Macfarlane, recently delivered a speech covering how the new regime works, its interaction with the ATO’s existing enforcement and other powers, how the ATO was applying the regime, and how it works for individual versus corporate trustees.

Some key points from the speech:

Identifying risk

The ATO selects SMSFs for audit and review using risk models, intelligence or referrals from other state or commonwealth departments and law enforcement agencies. The ATO has two primary automated risk models – when an SMSF is established and when an SMSF is operation.

In the SMSF establishment model, the ATO will, among other things, focus on the compliance history of the trustees/directors (eg if they have previously been part of another SMSF the ATO has had issues with). The ATO will also approach trustees by telephone and asks them questions about key obligations and concepts (eg sole purpose test). Depending on the answers, the ATO may allow registration or put conditions in place. Once the SMSF is in operation, the ATO will look at the income tax and regulatory history of the SMSF – this includes the SMSF annual return, auditor contravention reports, and other data sources. In addition, the ATO receives “dob-ins” from the general public and related parties of SMSF trustees and directors and the ATO manually reviews alerts and information in databases like RP data and AUSTRAC.

Rectifying contraventions

Many SMSF professionals use the Super P2P service. Ms Macfarlane said the ATO expects that in most cases where a trustee or auditor finds an issue or contravention, they can rectify it without ATO assistance. She said the auditor would likely report the contravention and the rectification and this would “generally be enough” to satisfy the ATO. Ms Macfarlane said the ATO encourages all trustees and their advisors to adopt this type of approach, ie to take steps to rectify a breach as soon as it is identified. She said in these circumstances, the ATO would be “unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose”.

Enforcement outcomes

The ATO reported the following enforcement outcomes for 2014–2015: 361 accepted enforceable undertakings; 54 education directions given (new power); 27 rectification directions given (new power); 92 funds made non-compliant, with trustees receiving a notice of non-compliance; 662 disqualified trustees; and 44 SMSFs wound-up due to compliance action.

Education and rectification directions

Ms Macfarlane made the following points:

  • Education directions – When a contravention of the SIS Act or regulations occurs due to a lack of knowledge or understanding by the trustee, an education direction may be appropriate. A trustee may be directed to undertake education in addition to other compliance action. For example, they could be directed both to undertake education and to rectify the contravention, and potentially also have an administrative penalty imposed.
  • Rectification directions – For contraventions of the SIS Act or regulations that occurred on or after 1 July 2014, the ATO can now direct the trustees to rectify a contravention with specified action and to provide the ATO with evidence of compliance with the direction. Generally, the ATO allows six months to rectify an issue, but in limited circumstances a slightly longer period may apply. This doesn’t prevent the ATO considering whether to accept an enforceable undertaking from a trustee if offered. These arrangements rely on SMSF trustees initiating the undertaking with the ATO before it issues the rectification direction (and this may be more practical for the trustees).

When considering whether to issue a direction, the ATO will take into account: any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction; the nature and seriousness of the contravention; and any other relevant circumstances.

  • Failure to comply with rectification direction – If the trustee fails to comply with the rectification direction within the specified period, then they have committed an offence of strict liability and are liable for a penalty of $1,800 (10 penalty units). The trustee or director may also be disqualified or issued with a notice of non-compliance. A trustee may request the terms of the rectification direction be varied, for example more time to complete the rectification. Requests must be made in writing, be received on or before the end of the period specified, be signed and dated, and set out the reasons for making the request. The ATO must make a decision on the request within 28 days or they will be taken to have refused the request. The trustee may object to the ATO decision to: give a rectification direction; or refuse to vary a rectification direction.

Administrative penalties

Where a trustee contravenes a specific provision of the SIS Act, an administrative penalty will automatically be imposed, as set out in s 166 of the SIS Act. From 31 July 2015, the Commonwealth penalty unit increased from $170 to $180. In the case of contraventions by a corporate trustee of an SMSF, the directors are jointly and severally liable for the one administrative penalty imposed whereas individuals will each receive a separate administrative penalty. Where there is more than one trustee, Ms Macfarlane said it’s expected each trustee will have the penalty imposed on them individually unless there are exceptional circumstances supporting the imposition on specific trustees only. The burden will be on the trustee to prove, for example that another trustee committed fraud against them. Ms Macfarlane made the following points re penalty remission:

  • When considering remission, the ATO will take into account: compliance history; rectification action; and any other relevant circumstances.
  • Trustees may object to the ATO’s decision not to remit, or not to remit in full, the administrative penalty. However, Ms Macfarlane said it is unlikely that a trustee will be given more than one penalty remission as multiple breaches demonstrate poor compliance history.
  • As the rules are new, so far the ATO has either remitted the penalty or are considering a remission request. However, Ms Macfarlane said that as the ATO audits more SMSFs for breaches made since 1 July 2014, people can expect to see increasing application of SMSF administrative penalties over the next 18 months, with requests for remission being denied in instances of serious and/or repeated non-compliance.
  • The ATO needs to confirm a contravention before it will apply a penalty. Ms Macfarlane said the ATO does not intend to automatically apply penalties to all contraventions reported to it. “We must impose the SMSF administrative penalty when we confirm an eligible breach during an ATO audit, so it’s best to avoid the audit by taking steps to rectify the breach before we get involved,” she said.

Approach to new powers

Ms Macfarlane said the ATO uses “the new powers and penalties to drive compliance, not to increase revenue”. “So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences,” she said. However, Ms Macfarlane also reminded people of the purpose of SMSFs to provide retirement benefits for members. “Those people looking to ‘play the system’ and receive a present-day tax benefit in their personal or business affairs are on notice; regulatory and income tax breaches related to the same transaction or arrangement will no longer be treated in isolation. If we find an aggressive taxation approach coupled with a regulatory breach we will definitely look to disqualify the trustee,” she said.

Ms Macfarlane also discussed four case studies illustrating how the new regime will operate. The following case study (Case study 4) illustrates a scenario where the ATO considers an education direction, a rectification direction and remission of administrative penalties:

Case Study 4

The Northern Super Fund, a regulated SMSF was established on 4 May 2011. John and Martha are members of this SMSF. The trustee is Vineyard Video Pty Ltd with John and Martha as directors. The fund’s total assets as at 30 June 2014 are $400,000. The fund lodged all SMSF annual returns on time with no prior contraventions reported.

The 2014–2015 SMSF annual return was due on 28 February 2016. An ATO audit of the 2014–2015 income year starts on 1 April 2017 as the SMSF annual return has still not been lodged and no extension to lodge has been requested.

The directors admit to the ATO case officer that they have not lodged because they are behind in the administration of the SMSF. For the 2014–2015 income year, it is found that the trustee has failed to: prepare the accounts and statements of the fund; appoint an approved SMSF auditor within the prescribed timeframe, and lodge the SMSF annual return.

Accordingly, in the 2014–2015 income year the trustee has contravened ss 35B, 35C and 35D of the SIS Act. As the contravention occurred after 1 July 2014, an education direction can be considered. Although an education direction may not be the most appropriate tool in this instance, as the trustee has lodged all previous annual returns on time, it appears that the trustee has knowledge of and is aware of the requirements.

It may be appropriate to issue a rectification notice to prepare the accounts and statements for the 2014–2015 income year, to provide the accounts and statements to an SMSF auditor and to lodge the 2014–2015 SMSF annual return.

Under s 166(1), the body corporate is liable for administrative penalties of $1,700 (10 penalty units) for contravening s 35B. Additionally the trustee is also liable for a failure to lodge penalty.

The trustee has lodged all other SMSF annual returns on time and has no prior contraventions. This is a first contravention and may warrant full remission of the administrative penalty.

Source: ATO speech, “The new administrative penalty regime: the ATO’s new stick”, Address to the Tax Institute National Superannuation Conference, Doltone House, Sydney, 20 August 2015, https://www.ato.gov.au/Media-centre/Speeches/Other/The-new-administrative-penalty-regime–the-ATO-s-new-stick/.

Find your small lost superannuation accounts

The Tax and Superannuation Laws Amendment (2015 Measures No 4) Bill 2015 has been introduced. It proposes to amend the Superannuation (Unclaimed Money and Lost Members) Act 1999 to increase the account balance threshold below which small lost member accounts will be required to be transferred to the Commissioner of Taxation, ie from $2,000 to $4,000 from 31 December 2015, and from $4,000 to $6,000 from 31 December 2016.

Other amendments

The Bill also proposes the following amendments:

  • CGT scrip-for-scrip rollover integrity – makes amendments to improve the integrity of the scrip-for-scrip rollover in Subdiv 124-M of the ITAA 1997. Date of effect: applies in relation to CGT events that occur after 7.30pm (AEST) on 8 May 2012.
  • Government employees delivering overseas assistance – amends the income tax law by removing an income tax exemption which applied to employees of an Australian government agency who work overseas for not less than 91 continuous days in the delivery of Official Development Assistance. These employees will no longer be able to claim an income tax exemption on the income they earn while overseas. Date of effect: applies from 1 July 2016.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 4) Bill 2015 awaiting Royal Assent, before the House of Reps at the time of writing, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5517%20Recstruct%3Abillhome.

Client Alert (October 2015)

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Excessive deduction claims on holiday homes on ATO hit list

The ATO is increasing its focus on holiday home investors and, in particular, whether they are correctly claiming deductible expenses. A key concern is when people make claims for expenses when the property was not available for rent. The ATO has recently advised that it will be sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home was rented out or was genuinely available for rent.

TIP: Holiday home investors should be aware that the ATO appears to be taking a broad approach in monitoring rental deductions. Where relevant, it may be prudent for holiday home investors to take this opportunity to review the rules surrounding holiday home tax deductions to ensure that any risks or issues are addressed in a timely manner. It may also be a good idea to review records now so that you are prepared should the taxman come knocking. If you have any questions about this issue, please contact our office.

Foreign property investors – reduced penalty period ending

The ATO has reminded foreign investors that the reduced penalty period for possible breaches of Australia’s foreign investment rules for purchases of Australian real estate will close soon. The reduced penalty period is only available until 30 November 2015. From 1 December 2015, new criminal and civil penalties will apply. The ATO said if foreign investors disclose a breach of the rules for residential real estate purchases during the reduced penalty period, depending upon their circumstances, they may:

  • be given a concessional period of 12 months to divest themselves of the property, rather than a shorter period;
  • not be referred for criminal prosecution.

Payroll tax grouping – know the rules

For payroll tax purposes, businesses may be grouped with other businesses if there is a link between the companies. Businesses may be deemed linked in several ways. One of the most common ways is where two or more businesses are controlled by the same person or persons. However, there are specific exclusions under the payroll tax grouping rules which could apply for a business depending on the circumstances. This will require making an application to the relevant state or territory revenue authority.

When a group exists, only a single tax-free threshold will apply to the whole group. That is, the separate businesses themselves will not each have the benefit of the tax-free thresholds. Each member of the group will be liable for any outstanding payroll tax of the other group members. Therefore, it is important for businesses to identify whether they could be grouped for payroll tax purposes.

TIP: The potential eligibility for exclusion from the payroll tax grouping rules should be assessed. Furthermore, as business conditions may change and as part of the overall management of a business, it may be prudent to regularly examine your business’s payroll tax obligations.

No GST credits for mining accommodation

The Full Federal Court has dismissed a taxpayer’s appeal from an earlier decision which held it was not entitled to input tax credits for acquisitions relating to providing accommodation to employees and contractors working in the Pilbara.

The taxpayer, Rio Tinto Services Ltd, was the representative member of the Rio Tinto Ltd GST group, which carried on a large-scale mining enterprise in outback Australia. The group provided and maintained residential accommodation for its workforce in various locations, comprising some 2,300 houses and apartments. This was operated at a considerable loss, for example, in 2010 the taxpayer received $6.1 million in rent but the associated costs exceeded $38.8 million.

The case was conducted as a test case for GST paid in October 2010 on expenditure including construction and purchase of new housing, repairs, cleaning and landscaping. The taxpayer claimed it was entitled to input tax credits of nearly $600,000 for acquisitions made in providing and maintaining residential accommodation for the group’s workforce in the Pilbara region. It argued the housing for its workers were a necessary part of its mining operations.

The Full Federal Court said it was clear from the facts that all of the acquisitions related wholly to making supplies of rental residential accommodation. Although the supplies of accommodation were for the broader business purpose of carrying on the taxpayer’s mining operations, it said this did not alter the fact that the acquisitions all related to supplying premises by way of lease, which were input taxed supplies.

ATO’s proportionate compliance approach to SMSFs

From 1 July 2014 the ATO has three new regulatory compliance powers to deter and address contraventions of the superannuation law by trustees of self-managed super funds (SMSFs). These three new powers include the ability of the ATO to issue education directions, rectification directions and administrative penalties. The new laws were introduced to give the ATO more flexible and proportionate powers to deal with the various levels of noncompliant behaviour by trustees.

It is important for trustees to understand the ATO’s compliance approach to administrating the SMSF sector. A key message that the ATO has been communicating to all trustees is for them to rectify a breach as soon as it is identified. According to ATO Assistant Commissioner, SMSF Segment, Superannuation, Kasey Macfarlane, in these circumstances, the ATO would be “unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose”.

Ms Macfarlane said the ATO uses “the new powers and penalties to drive compliance, not to increase revenue”. “So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences,” she said.

Find your small lost superannuation accounts

A Bill has been introduced into Parliament which contains legislative amendments to increase the account balance threshold below which small lost member accounts will be required to be transferred to the Commissioner of Taxation, ie from $2,000 to $4,000 from 31 December 2015, and from $4,000 to $6,000 from 31 December 2016.

TIPS:

Moving all your super from multiple accounts into one account (known as “consolidating your super”) might help you to save on fees and make managing your super easier.

There may be sound reasons for maintaining a separate small superannuation account. It may be prudent to assess those reasons and, if those reasons are still valid, to take steps to ensure that you remain an active fund member.

Individuals are able to claim back their superannuation from the Commissioner at any time. Interest, calculated in accordance with the Consumer Price Index (CPI), has been payable on unclaimed superannuation money repaid since 1 July 2013.

Please contact us for further information.

TaxWise Budget 2015-16

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TaxWise® 2015-16 FEDERAL BUDGET EDITION

The 2015-16 Federal Budget was handed down on 12 May 2015.

The intention of this Budget is to support small businesses and grow jobs, support families and ensure fairness of tax and benefits. At the same time, national security is being ensured as well as steadily repairing the budget in a measured way. The Treasurer, the Hon. Joe Hockey MP, stated that the Government is taking steps to continue to repair the budget “with sensible savings and a prudent approach to spending”.

The Budget mainly focuses on small businesses with aggregated turnover of less than $2 million and large businesses with global revenue of at least $1 billion. The main measures likely to affect you are outlined below. To ensure you know precisely how you may be affected by one or more of these measures, you should consult your tax adviser.

Budget measures affecting Individuals and Families

 

Medicare levy low-income thresholds for singles, families and single seniors and pensioners increased

With effect from the 2014-15 year, the Medicare levy low-income thresholds for singles, families and single seniors and pensioners will be increased per the table below:

2014-15 2013-14
Singles $20,896 $20,542
Couples (no children) $35,261 $34,367
Single seniors and pensioners $33,044 $32,279

The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156 for 2013-14).

The increase in these thresholds takes into account movements in the Consumer Price Index (CPI). This is to ensure that generally low-income taxpayers continue to be exempted from paying the Medicare levy.

Families package: reforms to child care system

The Budget contains a package of reforms to child care details of which are set out below.

Child Care Subsidy

From 2014-15, the Government will provide an additional $3.2 billion over five years to support families with child care needs. This is to help with getting parents back to work, to stay in work, and to undertake education and training or other recognised activities.

From 1 July 2017, a new Child Care Subsidy will be introduced to support families where both parents work. Families meeting the ‘activity test’ with annual incomes up to $60,000 will be eligible for a subsidy of 85% of the actual fee paid, up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.

No annual cap will apply for families with annual incomes below $180,000. However, the Child Care Subsidy will be capped at $10,000 per child per year for families with incomes of $180,000 or more.

Parents must also do a minimum of eight hours a fortnight of work, study or training to qualify for any child care support.

The income threshold for the maximum subsidy will be indexed by CPI with other income thresholds aligned accordingly. Eligibility will be linked to the new ‘activity test’ to better align receipt of the subsidy with hours of work, study or other recognised activities.

The hourly fee cap in 2017-18 will be set at $11.55 for long day care, $10.70 for family day care, and $10.10 for outside school hours care. The hourly fee caps will also be indexed by CPI.

Also, a new Interim Home Based Carer Subsidy

Programme will subsidise care provided by a nanny in a child’s home from 1 January 2016. The pilot programme will extend fee assistance to the parents of approximately 10,000 children. Families selected to participate will be those who are having difficulty accessing child care with sufficient flexibility.

Support for families will be based on the Child Care Subsidy parameters, but with a fee cap of $7.00 per hour per child.

The Child Care Subsidy replaces the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance payments that will cease on 30 June 2017.

Child Care Safety Net

Additional support will be provided to eligible families through a Child Care Safety Net, providing targeted support to disadvantaged or vulnerable families to address barriers to accessing child care. This will be funded by $327.7 million over four years from 2015-16.

The Child Care Safety Net consists of three programmes:

  • the Additional Child Care Subsidy;
  • a new Inclusion Support Programme; and
  • the Community Child Care Fund.
  • The Child Care Safety Net replaces the Inclusion and Professional Support Programme (ceasing on 30 June 2016) and the Community Support Programme (ceasing on 30 June 2017).

Immunisation requirements for eligibility to Government payments

From 1 January 2016, children will have to fully meet immunisation requirements, that is be up-to-date with all childhood immunisations, before their families can access subsidised child care payments or the Family Tax Benefit Part A end-of-year supplement.

Exemptions will only apply for medical reasons.

Accessing parental leave pay from both employer and Government

From 1 July 2016, individuals will no longer be able to access Government assistance in the form of the existing Parental Leave Pay (PLP) scheme, in addition to any employer-provided parental leave entitlements.

Currently, individuals are able to ‘double-dip’ and access Government assistance in the form of PLP as well as any employer-provided parental leave entitlements.

The Government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage). This will save the Government $967.7 million over four years through this measure.

End of Family Tax Benefit Part A large family supplement

From 1 July 2016, the Family Tax Benefit (FTB) Part A large family supplement will cease.

Families will continue to receive a ‘per child’ rate of FTB Part A for each eligible child in their family.

Family Tax Benefit Part A reduced portability

From 1 January 2016, families will only be able to receive Family Tax Benefit (FTB) Part A for six weeks in a 12-month period while they are overseas.

Currently, FTB Part A recipients who are overseas are able to receive their usual rate of payment for six weeks and then the base rate for a further 50 weeks.

Portability extension and exception provisions which allow longer portability under special circumstances will continue to apply.

Pension reforms not proceeding

The Government will not be proceeding with elements of the 2014-15 Budget measure “Maintain eligibility thresholds for Australian Government payments for three years” that relate to the pension income test free areas and deeming thresholds.

The Government proposal was to change how it deems the return from a person’s financial assets for the purposes of the pension active test. The deeming thresholds were to be reset from $46,000 to $30,000 for single pensioners and from $77,400 to $50,000 for pensioner couples from 1 September 2017. Instead, the pension income test free areas and deeming thresholds will continue to be indexed annually by CPI.

Modernising the methods used for calculating work-related car expense deductions

The methods of calculating work-related car expense deductions will be modernised from the 2015-16 income year.

This involves removing:

  • the ‘12% of original value method’; and
  • the ‘one-third of actual expenses method’

as these methods are used by less than 2% of those who claim work-related car expenses.

Remaining methods

The ‘cents per kilometre method’ will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre to apply for all motor vehicles, with the Commissioner of Taxation responsible for updating the rate in following years.

The ‘logbook method’ of calculating expenses will be retained.

These changes will not affect leasing and salary sacrifice arrangements and will better align car expense deductions with the average costs of operating a motor vehicle.

Zone tax offset to exclude “fly-in fly-out” and “drive-in drive-out” workers

From 1 July 2015, the zone tax offset will exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ (FIFO) workers where their normal residence is not within a ‘zone’.

The zone tax offset is a concessional tax offset available to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified locations.

The specified remote areas of Australia covered by the zone tax offset are comprised of two zones, Zone A and Zone B. In general, Zone A comprises those areas where the factors of isolation, uncongenial climate and the high cost of living are more pronounced and Zone B comprises the less badly affected areas. The tax offset for ordinary Zone A residents is accordingly higher than the tax offset for ordinary Zone B residents. A special category of zone allowances is available to taxpayers residing in particularly isolated areas (‘special areas’) within either zone.

Eligibility is based on defined geographic zones and residing or working in a specified remote area for more than 183 days in an income year. However, it is estimated around 20% of claimants do not actually live full-time in the zones.

The changes will better target the zone tax offset to taxpayers who have taken up genuine residence within the zones. This will align the zone tax offset with the original policy intent, which was to support genuine residents of zones. For those FIFO workers whose normal residence is in one zone, but who work in a different zone, they will retain the zone tax offset entitlement associated with their normal place of residence.

Changes to tax residency rules for temporary working holiday makers

From 1 July 2016, the tax residency rules will be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.

Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax-free threshold, the low income tax offset and the lower tax rate of 19% for income above the tax-free threshold up to $37,000.

Income tax relief for Australian Defence Force personnel deployed overseas

Income tax relief will be provided for Australian Defence Force personnel deployed on Operations AUGURY and HAWICK.

A full income tax exemption will be provided to personnel on Operation AUGURY, and the overseas forces tax offset will be available to personnel on Operation HAWICK.

Removal of Government employee income tax exemption

From 1 July 2016, the income tax exemption that is currently available to Government employees who earn income while delivering Official Development Assistance overseas for more than 90 continuous days will be removed.

This measure will remove the inconsistent taxation of Government employees delivering Official Development Assistance overseas by ensuring that their foreign earnings are treated as assessable income in Australia.

Australian Defence Force and Australian Federal Police personnel and individuals delivering Official Development Assistance for a charity or private sector contracting firm will remain eligible for the exemption.

The ‘Small Business’ package of Budget measures

Small business tax rate cuts

There are cuts to the tax rate for small businesses which will apply from the 2015-16 income year.

Incorporated Entities

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. However, the maximum franking credit rate for a distribution will remain at 30%.

Unincorporated entities

For sole traders and individuals who earn business income from a partnership or trust with an aggregated annual turnover of less than $2 million, a 5% tax discount (provided as a tax offset) will be introduced and capped at $1,000 per individual.

Small business accelerated depreciation changes

From Budget Night (starting 7.30pm (AEST) 12 May 2015), the threshold below which small businesses can claim an immediate deduction for the cost of an asset they start to use or install ready for use will be temporarily increased from $1,000 to $20,000. This will apply to assets acquired and installed ready for use from Budget Night through to 30 June 2017.

Only small businesses with an aggregated annual turnover of less than $2 million are eligible.

Assets valued at $20,000 or more that cannot be immediately deducted can be included in the entity’s small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter, in the same way the rules currently apply for assets costing $1,000 or more.

Also, the balance in the small business simplified depreciation pool will be able to be immediately deducted if it is less than $20,000 (including an existing pool).

The rules currently preventing a small business using the simplified depreciation regime for five years if it opts out of the regime will also be suspended until 30 June 2017.

While small businesses can access the simplified depreciation regime for a majority of capital assets, certain assets are not eligible (such as horticultural plants and in-house software) for which specific depreciation rules apply.

  • Note that from 1 July 2017, the $20,000 threshold for the immediate deduction of assets and the value of the pool will revert back down to $1,000.

Immediate deduction for business establishment costs

From the 2015-16 income year, an immediate deduction will be available for professional expenses that are associated with starting a new business, such as professional, legal and accounting advice or legal expenses to establish a company, trust or partnership.

Under the current laws, these expenses can only be deducted over a five year period.

CGT relief reforms for small business restructures

From the 2016-17 income year, small businesses with an aggregated turnover of $2 million or less may change the legal structure of their business without attracting a capital gains tax (CGT) liability. This measure recognises that new small businesses may initially choose a legal structure that no longer suits them once their business is more established. They will be able to change their legal structure without being hampered by potential CGT implications.

Currently, CGT roll-over relief is only available to individuals, trustees or partners in a partnership who incorporate. This new measure provides CGT relief to many more entities.

Broader FBT exemption for portable electronic devices

The fringe benefits tax (FBT) exemption for work-related portable electronic devices used primarily for work purposes will be expanded from 1 April 2016.

Small businesses with an aggregated annual turnover of less than $2 million that provide their employees with more than one qualifying work-related portable electronic device will be able to access the FBT exemption even if the additional items have substantially similar functions as the first device.

The current FBT exemption may only apply to more than one portable electronic device if the devices perform substantially different functions. This measure should help alleviate the confusion around which device is eligible for exemption from FBT where there is an overlap of functions (for example between a tablet and a laptop).

Measures encouraging new businesses

In order to encourage new businesses and entrepreneurship:

  • business registration processes will be streamlined with a single online portal (business.gov.au) developed for business and company registration, making it much easier to register a new business.

A new business will no longer need an Australian Company Number or business Tax File Number. It will be able to use its Australian Business Number to interact with the ATO and ASIC. The new portal (expected to be implemented by mid-2016) will provide all the relevant information clearly and will have integrated customer support; and

  • a regulatory framework to facilitate the use of crowd-source equity funding will be implemented, including simplified reporting and disclosure requirements, to help small businesses access innovative funding sources.

Employee share schemes: further changes

With effect from 1 July 2015, further minor technical changes will be made to the taxation of employee share schemes (ESS) to make ESS more accessible, by:

  • excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • providing the CGT discount to ESS interests that are subject to the start-up concession where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
  • allowing the Commissioner of Taxation to exercise discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

Accelerated depreciation for water facilities, fodder storage and fencing helping farmers prepare for drought

All primary producers will be able to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills for income years commencing on or after 1 July 2016.

Primary producers will also be allowed to depreciate over three years all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed. Currently, the effective life for fences is up to 30 years, water facilities is three years and fodder storage assets is up to 50 years.

The measure is aimed at improving resilience for those primary producers who face drought, assisting with cash flow and reducing red tape by removing the need for primary producers to track expenditure over time. It will form part of the Government’s White Paper on Agricultural Competitiveness.

Changes to Superannuation

Lost and unclaimed superannuation

From 1 July 2016, the Government will implement a package of measures to reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining administrative arrangements for lost and unclaimed superannuation. The cost of implementing the measures will be met from within the existing resources of the ATO.

 

Release of superannuation for a terminal medical condition

From 1 July 2015, terminally ill patients will be able to access superannuation early.

Currently, patients must have two medical practitioners (including a specialist) certify that they are likely to die within one year to gain unrestricted tax-free access to their superannuation balance.

The Government will change this period to two years, giving terminally ill patients earlier access to their superannuation.

Supervisory levies to increase

The Government will raise additional revenue of $46.9 million over four years from 2015-16 by increasing the supervisory levies paid by financial institutions. This should fully recover the cost of superannuation activities undertaken by the ATO and the Department of Human Services, consistent with the Government’s cost recovery guidelines.

Changes to GST

GST extended to offshore supplies of services and intangibles to Australian consumers

From 1 July 2017, offshore supplies of services and intangibles to Australian consumers will be subject to GST.

Exposure Draft legislation was released on Budget Night which extends the scope of the GST to offshore supplies of services and intangibles to Australian consumers. That is, all supplies of things other than goods or real property will be ‘connected with the indirect tax zone’ (ie Australia) where they are made to Australian consumers. This will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier.

The purpose of this measure is to ensure Australia’s GST revenue base does not erode over time as the number of foreign digital suppliers rises.

Responsibility for GST liability arising under the amendments may be shifted from the supplier to the operator of an electronic distribution service in certain circumstances where the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. Shifting responsibility for GST liability to operators is aimed at minimising compliance costs as operators are generally better placed to comply and ensure that digital goods and services sourced in a similar manner are taxed in a similar way. These amendments are broadly modelled on similar rules currently in operation in the European Union and Norway.

A modified GST registration and remittance scheme for entities making supplies that are only connected with the ‘indirect tax zone’ as a result of the amendments will also be implemented.

This change will require the unanimous agreement of the States and Territories before enactment of legislation.

Reverse charge rules for going concerns and farmland sales not proceeding

The previously announced measure to replace the current GST-free treatment for supplies of going concerns and certain farmland sales with a reverse charge mechanism will not proceed.

This measure was intended to reduce the compliance burden for taxpayers. However, during design of the implementation of this measure, it became apparent that proceeding with this measure would have resulted in adverse consequences for taxpayers.

FBT and Meal Entertainment

FBT: meal and entertainment for not-for-profit employees

From 1 April 2016, a separate, single grossed-up cap of $5,000 will be introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees of not-for-profits. Meal entertainment benefits exceeding the separate grossed-up cap of $5,000 can also be counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap. All use of meal entertainment benefits will become reportable.

Currently, employees of public benevolent institutions and health promotion charities have a standard $30,000 FBT exemption cap (this will be $31,177 for the first year of the measure, due to the Temporary Budget Repair Levy that is currently in place) and employees of public and not-for-profit hospitals and public ambulance services have a standard $17,000 FBT exemption cap (this will be $17,667 for the first year).

In addition to these FBT exemptions, these employees can salary sacrifice meal entertainment benefits with no FBT payable by the employer and without it being reported. Employees of rebatable not-for-profit organisations can also salary sacrifice meal entertainment benefits, but the employers only receive a partial FBT rebate, up to a standard $30,000 cap ($31,177 for the first year).

The aim of this measure is to improve integrity in the tax system by introducing a limit on the use of these benefits.

 

Luxury Car Tax change

Luxury car tax exemption for endorsed public museums and art galleries

Public museums and public art galleries that have been endorsed by the Commissioner of Taxation as deductible gift recipients will be allowed to acquire cars free of luxury car tax. The measure will only be in respect of cars acquired for the purpose of public display, consigned to the collection and not used for private purposes. This measure will have effect from the date of Royal Assent of the enabling legislation.

 

Cutting ‘red tape’ and funding the IGT

ATO reforms to cut ‘red tape’

An additional $130.9 million will be provided to the ATO over four years (including capital of $35.6 million) to deliver an improved experience for clients.

Red tape will be reduced and future administrative savings delivered through investment in three initiatives:

  • a digital-by-default service for providing information and making payments;
  • improvements to data and analytics infrastructure; and
  • enhancing streamlined income tax returns through the MyTax system for taxpayers with more complex tax affairs.

Additional funding for the Inspector-General

The Government will provide at least $14.6 million over five years to the Inspector-General of Taxation’s (IGT) office to support its operations. This funding is in addition to the 2014-15 Budget funding to the IGT in relation to the transfer of tax complaints handling.

 

Budget measures affecting Large Businesses

A raft of measures affecting large businesses were also announced in the Budget. These are summarised below:

For companies with global revenue of $1 billion or more

  • A targeted multinational anti-avoidance law will be introduced into the general anti-avoidance provisions.
  • The maximum administrative penalties that apply to companies that enter into tax avoidance and profit shifting will be doubled.
  • The OECD’s new transfer pricing documentation standards will be implemented from 1 January 2016.

Other measures combatting multinational tax avoidance

  • A voluntary corporate disclosure code will be developed to facilitate greater compliance with the tax system.
  • The Government will also tackle treaty abuse in its treaty practices, consult on the development of anti-hybrid rules, exchange information with other countries on harmful tax practices, and further fund the ATO’s profit-shifting investigations.

Other measures

  • The reforms to modernise the Offshore Banking Unit (OBU) regime and targeted integrity measures will proceed.
  • The start date of the new managed investment trusts (MITs) regime has been deferred to 1 July 2016 but MITs can choose to apply the new regime from 1 July 2015.

TaxWise® News is distributed by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

Client Alert – Federal Budget Edition (May 2015)

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PERSONAL TAXATION

Personal tax rates: budget deficit levy not to be extended

The 2015–2016 Budget did not make any changes to the current personal tax rates, although in the lead-up to the Budget, the Treasurer indicated that the 2% budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years.

The levy was announced in last year’s Budget and applies for three years from 1 July 2014. It is due to cease at the end of the 2016–2017 financial year.

Work-related car expenses simplified

The Budget confirmed that the 12% of original value and one-third of actual expenses incurred methods would be discontinued. That means only the cents per km and logbook methods remain. The Government will set 66 cents per kilometre as the rate for using the cents per km method, irrespective of a car’s engine size. The changes will apply from the 2015–2016 income year.

Medicare levy low-income thresholds for 2014–2015

From the 2014–2015 income year, the Medicare levy low-income threshold for singles will be increased to $20,896 (up from $20,542 for 2013–2014). For couples with no children, the threshold will be increased to $35,261 (up from $34,367 for 2013–2014). The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156).

For single seniors and pensioners, the Medicare levy low-income threshold will be increased to $33,044 (up from $32,279). This threshold applies to those entitled to the seniors and pensioners tax offset (SAPTO).
The measure will apply from 1 July 2014.

Temporary working holiday makers – tax residency rules to change

The Government will change the tax residency rules to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income.

This measure will apply from 1 July 2016.

 

SMALL BUSINESS

Tax rate cut to 28.5%

The Government announced, with effect from the 2015–2016 income year (ie from 1 July 2015), a 1.5% cut in the company tax rate applying to small businesses (turnover less than $2 million), reducing the tax rate to 28.5%. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income. The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies.

Tax discount for unincorporated small businesses

The Government said that with effect from 1 July 2015 individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity, and will be capped at $1,000 per individual for each income year.

Small business asset accelerated depreciation write-off

Small businesses would be able to immediately write off assets they start to use or install ready for use, provided the asset costs less than $20,000. This will apply for assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool. The Government will also suspend the current “lock out” laws for the simplified depreciation rules until 30 June 2017.

From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert to existing arrangements.

Immediate deductibility for professional expenses re start-ups

The Government will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. The measure will be available to businesses from the 2015–2016 income year.

CGT rollover relief for change to entity structure

The Government has confirmed that it will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point.

The measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established, for example a sole trader changing its business structure to a trust. The measure will be available from the 2016–2017 income year.

No FBT on work-related electronic devices

From 1 April 2016, ie the start of the 2016–2017 FBT year, the Government will allow an FBT exemption for small businesses that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions.

Further ESS changes

Significant changes to the employee share schemes (ESS) rules were announced in October 2014. Additional changes announced in the Budget will:

  • exclude eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • provide the CGT discount to employee share scheme interests that are subject to the start-up concession, where options are converted into shares and the resulting shares are sold within
    12 months of exercise; and
  • allow the Commissioner to exercise a discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

These changes will take effect from 1 July 2015.

 

GST

“Netflix tax” to start 1 July 2017

The Government has announced that it will impose GST on offshore intangible supplies to Australian consumers with effect from 1 July 2017. The measure has been cited in the media as the “Netflix” tax. The Government released draft legislation which contains the details of the changes.

The key concept in determining if a supply is made to an Australian consumer is determining if the entity is an Australian resident. Broadly, for individuals, the term takes its ordinary meaning. Similarly, a company will be an Australian resident if the company is incorporated in Australia or if it is effectively owned or controlled by Australian residents.

 

CHILD CARE AND PENSION/WELFARE MEASURES

Major childcare payments revamp

The Government announced it will establish a new and simpler mainstream Child Care Subsidy from 1 July 2017. Key points include the following:

  • Abolition of the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programmes.
  • A single means tested Child Care Subsidy for all families, subject to a new activity test, for up to 100 hours of subsidised care per child per fortnight.

Child care subsidies will remain linked to immunisation requirements strengthened, from 1 January 2016, under the Government’s “no jab, no pay” policy.

Paid parental leave – no double-dipping

The Treasurer said the Government will stop people from claiming parental leave payments from both the Government and their employers – he said this was effectively double dipping. This would apply from
1 July 2016.

Age Pension assets test: threshold increased, taper rate tightened

The Government confirmed that the Age Pension assets test threshold for a single homeowner will be increased to $250,000 (up from $202,000) and $375,000 for a homeowner couple (up from $286,500) from January 2017. The assets test threshold (or assets free area) for non-homeowners will be increased to $450,000 (single) and $575,000 (couple).

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. The measures will commence from
1 January 2017.

The Government will also be dropping its 2014 Budget proposal to index the Age Pension to CPI.

 

SUPERANNUATION

Defined benefit super schemes: Government to close loophole

The Government confirmed that a 10% cap will apply to the “deductible amount” for pension income received from a defined benefit superannuation scheme for the purposes of the social security income test. Recipients of Veterans’ Affairs pensions and defined benefit income streams paid by military superannuation funds are exempt from this measure. In addition, the measure will not affect the means test treatment of income streams purchased for retail providers of these products. The measure will apply from 1 January 2016.

 

Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. 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. The Bulletin 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.

Tax Wise Individual News (April 2015)

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IN THIS ISSUE
Medicare Levy Surcharge and Private Health Insurance Rebate

Superannuation guarantee rateSuper contributions caps

Changes to superannuation excess concessional contribution cap

Are you paying super fund fees unnecessarily?

Time limits for Family Assistance lump sum payments

Dabbling in Bitcoin? What’s the ‘tax’ story?

What’s the ATO’s view of GST and crowdfunding?

Are you in a partnership?

Correcting arrangements involving private companies and shareholders and their associates

Nil activity statements must be lodged

If you work in the building and construction industry

Do you own a rental property?

Selling or closing down a business

ATO Updates

The Privacy Commissioner and the Tax File Number privacy rule

Medicare Levy Surcharge and Private Health Insurance Rebate

Income thresholds
Legislation was passed in October 2014 to pause for three years the income thresholds which determine the tiers for the Medicare levy surcharge and government rebate on private health insurance from the 2015-16 financial year. Usually the income amounts would be increased by an indexed amount, but this is not going to happen for the next three years. The tables below set out the income levels for singles and families and confirm the income amounts will remain the same from the 2015 to the 2018 income years:

 

Singles

Income Year Base Tier Tier 1 Tier 2 Tier 3
2013-14 $88,000 or less $88,001 – $102,000 $102,001 – $136,000 $136,001 or more
2014-15 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2015-16 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2016-17 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more
2017-18 $90,000 or less $90,001 – $105,000 $105,001 – $140,000 $140,001 or more

 

Family

Income Year Base Tier Tier 1 Tier 2 Tier 3
2013-14 $176,000 or less $176,001 – $204,000 $204,001 – $272,000 $272,001 or more
2014-15 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2015-16 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2016-17 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more
2017-18 $180,000 or less $180,001 – $210,000 $210,001 – $280,000 $280,001 or more

It is anticipated indexation to increase the income amounts will begin again from the 2018-19 income year.

Private health insurance rebate percentage

From 1 April each year, the private health insurance rebate percentages for premiums paid will be subject to an annual adjustment. The rebate adjustment factor is based on a formula that uses the Consumer Price Index and the average annual increase in premiums. The first annual adjustment occurred on 1 April 2014.

This means there will be two different rebates to enter in your tax return for each tax year:

  • from 1 July 2014 to 31 March 2015, and
  • from 1 April 2015 to 30 June 2015.

These different rebates appear on your private health insurance statement as two separate lines. Both must be entered on your tax return.

The rebate amount for the period 1 July 2014 to 31 March 2015 is:

Age range Base Tier Tier 1 Tier 2 Tier 3
Under 65 years 29.04% 19.36% 9.68% 0%
65 – 69 years 33.88% 24.20% 14.52% 0%
70 years and over 38.72% 29.04% 19.36% 0%

Please note: We are awaiting the private health insurance rebate percentages for the period 1 April 2015 to 30 June 2015. We expect to receive these in April and will send them to you as soon as they are released.

Private health insurance rebate – reversal of amendments

The ATO has advised that it regularly matches data with health insurers to identify taxpayers who received the private health insurance (PHI) rebate through reduced premiums and have also claimed them in their income tax return. When this double claim occurs, the ATO automatically amends the taxpayer’s assessment to remove the rebate.

The ATO has reviewed amendments to reverse double claims for the PHI rebate and has identified some that have been made outside the taxpayer’s period of review.

The ATO says that in limited circumstances an assessment may be amended at any time to give effect to the provisions that relate to the PHI rebate.

The ATO has advised that if there are taxpayers affected, the ATO will write to the taxpayer’s registered contact (this could be your tax agent) about this decision and tell them a notice of amended assessment will issue soon. If you have been affected by this, you may have already received a notice of amended assessment, in which case, you should talk to your tax agent about it.

Medicare Levy Surcharge amounts

The following Medicare Levy surcharge amounts apply for the 2014-15 Income Year depending on which income tier you fall into (refer to the income tables above):

Income Tier Base Tier Tier 1 Tier 2 Tier 3
Surcharge amount 0% 1% 1.25% 1.5%

To do!
Completing your private health insurance rebate information in your tax return has become a little tricky with the introduction of an annual adjustment on 1 April for the private health insurance rebate percentages as now you have double the information to include in your return. See your tax agent for help in completing this part of return.

Superannuation guarantee rate

Previous editions of TaxWise have noted the change in the superannuation guarantee rate amounts. The rates have been included again as, if you are an employee, you should make sure your employer is contributing the right amount into your superannuation account:

Year Superannuation guarantee rate percentage
From 1 July 2013 9.25%
From 1 July 2014 9.5%
From 1 July 2015 9.5%
From 1 July 2016 9.5%
From 1 July 2017 9.5%
From 1 July 2018 9.5%
From 1 July 2019 9.5%
From 1 July 2020 9.5%
From 1 July 2021 10%
From 1 July 2022 10.5%
From 1 July 2023 11%
From 1 July 2024 11.5%
From 1 July 2025 12%
  Note!
 Check you are getting the right amount of super being paid into your super fund.

per contributions caps

With the super guarantee rate having changed, it is worth remembering what the contributions caps are as well.
The concessional contributions general cap includes:

  • employer contributions (including contributions made under a salary sacrifice arrangement);
  • personal contributions claimed as a tax deduction by a self-employed person.

The non-concessional contributions cap includes personal contributions for which you do not claim an income tax deduction.

Both of these are noted in the table below.

Income year Concessional contributions
general cap		 Non-concessional
contributions cap
2014-15 $30,000** $180,000
2015-16 $30,000 $180,000

**If you are 49 years old or over on 30 June 2014, the concessional contributions cap is temporarily increased for the 2014-15 income year to $35,000. This cap is not indexed and will cease to apply when the indexed cap that otherwise applies reaches $35,000.

Changes to superannuation excess concessional contribution cap

From 1 July 2013, if you exceed your concessional contributions cap, the excess amount will be included in your assessable income and taxed at your marginal rate. An interest charge also applies.

You can choose to release out of your super fund up to 85% of the excess contribution made if you complete an election form. If you do elect to release an amount, the ATO will issue your super fund with an ‘excess concessional contributions release authority’. Your super fund must pay the amount to be released to the ATO (as well as return the release authority statement) within 7 days.

The released amount must be paid directly to the ATO and is to be treated as a non-assessable, non-exempt benefit payment to the member.

To do!
It is worth checking your super fund account to ensure no excess contributions have gone in, or if they have, considering whether you want to withdraw them. Talk to your tax agent if you are unsure whether the right amount of super has been paid into your account.

Amendment to taxing excess super contributions

Following on from the above, the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 amends some provisions that relate to the taxation of excess super contributions to:

  • provide individuals with an option to be taxed on the earnings associated with their excess superannuation non-concessional contribution at their marginal tax rate;
  • ensure that individuals whose superannuation benefits are involuntarily transferred from one superannuation plan to another plan are not disadvantaged through the transfer; and
  • remove the need for a roll-over benefit statement to be provided to an individual whose superannuation benefits are involuntarily transferred, and allow taxation officers to record or disclose personal information in certain circumstances.

If you are concerned you have made excess contributions to your super fund, speak to your tax agent about whether you are likely to be affected by any of these recent changes.

The Bill received Royal Assent on 19 March 2015.

Are you paying super fund fees unnecessarily?

The ATO noted in a recent media release that Australians with multiple superannuation accounts could be paying thousands of dollars in unnecessary fees every year. According to new figures released by the ATO, 45% of working Australians have more than one superannuation account.

The ATO is encouraging taxpayers with multiple accounts to consider consolidating their superannuation into one preferred account. Australian Prudential and Regulation Authority (APRA) figures show the median figure for fees and charges paid by Australians for a low cost superannuation account is $532 per year.

To do!
Do you have multiple super fund accounts and are wasting money on unnecessarily paying fees in all the funds? If so, it is time to combine all your super into one account. Your tax agent can help you to do this.

Time limits for Family Assistance lump sum payments

If you want to claim any of the following family assistance payments for the 2014 financial year, you must lodge your claim with the Department of Human Services (Centrelink) by 30 June 2015 to be eligible:

  • Family Tax Benefit
  • Child Care Benefit
  • Single Income Family Supplement (SIFS).

Your tax agent will be able to help you make this claim.

Dabbling in Bitcoin? What’s the ‘tax’ story?

On 17 December 2014, the ATO issued its position on how it will treat Bitcoin, a digital currency, for tax purposes. The ATO’s views are:

Income Tax

  • Bitcoin is not a ‘foreign currency’ for the purposes of the income tax law because the ATO does not view Bitcoin as currency or foreign currency in the context in which those terms operate for the purpose of the Australian tax law (TD 2014/25).
  • Bitcoin is a ‘CGT asset’ for the purposes of the income tax law as it is regarded as ‘property’ for the purpose of the tax law (TD 2014/26).
  • Bitcoin is trading stock when held for the purpose of sale or exchange in the ordinary course of a business because it is regarded as property for tax purposes (TD 2014/27).

FBT

  • The provision of Bitcoin by an employer to an employee in respect of their employment is a property fringe benefit (TD 2014/28).

GST

  • A transfer of Bitcoin from one entity to another is a ‘supply’ for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to Bitcoin because Bitcoin is not ‘money’ for the purposes of the GST Act.
  • The supply of bitcoin is not a ‘financial supply’ nor an input taxed supply.
  • A supply of bitcoin is a taxable supply if the requirements under the GST Act are met.
  • A supply of bitcoin in exchange for goods or services will be treated as a barter transaction.
  • Bitcoin is not goods and cannot be the subject of a taxable importation. However, an offshore supply of Bitcoin can be a taxable supply under the ‘reverse charge’ rules.
  • An acquisition of Bitcoin will not give rise to input tax credits under the provisions of the GST Act which allow input tax credits for certain acquisitions of second-hand goods.
  • A supply of Bitcoin is not a supply of a voucher.

(See GSTR 2014/3)

The reasoning behind the ATO’s positions is very technical. If you are interested to understand more about it, your tax adviser will be able to tell you more.

Note!
If you are dabbling in Bitcoin, beware the possible tax implications for you.Also, at the time of writing, there is a Senate committee conducting an inquiry into how Australia should regulate digital currency, including how the tax system should treat digital currency, such as Bitcoin. The tax treatment for Bitcoin could potentially change pending the outcome of the inquiry due to report in August this year.

What’s the ATO’s view of GST and crowdfunding?

Crowdfunding involves using the internet and social media to raise funds for specific projects or particular business ventures. For ATO information about the GST treatment of crowdfunding, go to the ATO’s website.

Are you in a partnership?

In November last year, the ATO issued an addendum to Taxation Ruling TR 2005/7:

  • TR 2005/7A1 – Income tax: the taxation implications of ‘partnership salary’ agreements

The addendum amends the ruling to include the taxation consequences of a partner’s salary where the partnership is a corporate limited partnership.

As a result, ATO ID 2002/564 (Income Tax Partner Salary in A Corporate Limited Partnership) has been withdrawn.

If you are in a partnership, this change might affect you. Talk to your tax adviser to see if you are affected in any way.

Correcting arrangements involving private companies and shareholders and their associates

Recently, the ATO published on its website information about what to do if a private company has, for example, made a loan to a shareholder that is a ‘deemed dividend’ for tax purposes. A taxpayer can take corrective action by, for example, putting the right loan documentation in place, to ensure that the amount is not captured by the ‘deemed dividend’ rules (colloquially known as “Division 7A”).

Your tax agent will be able to assist you if you have any concerns about loans or other arrangements you may have in place with a private company, so it is always best to consult your tax professional for help with these sorts of things.

Note!
If you have a loan from a private company, check with your tax adviser to see if you need to take any corrective action.

Nil activity statements must be lodged

If you have Activity Statements to lodge, even if your Activity Statement is nil for a particular period, the Activity Statement still needs to be lodged. Failure to lodge an activity statement, even one with zero obligations, may delay processing and result in penalties.

It is good to stay on top of these obligations and obtain the assistance of your tax agent to ensure you lodge your Activity Statement on time, every time.

Tip!
The ATO has published some tips for getting your Activity Statement right which you can find on the ATO website.

If you work in the building and construction industry

The ATO has published the following information about the taxable payments reporting obligations of persons in the building and construction industry:

Do you own a rental property?

The ATO has advised that it has redeveloped the letters it is sending to agents and taxpayers regarding reviews of rental legal and/or borrowing expense claims to make the letter clearer. In feedback, the ATO was asked to provide information on the specific area of the expense claims it is reviewing. The re-drafted letters now identify:

  • return label and amounts in question;
  • the proposed adjustments;
  • what to do in the event of a disagreement; and
  • where to find relevant information on ato.gov.au about what can be claimed, including QR reader codes to scan for smart phones or tablets.
To Do!
You should see your tax adviser if you have a rental property and receive one of these letters.

Selling or closing down a business

If you are selling or closing down a business, there are some important tax obligations for the business that you should attend to, such as:

  • ensuring all outstanding Activity Statements and returns (income tax, FBT) have been lodged;
  • put in all requests for any refunds owed to your business;
  • cancel any PAYG withholding registrations for the business; and
  • cancel the business’ ABN (which should also result in the cancellation of other registrations such as GST).

More information can be found on the ATO’s website.

ATO Updates

Are you a director of a company?

The ATO advises that it has created a new page on its website with information about the director penalty regime, which is all about what happens when a company deducts PAYG withholding amounts from its employees’ salaries and wages, but fails to remit those amounts to the ATO. To access the page, go to the ATO website

Deductibility of working with children checks

The ATO advises that the requirement for people to obtain a Working with Children check will be introduced in NSW and exists in many other states. For information about when the cost of a working with children check is deductible, check the ATO website.

GST – avoiding common errors

For ATO advice about avoiding common errors that may occur when completing activity statements, accounting for GST and claiming GST credits, go to the ATO website

Farm management deposits scheme

For ATO information about the farm management deposits scheme, go to the ATO website.

The Privacy Commissioner and the Tax File Number privacy rule

The Privacy Commissioner has issued a new privacy rule under the privacy law about Tax File Numbers, to replace the previous Tax File Number Guidelines 2011. The new rule is the Privacy (Tax File Number) Rule 2015 (Legislative Instrument F2015L00249; registered 4 March 2015).

The primary purpose of the rule is to regulate the collection, storage, use, disclosure, security and disposal of individuals’ Tax File Number (TFN) information. A breach of the rule is an interference with privacy under the Privacy Act. Individuals who consider that their TFN information has been mishandled may make a complaint to the Privacy Commissioner.

The rule explicitly authorises the use and disclosure of TFN information by a TFN recipient (such as the Commissioner of Taxation and the trustees of a superannuation fund) for the purpose of giving an individual any TFN information that the TFN recipient holds about an individual. This ensures that the TFN Rule does not prevent an individual being given access to his or her information under Australian Privacy Principle 12 of the Privacy Act, or another Act that provides for access by persons to documents.

DISCLAIMER

Taxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

Client Alert – FBT Return Checklist (March 2015)

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Rate of tax

  Yes No
Are you aware the FBT rate for the FBT year ending 31 March 2015 has increased to 47%?Note the FBT rate will rise to 49% for the FBT years ending 31 March 2016 and 31 March 2017. The rate was 46.5% for the FBT year ending 31 March 2014.    

Gross-up rates

  Yes No
Are you entitled to a GST refund on the provision of the fringe benefit?If yes, Type 1 gross-up rate applies: 2.0802. If no, Type 2 gross-up rate applies: 1.8868.When the FBT rate rises to 49% for the 2015–2016 and 2016–2017 FBT years, the Type 1 and Type 2 gross-up rates will be 2.1463 and 1.9608, respectively.    
Are fringe benefits that are reportable on employees’ pay-as-you-go (PAYG) payment summaries grossed-up using the Type 2 gross-up rate?Reportable fringe benefits are grossed-up using the Type 2 rate, regardless of the gross-up rate used in calculating the FBT payable on a benefit.    

Types of benefits

  Yes No
Car fringe benefits
Was a vehicle made available to an employee (or an employee’s associate) for private use where the vehicle is owned or leased by you, an associate of yours or a third party pursuant to an agreement with you?If yes, a car fringe benefit may arise.    
Was the vehicle designed to carry less than one tonne or fewer than nine passengers?If yes, a car fringe benefit may arise. If no, the fringe benefit may be a residual benefit.    
Was the vehicle provided a taxi, panel van, utility truck or non-passenger road vehicle designed to carry a load of less than one tonne?If yes, an exemption from FBT may apply if the private use is limited to: travel between home and work; travel incidental to travel in the course of performing employment-related travel; or non-work-related use that is minor, infrequent and irregular.    
Did the employee contribute to the running costs of the vehicle?The value of the benefit is reduced by the employee’s contribution if appropriate evidentiary documents have been maintained.    
Has an election been made to use either the statutory formula method or the operating costs method?The statutory formula method must be used unless an election has been made to use the operating costs method. However, even if such an election has been made, the statutory formula method applies if it results in a lower taxable value.    
Has the valuation method been switched from the previous year?If the statutory formula method was used in the previous year and the operating costs method has been elected in this current year, has a logbook been maintained?    
Statutory formula method
Have you identified car benefits provided after 7.30pm AEST on 10 May 2011 that will be subject to the flat 20% rate? Transitional provisions may need to be flagged.For those using the statutory formula method, the 20% flat statutory rate has gradually phased in. From the 2014–2015 FBT year, the FBT statutory rate is 20% no matter how far the car is driven. See “Car fringe benefits statutory formula rates” on page 6.    
Were any non-business accessories (eg window tinting and rust-proofing) fitted to the vehicle during the FBT year?If yes, the base value of the car is increased by the (GST-inclusive) cost price of the accessories.    
How long has the vehicle been owned?If owned for more than four years, the cost base of the vehicle is reduced by one-third. However, this reduction does not apply to non-business accessories fitted after the acquisition of the vehicle.    
Were there any days during the FBT year when the vehicle was unavailable for private use?The taxable value of the car benefit is reduced by the number of days during the FBT year in which the vehicle was not used or available for private use by the employee (or the employee’s associate).    
Operating costs method
Was the vehicle acquired during the FBT year?If yes, has a log book been kept for a minimum continuous period of 12 weeks?    
What were the opening and closing odometer readings for the vehicle?The readings must be recorded to enable total kilometres travelled for the year to be calculated.    
Have you made a reasonable estimate of the business kilometres travelled and the business use percentage?This must be in writing, which is normally evident by maintaining a log book.    
Was the vehicle replaced during the FBT year?If the vehicle was replaced, the previously established business percentage may be transferred to the replacement vehicle, provided the percentage had not changed.    
What is the written-down value of the vehicle as at 1 April 2014?The deemed depreciation and deemed interest is calculated based on the written-down value of the vehicle as at 1 April 2014.    
Have you determined the total operating costs of the vehicle for the FBT year?Deemed depreciation and deemed interest must also be included in the operating costs of the vehicle.    
Car parking fringe benefits
Does your business meet the requirements to be classified as a small business entity (SBE) for income tax purposes?An exemption from car parking fringe benefits arises if your business is an SBE and the car parking is provided (ie not a commercial car park). An SBE is essentially an entity with an aggregated turnover of less than $2 million.    
Did you meet the costs, or part thereof, of the car parking expenses of an employee, where the car being parked is designed to carry a load of less than one tonne or fewer than nine passengers and the following conditions are present:•       the car is parked on the business premises;•       the car is used by the employee to travel between home and work and is parked at or in the vicinity of employment;•       the car is parked for periods totalling more than four hours between 7.00am and 7.00pm; and•       a commercial car parking station is located within one kilometre of the premises where the car is parked and the operator of the parking station charges more than $8.26 for all-day parking?

A car parking benefit potentially arises if the answer is yes.

    
Has an election been made for calculating the number of car parking benefits provided: actual usage records method, statutory formula method, or 12-week register method?If no election is made, the actual usage records method must be used.    
Has an election been made for calculating the value of car parking benefits provided: commercial parking station method, market value basis, or average cost method?The commercial parking station method will automatically apply if no election has been made.    
Living-away-from-home allowances
Has an allowance been paid to an employee by their employer to compensate the employee for additional non-deductible expenses and/or other additional disadvantages incurred because the employee’s employment duties require them to live away from their normal residence (or, for LAFHA benefits provided in respect of a period commencing before 1 October 2012, the employee’s usual place of residence)?A LAFHA fringe benefit may arise if the answer is yes. Note the treatment of LAFH allowances and benefits has been significantly overhauled, narrowing the scope for eligibility. Among other things, there is an increased requirement to ensure LAFH payments are properly tracked, categorised and substantiated.    
Meal entertainment fringe benefits
Has an election been made to use either the 50/50 split method or the 12-week register method?If no election is made, the taxable value is based on actual expenditure incurred.    
If using the 12-week register method, is the register still valid?A register is only valid for the FBT year in which the register period ends and the next four FBT years, provided that the total GST-inclusive entertainment costs do not vary by more than 20% between each FBT year.    
Did the employee (or their associate) contribute to the provision of the benefit?The taxable value of the benefit is reduced by any contributions.    
Loan fringe benefits
Was a loan made to an employee (or their associate) during the FBT year?A fringe benefit may potentially exist. A “loan” includes an advance of money, the provision of credit, the payment of money on account of another if there is an obligation to repay, or any other transaction that is a loan in substance.    
Was the interest rate charged on the loan lower than the notional FBT interest rate (5.95%)?The taxable value of the benefit is the amount by which the notional interest rate calculated on the loan for the year exceeds the amount of interest that has actually accrued on the loan during the year.    
Was the interest on the loan paid at least every six months?If interest is not paid at least every six months, a new loan equivalent to the deferred interest component will arise.    
Did the employee use the loan for income-producing purposes, which means they would therefore be entitled to a deduction (in their personal tax return) in respect of the interest incurred?The taxable value of the benefit is reduced by the amount to which the employee would be entitled to a deduction, provided a declaration has been given setting out particulars of the use to which the loan was put.    
In-house fringe benefits
Were any benefits that are similar or identical to those provided to your customers or clients provided to an employee (or an associate of an employee)?If yes, the first $1,000 of the aggregate of the taxable values of in-house fringe benefits (ie in-house expense payments, in-house property and in-house residual fringe benefits) provided to the employee during the year is exempt from FBT. However, the $1,000 reduction will not apply to an in-house benefit provided on or after 22 October 2012 under a salary packaging arrangement.    
Airline transport fringe benefits
Were any airline transport benefits provided?The ATO has reminded employers about airline transport fringe benefits. Changes have been made in respect of airline transport fringe benefits provided after 7.30pm AEST on
8 May 2012. Under these changes, there is no longer a separate category of fringe benefit for airline transport fringe benefits. Airline transport fringe benefits are now taxed under the in-house benefit provisions and the way the taxable value is calculated has been changed.The changes apply for the FBT year ended 31 March 2014 and later years, so the 2015 year will be only the second year they have applied. The ATO has reminded affected taxpayers that – because airline transport fringe benefits provided after the above date are taxed under the in-house benefit provisions – for the year ended 31 March 2014 onwards, airline transport fringe benefits will be included under the Property or Residual categories in the Details of fringe benefits provided item on the FBT return.		    
Property fringe benefits
Was any property provided (free or at a discount) in respect of an employee’s employment?Property includes all tangible and intangible property. Examples of property are goods, shares and real property. The ATO considers the provision of Bitcoin to be a property fringe benefit since the definition of intangible property includes any other kind of property other than tangible property.    
Have employer-provided property (in-house property fringe benefits) and those provided from other sources (external property fringe benefits) been identified?The taxable values for the former and latter are calculated differently.    
If the benefit is an in-house property fringe benefit, has the $1,000 exemption for “in-house benefits” been considered?The taxable value of in-house property fringe benefits may qualify for the general exemption of up to $1,000 for “in-house” benefits. However, the $1,000 reduction will not apply to an in-house benefit provided on or after 22 October 2012 under a salary packaging arrangement.    
Have in-house property fringe benefits accessed by way of salary packaging arrangements been identified?If an in-house property fringe benefit is provided on or after 22 October 2012 under a salary packaging arrangement, the taxable value of the benefit is an amount equal to the notional value of the benefit at the time it is provided. The notional value is the amount that the employee could reasonably be expected to pay under an arm’s length arrangement.    
If the benefit was an external property fringe benefit, were you dealing with the external party at arm’s length?If the property is acquired under an arm’s length transaction by the employer or an associate of the employer, the taxable value of the benefit is the cost price of the property reduced by the amount (if any) paid by the employee. This rule applies if the property is provided to the employee around the time it was acquired by the employer or associate etc.    
Would the employee have been entitled to a once-only deduction if he or she had incurred the relevant expenditure?The taxable value of the property fringe benefit is effectively reduced by the deductible amount (the “otherwise deductible” rule).    
Is an employee declaration required?The otherwise deductible rule requires an employee declaration setting out details sufficient to establish the connection between the property provided and the income-producing activities of the employee. However, if the property was provided exclusively in the course of the employee’s employment, a declaration is not required.    
Expense payment fringe benefits
Did you pay or reimburse an employee (or their associate) for any expenses incurred by them?Potentially, an expense payment fringe benefit arises. Examples include electricity, gas and telephone expenses, school fees, property rates, mortgage payments, and road tolls.    
Would the employee have been entitled to a once-only deduction if he or she had incurred the relevant expenditure?The taxable value of the expense payment fringe benefit is effectively reduced by the deductible amount (the “otherwise deductible” rule).    
Is an employee declaration required?A declaration, in an approved form, setting out particulars of the expense and the extent to which expenditure would have been otherwise deductible in earning the employee’s income, is required to reduce the taxable value of the expense payment fringe benefit.    
Have exempt expense payment benefits been identified?    
Work-related items
Did you provide an employee with any of the following work-related items: a portable electronic device (eg a laptop, mobile or GPS navigation device); an item of computer software; an item of protective clothing; a briefcase; or a tool of trade?If yes, an exemption from FBT may be available. Note there are different rules for items provided before 7.30pm AEST on 13 May 2008.    
Were the items provided primarily for use in the employee’s employment?If yes, an exemption from FBT applies.    
Did you provide the employee more than one each of the items listed above (except where the item is a replacement item)?If yes and the additional item has substantially identical functions to the original item (and is not a replacement item), the additional item will not be exempt from FBT. Note the ATO accepts that an iPad does not have substantially identical functions to a laptop computer.    
Minor, infrequent and irregular benefits
Were there any infrequent and irregular benefits with a notional taxable value of less than $300 per benefit being provided?A benefit with a notional taxable value of less than $300 does not automatically attract an exemption from FBT unless it is infrequent and irregular.    

 


FBT rates and thresholds

  FBT year ending 31 March 2015 FBT year ending 31 March 2014
FBT tax rate 47.0% 46.5%
Type 1 gross-up rate (ie entitled to a GST credit for the provision of a benefit) 2.0802 2.0647
Type 2 gross-up rate (ie not entitled to a GST credit for the provision of a benefit) 1.8868 1.8692
Reportable fringe benefits threshold (ie a total gross-up value exceeding $3,773)2 $2,0001 $2,0001
Car parking threshold $8.26 $8.03
Cents per kilometres for motor vehicle (where the benefit is a residual benefit):    
                Engine capacity Rate per kilometre Rate per kilometre
                0–2,500cc 50 cents 49 cents
                Over 2,500cc 60 cents 59 cents
                Motorcycles 15 cents 15 cents
Deemed depreciation rate (operating cost method) for car fringe benefits:    
                Date of car purchase Depreciation rate Depreciation rate
                On or after 10 May 2006 25% 25%
                From 1 July 2002 to 9 May 2006 18.75% 18.75%
                Up to and including 30 June 2002 22.5% 22.5%
Benchmark interest rate3 5.95% 6.45%
Minor and infrequent benefits threshold4 $300 $300
Record keeping exemption threshold $7,965 $7,779

(1)         Threshold is based on the total taxable value of fringe benefits provided to an employee.

(2)         The actual reportable fringe benefits amount shown on a PAYG summary is always grossed-up using the Type 2 gross-up rate.

(3)         The benchmark interest rate is used to calculate the taxable value of a loan benefit and the deemed interest of a car fringe benefit where an employer chooses to use the operating cost method.

(4)         Threshold is based on the taxable value of a benefit and applies to each benefit provided during the FBT year.

Car fringe benefits statutory formula rates

Below are the statutory car rates for car fringe benefits provided prior to 7.30pm AEST on 10 May 2011, or where you have a pre-existing commitment1 in place to provide the car after this time:

Kilometres travelled Statutory rate
Less than 15,000 26%
15,000–24,999 20%
25,000–40,000 11%
Above 40,000 7%

(1)         For those with pre-existing commitments (contracts entered into prior to 10 May 2011), the old statutory rates will continue to apply. The commitments need to be financially binding on one or more of the parties. However, where there is a change to pre-existing commitments, the new rate will apply from the start of the following FBT year. Changes to pre-existing commitments include refinancing a car and altering the duration of an existing contract. Changing employers will cause the new rate to apply immediately for the new employer.

Statutory rates for “new contracts” entered into after 7.30pm AEST on 10 May 2011 have been phased in as follows:

Kilometres travelled From 10 May 2011 From 1 April 2012 From 1 April 2013 From 1 April 2014
Less than 15,000 20% 20% 20% 20%
15,000–24,999 20% 20% 20% 20%
25,000–40,000 14% 17% 20% 20%
Above 40,000 10% 13% 17% 20%

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.