Client Alert Explanatory Memorandum (August 2017)

Tax cut for small businesses: ATO will amend returns

For the 2016–2017 income year, the company tax rate for small businesses decreases to 27.5%. Companies with turnover of less than $10 million are eligible for this rate. The maximum franking credit that can be allocated to a frankable distribution has also been reduced to 27.5% for these companies.

The reduced company tax rate of 27.5% will progressively apply to companies with turnover of less than $50 million by the 2018–2019 income year. The ATO says if a company lodged its 2016-17 company tax return early, and its turnover is less than $2 million, it will amend the return and apply the lower tax rate.

If the company’s turnover is from $2 million to less than $10 million, the company will need to review its return and lodge an amendment if required.

2016–2017 tax rate change and over-franking

Legislation has now passed to apply a 27.5% corporate tax rate from 1 July 2016 for small business entities (SBEs) with aggregated turnover of under $10 million. The legislation also introduced a new formula for determining the maximum franking credit entitlement for a frankable distribution, which is generally based on the company’s corporate tax rate for the income year.

Draft Practical Compliance Guideline PCG 2017/D7 notes that if an SBE fully franked a 2016–2017 distribution before 19 May 2017, the amount of the franking credit on members’ distribution statements may be incorrect if it was based on the 30% corporate tax rate.

The draft guideline sets out a practical compliance approach that affected entities may use to inform members of the correct franking credit attached to their distributions, as an alternative to requesting ATO permission to amend the distribution statement. Affected entities are corporate tax entities that paid a fully franked (or close to fully franked) distribution at the 30% rate between 1 July 2016 (for normal balancers) and 18 May 2017, where the distribution was over-franked because of the newly reduced 27.5% tax rate.

When the draft guideline is finalised, it will apply from the first day of an entity’s 2016–2017 income year (that is, 1 July 2016 for 30 June balancers).

Written notice informing members

The draft guideline allows affected entities to advise members in writing of their correct franking credit for the 2016–2017 income year without re-issuing the distribution statement. The written notice should contain the following details:

  • the name of the entity making the distribution and the member’s name;
  • the amount of the distribution and the date it was made;
  • the fact that the initial distribution statement was incorrect;
  • the revised amount of franking credit allocated to the distribution, rounded to the nearest cent;
  • the franking percentage for the distribution, worked out to two decimal places; and
  • the amount of any withholding tax deducted from the distribution.

The notice can be provided electronically. Members must then use the notice to correctly report on their 2016–2017 tax return.

No administrative penalties

The draft guideline indicates that affected entities will not be penalised for an initial incorrect 2016–2017 statement if they give each member either:

  • written notice clearly showing the correct amount of the franking credit; or
  • a new distribution statement (after receiving ATO permission to amend the statement).

Instant asset write-off extended for small business entities

The Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Act 2017 extends the period during which small business entities (SBEs) can access accelerated depreciation. The extension is for 12 months, ending on 30 June 2018.

SBEs will be able to can claim an immediate deduction for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 12 May 2015, and first used or installed ready for use on or before 30 June 2018. Depreciating assets that do not meet these timing requirements will continue to be subject to the $1,000 threshold.

SBEs will be able to claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2018.

Second element of cost of depreciating assets

SBEs will be able to claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred on or after on 12 May 2015 and on or before 30 June 2018. Costs that are incurred outside of these times will continue to be subject to the $1,000 threshold.

SBEs will be able to claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000 and the cost is incurred on or after 1 July 2018.

Extension of deduction for low pool values

From 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets, can be allocated to an SBE’s general pool and deducted at a specified rate for the depletion of the pool. This does not change.

Assets and costs allocated to a general pool are deducted at a rate of 15% in the year they are allocated and a rate of 30% in subsequent income years.

If the balance of an SBE’s general pool is less than $20,000 at the end of an income year, it can claim a deduction for the entire balance of the pool. The income year must end on or before 30 June 2018 (rather than the previously stipulated 30 June 2017).

If the balance of an SBE’s general pool is less than $1,000 at the end of an income year that ends after 30 June 2018 (instead of the previously stipulated 30 June 2017), it can claim a deduction for the entire balance of the pool.

Deferral of five-year “lock-out” rule

The increased threshold that applies until 30 June 2018 will apply to all SBEs, including those subject to the five-year lock-out rule in that period due to the entity previously opting out of the SBE capital allowance provisions.

For the purposes of applying the lock-out rule to an income year after 30 June 2018, only the choice made in the last income year ending on or before 30 June 2018 will be relevant.

ATO update on Manage ABN Connections

Manage ABN Connections is a new way for businesses to access government online services using their myGov login. The ATO says it is a secure login alternative to an AUSkey when accessing the Business Portal and other government online services, and can be used from mobile devices.

The ATO says feedback from tax professionals identified that further work is required to meet their needs. The ATO advised that the myGov login is therefore not currently available to access the Tax or BAS Agent Portals.

If a tax agent’s client already has a myGov account linked to the ATO, Centrelink or Medicare, they can now use Manage ABN Connections to access government online business services. If the client doesn’t have a myGov account, the ATO says they will need to create one and link to the ATO, Centrelink or Medicare before they can set-up their ABN connection.

If a tax agent’s client creates a myGov account and links to the ATO, tax agents should be aware that they will receive most of their personal ATO mail (and business ATO mail, if they are a sole trader) through their myGov inbox. The ATO says tax agents will still be able to access any correspondence the ATO sends to their client’s myGov inbox via the client communication list in the portal. If the client does not want to receive their ATO mail through their myGov inbox, the ATO says they should link to Centrelink or Medicare, not the ATO.

Work-related deductions denied: lack of documenting evidence

A pipe fitter has been denied deductions by the Administrative Appeals Tribunal (AAT) for work-related expenses: Re Hamilton and FCT [2017] AATA 734.

The expenses fell into three categories:

  • tool expenses ($945) – although his employer provided tools, the taxpayer said he also used his own tools;
  • mobile phone expenses ($519) – although mobile phones were banned from the work site, the taxpayer said he used his phone to communicate with work groups and supervisors and arrange tools, cranes and transport (the ATO allowed a $50 deduction for “minor use”); and
  • overtime meal expenses ($3,110) – the taxpayer was paid a meal allowance of $10.20 per day, but he claimed an average of $27 per day (the ATO allowed a deduction of $10.20 per day).

The AAT disallowed the claims because the taxpayer was unable to produce adequate documentary evidence:

  • tool expenses – the only documentary evidence produced were credit card statements showing charges incurred at a hardware shop, but there was no evidence to show what the charges were for (and the taxpayer failed to produce any receipts);
  • mobile phone expenses – the only documentary evidence produced were Telstra accounts, but they did not show where calls were made from, the time they were made or their duration; and
  • overtime meal expenses – the taxpayer did not produce any receipts and could not rely on the substantiation exception in s 900-60 of the Income Tax Assessment Act 1997 to claim the difference between the amount of the allowance and the amount claimed.

Super reforms: changes to TRIS, CGT relief, pension cap and LRBA integrity rules

The Treasury Laws Amendment (2017 Measures No 2) Act 2017 makes a range of technical amendments to the super reform legislation.

TRIS rules for becoming retirement phase pension

The amendments deem a transition-to-retirement income stream (TRIS) to be in retirement phase where the recipient of the income stream has satisfied a condition of release with a nil cashing restriction (eg retirement or attaining age 65). This means that a TRIS will stop being a pension (subject to 15% tax on fund earnings from 1 July 2017) and become a retirement phase superannuation income stream that qualifies for the earnings tax exemption once the recipient notifies the fund that a nil condition of release under the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) has been satisfied.

Except for attaining age 65, the individual will be responsible for notifying the fund of a nil condition of release (such as retirement, permanent incapacity or a terminal medical condition). The fund will be entitled to the earnings tax exemption from the time it is notified.

Under the super reform legislation, a superannuation income stream must be in the “retirement phase” from 1 July 2017 in order for the fund to claim an earnings tax exemption for the assets used to meet pension liabilities. A TRIS is specifically deemed not to be in retirement phase. As such, from 1 July 2017, a fund will not qualify to access the exempt current pension income (ECPI) provisions in relation to TRIS obligations.

The amendments will mean that a recipient of a TRIS will not need to commute and rollover their TRIS benefits to a replacement superannuation income stream to access the earnings tax exemption when the TRIS recipient later satisfies a condition of release with a nil cashing restriction. To avoid individuals having to restructure their TRIS interests to convert them into a retirement phase superannuation income stream, the amendments to s 307-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) will deem a TRIS to enter retirement phase when the recipient notifies the fund that a nil condition of release has been satisfied.

CGT relief for TRIS assets

The period in which an asset supporting a TRIS can cease to be a segregated current pension asset of a fund and still qualify for CGT relief will be extended to include the start of 1 July 2017. This change will ensure that the CGT relief applies as intended to segregated assets that support TRISs prior to the TRIS changes coming into effect. Extending the period to the start of 1 July 2017 seeks to recognise that the change for TRISs will apply from 1 July 2017 without any action being taken by the holder of the TRIS or the entity that provides it.

Pension balance credit for LRBA repayments

The Act provides that an additional pension transfer balance credit will arise for certain repayments of a limited recourse borrowing arrangement (LRBA) by a self-managed superannuation fund (SMSF) that shifts value between an accumulation phase interest to a retirement phase superannuation income stream interest in the fund: new s 294-55 of ITAA 1997. The amount of the credit will be equal to the increase in the value of the retirement phase interest. The credit will arise at the time of the repayment.

The measure is aimed at concerns about the ability of SMSF members to potentially use LRBAs to effectively transfer the growth in fund assets to the retirement phase, which would not currently be captured by the $1.6 million pension cap regime.

It is important to note that if the repayment by the fund is sourced from assets supporting the same retirement phase interest it will not result in a transfer balance credit as the LRBA reduction is naturally offset by a corresponding reduction in cash. However, if the repayment is sourced from other assets (eg assets that support a separate accumulation interest in the fund), there will be no offsetting decrease in the value of the retirement phase superannuation interest, meaning that a transfer balance credit is required for the increase pension interest by the repayment.

To determine whether a transfer balance credit has arisen, trustees will need to identify the source of any payments in respect of an LRBA that is supporting a retirement phase income stream. To the extent that such payments are sourced from other assets, a transfer balance credit will arise. It is not necessary to determine the total value of a particular super interest supporting an income stream in order to calculate the amount of a transfer balance credit for the repayment of a related LRBA. All that is relevant is the amount of the increase in the value of the interest, which can be determined by reference to the amount of the payment that is sourced from assets supporting accumulation phase interests.

Example

Bob is 65 and is the only member of his SMSF. Bob’s superannuation interests are valued at $3 million and are based on cash that the SMSF holds.

Bob’s SMSF acquires a $1.5 million property. This property is purchased after 1 July 2017 using $500,000 of the SMSF’s cash and an additional $1 million that it borrows through an LRBA. Bob then commences an account-based income stream.

The superannuation interest that supports this income stream is backed by the property, the net value of which is $500,000 (being $1.5 million less the $1 million liability under the LRBA). Bob therefore receives a transfer balance credit of $500,000.

Bob’s SMSF makes monthly repayments of $10,000. Half of each repayment is made using the rental income generated from the property. The other half of each repayment is made using cash that supports Bob’s other accumulation interests. At the time of each repayment, Bob receives a transfer balance credit of $5,000, representing the increase in value of the superannuation interest that supports his income stream. The repayments that are sourced from the rental income that the SMSF receives do not give rise to a transfer balance credit because they do not result in a net increase in the value of the superannuation interest that supports his income stream.

The LRBA integrity measure will only apply prospectively in relation to borrowings entered into on or after 1 July 2017. Importantly, a transitional provision ensures that it will not apply to the re-financing of an existing pre-July 2017 borrowing. However, to qualify for this exemption, the re-financing arrangement must apply to the same asset and the re-financed amount must not be greater than the outstanding balance on the LRBA just before the re-financing.

Pension transfer balance cap

The Act also makes the following changes to the $1.6 million pension transfer balance cap provisions:

  • enables additional transfer balance credits and transfer balance debits to be prescribed by regulation. For example, special credit and debit rules are likely to be required for the new “innovative income stream products” that are currently being developed;
  • clarifies the matters covered by the assumption about compliance with pension or annuity rules and for which the consequences of not complying with a commutation authority are disregarded;
  • enables the correct value for a debit that arises for failures to comply with rules and standards to be calculated for a failure that occurs part-way through an income year;
  • provides an alternative debit where the proceeds of structured settlements were contributed into superannuation prior to 1 July 2017;
  • amends the rules for the part-year defined benefit income cap so that they only apply where an individual is first entitled to concessional tax treatment in respect of defined benefit income; and
  • brings forward the application of the rules about the transfer of assets by life insurance companies to facilitate those companies accounting for and rebalancing their assets in anticipation of the transfer balance cap applying from 1 July 2017.

SMSF annual return: key changes for 2016–2017

The ATO has released the 2017 self-managed superannuation fund (SMSF) annual return and instructions. Key changes for 2017 include the transitional CGT relief for super funds as part of the 1 July 2017 reforms, reporting on limited recourse borrowing arrangements (LRBAs) and early stage investor tax incentives.

CGT relief for super reforms

The instructions note that transitional CGT relief is available for SMSFs to provide relief from certain capital gains that might result from individuals complying with the transfer balance cap and transition-to-retirement income stream (TRIS) reforms, which commence on 1 July 2017. This CGT relief is not automatic and must be chosen by a trustee for a CGT asset. It applies on an asset-by-asset basis to assets held at all times between the start of 9 November 2016 to just before 1 July 2017.

If CGT relief is chosen, the trustee will need to advise the ATO in the approved form (the  CGT schedule). The CGT schedule must be received by the ATO on or before the day the SMSF is required to lodge its 2017 SMSF annual return. A choice to apply CGT relief is irrevocable. Item 8 of the CGT schedule asks whether the fund has chosen to apply the transitional CGT relief for superannuation funds. The notional capital gain amount deferred must be listed at label G.

LRBAs and early stage investors

Additional questions have also been added to the SMSF annual return about the use of LRBAs and additional borrowings. If a fund reports LRBA assets, details are required about the financing arrangements, such as whether finance was obtained from a licensed financial institution and whether the member or related parties of the fund used personal guarantees and other security for the LRBA. The SMSF return also requires additional information from SMSF investors who may be eligible for tax incentives and modified CGT treatment for investments in a qualifying early stage innovation company from 1 July 2016.

SMSFs: pre-1 July 2017 commutation of death benefit income streams

Practical Compliance Guideline PCG 2017/6 sets out a practical administrative approach to help SMSFs comply with the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) if they have received a superannuation lump sum resulting from the pre-1 July 2017 commutation and roll-over of a death benefit income stream.

The ATO is aware that industry participants have inferred (from TD 2013/13) that s 307-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides a mechanism for a deceased member’s spouse to roll over a death benefit income stream and retain the amounts as her/his own superannuation interest, without needing to immediately cash out that benefit. This has resulted in a number of death benefit income streams being commuted, rolled over and treated as the spouse’s own superannuation interest, with the amounts becoming mixed with the spouse’s other superannuation interests and/or remaining in the accumulation phase. However, the ATO’s view is that rolling over a death benefit income stream does not change a superannuation provider’s obligation to cash the deceased member’s interest as soon as practicable (as a superannuation lump sum and/or a death benefit income stream).

The Guideline acknowledges that funds would face significant practical difficulties (in tracing, valuing and then cashing death benefits) if they were required to apply the Commissioner’s position. Accordingly, the Guideline advises that the ATO will not apply compliance resources to review whether an SMSF has complied with the compulsory cashing requirements relating to a death benefit (as set out in reg 6.21 of the SIS Regs) if all of the following requirements are satisfied:

  • the SMSF member was the deceased’s spouse at the date of death;
  • the commutation and roll-over of the death benefit income stream occurred before 1 July 2017; and
  • the superannuation lump sum paid from the commutation is a member benefit for income tax purposes because it satisfies s 307-5(3) of ITAA 1997.

Single Touch Payroll operative for early adopters

Single Touch Payroll (STP) is here. It had a “soft” or voluntary start on 1 July 2017. From that date, employers may choose to report under STP. For those who qualify (ie employers with 20 or more employees), STP will be mandatory from 1 July 2018.

For employers with 19 or fewer employees on 1 April 2018, their reporting obligations will not change. They will not need to start reporting through STP from 1 July 2018, but may choose to start using a payroll solution to take advantage of the benefits of STP reporting.

STP will automatically provide payroll and superannuation information to the ATO at the time it is created. Reporting through STP means that when employers complete their normal payroll process, their employees’ PAYG withholding and super guarantee information will be sent to the ATO directly from their payroll solution. If an employer reports to the ATO through STP, its employees will be able to see more of their tax and super information online through myGov.

Entities that report under STP are able to obtain relief from obligations to provide payment summaries to individuals and a payment summary annual report to the Commissioner.

The ATO says it is working with payroll solution providers to ensure their products are ready for STP reporting.

“Netflix” tax: who is an Australian consumer?

From 1 July 2017, the supply of services, digital products or rights are connected with Australia (and so potentially liable to GST) if made to an Australian consumer by an overseas-based supplier. This is referred to as the digital import or “Netflix tax” rules.

GST Ruling GSTR 2017/1 explains how overseas suppliers can decide whether a recipient of a supply is an Australian consumer. It explains what evidence suppliers should have, or what steps they should take to collect evidence, in establishing whether or not the supply is made to an Australian consumer.

Meaning of “Australian consumer”

Two limbs must be satisfied for an entity to qualify as an Australian consumer. First, an entity must be an Australian resident for income tax purposes (although there is an exception for residents of external territories). This is referred to in the Ruling as the “residency element”. Second, the recipient must not be registered for GST or, if registered, not acquire the supply solely or partly for its enterprise. This second limb is referred to as the “consumer element”.

Overseas suppliers can treat the supply as having not been made to an Australian consumer (and so not liable for GST) if they:

  • satisfy particular evidentiary requirements; and
  • reasonably believe that the recipient is not an Australian consumer.

An overseas supplier can satisfy the evidentiary requirements by using either the supplier’s usual business systems and processes (the business systems approach) or by using what the Ruling terms the “reasonable steps” approach (ie where the supplier has taken steps to obtain information about whether the recipient is an Australian consumer).

The reasonable belief requirement can be based on a belief that the recipient does not satisfy either the residency element or the consumer element.

Residency element

The ATO’s view on the meaning of “non-resident” for GST purposes is set out in GST Ruling GSTR 2004/7. Although that ruling considers the definition of non-resident for the purposes of the GST export rules, GSTR 2017/1 states that the ATO will adopt it for the purposes of the Netflix tax.

In terms of the business systems approach for evidentiary requirements, GSTR 2017/1 provides the following examples of information that the ATO will accept to support a conclusion as to whether the recipient satisfies the residency element:

  • the recipient’s billing or mailing address;
  • the recipient’s banking or credit card details, including the location of the bank or credit card issuer;
  • location-related data from third-party payment intermediaries;
  • mobile phone SIM or landline country code;
  • the recipient’s country selection;
  • tracking/geolocation software;
  • the internet protocol (IP) address;
  • the recipient’s place of establishment (for non-individuals);
  • representations and warranties given by the recipient;
  • the origin of correspondence; and
  • locations, such as a wi-fi spot, where the recipient’s physical presence at the location is needed.

In terms of the reasonable steps approach for evidentiary requirements, GSTR 2017/1 lists the following relevant circumstances:

  • the level of interaction the supplier has with the recipient in making the supply or in maintaining the commercial relationship;
  • the type of personal information that a recipient will usually share, or usually be willing to share, with the supplier in the course of making a supply or in maintaining the commercial relationship, taking into account the type of supply, its value and the nature of the commercial relationship between the parties;
  • the difficulty and costs involved for the supplier in taking steps to obtain information about whether the recipient is an Australian consumer; and
  • the expected reliability of the information.

The ATO will also accept that the evidentiary and reasonable belief requirements have been satisfied if an overseas-based supplier sets up its systems to comply with the requirements of an overseas jurisdiction and such systems indicate that the recipient’s residency is outside Australia. This applies to suppliers operating in countries from the European Union, as well as New Zealand and Norway.

GSTR 2017/1 also examines what should be done if there is inconsistent evidence or other uncertainty. It provides many examples to illustrate the Commissioner’s views.

Consumer element

GSTR 2017/1 states that specific evidence is needed to establish a reasonable belief that the recipient does not satisfy the consumer element. This evidence is the recipient’s ABN and a declaration or statement indicating that the recipient is GST-registered. The ATO expects the supplier to take reasonable steps to ensure that the ABN is likely to be valid and belong to the customer. These steps may include:

  • using ABN Lookup or the ABN Lookup tool;
  • ensuring the ABN provided is in the correct format; and
  • ensuring there are no duplicate ABN entries for different recipients.

New draft GST guidelines issued

Supplies through electronic distribution platforms

Draft Law Companion Guideline LCG 2017/D4 (the Draft) deals with how the ATO intends to apply the Netflix and low-value imported goods measures to supplies made through electronic distribution platforms (EDPs).

The draft guidance sets out a four-step approach for determining whether an EDP operator is responsible for GST.

Step 1: Work out whether the supply is made though a service which is an EDP, such as a website, internet portal, gateway store or online marketplace. The Draft provides that a service will qualify as an EDP if it is delivered via electronic communication and enables entities to make supplies available to end users. The mere provision of a carriage service, access to a payment system or the processing of payments, or face value vouchers that are taxed on redemption or expiry, will not be an EDP.

Step 2: Determine whether the supply is subject to the EDP rules. A supply of a digital service or a digital product to an inbound intangible consumer will automatically be subject to the EDP rules (and can be subject to the rules by agreement in other situations). An offshore supply of low-value goods will also be subject to the rules, unless the supply is connected with Australia because the goods are sourced within Australia or the merchant is the importer.

Step 3: Ascertain whether any exclusions apply, in which case the merchant will be responsible for GST, not the EDP operator.

Step 4: Work out who will be responsible for GST if multiple EDPs are involved. A written agreement between EDP operators may determine responsibility. The Draft notes that the Commissioner can, by legislative instrument, prescribe additional rules to determine responsibility for GST and invites submissions on the matter. In the absence of a written agreement and any legislative instrument, the operator responsible for the GST will be the first of the EDP operators to receive or authorise the charging of any consideration for the supply. If no entity meets this criterion, the responsible operator will be the first to authorise the delivery of the supply.

Redeliverers and supplies of low-value imported goods

Draft Law Companion Guideline LCG 2017/D5 explains the measures in the Treasury Laws Amendment (GST Low Value Goods) Bill 2017 (awaiting assent) that will make redeliverers responsible for GST on offshore supplies of low-value goods from 1 July 2018.

The Bill imposes GST on supplies of imported low-value goods, ie those worth less than A$1,000. Under the reforms, a redeliverer will be treated as the supplier if low-value goods are delivered outside Australia as part of the supply and the redeliverer assists with their delivery into Australia as part of, broadly, a shopping or mailbox service that it provides under an arrangement with the consumer.

The draft guidance seeks to clarify three matters: (i) the meaning of “redeliverer”; (ii) when a redeliverer will be responsible for GST under the amendments; and (iii) who will be responsible for GST where multiple deliverers are involved in an arrangement to bring low-value goods to Australia.

A redeliverer is an entity that assists in bringing goods to Australia through the provision of either:

  • an offshore mailbox service, where it provides or assists in providing the use of an overseas address to which goods are delivered; or
  • a personal shopping service, where it purchases or assists in buying goods outside Australia as the agent of a recipient.

Transporters, freight forwarders and merchants are not redeliverers. Importantly, the ATO accepts that overseas relatives or friends who assist in purchasing low-value goods, or arranging for the goods to be sent to Australia, are not typically redeliverers as they are not carrying on an enterprise.

LCG 2017/D5 states that if a merchant or EDP operator assists in bringing the goods to Australia, the redeliverer will not be responsible for GST on the offshore supply. This is because the redeliverer is last in the hierarchy of entities that can be responsible for GST under the amendments. Where there are multiple redeliverers (eg a redeliverer hires another entity to purchase the goods as an agent of the customer), hierarchy rules will apply to ensure that only one entity is responsible for the GST.

Client Alert Explanatory Memorandum (April 2017)

 

Ride-sharing drivers must register for GST

Not surprisingly, the ATO has moved quickly to state its views on the implications of the recent Federal Court decision regarding Uber. The Court held that the UberX service supplied by the ride-sharing network’s drivers constitutes the supply of “taxi travel” within the meaning of s 144-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act), effectively meaning that Uber drivers need to register for GST.

The ATO agrees that ride-sharing (also known as ride-sourcing) is taxi travel within the meaning of the GST law. As a result, the ATO says taxpayers who provide ride-sharing services must:

  • keep records;
  • have an Australian Business Number (ABN);
  • register for GST, regardless of how much they earn (that is, the $75,000 GST turnover registration threshold does not apply – drivers must register from dollar one of their ride-sharing income);
  • pay GST on the full fare amounts received from passengers;
  • lodge activity statements; and
  • include all income from ride-sharing in their tax returns.

The ATO says drivers are entitled to claim income tax deductions and GST credits (for GST paid) on expenses apportioned to the ride-sharing services they supply. Where the ATO’s data-matching activities identify people who provide ride-sharing services, it will write to them to explain their tax obligations.

Source: ATO, Ride-sourcing is taxi travel, 17 February 2017, https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Ride-sourcing-is-taxi-travel/.

Tax offset for spouse super contributions: changes from 1 July 2017

Currently, an individual can claim a tax offset up to a maximum of $540 for contributions they make to their spouse’s eligible superannuation fund if, among other things, the total of the spouse’s assessable income, total reportable fringe benefits and reportable employer super contributions is under $13,800.

The ATO reminds taxpayers that from 1 July 2017, the spouse’s income threshold will increase to $40,000. The current 18% tax offset of up to $540 will remain and will be available for any individual, whether married or de facto, contributing to super for a recipient spouse whose income is up to $40,000. As is currently the case, the offset gradually reduces for incomes above $37,000 and completely phases out when income exceeds $40,000.

Individuals will not be entitled to the tax offset when the spouse receiving the contribution:

  • has exceeded their non-concessional contributions cap for the relevant year; or
  • has a total superannuation balance equal to or more than the general transfer balance cap ($1.6 million for 2017–2018) immediately before the start of the financial year in which the contribution was made.

The ATO says the intent of this change is extending the current spouse tax offset to allow more couples to support each other in saving for retirement.

Source: ATO, Change to spouse tax offset, 21 February 2017, https://www.ato.gov.au/Individuals/Super/Super-changes/Change-to-spouse-tax-offset/.

ATO targets restaurants and cafés, hair and beauty businesses in cash economy crackdown

The ATO is visiting more than 400 businesses across Perth and Canberra in April as part of a campaign to help small businesses stay on top of their tax affairs. Assistant Commissioner Tom Wheeler said the ATO is focusing on businesses operating in the cash and hidden economies, with the aim of ensurig fairness for all businesses and the community.

He said ATO officers will be visiting restaurants and cafés, hair and beauty and other small businesses in Perth and Canberra to make sure their registration details are up to date. “These industries are on our radar because they have ready access to cash, and this is a major risk indicator”, Mr Wheeler said.

Mr Wheeler said the industries the ATO is visiting have some of the highest rates of concerns reported to the ATO from across the country. He said the visits are part of an ongoing ATO program of work, which is making its way around the country. So far, the ATO has met businesses in Sydney, Adelaide, Melbourne and the Gold Coast.

Source: ATO, Tax officers hit the streets to help small businesses, 7 March 2017, https://www.ato.gov.au/Media-centre/Media-releases/Tax-officers-hit-the-streets-to-help-businesses/; Working with industry, 11 January 2017, https://www.ato.gov.au/general/building-confidence/in-detail/working-with-industry/.

Super reforms: $1.6 million transfer balance cap and death benefit pensions

Draft Law Companion Guideline LCG 2017/D3

On 13 February 2017, the ATO released Draft Law Companion Guideline LCG 2017/D3. This Draft Guideline deals with the treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap from 1 July 2017.

Where a taxpayer has amounts remaining in superannuation when they die, their death creates a compulsory cashing requirement for the superannuation provider. This means the superannuation provider must cash the superannuation interests to the deceased person’s beneficiaries as soon as possible. The payment of superannuation interests after the person’s death is called a superannuation death benefit.

Where a superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit arises in the dependant beneficiary’s transfer balance account under s 294-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The amount and timing of a transfer balance credit for a death benefit income stream depends on whether the recipient is a reversionary or non-reversionary beneficiary.

Reversionary vs non-reversionary pensions

The Draft Guideline states that a reversionary death benefit income stream is an income stream that reverts to the reversionary beneficiary automatically upon the super fund member’s death. That is, the income stream continues, with the entitlement to it passing from one person (the deceased member) to another (the dependant beneficiary) under the rules of the fund. On the other hand, a non-reversionary death benefit income stream is a new superannuation income stream created and paid to a dependant beneficiary where the trustee exercises a power or discretion to determine an amount in the beneficiary’s favour: see Taxation Ruling TR 2013/5.

Transfer balance credit: reversionary pension

For a reversionary death benefit income stream, a credit will arise in the recipient’s transfer balance account 12 months after the original super fund member’s death. If the reversionary income stream commenced before 1 July 2017, the credit will arise on the later of 1 July 2017 or 12 months after the death of the original member.

The credit that will arise in the reversionary beneficiary’s transfer balance account is equal to the value of the superannuation interest on the day when it first becomes payable to the reversionary beneficiary (ie at the date of the death); or just before 1 July 2017 if the income stream commenced before that time.

Transfer balance credit: non-reversionary pension

For a non-reversionary income stream, a credit will arise in the recipient’s transfer balance account on the later of 1 July 2017 or when the person becomes entitled to be paid the income stream. The credit is the value of the superannuation interest at the time it commences, or just before 1 July 2017 if it commenced before that time. The ATO notes that the value for non-reversionary pensions may include any investment earnings that accrued to the deceased member’s interest between the date of their death and the time the death benefit income stream commences.

Example

Nathaniel commences a pension worth $1.4 million on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel’s death. Nathaniel dies on 1 January 2018. The value of the superannuation interest supporting the pension at the time of Nathaniel’s death, 1 January 2018, is $1.3 million. Nathaniel had no other superannuation interests.

Malena is Nathaniel’s spouse and only beneficiary. On 15 June 2018, she is advised she is entitled to all of Nathaniel’s remaining superannuation interest. During the period between Nathaniel’s death and the death benefit income stream payment to Malena commencing, $1,000 of investment earnings accrued to the interest, bringing its total value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream when it commences on 15 June 2018 is $1,301,000.

A transfer balance credit arises in Malena’s transfer balance account on 15 June 2018. That transfer balance credit is equal to the value of the superannuation interest supporting the death benefit income stream on 15 June 2018 (ie $1,301,000).

Commutation of excess transfer balance

To reduce an excess transfer balance so that it does not exceed the general transfer balance cap ($1.6 million for 2017–2018), an individual can choose to commute either (fully or partially):

  • the death benefit income stream; or
  • a superannuation income stream that the individual already has in retirement phase.

If an individual choose to commute their own existing superannuation income stream, the commuted amount can remain within the superannuation system as an accumulation interest. However, if the individual chooses to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest and the commuted amount must be cashed out as a lump sum death benefit.

Source: ATO, Law Companion Guideline LCG 2017/D3, 13 February 2017, https://www.ato.gov.au/law/view/document?DocID=COG/LCG20173/NAT/ATO/00001.

No deduction for carried-forward company losses

The Administrative Appeals Tribunal (AAT) has confirmed that a company that was a partner in a shopping centre development business was not entitled to deductions for carried-forward losses of over $25 million incurred from carrying out those activities in the 1990 to 1995 income years. The AAT found that the company did not satisfy the relevant “continuity of ownership” and “same business” tests that applied in relation to the 1996 to 2003 income years, when it sought to recoup the losses.

Background

The taxpayer company was part of a complex family corporate structure that included interposed trusts and subsidiary companies. In the 1990 to 1995 income years, it was a 50% partner in a shopping centre development business. However, by the time the development was completed, the combination of increasing interest rates, overruns in development costs and the receipt of lower-than-expected rental income meant the company was in a difficult financial position. A receiver and manager was appointed to the partnership and the company went into administration.The taxpayer later claimed a deduction for carried-forward losses of $25 million from the venture, which it sought to recoup in the 1996 to 2003 income years.

The issue for the AAT’s consideration was whether the taxpayer satisfied the “continuity of ownership” test that applied for the 1996 and 1997 income years, the 1998 and 1999 income years and the 2000 to 2003 income years in order to be entitled to a deduction for the carried-forward losses. Alternatively, the taxpayer was required to satisfy the “same business” test that applied for the relevant years.

For the 1996 and 1997 income years, the continuity of ownership test under s 80A of the Income Tax Assessment Act 1936 (ITAA 1936) required the same persons to beneficially own more than 50% shareholding in the company in both the year the loss was incurred and the year it was sought to be recouped. For the 1998 and 1999 income years, the test under ss 165-12 and 165-165 of the Income Tax Assessment Act 1997 (ITAA 1997) required the same persons to beneficially own more than 50% shareholding in the company in the both the year the loss was incurred and the year it was sought to be recouped, as well as during any intervening period. For the 2000 to 2003 income years this test (under amended ss 165-12 and 165-165) applied in the same manner, but with the additional requirement that the exact same interests must be owned by the same persons over the relevant period.

Decision

In confirming that the taxpayer had not discharged the burden of proving it had satisfied the “continuity of ownership” test or the “same business” test for the years in question, the AAT first found that, for the 2000 to 2003 income years, the requirements in amended s 165-12 and s 165-165 were clearly not met because interests held by the relevant shareholders during the loss years were fundamentally different from interests they held in the 2000 to 2003 income years. The AAT also took into account the lack of specific records about the shareholdings at the relevant times, and noted gaps in the documentation and other evidence. At the same time, the AAT dismissed the taxpayer’s claims that the amendments to ss 165-12 and 165-165 did not apply to the years in question, because the legislation clearly stated they were to apply to income years ending after 21 September 1999.

Likewise, the AAT found that the continuity of ownership test applicable for the other years (the 1996 to 1997 years and the 1998 to 1999 years) had not been satisfied either for similar reasons.

The AAT noted the taxpayer’s concern that the burden of proof it bore in the circumstances placed “a weight upon the taxpayer similar to that placed upon Atlas, who carried the whole weight of the heavens as well as the globe of the earth upon his shoulders”. However, the AAT said this does “not excuse a taxpayer from the obligation to make good its case on some satisfactory basis other than speculation, guesswork or corner-cutting”. The AAT further noted that “even allowing for the fact that the first claimed loss year (1990) is now over a quarter of a century ago, it is surely not unreasonable to expect that a case put forward in support of tax losses of almost $5 million should be supported by more than assertions and broad-brush submissions” – especially considering the taxpayer was part of a large, sophisticated corporate group that would be expected to keep proper accounting and corporate records.

The AAT then found that the taxpayer had not met the requirements of the “same business” test as it variously applied to the years in question. The Tribunal noted that the company’s originally stated objective in the loss years was “investment in shopping centre and building construction”, but by the time of the recoupment years its stated objective was “investment in units in a trust”, with no element of property development. Furthermore, from the time the shopping centre was sold in 1993, there was no evidence of business activity being carried on until some three years later, when the taxpayer began to invest in a number of service stations to be leased to a major oil company and from which it derived rent.

Finally, the AAT found that the shortfall penalties the Commissioner of Taxation had imposed for “intentional disregard of the law” should be reduced to penalties for “recklessness”, although it agreed to retaining various uplift components. The Tribunal noted an anomaly in the penalty calculation in these circumstances which resulted in a 100% increase in the uplift factor for certain years, but left this matter for the Commissioner to address when recalculating the penalties.

Re RGGW and FCT [2017] AATA 238, AAT, File Nos: 2015/4095-4102, Frost DP, 20 February 2017, http://www.austlii.edu.au/au/cases/cth/AATA/2017/238.html.

Overseas income not exempt from Australian income tax

The Administrative Appeals Tribunal (AAT) has affirmed the ATO’s decision that income a taxpayer earned working for the United States Army in Afghanistan is not exempt from Australian income tax under s 23AF of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer was an electrician and mechanic. During the 2010–2011 income year his American employer subcontracted his services to the United States Army in Afghanistan. He travelled there on at least four occasions, including for one period of at least four months. His role in “outside plant construction” was a critical part of the future power distribution network.

The taxpayer claimed that his 2010–2011 earnings were exempt from income tax under s 23AF of ITAA 1936. That section exempts personal services income (including salary and wages) that is attributable to a period of qualifying service on an “approved project”. The period must be continuous for 91 days or more.

An “approved project” is an “eligible project” that the Trade Minister (or their delegate) is satisfied is or will be in the national interest and has approved in writing. There are various categories of “eligible project”, including

  • the design, supply or installation of any equipment or facilities;
  • the construction of works; or
  • the development of an urban or a regional area.

The AAT decided that the s 23AF exemption did not apply in this case, because the taxpayer had not worked on an approved project. Although the particular project satisfied the first two categories in the definition of an eligible project, the Trade Minister (or delegate) had not approved it in writing for the purposes of s 23AF, so it was not actually an approved project. The AAT pointed out that although the Trade Minister has the discretion to approve eligible projects, the approval must be given in writing.

The AAT also commented that there was no evidence indicating that the Trade Minister (or any delegate) considered the United States Army project in Afghanistan where the taxpayer worked to be in the Australian national interest.

Re Wilson and FCT [2017] AATA 119, AAT, Ref No 2016/3489, Tavoularis SM, 1 February 2017, http://www.austlii.edu.au/au/cases/cth/AATA/2017/119.html.

 

GST on low-value imported goods

The Government has introduced legislation to impose goods and services tax (GST) on supplies of imported goods worth less than $1,000. The measures are scheduled to commence on 1 July 2017.

The Treasury Laws Amendment (GST Low Value Goods) Bill 2017 was introduced into the House of Representatives on 16 February 2017.

Context and background

GST is imposed on goods that are subject to taxable importation. The importer pays the GST in this case. Currently, goods brought into Australia from overseas that are valued at less than the $1,000 threshold do not attract duty or GST. This is because they are low-value goods, a category that Australian taxation law specifies as non-taxable importations. Additionally, goods brought into Australia by a supplier from overseas fall outside the current definition of “connected with Australia” in s 9-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which means their supply is not captured by the Act’s Div 9 rules. The combined effect of these factors is that consumers can buy low-value goods from overseas, for example by ordering them online from an international store, without the transaction being subject to GST.

The low-value goods GST measures use a very similar approach (and similar terminology) to the “Netflix tax” legislation enacted by the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Act 2016. The system proposed in the GST Low Value Goods Bill moves the GST payment responsibility from the customer to the overseas supplier. This means, if the Bill is passed, that overseas suppliers would be required to register for and pay Australian GST if their GST turnover exceeds $75,000. This system aims to overcome the logistical problems involved in making customers pay GST.

Alternatively, the GST liability for low-value imported goods may fall to the operator of an electronic distribution platform (EDP) – as is the case for the Netflix tax – or to goods forwarders (transport and freight companies), which are described as “redeliverers” in the Bill. The latter consideration does not apply to digital supplies like Netflix, as no physical movement of goods is required.

Note: the GST legislation refers to the “indirect tax zone”, rather than “Australia”. This is the same as the term “Australia”, except that it excludes the areas where GST does not apply (such as the external territories).

Broad overview

Broadly, the GST Low Value Goods Bill sets out the following measures which, if the Bill is passed, will come into effect from 1 July 2017:

  • GST will be imposed on supplies of goods valued at $1,000 or less at the time of supply to Australia, if those goods are purchased by “consumers” and brought to Australia with the assistance of the supplier (ie the vendor);
  • only supplies made to private consumers will be affected – importations by businesses will not be subject to these rules;
  • the GST liability will rest with the vendor, but may extend to the operator of an EDP (if the sale is made through that platform) or the redeliverer;
  • supplies will be subject to GST regardless of their small value – for example, even a supply worth $10 will be caught by the rules;
  • GST will be calculated in the usual manner, imposed at a rate of 10% on the value of the supply;
  • there is scope for GST to be imposed on the end consumer by reverse charge should they claim to be a business (so that the overseas supplier charges no GST) but then use the goods wholly or partly for private purposes;
  • non-resident suppliers will be offered a limited registration option; and
  • such importations will be deemed non-taxable to prevent double taxation (ie for the purposes of customs entry).

These rules would largely be contained in new Subdiv 84-C of the GST Act, entitled “offshore supplies of low value goods”.

Note: The GST Low Value Goods Bill introduced on 16 February 2017 does not include changes to the Customs Act 1901 (Customs Act) or any related legislation.

What goods are subject to the proposed measures?

Three general requirements must be met for goods to become subject to GST under the low-value importation rules.

Firstly, the goods must be brought into Australia and the vendor must assist in arranging their delivery to Australia. If the vendor does not, the entity that does deliver the goods (the redeliverer) may instead be liable for the GST.

The second requirement is that the goods are of low value (worth $1,000 or less) based on their customs value. If the value is more than $1,000, the goods will remain subject to the ordinary importation rules currently in place. The customs value is determined as though the goods were exported at the time the consideration for the supply was first agreed upon, rather than at the time the goods were exported/imported into Australia or considered by a customs official. There is also scope for the Commissioner of Taxation to develop alternative exchange rate calculation methods (by legislative instrument), rather than using the fixed process mandated by the Customs Act.

Also, see below (under the heading “Other matters”) for information about the Bill’s treatment of a single supply involving multiple goods; for example, the purchase of a product costing less than $1,000 as well as a product costing more than $1,000.

The third requirement is that the entity to which the goods are supplied (the purchaser/customer) must use the goods in a private capacity (the Bill defines this as a “consumer”). In other words, genuine business purchases will not be subject to GST under the low-value importation rules. This third requirement will extend mostly to purchasers who are not registered or required to be registered for GST, but also includes purchases where a registered entity acquires certain goods solely for private purposes. This generally reflects the approach taken for the Netflix tax – under those rules, no GST liability arises if the consumer is otherwise entitled to an input tax credit for the acquisition.

If these three requirements are satisfied, the goods supply will be connected with Australia for the purposes of s 9-25 of the GST Act, and therefore potentially subject to GST (proposed s 9-25(3A) of the GST Act).

Who is proposed to be liable for GST?

The supplier will be liable for GST, providing that its GST turnover is in excess of $75,000. The GST turnover is determined by reference to its Australian sales only. For example, if an overseas vendor has turnover of $1 million per annum, but that turnover only includes sales of $50,000 to Australia, it will not be required to register and so will not be liable for GST on any of its sales.

If the vendor does not assist in delivery of the goods to Australia, it will not be liable for GST. If delivery is handled by a redeliverer, then that entity will be liable for GST on the supply (providing, of course, that the redeliverer’s Australian GST turnover exceeds $75,000). The explanatory memorandum to the GST Low Value Goods Bill indicates this provision intends to capture the services of a class of businesses often referred to as mail, post and package forwarders, or redeliverers, which assist purchasers to obtain goods from foreign suppliers.

Finally, if the sale of low-value goods is made through an EDP, then responsibility for the GST on the supply is shifted to the EDP operator. The most obvious examples of EDPs are the App Store and Google Play. This provision reflects the approach taken in the Netflix legislation.

The limited registration option will be available for all categories of suppliers.

There is scope for a customer to reverse-charge GST if it acquires low-value imported goods partly for private purposes and partly for business purposes. Additionally, if a customer falsely represents that it is acquiring goods for a business purpose (and so no GST is imposed), it may also have to reverse-charge the GST liability (and will be subject to penalties).

Other matters

As already noted, a consumer may sometimes purchase several goods as part of one supply. In such a case, the low-value goods test applies to each of the several goods supplied. Two obvious scenarios arise from this provision.

Firstly, where several goods valued under $1,000 are bought together and delivered together and the total value is in excess of $1,000, each product will be treated as a supply of low-value goods, regardless of the total value of the supply.

Secondly, where individual goods have a value below $1,000 but goods with a value above $1,000 are also purchased, the part of the supply that has a value of more than $1,000 is treated as not a supply of low-value goods. The explanatory memorandum to the GST Low Value Goods Bill provides an example where a consumer buys a dress valued at $1,300 from a supplier in the United Kingdom, as well as a shirt valued at $200. The sale of the dress and the sale of the shirt are treated as separate supplies, despite the items being purchased in a single transaction.

This approach could pose something of a logistical nightmare. When goods arrive at customs, likely in a single parcel, part of the contents will have to be carved out as a supply on which the vendor has paid GST and part will require GST to be imposed on the purchaser.

Other points of note:

  • Under the current rules, international transport services are GST-free. The transport costs are factored into the goods’ value when they are imported for home consumption, and the importer pays GST upon their entry to Australia. Under the new rules, such costs will not be GST-free. GST will be applied to the value of the goods supplied and any other costs included as part of the supply of goods (eg transport and insurance).
  • Tax invoices and adjustment notes will not be required for an offshore supply of low-value goods to a consumer. This is sensible, as by definition consumers will not be able to claim input tax credits.
  • The new rules include a safe harbour for overseas suppliers. A supply will not be connected with Australia if, at the time the consideration for the supply is set, the supplier (or the entity liable for the GST) reasonably believes that the goods will be imported as a taxable importation.
  • As well applying for goods ordered online (or by telephone), the new rules will apply where a consumer buys goods in person in a store overseas and makes an arrangement with the vendor’s assistance for the goods to be brought to Australia.
  • Tobacco, tobacco products and alcoholic beverages are specifically excluded from the definition of “goods” for the purposes of the low-value goods rules.

Source: Treasury Laws Amendment (GST Low Value Goods) Bill 2017, 16 February 2017, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5819%20Recstruct%3Abillhome.

Draft ATO guideline

The ATO released Draft Law Companion Guideline LCG 2017/D2 on 24 February 2017. It discusses the amendments proposed in the GST Low Value Goods Bill.

The Draft Guideline discusses:

  • how to calculate the GST payable on a supply of low-value goods;
  • the rules to prevent double taxation of goods, and to correct errors or deal with changes in the GST treatment of a supply; and
  • how the rules interact with other rules under which supplies are connected with Australia.

The ATO intends to issue separate guidance about determining which entity is responsible for GST on supplies of low-value imported goods. This is expected to address issues such as when an EDP operator or redeliverer will be responsible for GST – and the rules where more than one EDP operator or redeliverer is involved in the supply.

The Draft Guideline draws heavily on the explanatory memorandum to the GST Low Value Goods Bill. It also offers additional examples and covers the following important details.

Currency conversion

Under proposed s 84-79(4)(e) of the GST Act, there will be two ways to work out the equivalent value in Australian currency of goods sold in a foreign currency:

  • under the provisions in s 161J of the Customs Act; or
  • in a manner determined by the Commissioner of Taxation.

The ATO is creating a draft legislative instrument which specifies that the Australian dollar amount to be used in working out a customs value can be calculated using the relevant Reserve Bank of Australia currency exchange rate for the date the price of the goods is first agreed upon.

Supplies not connected with Australia

Even if a supply satisfies the requirements for a supply of low-value goods, the supply will not be connected with Australia under proposed s 84-83 of the GST Act if:

  • the supplier has taken reasonable steps to obtain information about whether the goods will be imported as a taxable importation; and
  • after taking these steps, the supplier reasonably believes the goods will be imported as a taxable importation.

The Draft Guideline provides some helpful examples to illustrate the test’s two elements (reasonable belief and reasonable steps).

Australian consumer law requirements

Generally speaking, Australian consumer law requires retailers to provide prices inclusive of GST, where GST is applicable. However, it may be difficult for offshore suppliers to be certain whether a supply of goods will be liable for Australian GST. To address this, the Draft Guideline states that if it is initially considered less likely that GST will apply to Australian recipients, a supplier can display a message that notes the potential for additional taxes to apply.

However, when an offshore supplier is aware that they are offering low-value goods for sale into Australia to consumers, the price displayed should be GST-inclusive. This would be the case where the supplier’s website advertises consumer goods in Australian dollars and/or uses a “.com.au” domain name, or where location services show a goods recipient is in Australia.

Supplies of low-value goods not subject to GST at the border

Under s 42-15 of the GST Act, an importation of goods will be a non-taxable one to the extent that:

  • the supply is an offshore, taxable supply of low-value goods (under s 9-5);
  • the supply is connected with Australia only because the new provisions apply to it; and
  • before the time when a taxable importation would have been made, notification that the supply is taxable is provided to the Comptroller-General of Customs in the approved form.

The requirement to notify Customs for the purposes of s 42-15 will presumably be met where the relevant fields are completed on the import declaration for the goods.

To switch off the taxable importation, notification will need to be provided by the time at which the taxable importation would otherwise have been made. Using the terms in the customs legislation, this means the notification must be provided before goods are delivered into home consumption in accordance with an authority to deal, by including the information in the import declaration or in an amended import declaration.

Supplies incorrectly treated as taxable supplies

If the supplier (or entity treated as the supplier) discovers that the supply should not have been a taxable one, because of information about the nature of the goods or about the recipient, an adjustment event will arise.

If the supplier has already included the GST payable on such a supply in its assessed net amount in a return, the amount will be “excess GST” for the purposes of Div 142 of the GST Act. This applies so that an amount of excess GST is only refundable to the supplier if either it has not been passed on to the recipient or the recipient has been reimbursed for the excess GST passed on. Once a reimbursement is made to the recipient, the supply ceases to be a taxable one and the supplier can make a decreasing adjustment.

If the excess GST has not been passed on to the recipient, s 142-10 does not apply and the supplier may request an amended assessment or claim a refund in a later tax period (if the conditions set out in Legislative Determination GSTE 2013/1 are satisfied).

Source: ATO, Draft Law Companion Guideline LCG 2017/D2, 24 February 2017, https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCG20172%2FNAT%2FATO%2F00001%22.

Alternative assessments not tentative: Federal Court decision

The Federal Court has found that a company’s tax assessments were not tentative and provisional, and therefore were valid. The taxpayer company was the trustee of a discretionary trust (the Whitby Trust). The beneficiaries were the five children of the company’s director. One of the children was a minor and thus under a legal disability.

For the 2011 to 2014 income years, the Commissioner of Taxation had notified the taxpayer it was liable to pay tax assessed in two different amounts, calculated by two different methods.

The “primary assessments” for each year were calculated on the basis that the four adult beneficiaries were each presently entitled to equal shares totalling 80% of the net income of the Whitby Trust, relying on s 99A of the Income Tax Assessment Act 1936 (ITAA 1936) and the beneficiary who was a minor was presently entitled to a 20% share of the net income of the trust, but was subject to a legal disability, relying on s 98 ITAA 1936. The primary assessments were issued in April 2014 after the Whitby Trust undertook an audit of transactions.

The “alternative assessments” were made with reference to the same 80% and 20% proportions, but on the basis that none of the beneficiaries were presently entitled to a share of the net income of the trust for each relevant year. The alternative assessments were issued in October 2015. The total tax shortfall over the four income years was just over $23.5 million. The Commissioner also imposed administrative penalties.

When issuing the alternative assessments, the Commissioner explained in a letter to the taxpayer that if the primary assessments were invalid then the alternative assessments were original assessments, but if the primary assessments were valid then the alternative assessments affirmed or amended the primary assessments. The Commissioner asserted in the letter that “on any view, these are valid assessments”.

The Commissioner sent further letters to the taxpayer stating that he would apply Law Administration Practice Statement 2006/7, which deals with the collection of tax where there are primary and alternative assessments.

The taxpayer sought relief under s 39B of the Judiciary Act 1903, arguing that the primary and alternative assessments were invalid because they were tentative and provisional. The taxpayer said that the assessments were tentative because, for each year, they imposed two separate and different income tax liabilities on its single trustee capacity. As a result, the taxpayer owed different debts in each relevant year in circumstances where payment of one did not abate the other, and each debt was an independent debt owed to the Commonwealth and payable to the Commissioner (with interest accruing on each debt).

The Commissioner, on the other hand, argued that a trustee’s liability to pay income tax is of a “representative character” and the relevant provisions in the ITAA 1936 (ss 98 and 99A) envisage that a trustee might be liable to multiple assessments in respect of different beneficiaries’ entitlements to a share of the net income of the trust. The primary and alternative assessments were therefore comparable to assessments for two or more taxpayers in relation to the same income in the same year. Such assessments are not liable to be set aside as tentative or provisional.

Decision

Justice Jagot considered the interaction between the ITAA 1936 provisions that deal with the taxation of trusts (in particular ss 98 and 99A) and the ITAA 1936 provisions that concern assessments and amended assessments (in particular ss 166 and 169). In finding for the Commissioner, her Honour advanced various propositions.

  1. Section 166 of ITAA 1936 is concerned with making an assessment on the “taxable income” of any taxpayer. Under ss 4-10(4) and 9-5 item 6 of ITAA 1997, however, the liability of a trustee in that capacity to income tax is not worked out with reference to the trust’s net income for the income year, under the process established by ss 98, 99 and 99A of ITAA 1936, or with reference to taxable income. Accordingly, in making the assessments in this case, the Commissioner was not exercising his power under s 166.
  2. Sections 98, 99 and 99A of ITAA 1936 contemplate that a trustee will be assessed and liable to pay tax in respect of the different beneficiaries depending on their status. As a result, a trustee’s position in this context is different from the position of an individual or corporate taxpayer who is liable to be assessed and pay income tax on their taxable income for the year.
  3. The assessments specified the amount of tax income assessed and the amount of tax payable on it. Nothing in the evidence otherwise undermined the definite character of the liability imposed. It was merely that one set of assessments assumed a present entitlement of the beneficiaries and the other set assumed no such present entitlement.
  4. The Commissioner had taken a view of the facts and made assessments for each year based on that view (the primary assessments). The alternative assessments were not issued for the purpose of double recovery, but performed a protective function in case the Commissioner’s view about the operation of the trust was incorrect.

In conclusion, Jagot J was not persuaded that “the statutory scheme precludes the approach the Commissioner has taken or, of necessity, renders that approach tentative or provisional in the sense that the assessments are no assessments at all”.

Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28, 30 January 2017, http://www.austlii.edu.au/au/cases/cth/FCA/2017/28.html.