Work-related COVID-19 tests may be deductible

After the recent furore over the non-existent supply of rapid antigen tests (RATs) and the reduced availability of polymerase chain reaction (PCR) tests at many COVID-19 testing sites, the Federal Government is hoping for some good press with the announcement that it will legislate to make both PCR tests and RATs tax-deductible for individuals who buy them for a work-related purpose.

According to the government’s proposal, deductibility of tests will take effect from the beginning of the 2021–2022 tax year (that is, starting 1 July 2021) and will be ongoing. Individuals will also be able to deduct the cost of a test regardless of whether they are required to attend the workplace or have the option to work remotely.

How people will benefit from this proposal depends on their individual tax rate. As a simple example, assuming that there are 249 working days in a year and that each RAT costs $20, if an employee was required to take a RAT every day that they worked, the total cost over the year would be $4,980. If that employee made the minimum wage rate of $20.33 per hour and worked 7.5 hours each day, then their yearly before tax income would be $37,966.

Based on that before-tax income, the individual would usually have to pay around $3,755 in tax. If the deduction for the COVID-19 tests was included, it would reduce the tax paid to $2,809 – a tax saving of $946 to the individual for the year. However, given that the initial test outlay for the entire year could be close to $5,000, the deduction certainly wouldn’t have the same monetary effect as to providing free tests to essential and hospitality workers.

For businesses that are able to obtain enough RATs for their workforce, the government has also proposed to make COVID-19 tests provided by employers to employees exempt from FBT, if they are used for work-related purposes. This essentially means that the tests would be excluded from the definition of a fringe benefit, and employers would not have to pay FBT on the costs of tests given to their employees in a work-related context.

With the Federal election fast creeping up, there doesn’t seem much time for this proposal to be introduced in Parliament and passed into law, especially given the lack of timeframes provided and the myriad of previous election promises also yet to be legislated. A possible change in government may even mean that this proposal remains just that, or we later see different arrangements altogether. There is uncertainty as to whether a Labor government would champion this specific tax-deductibility measure, in particular due to their election pledge of providing free RATs to all Australians through Medicare.

With all this in the background, the ATO has not provided any detailed advice or guidance on the practical aspects of this proposal. In the interim, it recommends that individuals and/or businesses incurring expenses for COVID-19 tests should keep a record of the expenses (receipts or other documentary evidence of purchase), to make the process straightforward should they become deductible in the future.

Natural love and affection: commercial debt forgiveness

The ATO has recently finalised its stance on the issue of commercial debt forgiveness – in particular, the “natural love and affection” exclusion.

A commercial debt is any debt where interest payable is deductible, or would be deductible if interest were payable, but for certain statutory restrictions. Under this definition, investments that are securities and equity for debt swaps could be included.

Under the commercial debt forgiveness provisions, if a taxpayer’s obligation to pay the debt is released, waived, or otherwise extinguished (i.e by agreement, parking of debt, repurchase, redemption etc.), the amount forgiven will be deducted from the taxpayer’s current and future tax deductions. Specifically, the amount forgiven will reduce prior-year revenue losses, prior-year net capital losses, undeducted balances of other expenditure being carried forward for deduction, and the CGT cost base of other assets held, in that order.

Given that commercial debts forgiven may mean a business will have to pay more tax, it can be advantageous if debts the business has forgiven are not captured under the commercial debt forgiveness provisions. The exclusions available include forgiveness of a debt that is effected under an Act relating to bankruptcy or by will, and a natural person’s forgiveness of a debt for reasons of natural love and affection for the debtor.

Before 6 February 2019, the natural love and affection exclusion to commercial debt forgiveness didn’t require the creditor who forgave a debt to be a “natural person”. This meant that a company, through its directors, could forgive the debts of an individual, giving the reason of natural love and affection for the individual, and this would not have been considered a commercial debt forgiveness, meaning a lower tax bill for the company.

Then, the ATO released a draft determination on 6 February 2019 which explicitly stated that the exclusion for debts forgiven for reasons of natural love and affection requires the creditor to be a natural person. This view has been confirmed in the finalised determination, which the ATO recently released.

Delving a little deeper into the final determination: while the ATO states that a debt-forgiving creditor must be a natural person and the object of their love and affection must be one or more other natural persons, where the conditions for the exclusion are otherwise satisfied, there is no requirement that the debtor must also be a natural person. For example, this means that the natural love and affection exclusion can apply in circumstances where the debtor is a company, such as where a parent (a natural person) forgives a debt they are owed by a company that is 100% owned by their child or children.

The natural love and affection exclusion to commercial debt forgiveness may also apply in instances where a natural person forgives a debt owed to a trust or partnership, in their capacity as a trustee of the trust or as a partner in the partnership, respectively. The ATO’s determination points out that cases where this could happen would be limited, given limitations that arise under trust and partnership law principles, statute and terms of any trust deed or partnership agreement.

According to the ATO, whether a creditor’s decision to forgive a debt is motivated by natural love and affection for a person needs to be determined on a case-by-case basis. In addition, while the ATO will not devote compliance resources in relation to debts forgiven before 6 February 2019, if required to state a view in a private ruling or litigation the Commissioner of Taxation will do so consistently with the views set out in the final determination.

Source: www.ato.gov.au/law/view/document?docid=TXD/TD20221/NAT/ATO/00001

Last chance to claim the loss carry-back

Businesses that need a little more financial help will have one last opportunity to claim the loss carry-back in their 2021–2022 income tax returns. Businesses that have an early balancer substituted account period (SAP) for the 2021-22 income year are eligible to claim the loss carry-back offset before 1 July 2022.

To recap, the loss carry-back is a refundable offset that effectively represents the tax that the business would save if it had been able to deduct the loss in an earlier year using the loss year tax rate. It may result in a cash refund, a reduced tax liability, or reduction of a debt owing to the ATO. Eligible businesses include companies, corporate limited partnerships and public trading trusts.

A company, corporate limited partnership or public trading trust may be eligible if it made a tax loss in 2021, carried on a business with an aggregated turnover of less than $5 billion, had an income tax liability in 2019 or 2020, and has met all of its lodgment obligations for the five prior income years.

Loss carry-back can either be claimed by businesses through their standard business reporting enabled software, where it has the additional loss carry-back labels required, or by using the paper copy of the company tax return 2021 and attaching a schedule of additional information to report the extra aggregated turnover and loss carry-back labels required (because these are not included in the company tax return 2021 itself).

For example, if a business is carrying back a tax loss from the 2021–2022 income year, the additional information needed includes the income year the business is choosing to carry the loss back to, the tax losses incurred, net exempt income, the income tax liability for the prior year, and the aggregated turnover range of the business.

Since there are so many additional labels which may need to be completed, the ATO has developed a loss carry-back tax offset tool which will assist businesses that are claiming the loss carry-back before 1 July 2022 to determine which labels are relevant in their unique situations. Once all of the relevant information is provided, the tool will first determine whether the business is eligible to claim the loss carry-back tax offset, then calculate the maximum amount of tax offset available. It will also provide a printable report of the labels which will need to be completed.

However, to use the tool, businesses will need to have the following information handy:

• income tax lodgment history;
• for the 2019–2020 and later income years, details of the loss that was made, including the amount of tax losses, the tax rate and the aggregated turnover for that year and the prior year;
• for the 2018–2019 and later income years, details of the tax liability, including the amount, and any net exempt income; and
• opening and closing balances of the franking account for the income year that is being lodged (ie 2021–2022).

If your clients’ businesses have been battered by the latest COVID-19 wave, they may be able to take advantage of this refundable offset one last time. Remember, the offset effectively represents the tax that the business would save if it had been able to deduct the loss in an earlier year using the loss year tax rate. Because the offset is refundable, it may result in a cash refund, a reduced tax liability, or reduction of a debt owing to the ATO, all of which should help with cash flow.

Source: www.ato.gov.au/business/loss-carry-back-tax-offset/

www.ato.gov.au/Calculators-and-tools/Loss-carry-back-tax-offset-tool/

Tax debts may affect business credit scores

The ongoing COVID-19 pandemic has caused uncertainty in many parts of the economic and has led to what many experts term a “two-speed economy”: while some businesses are recovering well, others continue to suffer from the effects. If your clients’ businesses have had issues paying debts, or have prioritised trade debts ahead of tax debts, remember that these actions may lead to penalties and have a lasting impact on the business.

The best option is to engage with the ATO to manage business debts. Failure to get in touch with the ATO to come to an arrangement will not only affect the potential penalties imposed, but may also affect a business’s credit score.

Laws were passed in 2019 which allow the ATO to disclose information about overdue business tax debts to credit reporting agencies including Equifax, Experian and Illion. The laws were originally promoted as a way to support businesses in making more informed decisions about dealings with various parties by making overdue tax debts more visible. The flow-on effects from that include reducing unfair financial advantages obtained by businesses that do not pay their tax on time, and encouraging businesses to engage with the ATO to manage their tax debts to avoid having those debts disclosed.

To protect taxpayers, the laws passed contained some safeguards. Not all tax debts can be disclosed by the ATO. The following criteria must be met for a business’s debt to qualify for disclosure:

• the business has an ABN and is not an excluded entity (excluded entities include deductible gift recipients, complying super funds or self managed super funds, registered charities and government entities);
• the business has one or more tax debts, of which at least $100,000 is overdue by more than 90 days;
• the business operators have not engaged with the ATO to manage the debt; and
• there is no active complaint with the Inspector-General of Taxation and Tax Ombudsman regarding the ATO’s intent to report tax debt information.

Even if a business debt satisfies these criteria, where exceptional circumstances apply to the situation the ATO may still have the discretion to not report the debt information to credit reporting agencies. “Exceptional circumstances” may include, but are not limited to, family tragedy, serious illness and the impact of natural disasters. The ATO will assess claims of exceptional circumstances on a case-by-case basis.

It should be noted that the ATO does not consider cash flow issues nor financial hardship to be exceptional circumstances, although it still recommends that taxpayers who are experiencing these issues initiate ATO contact as soon as possible to discuss debt management options. For example, where a business has been affected by COVID-19, the ATO has committed to additional administrative support in the areas of lodgment and payment.

Before any debt is disclosed to credit reporting agencies, the ATO is required to send the business a written notice confirming its intent to report the debt information, and setting out the criteria that the business has met and the debt information that will be disclosed. The letter will also outline the steps which the business can take to avoid having the tax debt reported – and these need to be taken within 28 days of receiving the notice. Business owners who believe that the ATO has made a mistake or who disagree with a disclosure decision are advised to contact the ATO immediately upon receiving a notice.

Source: www.ato.gov.au/General/Paying-the-ATO/If-you-don-t-pay/Disclosure-of-business-tax-debts/

https://moneysmart.gov.au/managing-debt/credit-scores-and-credit-reports

Contributions into SMSFs: minimum standards

There are many compliance obligations for trustees of self managed superannuation funds (SMSFs). One of the simplest but most important is ensuring that contributions from members can be accepted into the fund. This involves reporting the tax file numbers (TFNs) of members to the ATO, ensuring non-mandated contributions are not accepted for members over a certain age, and observing certain restrictions on in specie (asset) contributions. If an SMSF inadvertently accepts a non-allowable contribution in error, it must generally be returned within 30 days of the fund becoming aware, otherwise breaches of the contribution rules may occur.

Broadly, whether a contribution to an SMSF can be accepted depends on the type of contribution, the age of the member making the contribution, certain caps, and whether the fund has the TFN of the member.

When a member joins an SMSF, they need to provide their TFN, which then needs to be passed on to the ATO through the registration process. It should be noted that members are not legally required to provide their TFNs. However, if a TFN is not provided, the fund cannot accept certain member contributions, including personal contributions, eligible spouse contributions and super co-contributions. Employer contributions, including salary sacrifice contributions and other assessable contributions, may also be liable for additional income tax of 32% on top of the 15% tax already paid.

As a trustee, you must ensure that any TFNs reported to the ATO for members are correct. If you do not know a member’s TFN, you cannot report an exemption code such as 444 444 444. According to the ATO, exemption codes like this are intended for use by banks/investment bodies for an exemption from withholding tax on interest and other investment income, and are not for use when an SMSF member has not provided a valid TFN to the trustee.

In circumstances where an SMSF mistakenly accepts a contribution it should not have, the fund must return it within 30 days of becoming aware of the error. The 30-day limit is a grace period allowing the fund to remove the contributions from the super system without breaching the payment or contribution rules. Failure of the SMSF to comply with the time limit does not affect the fund’s legal obligation to return contributions.

Even if a member has provided their TFN, the type of a contribution combined with the age of the member can affect what is acceptable. For example, mandated employer contributions such as super guarantee contributions from a member’s employer can generally be accepted at any time, regardless of the member’s age or the number of hours they work. Non-mandated contributions largely cannot be accepted if a member is aged 75 years or older.

Non-mandated contributions include the following:

• contributions made by employers over and above super guarantee or award obligations (that is, salary sacrifice contributions); and
• member contributions, including personal contributions, downsizer contributions, super co-contributions, eligible spouse contributions and contributions made by a third party such as an insurer.

Lastly, there are restrictions on when an SMSF can accept an asset as a contribution from a member. These are referred to as “in specie contributions”, which just means contributions to the fund in the form of a non-monetary asset. Generally, an SMSF must not intentionally acquire assets (including in specie contributions) from related parties to the fund; however, there are exceptions for listed shares and other securities, as well as business real property.

Source: www.ato.gov.au/Super/Self-managed-super-funds/Contributions-and-rollovers/Contributions-you-can-accept/

SMSFs investing in crypto-assets: be informed and keep records

According to the Australian Securities and Investments Commission (ASIC), there has recently been a surge of promoters encouraging individuals to set up self managed superannuation funds (SMSFs) in order to invest in crypto-assets. ASIC warns people to be aware that while crypto-asset investments are allowed for SMSFs, they are high risk and speculative, as well as being an attractive area for scammers targeting uninformed investors.

Seek reliable information

Current record low deposit rates and volatility in stock markets around the world have motivated many retirees to seek alternative asset classes to either protect their investments or get higher returns. In conjunction, there has been a noticeable increase in spruikers encouraging individuals to invest in crypto-assets through SMSFs, with many promotions recommending switching from retail or industry super funds in order to do so.

For example, late last year ASIC moved to shut down an unlicensed financial services business based on the Gold Coast that promised annual investment returns of over 20% by investing in crypto-assets through SMSFs. The money obtained was not invested, but instead allegedly used by the directors of the business for their own personal benefit, including acquiring real property and luxury vehicles in their personal names.

Professional advice should always be sought before deciding on whether an SMSF is appropriate for your circumstances, as there are risks involved in being the trustee of an SMSF, and any SMSF established must meet the “sole-purpose” test. Remember, SMSF trustees bear all the responsibility for the fund and its investment decisions complying with the law, and breaches may lead to administrative or civil and criminal penalties. This is the case even if you (as the trustee) rely on the advice of other people, licensed or otherwise.

SMSFs are not generally prohibited from investing in crypto-assets – if you do decide, after receiving appropriate advice, that investing in crypto-assets through an SMSF is right for your situation, you can do so. Careful consideration must also be given to the following factors:

• the fund’s governing rules: trustees need to ensure that any investments in crypto-assets are allowed under the particular SMSF’s deed;
• investment strategy: there should be documentation of how the SMSF’s investments will meet retirement goals, taking into account diversification, liquidity and the ability of the fund to discharge its liabilities; and trustees need to consider the level of risk for the proposed crypto-asset investments, including reviewing/updating the fund’s investment strategy to ensure they are permitted;
• ownership and separation of assets: crypto-assets must be held and managed separately from any personal or business investments of trustees and members – the SMSF must maintain and be able to provide evidence of a separate crypto-asset “wallet”; and
• valuation: SMSFs must obtain fair market valuations for their crypto-assets for the purposes of calculating member balances.

Other considerations include restrictions on related-party transactions (that is, if you currently own crypto-assets and want to transfer them to the SMSF for various purposes, you will be unable to do so), and potential CGT consequences when an in specie lump sum payment of crypto-assets occurs upon a condition of release.

Keep your records in order

If you do decide to invest in crypto-assets, whether through an SMSF or as an individual investor, it’s also important to keep accurate records and ensure you report any related income to the ATO.

Each time you transact in crypto, the ATO requires you to keep a record of:

• the date and value of the cryptocurrency (or digital asset) in Australian dollars at the time of the transaction;
• what the transaction was for; and
• who the other party was (a cryptocurrency address is sufficient).

You must keep these records for at least five years after lodging the relevant return or form.

The ATO started its first crypto data-matching program in April 2019, comparing taxpayer self-reported income to cryptocurrency transaction data for the 2015–2020 financial years. This program was expanded mid-last year to cover the 2021–2023 financial years, and the ATO will no doubt continue to gather and compare data into the future under subsequent programs. Records relating to between 400,000 and 600,000 individuals will be obtained each financial year under the current program.

The ATO sources its data from designated service providers (DSPs) or entities providing a designated service under Australia’s anti-money laundering/counterterrorism legislation. It may also obtain data from other sources.

A designated service is any service that exchanges, issues, transacts or deals in digital currency. This includes centralised cryptocurrency exchanges, exchanges that convert fiat currency to cryptocurrency (or vice versa) or other designated or regulated entities.

The ATO’s legal power to gather information is extensive and includes the power to physically enter any place and inspect any document, good or other property – this extends to a physical cryptocurrency wallet. The ATO is also permitted by law to amend a taxpayer’s tax return for an unlimited period where it considers that fraud or evasion has occurred – and deliberate non-reporting of gains made from disposals of crypto-assets would meet this description. Possible penalties and interest are also a consideration.

Source: https://asic.gov.au/about-asic/news-centre/articles/warning-self-managed-super-funds-and-crypto-investments/

https://moneysmart.gov.au/investment-warnings/cryptocurrencies

www.ato.gov.au/super/self-managed-super-funds/in-detail/smsf-investing/smsf-investing-in-cryptocurrencies/

www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/

COVID-19 vaccination rewards: tax implications

Amidst the Omicron COVID-19 wave and with our governments shortening booster dose intervals, many businesses are encouraging their employees and customers to get either vaccinated or get their booster dose by offering rewards or incentives. While this is an effective way to help employees and customers stay safe and businesses to stay open, it’s important to consider that there may be some tax consequences involved. Ordinarily, non-cash benefits provided to the general public are not subject to FBT, while non-cash benefits provided exclusively to employees may be, and cash payments to employees need to be reported through Single Touch Payroll (STP).

Non-cash benefits provided to the general public

Where businesses provide free or discounted goods, services, vouchers, gift cards, rewards points or other non-cash benefits (for example, entries into a draw to win prizes) to everyone who has had their COVID-19 vaccinations, those benefits will not be subject to FBT, even if employees take part in the program. This is because the benefit is not provided in respect of the employee’s employment. “Public” in this case denotes both members of the public in general, and those who make up a more specific section of the public (for example, all members of a particular club).

Non-cash benefits provided to employees

Providing non-cash benefits specifically to employees, such as goods and services, vouchers and gift cards or points in a rewards scheme may be subject to FBT. However, a benefit that has a value of less than $300 may qualify for a minor benefits exemption provided that:

• the benefit is provided infrequently and irregularly;
• the value and total value of the minor benefit and other similar or identical benefits are low;
• it is difficult to calculate the taxable value of the benefit and any associated benefits; and
• the benefit is provided as a result of an unexpected event.

In the event that the non-cash benefit provided to employees does not qualify for the minor benefit exemption, the business may be entitled to a reduction in taxable value of FBT if the benefit is an in-house benefit. Generally, an in-house benefit is one that is identical or similar to the benefits provided to customers in the ordinary course of business (for example, clothes provided by a clothing retailer, or electronics provided by an electronic retailer). Businesses can reduce the aggregate taxable value of these benefits by $1,000 if the benefits are not provided under a salary packaging arrangement.

Where a business provides transport or pays for an employee’s transport to get their COVID-19 vaccination or booster, the travel would be considered work-related preventative health care, and is therefore exempt from FBT.

For businesses that offer their employees entry into a draw to win prizes as a reward for vaccination, there will be no FBT consequences when the entry to the draw is given to the employee; however, FBT may apply when the winner receives their prize, unless an exemption or reduction applies.

Cash payments

Where a business gives its employees a cash payment for getting vaccinated, the business will need to report the payment via Single Touch Payroll (STP) as part of each employee’s salary or wages, withhold tax from the amount under PAYG withholding, and include the amount in each employee’s ordinary time earnings for the purposes of determining super contributions for the employees.

Businesses that have already made cash payments to their employees and have inadvertently failed to withhold tax should make contact with the ATO as soon as practicable to facilitate the possible remission of any failure-to-withhold penalties. In addition, the ATO reminds businesses that super contributions on cash payments should be made no later than 28 days after the end of the quarter in which the payment was made, otherwise the super guarantee charge may apply.

Source: www.ato.gov.au/law/view/document?DocID=AFS/VACC_INC-COVID-19

www.ato.gov.au/General/COVID-19/Support-for-businesses-and-employers/COVID-19-and-fringe-benefits-tax/

www.ato.gov.au/General/COVID-19/Support-for-individuals-and-employees/COVID-19-vaccination-incentives-and-rewards-for-employees/

Free mental health support for small business

The Federal Government has announced additional funding to extend the availability of free mental health support to small business owners dealing with the current pandemic and recent natural disasters.

Funding of $4.6 million will go to Beyond Blue to boost its successful and innovative mental health program, NewAccess for Small Business Owners, and $2.1 million will go to Financial Counselling Australia to extend the Small Business Debt Helpline for 2022.

NewAccess for Small Business Owners

The NewAccess for Small Business Owners Program provides free, confidential, one-on-one mental health support by phone or video call to small business owners, including sole traders. The coaches are former small business owners themselves, so they understand the unique challenges that small businesses face, including family and financial pressures.

The program, developed and provided by Beyond Blue, starts with an initial assessment that allows the coach to develop a program tailored to each business owner’s individual needs. The sessions then use Low-intensity Cognitive Behavioural Therapy (LiCBT) work to help participants in recognising the ways they think, act and feel, and in separating from unhelpful thoughts. The program provides practical skills to manage stress and get back to feeling like yourself.

The recently announced additional funding will allow for six more coaches from 1 April 2022, meaning the program will have a team of 18 specialised support coaches available to help 4,680 small business owners through the series of six one-on-one coaching sessions.

Business owners who’ve participated in the program say it’s helped them feel better able to address the challenges they’re facing, and they feel well supported by people who understand them. Participants also say they value being able to get support almost immediately using the free service.

More information about the NewAccess for Small Business Owners program is available by calling 1300 945 301 or on the Beyond Blue website at www.beyondblue.org.au/newaccess-sbo.

Small Business Debt Helpline

The Small Business Debt Helpline was set up in 2020 by Financial Counselling Australia (FCA) with Federal Government funding. It’s a service for small business owners in financial difficulty, and supports small business owners to navigate issues including avoiding bankruptcy, negotiating payment plans, debt waivers, grant applications and insolvency.

The helpline is free to use, and the services provided are independent, confidential and impartial. Its professional financial counsellors offer a listening ear and practical business advice. They don’t sell anything or work on commission.

Small business owners can contact the Small Business Debt Helpline by calling 1800 413 828 (9 am to 5.30 pm AEDT, Monday to Friday) or on the Small Business Debt website at https://sbdh.org.au/.

ATO support options

The ATO also reminds business owners whose mental wellbeing may be affecting their ability to pay tax or super that it has support options available, including help with setting up payment plans and deferring lodgements or payments. Information is available on the ATO website at www.ato.gov.au/General/Support-in-difficult-times/.

Source: www.ato.gov.au/general/covid-19/

https://ministers.treasury.gov.au/ministers/stuart-robert-2021/media-releases/more-funding-free-mental-health-counselling-small

Changes to recovery loan scheme for small and medium enterprises

As a part of an economic package to help businesses recover from the impacts of the COVID-19 pandemic, the Federal Government provided low-cost credit to qualifying small and medium enterprises (SMEs) in the form of the SME Recovery Loan Scheme. When it was first introduced, and until 31 December 2021, the government essentially guaranteed 80% of the loan amount.

However, from 1 January 2022, as restrictions have eased, the government guarantee has been reduced from 80% of the loan amount to 50% of the loan amount. The eligibility conditions have also been slightly fine-tuned, with the scheme now due to end on 30 June 2022.

To recap, the scheme is available to eligible small and medium businesses with up to $250 million turnover, including sole traders and non-profits. Previously, the scheme was also open to recipients of JobKeeper payments between 4 January 2021 and 28 March 2021, and those businesses affected by floods in eligible local government areas in March 2021. Now, only those businesses that have been adversely economically affected by COVID-19 are eligible.

Eligible small and medium businesses can access up to $5 million in total from participating lenders. This is in addition to the loan limits for Phase 1 (unsecured capital loans of up to $250,000 for terms of up to three years) and Phase 2 (unsecured loans of up to $1 million for terms of up to five years with a cap on interest rates) of the scheme.

Loans can now be unsecured or secured and will generally be for terms of up to 10 years, with an optional repayment holiday period of up to 24 months. The amounts can be used for a range of business purposes, including investment support or refinancing the pre-existing debt of an eligible borrower. For example, the loans can be used to purchase non-residential real property, including commercial property, or for the acquisition of another business.

While the exact interest rate will be determined by participating lenders, under the scheme, the maximum rate will be capped at around 7.5% with flexibility for interest rates on variable rate loans to increase if market interest rates rise over time.

Participating lenders can offer any suitable product to eligible businesses except for credit cards, charge cards, debit cards or business cards.

Loans issued under the scheme to refinance existing loans cannot be used for the purposes of:

• purchasing residential property;
• purchasing financial products;
• lending to an associated entity; or
• leasing, renting, hiring or hire-purchasing existing assets that are more than halfway into their effective life.

Further, there will also be some restrictions on refinancing loans, including not allowing loans more than 30 days in arrears to be refinanced, and not allowing borrowers who have entered into external administration or are insolvent to refinance debts. Participating lenders include the “Big 4” banks, plus a host of other smaller financial institutions and mutual societies.

Source: https://treasury.gov.au/coronavirus/sme-recovery-loan-scheme

https://business.gov.au/grants-and-programs/sme-recovery-loan-scheme

Need more money in retirement?

Retirees who own their own home and need more money in retirement are now able to access the Home Equity Access Scheme, run through Services Australia. The scheme was previously known as the Pensions Loans Scheme but along with a new name, the fortnightly interest rate has been lowered to 3.95% per annum. To access the scheme, there is no need for an individual and/or their partner to be on the Age Pension, although certain other requirements need to be met. Loan payments under the scheme can be started and stopped at any time.

The Home Equity Access Scheme allows older Australian to get a voluntary non-taxable fortnightly loan at an interest rate of 3.95% per annum, which is a much lower rate than personal loans from various providers, which typically start from around 5% per annum. To access the loan, a retiree or their partner needs to meet the following requirements:

• be at Age Pension age or older;
• be receiving or be eligible to receive a qualifying pension (the Age Pension, Carer Payment or Disability Support Pension);
• own real estate in Australia that can be used as security for the loan;
• have adequate and appropriate insurance covering the real estate offered as security; and
• not be bankrupt or subject to a personal insolvency agreement.

It should be noted that retirees can get a loan even if their income and assets mean that they wouldn’t normally get one of the qualifying pensions – they just need to be able to meet the eligibility rules. People who are on either the Pension Bonus Scheme or an Asset Hardship Payment may have affected eligibility for the scheme affected.

There are costs associated with starting and stopping the scheme – for example, Services Australia will place a charge or caveat on the property offered as security for the loan, and the retiree will need to pay the costs involved with registering and removing the charge or caveat. These costs will not need to be paid upfront and can be added to the loan balance, which can then be paid at any time.

When qualifying for the scheme, people can choose to get their loan payment each fortnight at either the maximum amount (which is 150% of the person’s maximum pension rate), a smaller percentage, or a fixed loan amount of their choosing. The loan amount will be automatically adjusted whenever the pension amount changes.

For individuals who do not receive the pension, the maximum amount under the Home Equity Access Scheme, $1,665.45 per fortnight, can be accessed.

Payments under the scheme will continue until the holder reaches their maximum loan amount (including interests and costs). This maximum loan amount depends on the person’s age, the age of their partner (if any), and the market value of the property offered as security. For example, for a single person aged 70 who has a home with a market value of $800,000, the maximum loan amount available under the scheme is $246,400.

The scheme is flexible, which means it’s possible to stop loan payments at any time and to make repayments at any time, but regular repayments are not required. Rather, recipients of the loan have the choice to wait to pay the loan, legal costs and accrued interest in full when they sell the property they’ve used as security. However, it should be noted that the longer the loan is held, the more interest will accrue.

Source: https://ministers.dss.gov.au/media-releases/7851 

www.servicesaustralia.gov.au/home-equity-access-scheme

www.dva.gov.au/financial-support/income-support/support-when-you-cannot-work/pensions/home-equity-access-scheme

Income protection insurance in super: beware of offsets

In Australia, around seven of the 20 largest MySuper products provide default income protection insurance on an opt-out basis. While income protection insurance has the advantage of providing a regular income for a specified period of time if a person cannot work due to temporary disability or illness, a recent ASIC review into this type of cover in super has raised concerns around the amount of information given to members – in particular communication about “offset clauses”, which are often described in technical and legalistic language.

Insurance within super is usually the most cost-effective way for an individual to cover themselves in the event of a mishap. Most super funds typically offer three types of insurance for their members: life cover, total and permanent disability (TPD) and income protection insurance (or salary continuance cover).

Life cover (death cover) pays a lump sum or income stream to beneficiaries upon the insurance holder’s death, or in the event of a terminal illness. TPD insurance pays the holder a benefit if they become seriously disabled and are unlikely to work again. Income protection insurance pays a regular income for a specified period, ranging from two years to five years, or up to a certain age, if the holder can’t work due to temporary disability or illness. It is estimated that seven out of the 20 largest MySuper products provide default income protection insurance on an opt-out basis, and approximately 3.4 million MySuper accounts have income protection insurance.

Recently, ASIC reviewed the practices of five large super funds that provide default income protection insurance on an opt-out basis to their members, accounting for around 2 million MySuper member accounts as at June 2021. From that review, the regulator has raised various concerns around the amount of information received by members on these policies and whether funds should be doing more to communicate clearly about insurance.

Overall, the review found that most income protection insurance policies contain “offset” clauses, which mean that the insurance benefit is reduced or “offset” if the individual receives other kinds of income support. This is used as a way to reduce incentives for individuals to delay their return to work as a result of receiving more income while disabled than when working. In addition, the review found there were large variations between super funds in the types of income that were offset against income protection benefits.

For example, different funds will offset different combinations of alternative income such as paid leave (annual or long service), employer super contributions, social security benefits, TPD benefits, workers compensation, and other insurance settlement or benefits.

ASIC found that trustees were not proactively giving their members clear explanations about when insurance benefits would or would not be paid as a result of offsets. This information is obviously relevant to members considering whether they should opt out of default income protection insurance, and to those making insurance claims.

ASIC’s concern is not that these offset clauses exist, but rather that relevant information to explain the clauses was not available in website communications or in welcome packs, and the clauses were only described in technical and legalistic language in insurance guides.

The regulator is also concerned that super fund trustees were unable to demonstrate that they had sought reliable data on offsets and used it to review the appropriateness of their default income protection insurance offering. This could cause unnecessary erosion of super benefits of members if offsets mean that particular groups of members get little value from their default insurance if they need to claim.

Super fund members can get more information on ASIC’s MoneySmart website about what to look for when considering income protection insurance through super, at https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance.

Source: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-343mr-super-trustees-offering-default-income-protection-insurance-urged-to-check-on-member-outcomes/

ATO scrutinising gifts or loans from overseas

The ATO has recently issued an alert warning taxpayers against disguising undeclared foreign income as gifts or loans from related overseas entities, including family and friends. It says it has continued to encounter situations where Australian resident taxpayers have derived amounts of income or capital gains offshore that are assessable, but the taxpayers have failed to declare the amounts in their income tax returns.

Individuals who are Australian residents for tax purposes should remember that their worldwide income, as well as certain profits derived by offshore entities they control, is assessable income for Australian tax purposes.

The ATO will now be looking closely at arrangements where taxpayers are aware of their residency status and the tax implications that flow from it, but attempt to avoid or evade tax of their foreign assessable income by concealing the character of the funds upon repatriation to Australia by disguising the amounts as either gifts or loans from a related overseas entity.

Whether or not a gift or loan is genuine depends upon the following criteria being satisfied:

• the characterisation of the transaction as a gift or loan is supported by appropriate documentation;
• the behaviour of the parties is consistent with that characterisation; and
• the monies provided are sourced from funds genuinely independent of the gift or loan receiver.

If family or friends who reside overseas have provided a genuine gift to an individual or their business, it is prudent for them to keep supporting documents such as:

• any declarations the donor has made in their country of residence about the nature of the amounts transferred;
• an executed contemporaneous deed of gift prepared by the donor;
• formal identification of the donor (eg a copy of their photo identification from their passport or identity card);
• a copy of the donor’s bank statements showing the gift and donor’s wealth before they made the gift; and
• financial records reflecting the donor’s transfer.

Gifts also include inheritances. Where an inheritance is received, a certified copy of the donor’s will or a distribution statement for the estate should be a part of the recordkeeping.

In relation to genuine loans from overseas entities made to help start up a business or to acquire income-producing assets, supporting documents may include the following:

• a properly documented loan agreement that details parties to the loan, date, amount, interest rate, frequency of repayments and terms of the loan;
• correspondence relating to the loan, such as pre-contractual negotiation communications or variations made post-agreement);
• documents in relation to security or guarantees provided;
• arrangements governing the drawdown and transmission of funds;
• financial records showing advance of funds and subsequent repayments, including interest and principal payments over the loan term;
• financial and accounting records showing how the loan amounts were used; and
• documents showing the payment of withholding tax.

If there is any uncertainty about whether particular amounts are genuine gifts or loans, the ATO has said it will form a view based on all the available evidence – therefore, keeping contemporaneous and complete records is strongly recommended. The ATO notes that a deed of gift or a statutory declaration (provided either by the donor or the receiver) may not be accepted as conclusive evidence.

New data matching program: government payments

A new data matching program designed to identify and address non-compliance with tax and super obligations is under way in relation to government payments for the 2018–2019 to 2022–2023 income years. In essence, it covers most services that the Commonwealth Government pays third-party program providers to deliver.

Specifically, data will be obtained from the following agencies in relation to these programs that they deliver:

• Comcare – services provided under the Safety Rehabilitation and Compensation Act 1988;
• Department of Education, Skills and Employment – VET FEE-HELP scheme, VET student loans program, child care subsidy, employment services;
• Department of Health – aged care subsidy, hearing services program, Commonwealth home support program;
• National Disability Insurance Agency – National Disability Insurance Scheme (NDIS);
• National Indigenous Australian Agency – Indigenous Advancement Strategy;
• Department of Home Affairs – youth transition support services, national community hubs, humanitarian settlement program, Australian cultural orientation program, adult migrant English program, free translating service, and settlement engagement and transition support program;
• Department of Veterans’ Affairs – health treatment program; and
• clean energy regulator – large-scale renewable energy target and small-scale renewable energy scheme.

The wide-ranging nature of this program is designed to identify and address non-compliance with tax and super obligations by service providers receiving government payments or helping deliver the specified programs. The data collected will enhance the information the ATO currently receives from government entities through the taxable payments annual report (TPAR).

This means that contractors, subcontractors and consultants in any type of business structure (sole trader, company, partnership or trust) that receive payments from government under any of these programs may be subject to extra scrutiny.

Service provider identification details obtained under the program will vary depending on whether they are individuals or entities. For individuals and sole traders, basic details collected will include names (first and last), dates of birth, addresses (residential, postal, etc), ABNs, service types, email addresses and phone numbers. For entities, basic details collected will include service provider business names, addresses (business, postal, registered, etc), ABNs, ACNs, organisation or service types, contact names, email addresses and phone numbers.

Payment information obtained under the program will consist of service provider IDs, names of services, types of services (linked to programs), value of payments received for the relevant financial years, counts and types of claims, and withholding and re-credit amounts.

It is estimated that 36,000 service providers will be captured under this program each financial year; of that number, approximately 11,000 will be individuals and the rest will be companies, partnerships, trusts and government entities.

The ATO will be checking the registration obligations of third-party providers (ABNs, TFNs, GST and PAYG withholding) as well as lodgment obligations (outstanding income tax, BAS and FBT returns). It will also look at whether service providers have correctly reported income, comparing the data obtained against income records, and will check for any outstanding tax and super debts and assess the entity’s ability to pay those debts.

Source: www.ato.gov.au/General/Gen/Government-Payments-Program/

www.legislation.gov.au/Details/C2021G00763

Do you need a Director Identification Number?

Directors of companies will soon have to enrol in the Director Identification Number regime. This requires current and future directors to apply for director identification numbers (DIN) which will be permanently linked to the individual, even if they are no longer a director. It is hoped the regime will make it easier to trace relationships across companies and reduce instances of phoenixing and other illegal activity. Most existing directors will have until 30 November 2022 to apply for the DIN through the ATO.

The Director Identification Number regime came into force late in 2020 as a tool for the Federal Government to reduce phoenixing and black economy activities. Broadly, the regime will require all directors to confirm their identity with the ATO, at which time they will be issued a unique identifier. This identifier will then be permanently linked to the individual, even if they cease to be a director.

The Government has recently introduced an instrument that extends the time available for persons who are eligible officers immediately before the commencement of the obligations to apply for a DIN. Individuals that operate under the Corporations Act 2001 and became a director on or before 31 October 2021 are required to apply for a DIN before the end of the transitional period, which is between 4 April 2021 and 30 November 2022.

Directors who operate under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 and became a director on or before 31 October 2021 will have even more time to apply for a DIN – until 30 November 2023 (with a transition period between 4 April 2021 and 30 November 2023). Any individuals who are appointed directors between 1 November 2021 and 4 April 2022 will have within 28 days of their appointment to apply for the DIN, and from 5 April 2022 individuals seeking to become directors will need to apply for a DIN before their appointment.

It is envisaged that the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and preventing the use of fictitious entities. It will also assist regulators to investigate a director’s involvement in what may be repeated unlawful activity, including illegal phoenixing.

The Australian Securities and Investments Commission (ASIC) and external administrators will also benefit, saving time and money, as the DIN will make it simpler to track the corporate history of various directors and assist liquidators in improving the efficiency of the insolvency process. The DIN is also expected to protect individuals against the fraudulent use of stolen identities to set up companies, and is expected to improve overall data integrity and security.

To prevent abuse of the regime, any conduct that undermines the DIN requirement will be subject to civil and criminal penalties. This includes deliberately providing false identity information, intentionally providing a false DIN or intentionally applying for multiple DINs.

Directors will be able to use the new Australian Business Registry Services (ABRS) online services to register from 1 November 2021.

Sign-ins and director identity verification will be conducted using the myGovID app. This app requires a compatible smart device and will require an individual to enter personal details and verify at least two Australian identity documents (drivers licence, birth certificate, citizenship certificate, passport, etc) to obtain the “standard identity strength”. The “strong identity strength” which is currently in testing phase will require the completion of an additional face verification check.

Source: www.legislation.gov.au/Details/F2021L01391

www.ato.gov.au/General/Gen/Modernising-Business-Registers/

www.abrs.gov.au/director-identification-number/who-needs-apply-and-when

COVID-19 relief for SMSFs extended

Due to the ongoing economic impacts of COVID-19 on large parts of Australia, the ATO has announced the extension of various COVID-19 relief measures for trustees of self managed superannuation funds (SMSFs). The relief previously only applied to the 2019–2020 and 2020–2021 financial years, but will now also be available for the 2021–2022 financial year.

SMSF residency test

To be a complying super fund and receive tax concessions, SMSFs must be an “Australian super fund” at all times during the year. This requires, among other things, for the central management and control of the SMSF (ie individual trustees, or directors of a corporate trustee) to ordinarily be in Australia. Under the relief, a fund will still meet this requirement even if its central management and control is temporarily outside of Australia for up to two years.

Obviously, with the Australian borders pretty much closed during the entirety of the pandemic, and many other countries imposing travel bans, some individual trustees or directors of a corporate trustee may be stranded in another country over the two-year limit through no fault of their own. In these situations, provided there are no other changes in the SMSF or in the circumstances of the individual trustee (or directors of the corporate trustee) affecting other residency conditions, the ATO has indicated it will not apply compliance resources to determine whether a fund meets the residency test.

Rental relief

If an SMSF or a related party has continued to provide rental relief based on the current market conditions, whether it be a rental reduction, waiver or deferral to a tenant, the ATO will provide relief in the form of not taking any compliance action against the fund. However, this is predicated on the rental relief being offered on commercial terms, and there being proper documentation with regards to the arrangement.

The ATO notes that not taking compliance action is only an interim measure. In due course it will be making a formal determination, similar to the one made in 2020, to ensure that rental deferrals offered by SMSFs or related parties to their tenants does not cause a loan or an investment to be an in-house asset in the current and future financial years.

Loan repayment relief

For loan repayment relief provided by an SMSF to a related or unrelated party due to the financial impacts of COVID-19, where the relief is offered on commercial terms and the changes to the loan agreement are properly documented, the ATO will provide relief on similar terms as the interim rental relief – that is, it will not take any compliance action against the fund. This will also apply to limited recourse borrowing arrangements (LRBAs).

In-house assets

Where an SMSF exceeds the 5% in-house asset threshold at 30 June 2021 due to the financial impacts of COVID-19, trustees must still prepare a written plan to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022. However, the ATO has said it will not take any compliance action where the plan has not been executed by the due date (30 June 2022) as a result of the market not having recovered, or in some cases the plan may be unnecessary owing to the recovery of the market.

PAYG variations

The ATO has also confirmed that its penalty and interest relief for excessive PAYG variations applies to SMSFs that continue to be impacted by COVID-19 during 2021–2022. The ATO will not apply penalties or interest for excessive variations of PAYG instalments during the 2021–2022 income year, provided that the taxpayer has taken reasonable care to estimate their end-of-year tax.

This ATO concession for penalties and interest applies to 30 June ordinary balancers for the 2021–2022 income year and entities that have been granted a substituted accounting period (SAP). For an entity with a SAP, any variation must relate to instalments made during the 2021–2022 income year.

A PAYG instalment variation requires a reasonable and genuine attempt to determine the liability. When considering if a genuine attempt has been made, the ATO takes into account what a reasonable person would have done in the taxpayer’s circumstances.

The ATO notes that PAYG variations do not carry over into the new income year. Therefore, if a taxpayer made variations in the 2020–2021 income year, they may need to vary again in 2021–2022. The varied amount or rate then applies for all of the taxpayer’s remaining instalments for the income year, or until they make another variation.

The ATO encourages PAYG instalment payers to review their tax position regularly and vary the PAYG instalments as their situation changes. Taxpayers who realise they have made a mistake working out their PAYG instalment can correct it by lodging a revised activity statement or varying a subsequent instalment.

If a taxpayer is unable to pay an instalment amount, the ATO requires them to still lodge an instalment notice and discuss a payment arrangement with the ATO so that they don’t have a debt at the end of the year.

Audits

The ATO has also extended to 2021–2022 its existing COVID-19 relief in the Addendum to the Auditor/actuary contravention report (ACR). The ACR relief for 2021–2022 will apply for:

• rental relief (including rental reductions, waivers and deferrals);
• loan repayment relief (including for LRBAs); and
• in-house assets.

Approved SMSF auditors need to refer to the Addendum when determining whether a contravention arises because of the relief, when to report a contravention to the ATO via an ACR for the 2021–2022 financial year, and what evidence to obtain from the trustees to support the relief. In summary, SMSF auditors need to check that:

• rental relief is offered on commercial terms due to the financial impacts of COVID-19 (having regard to relevant state and territory COVID-19 support measures) and the arrangement is appropriately documented;
• loan repayment relief is offered on commercial terms due to the financial impacts of COVID-19 (having regard to the terms of relief offered by commercial lenders), and the changes to the loan agreement are properly documented;
• funds that exceeded the 5% in-house asset threshold at 30 June 2021 due to the financial impacts of COVID-19 have prepared a written plan to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022.

The ATO has said that SMSF auditors need to use their professional judgment when determining whether relief is offered on commercial terms due to the financial effects of COVID-19. If there is insufficient appropriate evidence to support the relief, including that it is offered on commercial terms, SMSF auditors should report this via an ACR where the reporting criteria are met.

Audit opinion modifications

The existing ACR Addendum notes that auditors may still need to modify their opinion in Part B of the audit report where they identify any material breach of the provisions and regulations listed within the audit report, even if those breaches have arisen from the impacts of COVID-19 in circumstances where the ATO will not be taking compliance action against them. Even where a modification is not necessary, for example because the auditor forms an opinion that the contravention is not material, the auditor must still notify the trustee of these contraventions. This could be done in the management letter to the trustee.

The ATO also recommends that auditors add to the management letter that the ATO will not be taking any compliance action against these contraventions for the 2019–2020, 2020–2021 and 2021–2022 financial years. All other contraventions identified in the fund need to be reported to the trustee in the management letter and reported to the ATO in the ACR where the reporting criteria are met.

Arm’s length terms must be documented

The ATO relief generally only applies where a landlord has “acted in good faith” and agreed that the tenant can defer payment of rent on arm’s length terms during one or all of the 2019–2020, 2020–2021 and 2021–2022 income years in order to ease the financial hardship caused by COVID-19.

The National Cabinet Mandatory Code of Conduct (or any relevant state-based codes or legislation) may assist in assessing whether the rental deferral has been negotiated in good faith and on arm’s length terms.

There must also be contemporaneous documentation reflecting the arm’s length terms and that the lease remains enforceable. Any deferred amounts must also be repaid by the tenant as soon as practicable.

Source:

www.pm.gov.au/sites/default/files/files/national-cabinet-mandatory-code-ofconduct-sme-commercial-leasing-principles.pdf

www.service.nsw.gov.au/campaign/covid-19-help-businesses/covid-19-assistance-commercial-and-residential-landlords

www.vsbc.vic.gov.au/your-rights-and-responsibilities/retail-tenants-and-landlords/

www.ato.gov.au/Super/Sup/Varying-your-pay-as-you-go-instalments-due-to-COVID-19/

www.ato.gov.au/Forms/Auditor-actuary-contravention-report-instructions/?anchor=AddendumAuditorContraventionReportingins#AddendumAuditorContraventionReportingins

www.ato.gov.au/Super/Sup/COVID-19-relief-in-ACR-Addendum-extended-to-2021-22-financial-year/