PERSONAL TAXATION

Personal tax rates: staged seven-year reform plan starting from 2018–2019

In the 2018–2019 Budget, the Government announced staged tax relief for low and middle income earners. The Government is proposing a major seven-year, three-step plan to reform personal income tax.

Step 1 will see a new, non-refundable low and middle income tax offset from 2018–2019 to 2021–2022, designed to provide tax relief of up to $530 for each of those years. The offset will be delivered on assessment after an individual submits their tax return, and will be in addition to the existing low income tax offset (LITO).

The low and middle income tax offset will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. Between $37,000 and $48,000 of taxable income, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333 of taxable income, the offset will phase out at a rate of 1.5 cents per dollar.

Step 2 will increase the top threshold of the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018. In 2022–2023, the top threshold of the 19% bracket will increase from $37,000 to $41,000 and the LITO will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667. The top threshold of the 32.5% bracket will increase from $90,000 to $120,000 from 1 July 2022.

Step 3: from 1 July 2024, the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, removing the 37% tax bracket completely. Taxpayers will pay the top marginal tax rate of 45% from taxable incomes exceeding $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

The Government says this means that around 94% of all taxpayers are projected to face a marginal tax rate of 32.5% or less in 2024–2025.

Medicare levy, 2017–2018 tax rates unchanged

The Government had proposed to increase the Medicare levy from 2% to 2.5% from 1 July 2019, but has decided not to proceed with this. Presumably the Bills to do this, which are currently before Parliament, will be removed. In an address on 26 April 2018 to the Australian Business Economists in Sydney, the Treasurer said that, due to the improving economy and fiscal position, the Government is “now in a position to give our guarantee to Australians living with a disability and their families and carers that all planned expenditure on the National Disability Insurance Scheme (NDIS) will be able to be met in this year’s Budget and beyond without any longer having to increase the Medicare levy”.

At the same time, it has been reported that Shadow Treasurer Chris Bowen has announced that Labor will not proceed with its proposal to increase the Medicare levy by 0.5% (to 2.5%) on those earning above $87,000.

The tax rates and thresholds for the 2017–2018 year remain unchanged.

BUSINESS TAXATION

$20,000 instant asset write-off for SBEs extended by 12 months

The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities (SBEs) by 12 months to 30 June 2019. This applies to businesses with aggregated annual turnover less than $10 million.

The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose. Only a few assets are not eligible for the instant asset write-off or other simplified depreciation rules (eg horticultural plants and in-house software).

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The current “lock out” laws for the simplified depreciation rules (which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2019.

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

While the extension of the write-off will be welcomed, SBEs of course need to have the cash-flow to enable them to spend the $20,000 in the first place.

Anti-avoidance rules: family trust circular distributions

The Government will extend specific anti-avoidance rules that apply to other closely held trusts that engage in circular trust distributions to family trusts.

Currently, where family trusts act as beneficiaries of each other in a round-robin arrangement, a distribution can ultimately be returned to the original trustee in a way that avoids any tax being paid on that amount. The measure will allow ATO to pursue family trusts that engage in these arrangements and impose tax on such distributions at a rate equal to the top personal rate plus the Medicare levy.

This measure applies from 1 July 2019.

Deductions disallowed for holding vacant land

The Government will disallow deductions for expenses associated with holding vacant land. Where the land is not genuinely held for the purpose of earning assessable income, expenses such as interest costs will be denied. It is hoped this measure will reduce the tax incentives for land banking which limit the use of land for housing or other development.

The measure will apply to both land held for residential and commercial purposes. However, the “carrying on a business” test would generally exclude land held for a commercial development. It will not apply to expenses associated with holding land that are incurred after:

• a property has been constructed on the land, it has received approval to be occupied and available for rent; or
• the land is being used by the owner to carry on a business, including a business of primary production.

Disallowed deductions will not be able to be carried forward for use in later income years. Expenses for which deductions will be denied could be included in the cost base if it would ordinarily be a cost base element (ie borrowing costs and council rates) for CGT purposes. However, if the denied deductions are for expenses would not ordinarily be a cost base element, they cannot be included in the cost base.

This measure applies from 1 July 2019.

Partnerships: enhancing integrity of concessions

Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.

The Government said this measure will prevent taxpayers, including large partnerships, inappropriately accessing the CGT small business concessions in relation to their assignment to an entity of a right to the future income of a partnership, without giving that entity any role in the partnership.

There are no changes to the small business CGT concessions themselves. The concessions will continue to be available to eligible small businesses with an aggregated annual turnover of less than $2 million or net assets less than $6 million.

These measures will apply from 7:30PM (AEST) on 8 May 2018.

TAX COMPLIANCE AND INTEGRITY

No tax deduction for non-compliant PAYG and contractor payments

Measures will be enacted to ensure that taxpayers will not be able to claim deductions for payments to their employees such as wages where they have not withheld any amount of PAYG from these payments, despite the PAYG withholding requirements applying.

Similarly, the Government intends to remove deductions for payments made by businesses to contractors where the contractor does not provide an ABN and the business does not withhold any amount of PAYG (again despite the withholding requirements applying).

These measures were recommended by the Black Economy Taskforce.

The revenue expectations linked with this expenditure is quite modest – “a small unquantifiable gain to revenue over the forward estimates period”.

The measures will commence on 1 July 2019.

Cash payments limit: payments made
to businesses

The Government will introduce a limit of $10,000 for cash payments made to businesses for goods and services.

This measure will require transactions over a threshold to be made through an electronic payment system or by cheque. Logically it would seem that this threshold amount should be $10,000, but this is not spelt out in the Budget papers or the media release.

The rules will not apply to transactions with:

• financial institutions; or
• consumer-to-consumer non-business transactions.

This measure was recommended by the Black Economy Taskforce. It is designed to support other measures designed to counter the black economy. There is no revenue impact associated with it.

The limit will apply from 1 July 2019. The Government will consult further as part of the implementation process.

Reportable payments system extended: security providers, road freight transport and computer design

The Government will extend the taxable payments reporting system (TPRS) to the following industries:

• security providers and investigation services;
• road freight transport; and
• computer system design and related services.

This will extend the TPRS requirements already applying to the building and construction industry. The TPRS requirements will also be extended, from 1 July 2018, to the cleaning and courier industries under measures contained in the Treasury Laws Amendment (Black Economy Taskforce Measures No 1) Bill 2018.

The reporting requirements will apply from 1 July 2019, with the first annual report required in August 2020.

SUPERANNUATION

SMSF member limit to increase from four to six

The Budget confirmed that the maximum number of allowable members in new and existing self managed superannuation funds (SMSFs) and small APRA funds will be expanded from four to six members from 1 July 2019. This measure was originally flagged on 27 April 2018 by the Minister for Revenue and Financial Services, Kelly O’Dwyer.

The proposed increase to the maximum number of SMSF members seeks to provide greater flexibility for large families to jointly manage retirement savings. Given the growth in the sector to date, Ms O’Dwyer said the measure will ensure SMSFs remain compelling retirement savings vehicle. The Government is expected to ask the ATO to work with industry on the design and implementation of this measure. It is not expected to have a revenue impact.

Extra SMSF members to provide flexibility

Currently, s 17A(1)(a) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires an SMSF to have fewer than five members. In addition, each member must be a trustee of the fund (or a director of the corporate trustee). This seeks to ensure that all members are fully involved and equally responsible for fund decisions and investments.

The Government’s proposal to allow up to six SMSF members may assist those with larger families to implement intergenerational solutions for managing long-term, capital intensive investments, such as commercial property and business real property. For example, allowing an extra two members provides an opportunity to improve a fund’s cash flow by using the contributions of the younger members to make pension payments to the members in retirement phase, without needing to sell a long-term investment.

As each member must be a trustee of the fund, a decision to add extra members should not be taken lightly as it can add complexity to the fund’s management and investment strategy. A change to the membership of an SMSF will alter the trustee arrangements which can impact who controls the fund in the event of a dispute. This is especially relevant in the event of the death of a member, as the surviving trustees have considerable discretion as to the payment of the deceased’s super benefits (subject to any binding death benefit nomination).

Labor’s dividend imputation policy

Allowing up to six SMSF members may assist some SMSFs to implement strategies to guard against Labor’s proposal to end cash refunds of excess franking credits from 1 July 2019. SMSFs in tax-exempt pension phase are expected to feel the brunt of Labor’s proposal, although an exemption was subsequently announced for SMSFs with at least one Government pensioner or allowance recipient before 28 March 2018.

To avoid wasting non-refundable franking credits, Labor’s proposal would create an incentive for SMSFs in pension phase to add additional accumulation phase members (eg adult children) who could effectively make some use of the excess franking credits within the fund. That is, the excess franking credits would be used to absorb some of the 15% contributions tax in relation to the accumulation members. For example, the proposal to increase the maximum number of SMSF members from four to six would enable a typical two-member fund in pension phase to admit up to four adult children as members. If those adult children are making concessional contributions up to the maximum of $25,000 per year, the fund could use the excess franking credits to offset up to $15,000 (four x $25,000 x 15%) in contributions tax each year for the adult children.

This strategy would essentially replicate, to the extent possible, the position of large APRA funds under Labor’s policy. APRA funds typically have more contributing members and diverse income sources (beyond franked dividends) that can usually fully absorb the franking credits.

As already noted, a decision to add additional members to an SMSF may add complexity to the management and control of the fund. This would require professional advice for the specific circumstances of the fund and its members.

Superannuation work test exemption for contributions by recent retirees

The Government will introduce an exemption from the work test for voluntary superannuation contributions by individuals aged 65–74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements.

Currently, the work test in reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) restricts the ability to make voluntary superannuation contributions for those aged 65–74 to individuals who self-report as working a minimum of 40 hours in any 30-day period in the financial year. The measure will give recent retirees additional flexibilities to get their financial affairs in order in transition to retirement. It will apply from 1 July 2019.

SMSF audit cycle of three years for funds with good compliance history

The annual audit requirement for SMSFs will be extend to a three-yearly cycle for funds with a history of good record-keeping and compliance.

The measure will apply to SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

This measure will start on 1 July 2019. The Government said it will undertake consultation to ensure a smooth implementation.

Super fees to be capped at 3% for small accounts, exit fees banned

Passive fees charged by superannuation funds will be capped at 3% for small accounts with balances below $6,000, while exit fees will be banned for all superannuation accounts from 1 July 2019. These measures form part of the Government’s Protecting Your Super Package.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, said there were around 9.5 million super account with a balance less than $6,000 in 2015–2016. To avoid these small accounts from being eroded, the Government will cap the administration and investment fees at 3% annually, Ms O’Dwyer said.

The Government will also ban exit fees on all superannuation accounts. Exit fees of around $37 million were charged to members in 2015–2016 to simply close an account with a super fund. The proposed ban on exit fees will also benefit members looking to rollover their super accounts to a different fund, or who hold multiple accounts and see exit fees as a barrier to consolidating accounts.

 

With nearly two million low and inactive accounts belonging to women, the Minister said these measures will help to protect the hard-earned super savings of women from undue erosion. These changes will take effect from 1 July 2019.

Superannuation insurance opt-in rule for younger and low-balance members

The Government will change the insurance arrangements for certain cohorts of superannuation members from 1 July 2019. Under the proposed changes, insurance within superannuation will move from a default framework to be offered on an opt-in basis for:

• members with low balances of less than $6,000;
• members under the age of 25 years; and
• members with inactive accounts that have not received a contribution in 13 months.

These changes seek to protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of. The Minister for Revenue and Financial Services, Kelly O’Dwyer, said around 5 million individuals will have the opportunity to save an estimated $3 billion in insurance premiums by choosing to opt-in to this cover, rather than paying for it by default.

The changes also seek to reduce the incidence of duplicated cover so that individuals are not paying for multiple insurance policies, which they may not be able to claim on in any event. Importantly, these changes will not prevent anyone who wants insurance from being able to obtain it. That is, low balance, young, and inactive members will still be able to opt in to insurance cover within super.

In addition, the Government said it will consult publicly on ways in which the current policy settings could be improved to better balance the priorities of retirement savings and insurance cover within super.

The changes will take effect on 1 July 2019. Affected superannuants will have a period of 14 months to decide whether they will opt-in to their existing cover or allow it to switch off.

CURRENCY:

This issue of Client Alert takes into account developments up to and including 14 February 2018.

Bill to implement housing affordability CGT changes

As part of the 2017–2018 Budget, the Federal Government announced a range of reforms intended to reduce pressure on housing affordability. Legislation – the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018 – has now been introduced into Parliament. It proposes to:

• remove the entitlement to the capital gains tax (CGT) main residence exemption for foreign residents; and
• modify the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an “associate inclusive” basis.

When the Bill has passed, both of these measures will apply from 9 May 2017. At the time of writing, the Bill is before the House of Representatives.

Main residence exemption

The main residence exemption disregards a capital gain or loss for CGT purposes if the taxpayer is an individual and the gain or loss came from selling or disposing of a dwelling that was their main residence throughout the ownership period. A partial exemption is available if the dwelling was their main residence for only part of the period or was also used in part to produce assessable income.

For this exemption, a dwelling includes:

• a building (eg a house) or part of a building (eg an apartment or townhouse) that consists wholly or mainly of accommodation;
• a caravan, houseboat or other mobile home; and
• any land immediately under the unit of accommodation; and
• adjacent land that, together with the land under the dwelling, does not exceed two hectares, and adjacent structures (eg a storeroom, shed or garage) used mainly for domestic or private purposes.

The main residence exemption may also apply to:

• an individual beneficiary in, or entity that is a trustee of, the deceased estate of a person who used the dwelling as a main residence; and
• the trustee of a special disability trust where the dwelling was the main residence of the individual principal beneficiary of the trust, or the main residence of another beneficiary who inherited the dwelling upon the principal beneficiary’s death.

Principal asset test

Under the foreign resident CGT regime, a capital gain or capital loss that a foreign resident makes in respect of a membership interest is disregarded unless both the non-portfolio interest test and the principal asset test are satisfied for the interest.

The principal asset test’s purpose is to determine when an entity’s underlying value is principally derived from TARP. A membership interest that a foreign resident holds in another entity will pass the principal asset test if the total market value of the entity’s TARP assets is greater than the total market value of its non-TARP assets.

Capital gains discount for affordable housing

The Bill also proposes to amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953) to provide an additional discount on CGT for affordable housing. The discount of up to 10% will apply if a CGT event happens to an ownership interest in residential premises that has been used to provide affordable housing.

This measure will apply to capital gains that investors realise from CGT events that occur on or after 1 January 2018, for affordable housing tenancies that start before, on or after 1 January 2018.

Changes to small business CGT concessions

Treasury has released draft legislation aimed at ensuring that taxpayers will only be able to access the small business capital gains tax (CGT) concessions for assets that are used (or held ready for use) in the course of a small business or are an interest in a small business.

This measure was announced in the 2017–2018 Federal Budget. The amendments include additional conditions that must be satisfied from 1 July 2017 to apply the small business CGT concession for capital gains that arise in relation to a share in a company or an interest in a trust (the “object entity”).

Broadly, these conditions require that:

• if the taxpayer does not satisfy the maximum net asset value (MNAV) test, the relevant CGT small business entity must have carried on a business just before the CGT event;
• the object entity must have carried on a business just before the CGT event;
• the object entity must either be a CGT small business entity or satisfy the MNAV test (applying a modified rule about when entities are “connected with” other entities); and
• the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The consultation period for the exposure draft ends on 28 February 2018.

Maximum net asset value test

To satisfy the MNAV test, the total net value of CGT assets owned must not exceed $6 million just before the relevant CGT event. The limit is not indexed for inflation.

When calculating the total, you must include the net value of CGT assets owned by the taxpayer, any connected entities, any of the taxpayer’s affiliates and entities connected with the affiliates.

Asset values contribute to the total only if the assets are used (or held ready for use) in a business carried on by the taxpayer or a connected entity. An asset doesn’t count towards the total if it is used in the business of an entity that is connected with the taxpayer only because of the taxpayer’s affiliate.

Bill to change residential property GST arrangements

A Bill has been introduced to amend the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and related legislation, requiring purchasers of new residential premises and new subdivisions of potential residential land to remit the GST on the purchase price directly to the ATO as part of the settlement process. Under the current law, the supplier of the property (eg the developer) is responsible for remitting the GST to the ATO upon lodging a business activity statement (BAS) up to three months after settlement.

The new measure was announced in the 2017–2018 Federal Budget to deal with developers dissolving their business and setting up a new entity to avoid paying GST to the ATO. In late 2017, the ATO reported that it had identified more than 3,700 people using this type of “phoenixing” activity to avoid their tax obligations over the previous five years.

When the Bill is passed, GST withholding by purchasers will commence on 1 July 2018. There is a two-year transition window for contracts that were executed before that date and will settle before 1 July 2020. After that date, GST withholding will apply to all residential sales.

The withholding amount is 1/11th of the contract price for fully taxable sales (reduced to 7% for margin scheme sales). Settlement adjustments are ignored and the withholding is based on the stated contract price only.

Purchasers will have two options in relation to the withheld GST:

• remit it to the ATO on or before settlement; or
• give the vendor a bank cheque on settlement (made out to the ATO).

All vendors of residential premises/residential land (including developers, investors and private home owners) will need to provide a notice to the purchaser before settlement advising whether GST withholding applies. Failure to do so will be a strict liability offence, attracting a fine of $21,000 for individuals and $105,000 for companies.

At the time of writing, the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 is before the House of Representatives.

Moving to combat the black economy

The black economy includes people who don’t correctly report and meet their tax obligations, and people who operate entirely outside the tax and regulatory system. The Government and the ATO consider the black economy a significant economic and social problem. The Australian Bureau of Statistics estimated in 2012 that the black economy could be as large as 1.5% of Australia’s gross domestic product, or around $25 billion.

The Black Economy Taskforce

The Federal Government established the Black Economy Taskforce in 2017 “to develop an innovative, forward-looking whole-of-government policy response to combat the black economy in Australia, recognising that these issues cannot be tackled by traditional tax enforcement measures alone”. In its Interim Report (released May 2017) the taskforce noted that a range of trends, vulnerabilities and other considerations suggest that the black economy could be larger today, and made a number of initial recommendations based on the experience of foreign jurisdictions, extensive consultation with stakeholders and the anecdotal evidence that the taskforce received.

The Government has now introduced the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 into Parliament. It proposes to combat the black economy by:

• prohibiting the production, distribution and possession of sales suppression tools;
• prohibiting the use of electronic sales suppression tools to incorrectly keep tax records; and
• requiring entities that have an ABN and that provide courier or cleaning services to report to the ATO (from 1 July 2018) information about transactions that involve engaging other entities to undertake those services for them.

At the time of writing, the Bill is before the House of Representatives.

Sales suppression tools

One of the taskforce’s recommendations for immediate action was to prohibit sales suppression technology and software. The Government announced its acceptance of this move in the 2017–2018 Federal Budget’’.

Transaction data recorded by point-of-sale (POS) systems is a key component of sales and accounting systems for modern business. This data provides a clear record of transactions against which accounts and tax returns can be audited. The importance of POS systems data for tax auditing has led to some people developing and using tools – known as ‘electronic sales suppression tools –’ that facilitate tax evasion by suppressing or falsifying POS records of transactions.

Currently, Australia’s tax law (namely the Taxation Administration Act 1953 [TAA 1953]) contains a variety of offences and penalties related to tax evasion and incorrect recordkeeping. These include penalties for providing false or misleading information to the ATO and for incorrectly keeping records with the intent of misleading the ATO.

Although these offences may apply to businesses that use electronic sales suppression software to incorrectly keep their records, the Government believes the TAA 1953 penalties aren’t high enough to reflect the seriousness of using tools to intentionally misrepresent a business’s tax position.

The Criminal Code in Sch 1 to the Criminal Code Act 1995 (CCA 1995) also contains offences related to forgery and providing false documents. Manufacturing electronic sales suppression tools may come under the offence for possessing, making or adapting a device for making forgeries, which can be punishable by imprisonment for up to 10 years. However, for the CCA 1995 provisions to apply, the device must be possessed, made or adapted specifically with the intention to commit forgery. The provisions also only apply to Commonwealth documents; this means, broadly, a document purporting to be made by a Commonwealth entity or official.

These requirements can be difficult to satisfy in the case of electronic sales suppression tools. Electronic POS records generally aren’t Commonwealth documents. And even where an electronic sales suppression tool that was developed overseas is used to falsify records kept for Australian tax purposes, it’s likely to be difficult to demonstrate that the tool was made or supplied with the intention of defrauding the Commonwealth specifically.

Third-party reporting

Another of the taskforce’s recommendations for immediate action was to extend the taxable payments reporting system (TPRS) to apply to contractors in the courier and cleaning industries. The Government also announced its acceptance of this move in the 2017–2018 Federal Budget.

The TPRS is a transparency measure that currently applies to the building and construction industry. It requires businesses in that industry to report to the ATO all payments that they make to contractors for building and construction services. The TPRS appears to have improved tax compliance in this area, and has the potential to do the same for the courier and cleaning industries, which are similarly high-risk sectors where tax evasion is concerned. 

Corporate tax avoidance: latest ATO targets

The ATO has provided a comprehensive update on its latest compliance projects and focus areas aimed at mitigating corporate tax avoidance.

Manipulation of thin cap rules

The ATO is investigating the possible manipulation of the thin capitalisation rules by 27 taxpayers in relation to asset revaluations totalling $78 billion.

The ATO had anticipated the amount of debt deductions disallowed would increase as a result of the safe harbour debt test thresholds reducing from 75% to 60% in 2014. However, it suspects that some taxpayers have responded by undertaking revaluations of certain assets to increase the value of their total assets. This has limited the impacts of the safe harbour thresholds reductions.

Intellectual property offshore

The ATO is investigating arrangements that result in the migration or artificial allocation of intangible assets, and rights in those assets, to offshore related parties by multinationals. These arrangements present a risk as multinationals implement non-arm’s length arrangements that:

• migrate or artificially allocate Australian generated intangibles to offshore related parties;
• involve the use of intangible rights or assets, where the value of these rights and assets is derived from, or maintained by, the activities and operations of Australian entities – particularly research and development (R&D) activities; and/or
• dispose of or allocate Australian generated intangible assets to offshore related parties and subsequently grant rights in these assets back to Australian entities.

Oil and gas industry

The ATO’s main focus in the oil and gas industry is on the treatment of labour costs (revenue versus capital) associated with the construction of high-value assets. The ATO is seeing taxpayers challenge the capital treatment of these costs. It is also concerned about the treatment of other “general” indirect costs associated with the construction of assets.

Pharmaceutical industry

The ATO will examine arrangements to determine whether Australian subsidiaries and their offshore related parties are operating under arm’s length conditions, such that the income declared reflects the economic contribution of the Australian operation to the Australian and global value chain. The ATO has refined its tax risk concerns to reflect the intricacies of the Australian pharmaceuticals industry and its subdivisions; for example, patented pharmaceuticals, generic pharmaceuticals, medical devices and over-the-counter vitamins and supplements.

Tax professionals and promoters

The ATO is also working to identify tax professionals and advisers who are promoting unacceptable tax planning. It is taking steps to deal with some advisers, including those who seek to cloak the promotion of unacceptable tax planning via inappropriate claims for legal professional privilege.

E-commerce

In the e-commerce industry, the ATO finalised 11 cases in 2017, issued amended assessments worth over $1 billion, collected tax of over $800 million and estimated future company tax revenue effects of over $500 million. It is still looking at another 20 major e-commerce players.

Social security means testing of lifetime retirement income streams

The Department of Social Services (DSS) has released its proposed means testing rules for pooled lifetime retirement income streams.

The pension standards in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs) were amended from 1 July 2017 to allow for a broader range of tax-exempt lifetime superannuation income stream products that enable the pooling of risk to manage longevity risk. Lifetime pensions and annuities that meet these new standards qualify for concessional tax treatment.

It is proposed that such pooled lifetime income streams would be assessed for social security means test purposes as follows:

• income test: 70% of all income paid from such products; and
• assets test: 70% of the nominal purchase price of the product until life expectancy at purchase, and 35% from then on.

The DSS says this approach should still provide a sufficient incentive to support take-up of lifetime products. It is expected that pensioners who allocate a proportion of their superannuation (eg up to 30%) to a pooled lifetime product will experience a similar outcome under the income test in the early years of retirement, compared to holding an account-based income stream and drawing the minimum payments.

Compared to the current means test rules for lifetime products, the DSS believes that assessing 70% of the nominal purchase price until life expectancy balances the up-front concessionality with a more consistent asset test assessment over time. It is also considered that maintaining this asset value until life expectancy will help mitigate the risk of lifetime products being used to shield assets from assessment. Once a person reaches life expectancy (as measured at the time they purchased the product), the assessable asset value will be reduced to 35%. DSS says this will help to address the risk of punitive asset test outcomes later in life, while still recognising an asset value for the product.

Deferred income streams

The new rules propose that deferred superannuation income stream products will receive the same asset test assessment as products that commence payments immediately. However, the proposed income test rules will only assess deferred products once payments commence.

Death and surrender values

Where new products offer surrender values or death benefits above the limits imposed by the “capital access schedule” in the SIS Regs, the assets test will assess the maximum value of:

• the amount determined under the proposed new rules (70% of the purchase price until life expectancy age, and then 35%);
• the value of the lump sum amount that is payable if a person withdraws from the product; or
• the highest death benefit payable under the product.

ATO now issuing excess transfer balance determinations

The ATO has advised that is now sending out excess transfer balance (ETB) determinations to individuals who have exceeded their superannuation transfer balance cap and not rectified the excess.

Transfer balance cap

The transfer balance cap, which has applied from 1 July 2017, is a new limit on the total amount of superannuation that can be transferred into the retirement phase. An individual can continue to make multiple transfers into the retirement phase as long as the total amount transferred remains below the cap.

The transfer balance cap has initially been set at $1.6 million, and will be indexed periodically in $100,000 increments in line with the consumer price index (CPI). The amount of indexation an individual is entitled to will be calculated proportionally based on the difference between their transfer balance total and the cap amount. If an individual’s transfer balance meets or exceeds the cap, they will not be entitled to indexation.

Excess transfer balance tax

Self managed superannuation fund (SMSF) members that had exceeded their transfer balance cap by $100,000 or less on 1 July 2017 had until 31 December 2017 to commute the excess capital. If they didn’t do so by that date, they will have to commute the excess capital and excess transfer balance earnings, and also pay excess transfer balance tax.

If an SMSF member receives an ETB determination from the ATO and the trustee has not already reported information to the ATO for that member, they must do so promptly so the ATO has all the required information about the member’s circumstances. The member can request an extension of time if needed, but should do this as soon as possible. The sooner the member removes the amount set out in the ETB determination from retirement phase, the lower the amount of excess transfer balance tax they will pay.

Windfarm grant was an assessable recoupment

The Full Federal Court has dismissed a taxpayer’s appeal and held that a Commonwealth grant of almost $2.5 million for the establishment of a windfarm was an assessable recoupment: Denmark Community Windfarm Ltd v FCT [2018] FCAFC 11.

Background

In May 2011, the taxpayer was given a renewable energy grant in respect of 50% of the project costs it had incurred in constructing two wind turbines. The grant was payable in instalments on the completion of identified project milestones.

The ATO issued a private ruling stating that the grant would be assessable income under s 20-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997). In response, the taxpayer argued that the grant was:

• not assessable under s 20-20(2) because it was not received by way of an “indemnity”; and
• not an assessable recoupment within the meaning of subs 20-20(2) or s 20-20(3) because those provisions required the relevant deduction to have been claimed for a “loss or outgoing”, which, it said, was not the case for deductions claimed for depreciation.

At first instance the Federal Court held that the grant was an assessable recoupment under subs 20-20(2) and 20-20(3). The primary judge found that the grant was received as compensation for an “expense” the taxpayer had incurred, which fell within the meaning of “indemnity”.

Decision

The Full Federal Court dismissed the taxpayer’s appeal and held that the amounts received under the grant were assessable recoupments under s 20-20(2) of ITAA 1997. The Full Court rejected the taxpayer’s argument that the depreciation deductions it claimed were not “for the loss or outgoing” under s 20-20(2)(b). Rather, the Full Court considered that the phrase “for the loss or outgoing” was sufficiently broad to pick up a depreciation deduction under Div 40 or Subdiv 328-D where the relevant outgoing was the cost of the depreciating asset. In such circumstances, the depreciation deduction may properly be regarded as a deduction “for the loss or outgoing”.

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ATO guidelines: profit allocation within professional firms

The ATO has become aware that its guidelines on Everett assignments and the allocation of profits within professional firms are being misinterpreted for some higher-risk arrangements, including the use of related-party financing and self managed superannuation funds (SMSFs).

The guidelines have been suspended from 14 December 2017 to allow the ATO to consult with stakeholders on replacement guidelines.

Anyone considering new arrangements beginning after the cut-off date should contact the ATO to discuss the arrangement risk profile and the possibility of a private ruling.

Arrangements beginning before the cut-off date that comply with the guidelines and do not exhibit high risk factors shouldn’t require action, but arrangements with high risk factors may be subject to ATO review.

TIP: The ATO encourages anyone who is uncertain about how the law applies to their existing circumstances “to engage with us as soon as possible”.

Housing affordability measures now law

Legislation has been passed to implement the 2017–2018 Federal Budget housing affordability measures. The following will start on 1 July 2018:

• the First Home Super Saver (FHSS) Scheme, which allows individuals to use specific amounts from their super to buy or construct a first home; and
• the option for individuals aged 65+ to make “downsizing” contributions of up to $300,000 to their super from selling a home they have owned for at least 10 years.

TIP: An exemption from meeting the FHSS Scheme “first home” requirement will be available for people suffering financial hardship. “Financial hardship” criteria are likely to include circumstances where someone has limited savings, is currently renting and had a past interest in a home that was in a cheaper real estate market or when the person was in a relationship that has since broken down.

Fringe benefits tax: employees’ private use of vehicles

The ATO has issued guidance for employers on determining an employee’s private use of a vehicle.

Draft Practical Compliance Guideline PCG 2017/D14 should provide more certainty and transparency about the circumstances where the ATO won’t apply compliance resources to investigating whether private vehicle use meets the car-related FBT exemptions.

Eligible employers who rely on this guideline won’t need to keep records to prove that an employee’s private use of a vehicle is minor, infrequent and irregular.

TIP: The guideline includes specific eligibility conditions for employers and their employees’ vehicle use. Talk to us about whether the new guidance applies to your FBT circumstances.

Tax consequences of trust vesting

The ATO has issued a long-awaited ruling on trust vesting, including changing a trust’s vesting date and the CGT and income tax consequences of vesting.

TIP: A trust’s “vesting date” is the day when the beneficiaries’ interests in the trust property become fixed. The trust deed will specify the vesting date and the consequences of that date being reached. Vesting does not, of itself, ordinarily cause the trust to come to an end or cause a new trust to arise. In particular, the underlying trust relationship continues after vesting while the trustee still holds property for the takers.

The key points in the draft ruling are that:

• before vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising a power to nominate a new vesting date);
• it is too late to change the vesting date once it has passed (and the ATO says it is unlikely that a court would agree to do so); and
• continuing to administer a trust in a way that is inconsistent with the vesting terms can have significant CGT and income tax consequences.

Disclosing business tax debt information to credit agencies

The Federal Government has released draft legislation and a draft legislative instrument that, when passed, will authorise the ATO to disclose a business’s tax debt to registered credit reporting bureaus where the business has not effectively engaged with the ATO to manage the debt.

The draft legislation intends to place tax debts on a similar footing as other debts, to encourage timely payment or engagement with the ATO for businesses that want to avoid having their debt information affect their creditworthiness. Disclosure to credit reporting bureaus will only be permitted if the ATO has given the taxpayer at least 21 days’ notice beforehand.

Taxing employee share scheme dividend equivalent payments

The ATO has made a new determination that dividend equivalent payments made under an employee share scheme (ESS) are assessable to an employee as income when they receive the payment for or in connection with services they provide as an employee.

A “dividend equivalent payment” is a cash payment to an employee participant and beneficiary an ESS funded from dividends on which the trustee has been assessed in previous income years because no beneficiary of the trust was entitled to the income at the time.

A trustee that makes a dividend equivalent payment under an ESS must withhold an amount from the payment, even though the trustee is not the employee’s employer.

TIP: The ATO offers a safe harbour from such payments being treated as income under specific circumstances. Get in touch with us to talk about whether your situation makes you eligible.

The new determination applies to dividend equivalent payments paid under the terms and conditions attached to ESS interests granted on or after 1 January 2018.

Superannuation integrity changes

The Government has released a consultation paper and exposure draft legislation to give effect to the following superannuation taxation integrity measures it announced in the 2017–2018 Federal Budget:

• the non-arm’s length income (NALI) rules in s 295-550 of the Income Tax Assessment Act 1997 for related-party superannuation fund transactions will be expanded from 1 July 2018 to also include expenses not incurred that would normally be expected to apply in a commercial arm’s length transaction (eg reduced interest expenses, brokerage, accountancy fees or legal costs); and
• a member’s share of the outstanding balance of a limited recourse borrowing arrangement (LRBA) will be included in the member’s “total superannuation balance” for new LRBAs entered into on or after 1 July 2018.

The measures are designed to ensure that related-party transactions with super funds and LRBAs can’t be used to circumvent the reduced contribution caps that apply from 1 July 2017. The changes should generally not affect LRBAs entered into with unrelated third parties for commercial rates of interest (and other expenses).

Guidance for SMSFs on transfer balance reporting

The ATO has released further guidance on when SMSFs need to report events affecting their members’ transfer balance accounts (by making a transfer balance account report, or TBAR) for the purposes of the $1.6 million pension cap.

From 1 July 2018, SMSFs that have any members with a total superannuation balance of $1 million or more must report events impacting that member’s transfer balance account within 28 days after the end of the quarter in which the event occurs.

SMSFs where all members have total super balances of less than $1 million can choose to report events which impact their members’ transfer balances at the same time that the fund lodges its annual return.

The guidance also covers reporting requirements for retirement phase income streams and commutations (including commutation authorities).