Consultation paper: combating phoenix activities

The Federal Government has released a consultation paper on company and tax law reforms to combat phoenix activities. Phoenixing occurs when individuals or entities strip assets from an indebted company and transfer them to another company to avoid paying the first company’s liabilities.

The following proposals are under consideration:

• The ATO, or whichever agency is best placed to do so, could operate a singular “phoenix hotline” so that any information reported by the community about phoenix concerns could be shared with all members of the Government’s Phoenix Taskforce.
• It is proposed to amend the Corporations Act 2001 to establish a specific phoenix offence, prohibiting the transfer of property from one company to another if the main purpose of the transfer was to prevent, hinder or delay the process of that property becoming available for division among the first company’s creditors. Rebuttable presumptions of insolvency would apply, and such a transaction would be void against a liquidator (so that the assets could be clawed back in liquidation).
• The promoter penalty laws could be extended to apply to promoters of illegal phoenix activity to assist in disrupting the phoenix business model, and in particular to facilitators who advise or aid and abet illegal phoenix activity. One option would be to expand the scope of the promoter penalty law to apply not just to “tax exploitation schemes”, but also to activities designed to avoid taxation obligations, including by rendering a company unable to pay its obligations. Another option is to create a new provision outside of the existing promoter penalty laws, similar to the provision on the promotion of illegal early release of superannuation benefits.
• The director penalty notice regime could be extended to include companies’ outstanding GST obligations. Directors of these companies would be personally liable to pay a penalty equivalent to the amount of unpaid GST. The proposed expansion would apply to all directors.
• There could be a limitation on a sole director’s ability to resign from office without either first finding a replacement director or winding up the company’s affairs. This could be enacted by amending the Corporations Act to deem such a resignation ineffective.

New passive income test for lower corporate tax rate

The recently introduced Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 ensures that a company will not qualify for the lower company tax rate if more than 80% of its assessable income is passive income.

The Bill modifies the requirements that must be satisfied for a corporate tax entity to qualify as a “base rate entity” by replacing the “carrying on a business” test with a passive income test. More specifically, the Bill amends the Income Tax Rates Act 1986 to ensure that, from the 2017–2018 income year, a corporate tax entity will qualify for the lower corporate tax rate for an income year if:

• no more than 80% of the its assessable income for that income year is base rate entity passive income; and
• the corporate tax entity’s aggregated turnover for the income year is less than the aggregated turnover threshold for that income year.

The amendment will apply from the 2017–2018 income year. In the 2016-2017 income year, a company will need to be carrying on a business and have a turnover under $10 million to qualify for the 27.5% tax rate.

Meaning of “passive income”

An amount of assessable income will be considered “base rate entity passive income” if it is:

• a distribution by a corporate tax entity (other than a non-portfolio dividend);
• franking credits attached to such a distribution;
• a non-share dividend;
• interest;
• a royalty;
• rent;
• a gain on a qualifying security;
• a net capital gain; or
• an amount that is included in the assessable income of a partner in a partnership or a beneficiary of a trust estate to the extent that the amount is referable to another base rate entity passive income amount.

An amount that flows through a trust to a corporate tax entity (ie directly from the trust to the corporate tax entity) will retain its character for the purposes of determining whether the amount is base rate entity passive income of the corporate tax entity. That is:

• if an amount derived by a trust is, for example, a dividend (other than a non-portfolio dividend) which passes directly from the trust to a beneficiary that is a corporate tax entity, then the amount will be base rate entity passive income of the corporate tax entity because the trust distribution is directly referable to the dividend of the trust;
• if an amount derived by a trust is, for example, trading income which passes directly from the trust to a beneficiary that is a corporate tax entity, then the amount will not be base rate entity passive income of the corporate tax entity because the trust distribution is directly referable to the trading income of the trust.

Imputation changes

The Bill makes consequential amendments to the operation of the dividend imputation system.

Under the imputation system, the amount of franking credits that can be attached to a distribution cannot exceed the “maximum franking credit” for the distribution. The maximum franking credit is worked out with reference to the “corporate tax gross-up rate” and the “corporate tax rate for imputation purposes”.

Corporate tax entities usually pay distributions to members for an income year during that income year. However, a corporate tax entity will not know its aggregated turnover, the amount of its base rate entity passive income, or the amount of its assessable income for an income year until after the end of that income year. The Bill therefore provides that a corporate tax entity must assume, for the purposes of working out its corporate tax rate for imputation purposes for an income year, that:

• its aggregated turnover for the income year is equal to its aggregated turnover for the previous income year;
• its base rate entity passive income for the income year is equal to its base rate entity passive income for the previous income year; and
• its assessable income for the income year is equal to its assessable income for the previous income year.

If the corporate tax entity did not exist in the previous income year, its corporate tax rate for imputation purposes for an income year will be the lower corporate tax rate of 27.5%.

ATO guidance: what is “carrying on a business”?

The ATO has issued Draft Ruling TR 2017/D7 to give guidance on whether a company is carrying on a business for the purpose of s 23AA of the Income Tax Rates Act 1986.

Section 23AA defines a “base rate entity” as an entity that carries on a business and has an aggregated turnover below the relevant threshold ($25 million for 2017–2018). A company that satisfies this definition is entitled to the reduced corporate tax rate (27.5% for 2017–2018).

The draft ruling addresses whether a company incorporated under the Corporations Act 2001 (other than a company limited by guarantee) carries on a business in a general sense. It emphasises that it is not possible to definitively state whether a company is carrying on a business for s 23AA purposes. As this is a question of fact, the ATO says the answer ultimately turns on an overall impression of the company’s activities, having regard to the indicators of carrying on a business.

However, the ATO is prepared to state that limited companies and no-liability companies are likely to be carrying on a business if they:

• are established and maintained to make a profit for their shareholders; and
• invest their assets in gainful activities that have both a purpose and prospect of profit.

Importantly, the draft says that a limited or no-liability company can be carrying on a business even if its activities are relatively limited and primarily consist of passively receiving rent or returns on its investments and distributing them to its shareholders.

The draft provides the following examples of companies that the ATO accepts as carrying on a business:

• a property investment company that lets out and manages a commercial property;
• a share investment company;
• a family company with income consisting only of an unpaid trust entitlement, which it reinvests – the ATO says if the company does not reinvest the unpaid present entitlement (UPE) or receives its entitlement in cash, it will not be carrying on a business;
• a company that leases multiple boats to unrelated parties; and
• a holding company that only holds shares in a subsidiary, where it invests the shares and also manages the company group.

On the other hand, the following example companies are not considered to be carrying on a business:

• a dormant company with retained profits, on which it derives small amounts of interest; and
• a company engaged solely in the preliminary activity of investigating the viability of carrying on a particular business.

Total superannuation balances: reporting obligation modified

The ATO has agreed to modify the reporting obligation for total superannuation balances, in recognition that some funds may not be in a position to report the correct accumulation phase value (APV) for 30 June 2017.

The concept of an individual’s “total superannuation balance” is used to determine eligibility for various super concessions, including the $1.6 million balance limit for making non-concessional contributions, Government co-contributions, the spouse contributions tax offset, carry-forward of unused concessional contributions and the self managed superannuation fund (SMSF) segregation method. An individual’s total superannuation balance at a particular time is broadly the sum of the APV, an adjusted balance for any pension transfer balance account and roll-over superannuation benefits in transit, less any structured settlement contributions.

Modified reporting obligation

The ATO notes that the APV is net of exit and administration fees payable on accessing the superannuation interest, and therefore needs to be taken into account in the valuation. However, some funds will not be in a position to report the correct APV for 30 June 2017 because they cannot exclude exit and administration fees from the reported value. This is due to varying interpretations of APV within the industry based on historical member account balance reporting. These fees are generally not material amounts. If the 30 June balance reported in the member contribution statement (MCS) is not the APV, the ATO says that funds should report the APV separately in a transfer balance account report (TBAR) around the same time as MCS lodgment.

Therefore, the ATO will provide a modified reporting obligation for the 30 June 2017 APV in the TBAR for the transition year. Funds will not be required to report an APV for 30 June 2017 if the difference between MCS account balance and APV is limited to the sum of exit and administration fees that would apply if the account was to cease at 30 June 2017.

Pension transfer balance account reports: due dates

A legislative instrument registered on 27 September 2017 sets out the way in which superannuation providers (and life insurance companies) are required to report transactions to enable the ATO to determine if an individual has exceeded their $1.6 million pension transfer balance cap.

Due date for reporting TBAR events

The instrument requires a transfer balance account report (TBAR) to be lodged no later than 10 business days after the end of the month in which the relevant reporting event occurred, or by such later date as the Commissioner may allow.

Self managed super fund admin concession until 1 July 2018

The explanatory statement to the instrument notes that an ATO administrative concession will be provided for self managed superannuation funds (SMSFs) to support their transition to event-based transfer balance cap reporting. To this end, the ATO released a position paper for consultation on 18 August 2017, proposing to allow SMSFs to defer their reporting until 1 July 2018. Going forward from that date, the position paper has put forward two options for how often SMSFs should report such events. The Commissioner also intends to provide an administrative concession for all other providers to allow them to lodge their first TBAR no later than 14 December 2017.

Reporting events

Superannuation funds and life insurance companies are required to report the following events for retirement phase income streams that result in a credit or debit in an individual’s transfer balance account:

• superannuation income streams in existence just before 1 July 2017;
• superannuation income streams that commence or begin to be in the retirement phase on or after 1 July 2017;
• commutations;
• compliance with a commutation authority issued by the Commissioner;
• certain limited recourse borrowing arrangement payments;
• personal injury (structured settlement) contributions;
• superannuation income streams that stop being in the retirement phase; and
• any other relevant transactions.

Fringe benefits tax: should an Uber be treated as a taxi?

The ATO has released a discussion paper on the FBT meaning of “taxi” in light of the Federal Court decision (Uber BV v Federal Commissioner of Taxation [2017] FCA 110) that UberX drivers are required to be registered for GST on the basis that they supply taxi travel.

The taxi travel FBT exemption, which was introduced in 1995, limited exempt travel to taxis to ensure that the travel was provided by an arm’s length supplier at commercial rates. The ATO’s current position is that the exemption is limited to travel in a vehicle licensed by the relevant state or territory to operate as a taxi. It does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi.

However, as a result of the Uber decision and proposed changes to licensing regulations in a number of states and territories, the ATO considers it appropriate to review its interpretation of the definition of “taxi” in the Fringe Benefits Tax Assessment Act 1986 (FBT Assessment Act).

The ATO’s discussion paper poses a number of consultation questions, including:

• Should a “motor vehicle that is licensed to operate as a taxi” be interpreted to mean a motor vehicle that is statutorily permitted to transport a passenger at his or her direction for the payment of a fare that will often, but not always, be calculated by reference to a taximeter?
• Should the FBT definition of “taxi” be interpreted to include not just vehicles licensed to provide taxi services, including rank and hail services, but [also] ride-sourcing vehicles and other vehicles for hire?

The ATO accepted comments on the discussion paper until 24 October 2017.

Tax treatment of long-term construction contracts

Draft Taxation Ruling TR 2017/D8 explains the methods that taxpayers can use to return income derived, and recognise expenses incurred, in long-term construction projects (that is, projects that straddle two or more income years). TR 2017/D8 is a “refresh” of IT 2450 (the original ruling on this matter) and makes no changes to the ATO’s views.

One of two methods of accounting may be adopted.

The first method is the basic approach, which is essentially the accruals method. Under this method, assessable income for an income year includes all progress and final payments received in the year, plus any amounts billed or billable to customers in the year for work carried out and certified as acceptable for payment. Amounts retained under a retention clause should not be included in assessable income until the taxpayer either receives them or is entitled to receive them from the customer. Losses or outgoings incurred during the income year are deductible to the extent permitted by law.

The second method is the estimated profits basis. This method is similar to the one laid out in AASB 15 Revenue from Contracts with Customers, which will be compulsory from 1 January 2018. Under the estimated profits basis, the ultimate profit or loss on a project can be spread over the years required to complete the contract. However, the ATO requires the basis of spreading to be fair and reasonable and in accordance with accepted accountancy practices. The “ultimate profit or loss” is in effect the notional taxable income expected to arise under the contract, which can be adjusted from year to year according to expectations existing at the close of each income year. Only those costs that are identified as likely to be incurred over the period of the contract and which are properly deductible may be taken into account in calculating notional taxable income.

Once a particular method is chosen, the ATO expects the taxpayer to apply it consistently for the duration of the contract. The same method should also be applied to all similar contracts that the taxpayer enters into.

Accounting methods that are not acceptable to the Commissioner include the “completed contracts” basis (which brings profits and losses to account on completion of a contract) and the “emerging profits” basis.

Foreign equity distributions to corporate entities

The ATO has issued two taxation determinations on the application of the foreign equity distribution rules in Subdiv 768-A of the Income Tax Assessment Act 1997 (ITAA 1997) where the recipient is a corporate partner in a partnership or a corporate beneficiary of a trust.

Under Subdiv 768-A, a foreign equity distribution is treated as non-assessable, non-exempt income (NANE income) if the recipient is an Australian corporate tax entity that holds a participation interest of at least 10% in the foreign company making the distribution. This treatment applies whether the distribution is received directly from the foreign company or indirectly through interposed partnerships or trusts.

The ATO’s view is that a partnership or trust can hold a direct control interest in a foreign company for Subdiv 768-A purposes, so that an Australian corporate tax entity can have an indirect participation interest in the foreign company via the partnership or trust.

Specifically, TD 2017/21 states that a corporate partner in a partnership can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test.

Similarly, TD 2017/22 provides that a corporate beneficiary of a trust can have a participation interest in the foreign company for the purpose of satisfying the 10% participation test. This aspect of TD 2017/22 differs from the draft (TD 2016/D7), which expressly stated that a corporate beneficiary of a discretionary trust can have a participation interest in a foreign company. However, the finalised determination notes that because a discretionary trustee will usually only exercise its discretion concerning the trust income and corpus at the end of the income year, a beneficiary would not have an entitlement at the test time if the foreign equity distribution is made before year-end.

Compensation for ATO systems outages

After the ATO’s unplanned system outages, it provided lodgment deferrals, and remitted interest and penalties where the outages affected practitioners and their clients’ lodgments. But what about compensation?

The ATO has advised that it assesses claims for compensation in two ways:

• compensation for legal liability (eg negligence)– claims that are resolved on the basis of legal liability must be settled in accordance with legal principle and practice; and
• compensation under the Compensation for Detriment caused by Defective Administration (CDDA) scheme, which allows the ATO to consider claims and pay compensation if practitioners or their clients have suffered disadvantage or loss because of defective administration.

The ATO says it considers claims in accordance with guidelines issued by the Department of Finance. Applications for compensation must address the criteria set out in the guidance material and establish that:

• the practitioner or client suffered direct financial loss;
• the loss was caused by the ATO’s defective administration; and
• the practitioner or client has taken reasonable steps to mitigate that damage.

In this context, “defective administration” means:

• a specific unreasonable lapse in complying with existing administrative procedures;
• an unreasonable failure to institute appropriate administrative procedures;
• an unreasonable failure to give the proper advice within an officer’s power or knowledge to give; or
• giving advice that was in all the circumstances incorrect or ambiguous.

The type of compensation the ATO says it can consider is financial loss with a direct connection to its actions that lead to a finding of legal liability or defective administration. This can be a loss such as:

• professional fees, where evidence of payment is provided and the decision-maker considers the fees to be reasonable;
• interest for delays in providing funds in cases where no statutory interest can be paid;
• bank or other administrative fees that the taxpayer incurred because of the ATO’s actions.

Generally, the ATO says claims for the following types of losses cannot be considered under claims of legal liability or the CDDA scheme:

• claims for personal time spent resolving an issue;
• claims for stress, anxiety or inconvenience;
• claims for delays in receiving funds from the ATO where statutory interest was paid;
• claims for costs associated with complying with the tax system, including costs associated with audits, objections and appeals – even where it is found that taxpayers complied with their obligations;
• claims for the costs of putting in a claim or conducting a claim for compensation;
• claims for taxation or other Commonwealth liabilities with substantive review rights that can be or could have been pursued.

Claims for compensation can be made using the ATO’s Applying for compensation form (NAT 11669).

For more information about how the ATO deals with compensation claims, send an email to compensation.application@ato.gov.au or phone 1800 005 172.

Small business restructure rollover: changes

The ATO has made a draft determination, under the Commissioner’s “remedial power” in the Taxation Administration Act 1953, which proposes to modify how the small business restructure rollover (SBRR) operates.

When the determination is finalised, it will modify s 40-340 of the Income Tax Assessment Act 1997 (ITAA 1997) so that where it provides balancing adjustment rollover relief for a depreciating asset under an SBRR, it “has effect as if it also provided that the disposal of the asset has no direct consequences under the income tax law”.

Under Subdiv 328-G of ITAA 1997, the SBRR is available in relation to the transfer of CGT assets, trading stock and revenue assets as part of a genuine business restructure. Generally, the SBRR’s effect is that no direct income tax consequences arise from the transfer of the small business’s assets, and their tax costs are rolled over to the transferee. However, for a depreciating asset, the benefit of the SBRR is provided under item 8 of the table in s 40-340(1). This provides rollover relief from the balancing adjustment event that happens on the transfer of the asset.

The main concern behind the modification (as reflected in the following example) appears to be the potential for a transfer to give rise to a dividend in the transferee’s hands.

Example

Fiona owns all of the shares in Orange Country Pty Ltd, which is a small business entity. Fiona decides to restructure her business to operate as a sole trader. She causes the company to transfer all of its assets, including an item of depreciable plant, to the sole trader entity for no consideration.

Under the capital allowance provisions, Orange Country Pty Ltd is taken to receive market value consideration for the transfer of plant. The company is entitled to choose the rollover and defer the tax consequences from the balancing adjustment event.

If the depreciable plant is paid out of profits derived by Orange Country Pty Ltd, Fiona’s assessable income will include the market value of the plant, under s 44 of the Income Tax Assessment Act 1936 (ITAA 1936). Alternatively, the amount would be an assessable deemed dividend under s 109C of ITAA 1936.

Tax cut closed off for passive investment companies

The Government has released exposure draft legislation to deny access to the lower corporate tax rate of 27.5% for companies with predominantly passive income. The draft legislation would amend the Income Tax Rates Act 1986 to ensure that a “base rate entity” will qualify for the lower tax rate only if:

• its “base rate entity passive income” is less than 80% of its assessable income for the year;
• it “carries on a business” in the year of income; and
• its aggregated turnover for the income year is less than the aggregated turnover threshold for the year (ie $10 million for 2016–2017; $25 million for 2017–2018; and $50 million for 2018–2019 and later years).

Meaning of “passive income”

Each of the following will be “passive income” of a base rate entity:

• distributions (eg dividends), excluding non-portfolio dividends;
• non-share dividends;
• rent;
• interest income;
• royalties;
• gains on qualifying securities under Div 16E of the Income Tax Assessment Act 1936;
• capital gains; and
• amounts included in assessable partnership or trust income, to the extent that they are attributable to base rate entity passive income as listed above.

Corporate tax rate for imputation purposes

In terms of working out the maximum franking credit for a distribution by reference to the “corporate tax gross-up rate”, the definition of the “corporate tax rate for imputation purposes” will be amended so that the entity can assume that its aggregated turnover, base rate passive income and assessable income are equal to the amounts for the previous income year. If the corporate tax entity did not exist in the previous income year, its corporate tax rate for imputation purposes for an income year will be deemed the lower corporate tax rate of 27.5%.

Example

Aco is carrying on a business. In the 2016–2017 income year, it has:

• aggregated turnover of $8 million;
• base rate passive income of $7.5 million; and
• assessable income of $8 million.

For the 2016–2017 income year, 92.59% of Aco’s assessable income is base rate entity passive income. This means that the applicable corporate tax rate is 30%, even though the company’s aggregated turnover is only $8 million (ie under the $10 million aggregated turnover threshold for 2016–2017).

Aco wants to pay a dividend to its shareholders in the 2017–2018 income year. To work out its corporate tax rate for imputation purposes for the 2017–2018 income year, it must assume that its aggregated turnover, base rate passive income and assessable income are the same as for the 2016–2017 income year.

Aco’s corporate tax rate for imputation purposes is 30%.

Therefore, its corporate tax gross-up rate for that income year will be: (100% – 30%) / 30% = 2.33.

Aco makes a fully franked distribution of $100 per share in the 2017–2018 income year. The maximum franking credit that can be attached to that distribution is $42.91 (ie $100/2.33). Aco makes the dividend payment on 31 March 2018.

Amy holds 50 shares in Aco and receives a dividend of $5,000. Franking credits of $2,145 are attached to the dividend. For the 2017–2018 income year, Amy includes $7,145 (ie $5,000 plus franking credits of $2,145) in her assessable income in relation to the dividend.

Amy is entitled to a refundable tax offset equal to the amount of the franking credits. Amy’s total assessable income for the 2017–2018 income year is $30,000, so her marginal tax rate is 19%. Therefore, Medicare levy aside, Amy’s tax payable on the franked dividend is $1,357.55. The excess franking credits (ie $787.45) will be:

• applied to reduce Amy’s other tax liabilities; or
• if she has no other tax liabilities, refunded to Amy.

Emma also holds 50 shares in Aco and receives a dividend of $5,000 (and franking credits of $2,145). For the 2017–2018 income year, Emma includes $7,145 in her assessable income in relation to the dividend.

Emma is entitled to a refundable tax offset equal to the amount of the franking credits. Emma’s total assessable income for the 2017–2018 income year is $120,000, so her marginal tax rate is 37%. Therefore, Medicare levy aside, the tax payable by Emma on the franked dividend is $2,643.65. This means Emma will need to pay additional tax of $498.65 on the franked dividend.

Identification numbers for directors: an Icarus moment for phoenix activities?

The Government has announced a package of reforms to combat phoenix activities, including the introduction of a Director Identification Number (DIN).

Phoenixing involves deliberately transferring assets from a failed or insolvent company to a new company, with the intention to avoid paying the original company’s creditors, tax and employee entitlements (that is, the new company illegally “rises from the ashes” of the indebted company).

The proposed DIN would identify each director with a unique number, and interface with government agencies and databases to allow regulators to map the relationships between directors and entities, and between directors and other people.

In addition to the DIN, the Government will consult on implementing a range of other measures, including:

• legislating on specific phoenixing offences, to better enable regulators to take decisive action against those who engage in this illegal activity;
• establishing a dedicated phoenix hotline, to provide the public with a single point of contact for reporting illegal phoenix activity;
• extending the penalties for promoting tax avoidance schemes to also capture advisers who assist phoenix operators;
• giving the ATO stronger powers to recover a security deposit from suspected phoenix operators;
• extending the director penalty provisions to make directors personally liable for GST liabilities;
• preventing directors from backdating their resignations to avoid personal liability or from resigning and leaving a company with no directors; and
• prohibiting entities related to phoenix operators from appointing liquidators.

Tax measures for affordable housing

The Government has released draft tax legislation to implement elements of its housing affordability plan. The following measures are contained in the draft legislation:

• enabling investors to obtain a 60% CGT discount in relation to affordable rental housing if they hold the investment for at least three years. Individual investors may invest by holding an ownership interest in affordable housing directly or through certain trusts, such as holding units within a managed investment trust (an MIT);
• allowing MITs to hold affordable housing (residential premises) primarily for the purpose of deriving long-term rent. Those MITs will also be permitted to derive other eligible investment business income from investments, including shares or commercial property. MITs will be able to construct or develop the affordable housing property within the MIT;
• precluding MITs from acquiring residential property other than affordable housing. MITs currently holding residential property will be allowed a transitional period, until 1 October 2027, for their existing property assets.

To qualify for the higher CGT discount and MIT concessional tax treatment, an affordable housing tenancy will need to be managed by a registered Community Housing Provider and provided as affordable housing for at least three years. As part of this, housing providers will determine the tenant eligibility criteria, including the rent charged, consistent with state and territory affordable housing policies.

Legislation for First Home Super Saver scheme and downsizer super contributions

A Bill has been introduced into Parliament to:

• establish the First Home Super Saver (FHSS) scheme, which will allow individuals who are saving for their first home to take advantage of the concessional taxation arrangements that apply to the superannuation system; and
• allow individuals aged 65 or over to use the proceeds from the sale of their main residence to make contributions of up to $300,000 to their superannuation provider (known as “downsizer contributions”).

FHSS scheme

Under the FHSS scheme, first home savers who make voluntary contributions into the superannuation system will be able to withdraw those contributions (up to certain limits) and an amount of associated earnings to purchase their first home. Concessional tax treatment would apply to amounts that are withdrawn under the scheme. The scheme will apply to voluntary contributions made into superannuation on or after 1 July 2017. Contributions will be able to be withdrawn from 1 July 2018;

Downsizer contributions

Under the proposed changes, downsizer contributions could be made regardless of the other contributions caps and restrictions that might apply to making voluntary contributions. However, downsizer contributions would not be tax deductible. The proceeds from contracts for the sale of a main residence entered into on or after 1 July 2018 would be eligible for use as downsizer contributions.

No GST on digital currency: Bill

The GST Act (A New Tax System (Goods and Services Tax) Act 1999) is being amended to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money.

Under the changes, supplies of digital currency made on and after 1 July 2017 will be disregarded for GST purposes unless the supply is undertaken in exchange for a payment of money or digital currency.

To give effect to this money-equivalent treatment of digital currency, the amending Bill inserts a definition of “digital currency” into the GST Act. In arriving at this definition, the drafters have taken into account two considerations:

• the significant risk that any definition based on the current architecture of cryptographic currencies (like Bitcoin) may lose relevance if new technical approaches emerge; and
• the existence of a number of types of digital assets that bear some similarities to digital currencies, but which are not treated as currencies, generally because either they are rights to particular things rather than having value only as a medium of exchange, or they are dealt with appropriately under the existing law.

Accordingly, the definition has been framed in terms of digital currency needing to have broadly the same features as state fiat currencies (legal tender). In particular, in the same way as state fiat currencies, the value of a digital currency must derive from the market’s assessment of the value of the currency for the purposes of exchange, despite it having no intrinsic value. The units must be capable of being consideration for any type of supply, and must be generally available to the public, free of any substantial restrictions on their use as consideration.

The definition also requires that digital currency must not have a value based on the value of anything else. Hence, units will not be digital currency if they are denominated in another currency, for example with a value pegged to the Australian or United States dollars.

Units are not digital currency – even if they have independent value and are fully transferable – if they provide the holder with benefits, entitlements or privileges, such as memberships or vouchers, other than an entitlement that is incidental to holding the unit or using it as consideration.

New financial and superannuation complaints authority

Legislation has now been introduced to establish a new external dispute resolution (EDR) framework and an enhanced internal dispute resolution (IDR) framework for the Australian financial system.

The new EDR framework is designed to ensure that consumers have easy access to a single EDR scheme, known as the Australian Financial Complaints Authority (AFCA), which will resolve disputes about products and services provided by financial firms. The AFCA scheme will replace the Superannuation Complaints Tribunal (SCT) and the existing EDR schemes approved by the Australian Securities and Investments Commission (ASIC); that is, the Financial Ombudsman Service (FOS) and the Credit and Investments Ombudsman (CIO).

Certain firms that provide financial and credit services to consumers will be required to be members of AFCA. This requirement will cover Australian financial services licensees, unlicensed product issuers, unlicensed secondary sellers, Australian credit licensees and credit representatives, regulated superannuation funds (other than SMSFs), approved deposit funds, retirement savings account providers, annuity providers, and life policy funds and insurers.

AFCA will be required to provide particulars to ASIC, the Australian Prudential Regulation Authority (APRA) and/or the ATO if it becomes aware that any of the following matters may have occurred in relation to a complaint:

• a serious contravention of a law;
• a contravention of the governing rules of a regulated super fund or of an approved deposit fund;
• a breach in the terms and conditions relating to an annuity policy, a life policy or a retirement savings account; or
• a refusal or failure by a party to a complaint to give effect to an AFCA determination.

If a complaint made under the AFCA scheme is settled between the parties, AFCA may also give the particulars of the settlement to APRA, ASIC or the ATO if AFCA believes that the settlement requires further investigation by those agencies.

Key features of the SCT’s complaints handling model, including the requirements for handling death benefit complaints, the decision-making test and the unlimited monetary jurisdiction, will be legislated into the new arrangements to provide certainty for stakeholders.

AFCA’s monetary limit of $1 million and compensation cap of $500,000 are almost double the existing limits. These increased amounts for both small business credit facility and other non-superannuation disputes will be set out in AFCA’s operating rules.

Before AFCA will consider a dispute, it will refer all complaints back to the financial firm for a final opportunity to resolve the dispute in a defined timeframe, to ensure that the IDR process has the opportunity to work.

AFCA will also have an independent assessor to investigate complaints regarding the ways disputes are handled. This measure aims to ensure procedural fairness.

Superannuation guarantee

Crackdown on employer non-compliance

The Government has announced a package of reforms to give the ATO near-real-time visibility over employers’ superannuation guarantee (SG) compliance. The package includes measures to:

• require super funds to report contributions received more frequently (at least monthly) to the ATO;
• roll out Single Touch Payroll (STP), with employers that have 20 or more employees transitioning to STP from 1 July 2018, and smaller employers from 1 July 2019 – STP is designed to reduce the regulatory burden on business and transform compliance by aligning payroll functions with regular reporting of taxation and superannuation obligations;
• improve the effectiveness of the ATO’s recovery powers, including strengthening director penalty notices and using security bonds for high-risk employers; and
• give the ATO the ability to seek court-ordered penalties in the most egregious cases of non-payment.

Salary sacrifice integrity: Bill introduced

Legislation has also been introduced to amend the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) so that employers will be prevented from using an employee’s salary sacrifice contributions to reduce the employer’s own minimum SG contributions. This change would apply to working out employers’ SG shortfalls for quarters beginning on or after 1 July 2018.

Currently, salary sacrificed superannuation amounts can count towards employer contributions that reduce an employer’s charge percentage for SG purposes. This means unscrupulous employers can potentially calculate SG obligations on the (lower) post-salary-sacrifice amounts.

To avoid an SG shortfall, an employer must contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying superannuation fund. If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary or wages base.

For the purposes of reducing the employer’s SG charge percentage, the Bill proposes to amend the definition of ordinary time earnings (OTE) so that the OTE base specifically includes any contributions that are “sacrificed ordinary time earnings amounts” of the employee for the quarter in respect of the employer. The Bill aims to ensure that contributions under a salary sacrifice arrangement will not be treated as contributions that reduce the employer’s SG charge. Rather, the mandatory employer contributions that reduce the SG charge will be calculated on a pre-salary-sacrifice base.

Where sacrificed salary or wages amounts (or sacrificed OTE amounts) are never contributed but instead paid to the employee in a later quarter (eg at the employee’s request), they will be disregarded to avoid double counting. The quarterly salary and wages base will also remain subject to the maximum contribution base ($52,760 per quarter for 2017–2018).

Example

Pablo has quarterly OTE of $15,000, which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 × 9.5%). He salary sacrifices $1,000 in a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter.

However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s SG obligation, and only makes a total contribution of $1,425 (mostly consisting of the employee’s $1,000 salary sacrificed amount, and only $425 of employer mandatory contribution).

As a result of the new amendments, Pablo’s $1,000 sacrificed contribution would no longer reduce the employer’s SG charge. Therefore, the charge percentage would only be reduced by 2.83% ($425 / $15,000 × 100). As the employer is required to contribute 9.5%, it must contribute an additional 6.67% to meet its minimum SG obligations. The total contribution of only $1,425 would mean the employer has a shortfall of approximately $1,000 (6.67% × $15,000).

With sacrificed contributions no longer reducing the charge, Pablo’s employer would need to contribute $1,425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, for a total contribution of $2,425, to avoid a shortfall and liability for the SG charge.