Client Alert Explanatory Memorandum (February 2018)

/in /by

ATO rethink on guidelines for profit allocation within professional firms

In reviewing its guidelines on Everett assignments and the allocation of profits within professional firms, the ATO has become aware that the guidelines are being misinterpreted in relation to certain arrangements that go beyond the guidelines’ scope. The ATO has found a variety of arrangements that exhibit high risk factors are not specifically addressed within the guidelines, including the use of related-party financing and self managed superannuation funds (SMSFs).

As a result, the ATO has suspended the application of the guidelines with effect from 14 December 2017.

Practitioners contemplating entering into new arrangements after the cut-off date should pursue an “early engagement discussion” with the ATO under its private rulings processes.

Practitioners who have entered into arrangements before the cut-off date that comply with the guidelines and do not exhibit high risk factors can rely on those guidelines. Pre-14 December 2017 arrangements that exhibit any of the high risk factors may be subject to review. The ATO says it encourages anyone who is uncertain about how the law applies to their existing circumstances “to engage with us as soon as possible”.

The ATO will consult with interested stakeholders on replacement guidelines and the application of any required transitional arrangements.

Housing affordability measures now law

Legislation to implement the 2017–2018 Federal Budget measures aimed at improving housing affordability has now been passed.

The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Act 2017 and the First Home Super Saver Tax Act 2017 implement the following measures (both of which start on 1 July 2018):

  • the First Home Super Saver (FHSS) Scheme, which provides concessional tax treatment for amounts released from superannuation in order to purchase or construct a first home (starting from 1 July 2018); and
  • an exemption for “downsizing” super contributions up to $300,000 when individuals aged 65 and over sell a home that they have owned for at least 10 years.

Note that as result of a Senate amendment during passage of the legislation, an exemption from meeting the “first home” requirement is now available. The exemption will apply if the ATO determines that the taxpayer has suffered financial hardship (the circumstances of which will be determined by regulation). It is envisaged that regulations would refer to circumstances where a taxpayer has limited savings, is currently renting and had an interest in a home many years ago that was in a cheaper real estate market or when the taxpayer was in a relationship that has since broken down. Taxpayers will still be limited to one withdrawal of their voluntary superannuation in their lifetime and it must be for their only home.

Fringe benefits tax: determining private use of vehicles

The ATO has issued employer guidance regarding how to determine an employee’s private use of a vehicle for the purposes of the car-related FBT exemptions.

Draft Practical Compliance Guideline PCG 2017/D14 is the ATO’s response to feedback that the application of the car exemptions is a compliance burden for employers and requires an overly detailed understanding of each vehicle’s use. The draft guideline has been issued to provide more certainty and transparency about the circumstances in which the ATO will not apply compliance resources to determine if private use of a vehicle meets the car-related FBT exemptions.

Eligible employers who rely on the guideline do not need to keep records to prove that an employee’s private use of a vehicle is minor, infrequent and irregular, and the ATO will not devote compliance resources to reviewing the employers’ access to car-related exemptions for that employee.

Eligible employers

An employer can rely on the guideline if:

  • the employer provides an eligible vehicle to an employee for performance of their work duties;
  • the employer takes all reasonable steps to limit private use of the vehicle and has measures in place to monitor such use;
  • the vehicle has no non-business accessories;
  • when the vehicle is acquired, its GST-inclusive value is under the luxury car tax threshold;
  • the vehicle is not provided as part of a salary packaging arrangement, and the employee cannot elect to receive additional remuneration in lieu of using the vehicle; and
  • the employee uses the vehicle to travel between home and work, and
  • any diversion adds no more than 2 km to the ordinary length of that trip;
  • no more than 750 km of travel in total for each FBT year for multiple journeys is for a wholly private purpose; and
  • no single, return journey for a wholly private purpose exceeds 200 km.

Employers will need to assess their eligibility to rely on the guideline on a yearly basis.

Examples included in the guideline involve:

  • incidental travel (regularly stopping at a newsagent) and wholly private travel (taking a relative to school 10 times during the FBT year) – the employer can rely on the guideline;
  • travel to attend seasonal weekly football training, which adds more than 2 km to the journey from home to work – the employer cannot rely on the guideline;
  • an employee who travels a total of 20,000 km and whose private use of the vehicle involves taking domestic rubbish to a tip (100 km return trip) and moving house three times (200 km in total) – the employer can rely on the guideline; and
  • private travel, including a single return trip of 300 km – the employer cannot rely on the

When it is finalised, the guideline will apply to car and residual benefits provided from the 2017-18 FBT year, ie from 1 April 2017.

ATO ruling: tax consequences of trust vesting

The ATO has issued a long-awaited ruling which sets out its views about the vesting of a trust, changing the trust’s vesting date and the income tax consequences of vesting (Draft Taxation Ruling TR 2017/D10).

A trust’s “vesting date” is the day on which the beneficiaries’ interests in the trust property become “vested in interest and possession”. The trust deed will specify the vesting date and the consequences of that date being reached (eg that the trust property will be held from that date for the takers on vesting in equal shares absolutely). The ATO notes that 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 will continue while the trustee holds property for the takers on vesting.

The key points made 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 tax consequences (eg potentially, CGT event E1, creation of a new trust).

Capital gains tax consequences of trust vesting

The draft ruling considers whether various CGT events may occur on vesting or  after vesting, noting that the terms of the trust deed are particularly relevant. The ATO says the following:

  • CGT event E1 (creation of a new trust) “need not happen merely because a trust has vested”, as vesting does not, of itself, cause the trust to come to an end and settle property on the terms of a new trust. However, E1 may occur if the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement (see the example below).
  • CGT event E5 (beneficiary becoming absolutely entitled) may occur if the vesting results in the takers becoming absolutely entitled as against the trustee to CGT assets of the trust.
  • CGT event E7 (disposal to a beneficiary to end a capital interest) may happen on actual distribution of CGT assets to beneficiaries, but it will not occur to the extent that the beneficiaries are already absolutely entitled to the CGT assets as against the trustee.

Taxation of trust net income after the vesting date

The draft ruling notes that, in the income year of vesting, different beneficiaries may be presently entitled to trust income derived before and after the vesting date. For example, the trustee of a discretionary trust may, prior to vesting, exercise a discretion to appoint pre-vesting income among those entitled to benefit under the trust. By contrast, the takers, on vesting, will be presently entitled to post-vesting income (usually in proportion to their vested interests in the trust property). In this situation, the ATO will accept a “fair and reasonable” allocation of trust income into pre-vesting and post-vesting trust income.

The draft ruling also states that:

  • in the income year after vesting, all of the trust income will flow to the takers on vesting according to their entitlements, so the trustee will not be assessed on any net income; and
  • a post-vesting payment or other purported distribution by the trustee will be void if it is not consistent with the vested beneficiaries’ fixed interests, and the deemed present entitlement rules in ss 101 and 95A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply.

Example

A discretionary trust holding several rental properties had a vesting date of 30 September 2016.

On 1 June 2017, the trustee became aware that the vesting date had passed and, with the acquiescence of the takers on vesting, continued to manage the trust as if the trust had not vested.

On 29 June 2017, the trustee executed a deed of extension that purported to extend the trust’s vesting date to 30 September 2057.

This subsequent execution of a deed of extension is void and ineffective to change a vesting date that has already passed. Any power of the trustee to extend the vesting date ceased on 30 September 2016.

If, once it is realised that the deed of extension is ineffective to change the trust’s vesting date, all of the takers on vesting agree that the trust assets should continue to be held on a new trust on the same terms as the original trust, and this is effective to create such a new trust over the assets by declaration or settlement, CGT event E1 would happen in relation to trust assets.

Disclosure of business tax debt information to credit agencies

The Federal Government has released draft legislation and a draft legislative instrument that, if passed, will authorise the ATO to disclose businesses’ tax debts to registered credit reporting bureaus (CRBs) where the businesses have not effectively engaged with the ATO to manage their 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 CRBs will only be permitted if the ATO has given the taxpayer at least 21 days’ notice beforehand.

The draft legislative instrument specifies the following criteria for the type of taxpayer that can be subject to the new disclosure arrangements:

  • registered on the ABR;
  • has a tax debt, and at least $10,000 of the debt is overdue for more than 90 days;
  • is not a deductible gift recipient, not-for-profit entity, government entity or complying superannuation entity;
  • is not effectively engaging to manage the tax debt; and
  • the ATO has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity.

According to the draft legislative instrument, an entity is not effectively engaging to manage its tax debt unless any of the following conditions are met:

  • it has entered into an arrangement with the ATO to pay the debt by instalments;
  • it has objected against a taxation decision to which the tax debt relates;
  • it has applied to the Administrative Appeals Tribunal for review or appealed to the Federal Court against a decision made by the Commissioner to which the tax debt relates.

The disclosure provisions will apply in relation to records and disclosures of information on or after the first 1 January, 1 April, 1 July, or 1 October to occur after the day the Bill receives assent (regardless of when the information was acquired).

Tax treatment of dividend equivalent payments under employee share schemes

The ATO has stated that a dividend equivalent payment made under an employee share scheme (ESS) is assessable to an employee as remuneration when they receive the payment in respect of services they provide as an employee, or where the payment has a sufficient connection with the recipient’s employment (Determination TD 2017/26).

The term “dividend equivalent payment” refers to a cash payment made by a trustee of a trust to an employee participant of an ESS (who is also a beneficiary of the trust), where the payment is funded from dividends (or income from other sources) on which the trustee has been assessed in previous income years because no beneficiary of the trust was presently entitled to the income. See below for an example taken from the determination.

A trustee that makes such a dividend equivalent payment is required to withhold an amount from the payment (even though the trustee is not an employer of the employee who receives the payment).

The ATO regards the following factors as indicative of a dividend equivalent payment being for, or in respect of, services as an employee:

  • it is agreed that the payment is consideration for services rendered by the employee;
  • the payment arises from a contract, an arrangement or a plan established by the employer to enable or facilitate the delivery of employment benefits (eg ESS interests) to the employee;
  • the employer is able to make the payment;
  • the payment is conditional on the employee meeting individual or specific employment-related targets;
  • the payment depends on the employee’s continued employment with the employer and is forfeited on cessation of employment; or
  • the payment is provided at the discretion of the employer or trustee (based on the employer’s direction or recommendations).

However, the determination offers a safe harbour from such payments being treated as remuneration where all of the following conditions apply:

  • the trustee is not an associate of the employer;
  • the payment is made because the employee is a beneficiary of the trust;
  • the trustee exercises its power under the trust deed to make the payment, independent of any direction or wishes of the employer;
  • the payment is not made in relation to:
  • the employee’s continued employment with the employer;
  • the employee meeting individual employment-related targets; or
  • termination, redundancy or retirement;
  • the payment does not arise from a contractual agreement to which the employee and employer are party;
  • the payment cannot be made by the employer, in lieu of the trustee making the payment; and
  • the trustee was assessed on the dividends (or other trust income) that the payment is calculated on in the income year the dividends or other income were received.

Example

A Co is an Australian resident company that carries on a business.

A Co establishes a trust for the purpose of providing shares (ESS interests) under an ESS to eligible Australian resident employees.

A Co makes a contribution to the trustee of the trust so the trustee can purchase and hold shares in A Co under the terms of the trust deed, plan handbook and invitation to the employees (together ESS agreement).

Under the terms of the ESS agreement an eligible employee is a beneficiary of the trust and has an interest in the trust that is a right to acquire the shares being held by the trustee. This interest does not entitle the employee to any income generated by the shares over the course of the ESS until such time as the employee satisfies certain conditions set by A Co that are specific to the employee’s performance and their continuous employment with A Co being three years (performance conditions).

Upon satisfying the performance conditions the employee is entitled to own the shares held by the trustee of the trust. In addition, the employee is entitled to receive from the trustee an amount reflecting the dividends (post-tax) the employee would have earned had the employee owned the shares from the day the employee received their interest in the trust. The trustee funds this payment from trust capital. According to the ESS agreement, this payment can be made by the trustee or the employer.

As the dividend equivalent payment will be made to the employee because the employee has satisfied certain performance conditions, these payments are made to the employee for, or in respect of, services provided by the employee (they are, in substance, a reward for performance). They are assessable to the employee under s 6-5 of the Income Tax Assessment Act 1997. While the quantum of the payment reflects a dividend equivalent that may have been received had the employee acquired the shares at the outset of the arrangement, this is merely a calculation mechanism and does not reflect the character of the payment in the recipient’s hands. The character of the payment in the employee’s hands is remuneration.

Before TD 2017/26 was issued, it had been industry practice to treat the employee as not being assessable on a dividend equivalent payment, on the basis that the trustee had borne the tax under s 99A of the Income Tax Assessment Act 1936 (ITAA 1936). The ATO apparently considers that this practice was adopted on the basis of an inappropriate reliance on Class Ruling CR 2013/151. While noting that CR 2013/151 applied only to the entities specified in that ruling, the ATO has effectively conceded that TD 2017/26 constitutes a change in its view on the issue, and has allowed limited grandfathering in its application.

The determination applies to dividend equivalent payments paid under the terms and conditions attached to ESS interests granted on or after 1 January 2018. Where a taxpayer is granted an ESS interest before that date and the terms and conditions attached to the interest include eligibility to receive a dividend equivalent payment, the ATO’s general administrative practice will be to treat such dividend equivalent payments as not assessable as ordinary or statutory income. This is conditional on the dividends or other income (that the dividend equivalent payment is calculated on) being assessed to the trustee under s 99A of ITAA 1936 in the income year when the dividends (or other income) were received.

Superannuation: progress on new integrity measures

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 (ITAA 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” (TSB) 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 cannot be used to circumvent the reduced contribution caps operating 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).

Non-arm’s length income to include expenses not incurred

The current NALI rules address non-commercial arrangements that could potentially shift income from a related party to a super fund (where the amounts would be taxed concessionally). The new non-arm’s length expense rules aim to prevent an increase in a fund’s capital by not incurring arm’s length expenses.

Under the proposed amendments to s 295-550 of ITAA 1997, non-arm’s length expenses incurred by a superannuation fund in gaining or producing assessable income would result in such income being taxed as NALI, at the top marginal rate of 45%. This will be the case for expenses of a capital or revenue nature.

Example

A self managed super fund (an SMSF) acquired a commercial property from a third party at its market value of $1 million on 1 July 2015. The SMSF derives rental income of $1,500 per week ($78,000 per annum) from the property. The SMSF financed the purchase of the property under an LRBA from a related party on terms consistent with s 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The LRBA was entered into on terms that include no interest, no repayments until the end of the 25-year term and borrowing of the full purchase price of the commercial real property (ie 100% gearing). The SMSF was in a financial position to enter into an LRBA on commercial terms with an interest rate of approximately 5.8%.

The proposed amendments to s 295-550 of ITAA 1997 would make it clear that, as the SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income, that income will be NALI. The income (less deductions attributable to the income) will form part of the SMSF’s non-arm’s length component and would be taxed at 45%.

For the NALI rules to apply to non-arm’s length expenses, there must also be a sufficient nexus between the expenses and the income. That is, the expenditure must have been incurred “in” gaining or producing the relevant income. The amendments are also likely to require some sort of determination as to the expenses that a fund “might have been expected to have incurred” if the parties had been dealing with each other at arm’s length.

LRBAs to count towards total super balance

An individual’s TSB is used to determine eligibility for various super concessions, including the $1.6 million balance cap for making non-concessional contributions, transfer balance account reporting (TBAR) and whether an SMSF can apply the segregated method.

The definition of “total superannuation balance” in s 307-230 of ITAA 1997 will be amended to take into account the outstanding balance of an LRBA entered into by an SMSF.

An individual member’s TSB will be increased by the share of the outstanding balance of an LRBA related to the assets that support their superannuation interests. This proportion would be based on the individual’s share of the total superannuation interests supported by the asset that is subject to the LRBA. This will ensure that SMSF members who have attained a condition of release cannot circumvent the caps by withdrawing lump sums and re-contributing the funds as a loan.

For an LRBA-related increase in the individual’s TSB, the SMSF must have used the borrowing to acquire one or more assets, and any such assets must support the superannuation interests of an individual at the time at which the total superannuation balance is determined.

This asset–member interest connection is determined by considering the way the fund has allocated its assets to meet its current and future liabilities in relation to each member’s interests. This test will require the SMSF trustee to determine which of its LRBA assets support which members’ interests, as well as the extent to which those interests are supported.

The outstanding balance of an LRBA is the amount still owing under the LRBA. Where an individual has a superannuation interest that is supported by an asset that is subject to an LRBA, the increase to their TSB is based on their share of this outstanding balance.

Including the proportion of the outstanding balance in a member’s TSB seeks to prevent double-counting of the outstanding balance from occurring where more than one member has an interest supported by an asset that was acquired through an LRBA. While an individual’s TSB can generally be measured “at a time”, it is generally only relevant at the end of a particular income year on 30 June.

Example

Laura is the sole member of her SMSF, which holds $2 million in accumulation phase. Laura takes a lump sum of $500,000 from the SMSF on 1 June 2019, which reduces her TSB as at 30 June 2019 to $1.5 million. On 30 June 2019, Laura lends the $500,000 on commercial terms back to her SMSF under an LRBA. The SMSF uses $1 million of its existing assets and the borrowed $500,000 to acquire a $1.5 million investment property.

Under the current law, Laura’s TSB as at 30 June 2019 is $1.5 million, comprising the net value of the property of $1 million ($1.5 million purchase price less the $500,000 LRBA) as well as the other assets valued at $500,000. As her TSB is below $1.6 million, Laura can make further non-concessional contributions of up to $100,000 in the year ending 30 June 2020. As the SMSF repays the LRBA, the net value of the fund will increase and Laura’s TSB will approach the $1.6 million threshold. However, just prior to reaching the $1.6 million threshold, she could withdraw another lump sum and enter into a new LRBA to acquire another income-producing asset. This would reduce her TSB again, allowing more contributions to be made to the SMSF.

Under the changes proposed in the Draft Bill, Laura’s TSB at 30 June 2019 will be $2 million, comprising the net value of the property of $1 million, the other assets valued at $500,000 and the $500,000 outstanding loan balance under the LRBA. As her TSB exceeds $1.6 million, Laura would not be able to make non-concessional contributions in the year ending 30 June 2020. Entering into a new LRBA arrangement with the SMSF would no longer increase Laura’s capacity to make non-concessional contributions for that year. The trustee could continue to repay the LRBA but could not use non-concessional contributions to do so.

Guidance for self managed super funds on reporting transfer balance events

The ATO has released further guidance on when self managed superannuation funds (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.

Transfer balance account reporting timeframes

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

SMSFs in which all the members have TSBs 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.

If an SMSF member was receiving a pre-existing income stream on 30 June 2017 (and it has continued in retirement phase on or after 1 July 2017), a TBAR must be lodged with the ATO by 1 July 2018. TBAR events that that occur during 2017–2018 should be reported at the same time the first TBAR form is due. That is, by:

  • 28 October 2018 (for those reporting quarterly); or
  • at the time the SMSF annual return is lodged (for those reporting annually where all of the SMSF members have total super balances less than $1 million).

Testing the $1 million threshold

The $1 million total threshold will be tested as at 30 June in the financial year before a fund’s first TBAR becomes due. If an SMSF member was receiving a retirement phase superannuation income stream from the fund just before 1 July 2017, the members’ TSB is measured at 30 June 2017.

If an SMSF member enters retirement phase for the first time after 1 July 2018, the ATO says that the SMSF will need to assess its position, in relation to the $1 million threshold, on 30 June immediately before the start of the relevant income stream. If the $1 million threshold is triggered at the first time an SMSF member starts an income stream, the SMSF will be locked into the quarterly TBAR reporting regime. A fund will not move between annual and quarterly TBAR reporting due to subsequent fluctuations to any of its members’ balances.

It would appear that if one member of an SMSF has TSBs of $1 million or more across all their funds (not just the SMSF), all of the other SMSF members will be dragged into the into the quarterly TBAR reporting net.

Reporting events

Superannuation funds are required to report events for retirement phase income streams that result in a credit or debit in an individual’s TBA. Common reportable events include:

  • income streams that a member was receiving just before 1 July 2017 (and that continued to be paid on or after 1 July 2017 in the retirement phase);
  • new retirement phase income streams (including death benefit income streams);
  • commutations of retirement phase income streams (partially or fully); and
  • converting a transition to retirement pension into a retirement phase superannuation income stream.

Events to be reported sooner

If a member exceeds their transfer balance cap of $1.6 million, they must report the following events sooner:

  • commutations (in response to an excess transfer balance determination issued by the ATO to an SMSF member) must be reported 10 business days after the end of the month in which the commutation occurs; and
  • commutation authorities – the response must be reported within 60 days of the date the commutation authority was issued.

Client Alert (February 2018)

/in /by

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).

Taxable payments annual report

/in /by

Some businesses and government entities need to report each year the total payments they make for services on the Taxable payments annual report. In addition, some government entities also need to report grants paid.

These payments need to be reported to us on the Taxable payments annual report by 28 August each year.

Building and construction:

Businesses in the building and construction industry need to report the total payments they make to each contractor for building and construction services each year.

Government:

Government entities at the federal, state and local levels need to report from 1 July 2017, the total payments they make wholly or partly to businesses for providing services. Some government entities will also need to report grants paid to people or organisations that have an ABN.

Payments you need to report

Report only payments you make to contractors for building and constructions services.

Contractors can be sole traders (individuals), companies, partnerships or trusts.

If invoices you receive include both labour and materials, whether itemised or combined, you report the whole amount of the payment, unless the labour component is only incidental.

The definition of building and construction services is broad – it includes any of the activities listed below if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface:

  • alteration
  • assembly
  • construction
  • demolition
  • design
  • destruction
  • dismantling
  • erection
  • excavation
  • finishing
  • improvement
  • installation
  • maintenance (excluding the maintenance, service or repairs of equipment and tools)
  • management of building and construction services
  • modification
  • organisation of building and construction services
  • removal
  • repair (excluding the service or repairs of equipment and tools)
  • site preparation.

Details you need to report

The details you need to report for each contractor includes:

  • ABN (where known)
  • name
  • address
  • gross amount you paid for the financial year (this is the total amount paid including GST)
  • total GST included in the gross amount you paid.

You are required to report the payments you make to contractors in the financial year in which the payments are actually made (cash basis).

The details you need to report are generally contained in the invoices you receive from your contractors.

When you receive an invoice, check the ABN on the invoice matches the ABN on your record for that contractor. Ensure you create a new contractor record if necessary. Where a contractor’s ABN changed during the year, you will need to include the two payee records in your annual report.

You can check your contractors’ details including ABN, name and GST registration to confirm they are correct by using ABN LookupExternal Link on the ABR website or ATO app.

For more information, please contact our consultant on 02 9954 3843.

Reference: https://www.ato.gov.au/Tax-professionals/Newsroom/Lodgment-and-payment/Need-to-lodge-a-taxable-payments-annual-report-/?landingpage

 

 

 

$20,000 instant asset write-off

/in /by

The write-off threshold of $20,000 has been extended to 30 June 2018.

If you buy an asset and it costs less than $20,000, you can immediately deduct the business portion in your tax return. The $20,000 threshold applied from 12 May 2015 and will reduce to $1,000 from 1 July 2018.

You are eligible to use simplified depreciation rules and claim the immediate deduction for the business portion of each asset (new or second hand) costing less than $20,000 if:

  • you have a turnover less than $10 million, and
  • the asset was first used or installed ready for use in the income year you are claiming it in.

Assets that cost $20,000 or more can’t be immediately deducted. They will continue to be deducted over time using the general small business pool. You write-off the balance of this pool if the balance (before applying any other depreciation deduction) is less than $20,000 at the end of an income year.

For more information please contact us on 02 9954 3843 or email admin@hurleyco.com.au

 

Reference: https://www.ato.gov.au/Newsroom/smallbusiness/Lodging-and-paying/$20,000-instant-asset-write-off/

Legislation makes many accountants responsible for the health and safety of the workers in their organizations. How do you ensure your business is safe?

/in /by

New Zealand’s workplace health and safety records paint a very grim picture.

Every year, 50 to 60 people are killed in workplace incidents, and hundreds more die as a result of work-related ill health. New Zealand’s fatality statistics are nearly twice as high as Australia’s, and three times as high as those of the UK.

These numbers, and the Pike River Mine Disaster which killed 29 New Zealand men in November 2010, helped prompt the Health and Safety at Work Act 2015. That law made organizations responsible for ensuring they meet health and safety responsibilities.

Essentially, New Zealand adopted the Australian Work Health and Safety Act 2011, which was introduced to harmonize work, health and safety regulations across most Australian states and territories.

Obligations under the new legislation

John Xerri is a partner in Deloitte’s Risk Advisory in Sydney and specializes in work health and safety (WHS). He says the aim of the legislation is to have WHS viewed as normal business practice and to remove the perception that it is merely ancillary.

“Up until the legislative changes, WHS was observed, but generally by someone well down in an organization, while the rest of the business went about what it was meant to be doing – running the business,” he says.

The new law prescribes that the “person conducting a business or undertaking” (PCBU) and its officers, or someone who has influence and control of the PCBU or organization, is responsible for the health and safety of workers.

Says Xerri: “Depending on the structure of an organization, some accountants could now be defined as officers – and all of a sudden they have duties and obligations under the new legislation.”

In the traditional accounting space, Xerri says an accountant’s role in life is o know what the business is doing. Health and safety presents a similar problem, “so the roles are very much aligned”.

Xerri says that under the new laws WHS has certainly achieved a higher profile and gained a lot of boardroom and senior management airplay, as clear obligations are targeted at that senior level.

Hazards and risks

One of the requirements in the legislation is that an organization must understand the nature of business’s hazards and risks.

“And that’s interesting if you have outside directors who have little understanding of what that business is about.”

The key difference between the old and new legislations, Xerri says, is that it took health and safety from being reactive – something that you do when something has gone wrong – to being proactive.

“The legislation now places a duty on an organization to proactively seek and eliminate risk. The legislation is enshrined in that. And prosecutions are now taking place on risk alone. That is the power of the legislation – an incident does not have to occur for the regulator to take action.”

A new approach for NZ

Chris Alderson is a director at PwC New Zealand and leads the Health and Safety consulting practice nationally.

He says while the Pike River mine disaster was definitely a call to action, there was general acknowledgement that New Zealand’s legislative framework needed to come into line with those of the UK, Canada and Australia.

“Some more advanced organizations in New Zealand were already moving to a new approach to health and safety, which focused a lot more on critical risk management rather than the traditional focus on lag-based measures like total recordable injury rates.”

Alderson says accountants need to ask risk questions. “What is the underlying risk that a health and safety initiative is aimed at? How does the spend strengthen the control environment, improve the organization’s culture or facilitate better governance?”

Alderson focuses on the law’s effects on people. “The consequences of a major workplace accident or preventable illness are devastating to the individuals involved, their families, and

have long-term impacts on the organization.”

Alderson says the first prosecutions are only now coming through and that penalties will vary. “An individual worker could be fined as much as NZ$300,000, an officer up to NZ$600,000 – and both categories could also include up to five years in prison. The organization can be fined up to NZ$3 million.” He says this amount cannot be insured against under the act, although legal costs can be.

Keeping safe on a budget

Deaths, jail time and millions of dollars are no trifling matters. So how can a business with budget constraints stay safe? Alderson says it’s all about focus.

“One thing we like to see is an understanding of the potentially hazardous activities that the organization’s workers and contractors regularly undertake.”

“Every business will be different, but if you can identify and acknowledge what these are, then you can prioritize where you need to spend to manage the risk of something going wrong.”

He advises trying to eliminate an activity or substitute it with one that carries a lower risk.

“For example, why send somebody into a confined space when you can send a remote vehicle or drone?

Spending on engineering controls is also a great investment – if you can protect the human from making a mistake with good equipment, then this is money well spent.”

Ultimately, he says, you need to put yourself in the eyes of an independent observer who would ask whether you had done enough to reduce potentially high-risk situations and activities to an acceptable level.

“I think that philosophically, accountants are well-placed. They can bring their critical thinking skills to bear on health and safety conversations within their organizations,” says Alderson.

“They should not feel that it is solely the realm of health and safety professionals or even operational managers.”

 

Reference: Malkovic, T., 2018. Acuity December/January. Health & Safety/Page 76: Acuity.

Superannuation downsizing measures to become reality

/in /by

The government has passed elements of its housing affordability plan, allowing those over the age of 65 to funnel money from the sale of their home into super.

As of 1 July 2018, Australians aged 65 and over who are selling a home they’ve owned for at least 10 years will be able to funnel up to $300,000 of the proceeds into their superannuation accounts.

This is “over and above existing contribution restrictions”, Treasurer Scott Morrison and assistant minister, Michael Sukkar MP said in a statement about the First Home Super Saver Scheme (FHSSS).

They said: “The downsizing measure removes a financial obstacle from older Australians who are considering moving to homes that better suit their needs.

“Both members of a couple may take advantage of this measure, together contributing up to $600,000 from the proceeds of the sale into superannuation.

“This will encourage older Australians, where appropriate, to free up homes that no longer meet their needs for younger growing families.”

Simultaneously, first home buyers will be able contribute up to $30,000 into superannuation.

According to the ministers, this means “most first home buyers will be able to accelerate their savings by at least 30 per cent using the scheme”.

“The measures legislated today are part of the Turnbull government’s comprehensive approach to housing affordability,” they continued.

The Treasurer called the incentives a “very significant tax cut” as those first home buyers would be granted the lower rate of tax afforded by putting their money into superannuation.

The FHSSS legislation comes as the Turnbull government announces that Treasury will review the rules that govern the early release of superannuation when it comes to financial hardship and on compassionate grounds.

It will also consider the circumstances under which superannuation assets could be made available to pay compensation to victims of crime.

 

If you have any questions regarding the above please call (02 9954 3843) or email us (admin@hurleyco.com.au).

 

Reference: https://www.nestegg.com.au/tax/11263-superannuation-downsizing-measures-to-become-reality?utm_source=Nestegg&utm_campaign=11_12_17&utm_medium=email&utm_content=1

 

 

ATO’s 2018 hit list targets smaller tax avoiders

/in /by

In an interview with Acuity, Australian Tax Commissioner Chris Jordan FCA spells out his new agenda for 2018, where he sets small business and big spenders in his sights.

In Brief

  • ATO Commissioner Chris Jordan gives Acuity the first detailed explanation of his 2018 tax “hit list”.
  • The hit list focuses on small businesses and individuals, after several years of focus on large businesses and multinationals.
  • Undeclared income, wrongly-claimed expenses and unpaid superannuation are key features of the 2018 hit list.

By David Walker.

Australian Tax Commissioner Chris Jordan has revealed in detail the tax issues that the Australian Tax Office will target in 2018 as it moves its focus to individuals and small business.

The hit list for 2018 and beyond includes undeclared business income, wrongly-claimed non-business expenses and unpaid superannuation guarantee contributions.

In a frank interview with Acuity, Jordan confirms the ATO believes it can now gain more from these smaller targets than from large multinationals. Big businesses, from BHP Billiton to Google, have been the highest-profile ATO focus for most of Jordan’s time as commissioner.

Jordan told Acuity that the “tax gap” – the estimated gap between tax theoretical tax payable and the amount actually paid – is bigger for small taxpayers as a group than for its “large market” group of big businesses. The ATO estimates the large market tax gap at A$2.5 billion. 

Next year’s hit list is based both on internal ATO work and on the work of the federal government’s Black Economy Task Force, says Jordan. The Task Force report is yet to be released.

Here the Tax Commissioner walks Acuity through the detail of the ATO’s 2018 list of target issues one by one:

  • Undeclared income: “If we look at cash businesses, for example, why today do people want to have a cash-only business?” Jordan asks. “People say to me: ‘it’s terrible – people steal the money, you’ve got to count it, you’ve got to reconcile it, you’ve got to have security around it, you’ve got to take it to the bank’ … There’s no compelling business reason to have cash only.” Cash-only businesses are often paying cash salaries, and that may mean employees are also failing to receive proper conditions and benefits.
  • Unexplained wealth or lifestyle:Jordan gives the example of a business-owning family which has reported parent incomes of $70,000 and $50,000, but has three children at private schools and has taken business class flights on overseas trips three times in the past two years. The ATO can source such information through feeds from the Department of Immigration, and even Facebook when the ATO risk filters throw up flags, he says. 
  • Private expenses wrongly claimed: Salary and wage-earners are claiming expenses that they can’t prove are related directly to work. And there are “small businesses that are mingling some of their private expenses with their business expenses”. Jordan acknowledges expenses have long been an issue for the ATO, but  he wants to “renew the discussion to highlight that we are going to be focusing on these areas”.
  • Unpaid superannuation guarantee contributions: Unlike cash wages, unpaid contributions create “a real loss” for the employee, he says, so there will be “a much greater focus” on the issue. The new single-touch payroll reporting system, which starts in July 2018, will provide the ATO with much better and earlier information on unpaid contributions.
  • Concentrations of cash-only businesses: The ATO has been making visits to businesses based on a data map of cash-only businesses and those which do not much use electronic payment facilities. Suburbs visited include Sydney’s Cabramatta and Haymarket. Some visits have been made in tandem with the Fair Work Commission or the Department of Immigration. “Often there are people there that are not supposed to be working, or they’ve overstayed visas,” he says.

He also repeats previous concerns that tax agents often fail to check that individual taxpayer clients have actually spent money before on “standard” claims for clothing, laundry and car expenses.

As commissioner, Jordan says he needed to previously address the tax failings of large businesses before he could turn his attention to smaller businesses and individuals.

He also criticises the attitudes of people who take a casual approach to paying their own tax but are outraged to hear of people abusing the welfare system. Cash payments facilitate welfare fraud, he notes. And he points out that undeclared income is one area where the ATO can use its data intelligence and analytics better. 

Reference: https://www.acuitymag.com/finance/atos-2018-hit-list-targets-smaller-tax-avoiders?ecid=O~E~Newsletter~Acuity~201710

 

 

Top 10 tips to help rental property owners avoid common tax mistakes

/in /by

Whether you use a tax agent or choose to lodge your tax return yourself, avoiding these common mistakes will save you time and money.

The Australian Taxation Office has published the following list.

  1. Keeping the right records

You must have evidence of your income and expenses so you can claim everything you are entitled to. Capital gains tax may apply when you sell your rental property. So keep records over the period you own the property and for five years from the date you sell the property.

  1. Make sure your property is genuinely available for rent

Your property must be genuinely available for rent to claim a tax deduction. This means that you must be able to show a clear intention to rent the property. Advertise the property so that someone is likely to rent it and set the rent in line with similar properties in the area. Avoid unreasonable rental conditions.

  1. Getting initial repairs and capital improvements right

You can’t claim initial repairs or improvements as an immediate deduction in the same income year you incurred the expense.

  • Repairs must relate directly to wear and tear or other damage that happened as a result of you renting out the property. Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floor boards are not immediately deductible. Instead these costs are used to work out your profit when you sell the property.
  • Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property such as fixing the hot water system or part of a damaged roof are classed as a repair and can be claimed in full in the same income year you incurred the expense.
  • Replacing an entire structure like a roof when only part of it is damaged or renovating a bathroom is classified as Top 10 tips to help rental property owners avoid common tax mistakes an improvement and not immediately deductible. These are building costs which you can claim at 2.5% each year for 40 years from the date of completion.
  • If you completely replace a damaged item that is detachable from the house and it costs more than $300 (e.g. replacing the entire hot water system) the cost must be depreciated over a number of years.
  1. Claiming borrowing expenses

If your borrowing expenses are over $100, the deduction is spread over five years. If they are $100 or less, you can claim the full amount in the same income year you incurred the expense. Borrowing expenses include loan establishment fees, title search fees and costs of preparing and filing mortgage documents.

  1. Claiming purchase costs

You can’t claim any deductions for the costs of buying your property. These include conveyancing fees and stamp duty (for properties outside of the ACT). If you sell your property, these costs are then used when working out whether you need to pay capital gains tax.

  1. Claiming interest on your loan

You can claim interest as a deduction if you take out a loan for your rental property. If you use some of the loan money for personal use such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

  1. Getting construction costs right

You can claim certain building costs, including extensions, alterations and structural improvements as capital works deductions. As a general rule, you can claim a capital works deduction at 2.5% of the construction cost for 40 years from the date the construction was completed. If the previous owner claimed a capital works deduction they are required to give you the information they used to calculate the costs so it always pays to ask them for this. If they didn’t use the property to produce assessable income you can obtain an estimate from a professional. If you use the services of a professional make sure they are qualified, use a reasonable basis for their valuation and exclude the cost of the land when working out construction costs.

  1. Claiming the right portion of your expenses

If your rental property is rented out to family or friends below market rate, you can only claim a deduction for that period up to the amount of rent you received. You can’t claim deductions when your family or friends stay free of charge, or for periods of personal use.

  1. Co-owning a property

If you own a rental property with someone else, you must declare rental income and claim expenses according to your legal ownership of the property. As joint tenants your legal interest will be an equal split, and as tenants in common you may have different ownership interests.

  1. Getting your capital gains right when selling

When you sell your rental property, you will make either a capital gain or a capital loss. This is the difference between what it cost you to buy and improve the property, and what you receive when you sell it. If you make a capital gain, you will need to include the gain in your tax return for that financial year. If you make a capital loss, you can carry the loss forward and deduct it from capital gains in later years.

Reference: https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Flyers-for-your-property-investor-clients/

New depreciation legislation for Australian property investors – Second-hand residential properties

/in /by

In one of the most dramatic changes to property depreciation legislation in more than 15 years, Parliament has passed the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 as at Wednesday 15th November 2017, with the Bill now legislation.

The new legislation means owners of second-hand residential properties (where contracts exchanged after 7:30pm on the 9th of May 2017) will be ineligible to claim depreciation on plant and equipment assets, such as air conditioning units, solar panels or carpet.

The good news is that there are still thousands of dollars to be claimed by Australian property investors, as there has been no change to capital works deductions, a claim available for the structure of a building and fixed assets such as doors, basins, windows or retaining walls. These deductions typically make up between 85 to 90 per cent of an investor’s total claimable amount.

Previously existing depreciation legislation will be grandfathered, which means investors who already made a purchase prior to this date can continue to claim depreciation deductions as per before.

Investors who purchase brand new residential properties and commercial owners or tenants, who use their property for the purposes of carrying on a business, are also unaffected.

Owners of second-hand properties who exchanged after 7:30pm on the 9th of May 2017 will still be able to claim depreciation for plant and equipment assets they purchase and directly incur an expense on. 

To read more about the new depreciation legislation and how this applies to a range of property investment scenarios, download BMT Quantity Surveyor’s comprehensive white paper document Essential facts: 2017 Budget changes and property depreciation.

It’s more important than ever to work with a specialist Quantity Surveyor to ensure that all deductions are identified and claimed correctly under the new legislation. Each and every BMT Tax Depreciation Schedule will be tailored to suit an individual’s property investment scenario, ensuring that all property depreciation and CGT deductions are maximised.

For investors who are planning on selling a property affected by the new rules, a BMT Tax Depreciation Schedule can be provided to assist them and their Accountant to perform a calculation adjustment for CGT liabilities.

For further information on any property investment scenario, please call us on 02 9954 3843.

 

Reference:

http://bmt-insider.bmtqs.com.au/new-depreciation-legislation-for-australian-property-investors/?utm_source=budget-2017&utm_medium=email&utm_campaign=legislation-confirmed-accountants

 

Client Alert Explanatory Memorandum (December 2017)

/in /by

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.