PERSONAL TAXATION

No change to personal tax rates; Budget deficit levy to end

The 2017–2018 Federal Budget contained no changes to the personal income tax rates and thresholds. This means that the 2% budget deficit levy on incomes over $180,000 will not be extended beyond its initial three years, and will cease on 30 June 2017.

The tax rates for foreign residents for 2017–2018 will be the same as those for 2016–2017, except that the top marginal rate will be 45%, reflecting the removal of the 2% temporary budget deficit levy.

The currently legislated low income tax offset (LITO) rates have not changed.

Medicare levy increase to 2.5% from 1 July 2019

The Government will increase the Medicare levy to 2.5% from 1 July 2019 (up 0.5% from the current 2% Medicare levy) to ensure the National Disability Insurance Scheme (NDIS) is fully funded and to guarantee Medicare. Other tax rates that are linked to the top personal tax rate, such as the FBT rate, will also be increased.

Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.

The increase in the Medicare levy is estimated to raise $8.2 billion over the forward estimates, being the net impact across all heads of revenue, not just the Medicare levy. The Government said it will credit $9.1 billion to the NDIS Savings Fund Special Account when it is established.

Low income thresholds for 2016–2017

The Medicare levy low-income threshold for singles will be increased to $21,655 (up from $21,335 for 2015–2016). For couples with no children, the family income threshold will be increased to $36,541 (up from $36,001 for 2015–2016). The additional amount of threshold for each dependent child or student will be increased to $3,356 (up from $3,306).

For singles eligible for the Seniors and Pensioners Tax Offset, the Medicare levy low-income threshold will be increased to $34,244 (up from $33,738 for 2015–2016). The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student.

Higher Education HELP changes confirmed

The Budget confirmed the announcement on 1 May 2017 by the Minister for Education and Training, Simon Birmingham, of  the Higher Education Reform Package to take effect generally from 1 January 2018.

See Client Alert for an overview of the key measures.

Tax free payments to child sexual abuse survivors

Redress payments under the Commonwealth Redress Scheme for Survivors of Institutional Child Sexual Abuse (the Scheme) will be tax exempt. The Scheme will commence in March 2018 and start receiving applications from 1 July 2018 from people who were sexually abused as children in Commonwealth institutions.

Changes to FTB Part A payments

The Budget confirmed that, from 1 July 2017, Family Tax Benefit Part A supplement payments will be reduced by $28 per fortnight for each child who does not meet the Government immunisation requirements.

Changes to dollar income test taper

The Government will implement a consistent 30 cents in the dollar income test taper for Family Tax Benefit Part A families with a household income in excess of the Higher Income Free Area (currently $94,316) from 1 July 2018. This will ensure that higher income families are subject to the same income test taper rates.

Proposed Part A rate increase not proceeding

The Government will achieve savings of $1.9 billion over four years from 2017–2018 by not increasing the maximum rate of Family Tax Benefit Part A, which was announced as part of the 2015–2016 Mid-Year Economic and Fiscal Outlook.

A standard tax deduction for work expenses? Not in this Budget

Talk of allowing individual taxpayers a standard tax deduction for work-related expenses (WRE) has been around for more years than we may care to remember. However, despite much speculation before the Budget, it was silent on such a proposal.

The Henry Tax Review in 2010 recommended a standard deduction to cover work-related expenses and the cost of managing tax affairs to simplify personal tax for most taxpayers. Taxpayers should be able to choose either to take a standard deduction or to claim actual expenses above the claims threshold, with full substantiation. Then, in the 2010–2011 Federal Budget, the Government announced that it would provide individual taxpayers with a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012, to increase to $1,000 from 1 July 2013. Of course, that did not proceed.

On 30 March 2015, the Treasurer released a tax discussion paper which also discussed WRE. Given the high proportion of taxpayers who incur a relatively low total value of legitimate WREs, the paper suggested a standard deduction could provide significant compliance savings. Rather than substantiating WRE expense claims with receipts, these taxpayers could “tick a box” to claim a standard deduction at a set amount. While it could deliver a simplicity benefit, the paper noted that a standard deduction would come at significant cost – people who do not currently have any WRE deductions could reduce their taxable income by the value of the standard deduction. The discussion paper was meant to be a precursor to a Green Paper covering tax options in the second half of 2015 and a tax reform White Paper before the 2016 Federal election, but neither eventuated.

Most recently, on 22 November 2016, the Treasurer asked the House of Representatives Standing Committee on Economics to inquire into and report on tax deductibility, specifically on the deductibility of expenditure by individuals in earning assessable income (including, but not limited to, a comparison with NZ and the UK), and deductibility of interest incurred by businesses. The Committee held a hearing in Canberra on 27 March 2017 (with a particular focus on WREs) but has not yet reported back to the Government. It heard that during the 2015 year, nearly $22 billion in work-related tax deductions were claimed. These claims have increased by 21% over the past five years, and the ATO has expressed concern about the level of non-compliance in relation to WRE.

It has been suggested that a standard tax deduction of $2,000 would be appropriate (the statistics reveal that is about the average of claims made). Perhaps taxpayers could be given the option of claiming the standard deduction or, if they wish to claim more, substantiating in full. Overall, any steps to help minimise tax compliance complexity and cost are welcome, but of course, revenue implications would have to be factored in.

So the idea of a standard tax deduction has received plenty of attention in recent years. A standard deduction would of course constitute a hit to the revenue, although it could be clearly quantified. Maybe for another time, or maybe not at all.

BUSINESS TAXATION

Major bank levy from 1 July 2017

The Government will introduce a major bank levy for authorised deposit-taking institutions (ADIs) with licensed entity liabilities of at least $100 billion from 1 July 2017. The threshold will be indexed to grow in line with nominal gross domestic product.

The levy will be calculated quarterly as 0.015% of an ADI’s licensed entity liabilities as at each APRA mandated quarterly reporting date (for an annualised rate of 0.06%).

Liabilities subject to the levy will include items such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. The levy will not apply to the following liabilities: additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.

The levy is expected to raise $6.2 billion over the forward estimates period, net of interactions with other taxes (principally corporate income taxes). The Government believes this represents a fair additional contribution from Australia’s major banks and will assist with budget repair.

Government commits to remainder of 10-year package to reduce company tax rate

The Budget confirmed the Government’s intention to re-introduce the remaining elements of its 10-year Enterprise Tax Plan.

Legislative amendments already passed by the Senate will see the corporate tax rate reduced for companies with a turnover less than $50 million. These Senate amendments are set to be approved by the House of Representatives as part of the Budget sittings. The Government said it remains committed to its 10-year Enterprise Tax Plan to eventually reduce the company tax rate to 25% for all companies.

In the 2016–2017 financial year, the reduced corporate tax rate of 27.5% will apply for businesses with an aggregated turnover of less than $10 million; $25 million turnover in 2017–2018; and $50 million turnover from 2018–2019. This effectively implements the first three years of the Government’s plan.

As per the trajectory in the Budget, the corporate tax rate will also be further reduced in stages, starting from 1 July 2024, so that it will eventually fall to 25% by the 2026–2027 financial year for businesses with an aggregated turnover of less than $50 million.

Small business measures

In addition to the reduced company tax rate, the Enterprise Tax Plan Bill includes measures to:

• increase the small business entity aggregated turnover threshold to $10 million from 1 July 2016 – but the threshold for accessing the CGT small business concessions will remain at $2 million; and
• increase the unincorporated small business tax discount from 5% to 16% over a 10-year period –- the threshold for accessing the discount will be $5 million (aggregated turnover).

The increase in the small business entity aggregated turnover threshold will enable a greater number of businesses to access concessions such as the simplified depreciation and trading stock rules and a two-year (instead of four-year) review period for amending assessments.

Higher instant asset write-off threshold for small business extended

The Government will extend the current instant asset write-off ($20,000 threshold) for small business entities (SBEs) by 12 months to 30 June 2018.

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

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

The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2018.

Note that when the SBE changes in the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 receive assent, the aggregated turnover threshold for a SBE will increase to $10 million (from 2016–2017). Accordingly, SBEs with aggregated turnover between $2 million and $10 million will benefit from the $20,000 instant asset write-off concession.

Suspension of lock out rules extended

The suspension of the “lock out” rules for the simplified depreciation regime will be extended by 12 months until 30 June 2018. The “lock out” rules prevent SBEs from re-entering the simplified depreciation regime for five years if they opt out.

CGT small business concessions: restricted to assets used in business

The Government will amend the small business CGT concessions to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.

Division 152 of the Income Tax Assessment Act 1997 provides four concessions to eliminate, reduce and/or provide a rollover for a capital gain made on a CGT asset used in a small business:

• the “15-year exemption”;
• the “50% reduction”;
• the “retirement exemption”; and
• the “roll-over” concession.

The concessions are designed to assist owners of small businesses by providing relief from CGT on assets related to their business which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business.

However, some taxpayers can access these concessions for assets unrelated to their small business, eg through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

The amendments to avoid this are proposed to start on 1 July 2017.The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.

GST

GST treatment of digital currency

The Government will align the GST treatment of digital currency with money.

The treatment of digital (or crypto) currency for GST purposes has been hugely challenging for the Government. Digital currency refers to things such as bitcoin, although there are apparently over 600 other currencies available. ATO rulings released in December 2014 set out the ATO view that bitcoin is neither money nor a foreign currency and the supply of bitcoin is not a financial supply for GST purposes. In its view, transacting with bitcoin is akin to a barter arrangement, with similar GST consequences.

The result is that trading with bitcoin can give rise to a form of double taxation for GST purpose – once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST.

There have been three significant developments up to this point which deal with the treatment of digital currencies:

• a Senate Economic References Committee report in 2015;
• the Government’s “Backing Australian FinTech” statement in March 2016; and
• a Government discussion paper in May 2016.

Presumably the proposed changes are a result of these developments. The changes will be designed to ensure that purchases of digital currency are not subject to GST. The Budget papers do not give specific details about how this will be achieved

The measure will come into effect from 1 July 2017. It will have “a small but unquantifiable decrease in GST collections”. In other words, less GST will be collected – but not much.

New residential premises: purchasers to pay GST

Purchasers of newly constructed residential properties (or new subdivisions) will be required to remit the GST directly to the ATO as part of settlement.

Currently, GST is included in the purchase price and it is the developer who remits any GST. However, some developers are failing to remit the GST (despite having claimed GST credits on their construction costs).

The Budget Papers state that, as most purchasers use conveyancing services to complete their purchase, they should experience minimal impact from these changes. No mention is made of the additional administrative cost to the conveyancers or indeed the purchasers.

The measure is proposed to start on 1 July 2018.

Interestingly, the net impact of this measure appears quite significant. It is estimated to increase GST revenue by $660 million and associated payments to the States and Territories, net of administrative costs, by $1.6 billion over the four-year forward estimates period. The difference is due to the timing of when GST is collected and recognised.

HOUSING AFFORDABILITY

Overview

The 2017–2018 Budget contained a number of measures designed to improve Australians’ access to secure and affordable housing across the housing spectrum. These include:

• strengthening the CGT rules to reduce the risk that foreign investors avoid paying CGT in Australia;
• introducing a 50% cap on pre-approved foreign ownership in new developments;
• applying an annual charge to foreign owners who leave residential property unoccupied or not available for rent for six months or more each year;
• easing restrictions that are contributing to the supply of housing falling behind population growth and encouraging a more responsive housing market;
• improving outcomes in social housing and homelessness;
• assisting first home buyers to build a deposit inside superannuation; and
• allowing older Australians to contribute downsizing proceeds into superannuation.

Increased CGT discount for investments in affordable housing

From 1 January 2018 the CGT discount for individuals will be increased from 50% to 60% for gains relating to investments in qualifying affordable housing.

To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount to the private rental market rate. Tenant eligibility will be based on household income thresholds and household composition.

The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of 3 years. Any period before the time a property was purchased when it was used for affordable housing purposes will count towards the buyer’s qualifying investment period (provided the previous owner did not claim the additional discount). 

The additional discount will be pro-rated for periods where the property is not used for affordable housing purposes.

The higher discount will flow through to resident individuals investing in qualifying affordable housing through a managed investment trusts.

The increased discount is not limited to investments in new affordable housing. This means that investors who elect to supply their existing properties for affordable housing will qualify for the additional discount provided the investment meets the eligibility requirements.

The Government will consult further on the implementation of this policy, including on the precise definition of affordable housing and tenant eligibility, and what qualifies as rent charged below the market rate.

SUPERANNUATION

No major new super measures, but 1 July reforms loom large

The Government did not announce any new major superannuation measures in the Budget. This will be a welcome relief for the super industry, which already has enough on its plate with major reforms set to start on 1 July 2017. As is the case with any large-scale changes such as the 1 July 2017 super reforms, refinements are often necessary to address unanticipated consequences as part the implementation process.

Super changes announced

A range of superannuation measures were announced in the Budget, including:

• the current tax relief for merging superannuation funds will be extended until 1 July 2020;

• the non-arm’s length income provisions will be amended from 1 July 2018 to reduce opportunities for members to use related-party transactions on non-commercial terms;
• limited recourse borrowing arrangements will be included in a member’s total super balance and the $1.6 million pension transfer balance cap from 1 July 2017;
• a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018; and
• a first home super saver scheme will allow future voluntary contributions to superannuation to be made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.

Merging super funds: tax relief extended until 1 July 2020

The Government will extend the current tax relief for merging superannuation funds until 1 July 2020 to remove tax as an impediment to fund mergers and industry consolidation.

Since December 2008, tax relief has been available for APRA regulated superannuation funds under Div 311 of the ITAA 1997 to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. This tax relief was due to lapse on 1 July 2017. It will now be extended until 1 July 2020.

The Government said that this tax relief for merging funds will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of the super industry. According to the Government, extending this relief will ensure super fund members’ balances are not reduced by tax when superannuation funds merge.

Merger tax relief will apply until 1 July 2020.

Note that the Government also released exposure draft legislation on 13 April 2017 proposing to expand the tax relief available to superannuation funds when mandatorily transferring assets as part of the transition to the MySuper rules (generally by 1 July 2017).

Super fund related-party transactions: non-arm’s length income rules to be amended

The non-arm’s length income (NALI) provisions for super funds will be amended from 1 July 2018 to reduce any opportunities for members to use related-party transactions on non-commercial terms to increase superannuation savings.

Specifically, the NALI provisions in s 295-550 of the Income Tax Assessment Act 1997  will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering
whether the transaction is on a commercial basis. A super fund’s non-arm’s length income (also known as “special income”) is taxed at 47% instead of the 15% concessional rate.

The measure will seek to ensure that the super reform legislation operates as intended. Essentially, it appears to be aimed at preventing individuals from using non-arm’s length arrangements with their superannuation fund to circumvent the pension balance cap and total superannuation balance threshold.

Super borrowings: LRBA integrity measure for pension cap

As an integrity measure, the use of limited recourse borrowing arrangements (LRBAs) by superannuation will be included in a member’s total superannuation balance and for the purposes of the $1.6 million pension transfer balance cap from 1 July 2017.

According to the Government, LRBAs can potentially be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the pension transfer balance cap. From 1 July 2017, the outstanding balance of an LRBA will be included in a member’s annual total superannuation balance. In addition, the repayment of the principal and interest of an LRBA from a member’s accumulation account will be a credit in the member’s pension transfer balance account. The measure is expected to save only $4 million over the forward estimates.

The Government previously released exposure draft legislation on 27 April 2017 proposing to include the use of LRBAs by self managed super funds in a member’s total superannuation balance and the $1.6 million pension transfer balance cap. Importantly, that draft legislation only proposed to apply on prospective basis in relation to borrowings that are entered into on or after the commencement of the Bill. So the Budget proposal to apply such an integrity measures to outstanding LRBA balances from 1 July 2017 seems a significant shift in policy.

Super contributions of proceeds up to $300,000 from downsizing a home

The Government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018. These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million total superannuation balance test for making non-concessional contributions (which applies from 1 July 2017).

The measure will apply to sales of a principal residence owned for the past 10 years or more. Both members of a couple will be able to take advantage of this measure for the same home. The measure seeks to reduce a barrier to downsizing for older people to enable more effective use of the housing stock by freeing up larger homes.

Note that the proceeds from downsizing a home in this manner are not proposed to be exempt from the Age Pension assets test. 

First home super saver scheme

The Government will encourage home ownership by allowing future voluntary contributions to superannuation made by first home buyers from 1 July 2017 to be withdrawn for a first home deposit, along with associated deemed earnings.

Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30% offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit.

Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure and combine savings for a single deposit to buy their first home together.

This measure is expected to have a cost to revenue of $250 million over the forward estimates. The ATO will be provided with $9.4 million to implement the measure.

A previous scheme, the First Home Saver Accounts (FHSA) scheme, was abolished from 1 July 2015, although people still have until 30 June 2017 to make claims for government contributions. The scheme operated on the basis that people made contributions to a FHSA which then resulted in a government contribution, the amount of which depended on how much the individual’s personal contribution was. To claim a government contribution, the person must have been a resident of Australia for tax purposes.

The main features of that FHSA were as follows:

• The government made a 17% contribution on the first $6,000 a person deposited each financial year. For example, a personal contribution of $1,000 would result in a government contribution of $170.
• The interest a person earned on their account was only taxed at a rate of 15%.
• The person had to save at least $1,000 each year over at least four financial years before they could withdraw the money. The four years did not have to be consecutive.
• The maximum account balance was capped at $90,000. After savings reached this level, only interest and earnings could be added to the balance.

Ride-sharing drivers must register for GST

In a recent decision, the Federal Court has held that the UberX service supplied by Uber’s drivers constitutes the supply of “taxi travel” for the purposes of GST. The ATO has now advised that people who work as drivers providing ride-sharing (or ride-sourcing) services must:

• keep records;
• have an Australian Business Number (ABN);
• register for GST;
• pay GST on the full fare they receive from passengers;
• lodge activity statements; and
• include income from ride-sharing services in their tax returns.

If you work as a ride-sharing driver, you are also entitled to claim income tax deductions and GST credits on expenses apportioned to the services you have supplied.

TIP: You must register for GST if you earn any income by driving for a ride-sharing service. The usual $75,000 GST registration threshold does not apply for these activities.

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

The ATO has reminded taxpayers that that the assessable income threshold for claiming a tax offset for contributions made to a spouse’s eligible superannuation fund will increase to $40,000 from 1 July 2017 (the current threshold is $13,800). The current 18% tax offset of up to $540 will remain in place. However, a taxpayer will not be entitled to the tax offset when their spouse who receives the contribution has exceeded the non-concessional contributions cap for the relevant year or has a total superannuation balance equal to or more than the general transfer balance cap immediately before the start of the financial year when the contribution was made. The general transfer balance cap is $1.6 million for the 2017–2018 year.

The offset will still reduce for spouse incomes above $37,000 and completely phase out at incomes above $40,000.

TIP: Contact us for more information about making the most of super contributions for you and your spouse.

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

The ATO will visit more than 400 businesses across Perth and Canberra in April as part of a campaign to help small businesses stay on top of their tax affairs. The primary focus is on businesses operating in the cash and hidden economies. ATO officers will be visiting restaurants and cafés, hair and beauty and other small businesses in these cities to make sure their registration details are up to date. These businesses represent the greatest areas of risk and highest numbers of reports to the ATO from across the country, and the visits are part of the ATO’s ongoing program of compliance work.

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

Where a taxpayer has amounts remaining in superannuation when they die, their death creates a compulsory cashing requirement for the superannuation provider. This means the superannuation provider must cash the superannuation interests to the deceased person’s beneficiaries as soon as possible. The ATO has released a Draft Law Companion Guideline to explain the treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap that will apply from 1 July 2017.

The Draft Guideline provides that where a deceased member’s superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account. The amount and timing of the transfer balance credit will depend on whether the recipient is a reversionary or non-reversionary beneficiary.

Tip: To reduce an excess transfer balance, you may be able to fully or partially convert a death benefit or super income stream into a super lump sum. Contact us if you would like to know more.

No deduction for carried-forward company losses

The Administrative Appeals Tribunal (AAT) has ruled that a company was not entitled to deductions for carried-forward losses of over $25 million that it incurred in the 1990 to 1995 income years. The AAT found that the company did not satisfy the “continuity of ownership” and “same business” tests that applied in relation to the 1996 to 2003 income years, when it sought to recoup the losses. In relation to the continuity of ownership test, the AAT found that the interests the relevant shareholders held during the loss years were different from their interests recoupment years. The AAT noted that the taxpayer company was obligated to keep appropriate records, even though 25 years had passed since the first claimed loss year (1990). The Tribunal also found that the company had clearly not met the requirements of the “same business” test for the different years in question.

TIP: This decision illustrates the need for companies to keep appropriate ownership records year-by-year to support any future carried-forward loss claims.

Overseas income not exempt from Australian income tax

The Administrative Appeals Tribunal (AAT) has agreed with the ATO’s decision that income a tapayer earned when working for the United States Army was not exempt from Australian income tax. The taxpayer, who was a mechanic and electrician, played a critical role in plant construction in Afghanistan.

While the project the taxpayer worked on met the legal definition of an “eligible project”, the AAT decided that the exemption he had claimed under s 23AF of the Income Tax Assessment Act 1936 did not apply because the project was not one that the Trade Minister had approved in writing, and there was no evidence that the Trade Minister considered it “in the national interest”.

GST on low-value imported goods

A Bill introduced into Parliament in February proposes to make Australian goods and services tax (GST) payable on supplies of items worth less than A$1,000 (known as “low value goods”) that consumers import into Australia with the assistance of the vendor who sells the items. For example, GST would apply when you buy items worth less than $1,000 online from an overseas store and the seller arranges to post them to you in Australia.

Under the proposed measures, sellers, operators of electronic distribution platforms or redeliverers (such as parcel-forwarding services) would be responsible for paying GST on these types of transactions. The GST could also be imposed on the end consumer by reverse charge if they claim to be a business (so the overseas supplier charges no GST) but in fact use the goods for private purposes. If the Bill is passed, the measures would come into force on 1 July 2017.

TIP: The ATO has also released a Draft Law Companion Guideline that discusses how to calculate the GST payable on a supply of low-value goods, the rules to prevent double taxation of goods and how the rules interact with other rules for supplies connected with Australia.

Alternative assessments not tentative: Federal Court

The Federal Court has found that a company’s tax assessments were not tentative or provisional, and therefore were valid.

For the 2011 to 2014 income years, the Commissioner of Taxation had notified the taxpayer, which was the trustee of a discretionary trust, that it was liable to pay tax assessed in two different amounts calculated by two different methods. The Commissioner explained to the taxpayer in writing how the two assessments applied.

The taxpayer argued that the assessments were tentative because, for each year, they imposed two separate and different income tax liabilities on its single trustee capacity. The Court denied this claim, agreeing with the ATO that a trustee’s liability to pay income tax is of a “representative character” and the relevant tax law provisions allow for a trustee’s liability to multiple assessments regarding different beneficiaries’ entitlements to a share of the net trust income. Accordingly, in effect the Court found that the primary and alternative assessments were comparable to assessments issued to two or more taxpayers in relation to the same income in the same income year, and were not liable to be set aside as tentative or provisional.

Re-characterisation of income from trading businesses

The ATO has released Taxpayer Alert TA 2017/1 to say it is reviewing arrangements that try to fragment integrated trading businesses to re-characterise trading income as more favourably taxed passive income. The ATO is concerned with cases where a single business is divided in a contrived way into separate businesses. The business income expected to be subject to company tax is artificially diverted into a trust and, on distribution from the trust, that income is ultimately subject to no tax or to a lesser rate than the corporate rate of tax.

The ATO explains that “stapled structures” are one mechanism being used in these arrangements, but the review will not be limited to arrangements involving stapled structures.

ATO warning: research and development claims in building and construction industry

The ATO and the Department of Industry, Innovation and Science have released Taxpayer Alert TA 2017/2 and TA 2017/3 as a warning to businesses that are not being careful enough in their claims or seeking to deliberately exploit the research and development (R&D) Tax Incentive program. The alerts relate to particular issues identified in the building and construction industry, where specifically excluded expenditure is being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses who had been incorrectly claiming ordinary business activities against the R&D tax incentive.

Intangible capital improvements made to a pre-CGT asset

The ATO has issued Taxation Determination TD 2017/1. It provides that for the purposes of the “separate asset” rules in the Income Tax Assessment Act 1997 (ITAA 1997), some intangible capital improvements can be considered separate capital gains tax (CGT) assets from the pre-CGT asset to which the improvements are made, if the improvement
cost base is more than the improvement threshold for the income year when CGT event happened, and it is more than 5% of the capital proceeds from the event.

This determination updates CGT Determination No 5 to apply to the ITAA 1997 provisions, without changing the CGT determination’s substance.

Personal services income diverted to SMSFs: ATO extends offer

Since April 2016, the ATO has been reviewing arrangements where individuals divert personal services income (PSI) to a self managed super fund (SMSF). The arrangements, described in Taxpayer Alert TA 2016/6, involve individuals (typically SMSF members at or approaching retirement age) performing services for a client but not directly receiving consideration for the services. Instead, the client sends the consideration for the services to a company, trust or other non-individual entity.

The ATO has previously asked taxpayers to help identify and resolve these issues before 31 January 2016, offering to remit the related penalties. That offer has now been extended to 30 April 2017.

Depreciating assets: composite items

Draft Taxation Ruling TR 2017/D1 sets out the Commissioner of Taxation’s views on how to determine if an entire composite item is a depreciating asset or whether its component parts are separate depreciating assets. The draft ruling says that a “composite item” is an asset made up of a number of components that can exist separately. Whether one or more of the item’s components can be considered separate depreciating assets is a question of fact and degree to be determined in the particular circumstances. For a component of a composite item to be considered a depreciating asset, the component must be separately identifible as having commercial and economic value.

Tax risk management and governance review guide released

The ATO has released a tax risk management and governance review guide to help businesses develop and test their governance and internal control frameworks, and demonstrate the effectiveness of their internal controls to reviewers and stakeholders. The guide sets out principles for board-level and managerial-level responsibilities, and gives examples of evidence that a business can provide to demonstrate the design and operational effectiveness of its control framework for tax risk. The guide was developed primarily for large and complex corporations, tax consolidated groups and foreign multinational corporations conducting business in Australia, but the ATO says the principles can be applied to a corporation of any size if tailored appropriately.

Overtime meal expenses disallowed because no allowance received

A taxpayer has failed in claiming deductions for overtime meal expenses before the Administrative Appeals Tribunal (AAT). The AAT denied his appeal because he was not paid an allowance under an industrial agreement.

The AAT noted that whether overtime meal expenses are deductible according to the tax law depends on whether the taxpayer receives a food or drink allowance under an industrial instrument. The AAT agreed with the Commissioner of Taxation that the taxpayer had not received an allowance of this kind and, in fact, had not received any allowance at all.

Time extension to review objection decisions disallowed – again!

The Administrative Appeals Tribunal (AAT) has refused to allow a taxpayer extra time to apply for review of a decision made by the Commissioner of Taxation. The taxpayer had previously made the same application for an extension, seven years after the Commissioner’s decision, but both the AAT and the Federal Court refused it.

In this later case, the AAT found that the taxpayer’s application should not be allowed because he had still not adequately explained why it took him seven years to ask for an extension and a decision review.

TIP: This decision illustrates that a taxpayer can continue to apply to the AAT for extension of time to apply for review of the Commissioner’s decision disallowing an objection, even after being previously rebuffed. The additional application must include new claims and the taxpayer’s case must have merit.

No deduction or capital loss for apparent guarantee liability

The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the “guarantee deed” that put into question whether the trusts were genuinely subject to a guarantee obligation – including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted.

Taxpayer denied deduction for work expenses of $60,000

The Administrative Appeals Tribunal (AAT) has confirmed that a mechanical engineer with a PhD qualification was not entitled to deductions for various work-related expenses totally approximately $60,000. The expense claims in question (for vehicle, self-education and other work expenses), were denied because the taxpayer was unable to establish the required connection between the outgoing amounts and the derivation of his assessable income as a mechanical engineer. Furthermore, in relation to a range of miscellaneous expenses (such as mobile phone and internet charges, professional membership fees, conference fees and depreciation), the AAT found that most of the deductions were not substantiated with sufficient (or any) evidence. The AAT did not exercise its discretion to allow these deductions on the basis of the “nature and quality” of any other evidence regarding the taxpayer’s incurring the expenses.

Contrived trust arrangements in ATO sights

On 17 November 2016 the ATO released Taxpayer Alert TA 2016/12, which deals with trust income reduction arrangements that are under review. The ATO says the arrangements appear designed to exploit the proportionate approach to trust taxation. The arrangements are deliberately structured to exclude from the trust income much of the economic benefit reflected in the taxable net income of the trust. In doing this, the taxpayers seek to gain substantial tax benefits.

The underlying premise of the arrangements described in the Taxpayer Alert is that the taxable net income of the trust is assessed to the presently entitled beneficiary, while the economic benefits reflected in that net income are retained by the trustee, or passed to a different beneficiary in a purportedly tax-free form. Under these arrangements, the rate of tax paid by the presently entitled beneficiary is lower (often significantly lower) than the rate of tax that would otherwise have been paid by the trustee and/or the beneficiary who receives the benefit.

The ATO says the arrangements in question typically display all or most of the following features:

• Steps are taken to create an artificial difference between the trust income and taxable net income of a closely held trust with the primary motivation appearing to be the avoidance of tax. The steps may include:
• amending or varying the trust deed definition of income or the trustee’s powers to determine trust income;
• the trustee taking steps for the principal purpose of reducing trust income; and/or
• the trustee relying on a power in the trust deed to determine that trust income is less than it would otherwise have been.
• The beneficiary who is made presently entitled to the trust income:
• pays little or no tax on the share of taxable net income included in its assessable income; or
• is a private company, with the arrangement designed to impose tax on the net income of the trust at the rate of 30%, while limiting any increase in the accumulated profits of the company so as to minimise future assessable income that arises from paying dividends out of company profits.
• The trust retaining the economic benefit reflects the artificial difference between the trust income and taxable net income of the trust. That benefit may subsequently be extracted in a form that is claimed to be tax-free (or subject to a reduced rate of tax) in the hands of the recipient (usually an individual related to the controlling mind).

The Taxpayer Alert gives four examples of the arrangements. The ATO is currently reviewing these arrangements. It has commenced compliance activities affecting a number of entities and is identifying tax advisors who are promoting these schemes, with plans to “follow up appropriately”. The ATO is developing its technical position on the arrangements and says it will canvass it in more detail in due course.

The ATO encourages those who may have entered, or may be planning to enter, into an arrangement of the types described to:

• phone the ATO on 1800 177 006;
• email the ATO at TrustRisk@ato.gov.au;
• ask the ATO for a private ruling;
• seek independent professional advice; and/or
• make a voluntary disclosure to reduce potential penalties.

The ATO identified the problematic arrangements through the Trusts Taskforce’s ongoing monitoring and reviews, and says it continues to look for such arrangements using sophisticated analytics.

Ten of the cases the ATO is examining show lost revenue of more than $40 million and go far beyond legitimate tax planning, raising a number of red flags, Deputy Commissioner Michael Cranston said. “We are looking closely to see if arrangements comply with trust law, constitute a sham or are captured by anti-avoidance provisions or integrity rules”, he said.

Source: ATO, Taxpayer Alert TA 2016/2, 17 November 2016, https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA201612%2FNAT%2FATO%2F00001%22; ATO media release, “ATO issues warning on contrived trust arrangements”, 17 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/ATO-issues-warning-on-contrived-trust-arrangements/.

GST and countertrade transactions

On 18 November 2016 the ATO issued Practical Compliance Guideline PCG 2016/18, which outlines the treatment of “countertrade” transactions – that is, the direct exchange of things by one entity for things provided by another entity – in the context of GST. It applies to entities that have entered into countertrade transactions as part of carrying on their enterprise, provided that that the transactions do not account for more than 10% (approximately) of the entity’s total number of supplies. The Guideline does not apply to countertrade transactions between the members of a “barter scheme”.

Broadly, the Guideline indicates that the Commissioner will not apply resources to verifyng compliance with GST reporting obligations for a countertrade transaction for taxpayers in the following circumstances:

• both parties to the transaction are registered for the GST;
• the parties engage in a countertrade transaction (directly exchange things, at arm’s length without any monetary consideration);
• both entities make wholly taxable supplies to each other, with the amount of GST payable being 1/11th of the GST-inclusive market value of those taxable supplies;
• one party makes a wholly creditable acquisition for which they are entitled to a full GST credit;
• the net effect would be GST-neutral if both parties had the same tax period;
• the taxpayers each have records that show:
• when the transaction was entered into and occurred,
• what was exchanged;
• the identity and ABN of the other entity; and
• the GST-inclusive market value of the goods agreed to; and
• there is no evidence of fraud or evasion.

The Guideline includes four examples to illustrate whether the Commissioner would take a compliance approach under various scenarios.

Date of effect

The Commissioner will adopt the compliance approach outlined in the Guideline from its date of issue (18 November 2016).

Source: ATO, Practical Compliance Guideline PCG 2016/18, 18 November 2016, https://www.ato.gov.au/law/view/document?DocID=COG/PCG201618/NAT/ATO/00001.

Companies held to be resident and liable to tax in Australia

In the long-running Hua Wang Bank dispute, the High Court has unanimously dismissed appeals of the four corporate taxpayers involved, confirming that they were Australian residents for income tax purposes. Accordingly, the companies were found to be liable to tax in Australia on the profits they made from share-trading activities on the Australian Stock Exchange (ASX). In making this finding, the Court rejected the taxpayers’ contention that because Perram J at first instance found that the directors of each taxpayer were resident abroad, and because meetings of those directors were held abroad, Perram J and the Full Federal Court should have held that the central management and control of each company was exercised abroad, and that the companies were not residents of Australia for income tax purposes.

Background

The appellants were four companies: Hua Wang Bank Berhad, Bywater Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd. Their combined amount of tax in dispute was over $14 million plus penalties. The Commissioner had issued assessments for the 2001 to 2007 income years treating profits from the companies’ acquisition and sale of securities on the ASX as income subject to tax in Australia (under s 6(1) of the Income Tax Assessment Act 1936). The taxpayers claimed they were not liable for tax on the profits because their “central management and control” was in various overseas locations, meaning they were not Australian residents for tax purposes.

In particular, the taxpayers claimed that the companies’ central management and control took place in the countries where they were incorporated (Switzerland, the UK and Samoa) because their directors were resident and held meetings of directors there. They further claimed that the profits were only subject to tax in the countries of incorporation because of the double taxation agreements (DTAs) then in effect. The parties did concede that if the taxpayers were found to be Australian residents, they would not be entitled to protection from Australian tax under the DTAs.

At first instance, in Hua Wang Bank Berhad v FCT [2014] FCA 1392, the Federal Court (Perram J) held that the taxpayers were residents of Australia, despite the directors being resident abroad. After an examination of the evidence, the judge found that the companies’ “real business”, and therefore their central management and control, took place in Australia. In particular, Perram J found that Chemical Trustee’s, Derrin’s and Bywater’s real business was conducted in Sydney by a Sydney-based accountant (Mr Vanda Russell Gould). The Court also found that Mr Gould owned Hua Wang Bank Berhad.

On appeal, in Bywater Investments Ltd v FCT [2015] FCAFC 176, the Full Federal Court unanimously dismissed the taxpayers’ appeals, holding that Perram J had been correct in concluding that each taxpayer had failed to discharge the burden of proving they were not Australian residents. Further, as none of the parties sought to challenge the Perram J’s finding that the shares were trading stock, the Court said it would be inappropriate to reconsider the issue of whether profits from the sale of shares were on revenue account.

The Commissioner told the High Court that there was no error in the prior decisions. The Commissioner argued that a company’s central management and control is located where its real business is carried on and, conversely, a company’s real business is carried on where its operations are controlled and directed. Moreover, the Commissioner argued that where a company’s operations are controlled and directed is “a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading”.

Decision

The High Court unanimously agreed with the Commissioner and held that, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the company’s central management and control actually occurs. Moreover, the Court emphasised, it was to be answered by reference to the course of the company’s business and trading, rather than by reference to the documents establishing the company’s formal structure and other procedural matters.

The High Court further held that the overseas locations of the companies’ boards of directors were insufficient to make the companies “foreign residents” in circumstances where, on the facts (as found at first instance), the boards of directors had abrogated their decision-making in favour of Mr Gould, and only met to mechanically implement or rubber-stamp decisions he made in Australia.

For the same reasons, the High Court found that the companies could not rely on the relevant DTAs to make the case that their “place of effective management” was outside Australia.

Bywater Investments Ltd v FCT; Hua Wang Bank Berhad v FCT [2016] HCA 45, High Court, French CJ, Kiefel, Bell, Nettle and Gordon JJ, 16 November 2016, http://www.austlii.edu.au/au/cases/cth/HCA/2016/45.html.

ATO statement

Tax Commissioner Chris Jordan said the High Court’s decision in Bywater Investments Ltd v FCT [2016] HCA 45 means that any parties who set up complex structures offshore “with the clear intent to avoid paying tax in Australia should take a hard look at what they are doing and whether they want to run the risk of being caught and seriously penalised”.

Commissioner Jordan said the High Court’s decision affirms the ATO’s “resolve to pursue cases of blatant tax evasion – we can and will catch this type of contrived behaviour”. He said the ATO will use all available powers and resources “to deal with such schemes and ensure all Australian residents pay the right amount of tax”.

He said the High Court’s finding was not a one-off decision. This case has a substantial litigation history, including 19 challenges to the evidence and procedure at the Federal Court, followed by an appeal to the Full Federal Court. “This was not an easy process”, Commissioner Jordan said, but “the ATO will not shy away from difficult and complex cases, no matter how long they take to run, and no matter how many obstacles are put in our way”.

Source: ATO media release, “High Court judgement confirms blatant tax evasion”, 16 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/High-Court-judgement-confirms-blatant-tax-evasion/.

Payment was assessable as “deferred compensation”

The High Court has unanimously dismissed a taxpayer’s appeal and held that payments of US$160 million made to the taxpayer pursuant to an incentive “profit participation plan” after termination of his employment was income according to ordinary concepts. In particular, the Court found that the payments were “deferred compensation” for the services the taxpayer had performed. At the same time, the Court dismissed the taxpayer’s claim that the amount was assessable as a capital gain, finding that it did not represent the proceeds for the future right to receive a proportion of company profits he was entitled to.

Background

The taxpayer was the employee of a global international commodity trading company (the Glencore Group) from January 1991 to December 2006 . The Glencore Group included an Australian subsidiary for which the taxpayer worked for the last four years of his employment. He held shares in the Group and participated in its various “profit participation plans” for key employees by way of being allocated units (or profit sharing certificates) in these plans.

The taxpayer’s employment with the Glencore Group was terminated on 31 December 2006. He subsequently relinquished his claims (by way of the required “declaration”) to his units in the profit participation plan (the Plan) then in existence and assigned his shares in the Group in consideration of the payment of US$160 million in 20 quarterly instalments over a five-year period (paid by a subsidiary of the Group).

The taxpayer returned the amount as a capital gain in the 2007 income year, as reduced by the 50% CGT discount. The Commissioner issued amended assessments, claiming the amount was assessable as either ordinary income, an ETP, dividends or non-share dividends.

At first instance, in Blank v FCT [2014] FCA 87, the Federal Court held that the amount was assessable as “ordinary income” in the income year when the entitlement to the payments arose. This was on the basis that the payments were “deferred compensation for services rendered” (because the Plan was intended to provide the taxpayer with compensation in consideration of services rendered), notwithstanding that the right to the payment arose after the termination of his employment.

In Blank v FCT (No 2) [2014] FCA 517, the Federal Court refused to re-open the case to allow the taxpayer to argue that s 23AG of ITAA 1936 (exemption of foreign income) applied to some of the payment as it related to his overseas service with the company. Instead, the Court found that s 23AG did not apply, as it required the foreign earnings to be exclusively derived from foreign service, and not from part of foreign service (as in this case). However, the taxpayer succeeded in arguing that the amount was derived in the 2008 income year.

Subsequently, in Blank v FCT [2015] FCAFC 154, the Full Federal Court confirmed in a majority decision that the payments the taxpayer received were assessable to him as ordinary income in the income year when the right to the payments arose, on the basis that the payments represented “deferred compensation” following the relinquishment of his right to participate in the company’s Plan on termination of his employment.

The primary issue on appeal to the High Court was the proper “characterisation of the receipt of the payment in the taxpayer’s hands”. In particular, the issue was whether the payments were ordinary income as a reward for services or, as the taxpayer claimed, “the proceeds of the exploitation of interconnected rights that conferred on him a right to receive, in the future, a proportion of the profit of [the Group] and therefore assessable as a capital gain”.

Decision

In unanimously dismissing the taxpayer’s appeal, the High Court concluded that the amount was income according to ordinary concepts, on the basis that it was “deferred compensation” for services the taxpayer had performed in his employment. In so finding, the Court emphasised the following matters:

• “some things are so obviously income that their nature is unchallengeable”, and one such thing is the reward for services rendered in the form of remuneration or compensation;
• the Plan expressly stated that the payment was deferred compensation from the taxpayer’s employment and that the “deferred compensation” was “in consideration of the services to be rendered” by the taxpayer;
• the Plan also recorded that the taxpayer had no proprietary interest whatsoever in the Plan and that he did not acquire any right in or title to any assets, funds or property of the Group as a result of his participation in it; and
• what the Plan conferred on the taxpayer was an executory and conditional promise to pay an amount calculated by reference to profits.

Moreover, the Court found the facts that the “payments” were paid after the termination of the contract of service, by an entity other than his direct employer and separately to his ordinary wages did not detract from its characterisation as income because the payments were “a recognised incident of his employment” with the Group.

At the same time, the High Court rejected the taxpayer’ s claim that his “associated rights” and entitlements under the Plan were of a proprietary nature. In this regard, the Court noted that the units (or profit sharing certificates) were issued to him solely for the purpose of calculating the “deferred compensation”. Further, the Court said the payment was not the proceeds of the exploitation of any anterior set of rights but was the promise to pay the taxpayer’s entitlement to profits on satisfaction of relevant conditions.

Likewise, the Court found that the rights created by the Plan were not mere “associated rights” of the shares in the ultimate holding company held by the taxpayer, as this was contrary to the express terms and purpose of the Plan. Neither did the “declaration” the taxpayer made on termination to relinquish his rights under the Plan and trigger his entitlement to the payments confer such a character on the payments.

In addition, the Court rejected that the payment was assessable under s 26(e) of ITAA 1936 (or s 15-2 of ITAA 1997). Again, the Court found this ignored the proper characterisation of the taxpayer’s rights under the Plan as an executory and conditional promise to pay money. Further, it was contrary to the purpose of s 26(e) (ie to ensure that receipts and advantages which are rewards for a taxpayer’s employment or services are treated as assessable income even if they are not paid fully in money, but by way of allowances or other advantages of a monetary value).

Accordingly, the Court concluded that the payment was ordinary income of the taxpayer in the form of deferred compensation for services he rendered as an employee, and therefore formed part of his assessable income pursuant to s 6-5 of ITAA 1997. At the same time, the Court confirmed that, as per the finding of the Federal Court, the income was derived in the 2008 income year, when the right to the payments arose.

Blank v FCT [2016] HCA 42, High Court, French CJ, Kiefel, Gageler, Keane and Gordon JJ, 9 November 2016, http://www.austlii.edu.au/au/cases/cth/HCA/2016/42.html.

ATO data-matching programs continue

On 26 October 2016, the ATO gazetted notices advising about a range of data-matching programs.

Share transactions 2016–2017 and 2017–2018

The ATO will continue to acquire details of share transactions. Data will be acquired for the period 20 September 1985 to 30 June 2018 from various sources, including:

• Link Market Services Limited;
• Computershare Limited;
• Australian Securities Exchange Limited;
• Boardroom Pty Ltd;
• Advanced Share Registry Services Pty Ltd;
• Security Transfer Registrars Pty Ltd; and
• Automic Registry Services (Automic Pty Ltd).

The ATO will collect various data items, including:

• full name and address;
• holder identity number (HIN);
• share registry number (SRN);
• entity name and ASX code;
• purchase date and price;
• sale date and price;
• share quantities acquired or disposed;
• corporate actions affecting shareholders (eg corporate reconstructions);
• broker identity;
• transaction codes;
• entity type; and
• direction indicator (buy or sell).

The ATO said the purpose of this data-matching program is to ensure that taxpayers are correctly meeting their taxation obligations in relation to share transactions. These obligations include registration, lodgment, reporting and payment responsibilities. It is estimated that data for a total of more than 61 million transactions will be obtained. Based on previous programs it is estimated that records relating to 3.3 million individuals will be matched. The ATO seeks to retain data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01398, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01398; ATO website, “Share transactions 2016–17 and 2017–18 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Share-transactions-2016-17-and-2017-18-financial-years-data-matching-program-protocol/.

Credit and debit cards 2015–2016 and 2016–2017

The ATO will continue to acquire annually data relating to credit and debit card payments to merchants. Data will be acquired for the 2015–2016 and 2016–2017 financial years from the following financial institutions:

• American Express Australia Limited;
• Australia and New Zealand Banking Group Limited;
• Bank of Queensland Limited;
• Bendigo and Adelaide Bank Limited;
• First Data Merchant Solutions Australia Pty Ltd (previously BWA Merchant Services Pty Ltd);
• Commonwealth Bank of Australia;
• Diners Club Australia;
• National Australia Bank Limited;
• St George Bank;
• Suncorp-Metway Limited;
• Tyro Payments Limited; and
• Westpac Banking Corporation.

The ATO will collect details (such as name, address and contact information) of merchants with credit and debit card merchant facilities and the amounts and quantities of transactions processed.

The ATO will match the credit and debit card payment data provided by the 12 financial institutions against ATO records to identify businesses that may not be meeting their registration, reporting, lodgment and/or payment obligations. It is estimated that around 950,000 records will be obtained, including 90,000 matched to individuals.

The data will be used to:

• identify liquidated or de-registered businesses that are continuing to trade;
• assist in identifying “cash only” businesses, by exception; and
• promote voluntary compliance with tax obligations and assist the ATO to build intelligence about businesses.

The ATO seeks to retain the data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01397, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01397; ATO website, “Credit and debit card 2015–16 and 2016–17 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Credit-and-debit-cards-2015-16-and-2016-17-financial-years-data-matching-program-protocol/.

Online selling 2015–2016, 2016–2017 and 2017–2018

The ATO will continue to acquire annual online selling data. Data will be acquired relating to registrants who sold goods and services to an annual value of $12,000 or more during the 2015–2016, 2016–2017 and 2017–2018 financial years. Data will be sought from eBay Australia and New Zealand Pty Ltd, a subsidiary of eBay International AG, which owns and operates www.ebay.com.au.

The ATO will collect personal details (such as name, address and contact information) of online selling account holders and the values and quantities of transactions processed for each online selling account.

The ATO will match the data provided by online selling sites against ATO records to identify businesses that may not be meeting their registration, reporting, lodgment and/or payment obligations. It is estimated that between 20,000 and 30,000 records will be obtained and that around half of the matched accounts will relate to individuals.

The ATO said the data will be used to:

• identify those apparently operating a business but failing to meet their registration and/or lodgment obligations; and
• promote voluntary compliance with tax obligations and assist the ATO to build intelligence about individuals and businesses that sell goods or services via online selling sites.

The ATO seeks to retain the data for a period of five years from receipt of all verified data files for each relevant financial year.

Source: Commissioner of Taxation Gazette, C2016G01396, registered 26 October 2016, https://www.legislation.gov.au/Details/C2016G01396; ATO website, “Online selling 2015–16, 2016–17 and 2017–18 financial years data matching program protocol”, 26 October 2016, https://www.ato.gov.au/General/Gen/Online-selling-2015-16,-2016-17-and-2017-18-financial-years-data-matching-program-protocol/.

Tax debt release applications refused

The Administrative Appeals Tribunal (AAT) has recently refused the applications of two individuals who sought to be released from their tax debts under s 340-5 of Sch 1 to TAA 1953. The cases are as follows.

Case 1: serious illness, but debt release refused

Background

As at 9 August 2016, the taxpayer’s total liability amounted to $130,416. In 2006, the taxpayer was diagnosed with Parkinson’s disease and was forced to retire early. He received payments under an income protection policy for the years ended 30 June 2010, 2011, 2012 and 2013, but was unaware until 2012 that the payments constituted assessable income. In January 2014, the taxpayer lodged tax returns for each of the years. In May 2014, the taxpayer applied to be released from his tax debts.

The AAT heard details about the taxpayer’s assets and liabilities, including the taxpayer’s home and an investment property. Together these properties comprised the bulk of the taxpayer’s and his wife’s assets. The taxpayer contended that, as a result of mortgages over the two properties in favour of his wife, he was unable to dispose of either property to raise any amount to pay the tax debt. It was also submitted that if one of the properties was sold, that would compound the effect of the taxpayer’s illness and may make it more difficult for him to acquire food, clothing, medical supplies or accommodation, and to provide support for his son, who suffers from schizophrenia.

Decision

The AAT accepted that a serious illness and the presence of dependent children were matters to be taken into account when considering the individual circumstances of an application for release. It said the taxpayer’s illness had obviously a profound effect on his life, including on his life expectancy. However, the AAT said it was not satisfied that the requirement that the taxpayer pay his tax liability would bring about “the dire results in respect of his health or otherwise as advanced on his behalf”.

The AAT also heard details of a contractual will arrangement which, among other things, was said to secure mortgages in favour of the wife over the taxpayer’s interest in the two properties. However, the AAT said it was not satisfied that the taxpayer was under any obligation to enter into the contractual will arrangement. It was also not satisfied that the taxpayer’s wife would seek to enforce her rights under that arrangement or that the properties would not be available to him to meet his tax liabilities.

The AAT affirmed the Commissioner’s decision, finding that the taxpayer would not suffer serious hardship if he was required to pay his tax liability. Even if it were a case of serious hardship, the AAT said it would not exercise its discretion to grant relief. The AAT considered that the taxpayer had not made proper provisions to meet his tax liabilities and preferred to pay his other debts.

Re ZDCW and FCT [2016] AATA 788, 7 October 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/788.html.

Case 2: discretionary spend a consideration

Background

In November 2006, the taxpayer applied for and was granted a release from his tax debts relating to the year ended 30 June 2004. In January 2012, the taxpayer lodged his returns for the years ended 30 June 2007, 2008, 2009 and 2010. He applied for, but was not granted releases from his tax debts relating to those years. In February 2015, the taxpayer lodged his returns for the years ended 30 June 2012, 2013 and 2014. The taxpayer again applied to be released, this time for the years ended 30 June 2007, 2008, 2009, 2010, 2012, 2013 and 2014. The application for debt release was again refused. The taxpayer contended that he had an outstanding compliance history that was not properly considered and that his current circumstances were a result of a catastrophic financial event in 2005. He contended that he was still experiencing hardship and was unable to meet even basic living necessities. The liability at 11 August 2016 to which s 340-10 of Sch 1 to TAA 1953 applied stood at $437,681 (comprising $242,246 primary tax and $195,435 general interest charge).

The taxpayer had been employed since January 2015 as a salesperson with a real estate agency based on the Sunshine Coast. The Commissioner pointed to the taxpayer’s “unusually high level of discretionary spending, including on holidays, dining out and entertainment, which could be reduced”. The AAT also heard details of the taxpayer’s borrowings to purchase properties. The taxpayer contended that he and his former spouse did not invest any of their own equity into the properties but instead borrowed funds, and said there was no money that could have been used to meet his tax liabilities. He also contended that throughout this period he was continually affected by the catastrophic financial events of 2005, leaving him constantly stressed and anxious. In addition, the AAT heard details of the taxpayer’s illegal early access to his superannuation benefits in the years ended 30 June 2007 and 2009. In total, the taxpayer accessed some $164,097. The AAT noted that the taxpayer had repaid some $88,238 to the self managed super fund.

Decision

The AAT agreed with the Commissioner’s description of the taxpayer’s discretionary spending. The AAT disagreed with the taxpayer’s contentions and was of the view that he “simply gave priority to other matters and ignored his tax obligations”. Overall, the AAT said the taxpayer had a “poor compliance history”. The AAT considered its discretion to release the debt in favour of the taxpayer should not be exercised under these circumstances.

Re Moriarty and FCT [2016] AATA 796, AAT, 11 October 2016, http://www.austlii.edu.au/au/cases/cth/AATA/2016/796.html.