Client Alert Explanatory Memorandum (August 2016)

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CURRENCY:

This issue of Client Alert takes into account all developments up to and including 13 July 2016.

ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses, updated for the 2013–2014 financial year. These benchmarks are a guide to help businesses compare their performance against similar businesses in the same industry. The benchmarks can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

The benchmarks:

  • are calculated from income tax returns and activity statements from over 1.3 million small businesses and, according to the ATO, are verified as statistically valid by an independent organisation;
  • account for businesses with different turnover ranges (up to $15 million) across more than 100 industries; and
  • are published as a range to recognise the variations that occur between businesses due to factors such as location and business circumstances.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind. “If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

According to the ATO, if a business is reporting above the benchmarks, it may mean the expenses of the business are high relative to its sales. This may indicate that:

  • there is high wastage;
  • business competitors may be able to source inputs at lower cost;
  • the volume of sales is too low (for rent and possibly labour);
  • the mark-up is lower than business competitors’;
  • not all sales have been recorded; and/or
  • internal cash controls may need to be examined.

If a business is reporting below the benchmarks, it may mean the expenses of the business are low relative to its sales. This may indicate that:

  • expenses may be recorded under the wrong label;
  • some expenses may have not been recorded;
  • the mark-up is higher than business competitors’; and/or
  • there is less wastage.

 

 

When the ATO sees that a business is outside the key ratio for the industry, it may indicate something is unusual, prompting the ATO to obtain further information from the business, its suppliers or its customers.

The benchmarks are available on the ATO website at https://www.ato.gov.au/business/small-business-benchmarks/

Source: ATO media release, “ATO benchmarks helping build small business”, 24 June 2016, https://www.ato.gov.au/Media-centre/Articles/ATO-benchmarks-helping-build-small-business/.

ATO benchmarks in action

If a business doesn’t have evidence to support its return, the ATO may use the benchmarks to determine income that has not been reported. For each industry, the ATO will highlight the benchmark it will use to predict income or turnover.

The following recent Administrative Appeal Tribunal (AAT) case highlights the ATO’s use of industry benchmarks.

Income tax and GST and associated penalties broadly affirmed

The AAT has affirmed the Commissioner’s income tax and associated penalty decisions imposed on a taxpayer. However, it also decided to vary the GST and associated penalty decisions to reflect a reduced GST liability, as conceded by the Commissioner before the hearing.

Background

The taxpayer operated a milk bar and contended it also operated a business providing homestay accommodation for foreign students. Following an ATO audit, the Commissioner was not satisfied that the taxpayer had reported its true taxable income for the 2010–2011 and 2011–2012 income years, nor that the taxpayer had reported its true GST net amounts for the quarterly periods from 1 April 2010 to 30 June 2012. The evidence of sales and purchases manually kept in books and cash register roll totals did not reconcile to the taxable amounts reported, and were less than the amounts the Commissioner contended could be expected if industry norms or expectations were applied to the purchases reported.

In this case, the Commissioner applied the tobacco retailing industry benchmarking figures to determine the taxpayer’s business income. The Commissioner did not accept that the taxpayer operated a homestay business and excluded all reported income and expenses relating to homestay activities. The Commissioner also disallowed expenses relating to two cars, and purchases that were not supported by a valid tax invoice. The amounts in dispute before the AAT totalled some $27,000 (primary tax and penalties).

Decision

The AAT held the taxpayer had failed to discharge the onus of proving that the income tax and GST assessments and amended assessments were excessive. The AAT was of the view there was a lack of evidence to prove otherwise. It said, “The combination of the accounts book, invoices led in evidence, inconsistent cash register rolls and absence of commitment to amounts of taxable income and supplies, or particular sources from which these amounts can be determined with confidence, make determination of the [taxpayer’s] taxable income and supplies little, if at all, more than guesswork. This being the case, it is impossible to say by what amount the assessments are excessive.”

The AAT also affirmed the penalty imposed for failure to take reasonable care. Among other things, the AAT heard the taxpayer’s evidence that taxable income amounts were made up as it was told (allegedly) by its tax agent that the ATO did not like to see losses, so that would bring unwanted attention. In affirming the penalty decisions, the AAT said, “In circumstances where a fabricated income figure is used in relevant tax filings it is difficult to see how reasonable care could be demonstrated. Further, there being no evidence of what the tax agent did or did not do makes a finding that the tax agent took reasonable care impossible to make.” The AAT also concluded that there were no grounds for remission.

In making its decisions, the AAT noted the outcomes of the case should not be taken as acceptance of whether the taxpayer did (or did not) carry on a homestay business.

Accordingly, the AAT affirmed the income tax and associated penalty decisions noting the Commissioner’s “concession” to vary the GST and associated penalty decisions to allow further input tax credits in respect of a small range of acquisitions.

Re H J International Trade Group Pty Ltd and FCT [2016] AATA 450, http://www.austlii.edu.au/au/cases/cth/AATA/2016/450.html.

 

 

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service.

Each year, an approved SMSF auditor must audit the fund. The auditor is required to report certain regulatory contraventions to the ATO via the auditor/actuary contravention report (ACR). The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees and professionals to engage early with the ATO in relation to unrectified contraventions. SMSF trustees, SMSF auditors and SMSF professionals (such as tax agents, accountants, financial planners, lawyers and fund administrators acting on behalf of SMSF trustees) can use the service.

The ATO says the new disclosure service should only be used when it is clear there has been a contravention of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or regulations that remains unrectified at the time the SMSF auditor reports it to the ATO. Before using this service, the ATO says, trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure.

The SMSF auditor is still required to report regulatory contraventions via an ACR. However, the ATO says it will not commence an audit based on an ACR if the issue has been resolved through a voluntary disclosure, unless it receives additional information that requires further investigation.

The ATO warns that SMSFs should not use this service if they have already received notification of an ATO audit or review in relation to the contravention. The ATO also notes that where disclosures are made about contraventions that occurred in previous years, any outstanding SMSF annual returns must be lodged.

Source: ATO, SMSF early engagement and voluntary disclosure service, 26 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/SMSF-early-engagement-and-voluntary-disclosure-service/.

ATO case studies

The ATO has provided the following case studies to illustrate the benefits of its early engagement and voluntary disclosure service.

Example 1: overdrawn bank account

The Stephens Superannuation Fund bank account was overdrawn twice during the 2014–2015 financial year. After rectifying the breach, the trustee engaged an SMSF auditor and disclosed the breaches to ATO via the SMSF early engagement and voluntary disclosure process.

The ATO advised the trustees that, given that the contraventions were rectified, there was no need for them to use the service. By raising the breaches with their approved auditor they had discharged their reporting obligations. The trustees also put controls in place to prevent the fund bank account being overdrawn in the future.

Given it was a reportable contravention, the SMSF auditor lodged an ACR. As a result of the ACR, the ATO sent an education letter to the fund in relation to the breach.

Example 2: breach of LRBA rules

The approved auditor for trustees Emma and Jonas Klein identified a limited recourse borrowing arrangement (LRBA) breach in relation to the Klein Superannuation Fund for the 2014–2015 financial year.

The breach arose because the Klein Superannuation Fund entered into an LRBA that had not been structured correctly. A holding trust did not hold the property on trust for the fund trustees and the LRBA was with a non-related party. The trustees made a voluntary disclosure of the breach and provided all relevant facts and supporting documentation. They also provided a proposed undertaking to rectify the contravention within six months.

The trustees actively engaged with the ATO throughout the resolution process and lodged the outstanding returns. The Commisisoner accepted their undertaking to rectify the contravention. The terms of the enforceable undertaking were that the property was to be transferred into the holding trust within six months. SMSF administrative penalties were imposed and remitted in full, given that the trustees made a voluntary disclosure.

Example 3: money lost in investment scam

The trustees made an SMSF voluntary disclosure that the Okafor Superannuation Fund had not lodged annual returns for four years because all its money was lost in an investment scam. The trustees made their disclosure prior to the notification of an ATO SMSF review or audit and provided all relevant facts and

 

 

supporting documentation, including bank statements. The trustees provided an undertaking to wind up the fund and not to act as trustees of another SMSF in the future.

The trustees actively engaged with the ATO throughout the process and the ATO verified the investment scam claims. The Commissioner accepted the undertaking and the SMSF was wound up.

Source: ATO, “Early engagement and voluntary disclosure”, 27 May 2016, https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-case-studies/Early-engagement-and-voluntary-disclosure/.

New tax governance guide for SMSFs

When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and super laws. The ATO has released a new tax governance guide for use by SMSFs. The ATO says it has been working with businesses, tax advisers and agents to design the guide and help private groups with tax governance.

The ATO says SMSF trustees and professionals can use this guide to develop an effective governance framework and identify ways to improve existing governance practices within their SMSFs.

Issues covered in the guide include:

  • corporate governance and tax governance;
  • starting your business;
  • business expansion;
  • funding and finance;
  • philanthropy;
  • succession planning;
  • exiting a business;
  • retirement planning, including SMSFs and CGT small business concessions; and
  • estate planning.

Among other things, the guide says that SMSF trustees must ensure that their funds meet the definition of an SMSF at all times and remain complying. This includes meeting requirements for fund structure, members and trustees; and governing fund compliance with rules for contributions, investments and payment of benefits. Where an SMSF auditor or other adviser identifies issues with a fund’s compliance, trustees should take immediate steps to correct them, the ATO warned.

The fund’s financial statements and regulatory compliance need to be audited before the SMSF annual return is lodged. An audit is required even if no contributions or payments are made in the financial year. The ATO recommends that trustees ensure all documents are provided to the SMSF auditor with sufficient time for the audit to be completed within the legislated period.

The ATO encourages trustees to work closely with their SMSF advisers and auditors. The auditor will give the trustee a report on their SMSF’s regulatory compliance, including any contraventions. Any material contraventions must be reported by the auditor to the ATO. Trustees should also periodically verify that their SMSF satisfies the requirements of a regulated super fund, including requirements around contributions, investments and paying out benefits.

The ATO suggests that trustees formulate an exit strategy so they are prepared should the time come that they no longer want an SMSF and need to wind it up. Matters such as disposal of assets, paying out or rolling over benefits, arranging the final audit, lodging the final SMSF annual return, paying outstanding tax, closing bank accounts and cancelling ATO registrations should be considered.

Source: ATO, “SMSF governance”, 31 May 2016, https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/Tax-governance/Retirement-planning/Self-managed-super-funds/.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the AAT in arguing that a commercial property it acquired and developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit – despite the fact that the AAT indicated the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the CGT 50% discount.

 

 

In coming to this conclusion, the AAT noted that even though the taxpayer’s property development business involved purchasing properties for resale at a profit, the business carried on by the taxpayer involved far more than this. A “wide survey and an exact scrutiny of the activities” of the taxpayer showed that over a 40-year period they involved everything from the acquisition, development and sale of residential properties to the acquisition and development of commercial properties to hold as capital assets for the purpose of deriving rental income. As a result, the AAT rejected the Commissioner’s basic claim that the taxpayer was carrying on “a business of the acquisition, development and disposal of properties for a profit”.

Moreover, the AAT found that in relation to the “discrete” transaction in question (which it was required to consider for the purpose of determining the issue), all the evidence pointed to the fact that the taxpayer intended to develop the original vacant car park into commercial property to lease to government agencies, for which there was growing demand at the time. This evidence included:

  • the uncontradicted evidence of the father and son controllers of the business (who historically had adopted the approach of individually assessing the best profitable use of a particular property and then putting the property to that use);
  • contemporaneous bank records (which noted that the building was to be “retained on completion for investment”);
  • that a 15-year lease agreement was originally entered into; and
  • that the intention to eventually sell (despite the father’s original resistance and his historical preference to generate income by rental returns) was because the offer to sell “was simply too good”.

In this regard, the AAT also noted that as part of the sale deal, the purchaser offered the taxpayer the opportunity to acquire substitute investment commercial properties – and that the three properties subsequently acquired by the taxpayer as part of this arrangement were still owned by the taxpayer, almost nine years after the relevant transaction. In arriving at its decision, the AAT noted that it is always possible that the owner of an asset will sell it, “but to elevate that possibility into an intention to make a profit by selling the property is to draw a long bow indeed” – particularly in the circumstances of this case and given the nature of the transaction in question.

Accordingly, the AAT found that while the transaction by which the property was disposed of was not a transaction undertaken in the ordinary course of the taxpayer’s business activities, having regard to the overall wide scope of its business activities, in terms of examining the specific transaction and its “discrete” nature, nor was the property acquired for the “purpose of profit-making by sale”. As a result, the AAT concluded that the profit from its sale was to be accounted for as a capital gain and not revenue profit.

Re FLZY and FCT [2016] AATA 348, , 27 May 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/348.html.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before the AAT in seeking to have excess concessional contributions for the 2014 financial year disregarded or reallocated pursuant to s 291-465 of ITAA 1997.

Background

The taxpayer was a full-time employee in the Victorian Public Service and also worked a number of part-time, casual jobs with approximately four employers. As at 30 June 2014, he was 56 years of age and his concessional superannuation cap was $25,000. He salary sacrificed $100 per week of his full-time earnings into one super fund and salary sacrificed all of his casual earnings with another super fund. The taxpayer did not check his super fund balances.

In June 2015, the taxpayer received a notice of amended assessment for the 2013–2014 financial year that included excess concessional contributions of $11,055. The amended assessment detailed the increase of taxable income from $88,075 to $99,130, an excess concessional contributions tax offset of $1,658 and an excess concessional contributions charge of $250. The taxpayer had previously received a notice of assessment for 2012–2013 financial year detailing excess concessional contributions of $7,656 and excess concessional contributions tax of $2,411.

The taxpayer submitted that he worked additional casual jobs and salary sacrificed his super to provide for his retirement and for his family. He did not have the predictability of knowing what he would earn through his casual jobs, which depended on having shifts allocated. The taxpayer submitted that the rules were difficult to comprehend and he had made an inadvertent mistake. Had he been aware he was approaching his concessional super contribution cap, the taxpayer submitted that he would have stopped the salary sacrifice arrangements, and that his ultimate tax bill would have been the same, albeit the tax bill would have been met by PAYG deductions over time.

Decision

The AAT said, “In a system where there are limits on what can be contributed to a superannuation fund while retaining concessional treatment, to waive compliance in this case would effectively provide [the taxpayer] with an advantage in the form of being allowed to contribute extra to his superannuation funds, and to enjoy the benefit of that without any cost associated with the excess, to the advantage of other taxpayers in the community who observe the limits.”

The AAT said that while the taxpayer’s “motives for working hard and stowing money away for retirement income are admirable, his predicament [did] not amount to a special circumstance”. It added that inadvertent mistakes were not special circumstances and that the “complexities of the system of taxation of retirement income and providing for retirement income are complexities the whole community has to deal with”. Accordingly, the AAT affirmed the Commissioner’s decision.

Monitoring the limits: taxpayer’s submission

During the hearing, the taxpayer suggested that the ATO might do more to advise what was required. The taxpayer suggested that in other settings there are apps available for use with modern technology that let people know their progressive use of facilities such as data volume downloaded from the internet, and something similar could be adopted in a taxation setting. The AAT said that submission was not for it to deal with; however, it suggested that it was “possibly one that the ATO might wish to explore for the future”.

Re Azer and FCT [2016] AATA 472, 4 July 2016, www.austlii.edu.au/au/cases/cth/AATA/2016/472.html.

Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal (QCAT) in arguing that there was a “constructive trust” in relation to three properties.

Background

The taxpayer had purchased three residential properties, one for each of his three children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the properties would each be left to the respective child.

The Commissioner assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The taxpayer objected, arguing that he was the trustee of each property for each child and that land tax (if any) should be assessed separately in respect of each property. The Commissioner contended that there was no “constructive trust” as was argued by the taxpayer, and that the taxpayer – as “owner” of the land – was liable to land tax on an aggregate basis.

Decision

The QCAT affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, s 20(1) of the Land Tax Act 2010 (Qld) to separately assess trust land did not apply. However, in doing so, the QCAT hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or QCAT otherwise. It also noted the possibility of a future express declaration of trust with consequential changes to the wills, which could affect future land tax liabilities.

Harrison v Comr of State Revenue [2016] QCAT 150, http://archive.sclqld.org.au/qjudgment/2016/QCAT16-150.pdf.

 

 

 

 

 

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Client Alert (August 2016)

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ATO small business benchmarks updated

The ATO has announced the latest benchmarks for small businesses. Based on the data from 2014 income tax returns and business activity statements, the benchmarks cover over 1.3 million small businesses.

ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind.

“If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr Bambrick said.

Mr Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr Bambrick said.

TIP: Business owners can use the benchmarks to compare their businesses with other similar businesses. They can also be used by the ATO to identify businesses that may not be meeting their tax obligations.

SMSF early voluntary disclosure service for contraventions

The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service. Each year, an approved SMSF auditor must audit a fund. The auditor is required to report certain regulatory contraventions to the ATO using the auditor/actuary contravention report. The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees to engage early with the ATO in relation to unrectified contraventions.

TIP: Beforeusing this service, the ATO says trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure. Please contact us for further information.

New tax governance guide for SMSFs

The ATO has released a new tax governance guide that can be used by SMSFs. The ATO has worked with businesses to design a guide to help private groups with tax governance. The guide also provides practical guidance about the key elements of SMSF governance. When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and superannuation laws.

SMSF trustees can use this guide to develop an effective governance framework and to identify ways to improve existing governance practices within their SMSFs. Issues covered in the guide include:

  • corporate governance and tax governance;
  • starting your business;
  • business expansion;
  • funding and finance;
  • philanthropy;
  • succession planning;
  • exiting a business;
  • retirement planning (covering SMSFs and CGT small business concessions); and
  • estate planning.

Property developer entitled to capital gain tax concession

A taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that a commercial property it acquired, developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit. The AAT reached this decision despite indicating that the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the 50% capital gains tax (CGT) discount.

TIP: This case is a good example of the need to maintain contemporaneous documentation should there be a dispute with the ATO. The ATO has recently reiterated its focus on trusts developing and selling properties as part of their normal business and incorrectly claiming the 50% CGT discount.

Superannuation concessional contributions caps must be observed

An individual taxpayer has been unsuccessful before AAT in seeking to have excess superannuation concessional contributions for the 2014 financial year ignored. In addition to having a full-time job, the individual also held a number of casual part-time jobs. To grow his retirement savings, he salary sacrificed super, but he did not check on his super balances. In June 2015, the individual was advised by the ATO that he had excess concessional contributions of around $11,000 for the 2014 financial year, an amount which was added back to his taxable income. He was therefore charged interest of $250. The AAT praised the individual’s efforts to save for his retirement, but it said the circumstances did not amount to “special circumstances” in which it could invoke its powers to ignore the excess contributions.

TIP: The taxpayer’s ultimate tax bill in this case would have been the same if he had stayed under the relevant cap, albeit the tax bill would have been met by PAYG deductions over time. Even so, this case is a good reminder for to monitor your super balances to ensure you don’t have a tax burden caused by extra contributions being added back to your taxable income.


Help the kids buy homes, but watch for land tax

A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal in a land tax dispute in arguing that there was a “constructive trust” in relation to three residential properties. The taxpayer, a father, had purchased the properties for each of his three adult children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the property would be left to the respective child. The Queensland Commissioner of State Revenue assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The Tribunal affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, it held the exemption under the Land Tax Act 2010 (Qld) to assess separately trust land did not apply. In this case, the Tribunal hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or Tribunal otherwise.

TIP: For parents looking to assist their adult children with buying homes, this case highlights the need to consider land tax implications. It is important to note that the land tax regimes differ from state to state. Please contact our office for assistance.

Taxation Issues on Release of a Company’s Unpaid Present Entitlement

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Taxation Determination TD 2015/20, released by the ATO on 25 November 2015, explains the Commissioner’s view on whether a release by a private company of its unpaid present entitlement (UPE) constitutes a “payment” under the Div 7A shareholder loan rules, contained in Pt III of the Income Tax Assessment Act 1936 (ITAA 1936). The TD was issued to address uncertainty about the ATO’s position on whether the “release” or waiver of a UPE amounts to a deemed dividend.

The Commissioner’s view, as outlined in TD 2015/20, is that Div 7A can apply where a private company with a UPE from a trust releases all or part of that UPE, and the trustee is either a shareholder or an associate of the private company. That is, the ATO considers the crediting of an amount to be a payment under Div 7A if the release represents a benefit to an entity.

This article examines the application of Div 7A in the context of UPE releases and payments based on TD 2015/20. It does not cover Div 7A rules more broadly.

Division 7A

The Div 7A rules in Pt III of ITAA 1936 state that unless they come within specified exclusions, certain private company payments, loans and forgiven debts are treated as dividends paid. The rules can apply to payments by a private company to a shareholder or their associates.

A payment is not treated as a dividend where, for example:

  • it is fully repaid or converted to a complying loan by the company’s lodgment day for the income year in which the payment occurs; or
  • it is assessable income (or is specifically excluded from being assessable income) under another part of the Act.

Principles outlined in TD 2015/20

TD 2015/20 provides that if a company releases a UPE, the release will typically be a payment under Div 7A, and therefore a potential deemed dividend, if the release is a benefit to the entity.

A UPE is a beneficiary’s right to receive trust income or capital that:

  • arises due to the beneficiary being made presently entitled to the amount; and
  • has not been satisfied, paid or effectively disclaimed.

According to TD 2015/20, there is a deemed dividend to a shareholder (or an associate of a shareholder) under Div 7A if:

  • there is a payment (according to the meaning in s 109C of ITAA 1936); and
  • that payment constitutes the release of a UPE as the result of an amount credited by the company for the benefit of the trust.

There must be a payment

Broadly, a private company is taken to have paid a dividend to a shareholder at the end of an income year if the company pays an amount to the entity during that year (s 109C(1) of ITAA 1936). For the purposes of Div 7A, a payment includes a credited amount to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity (s 109C(3) of ITAA 1936).

The release involves crediting

Two requirements must be satisfied for the release of a UPE by way of a credit to be considered a “payment” and therefore a deemed dividend under the Div 7A rules:

  1. Credit must have been provided by the private company. The income tax legislation does not define the term “credit”, so it must be interpreted according to its ordinary meaning. The Macquarie Dictionary defines “credit” as “enter[ing] upon the credit side of an account; giv[ing] credit for or to; giv[ing] the benefit of such an entry to (a person, etc)”. Based on this, the Commissioner views the forgiveness of a debt in a company’s accounts, accompanied by an intention not to recover the debt to constitute “crediting of an amount”, which falls within the Div 7A meaning of “payment”. Crediting does not need to be formally recorded in the company’s books of account.
  2. The credit must be applied for the benefit of the entity. According to TD 2015/20, a UPE is an asset that stands as a debit entry in a private company’s accounts. The Commissioner’s position is that a “benefit” is provided where a UPE is released by the private company, because it leaves the other entity (eg the trustee of a trust) with full ownership of the UPE. A UPE release is considered a payment irrespective of whether it is held in the main trust or in a subtrust, or whether the UPE is released voluntarily or at the direction of a court order.

Exceptions: where the release of a UPE does not give rise to a benefit

The release of a UPE does not give rise to a benefit and would not be considered a payment under the Div 7A rules if:

  • the trustee cannot satisfy the UPE due to circumstances beyond its control, and the beneficiary has no cause of action against the trustee to recover that loss; or
  • the UPE is already a Div 7A loan or has previously been converted to a debt (s 109F of ITAA 1936).

Conclusion

The Commissioner’s position, according to TD 2015/20, is that the deemed dividend rules in Div 7A can apply where a private company with a UPE to the income or capital of a trust releases all or part of the UPE, and the trustee is either a shareholder of the private company or an associate of a shareholder.

When writing off or releasing a UPE, corporate beneficiaries should therefore be careful to ensure no benefit is provided through the release and a payment under Div 7A does not arise. As TD 2015/20 applies both before and after its date of issue, taxpayers should review the information carefully to manage any possible Div 7A risk.

SMSF – Policy Conditions

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Income protection insurance is worth considering for working people. It can pay a proportion of your salary if you are temporarily unable to work because of sickness or injury. When taking out any insurance policy, you should check carefully the terms and conditions, and also the way the key terms of the policy are defined. This helps to avoid disappointment or disputes with the insurer should an unfortunate event occur.

This article takes a look at a determination made by the Financial Ombudsman Service (FOS) in relation to a dispute over an income protection insurance policy.

FOS examines “offset” condition

In June 2014, the FOS issued a determination regarding a claim under an income protection insurance policy. At the commencement of the policy, and until he became disabled, the applicant jointly owned and operated a family business with his wife. When the applicant became totally disabled, the family business continued and made profits without the applicant’s participation.

The determination considered the insurer’s interpretation of a policy condition which stated that “the amount of the monthly total disability benefit will be reduced, where necessary, so that the total that month of: … the total disability benefit payment … and amounts payable from the insured person’s employer or business…does not exceed 75% of pre-disability monthly earnings”.

The FOS said the insurer did not dispute that the applicant was totally disabled. However, it applied the policy condition to offset the continuing profits of the family business against the benefits otherwise payable to the applicant. The financial services provider (FSP) said that it accepted the applicant’s application for cover on the basis that he was entitled to 50% of the profits of the family business, and said that it took this into account when calculating the applicant’s pre-disability monthly earnings. Therefore, the FSP considered it was entitled to apply the policy condition.

A FOS panel did not agree with the insurer’s interpretation of the policy condition. The FOS said the panel determined that:

  • The insurer was only able to apply the policy condition to amounts which were referable to the applicant’s total disability. These did not include amounts which may have been payable to the applicant as a result of the profitability of the family business after he became incapacitated, and to which he did not contribute through personal exertion.
  • There is no unfairness or inconsistency in taking into account business profits prior to disablement when the applicant was working full time but not after he became totally disabled when he took no part in the business. Ignoring pre-disability profits of the business that were due to the applicant’s activities would contravene the policy definition of pre-disability monthly earnings.

When the applicant became totally disabled, he ceased to earn any personal exertion income. Any amounts subsequently payable to him from the business were “passive” income, in the nature of dividends on a shareholding. These were not amounts referable to his disability, and were therefore not able to be offset under the policy condition.

Talk to us

Like many things in life, the devil is in the detail, so it’s important that you understand what you are (or will be) covered for. It’s also important to consider seeking professional advice tailored to your circumstances. If you have any concerns or questions, please contact our office on 02 9954 3843.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Personal Tax – CGT: Deceased Estates

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It is relatively common for a taxpayer to inherit residential property under a will. While an inherited dwelling can be a wonderful gift, it often results in capital gains tax (CGT) implications, particularly where the taxpayer later sells the property. Individuals who inherit deceased estates therefore need to be aware of how the CGT rules work.

Generally, a CGT liability arises when a capital gain is made on the sale of a property. However, a taxpayer may be fully or partially exempt from CGT if the transaction involves the sale of a deceased person’s main residence, provided certain conditions are satisfied.

This article examines the rules surrounding application of the CGT main residence exemption contained in the tax law, in the context of a beneficiary selling a dwelling they acquired from a deceased estate.

Main residence exemption: basic rules

The main residence exemption rules appear in Subdiv 118-B of the Income Tax Assessment Act 1997. They provide that a capital gain or loss made on the disposal of a dwelling is generally disregarded for CGT purposes if the dwelling is a main residence of the taxpayer throughout the ownership period.

The tax legislation defines “ownership” as a legal or equitable interest or a right or licence to occupy the land or dwelling. The ownership period of a dwelling is the period during which the individual had an ownership interest in the dwelling or land.

The definition of “dwelling” includes a unit of residential accommodation, a caravan or a houseboat, and a dwelling can be made up of more than one unit of accommodation – for example, a house with a granny flat – provided they are used together as a single residence (see Taxation Determination TD 1999/69).

The main residence exemption is only available to natural persons, so it does not apply where a company or trust owns a residence, except where the residence is vested in the trustee of a deceased estate and it is the main residence of a surviving spouse.

Deceased estates and main residence

For a beneficiary taxpayer who inherits a dwelling to have access to the main residence exemption, the dwelling must have been a “main residence” of the deceased person at the date of their death. This generally means the person lived in the dwelling and it was their main residence during their lifetime, or the person stopped living in the dwelling but continued to treat it as their main residence during their lifetime. This could occur, for example, when the person lived in a retirement home or aged care facility during their later years.

A taxpayer who inherits a main residence and subsequently sells the property may be able to access either full or partial exemption from CGT. The conditions to be satisfied to access the exemption depend on whether the deceased person acquired the dwelling before or after 20 September 1985:

Full CGT exemption

Deceased person acquired the dwelling before 20 September 1985 and beneficiary acquired it after 20 September 1985

Where the dwelling is a pre-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling if either of the following applies:

  • condition 1: the taxpayer disposed of the property within two years of the deceased person’s death; or
  • condition 2: the disposal did not occur within two years, but from the date of the death until the time of the sale, the dwelling was not used to produce income and it was the main residence of the surviving spouse, an individual with a right to occupy the home under the will, or a beneficiary of the estate.

There is no requirement for a pre-CGT dwelling to have been the main residence of the deceased person.

The Commissioner of Taxation has discretion to extend the two-year period under certain circumstances.

Deceased person acquired the dwelling on or after 20 September 1985

Where the dwelling is a post-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling, provided certain conditions are met. There are different conditions depending on whether the taxpayer acquired the post-CGT dwelling before or after 20 August 1996.

Where the dwelling passed to the taxpayer on or before 20 August 1996, the full exemption is available if:

  • the dwelling was the deceased person’s main residence for their entire ownership period during their lifetime and they did not use it to produce income; and
  • condition 2 (described above) is met.
  • Where the dwelling passed to the taxpayer after 20 August 1996, the full exemption is available if:
  • the dwelling was the deceased person’s main residence just before their death and it was not being used to produce income at that time; and
  • either condition 1 or condition 2 (described above) is met.
Illustrative example 1

Andrew was the sole occupant of a home he bought in Coburg, Victoria, in December 1998. It was his main residence throughout his ownership period. Andrew died in April 2011 and left the house to his only daughter, Leanne. Leanne rented out the house for a short period, then sold it 18 months after her father died.

Is Leanne entitled to the full CGT exemption?

Yes, because she disposed of it within two years of her father’s death, it was her father’s main residence just before his death and it was not used to produce income at that time.

Partial CGT exemption

Where a dwelling was not the deceased person’s main residence during the full period of their ownership, a full or part exemption from CGT may be still available. The taxable capital gain or loss amount is calculated according to a formula prescribed in the legislation:

 Term  Pre-CGT dwelling  Post-CGT dwelling
Non–main residence days The number of days from the deceased person’s death until the disposal date, when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy it under the will, or the beneficiary The sum of (a) the number of days after the date of the death when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy under the will or the beneficiary, and (b) the number of days during the deceased person’s ownership period when the dwelling was not their main residence.
Total days The number of days from the deceased person’s death until the date of the dwelling’s disposal The number of days from the date the deceased person acquired the dwelling until the date of its disposal

If the ownership interest is disposed of within two years of the deceased person’s death, the taxpayer can ignore the non-main residence days and total days in the period from the date of death until the date of disposal if this reduces the tax liability.

Cost base of the dwelling

Where the dwelling was a post-CGT asset of the deceased person, the taxpayer inherits the deceased person’s cost base. If it was a pre-CGT asset of the deceased person, the taxpayer is taken as acquiring the dwelling for its market value at the date of the death.

Illustrative example 2

Zoe bought a house on 8 October 1995 and used it solely as a rental property. When Zoe died on 7 June 2005, the house passed to her son, John, and he used it as his main residence.

John then sold the house in November 2009, making a capital gain of $250,000 from the sale.

Is John eligible for the full CGT exemption?

No. Zoe never used the property as her main residence, so John cannot claim the full exemption for a main residence.

Is John eligible for the partial CGT exemption?

Yes, because he used the house as his main residence. John must use the prescribed formula to calculate the taxable portion of his capital gain.

Zoe owned the house for 3,531 days. John then lived in the house for 1,635 days. This gives 5,166 total days.

Zoe used the house as a rental property from the time she acquired it, so there were 3,531 non-main residence days.

Using the formula, the taxable portion of John’s capital gain is $170,876 ($250,000 x (3,531/5,166)).

On the basis that he is eligible to access the 50% CGT discount, John has a capital gain of $85,438.

Talk to us

Do you think the full or partial CGT exemption could apply to your circumstances? Please contact our office on (02) 9954 3843 for further information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Agistment Activities: Business

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Q. I propose to purchase about 20 acres of land which is used for cattle grazing. I will continue to use the land for agistment purposes, although my long-term plan is to subdivide the land and sell the subdivided blocks. Will the agistment activities amount to a business?

 

A. Whether your agistment operations constitute a business is generally a question of fact and law (and possibly Old English law). The following extract from para [22-250] of Thomson Reuters’ Australian CGT Handbook indicates it is possible for agistment activities to amount to carrying on a business in appropriate circumstances:

“Land used for agistment may fall outside the exclusion [for assets used in a business ‘mainly to derive rent’] as under old law “agistment” is the act of taking another’s stock to graze, pasture or feed on land with an implied agreement to redeliver it to the owner on demand: see, for example, Sinclair v Judge [1930] QSR 340. Therefore as the arrangement between the parties is more akin to bailment than a lease the payments may not be regarded as ‘rent’. Further it is possible to carry on a business of agistment (see, for example, AAT Case 10,331 (1995) 31 ATR 1146) – albeit, still the exclusion in s 152-40(4)(e) could be relevant as it applies to assets used in a business ‘mainly to derive rent’.”

The return on the activity may possibly be regarded as rental income. If so, the land may not be an active asset for the purposes of the CGT small business concessions – s 152-40(4)(e) ITAA 1997 excludes assets used in a business “mainly to derive rent”.

Carrying on a business

Whether a business is being carried on is a question of fact to be determined objectively on the specific facts of the case (eg Evans v FCT (1989) 20 ATR 922 at 939; Hart v FCT (2003) 53 ATR 371).

From the many court and tribunal decisions concerning this issue (eg Thomas v FCT (1972) 3 ATR 165, Ferguson v FCT (1979) 9 ATR 873, Hope v Bathurst City Council (1980) 12 ATR 231, FCT v Radnor Pty Ltd (1991) 22 ATR 344 and Spriggs and Riddell v FCT (2009) 72 ATR 148) ,it seems the following factors are particularly relevant – that is, when assessed objectively, their presence indicates a business is being carried on:

  • the person’s purpose and intention as they engage in the activities;
  • the intention to make a profit from the activities, even if only a small profit is made or a small loss incurred. (If a loss is incurred every year for a number of years, however, that suggests the activity may be more of a hobby.) It seems that an intention to make a profit is not of itself sufficient;
  • the size and scale of the activities – they must be in excess of domestic needs, but do not need to be the person’s only activities and can be carried on in a small way;
  • repetition and regularity of the activities – although the expression “carry on” does not necessarily require repetition (see FCT v Consolidated Press Holdings Ltd; CPH Property Pty Ltd v FCT (2001) 47 ATR 229 at 245) and an isolated activity may constitute beginning a business;
  • the activities being carried on in a systematic and businesslike way, as usual for that type of business (eg keeping detailed, up-to-date records and accounts); and
  • the existence of a business plan.

The factors must be considered in combination and as a whole, and no one factor is likely to be decisive: see Taxation Ruling TR 97/11. A person may carry on a business even if they are not actively engaged in the business: Puzey v FCT (2003) 53 ATR 614 at 624; Sleight v FCT (2003) 53 ATR 667 at 682 (decision upheld on appeal in FCT v Sleight (2004) 55 ATR 555).

Even if you are carrying on an agistment business, it is unlikely that it is a “primary production business” within the meaning in s 995-1 of the ITAA 1997. The Commissioner considers a landowner engaged in a primary production business if, under a share-farming arrangement allowing another person to cultivate the land, the landowner is carrying on business in partnership or is directly involved in that business with a degree of control or ongoing participation: Taxation Determination TD 95/62.

 

The above is a discussion only and further advice should be obtained. Please contact our office  on (02) 9954 3843 to discuss your circumstances and to obtain professional advice.

This article is sourced from Thomson Reuters TaxQ&A service.

SMSF ATO Powers

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The ATO – as the regulator of SMSFs (self-managed super funds) – has a range of treatments available to it to deal with SMSF trustees who have not complied with the super laws. The ATO says its primary focus is to encourage SMSF trustees to comply with the super laws. However, SMSF trustees should be aware of the range of penalties or actions that the ATO could apply in the event of a contravention.

These include the following actions:

  • Education direction – the ATO says it may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The education course is designed to improve both the competency of SMSF trustees and their ability to meet their regulatory obligations, and to reduce the risk of trustees contravening the law in future.
  • Enforceable undertakings – the ATO can decide whether or not to accept an undertaking from an SMSF trustee to rectify a contravention. The undertaking must be provided to the ATO in writing and must include the following:
    • a commitment to stop the behaviour that led to the contravention;
    • the action that will be taken to rectify the contravention;
    • the timeframe to rectify the contravention;
    • how and when the trustee will report that the contravention has been rectified; and
    • the strategies to prevent the contravention from recurring.
  • Rectification directions – the ATO may give a trustee or a director of a corporate trustee a written direction to rectify a contravention of the super laws. A rectification direction will require that a person undertakes specified action to rectify the contravention within a specified time, and provide evidence of compliance with the direction.
  • Administrative penalties – from 1 July 2014, individual trustees and directors of corporate trustees will be personally liable to pay an administrative penalty for various contraventions of the super law (breaching the SMSF borrowing rules or the in-house asset rules etc). The penalty cannot be paid or reimbursed from the assets of the fund.
  • Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened the super laws. The ATO can also disqualify an individual if it is concerned with the actions of that individual or if it doubts they are suitable to be a trustee.
  • Civil and criminal penalties – the ATO may apply through the courts for civil or criminal penalties to be imposed. Civil and criminal penalties apply where SMSF trustees have contravened provisions relating to these:
    • the sole purpose test;
    • lending to members;
    • the borrowing rules;
    • the in-house asset rules;
    • prohibition of avoidance schemes;
    • duty to notify the regulator of significant adverse events;
    • arm’s length rules for an investment;
    • promotion of illegal early release schemes.
  • Allowing the SMSF to wind-up – following a contravention, the trustee may decide to wind-up the SMSF and rollover any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority (APRA). Depending on the actions of the trustees and the type of contravention, the ATO may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance treatments.
  • Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance by the ATO. A notice of non-compliance is effective for the year it is given and all subsequent years. A fund remains a non-complying fund until a notice of compliance is given to the fund.
  • Freezing SMSF assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.

Informal arrangements

The ATO says it may take one or several courses of action, depending on how serious the contravention is and the circumstances involved. In some circumstances, the ATO may enter into an informal arrangement with a trustee to rectify a minor contravention within a short period of time. The arrangement can be made verbally or in writing and includes how and when the contravention will be rectified. The ATO will consider the trustee’s compliance history in deciding whether to accept the arrangement. The ATO may also provide trustees with informal education about their trustee obligations.

ATO identification of risk posed by SMSFs

The ATO will apply a risk-based approach in response to auditor contravention reports (ACRs). The Commissioner said he will consider multiple indicators and use risk models to determine the appropriate action to take on each SMSF. The key indicators used will include non-compliance (including regulatory and income tax matters), information from the SMSF annual return, ACRs, and other data, including trustee and members’ records.

Under this approach, the ATO will treat all ACRs received with an audit, phone call or letter, shortly after lodgment, to provide more certainty to trustees. The ATO said this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, warranting less intrusive action in many cases.

The ATO’s risk categories for SMSFs include the following:

  • High-risk SMSFs – will be selected for comprehensive audits that will see scrutiny of all regulatory and income tax risks displayed by the fund. There will be a particular focus on repeat offenders. This program will also involve an increasing number of ATO field visits to engage high-risk SMSFs. ATO administrative penalties for breaches by an SMSF trustee (up to $10,200 per breach) will be applied when the Commissioner confirms the breach is eligible for such a penalty.
  • Medium-risk SMSFs – the ATO will take less intrusive action on SMSFs assessed as medium risk. As trustees are responsible for their fund’s behaviour, the ATO says it will engage directly with trustees to discuss the reported contravention, remind trustees of their obligations, and encourage compliance in future. This action will usually occur within six to eight weeks of the ACR lodgment. In the majority of cases, if the trustee can assure the Commissioner that they understand their obligations, the issues reported in the ACR will be closed and no penalties applied. The ATO’s aim is to intervene before more serious comprehensive audits are required.
  • Lower-risk SMSFs – will be issued with tailored correspondence reminding the trustees of their obligations and encouraging compliance in future. The issue reported in the ACR will be closed with the issuing of this letter which will usually occur within six to eight weeks of the ACR’s lodgment.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Tax Debt Payment Plan

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Taxpayers who can’t pay their tax by the due date should consider whether to request a payment arrangement with the ATO. An arrangement to pay in instalments does not vary the time when the amount is due and payable, and therefore does not affect any liability to pay the general interest charge, or any other relevant penalty, for late payment.

It’s best practice to address tax debt problems as early as possible. If a payment arrangement is an appropriate approach for you, you need to understand the process involved.

Depending on eligibility, the ATO has three ways to help set up a payment plan:

  • Online payment plan services for debts under $100,000: If you’re an individual or a sole trader with an income tax or an activity statement debt of less than $100,000, you may be eligible to use the ATO online services for individuals to set up a payment plan.
  • Automated payment plan phone service for debts under $25,000: If your debt is less than $25,000, you can use the ATO automated phone service to arrange a late payment or make a request to pay by instalments.
  • Contact the ATO for more complex situations: If your tax debt is $25,000 or more, you can call the ATO on 13 11 42 to discuss your circumstances, or your tax adviser can call on your behalf. The ATO may need to know more about your financial situation and your circumstances so it can set up a payment plan. Among other things, the ATO may require that you show your business is viable.

Registered agents can also request a payment plan on their clients’ behalf.

If you run a small business with an activity statement debt, you may be able to pay it off interest-free over 12 months. You will need to have a good history of tax lodgments and payments.

The Commissioner is not legally bound to allow payment by instalments, and will consider each case on its own merits. If the Commissioner refuses your request to pay by instalments, that decision should be reviewable under the Administrative Decisions (Judicial Review) Act 1977.

The ATO’s Practice Statement PS LA 2011/14 contains guidelines on when the Commissioner may agree to payment of a tax-related liability by instalments. The Commissioner will not accept payment by instalments if the ATO’s prospects of recovery in the longer term would be diminished or the revenue would be disadvantaged.

Taxpayers paying by instalments are expected to finalise their debts in the shortest possible timeframe. If the period extends beyond one or more financial years, the taxpayer may be required to provide security or a surety. Also, payment arrangements will be reviewed regularly to take into account any changes in the taxpayer’s financial situation.

The Commissioner will consider a range of matters when deciding whether to allow you to pay by instalments, including:

  • the circumstances that led to your inability to pay;
  • your current financial position, including other current payment obligations and actions you have taken to rearrange your finances or borrow to meet the debt;
  • the stage any legal recovery action has reached and the grounds you put forward to justify deferring legal action;
  • your solvency, and arrangements you have made with other creditors (arm’s-length or otherwise) to pay your debts;
  • your compliance with other taxation obligations or commitments and the history of your dealings with the ATO;
  • whether alternative collection options may result in your debt being paid over a shorter period (eg the use of “garnishee” provisions); and
  • your willingness to enter into direct debit arrangements, where that facility exists.

Where a company has a tax debt, the Commissioner may not agree to payment by instalments if there are (or ought to be) reasonable grounds to suspect that the company is insolvent (in such a case, any money received under an instalment arrangement may be recoverable by the company’s liquidator under Pt 5.7B of the Corporations Act 2001).

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Super Guarantee: “Employees” or “Independent Contractors”?

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An “employee” for superannuation guarantee purposes includes anyone who is an employee at common law. The relationship between employer and employee is often described as a “contract of service” whereas the relationship between principal and independent contractor is a “contract for services”.

However, defining the contractual relationship between the employer and employee can be a difficult task. The matter of whether a person is an employee is a question of fact to be determined by examining the terms and circumstances of a contract, with regard to the key indicators. No one indicator of itself is determinative of that relationship and the totality of the relationship between the parties must be considered.

It is necessary to look beyond the legal form of the contract to the substance of the arrangement. Parties cannot deem a relationship between themselves to be something that it is not simply by giving it a different label. However, the ATO considers that such a clause may be used to help overcome any ambiguity as to the true nature of the relationship.

The changing nature and diversity of modern work arrangements and practices has made it increasingly necessary for the courts to adopt a broader multi-factorial test to discover the “real substance” of the relationship in question. The courts have also shown an increasing willingness to strike down “disguised employment relationships” that deliberately seek to position a relationship outside of the superannuation guarantee regime and other laws.

The absence of a simple and clear definition explaining the distinction between an employee and an independent contractor is problematic for those seeking to comply with their superannuation guarantee obligations. The ATO has issued Ruling SGR 2005/1 which discusses the various indicators that should be considered in determining whether a person is an employee (“contract of service”) or an independent contractor (“contract for services”). Broadly, this requires consideration of the right to control how, where, when and who is to carry out the work. This is often referred to as the “control test”. While the control test is still an important factor (especially for distinguishing traditional employment relationships), it is not the sole indicator of whether or not a relationship is one of employment. Indeed, the control test is just one of the relevant indicators to be considered.

The modern approach taken by the courts and tribunals to determine whether an employment relationship exists is to consider the “totality of the relationship”. In this multi-factorial approach, the question of whether a person is an employee or an independent contractor may be simply expressed as follows:

  • Is the person performing the work an entrepreneur who owns and operates a business?
  • In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Similar occupations but different outcomes

The following two cases decided in the Administrative Appeals Tribunal (AAT) demonstrate that different outcomes can be reached despite similar occupations of the workers involved – and that the outcomes of the cases very much depended on the evidence presented before the AAT.

In Trustee for the SR & K Hall Family Trust v FCT [2013] AATA 681, the plumbers were held to be employees and not independent contractors, despite using their own vehicles and tools. The AAT found the plumbers used the taxpayer’s tools for specialised jobs, wore the taxpayer’s logo and did not present themselves as contractors pursuing their own business independent of the taxpayer. In conclusion, it held the taxpayer had failed to discharge the onus of proving that the superannuation guarantee default assessments that the Commissioner had issued to it were excessive.

In XVQY v FCT [2014] AATA 319, the taxpayer was successful in arguing that the plumbers engaged by it were not employees. The AAT took into account the evidence in relation to control, the non-representation of the employer by the worker, the results character (the workers were responsible for satisfactory completion of the jobs), the capacity of the workers to delegate, the assumption of risk by the workers, and the significant ownership of the tools and equipment of the workers. The AAT considered the taxpayer had adequately discharged the onus of proving its case and set aside the Commissioner’s decision.

For taxpayers seeking to argue that workers are independent contractors and not employees, the above cases demonstrate the need to have evidence to address the various factors the courts and tribunals would consider in assessing whether workers are employees or independent contractors.

 

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

Sort Out the Income You Must Lodge on Your Tax Return

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Broadly speaking, if you are a resident of Australia, you must annually lodge an income tax return and pay annual taxes on worldwide income from many sources.

If you are lodging directly, the deadline is October 31 for the previous tax year ending on June 30. If the deadline falls on a weekend, you can lodge on the following Monday without incurring a penalty.  Taxpayers who lodge through tax agents should check with them for their deadlines, which vary. You must, however, contact a tax agent by October 31 if you are using one for the first time or are switching to a new one.

Here is a list of the most common sources of income you must report to the Australian Taxation Office (ATO).

Employment

With some exemptions, you must declare all income generated from employment. The most common types of employment income are:

  • Salary, wages and tips;
  • Allowances from your employer, such as a car allowance; and
  • Lump sum payments. Concessional treatment may apply, such as when you receive termination payments.

Pensions, Annuities and Government Payments

  • Pensions, which are series of superannuation income streams, generally have both a taxable and a tax-free component.
  • Annuities — a series of payments typically purchased with a lump sum from a life insurer — also contain taxable and non-taxable elements.
  • Government payments include payments such as age pensions and youth allowances.

Some government payments are subject to income tax while others are not. For example, disability support pensions can be taxable or exempt depending on, among other things, the age of the recipient.

Interest, Dividends and Rent

Interest income is generally taxable. For example, if you put money into a savings account for your child, you may need to declare interest earned on that account. Life insurance bonuses are also taxable.

If you own shares in a company, you must declare all assessable dividends paid or credited to you. You may receive dividends as cash or bonus shares from listed investment companies, public trading trusts, corporate unit trusts and corporate limited partnerships as a distribution. If you are paid or credited with bonus shares, the issuing company should provide you with a statement indicating whether the stock qualifies as a dividend. Payouts are assessable income in the year they are paid or credited to you.

Australian resident company dividends are taxed under a system called “imputation.” The tax the company pays is “imputed” to the shareholders as franking credits attached to their dividends. Depending on your financial circumstances, your might be able to use those credits to offset other tax liabilities.

Rent and rent-related payments are taxable. As an example, money from a bond associated with a lease is taxable if you received it because a tenant defaulted. Other rent-related payments may have to be declared on your income tax return.

Capital Gains

Australia does not have a separate capital gains tax. Gains are simply added to your ordinary taxable income.

Capital gains typically result from the sale of assets, such as real estate, shares or managed fund investments. The gain is the difference between what you paid for the property and the amount you received when you sold it. There are, however, many other ways to generate capital gains. Complex rules govern when gains may trigger a tax obligation, which often depends on the type of asset.

Foreign Sources

If you qualify as an Australian resident, you are taxed on worldwide income. That means you must declare all income from sources outside the country, such as foreign pensions and annuities, foreign employment income, and capital gains on the sale of foreign assets.

Foreign income may also be taxed in the country from which the income is sourced, and that could result in double taxation. However, Australia has tax treaties with more than 40 countries, including all of its major trading partners, that minimise or eliminate double taxation.

Residency requirements are complex, so if you are not sure of your tax status, consult a professional.

Partnerships and Trusts

You must pay income tax on your share of a partnership’s net income and, generally, on trust income you receive as a beneficiary.

Compensation and Insurance

If you lose salary, you may have to declare money you receive from an income-protection scheme, such as Workers’ Compensation or accident insurance. Compensation received for a personal injury caused by others, the payments may be tax-free if certain conditions are met.

Tax-Free Payments

Some payments are not taxable. For example, some Australian government pensions, allowances, first-home saver account government contributions, superannuation co-contributions, child support and spouse maintenance payments are all tax-free.

Income tax regulations can be very complex in some situations so consult with your tax adviser to ensure you meet all your obligations with the ATO.

 

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