Personal income tax cuts repeal

As part of the introduction of the carbon tax, two rounds of personal income tax cuts were to occur. The first round commenced on 1 July 2012. However, the second round of personal income tax cuts, scheduled to have begun on 1 July 2015, have recently been repealed.

The second round of tax cuts was intended to have done the following:

• Increase the tax free threshold to $19,400;
• increase the second personal marginal tax rate to 33 per cent;
• reduce the maximum value of the Low Income Tax Offset (LITO) to $300;
• reduce the withdrawal rate of the LITO to 1 per cent; and
• increase the threshold below which a person may receive LITO to a taxable income of $67,000.

As a result of the repeal, none of these changes will be made.

Changes to the Medicare levy

The following changes will be made to the Medicare levy starting from the 2014-2015 income year:

• increase the Medicare levy low-income thresholds for individuals and families (along with the dependent child/student component of the family threshold) in line with movements in the consumer price index (CPI);

• increase the Medicare levy low-income threshold for single taxpayers eligible for the seniors and pensioners tax offset (SAPTO), in line with movements in the CPI, so that they do not have a Medicare levy liability where they do not have an income tax liability; and

• increase the Medicare levy surcharge low-income threshold in line with movements in the CPI.

Medicare levy low-income thresholds

• The individual income threshold for the 2014-2015 income year is $20,896.
• The family income threshold for the 2014-2015 income year is $35,261.
• The child-student component of the family income threshold for the 2014-2015 income year is $3,238.
• The threshold for single taxpayers eligible for the SAPTO for the 2014-2015 income year is $33,044.

Phase-in limits

• The individual phase-in limit for the 2014-2015 income year is $26,120.
• The phase-in limit for taxpayers eligible for the SAPTO for the 2014-2015 income year is $41,305.

Dependent spouse tax offset and other amendments

The Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015 that has recently passed into law makes amendments in the following areas:

• Cessation of the First Home Saver Accounts Scheme

The Bill repeals the legislation providing for the First Home Saver Accounts (FHSAs) scheme, including the related tax concessions for the 2015-2016 income year and later income years.

The repeal of the FHSAs scheme applies from 1 July 2015 for accounts opened in respect of applications made before 7.30 pm on 13 May 2014. Generally, accounts opened after this date will not be eligible to be first home saver accounts.

• Abolishing the dependent spouse tax offset

The Bill amends the tax legislation to:

• abolish the dependent spouse tax offset (DSTO) from 1 July 2014;
• expand the dependant (invalid and carer) tax offset (DICTO) by removing the exclusion in relation to spouses previously covered by the dependent spouse tax offset;
• remove an entitlement to DSTO where it is made available as a component of another tax offset, and replace that component with a component made up of DICTO; and
• rewrite the notional tax offsets covering children, students and sole parents that are available as components of other tax offsets.

This measure applies to the 2014-2015 income year and all later income years.

These measures have now been passed into law.

To do!

If you have been eligible for any of these tax offsets in the past, you should speak with your tax agent to find out how these changes may impact you.

Employee share schemes – proposed changes are now law

Proposed changes to the taxation of employee share schemes have now become law. The changes include:

• reversing some of the changes made in 2009 to the taxing point for rights for employees of all corporate tax entities;
• introducing a further taxation concession for employees of certain small start-up companies; and
• supporting the ATO to work with industry to develop and approve safe harbour valuation methods and standardised documentation that will streamline the process of establishing and maintaining an ESS.

Despite these changes already being made, changes to further improve the taxation of employee share schemes may be coming shortly. Keep an eye out for further information in future editions of TaxWise.

Work-related car expense deductions

• Modernising the calculation of work-related car expense deductions

Following the announcement in the 2015-16 Federal Budget, exposure draft legislation was released in July this year to “modernise and simplify” the calculation of work-related car expenses.

The four available methods will be reduced to two. The “cents per kilometre” and “logbook” methods will be retained and the “12 per cent of original value” and the “one-third of actual expenses” methods will be removed.

The “cents per kilometre” method will be amended so that the three current rates based on engine size will be replaced with one rate set at 66 cents per kilometre, which applies to all motor vehicles.

Revisions to the rate will be made by the Commissioner in future income years.

Though not law yet, this change applies from 1 July 2015.

2) PAYG withholding variation: allowances – cents per km car expenses

On 17 June 2015 the ATO made a legislative instrument which varies the amount of withholding required by a payer under the PAYG withholding system for allowance payments in certain circumstances: Taxation Administration Act 1953 – Pay as you go withholding – PAYG Withholding Variation: Allowances (legislative instrument F2015L01047; registered 30 June 2015).

The legislative instrument revokes and replaces the previous instrument, Taxation Administration Act 1953 – PAYG Withholding Variation: Allowances (legislative instrument F2013L00521; registered 21 March 2013). That instrument provided a variation to the rate of withholding from a number of allowances when certain conditions are met. Broadly, the variation applies in certain cases when the allowance is expected to be fully expended on tax deductible items and the payee would not be required to substantiate expenditure incurred in relation to the allowance.

The new instrument differs from the previous instrument in only one respect. The variation for cents per kilometre car expense payments has been adjusted because of the proposed change to the calculation rules noted above.

The variation for cents per kilometre car expense payments will now apply for up to 5,000 business kilometres at:

• 66 cents per kilometre for the year commencing on 1 July 2015, or
• the rate published by the Commissioner for later years.

Where the allowance for car expenses is no more than the published rate, then no withholding will be required for payments up to 5,000 kilometres for a financial year. Withholding will be required from payments for distances travelled beyond 5,000 kilometres in a financial year.

If the per kilometre rate paid exceeds the published rate withholding will be required from the amount of each payment which exceeds the amount calculated at the published rate.

To do!

Your employer also needs to be aware of the changes to the PAYG withholding requirements.  Seek advice from your tax adviser about how best to manage these changes that apply for the 2015-16 financial year onwards.

Superannuation

• Early access to superannuation for people with terminal illness

On 7 May 2015 the Assistant Treasurer announced that the government will amend the provision for accessing superannuation for people suffering a terminal illness. This follows representations by Breast Cancer Network Australia and other organisations: Assistant Treasurer’s media release “Early access to superannuation for people with terminal illness” (7 May 2015).

Under the current provision for early access to superannuation, a person with a terminal illness is required to obtain a certification from medical specialists that he or she has less than 12 months to live.

This has proven difficult for some people, including women with secondary breast cancer diagnosis. Understandably, they want access to their money as they may experience significant financial burden associated with treatment costs or want to make the most of their time with their families.

On 25 June 2015, the government amended the relevant regulations to change the life expectancy period to 24 months, with the change taking effect from 1 July 2015.

• Superannuation guarantee: choice of super fund  

On 28 May 2015, the Small Business Minister introduced a bill to remove the obligation for employers to offer a choice of superannuation funds to temporary resident employees, or when superannuation funds merge. The changes are to apply from 1 July 2015.

In particular, these changes are intended to reduce compliance costs for businesses operating in industries that employ a high volume of individuals on working holiday visas, such as in hospitality and agriculture.

Employees in these situations will retain the right to choose a superannuation fund if they wish to do so. Employers will not be required to give employees a standard choice form if the employee holds a temporary visa as defined by the Migration Act 1958 nor in the circumstance when their superannuation benefits are transferred from a chosen fund or a default fund to a successor fund as a result of a superannuation fund merger arrangement.

These changes have now become law.

• Excess super contributions changes

The ATO has advised that from July 2015, it expects to start issuing elections to individuals with excess non-concessional contributions in 2013-2014. The election allows individuals to tell the ATO how they would like their excess non-concessional contributions to be treated.

Upon receipt of an election, where an individual has chosen to have their excess non-concessional contributions (and associated earnings) withdrawn from their super fund, the ATO will issue the nominated super fund with a release authority to have the money withdrawn. Funds can expect to start receiving release authorities from July 2015.

Individuals who leave their excess contributions in the fund will continue to be taxed on these contributions at the top marginal rate.

From 1 July 2013, individuals have the option of withdrawing their excess non-concessional contributions along with 85% of associated earnings for those excess contributions from their superannuation fund. The full associated earnings amount will be included in assessable income and taxed at marginal tax rate in the year the excess contributions were made. The individual will also receive a 15% tax offset to recognise that the associated earnings are taxed in the fund.

• Claiming ATO-held super

If you have superannuation that the ATO is holding on your behalf, you are now able to claim that superannuation through the MyGov website. The ATO has recently enhanced this function to allow ATO-held super to be paid directly to individuals, where eligible. Previously, ATO-held super had to be transferred to an existing super fund. For more go to the ATO website.

Tip!

Superannuation is often an area that most of us don’t pay much attention to. It’s a good idea to stay on top of superannuation changes, particularly the changes that affect your personal circumstances, and any super that you might have forgotten about. Your tax adviser will be able to assist you with any of your superannuation queries.

 

Self-managed superannuation funds

• Channelling dividends through SMSFs

The ATO has warned members of self-managed super funds (SMSF) against claiming franking credit benefits by channelling dividends from shares in private companies through SMSFs.

The practice occurs when a member of an SMSF with interests in a private company transfers his or her interest to a SMSF and then distributes retained profits and franking credits through the SMSF. The SMSF then claims the franking credit tax offset which results in the tax paid by the company being refunded directly to the SMSF which can then be distributed to the member tax free.

The ATO believes that SMSF members approaching retirement age are more likely to get involved in these schemes because profits from shares are tax exempt as they are treated as supporting the payment of pensions. The ATO may undertake compliance activity seeking to apply the taxation and superannuation provisions, including anti-avoidance rules to such arrangements. The ATO will also consult on the application of relevant anti-avoidance provisions and consider a public ruling on such arrangements.

Any taxpayers involved in similar arrangements should review their taxation affairs and consider seeking independent advice from an advisor not involved with the arrangement.

• ATO trusts letter campaign for SMSF clients

The ATO is reviewing the returns of self-managed superannuation funds (SMSFs) which have received distributions from a discretionary trust.

Distributions of income to SMSFs from discretionary trusts are considered to be non-arm’s length income, which is taxed at the highest marginal rate.

Trustees of SMSFs (or their advisors) will receive an ATO letter asking them to contact the trustee of the distributing trust and review the trust deed and any resolutions to determine whether the amount reported in the annual return is non-arm’s length income. Returns may need to be amended as a result of this review.

To do!

Seek the assistance of your tax agent or adviser if you receive one of these letters.

Receipt of individual interest in net income of partnership – draft TD 2015/D2

In June this year, the ATO issued a draft taxation determination TD 2015/D2 entitled “Income tax: if a retiring partner receives an amount representing their individual interest in the net income of the partnership for an income year, is the amount assessable under section 92 of the Income Tax Assessment Act 1936?”

The draft determination answers this question as ‘yes’. Subject to paragraph 3 of the draft determination, the amount is included in the partner’s assessable income for the income year under section 92 of the ITAA 1936.

This is the case regardless of:

• how the payment is labelled or described (including whether the payment is expressed to be consideration for something provided or given up by the partner); and
• the timing of the partner’s retirement (including whether the partner retires before the end of the income year); and
• the timing of the payment.

However, according to the draft determination, an amount is not assessable under section 92 to the extent that it represents net income of the partnership which is attributable to both a period when the partner was not a resident of Australia, and sources outside of Australia.

To do!

If you are part of a partnership, it would be useful to keep track of the progress of the ATO’s ruling on this issue, particularly if one of your partners, or you, is close to retiring from the partnership.

Small business Budget measures

More of the small business tax measures announced in the 2015-16 Federal Budget have recently passed through Parliament, including:

• Tax rate cut for other business entities – A 5% tax discount for individual taxpayers capped at $1,000 with business income from an unincorporated business with an aggregated annual turnover of less than $2 million will be introduced from the 2015-16 income year.

The amount of the tax offset is 5% of the income tax payable on the portion of an individual’s income that is small business income, that is 5% of the person’s “total net small business income”. An individual’s “total net small business income” is comprised of the “net small business income” they make as a small business entity, together with any share of the “net small business income” of a small business entity that is included in the individual’s assessable income.

In general terms, the net small business income of a small business entity (including an individual) is the assessable income of the entity that relates to the entity carrying on a business, less any deductions to which the entity is entitled to the extent the deductions are attributable to the income. Where an individual has a share of the net small business income of another entity included in his or her assessable income, the individual also reduces the share by any deductions to which the individual is entitled, to the extent the deductions are attributable to the share of the entity’s net small business income.

• Electronic devices and FBT – The fringe benefits tax exemption for portable electronic devices used primarily for work purposes will be expanded from 1 April 2016.

The exemption is extended to small businesses that provide employees with more than one work-related portable electronic device, even where the devices have substantially identical functions.

Currently, a portable electronic device is not exempt from FBT if, earlier in the same FBT year, the employer has provided the employee, by way of an expense payment or property benefit, with an item that has substantially identical functions.

For small businesses, this limitation will be removed with respect to portable electronic devices. Small business employers will be allowed an FBT exemption for multiple portable electronic devices provided to the same employee in the same FBT year, even if those devices have substantially identical functions.

• Professional expenses – new businesses will be able to claim an immediate deduction for professional expenses (eg for the cost of advice from lawyers, accountants and other professionals) associated with starting a business from the 2015-16 income year.

This will include government fees and charges as well as costs associated with raising capital that are presently only deductible over five years.

For expenses to be immediately deductible, the entity claiming the deduction must be:

• a small business entity; or
• not carrying on a business and not connected with, or an affiliate of, an entity that carries on a business that is not a small business entity;

for the income year in which the deduction is claimed.

Immediate deductibility will be available for only two categories of expenditure:

• expenditure on advice or services relating to the structure or the operation of the proposed business (including costs associated with raising capital, whether debt or equity); and
• payment to an Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure.

The amendments do not apply to expenditure incurred in relation to an ongoing business or a business that has ceased to operate (including expenditure relating to the liquidation or winding up of an entity).

The amendments will apply to expenditure incurred in the 2015-2016 income year and later income years. The amendments will have retrospective application to a small group of taxpayers with substituted accounting periods for the 2015-2016 income year that commence before 1 July 2015.

Tip!

Do you have a small business? Are you thinking of setting up a new small business? If so, you should speak to your tax adviser to see if any of these new measures might apply to your business.

Limiting fringe benefits tax concessions on salary packaged entertainment benefits

In late June 2015, exposure draft legislation was released for consultation in relation to the 2015-2016 Federal Budget measure that will limit the FBT concessions on salary packaged entertainment benefits.

The measure, which applies from 1 April 2016, will introduce a separate single grossed-up cap of $5,000 for salary packaged meal entertainment and entertainment facility leasing expenses (entertainment benefits) for employees of public benevolent institutions, health promotion charities and employees of public and not-for profit-hospitals and public ambulance services. Currently these employees can salary package entertainment benefits with no FBT payable by the employer and without the benefits being reported.

All salary packaged entertainment benefits will also become reportable fringe benefits.

Note!

If you have salary packaged entertainment benefits from your employer, you should consult your tax adviser to see if this proposed law change affects you in any way.

Reasonable travel and overtime meal allowance expense amounts for 2015-2016 – TD 2015/14

On 1 July 2015 the ATO issued taxation determination TD 2015/14 “Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2015-16 income year?”

The determination sets out the amounts that the Commissioner considers are reasonable (reasonable amounts) for the substantiation exception in the income tax legislation for the 2015-2016 income year in relation to claims made for:

• overtime meal allowance expenses – for food and drink in connection with overtime worked and where a meal allowance has been paid under an industrial instrument;
• domestic travel allowance expenses – accommodation, food and drink, and incidentals that are covered by the allowance;
• travel allowance expenses for employee truck drivers – food and drink that are covered by the allowance; and
• overseas travel allowance expenses – food and drink and incidentals that are covered by the allowance.

Tax integrity: Extending GST to digital products and other services imported by consumers

On Budget Night, the Commonwealth Treasury released an exposure draft Bill and associated explanatory material which amend the GST law to give effect to the 2015-2016 Budget decision to ensure digital products and services provided to Australian consumers receive equivalent GST treatment whether they are provided by Australian or foreign entities.

This measure does not commence until 1 July 2017, so there is quite a long lead time before this measure will be enacted. However, it is good to be aware that this change will soon be coming.

GST on low-value overseas online transactions

At the Australian Leaders’ Retreat held in Sydney on 22 July 2015, the Prime Minister, First Ministers from each State and Territory, and the President of the Australian Local Government Association agreed to keep Commonwealth and State tax changes on the table including the GST and the Medicare levy: Australian Leaders’ Retreat Communiqué (23 July 2015).

As a first step, there was agreement in principle to broaden the GST to cover overseas online transactions under $1,000. This matter will be referred to the meeting of Treasurers that was to be held on 21 August 2015 to progress in detail.

At the time of writing, no further details on proposed changes to the $1,000 were available and the Treasurers’ meeting had not yet occurred.

Should the proposed changes be proceeded with, later issues of TaxWise Individual will contain any necessary updates.

ATO focus on rental property deductions

The ATO says that it will have an increased focus on rental property deductions this Tax Time and is encouraging rental owners to double-check that their claims are correct before lodging their tax returns.

In particular, the ATO is paying close attention to:

• excessive deductions claimed for holiday homes;
• husbands and wives splitting rental income and deductions for jointly owned properties where such claims are not supported;
• claims for repairs and maintenance shortly after the property was purchased; and
• interest deductions claimed for the private proportion of loans.

While the ATO will be paying closer attention to these issues in 2015, it will also be actively educating rental property owners about what they can and cannot claim.

For example, the ATO will be writing to rental property owners in popular holiday locations, reminding them to claim only the deductions they are entitled to, for the periods the property is rented out or is genuinely available for rent.

Your tax adviser will be able to assist you with ensuring you make the correct claims against your rental property.

Tip!

Your tax adviser is well-equipped to assist you to make appropriate claims for deductions against rental income you may have earned. Seek their advice and assistance to ensure you claim the right amounts.

ATO focus on high work-related expense claims

The ATO has warned that this year the ATO will be focusing on unusually high work-related expense claims across all industries and occupations, a much wider approach than in previous years.

The ATO says that its ability to identify and investigate claims that differ from the norm is improving each year at a rapid rate due to enhancements in technology and the use of data.

This means that every return is scrutinised and it is becoming a lot easier to identify claims that are significantly higher than those claimed by people with similar occupations and employment income.

In addition to focusing on work-related expense claims that are significantly higher than expected, the ATO will also be paying particular attention to claims:

• that have already been reimbursed by employers; and
• for private expenses such as travel from home to work.

 

Note!

If you have not yet done your 2014-15 income year tax return, you should make sure that any claims you intend to make you are entitled to. If you are unsure what you are entitled to claim or how much of an expense you can claim, you should always seek the advice and assistance of a tax agent. Also, they will be able to tell you about expenses you might be able to claim that you hadn’t even thought of!

 

Tip!

The ATO has released some handy information about claiming mobile phone, internet and home phone expenses.

The ATO myDeductions tool for employees

The ATO has launched a tool for individuals who are employees claiming work-related expenses. The myDeductions tool is intended to make it easier and more convenient to keep individual income tax-related deductions all in one place.

 

The myDeductions tool can be used to:

 

• capture and classify work-related expenses, gifts and donations or the cost of managing tax affairs
• store photographs of receipts
• record car trips.

Tip!

This might be a handy new tool to record your deductions throughout the year, but your tax agent is still the best source of information to help you know what you should be recording. Consider sitting down with them now to talk about the kinds of expenses you should retain information about throughout the income year to help you prepare for your 2015-16 return.

Have you been selling goods online?

Have you been selling goods online? If so, you should note that the ATO has announced that it has set up the ‘2014 Online Selling Data Matching Program’ through which it will request and collect online selling data relating to registrants that sold goods and services of a total value of $10,000 or more for the period from 1 July 2013 to 30 June 2014.

The data the ATO acquires will be electronically matched with certain sections of ATO data holdings to identify possible non-compliance with registration, reporting, lodgement and payment obligations under taxation law.

‘Data providers’ are included in the program based on the following principles:

• the data owner or its subsidiary operates a business in Australia that is governed by Australian law;
• the data owner provides an online market place for businesses and individuals to buy and sell goods and services;
• the data owner tracks the activity of registered sellers;
• the data owner has clients whose annual trading activity amounts to $10,000 or more;
• the data owner has trading activity for the year in focus;
• where the client base of a data owner does not present an omitted or unreported income risk, or the administrative or financial cost of collecting the data exceeds the benefit the data may provide, the data owner may be excluded from the program.

Data will be sought from eBay Australia & New Zealand Pty Ltd, a subsidiary of eBay International AG which owns and operates www.ebay.com.au.

Through this program, the ATO will be able to:

• address the compliance behaviour of individuals and businesses selling goods and services via the online selling site who may not be correctly meeting their taxation obligations, particularly those with undeclared income and incorrect lodgment and reporting for goods and services tax; and
• be more strategic in its approach to determine appropriate educational and compliance strategies to encourage voluntary compliance for taxpayers in the online selling market to ensure they meet their taxation obligations.

It is expected that records relating to between 15,000 and 25,000 individuals will be matched.

Note!

If you have been selling goods online and you are concerned about whether you may be caught up in the ATO’s data matching program, speak with your tax agent to find out whether are likely to become involved in this program.

ATO issues guidance on the Sharing Economy

• The sharing economy and tax

The ATO has released advice about the tax treatments of income earned from “sharing economy” activities. The “sharing economy” (also referred to as collaborative consumption, peer-to-peer or similar terms) is a way of connecting buyers (“users”) and sellers (“providers”) for economic activity.

These activities are typically promoted via a website or app and include:

• renting out a room, property or a car park (eg ‘Air BnB’);
• providing odd jobs, errands, deliveries or more skilled services on an ad hoc basis; and
• using a car to transport passengers for a fare (ride-sourcing) (eg Uber).

The ATO points out that the same tax laws that apply to activities conducted in a conventional manner apply to activities in the sharing economy. If you have provided any of these services, you might have income to declare, expenses to claim and GST obligations to meet.

• The Uber ruling – ATO advice on taxi travel services through ride-sourcing

The ATO has released advice on the tax consequences of a range of collaborative consumption activities, including taxi travel through ride-sourcing (also known as ride-sharing or ride-hailing), provided as part of the “sharing economy”. There are both GST and income tax implications for persons who make money from such activities.

In particular, the ATO has confirmed that people who provide ride-sourcing services are providing “taxi travel” under the GST law. The existing tax law applies and so drivers are required to register for GST regardless of their turnover. That is, if you provide taxi travel in the course of carrying on an enterprise, you must register for GST no matter what your turnover might be; the normal registration turnover threshold does not apply. “Taxi travel” is defined in the GST Act as travel that involves transporting passengers, by taxi or limousine, for fares. This includes making a car available for public hire and using it to transport passengers for a fare.

Drivers who offer taxi travel must register for GST, charge GST on the full fare, lodge business activity statements and report the income in their tax returns.

However, recognising that some taxpayers may need to take some corrective actions, the ATO gave drivers until 1 August 2015 to get an ABN and register for GST.

There is also advice on the provision of accommodation supplies, parking services and making offers to provide goods or services to a consumer.

For more information, including advice about the involvement of “facilitators” (third parties who operate a website or mobile device application used to facilitate a transaction between a driver and a passenger), refer to the ATO website here, and here.

ATO warns about phony tax debt scam

The ATO is again warning the public to be aware of an aggressive phone scam circulating where fraudsters are intimidating people into paying a fake tax debt over the phone by threatening jail or arrest: ATO media release (6 July 2015).

Second Commissioner Geoff Leeper has said that the ATO is very concerned about taxpayer privacy and is reminding people of the key differences between a scam of this nature and a genuine call from the ATO.

“We make thousands of outbound calls to taxpayers a week, but there are some key differences to a legitimate call from the ATO and a call from a potential scammer” said Mr Leeper.

“We would never cold call you about a debt; we would never threaten jail or arrest, and our staff certainly wouldn’t behave in an aggressive manner. If you’re not sure, hang up and call us back on

13 28 69,” said Mr Leeper.

Important information taxpayers should remember:

• The ATO would never cold call you about a debt. If you have a debt you will receive a letter or SMS to remind you that a payment is due in the first instance.
• The ATO would never threaten jail or arrest.
• If you receive a call from the ATO and are concerned about its legitimacy, ask for the caller’s name and phone them back through the ATO’s switchboard on 13 28 69.

Mr Leeper also said that scammers pretending to be from the ATO are generally more common during tax time and encouraged people to be vigilant and to protect their personal information.

If people think they may have fallen victim to a phone scam, they should contact the ATO on 13 28 69.

For more information and examples of recent scams visit the ATO website or SCAMwatch.

DISCLAIMER

Taxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

Note!

If you are unsure about any contact you have received that is purportedly from the ATO, always contact your tax agent to see if the contact is legitimate, especially if your tax agent is your primary point of contact with the ATO and not your personal contact information.

Small business tax discount on the way

In a surprise – but welcome – move in the 2015 Federal Budget, the Government announced a small business tax discount. The Government said that, with effect from 1 July 2015, individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset through the individual’s end-of-year tax return.

Example: A person running a business as a sole trader has an annual turnover of $300,000 and taxable income of $75,000. Under the current law, the business would pay tax, at the owner’s marginal tax rate, of around $16,000 in total. Under the proposed new law, the $16,000 tax bill on the business income would be reduced by 5%, or $800. While there is no change in the owner’s tax rate, under the new law the owner would pay only $15,200 tax.

Legislation to implement the small business tax discount is currently awaiting formal enactment.

Ride-sharing provider challenges ATO’s GST view

Uber BV has lodged an application in the Federal Court to challenge the ATO’s view on GST in relation to ride-sharing drivers.

In May 2015, the ATO released information on its website providing its view of the tax obligations of people providing services in the sharing economy.
The ATO was of the view that people who provide ride-sourcing (or ride-sharing) services were providing “taxi travel” under the GST law, and were therefore required to register for GST regardless of turnover, charge GST on full fare amounts, lodge BASs and report income in their tax returns. The ATO had given ride-sourcing drivers until 1 August 2015 to obtain their ABN and be registered for GST.

However, in a company statement, Uber argued that the ATO’s position unfairly targets Uber’s driver-partners. In the meantime, the ATO has maintained its view that people who provide ride-sourcing services are providing “taxi travel” under the GST law, and that it expects all ride-sourcing drivers to be registered for GST.

TIP: According to the ATO, although ride-sourcing drivers need to account for the GST on full fare amounts, they can also claim GST credits for relevant business expenses. The ATO says drivers must report income earned from providing ride-sourcing services; however, they can also claim deductible business costs. Please contact our office for assistance.

Crowdfunding for small proprietary companies: consultation

Crowd-sourced equity funding (or equity crowdfunding) is an innovative form of fundraising that allows a large number of individuals to make small equity investments in a company.

The Government is looking at ways to facilitate equity crowdfunding and has released details of its proposed regulatory framework for public companies. However, a key part of the Government’s public consultation is to also examine whether its proposed regulatory framework for public companies should be extended to proprietary companies.

The Government notes that proprietary companies are subject to limitations under the Corporations law on the way they can raise funds. These limitations make it difficult for proprietary companies to effectively use equity crowdfunding to raise funds from a large number of small shareholders. Accordingly, the Government is seeking views on way it could amend the law to make capital raisings by small proprietary companies more flexible. Public consultation closes on 31 August 2015.

SMSFs in pension phase need to exercise care

The ATO is of the view that most trustees of self managed super funds (SMSFs) do the right thing. However, it has identified a number of issues concerning SMSFs in pension phase, noting the growing number of people expected to receive a pension in the next 10 years.

The following gives a snapshot of some key issues identified by the ATO:

• Setting up and starting a pension: In the pension establishment phase, a fundamental and critical question that should not be overlooked is whether the member has reached preservation age. The ATO has reminded trustees that the legislated rise in the preservation age came into effect from 1 July 2015 – this affects people born after 30 June 1960.
• Paying a pension: One of the most common reasons for an SMSF in the pension phase not being entitled to applicable income tax exemptions under the exempt current pension income (ECPI) provisions is that the trustee has failed to pay the required annual minimum pension amount to a member.
• Ceasing a pension: The ATO is starting to see a range of issues related to what happens in the unexpected event of a pensioner’s death. For example, is the nominated reversionary beneficiary entitled to receive a death benefit pension under the terms of the SMSF’s deed and the law?

TIP: The ATO is starting to see liquidity problems associated with real property exacerbated for SMSFs in pension phase where the asset has been acquired under a limited recourse borrowing arrangement (LRBA). As the income of the SMSF is diverted to meeting the loan obligations of the fund, the ATO has found there can be insufficient funds remaining to make the required pension payments. There is also an added level of complexity to LRBAs involving related parties where the trustees fall foul of the arm’s-length rules in an effort to try to overcome their liquidity issues. If you have any concerns, please contact our office for further information.

ATO data-matching: immigration visa holders

The ATO has announced that it will acquire names, addresses and other details of visa holders, their sponsors and migration agents for the 2013–2014, 2014–2015, 2015–2016 and 2016–2017 financial years from the Department of Immigration and Border Protection (DIBP). The purpose of the data-matching program is to ensure that taxpayers are correctly meeting their taxation obligations. It is estimated that records relating to one million individuals will be obtained.

The ATO has been data-matching visa data from the DIBP (and its predecessors) against ATO data holdings for a number of years. The ATO said this electronic data-matching has been very effective in assisting to mitigate compliance risks. According to the ATO, empirical evidence from earlier data-matching programs has confirmed an elevated level of risk within the subset of taxpayers who are first-time lodgers with DIBP links.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

Work-related and rental property claims on ATO’s watch list

Tax time is in full swing and the ATO has highlighted areas of concern for individuals ahead of tax return lodgment time. High on the ATO’s watch list is work-related expense claims that are significantly higher than expected. In particular, the ATO will be paying particular attention to claims that have already been reimbursed by employers and expenses that are, in fact, private. These items are not deductible.

TIP: You are entitled to claim deductions for some expenses that are directly related to earning your income. The expenses must not be private, domestic or capital in nature. If the expense is both private and work-related, you can claim a deduction for the work-related portion.

The ATO will also keep a keen eye on rental property deductions. The ATO will be playing close attention to:

• excessive deductions claimed for holiday homes;
• husbands and wives splitting rental income and deductions inappropriately for jointly owned properties;
• claims for repairs and maintenance shortly after the property was purchased; and
• interest deductions claimed for the private proportion of loans.

TIP: You can claim expenses relating to your rental property but only for the period your property was rented or available for rent (eg advertised for rent). If part of your property is used to earn rent, you can claim expenses relating to that part of the property. You will need to work out a reasonable basis to apportion the claim. Please contact our office for assistance.

Share-economy service providers need to assess tax implications

New internet and mobile technologies have allowed people to consider enterprises such as letting a spare room, letting a car space, doing odd jobs or other activities for payment, or driving passengers in a car for a fare. However, the ATO has warned that individuals providing such share-economy services may have tax obligations, which may include declaring income and registering for GST.

TIP: It may be prudent for all share-economy service providers to assess whether they are meeting their tax obligations. Please contact our office for assistance.

The ATO has also confirmed that people who provide ride-sharing services are providing “taxi travel” under the GST law. It said the existing tax law applies and therefore drivers are required to register for GST regardless of their turnover. Affected drivers must also charge GST on the full fare, lodge BASs and report the income in their tax returns.

TIP: Recognising that some taxpayers may need to take corrective actions, the ATO is allowing drivers until 1 August 2015 to obtain an ABN and register for GST. The ATO said it does not intend to apply compliance resources regarding GST obligations for drivers prior to 1 August 2015 – except if there is evidence of fraud, or other significant matters.

Franked distributions funded by capital-raising under scrutiny

The ATO has cautioned companies about raising capital to fund franked distributions. The ATO is reviewing arrangements where companies raise new capital to fund franked distributions and release accumulated franking credits to shareholders.

In a typical case, the ATO is seeing companies issue rights to shareholders and use funds raised to make franked distributions via special dividends or an off-market share buy-back. The ATO said these arrangements are distinct from ordinary dividend reinvestment plans involving regular dividends.

ATO Deputy Commissioner Tim Dyce said the distributions are unusually large compared to ordinary dividends and occur at a similar time, and in a similar amount, to the capital raised. “So, a potentially large amount of franking credits is released with minimal net changes to the company’s economic position. There is also minimal impact on the shareholders, except in some cases they may receive refunds of franking credits and in the case of buy-backs they may also get improved capital gains tax outcomes,” he added.

The ATO considers that the arrangements may not be compliant with the tax law. In particular, the ATO has warned of the potential application of the general anti-avoidance rules. It has also warned that penalties may apply to participants.

“Contrived” dividend arrangements used by SMSFs flagged by ATO

The ATO is investigating arrangements where a private company with accumulated profits channels franked dividends to a self-managed super fund (SMSF) instead of to the company’s original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders (or individuals associated with the original shareholders) benefit as members of the SMSF from franking credit refunds to the SMSF.

The ATO was concerned that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax, in the SMSF because the relevant shares are supporting pensions. The ATO also warned the arrangement has features of dividend stripping which could lead the ATO to cancel any tax benefit for the transferring shareholder and/or deny the SMSF the franking credit tax offset.

Lump sum finalisation payment taxable

An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a matter concerning the tax treatment of a lump sum finalisation payment. The Tax Commissioner considered the payment was assessable as ordinary income. The taxpayer disagreed.

In 1995, the individual was diagnosed with a number of illnesses and was deemed unfit for work. She was paid monthly benefits under her employer’s salary continuance policy, which she declared as assessable income. When that scheme discontinued, she commenced participation in a government scheme which continued the monthly payments. In 2008, she was informed that the Commonwealth intended to finalise its obligations and pay a final lump sum in July 2008. Under a deed of release, the scheme made a final payment of just over $2 million to the taxpayer, less an amount of $931,119.40 (being tax withheld and remitted to the ATO).

The AAT concluded the final payment was “income according to ordinary concepts” under the tax law. It was therefore assessable income to be taken into account in assessing the taxpayer’s taxation liabilities for the year ended 30 June 2009.

“Nomad” had continuity of association with Australia

An individual has been unsuccessful before the AAT in arguing that he had “let go” of Australia in 1999 to pursue his “nomadic” working life abroad and that his base of operations was in the United Kingdom.

The taxpayer was born in the United Kingdom, and worked as a diver and diving supervisor for overseas companies at many places around the world.

However, the AAT held he was a resident of Australia for the 2006 to 2011 income years for tax purposes. The AAT noted that the taxpayer’s physical, emotional and financial ties to Australia in those years were very strong. In particular, he jointly owned a home in Australia with his wife of over 23 years and his emotional ties to her were “clearly the most significant in his life”.

The AAT also held the taxpayer did not satisfy the rules to have his foreign sourced income treated as exempt income, nor was he entitled to any foreign tax offset as he had not produce evidence of any foreign tax paid on his overseas earnings.

The AAT therefore affirmed amended tax assessments which increased the taxpayer’s tax liability by around $300,000 for the relevant income years.

The taxpayer has appealed to the Federal Court against the decision.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

CURRENCY:

This issue of Client Alert Explanatory Memorandum takes into account all developments up to and including 15 June 2015.

Small business company tax rate cut

The Tax Laws Amendment (Small Business Measures No 1) Bill 2015 has been introduced. It proposes to implement a 2015–2016 Budget measures by amending the Income Tax Rates Act 1986 to reduce the company tax rate from 30% to 28.5% for companies that are small business entities with an aggregated turnover of less than $2 million. The company tax rate for corporate unit trusts and public trading trusts that are small business entities will also be reduced to 28.5%. For all other companies that are not small business entities, the corporate tax rate will remain at 30%. Importantly, and as also announced in the Budget, the maximum franking credit that can be allocated to a frankable distribution will be unchanged, so the same rate of 30% will continue to apply to all companies.

The term “small business entity” takes its meaning from s 328-110 of ITAA 1997 and includes the requirement that an entity must have an aggregate turnover of less than $2 million in the previous year and be likely to come under the turnover threshold of $2 million for the current year.

Consequential amendments

Some consequential amendments flow from the rate reduction to 28.5%:

• Non-profit companies pay no tax on the first $416 of their taxable income. Tax is then shaded in at a rate of 55% of the excess over $416 until the tax on taxable income equals the corporate tax rate. Where the taxable income exceeds the shade-in limit, the full taxable income is effectively taxed at the corporate tax rate. The shade-in limit is currently $915 (reflecting the current 30% corporate tax rate). With the reduction in corporate tax rate to 28.5% for small business companies, it is proposed to reduce the shade-in limit to $863 for non-profit companies that are small business companies. As a result, the rates of tax payable by a non-profit company that is a small business company would be:

–        nil on the first $416 of taxable income;

–        55% on taxable income between $416 and $863; and

–        28.5% on taxable income above $863.

• Currently, the tax payable by a recognised medium credit union (ie a credit union with notional taxable income between $50,000 and $150,000) before any offsets or credits is limited to 45% of the amount by which the credit union’s taxable income exceeds $49,999. The 45% rate that applies to the taxable income of recognised medium credit unions reflects the current 30% corporate tax rate. As the corporate tax rate is being reduced to 28.5% for small business companies, this credit union rate would be reduced to 42.75% for medium credit unions that are small business companies.
• A number of consequential amendments will be made to various provisions in ITAA 1936 and ITAA 1997 that refer to a 30% rate, to ensure that the appropriate rate is applied for small business companies.
• Other consequential amendments would be made that:

–        ensure that the amount of the rebate allowed under the tax exempt infrastructure borrowing concessions in certain circumstances is calculated based on the corporate tax rate that applies to the entity;

–        ensure that when reducing a carried forward tax offset by any unused or net exempt income, the reduction is calculated based on the corporate tax rate that applies to the entity;

–        update examples which illustrate the operation of the company tax loss rules in certain circumstances to clarify that the company in the examples is not a small business entity;

–        update an example which illustrates the operation of capital gains tax discount rules for shareholders in listed investment companies to clarify that the company in the example is not a small business entity.

Date of effect

The amendments would apply for the first income year beginning on or after 1 July 2015 and for subsequent income years.

Previous announcement

The change was announced in the 2015–2016 Federal Budget.

Source: Tax Laws Amendment (Small Business Measures No 1) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5465%20Recstruct%3Abillhome .

[Postscript: At the time of publication, the Bill had passed all stages of Parliament without amendment and was effectively awaiting Royal Assent.]

Accelerated depreciation write-off for SMEs

The Tax Laws Amendment (Small Business Measures No 2) Bill 2015 has been introduced. It proposes to allow a short-term accelerated depreciation write-off up to $20,000 (up from the current $1,000 threshold) for assets acquired by small businesses, and to allow primary producers to claim an immediate deduction for capital expenditure on water facilities and fencing assets and deduct capital expenditure on fodder storage assets over three years.

$20,000 write-off

The Bill would amend the accelerated depreciation rules for small businesses (businesses with an aggregate annual turnover of less than $2 million) by temporarily increasing the threshold under which certain depreciating assets, costs incurred in relation to depreciating assets and general small business pools can be written off. The increased threshold of $20,000 would apply only to assets that were first acquired at or after 7:30 pm legal time in the ACT on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. From 1 July 2017, the threshold would revert to the existing $1,000. The increased threshold would be available to all small businesses (including those who previously opted out of the simplified depreciation rules).

Key features

• Small business entities can claim an immediate deduction (ie in their next tax return) for depreciating assets that cost less than $20,000, provided the asset is first acquired at or after 7.30 pm, by legal time in the ACT, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Depreciating assets that do not meet these timing requirements would continue to be subject to the $1,000 threshold. The asset can be new or second-hand.

–        The write-off is for the taxable purpose proportion of the cost of an asset acquired for less than $20,000. The “taxable purpose proportion” of a depreciating asset is defined in s 328-205(3) and in general terms represents the proportion of an asset’s use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than $20,000 is claimed in the income year in which the asset was first used or installed ready for use.

• The requirement that an asset be “first acquired” at a particular time is not a feature of current Subdiv 328-D and is an additional requirement for the increased threshold to apply. This additional requirement limits access to the increased threshold to a small business entity’s “new” assets. Requiring a depreciating asset to have been “first” acquired by the small business entity is designed to ensure that assets cannot satisfy the acquisition requirement if they were previously acquired at an earlier time, temporarily disposed of, and then reacquired at or after the 7.30 pm start time.

–        Depreciating assets that are first acquired prior to the 7.30 pm start time would continue to be subject to the existing threshold, irrespective of when they are first used or installed ready for use. The existing $1,000 threshold would also apply to depreciating assets that are first acquired from the 7.30 pm start time but were not first used or installed ready for use on or before 30 June 2017.

Small business entities can claim an immediate deduction for depreciating assets that cost less than $1,000 if the asset is first used or installed ready for use on or after 1 July 2017

• Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets (eg an amount spent on improving or transporting a depreciating asset) that are first used or installed ready for use in a previous income year. The total amount of the cost must be less than $20,000 and the cost must be incurred at or after 7.30 pm, by legal time in the ACT, on 12 May 2015, and on or before 30 June 2017. Costs that are incurred outside of these times would continue to be subject to the $1,000 threshold.

–        As a result of the proposed amendments, if a small business entity incurs a cost of $20,000 or more that is included in the second element of a depreciating asset’s cost, and the depreciating asset has been written off in a previous income year, the asset in relation to which the cost was incurred will be treated as having a value equal to the amount that is included in the second element of its cost. The asset would then be allocated to the small business entity’s general small business pool, deducted at a rate of 15% in the income year in which the amount was incurred, and then deducted at a rate of 30% in subsequent income years as part of the general small business pool.

• Small business entities can claim a deduction for an amount included in the second element of the cost of depreciating assets that are first used or installed ready for use in a previous income year, where the amount is less than $1,000, and the cost is incurred on or after 1 July 2017.
• From 7.30 pm, by legal time in the ACT, on 12 May 2015, assets that cost $20,000 or more, and costs of $20,000 or more relating to depreciating assets, can be allocated to a small business entity’s general small business pool and deducted at a specified rate for the depletion of the pool.
• Assets and costs allocated to a general small business pool are deducted at a rate of 15% in the year they are allocated, and a rate of 30% in subsequent income years.
• If the balance of a small business entity’s general small business pool is less than $20,000 at the end of an income year, the small business entity can claim a deduction for the entire balance of the pool. The income year must end on or after 12 May 2015, and on or before 30 June 2017.
• If the balance of a small business entity’s general small business pool is less than $1,000 at the end of an income year that ends after 30 June 2017, the small business entity can claim a deduction for the entire balance of the pool.

Five-year “lock out” rule

Under existing arrangements, a small business entity that elects to apply the small business capital allowance provisions in an income year, and then does not choose to apply the provisions for a later income year in which it satisfies the conditions to make this choice (that is, the entity “opted out”), is not able to apply the small business capital allowance provisions for a period of five income years, commencing from the first later year for which the entity could have made the choice to apply the provisions. This rule is contained in s 328-175(10), and is commonly referred to as the “lock out” rule.

Amendments in the Bill propose to alter the way the lock out rule applies in particular income years. Small business entities would not be required to apply the lock out rule to income years that end on or after 12 May 2015 but on or before 30 June 2017.

In other words, the increased threshold that applies between 12 May 2015 and 30 June 2017 applies to all small business entities, including those subject to the five-year lock out rule in that period because they previously opted out of the small business entity capital allowance provisions. For the purposes of applying the lock out rule to an income year after 30 June 2017, only the choice made in the in the last income year ending on or before 30 June 2017 is relevant.

Artificial or contrived arrangements to claim deduction

The Government says that, consistent with the objective of the increased threshold applying to newly acquired assets, it is not intended that assets acquired under artificial or contrived arrangements have access to the increased threshold, or for that matter to the existing arrangements. An example of an arrangement of this kind is one where a number of related small business entities that earned income from similar income sources sold their assets to one another in order to satisfy the “first acquired” requirement and write off the full value of those assets under the increased threshold.

While a specific provision has not been included under the amendments in the Bill for artificial or contrived arrangements, the Government says the general anti-avoidance provisions are intended to be applied to arrangements of that kind. The explanatory memorandum says: “In the event of evidence that small business entities systematically engaged in artificial or contrived arrangements designed to take advantage of the increased threshold and the general anti-avoidance provisions became too administratively difficult to apply, retrospective amendments to explicitly prohibit such behaviour would be considered to ensure that the integrity of the small business capital allowance provisions is maintained.”

Date of effect

The changes would apply only to assets first acquired at or after 7.30 pm, legal time in the ACT, on 12 May 2015, and first used or installed ready for use on or before 30 June 2017. Assets that do not satisfy these timing requirements would continue to be subject to the existing $1,000 threshold.

Previous announcement

The changes were announced in the 2015–2016 Federal Budget

Primary producers

The Bill would amend ITAA 1997 to allow taxpayers carrying on a primary production business to claim an immediate deduction for capital expenditure on water facilities and fencing assets, and to deduct capital expenditure on fodder storage assets over three years.

Key features

• Primary producers may deduct capital expenditure on a fodder storage asset over three years. Previously, a primary producer could deduct the capital expenditure on a fodder storage asset over the effective life of the asset. The availability of accelerated depreciation would be limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fodder storage asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia.

–        A repair of a capital nature or an alteration, addition or extension, to an asset or a structural improvement that is primarily and principally for the purpose of storing fodder will be a separate depreciating asset, ensuring that deductions for capital expenditure on those assets are not denied solely by the operation of ss 40-50 and 40-555.

• Primary producers may deduct capital expenditure on a “water facility” (which retains its existing meaning as defined in s 40-520) in the year in which the expenditure is incurred. Previously, primary producers and irrigation water providers could deduct capital expenditure on water facilities over three years.

–        These amendments apply to irrigation water providers in addition to primary producers. This continues the existing equivalence of treatment of irrigation water providers and primary producers for deductions of capital expenditure on water facilities.

• Primary producers may deduct capital expenditure on a fencing asset in the year in which the expenditure is incurred. A fencing asset is an asset or structural improvement that is a fence, or a repair of a capital nature, or an alteration, addition or extension, to a fence. The availability of accelerated depreciation would be limited to capital expenditure incurred on the construction, manufacture, installation or acquisition of a fencing asset if that expenditure was incurred primarily and principally for use in a primary production business conducted on land in Australia.
• A primary production business includes a business to cultivate plants, maintain animals, conduct fishing operations or fell trees. The full definition is contained in s 995-1(1).
• The amendments will be included in Div 40-F and operate as an exception to the general rules applying to deductions of capital expenditure on depreciating assets contained in Div 40.

Date of effect

The amendments would apply to assets that an entity starts to hold, or to expenditure an entity incurs, at or after 7.30 pm, by legal time in the ACT, on 12 May 2015.

Previous announcement

The changes were announced in the 2015–2016 Federal Budget.

Source: Tax Laws Amendment (Small Business Measures No 2) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5466%20Recstruct%3Abillhome .

[Postscript: At the time of publication, the Bill had passed all stages of Parliament without amendment and was effectively awaiting Royal Assent.]

Dependent spouse tax offset to be abolished

The Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015 has been introduced. It proposes to amend ITAA 1936 and ITAA 1997 to:

• repeal the provisions providing an entitlement to the dependent spouse tax offset (DSTO), and associated cross references to the DSTO contained in other provisions in the tax law;
• expand the dependent (invalid and carer) tax offset (DICTO) by repealing the provision excluding spouses covered by the DSTO from being covered by DICTO;
• remove the DSTO and instead allow the DICTO to be claimed as a component of the zone tax offset (ZTO), overseas civilians tax offset (OCTO) and overseas forces tax offset (OFTO); and
• rewrite the notional tax offsets contained in ITAA 1936 covering children, students and sole parents (which are used for calculating components of ZTO, OCTO and OFTO) into ITAA 1997 and update cross references to reflect the rewrite.

Under the changes:

• a taxpayer who has a spouse who is genuinely unable to work due to invalidity or carer obligations will be eligible for DICTO (worth up to $2,471 [indexed]) if they contribute to the maintenance of the spouse and meet certain income tests and other eligibility criteria; and
• taxpayers eligible for the ZTO, OFTO or OCTO can receive a further entitlement of 50% or 20% of their DICTO entitlement as a component of ZTO, OFTO or OCTO depending on where they reside.

A number of technical amendments to the DICTO are proposed to ensure it operates as intended.

Date of effect

The amendments generally apply to the 2014–2015 income year and to all later income years. The technical amendments apply to the 2012–2013 income year, and to all later income years that align with the introduction of the DICTO.

Previous announcement

The measure was announced in the 2014–2015 Budget.

Other amendments

The Bill also proposes the following amendments:

• Finalisation of the Investment manager regime (IMR) – The Bill amends ITAA 1997 to implement the third and final element of the IMR reforms. In addition, these amendments make some changes to the existing regime. The IMR reforms are designed to attract foreign investment to Australia and promote the use of Australian fund managers by removing tax impediments to investing in Australia. The development and introduction of an IMR was a recommendation of the 2009 Australian Financial Centre Forum report, Australia as a Financial Centre: Building on our Strengths, commonly known as “the Johnson Report”.
• Modernisation of the Offshore banking unit (OBU) regime – The Bill makes a number of reforms to modernise the OBU regime. The reforms include measures implementing recommendations of the Johnson Report, and targeted amendments to address a number of integrity concerns with the existing regime.
• Income tax exemption for the Global Infrastructure Hub Ltd – The Bill amends ITAA 1997 to exempt the Global Infrastructure Hub Ltd from liability to pay income tax on ordinary income and statutory income.
• Cessation of the First Home Saver Accounts (FHSAs) Scheme – The Bill repeals the legislation providing for the FHSAs Scheme, including the related tax concessions.
• Update of deductible gift recipients (DGRs) list – The Bill amends ITAA 1997 to update the list of DGRs. The changes will extend the listing of the Australian Peacekeeping Memorial Project Incorporated and the National Boer War Memorial Association Incorporated.
• Miscellaneous amendments – The Bill makes a number of miscellaneous amendments to taxation, superannuation and other laws. These amendments include style and formatting changes, the repeal of redundant provisions, the correction of anomalous outcomes and corrections to previous amending Acts.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 1) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5454%20Recstruct%3Abillhome .

R&D tax incentive rate reduction back in spotlight

The Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015 has been introduced. It proposes to amend ITAA 1997 to:

• reduce the rates of the tax offset available under the R&D tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points. The higher (refundable) rate of the tax offset will be reduced from 45% to 43.5% and the lower (non-refundable) rates of the tax offset will be reduced from 40% to 38.5%. Under the changes:

–        eligible entities (i) with annual turnover of less than $20 million; and (ii) which are not controlled by an exempt entity or entities, may obtain a refundable tax offset equal to 43.5% of their first $100 million of eligible R&D expenditure in an income year and a further refundable tax offset equal to the amount by which their research and development expenditure exceeds $100 million multiplied by the company tax rate; and

–        all other eligible entities may obtain a non-refundable tax offset equal to 38.5% of their eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which their research and development expenditure exceeds $100 million multiplied by the company tax rate.

–        Date of effect: the changes will apply to income years starting on or after 1 July 2014.

• abolish the seafarer tax offset – would repeal Subdiv 61-N.

–        Date of effect: will apply to assessments for 2015–2016 and later income years.

Both measures were announced in the 2014–2015 Federal Budget.

In the 2015–2016 Budget, the Government reiterated its intention to change the rates of assistance under the R&D tax incentive to 43.5% for eligible entities with a turnover under $20 million per annum (and not controlled by an income tax exempt entity) and 38.5% for all other eligible entities.

Source: Tax and Superannuation Laws Amendment (2015 Measures No 3) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5456%20Recstruct%3Abillhome .

Age Pension changes on the way

The Social Services Legislation Amendment (Fair and Sustainable Pensions) Bill 2015 has been introduced to give effect to several 2015–2016 Budget measures (and reintroduce some measures previously in 2014 Bills that are still before the Senate). In summary, the Bill proposes to amend the Social Security Act 1991, the Veterans’ Entitlements Act 1986, ITAA 1997 and other Acts as follows:

• Age Pension assets test – increase the assets test free areas from 1 January 2017 but tighten the assets test taper rate at which the Age Pension begins to phase out.
• Defined benefit schemes – introduce a 10% cap on the “deductible amount” of defined benefit income streams (excluding military super schemes) for the purposes of the social security income test from 1 January 2016.
• Age Pension while overseas – reduce from 26 weeks to six weeks the time for which Age Pension recipients will be paid their basic means-tested rate while outside Australia.
• Seniors Supplement – replace the Seniors Supplement with the Energy Supplement.
• Education Supplement – cease the pensioner education supplement and the education entry payment.

Age Pension assets test

The Bill will amend the Social Security Act 1991 and the Veterans’ Entitlements Act 1986 to increase the assets test threshold (or assets free area) for a single homeowner to $250,000 (up from $202,000) and $375,000 for a homeowner couple (up from $286,500) from 1 January 2017. The assets test threshold for non-homeowners will be increased to $200,000 more than homeowner pensioners; that is, $450,000 for a single and $575,000 for a couple.

Assets test taper rate

The assets test taper rate at which the Age Pension begins to phase out will be increased from $1.50 of pension per fortnight to $3.00 of pension for each $1,000 of assets over the relevant assets test threshold. This measure will essentially restore the $3.00 taper rate that was in place before 20 September 2007, when the then Government reduced it from $3.00 to $1.50 as part of the Simplified Superannuation measures.

The increased taper rate means that the maximum value of assets that a homeowner couple can hold to qualify for a part pension will be reduced from $1.151 million to approximately $823,000 from 1 January 2017 (or $547,000 for a single homeowner instead of the current $775,500). For a non-homeowner couple, the Age Pension will not phase out completely until $1.023 million (down from $1.298 million) or $747,000 (for a single non-homeowner instead of the current $922,000).

Note that indexation of the assets test free area will be paused for three years from 1 July 2017 under changes by the Social Services and Other Legislation Amendment (2014 Budget Measures No 6) Act 2014. Accordingly, the Bill will repeal those provisions from the 2014 Budget Measures No 6 Act to ensure the assets limits for pensions are not paused.

Seniors Health card guaranteed

Those whose pension is cancelled as a result of the asset test changes from 1 January 2017 will automatically be issued with a Commonwealth Seniors Health Card (CSHC), or a Health Care Card for those under pension age. Veterans whose service pension is cancelled under this measure will retain their Veterans’ Affairs Gold Card. The usual income test applying to such cards will be disregarded for this purpose.

Pensioners who are overseas at 1 January 2017 but would otherwise qualify for a card will be automatically issued such a card upon their return, provided they return within 19 weeks of leaving Australia. Pensioners who are overseas at 1 January 2017 but return to Australia after 19 weeks will also qualify for a card if they have a nil rate of pension on 1 January 2017 as a result of these changes. However, the card will not be automatically issued. They will need to claim the card on their return.

 

Social Security assets test – current thresholds from 20 March 2015 (proposed from 1 January 2017)
	Homeowners		Non-homeowners
Full pension/part pension	Single	Couple (combined)	Single	Couple (combined)
	$	$	$	$
Full pension – assets at or below	202,000	286,500	348,500	433,000
From 1 January 2017	(250,000)	(375,000)	(450,000)	(575,000)
No pension – assets at or above	775,500	1,151,500	922,000	1,298,000
From 1 January 2017	(547,000)	(823,000)	(747,000)	(1,023,000)
Notes:a. Fortnightly pension reduces by $1.50 ($3.00 from 1 January 2017) for every $1,000 of assets above the relevant amount.b. Cut-off asset values at which no pension is received may be higher if pensioner qualifies for rent assistance. Cut-off asset values are also higher for illness separated couples (or where one partner eligible).

 Date of effect

The changes would come into effect on 1 January 2017.

Previous announcement

The Age Pension assets test measures were previously announced by the Minister for Social Services on 7 May 2015 ahead of the 2015–2016 Budget. At that time, Mr Morrison said that more than 90% (or 3.7 million pensioners) who receive pension linked payments would either be better off or have no change to their arrangements under these proposals. Mr Morrison said that more than 170,000 pensioners with modest assets would have their pensions increased by an average of more than $30 per fortnight should the proposed measure come into effect from January 2017. This would include around 50,000 part pensioners who would now qualify for a full pension under the changed rules. However, 91,000 current part pensioners would no longer qualify for the pension and a further 235,000 would have their part pension reduced.

The Minister said that all couples who own their own home with additional assets of less than $451,500 would get a higher pension. Couples who don’t own their own home and have asset holdings up to $699,000 in January 2017 would be better off. For singles the maximum threshold point, below which pensioners would be better off, would be $289,500 for home owners and $537,000 for non-homeowners.

Defined benefit schemes: 10% cap on deductible amount

The Bill will amend ss 1099A and 1099D of the Social Security Act 1991 to put a 10% cap on the “deductible amount” for pension income received from a defined benefit superannuation scheme (excluding military super schemes) for the purposes of the social security income test. Currently, some defined benefit superannuants can have a large proportion of their superannuation income (ie the “deductible amount”) excluded from the pension income test. The deductible amount is calculated by reference to the tax-free component of the amount payable under the defined benefit income stream.

The proposed 10% cap seeks to close an unintended loophole that opened up in 2007 thanks to some legislative changes to ITAA 1997 which resulted in an increase to the tax-free component for some individuals. This had the effect of increasing the deductible amount for the purpose of the Social Security Act, resulting in individuals becoming entitled to income support payments.

Exclusions

Recipients of Veterans’ Affairs pensions and defined benefit income streams paid by military superannuation funds (ie “military defined benefit income streams”) would be exempt from this measure. In addition, the measure would not affect the means test treatment of income streams purchased for retail providers of these products. For example, AMP, AXA and funds of that nature, self managed superannuation funds (SMSFs) and small APRA funds do not operate in this way.

Date of effect

The measure would apply from 1 January 2016.

Previous announcement

The measure was previously announced by the Minister for Social Services on 7 May 2015 ahead of the 2015–2016 Budget. At that time, Mr Morrison said that this “loophole” was allowing around 48,000 high-income members from some public sector and large corporate defined benefits superannuation schemes to effectively fly “under the radar” on the income test for the pension. A defined benefit income stream is a pension paid from a public sector or other corporate defined benefit superannuation fund where the pension paid generally reflects years of service and the final salary of the beneficiary.

For most people with a defined benefit income stream, the Minister said that the gross income they receive from those schemes is subject to the income test for the pension. However, for those who are part of some large state government public sector schemes, significant portions of their income are disregarded in assessing their eligibility for a pension under the income test. The reason for that is to reflect what is seen as the voluntary after-tax contributions made when they were working. However, the amounts being deducted in these cases are in excess of those “notional contributions”, Mr Morrison said.

Age Pension access while overseas

The Bill proposes to reduce from 26 weeks to six weeks the length of time for which recipients of Age Pension (and a small number of other payments with unlimited portability) would generally be paid their basic means-tested rate while outside Australia. After six weeks’ absence from Australia, pensioners who have lived in Australia for less than 35 years would be paid at a reduced rate proportional to their period of Australian Working Life Residence (AWLR). The AWLR (known as the “35 years rule”) is the period a person has lived in Australia, as a permanent resident, between the age of 16 years and Age Pension age. To retain the basic means-tested rate while overseas, a person needs 35 years’ working life residence in Australia.

Date of effect

The amendments would commence from 1 January 2017 but only apply to absences starting on or after that date. Pensioners who are overseas on 1 January 2017 would continue to be allowed the full 26-week period of absence before their payment was potentially reduced.

Previous announcement

This measure was previously announced in the 2015–2016 Budget.

Energy Supplement replacing Seniors Supplement

The Bill proposes to cease payment of the Seniors Supplement for holders of the CSHC or Veterans’ Affairs Gold Card by reintroducing the measure in the Social Services and Other Legislation Amendment (Seniors Supplement Cessation) Bill 2014. Consequential amendments to ss 52-10, 52-40 and 52-65 of ITAA 1997 would also replace references to the tax-exempt Seniors Supplement with references to the Energy Supplement.

Date of effect

There would be a new start date of 20 June 2015 (meaning that the last quarterly payment of the Seniors Supplement would generally be made on 20 June 2015).

Education Supplement

The Bill reintroduces the measures from Sch 4 and Sch 5 to the Social Services and Other Legislation Amendment (2014 Budget Measures No 4) Bill 2014 to cease the pensioner education supplement and the education entry payment.

Date of effect

There would be a new start date of 1 January 2016.

Source: Social Services Legislation Amendment (Fair and Sustainable Pensions) Bill 2015, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar5485%20Recstruct%3Abillhome