Mining tax gone but watch for associated tax changes

Following the speedy passage of the mining tax repeal legislation, on 9 September 2014 the Government announced that it will be recommending to the Governor-General that he proclaim 30 September 2014 as the commencement date for Schedules 1 to 5 to the Minerals Resource Rent Tax Repeal and Other Measures Bill 2014 (which received Royal Assent on 5 September 2014 as Act No 96 of 2014). As a result, the Government said the Schedules will have the following dates of effect for most taxpayers:

• Schedule 1 – abolition of the mining tax from 1 October 2014, with taxpayers final MRRT year (even if it is a part year) ending on 30 September 2014;
• Schedule 2 – abolition of the company loss carry-back from 1 July 2013;
• Schedule 3 – reduction of the instant asset write-off from 1 January 2014;
• Schedule 4 – abolition of accelerated depreciation for motor vehicles from 1 January 2014; and
• Schedule 5 – abolition of geothermal energy concessions from 1 July 2014.

Taxpayers with a substituted accounting period may have a different date of effect.

The Government said the above dates are consistent with the Exposure Draft to the mining tax repeal legislation, and with the dates announced in November 2013 at the time of the introduction of the first mining tax repeal Bill to Parliament. The Government further added that the tax measures can be reconsidered in the context of the Government’s review into taxation through the Tax White Paper.

At the time of writing (15 September 2014), the Governor-General had yet to make the anticipated proclamations.

ATO administration and assistance

The Government said it has consulted with the ATO in relation to the administration of the measures and their dates of effect to ensure that assistance is provided to affected businesses. The ATO has issued a separate media release (dated 9 September 2014) outlining how this assistance will be provided. Key points are as follows.

Mining tax repeal

The effect of the repeal is that entities will not accrue further minerals resource rent tax (MRRT) liabilities from 1 October 2014. The ATO said it will be consulting with industry to implement the administrative approach.

Company loss carry-back provisions

The repeal of the company loss carry-back provisions applies from 1 July 2013 for most taxpayers. Companies who have claimed the offset and are now no longer eligible will be contacted by the ATO about their circumstances. The ATO said it will amend the affected assessments and taxpayers will not be subject to penalties and interest if payment is made “within a reasonable time”.

Small business instant asset write-off

The repeal of the provisions allowing small businesses asset write-off concessions apply from 1 January 2014 for most taxpayers (ie the write-off threshold falls from $6,500 to $1,000 from 1 January 2014). From 1 January 2014, only assets costing less than $1,000 (acquired and installed ready for use after 31 December 2013) will be eligible for immediate write-off. Assets costing $1,000 or more will need to be depreciated in the general small business pool. Assets costing less than $6,500 – acquired and installed ready for use by the small business between 1 July 2013 and 31 December 2013 – will still be eligible to be immediately written-off. Those taxpayers who have lodged their 2013–2014 tax returns under the previous law should now seek amendments to reduce their depreciation claim. The ATO said it does not intend to apply penalties or the shortfall interest charge (SIC) if taxpayers request to amend their assessments “within a reasonable period of time”.

Accelerated deduction for motor vehicles

From 1 January 2014, motor vehicles will only be immediately deductible if they cost less than $1,000. Motor vehicles costing $1,000 or more, acquired and available for use after 31 December 2013 will need to be depreciated in the general small business pool. Under previous legislation, small businesses could claim up to $5,000 as an immediate deduction for motor vehicles costing $6,500 or more that were acquired from the 2012–2013 income year onwards. Note that motor vehicles acquired and available for use between 1 July 2013 and 31 December 2013 will still be eligible for an immediate initial deduction of up to $5,000. The ATO said no shortfall penalty will apply if taxpayers seek to amend their return “within a reasonable time” and the SIC will also be remitted to nil.

Abolition of geothermal energy exploration expenditure

From 1 July 2014:

• geothermal energy exploration and prospecting expenditure will no longer be immediately deductible; and
• if a geothermal exploration right is exchanged for a geothermal energy extraction right relating to the same, or a similar area, then a CGT rollover applies to defer the liability until the sale of the extraction right. These changes do not affect deductions or balancing adjustments for geothermal exploration rights or geothermal exploration information that started to be held before the income year in which the amendments commence.

The ATO has advised the Government that it will waive all penalties and interest in instances where taxpayers have chosen not to prepare their returns on the basis of the Government’s announcement of the measures, if they seek to have their income tax assessments amended in “reasonable time”.

Families and superannuation savers – take note

In order to pass the mining tax repeal legislation through the Senate, the Government made a deal with the Palmer United Party and Senator Muir (Australian Motoring Enthusiast Party) to defer the abolition of:

• the Income Support Bonus to 31 December 2016;
• the Schoolkids Bonus to 31 December 2016 (and the bonus will be restricted to families earning less than $100,000 per annum); and
• the Low Income Super Contribution to 30 June 2017.

The Government also agreed to freeze the superannuation guarantee (SG) rate at 9.5% for seven years. Under the changes, the SG rate will increase to 10% from 1 July 2021 and by 0.5% per year from 1 July 2022 until it reaches 12% for the year beginning 1 July 2025. The “rephased” SG percentage is summarised in the table below.

 

Financial year	SG charge percentage (%)
	Rates as amended	Rates proposed in original Bill	Law before changes
starting on 1 July 2014	9.5	9.5	9.5
starting on 1 July 2015	9.5	9.5	10
starting on 1 July 2016	9.5	9.5	10.5
starting on 1 July 2017	9.5	9.5	11
starting on 1 July 2018	9.5	10	11.5
starting on 1 July 2019	9.5	10.5	12
starting on 1 July 2020	9.5	11	12
starting on 1 July 2021	10	11.5	12
starting on 1 July 2022	10.5	12	12
starting on 1 July 2023	11	12	12
starting on 1 July 2024	11.5	12	12
starting on or after 1 July 2025	12	12	12

Sources: Minerals Resource Rent Tax Repeal and Other Measures Bill 2014, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=r5327; Treasurer and Acting Assistant Treasurer’s joint media release, 9 September 2014, http://jbh.ministers.treasury.gov.au/media-release; ATO media release, 9 September 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-provides-advice-on-MRRT-repeal.

Professional firms and profit distribution under scrutiny

The ATO has released draft guidelines on how it will assess Pt IVA risk applying to the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income.

ATO Deputy Commissioner Michael Cranston said the draft guidelines explain how professionals can assess the tax risks flowing from the use of partnerships of discretionary trusts and similar structures. “Professional practices may legitimately operate as a partnership of discretionary trusts or through similar structures. The ATO is reviewing remuneration arrangements used by accountants, lawyers and other professionals to make sure people are using these structures appropriately,” he said. Firms which could be affected include, but are not limited to, those that provide accounting, architectural, engineering, financial, legal and medical services.

The ATO’s concerns

The ATO said that in some cases practice income may be treated as being derived from a business structure, even though the source of that income remains, to a significant extent, the provision of professional services by one or more individuals. The ATO said it was concerned that Pt IVA may apply to schemes which are designed to ensure that the individual practitioner professional (IPP) is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. Where an individual attempts to alienate amounts of income flowing from their personal exertion (as opposed to income generated by the business structure), the ATO said it may consider cancelling relevant tax benefits under Pt IVA.

The ATO said it acknowledged that the general anti-avoidance provisions have historically been applied to assess individuals on income generated by their personal exertion or application of their professional skills, rather than profits or income generated by a business. However, the ATO said it considers that Pt IVA could apply where an IPP arranges for the distribution of business profits or income to associates without regard to the value of the services the individual has provided to the business. This is particularly the case, where for example, the level of income received by the individual, whether by way of salary, distribution of partnership or trust profit, dividend or any combination of them, does not reflect their contribution to the business and is not otherwise explicable by the commercial circumstances of the business.

Low risk and high risk arrangements

Mr Cranston said the draft guidelines set out what the ATO considers to be low risk, legally effective arrangements, and what it considers to be high risk arrangements that might attract attention. The draft guidelines set out circumstances that the ATO considers low risk and not subject to compliance action on the issue. Broadly, a case would be considered low risk if the IPP meets one of the following guidelines regarding income from the firm:

• the IPP receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks eg industry benchmarks for a region provided by a professional association, agency or consultant; and/or
• 50% or more of the income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the IPP; or
• the IPP and their associated entities both have an effective tax rate of 30% or higher on the income received from the firm.

Where none of the low risk guidelines are met, the ATO will consider the arrangement to be “higher risk”. In these cases, the lower the effective tax rate, the higher the ATO will rate the compliance risk and the greater the likelihood of compliance action. For example, an arrangement with an effective tax rate of 15% would be rated as higher risk than one with an effective tax rate of 25%. Note that in cases where other compliance issues are evident (eg late lodgment of returns, income injection to entities with carry forward losses, avoidance of Div 7A, inappropriate access to low income tax offsets or other benefits etc), the taxpayer will be rated as higher risk.

Date of effect and review

The draft guidelines have been co-designed with industry representatives and have been issued as a working draft for ongoing public consultation. The ATO said the draft guidelines will be applied from the 2014–2015 income tax year. The ATO said the guidelines will be reviewed during the 2016–2017 year, subject to the possibility of judicial guidance pending an appropriate test case being identified.

Sources: ATO publication, “Assessing the risk: allocation of profits within professional firms”, 2 September 2014, https://www.ato.gov.au/Business/Starting-and-running-your-small-business/In-detail/Professional-practice-income/Assessing-the-risk–allocation-of-profits-within-professional-firms; ATO media release, 1 September 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-provides-guidance-on-discretionary-trust-partnerships-for-professionals.

Dividend washing compliance still on ATO’s radar

The ATO says it will soon commence the next phase of its dividend washing compliance program by issuing letters to 500 taxpayers who did not respond to the ATO’s initial letters. The ATO will also issue letters to another 1,500 taxpayers whose updated data suggests they may have entered into a dividend washing transaction. The letters will ask those taxpayers to self-amend their tax returns for the income years ending 30 June 2011, 2012 and 2013 in order to reverse franking benefits they may have obtained from dividend washing transactions.

In line with an earlier commitment, the ATO says it will not impose any penalty on taxpayers who have entered into dividend washing transactions and who come forward to self-amend their tax returns before the date specified in the ATO letter. In addition, the ATO says that taxpayers who have entered into dividend washing transactions but do not receive a letter from the ATO will not be subject to penalties provided they amend their tax returns by 22 September 2014.

The ATO reiterated its position in Taxation Determination TD 2014/10 that obtaining two sets of franking credits from one dividend event is not allowed. The ATO says taxpayers who are unsure about their own circumstances should seek independent advice or apply for a private ruling from the ATO. Taxpayers can call the ATO on 1800 177 006 if they require further assistance.

In March 2014, the ATO issued letters to taxpayers who it identified may have been involved in dividend washing transactions. As at 30 June 2014, approximately 1,300 of the taxpayers contacted in March had responded by coming forward to make voluntary amendments under which the franking benefits obtained from dividend washing transactions have been removed from their tax returns.

The ATO says it will continue to monitor dividend washing and apply the law to disallow additional franking credits.

Sources: ATO media release, 11 August 2014, https://www.ato.gov.au/Media-centre/Articles/ATO-targets-dividend-washing/; ATO publication, “New law preventing dividend washing”, 12 August 2014, https://www.ato.gov.au/Tax-professionals/News-and-updates/Income-tax/New-law-preventing-dividend-washing.

Rental property deductions – avoid common errors

The ATO says it is increasing its focus on rental property deductions. It says common errors made by rental property owners include the following:

• claiming rental deductions for properties not genuinely available for rent;
• incorrectly claiming deductions for properties only available for rent part of the year, such as a holiday home;
• incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as re-modelling a bathroom or building a pergola;
• overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.

The ATO has also released a series of short videos which explain the tax implications of buying, owning and selling a rental property. The short videos are available on the ATO website at https://www.ato.gov.au/General/Property/In-detail/Rental-properties/Rental-Property-video-series.

Source: ATO publication, “Claiming rental property expenses?”, 18 August 2014, https://www.ato.gov.au/Tax-professionals/News-and-updates/Income-tax/Claiming-rental-property-expenses.

Data-matching offshore bank accounts

The ATO has gazetted a notice outlining details of a data-matching program targeting foreign bank accounts. The ATO will request and collect account details of bank customers from various financial institutions listed in the notice to identify Australian resident taxpayers with offshore bank accounts which may show undeclared income and/or gains for the years ended 30 June 2012 to 30 Jun 2015. The financial institutions listed in the notice include the following:

• Australia and New Zealand Banking Group Limited
• Bank of China (Australia) Limited
• Bank of China Limited
• Credit Suisse AG
• Deutsche Bank Aktiengessellschaft
• HSBC Bank Australia Limited
• Hongkong and Shanghai Banking Corporation Limited
• Investec Bank (Australia) Limited
• Macquarie Bank Limited
• Rabobank Australia Limited
• Rabobank Nederland
• UBS AG
• Citibank, N.A.
• Citigroup Pty Limited

The program will, among other things, help the ATO to identify Australian resident taxpayers who may be outside the tax system, and increase transparency of the worldwide dealings of Australian resident taxpayers. The program will also assist the ATO in building an understanding of taxpayer behaviour in international dealings, develop compliance profiles and improve fraud detection models. The ATO estimates that approximately 50,000 offshore records will be obtained under the program.

Other data-matching programs

The ATO has also gazetted notices announcing the following data-matching programs:

Taxable government grants and payments

The ATO will acquire details of entities receiving taxable grants and payments from various Federal, State and Territory and Local Government departments, agencies and authorities.

The ATO notes the gazette notice replaces previously issued notices re Local Government Contractor Payments (C2014G00139, 28 January 2014), Childcare and Educator Payments (C2014G00566, 2 April 2014), and Queensland Government Contractor Payments (C2014G00567, 2 April 2014).

The ATO says the program will enable it to do the following:

• identify and test the correct taxation reporting by recipients of taxable Government grants and payments from agencies across the Federal, State and Local levels of government; and
• identify areas that require improved educational and compliance strategies to encourage voluntary compliance for recipients of Government payments and grants.

Records matched under the program will exceed 5,000 individuals throughout Australia.

Music royalty payments

The ATO will acquire details of entities collecting and distributing music royalty payments for the 2011, 2012 and 2013 financial years from the following sources:

• Australasian Performing Right Association (APRA);
• Australasian Mechanical Copyright Owners Society (AMCOS);
• APRA New Zealand Limited; and
• AMCOS New Zealand Limited.

Among other things, the ATO aims to detect instances of potential non-compliance, especially with omitted income and alienation of personal services income. The ATO also aims to develop a profile of the industry, including any risks and trends of non-compliance with taxation and superannuation obligations, and tailor educational strategies specifically for participants in the music industry. It is estimated that records for more than 15,000 entities will be obtained, of which most will be individuals.

Further information

Documents describing the programs are available by emailing the ATO at SpecialPurposeDataSteward@ato.gov.au.

Sources: Commonwealth Gazettes, Banking Transparency (2012–2015) (C2014G01381, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01381; Taxable Government Grants and Payments (2014) (C2014G01382, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01382; Music Royalty Payments (2011–2013) (C2014G01380, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01380.

Settlement for damages subject to capital gains tax

The Australian Administrative Tribunal (AAT) has affirmed that a taxpayer was liable for capital gains tax (CGT) on a payment made to her in settlement of litigation she pursued for breach of contract and negligence. In doing so, the AAT dismissed the taxpayer’s claim that the payment of damages per se could not give rise to a profit or gain. It also found that she had failed to establish any relevant cost base for legal expenses that would otherwise reduce the assessable capital gain.

Background

The taxpayer was a solicitor who ran a family practice (with her husband). In anticipation of the husband’s retirement, they entered into an agreement with another solicitor to, among other things, transfer clients to him and recover outstanding debts of their practice. However, following the apparent failure of the agreement, the taxpayer (and her husband) sued the other solicitor for breach of various contractual and equitable duties.

By deed of settlement dated 6 September 2007, the solicitor agreed to pay the taxpayer and her husband $700,000 (as indemnified by LawCover insurance). Importantly, the settlement deed did not set out any basis for apportioning the $700,000 amongst the various claims made under the statement of claim lodged by the taxpayer and her husband. Nor was there material available to indicate how the $700,000 was calculated.

The Commissioner assessed the taxpayer for CGT on her share of the settlement payment (ie $350,000 – later reduced to $175,000 due to the effect of the CGT 50% discount). He did so on the basis that CGT event C2 (ending of intangible asset) applied to the transaction and that the taxpayer had failed to establish a relevant cost base. The Commissioner also imposed 50% shortfall penalties for “recklessness”.

The taxpayer argued that CGT could not apply to a payment for “damages” per se. It did not give rise to a profit or gain, and all the payment did was return her to her “pre-damage” position. Alternatively, she argued that if CGT did apply, then she was entitled to a cost base for her share of legal costs in pursing the action which would reduce her gain to some $34,000. She also contested the imposition of shortfall penalties for recklessness.

Decision

In dismissing the taxpayer’s application, the AAT found that she had not discharged the burden of proving the assessment was excessive and what the correct assessment should be – and, in particular, that relevant legal expenses had in fact been incurred for cost base purposes.

The AAT first found that each of the causes of action pleaded by the taxpayer against the solicitor were CGT assets under the definition of “CGT asset” in s 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as they were either “a kind of property” or, alternatively, “legal or equitable rights that were not property”. It then found that CGT event C2 happened when the deed of settlement was executed because the CGT assets (being the causes of action or “choses in action”) ended by “release, discharge or satisfaction or by being surrendered” as required by CGT event C2. The AAT further found that this event happened in the 2008 income year, being the time the taxpayer entered into the settlement deed.

In terms of the amount of the capital gain from the event, the AAT stated that the payment made to the taxpayer was clearly the capital proceeds from the event. It then found that legal costs incurred by a taxpayer in respect of such an action could form part of the cost base of the assets in question, but the taxpayer had failed to establish that the expenses had in fact been incurred. In particular, the AAT noted that while invoices were provided, there were a number of problems with these invoices including:

• there was no clear evidence to support the fact that the invoices were ever paid;
• even if they were paid, there was no clear evidence they were paid by the taxpayer (ie “incurred” by the taxpayer for cost base purposes);
• even if paid, there seemed to have been no clear basis for establishing that the invoices that were paid related specifically to the damages received; and
• there was difficulty in reconciling the quantum of the legal costs and the net damages figures with the invoices.

The AAT also emphasised that the taxpayer had not maintained adequate records of cost incurred for CGT purposes as required by s 121-20. Accordingly, in all these circumstances, the AAT found that the taxpayer had not discharged her burden of proving the assessment was excessive and what it, instead, should have been.

Importantly, in relation to the taxpayer’s argument that damages cannot be a capital gain, the AAT stated that “there does not appear to be such a broad principle in operation and certainly since the introduction of taxes on capital gains in Australia, it is entirely possible for damages received by way of settlement of a claim to be treated as a capital gain after appropriate adjustment is made for any costs that can be used to reduce that amount under the relevant statutory formulation provided in the legislation”. It also noted that this was clear from the decisions in Tuite v Exelby (1993) 25 ATR 81 and Carborundum Realty Pty Limited v RAIA Architecture Pty Limited (1993) 25 ATR 192, for example.

Finally, the AAT found that the 50% shortfall penalties imposed for “recklessness” were appropriate in the circumstances and, in particular, in view of the taxpayer taking no steps to seek independent legal advice in relation to whether any tax might be payable on the payment, the failure to keep virtually any records as required by the tax law and the fact that the taxpayer lodged a tax return which was incorrect in a “material particular”.

Comment

Note that this result accords with the Commissioner’s view in Taxation Ruling TR 95/35 which states that compensation will be considered to be capital proceeds for the right to sue per se, if it is not received in relation to an underlying asset or is received as an undissected lump sum.

Re Coshott and FCT [2014] AATA 622, 2 September 2014, http://www.austlii.edu.au/au/cases/cth/AATA/2014/622.html.

Bitcoin tax guidance from the ATO

The ATO has released its views on the tax treatment of Bitcoins and other crypto-currencies. The views are contained in four Draft Taxation Determinations and a Draft GST Ruling. The ATO has also released a guidance paper.

ATO Senior Assistant Commissioner Michael Hardy said the ATO has consulted extensively with Bitcoin experts, businesses, industry bodies and other external stakeholders to develop the guidance and explain the obligations of Bitcoin users. Mr Hardy said people should seek a private ruling if their circumstances are not covered by the guidance.

Guidance paper – tax consequences of Bitcoin transactions

The ATO released a guidance paper on the tax consequences of transacting with Bitcoins, which it considers akin to a barter arrangement, with similar tax consequences. It states that the records taxpayers are required to keep in relation to such transactions are the date of the transactions; the amount in Australian dollars (taken from a reputable online exchange); what the transaction was for; and who the other party was (eg their Bitcoin address).

According to the ATO, generally there will be no income tax or GST implications of taxpayers using Bitcoins to pay for goods or services if they are not in business or carrying on an enterprise (ie acquiring goods or services for personal use or consumption). However, where transactions using Bitcoins are conducted in a business, the following tax consequences may apply:

• the value of Bitcoins received for goods or services provided as a part of a taxpayer’s business needs to be recorded in Australian dollars as a part of their ordinary income;
• businesses may be able to claim input tax credits on GST charged on the Bitcoins they received as payment if the supply of goods or services was a taxable supply;
• a deduction is allowed for the purchase of business items using Bitcoins based on the arm’s length value of the item acquired;
• GST is payable on the supply of Bitcoins made in the course or furtherance of a taxpayer’s enterprise and the GST value is calculated on the market value of the goods or services; and
• capital gains consequences may apply where taxpayers dispose of Bitcoins as a part of carrying on a business. However, any capital gain is reduced by the amount that is included in their assessable income as ordinary income.

In instances where an employee has a valid salary sacrifice arrangement with their employer to receive Bitcoins as remuneration (ie salary and wages) instead of Australian dollars, the ATO notes the payment will be a fringe benefit. However, it states that in absence of a valid salary sacrifice arrangement, the remuneration will be treated as salary and wages and the employee will need to meet their usual PAYG obligations.

Mining Bitcoins

The ATO states that those in the business of mining Bitcoins need to include in their assessable income any income derived from the transfer of the mined Bitcoins to a third party. It says any expense incurred in relation to the mining activity would be allowed as a deduction. However, losses made may be subject to non-commercial loss provisions. Further, the ATO notes that Bitcoins are trading stock, and those in the business of mining Bitcoins are required to bring to account any Bitcoins on hand at the end of each income year. It notes that GST may be payable on supply, and input tax credits may be available.

Bitcoin exchange transactions

The ATO notes the following tax and GST consequences in relation to Bitcoin exchange transactions.

Taxpayers conducting a Bitcoin exchange (including Bitcoin ATMs)

Proceeds are included in assessable income. Expenses incurred are allowed as a deduction. Any Bitcoin on hand at the end of the income year needs to be accounted for as trading stock. GST may be payable on supply, and input tax credits may be available.

Taxpayers transacting with a Bitcoin exchange

Those taxpayers who acquired Bitcoins as an investment but are not carrying on a business will not be assessed on any profits resulting from the sale. Also, deductions will not be allowed for any losses made (CGT may apply). However, if the transactions amount to a profit-making undertaking or plan, then the profits on disposal will be assessable income. There will be no GST consequences where the Bitcoins were not supplied or acquired in the course or furtherance of an enterprise carried on.

Draft Taxation Determinations

The ATO has issued the following Draft Taxation Determinations.

Draft TD 2014/D11

This TD states that Bitcoins are not a “foreign currency” for the purposes of Div 775 of the ITAA 1997. The Draft states that the Commissioner’s view is that the current use and acceptance of Bitcoins in the community is not sufficiently widespread that it satisfies the test in Moss v Hancock [1899] 2QB 111, nor is it a generally accepted medium of exchange as per Travelex Ltd v FCT (2008) 71 ATR 216. Accordingly, the Draft indicates that Bitcoins do not satisfy the ordinary meaning of money. Since foreign currency is defined as a currency other than Australian currency, the Commissioner states that Bitcoins are not a foreign currency under Div 775 as it is not legally recognised as a unit of account and form of payment by the laws of any other sovereign country.

Draft TD 2014/D12

This TD says that Bitcoin holding rights amount to property and as such it is a “CGT asset” for the purposes of s 108-5(1) of the ITAA 1997. According to the Draft, the disposal of Bitcoins to a third party will usually give rise to CGT event A1 and taxpayers will be assessed on capital gains made. However, in circumstances where the Bitcoins are considered to be a personal use asset (ie kept for personal enjoyment or use) taxpayers may have access to s 118-10(3).

Draft TD 2014/D13

This TD indicates that when held for the purpose of sale or exchange in the ordinary course of a business, Bitcoin is trading stock for the purposes of s 70-10(1) of the ITAA 1997. The Draft states that this is evident from the context in John v FCT (1989) 20 ATR 1 that the trading activity to which the definition applies involves the passing of a proprietary interest in the things traded. In addition, it is also clear from FCT v Sutton Motors (Chullora) Wholesale Pty Ltd (1985) 16 ATR 567 that intangible property such as shares are capable of being trading stock.

Draft TD 2014/D14

This TD states that the provision of Bitcoins by an employer to an employee in respect of their employment is a property fringe benefit for the purposes of s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Draft states that Bitcoin is not tangible property for the purposes of the FBTAA nor is it real property, and Bitcoin holding rights are not a chose in action. However, it states that as the definition of intangible property includes “any other kind of property other than tangible property”, Bitcoins will fall within this definition. In addition, the Draft indicates that since Bitcoins are not money, but is considered property for tax purposes, it satisfies the definition of a “non-cash benefit” and is excluded from PAYG withholding, which in turn means that it is not “salary or wages”.

Draft GST Ruling

The ATO also issued Draft GST Ruling GSTR 2014/D3 which considers whether Bitcoins are “money” as defined in s 195-1 of the GST Act and whether they are a “financial supply” under s 40-5(1) of the GST Act. The Draft states that a transfer of Bitcoins is a “supply for GST purposes” as Bitcoins are not “money” for the purposes of the GST Act. It also states that a supply of Bitcoins is not a “financial supply” and therefore is not input taxed.

Further, the Draft indicates that a supply of Bitcoins is a taxable supply under s 9-5 if the other requirements are met and the supply of Bitcoins is not GST-free under Div 38 (eg as a supply to a non-resident for use outside Australia). It also states that a supply of Bitcoins in exchange for goods or services will be treated as a barter transaction.

The Draft includes three examples outlining the various GST consequences of using Bitcoins in exchange for goods or services.

Public consultation

The Draft TDs and Draft GST Ruling are open to public consultation until 3 October 2014.

Date of effect

When the final Determinations and final GST Ruling are issued, it is proposed they will apply both before and after their date of issue.

Links to the Draft TDs, Draft GST Ruling and ATO Guidance Paper

• TD 2014/D11 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D11%2FNAT%2FATO%2F00001%22
• TD 2014/D12 –http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D12%2FNAT%2FATO%2F00001%22
• TD 2014/D13 –http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D13%2FNAT%2FATO%2F00001%22
• TD 2041/D14 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D14%2FNAT%2FATO%2F00001%22
• Draft GSTR 2014/D3 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DGS%2FGSTR2014D3%2FNAT%2FATO%2F00001%22
• ATO publication, “Tax treatment of crypto-currencies in Australia – specifically bitcoin”, 20 August 2014 –https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin

Source: ATO media release, 20 August 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-delivers-guidance-on-Bitcoin.

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.

Share transfer to family partnership ineffective

The Administrative Appeals Tribunal (AAT) has dismissed applications from a married couple and found that they were each assessable on dividends of some $1.8 million that they did not return in their assessable income. In doing so, the AAT dismissed the taxpayers’ argument that shares in a family company that gave rise to the dividend income had been transferred to a family partnership, and as a result they had not derived the dividend income themselves.

Background

The husband-and-wife taxpayers were the sole shareholders in a family company (Rocbit Pty Ltd) that had been established in 1994. The taxpayers and Rocbit were also named beneficiaries of a family discretionary trust (Yazbek Trust) established in 1982.

In 2005, a limited partnership was formed under relevant NSW legislation, the partners of which were the taxpayers, and a company which was named as the “general partner” (of which, importantly, its sole director was at all relevant times the husband taxpayer). The terms of the partnership agreement required the taxpayers to contribute the shares they each owned in the family company to the partnership as “initial capital”. A related agreement provided that this was to be done by providing the general partner with the power of attorney to deal with shares and to apply any proceeds from the sale of the shares to the business of the partnership. Despite this arrangement, the taxpayers remained the full registered owners of the shares.

In the 2005 income year, the family trust distributed some $2 million to the family company which returned it as assessable income and then declared a dividend of that amount to its respective shareholders (including the taxpayers, as registered shareholders). However, the dividend income was credited to the loan accounts of the shareholders. Similar patterns of distribution occurred in the 2006 to 2008 years, but for lesser amounts. At the same time, in those years, Rocbit declared a dividend in favour of the family partnership which was returned as assessable income of the partnership. As the distributions were fully franked, no tax was paid.

Following an audit, the Commissioner increased the taxpayers’ assessable income for the years 2005, 2007 and 2008 for some $1.8 million in dividend income each that they had not declared. He did this on the basis that, as registered shareholders of Rocbit, they had derived the income despite their claim that their shares had been transferred to the family partnership and that it, instead, had derived the income. The Commissioner also imposed 50% shortfall penalties for recklessness.

Decision

The AAT affirmed the assessments on the basis that the relevant partnership agreements did not have the effect of transferring the ownership of the shares in the family company to the family partnership, and that therefore the shares did not become partnership property. Instead, the AAT found that while the primary partnership agreement required the taxpayers to contribute all the shares they held in Rocbit to the family partnership agreement, this was qualified by the effect of the accompanying power-of-attorney arrangement which meant that the shares were at all relevant times owned both legally and beneficially by the taxpayers.

In this regard, the AAT noted among other things that the partners were not required to actually transfer their shares to the partnership and the general partner (whose sole director was the husband taxpayer) had the power of attorney to deal with the property (whereby the partners were required to permit the property to be mortgaged or charged by the general partner). The AAT also emphasised that the register of members of Rocbit recorded that throughout the whole of the period, from the beginning of the 2005 income year to the end of the 2008 income year, the taxpayers each held one ordinary share and that those shares were beneficially held by each of them.

Accordingly, the AAT concluded that the relevant partnership agreements, when read together, did not provide for a transfer of the shares. All they allowed for was a right to use the shares for certain purposes and a right to an application of the income of the shares – with the result that the dividend income was derived by, and belonged at all times to, the taxpayers. The AAT also found that the effect of the crediting of the loan accounts meant that the dividend income had been “applied” to the taxpayers’ benefit for the purpose of being derived in terms of s 44 of the Income Tax Assessment Act 1936 (ITAA 1936).

As a result of its finding, the AAT found it unnecessary to deal with the issue of whether a capital gain arose on the claimed transfer of the shares to the partnership and whether any rollover relief applied. However, it found that 50% shortfall penalties imposed for recklessness should be substituted with 25% shortfall penalties for “carelessness”. The AAT’s view is that the Commissioner’s claim that the taxpayer’s failure to seek a second opinion on the arrangement put in place by its advisers could not amount to “recklessness” in these (or any) circumstances.

Appeals update

The taxpayers have appealed to the Federal Court against the decision.

Re Yazbek and FCT [2014] AATA 423, www.austlii.edu.au/au/cases/cth/AATA/2014/423.html.

Property developers and use of trusts under scrutiny

The ATO has issued Taxpayer Alert TA 2014/1 which describes an arrangement where property developers use trusts to return the proceeds from property development as capital gains instead of income on revenue account.

ATO Deputy Commissioner Tim Dyce said the ATO has “begun auditing property developers who are carrying out activities which conflict with their stated purpose of capital investment”. He said a “growing number of property developers are using trusts to suggest a development is a capital asset to generate rental income and claim the 50% capital gains discount”. Mr Dyce warned that penalties of up to 75% of the tax avoided can apply to those found to be deliberately using special purpose trusts to mischaracterise the proceeds of property developments.

The ATO said the Taxpayer Alert applies to arrangements which display all or most of the following:

1. An entity with experience in either developing or selling property, or in the property and construction industry, establishes a new trust for the purpose of acquiring property for development and sale.
2. In some cases the trust deed may expressly state that the purpose of the trust is to hold the developed property as a capital asset to generate rental income. In other cases the trust deed may be silent as to its purpose.
3. Activity is then undertaken in a manner which is at odds with the stated purpose of treating the developed property as a capital asset. For example:
   • documents prepared in connection with obtaining finance for the development may indicate that the dwellings constructed on the land are to be sold within a certain timeframe and that the proceeds are to be used to repay the loan;
   • communication with local government authorities overseeing building approvals may describe the activity as being the development of property for sale;
   • real estate agents may be engaged early in the development process, and advertising to the general public may indicate that the dwellings/subdivided blocks of land are available to be purchased well in advance of the project’s completion, including sales off the plan.
4. The property is sold soon after completion of the development, where the underlying property may have been held for as little as 13 months.
5. The trustee treats the sale proceeds as being on capital account, and because the trustee acquired the underlying property more than 12 months before the sale, it claims the general 50% CGT discount (in other words, it treats the gain/profit of each sale as a discounted capital gain).

The ATO said it was concerned that arrangements of this type could give rise to various tax issues, including the following:

• whether the underlying property constitutes trading stock for the purposes of s 70-10 of the ITAA 1997, on the basis that the trustee is carrying on a business of property development;
• whether the gross proceeds from sale constitute ordinary income under s 6-5 of the ITAA 1997 on the basis that the trustee is carrying on a business of property development; and
• whether the net profit from sale is ordinary income under s 6-5 on the basis that although the trustee is not carrying on a business of property development, it is nevertheless involved in a profit-making undertaking.

The ATO said it has made adjustments to increase the net income of a number of trusts. It said penalties will be significantly reduced if taxpayers make a voluntary disclosure.

Sources: Taxpayer Alert TA 2014/1, 28 July 2014, http://law.ato.gov.au/atolaw/view.htm?DocID=
TPA/TA20141/NAT/ATO/00001; ATO media release, 28 July 2014, www.ato.gov.au/Media-centre/Media-releases/ATO-warns-property-developers-to-declare-income.

Residency depends on facts and circumstances of each case

The ATO has released Decision Impact Statement on the decision in Re Dempsey and FCT [2014] AATA 335. In that case, the AAT allowed the taxpayer’s objection to amended assessments issued to him for the 2009 and 2010 income years after finding the taxpayer was not a “resident” of Australia as defined in s 6(1) of the ITAA 1936. The AAT concluded that – based on the circumstances peculiar to the taxpayer and after weighing the evidence presented to it at the hearing, including the taxpayer’s statements about his intention – he had made a settled employment, lifestyle and residence choice for the indefinite future and that was to make his home in Saudi Arabia.

The ATO said the decision was reasonably open to the AAT. It said the approach taken by the AAT in reaching its decision was consistent with its approach to issues of residency, including the ATO view expressed in IT 2650. Under this approach, the issue requires a weighing of all the relevant facts and circumstances and an application of the statute and authorities to those facts. The ATO considered the outcome of the case was confined to its facts and created no new law in this area.

The ATO provided its administrative treatment as follows. It said the decision of the AAT does not change its approach to residency cases. It said these matters involve questions of fact and degree and different facts may result in different conclusions as to residency. The ATO said it will continue to approach residency cases by weighing all the relevant facts and circumstances and applying the relevant tax law and authorities to those facts.

Source: ATO Decision Impact Statement on Re Dempsey and FCT [2014] AATA 335, http://law.ato.gov.au/
atolaw/view.htm?docid=%22LIT%2FICD%2F2013%2F4861-2013%2F4862%2F00001%22.

Billions in lost super waiting to be claimed

According to the ATO, more than $14 billion in lost super is waiting to be claimed. The ATO said $8 billion in super was sitting in accounts that have not received a contribution in five years. A further $6 billion in super was sitting in accounts where funds have not been kept up-to-date with changes to personal details. ATO Assistant Commissioner John Shepherd said it was “easy for this to happen because when people get married or move house, the last thing on their mind is updating their name and address details with a super fund”. However, he said it was important to provide funds with tax file numbers (TFNs) which can help individuals be reunited with their super.

More than 40% of super account holders have more than one account and many of these additional accounts have not received a contribution for quite some time, said Mr Shepherd. The ATO was also seeing many people failing to take advantage of their ability to choose a fund when they start a new job.

The ATO has released the following research and statistics:

• Lost and ATO-held super overview – www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/
  Super-statistics/Lost-and-ATO-held-super/Lost-and-ATO-held-super-overview.
• Lost and ATO-held super by postcode – www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/
  Super-statistics/Lost-and-ATO-held-super/Lost-and-ATO-held-super-by-postcode.

Source: ATO media release, 1 August 2014, www.ato.gov.au/Media-centre/Media-releases/New-statistics-reveal-$14-billion-in-lost-super.

ASIC eye on SMSF property investment advice

In a recent speech, Commissioner Greg Tanzer of the Australian Securities and Investments Commission (ASIC) warned of ASIC’s concern about advice being given to self managed superannuation funds (SMSFs) to invest in property. He said ASIC was aware there had been a sharp rise in promoters recommending that investors either set up or use an existing SMSF to invest in property. ASIC is concerned these promoters may not be complying with the law.

Mr Tanzer said ASIC was concerned that, with the increased popularity of SMSFs and property investment, real estate agents and property advisers may not realise they may be carrying on a business of providing financial product advice and may need an Australian financial services (AFS) licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property.

Mr Tanzer said ASIC is now working with individual businesses suspected of engaging in unlicensed conduct to help them understand their obligations.

Other points made by Mr Tanzer include the following:

SMSF “one-stop shop” operators

Mr Tanzer provided an update of ASIC’s work done to explore the trend of “one-stop shop” operators offering a range of services to SMSFs. He said so far the project team has identified that a feature of these business models is a “one size fits all” approach where all investors who use their multiple services receive the same suite of products and services – that is, they end up with an SMSF, a property investment and a limited-recourse borrowing arrangement. The project team was also exploring whether commissions are being paid within these business models and whether these commissions are consistent with the restrictions on payment of commissions for advice under the Future of Financial Advice (FOFA) reforms.

Limited AFS licence

As at 27 May 2014, the ASIC Licensing team received 62 applications for a limited AFS licence. Although noting it was early days in the implementation of the limited AFS licence regime, Mr Tanzer noted that ASIC has identified some “concerning trends” from the process so far. Among other things, ASIC has found inadequate or no evidence of RG 146 training course completion for all or some of the financial products sought under the application. ASIC has also found inadequate coverage of professional indemnity insurance. Other issues included: limited or no knowledge of the restricted scope of the “class of product” advice authorisation; and financial statements lodged in the name of a trust and not the entity or individual applicant.

In response to these trends, ASIC has updated Information Sheet 179 Applying for a limited AFS licence. The updated Information Sheet is available on the ASIC website at www.asic.gov.au/
asic/pdflib.nsf/LookupByFileName/Applying_for_a_limited_AFS_licence_0179.pdf/$file/Applying_for_a_limited_AFS_licence_0179.pdf.

ASIC is also looking at putting together another information sheet to provide guidance on what activities the limited AFS licence will cover as well as what activities do not need a licence.

SMSF auditors

Mr Tanzer said he hoped that accountants were using ASIC’s public register of approved SMSF auditors to verify that the auditors they are referring to SMSFs are registered, or are using the register to establish to others that they are, in fact, registered. ASIC also maintains a public register of disqualified SMSF auditors. Since the commencement of the regime, Mr Tanzer said ASIC has issued one disqualification order preventing a person from being an approved SMSF auditor. In relation to administrative actions in response to poor auditor conduct, Mr Tanzer noted the ATO has commenced referral of matters to ASIC as a result of its compliance program, and that ASIC will consider those matters with regard to administrative action.

Source: ASIC Commissioner Greg Tanzer speech at CPA Australia’s SMSF Conference 2014, 16 July 2014, www.asic.gov.au/asic/asic.nsf/byHeadline/Regulators-perspective-on-the-regulation-of-SMSFs–speech?opendocument.

Bad debt deduction for “unpaid trust entitlements” refused

The AAT has affirmed a decision of the Commissioner refusing a taxpayer’s bad debt deduction claim in relation to certain trust distributions.

Background

The taxpayer was a beneficiary of a family discretionary trust. Over the years, the trust determined to distribute some of the trust’s income the taxpayer. Some of the distributions were actually paid to the taxpayer, but the bulk was credited to an account in the books of the trust in the taxpayer’s name. In 2012, the taxpayer decided the trust was not going to be able to pay him the amount of $227,258 then standing to his credit in the accounts of the trust. In his tax return for the year ended 30 June 2012, the taxpayer claimed a deduction of $227,258 on the basis that it was a bad debt under s 25-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The Commissioner refused the deduction and the taxpayer sought a review. The AAT noted the trustee was a company in which the taxpayer and his wife (another beneficiary) were the only members.

The taxpayer contended before the AAT that $142,545 of the $227,258 amount written off was deductible pursuant to s 25-35. The taxpayer accepted that, on his argument, only part of the amount written off could be deducted. He argued that the debt was to be characterised as unpaid trust entitlements and that the debt written off had the same character of the trust distributions included in his assessable income in the 2005 and 2007 income years.

The Commissioner, before the AAT, accepted the amount written off was a debt but contended the amount written off was not the taxpayer’s unpaid present entitlement – rather, it was the outstanding balance in the loan account in the taxpayer’s name in the books of account of the trust. As such, it was of an entirely different character to the monies included in the taxpayer’s assessable income in 2005 and 2007 and therefore not deductible under s 25-35.

Decision

The AAT said the starting point must be an analysis of the distribution transaction and that analysis is necessarily informed by the terms of the deed creating the trust. It said the trustee, having resolved to distribute to the taxpayer, could pay the income of the trust to the taxpayer or it could set it aside to a separate account in the books of the trust in the name of the taxpayer.

The AAT did not accept that the amounts set aside in the books of the trust constituted “unpaid entitlement”. The AAT was of the view the taxpayer’s entitlement was paid in the manner prescribed by the deed, and once paid, lost its character as unpaid entitlement. It agreed that the subject amounts became a loan at call from the taxpayer to the trust.

The AAT was also of the view that the debt written off was different in character to the income included in the taxpayer’s assessable income in the 2005 and 2007 income years. It said what “was included in the [taxpayer’s] assessable income in those years had as its source the share of the trust income to which he became presently entitled. What was written off was of an entirely different character; it was an investment [the taxpayer] chose to make in the business of the trust”.

The AAT went on and said there was nothing anomalous or unusual in the result. It said the taxpayer, “who was the alter ego of the trust in any event, chose to leave the bulk of the amounts distributed to him invested in the business of the trust”. Once he chose that course, the AAT said, the “debt” thereby created was of an entirely different character to his entitlement to the distribution from the trust.

Re Pope and FCT [2014] AATA 532, www.austlii.edu.au/au/cases/cth/AATA/2014/532.html.

Family fails to prove assessments excessive

Taxpayers from the same family have been unsuccessful before the AAT in discharging the onus of proving that assessments issued to them, which were based on an asset betterment test, were excessive. This was despite the fact that the Commissioner conceded, and the AAT acknowledged, that the amounts in issue were not entirely accurate because of inherent flaws in the nature of an asset betterment test.

Background

The taxpayers were six members of a family group which included the father and one of his sons who described himself as “the CEO in the family” in relation to the family businesses (and who represented the family during the proceedings). The matter spanned various income years (ie the 2001 to 2008 income years depending on the taxpayer). It involved unexplained large sums of moneys flowing through family bank accounts, and the purchase of properties in family names in circumstances where relatively little income was returned from various small businesses conducted by the family and the father was on an age pension. Also at issue was the apparent receipt of £3.17 million by the son between 2003 and 2008 from his apple exporting business, in which he acted as a buyer’s agent.

After an audit of the taxpayers which included an asset betterment analysis, the Commissioner issued amended notices of assessment and default assessments against the various members of the family in the relevant years of income, and also imposed 75% administrative penalties for intentional disregard of the law. The Commissioner claimed that the taxpayers’ patterns of expenditure and asset acquisition suggest they had access to much greater income than they returned and that the large flows of cash through the accounts and many of the expenditures (including transfer of funds overseas) should be regarded as assessable income. The Commissioner also claimed that there was fraud or evasion (for some of the taxpayers) allowing the issuing of assessments out of time.

The taxpayers claimed, among other things, that the moneys arose from savings by all family members, gifts from weddings, and gambling successes. One of the family members admitted to regularly taking business proceeds from the till for private purposes. The taxpayers also claimed that deposits for each property were scraped together from the family trust, savings and other legitimate sources and the rest of the purchase price was funded by debt. The son also claimed that the moneys received from the apple exporting business were reinvested in the business in various ways, including the preparing of the export containers, and in the acquisition of a new wholesaling business in 2006. In addition, they claimed that business records were lost in the Brisbane floods of 2011.

Decision

The AAT clearly found that the taxpayers had not discharged the onus of proving that the assessments were excessive, despite agreeing with the Commissioner that there were “flaws” in the asset betterment analysis used to raise the assessments. However, the AAT said that there was “nothing remarkable or improper in that” as the asset betterment analysis was a “blunt tool”, but one that “provided a starting point for the analysis and a basis for the assessments”. The AAT then noted that “as more information about the taxpayers’ affairs was gathered in the course of these proceedings, it became apparent the amended assessments were indeed wide of the mark”. However, the AAT reiterated that it was not enough for the taxpayers to show the amended assessments were incorrect: they had to go further and “positively prove” the “actual taxable income” and must show that the amount of money for which tax was levied by the assessment exceeded the actual substantive liability.

In arriving at this conclusion, the AAT took into account a range of matters including the “conspicuous” inability to explain the transactions recorded in the bank accounts, inconsistent evidence as to which family member had the authority to deal with the funds in the accounts, the fact that the gambling explanation was inconsistent with the pattern of deposits and the lack of credibility of evidence given by the family members. In relation to the property acquisitions, the AAT had difficulty in seeing how the acquisition of the properties could be funded in circumstances where “none of the family members reported earning significant amounts of assessable income during the years under review, yet they collectively managed to acquire a large number of properties in that period” and that other possible sources of funds were not satisfactorily explained.

The AAT also gave weight to inconsistent evidence given in relation to the son’s exporting business as to how the business operated (in the absence of a written agreement). In this regard, the AAT said that there was no doubt that the purchaser (who gave his evidence via video link) paid a relatively large amount to the son and that payments were made on a reasonably regular basis, but that it was unclear how many of those payments were made or how much profit the son actually made (albeit, there was evidence that each transaction was structured so there would be a profit margin). The AAT also found that there was evidence that the son used funds from business accounts for his own purposes, despite his claims that the funds were only used for reinvestment in the business and in the acquisition of another business.

The AAT also dismissed evidenced presented by a tax agent engaged by the taxpayer to explain the sources of their funds. It did so on several grounds, including the tax agent’s reliance on his own asset betterment test to generate estimates of the taxpayers’ income. In this regard, the AAT said that “it is one thing for the Commissioner to use that method to help him identify potential under-reporting and make an assessment in the first place – the Commissioner has no choice but to make an informed guess and then put the taxpayer to proof [but] more should be expected of a taxpayer, even one who has lost records in a flood”. The AAT also said that it was unhelpful for the tax agent to “merely point out the flaws in the Commissioner’s asset betterment effort”.

In relation to the issuing of assessments out of time, the AAT found that there was fraud or evasion which permitted this course of action. The AAT also found that 75% shortfall penalties imposed for “intentional disregard of the law” (plus the accompanying 20% uplift factor) were appropriate in the circumstances (except in the case of one of the family members) and that, furthermore, there were no grounds to remit the penalties.

LNNB and FCT [2014] AATA 527, www.austlii.edu.au/au/cases/cth/AATA/2014/527.html.

Tax consequences following marriage break-up

Taxation Ruling TR 2014/5 outlines the taxation effect under s 44 of the ITAA 1936, Div 7A of the ITAA 1936, Subdiv 126-A of Pt 3-3 of the ITAA 1997, and Div 207 of the ITAA 1997, of private companies paying money or transferring property in compliance of orders made by the Family Court under s 79 of the Family Law Act 1975.

Specifically, the Ruling outlines the following consequences:

• Money or property to be paid or transferred to a shareholder – to the extent paid out of the private company profits and is an ordinary dividend, the ATO says it is assessable income of the shareholder under s 44.
• Money or property to be transferred to an associate of a shareholder – the ATO says the payment of money or transfer of property is a payment for the purposes of s 109C(3). In addition, the ATO indicates that s 109J does not prevent the payment from being treated as a dividend under s 109C(1).
• Dividends frankable – payments that amount to ordinary dividends are frankable. Where a dividend is taken to be paid to an associate of a shareholder under s 109C is franked, that associate is themselves treated as being a shareholder.
• CGT rollover applies – where a private company transfers property to a shareholder in compliance with a s 79 order, the rollover consequences in s 126-5 of the ITAA 1997 apply (if acquired after 20 September 1985) and the cost base of the shareholder’s shares in the private company are both reduced pursuant to s 126-15(3) and increased pursuant to s 126-15(4) of the ITAA 1997. In addition, where a private company transfers property to an associate of a shareholder, the rollover consequences in s 126-5 apply and the cost base of the shareholder’s shares in the private company are reduced (s 126-15(3)).

The Ruling includes eight examples to illustrate different outcomes of transfers. It was previously released as Draft Taxation Ruling TR 2013/D6 and contains some changes, eg ATO comments on how an associate receiving a deemed dividend can access franking credits on the deemed distribution.

Date of effect

The Ruling applies both before and after its date of issue.

Source: Taxation Ruling TR 2014/5, 30 July 2014, http://law.ato.gov.au/atolaw/view.htm?docid=%22TXR%
2FTR20145%2FNAT%2FATO%2F00001%22.

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.

Tax debt release on serious hardship grounds refused

A taxpayer has been unsuccessful before the Administrative Appeals Tribunal (AAT) in seeking to be released from his tax liabilities under s 340-5 of Sch 1 of the Taxation Administration Act 1953.

As of 4 May 2014, the taxpayer’s outstanding tax debts amounted to around $58,000. However, the AAT was not satisfied that the taxpayer’s situation, if the taxpayer were required to pay the tax debts, would entail serious hardship. The AAT said that even if it were a case of serious hardship, the AAT would not exercise the discretion to grant relief. The AAT noted that no explanation was offered for the failure by the taxpayer to meet his tax liabilities as they arose. When comparing household income with expenses, the AAT was of the view that, although outlays were not extravagant, there was a level of discretionary spending that, if necessary, could be reduced.

The AAT said that instead of paying what it considered to be manageable tax assessments, the taxpayer “largely ignored his tax liabilities over the last five or six years, and has allowed the amounts due to accumulate with interest”. It added that the taxpayer “simply failed to give proper priority to paying his tax” and that “since entering the PAYG instalment system in 2008 he has paid only four of 22 assessments”. Further, the AAT said that the taxpayer had made no “sustained effort to clear arrears and achieve compliance”. It noted that since the “middle of last year he has been paying $150 per fortnight but he has not been meeting current assessments”.

Re Power and FCT [2014] AATA 343, www.austlii.edu.au/au/cases/cth/AATA/2014/343.html.

GST credits for property development project managers denied

Two taxpayers have been unsuccessful before the AAT in a matter concerning claims for input tax credits (ITCs) in respect of purported acquisitions made in relation to certain property developments.

Background

The first taxpayer (a company) and the second taxpayer (a partnership of two individuals) claimed to have made acquisitions in relation to a property development. The first taxpayer also claimed to have made acquisitions in relation to another property development. Both taxpayers were registered for GST. However, the Commissioner issued to both taxpayers amended assessments denying ITCs claimed for those purported acquisitions – in the first taxpayer’s case, for the tax periods April 2010 to June 2011, and in the second taxpayer’s case, for the tax periods April 2009 to December 2010. The Commissioner’s position was that neither taxpayer carried on an enterprise at all, so neither of them could be entitled to any ITCs. The Commissioner also imposed an administrative penalty at the rate of 50% on the shortfall amount.

The AAT dealt mainly with the arrangements concerning the first property development as the AAT was of the view that the arrangements did not differ materially from the second development. The AAT noted that there had been some work done on the property; however, the parties disputed what that work consisted of, how much of it was done, who it was done for, and whether it had been paid for.

The AAT heard from the taxpayers that they were “principal contractors to the project”. The project was presumed by the AAT to be the development of the property for eventual subdivision. However, the AAT noted that exactly what the “principal contractors” did in respect of the property remained the subject of “quite profound mystery”. The AAT said that the same observation applied in respect of what the “principal contractors” were supposed to have acquired from various entities, described by the taxpayers as the “subcontractors”, who were said to have undertaken some of development activities.

The AAT understood the case put by the taxpayers as follows: the owner of the property engaged the principal contractors to get certain work done on the property; the principal contractors in turn engaged subcontractors to do the physical work; the subcontractors did the work and charged the work to the principal contractors; and the principal contractors bundled up the charges with a 20% mark-up and on-charged the owner of the property.

The AAT noted that the total amount invoiced to the first taxpayer by the subcontractors (in relation to both property developments) was over $250,000. The total amount invoiced to the second taxpayer was over $820,000. However, the AAT said the invoices themselves were “short on detail”. The AAT also noted that the Commissioner had notified the taxpayers of his doubts concerning the work undertaken on the property after he was informed by the relevant council authority that approval to subdivide the property had been refused.

Decision

The AAT said that each taxpayer’s claim for ITCs failed “at the most basic level”. It said: “It is trite to observe that an entity is not a ‘project manager’ simply because someone says it is. It is equally trite to observe that, to carry on an enterprise, an entity must do something.” The AAT was unable to identify the “activity” that the taxpayers were doing in respect of the properties. The AAT was also not satisfied that either of the taxpayers, in relation to the relevant property developments, carried on any activities “in the form of a business”. A key issue identified by the AAT was the difficulty the taxpayers had in articulating the arrangement between themselves, the land owners and the subcontractors.

The AAT was of the view that the “true arrangement” was that work was done for, and the supplies were made to, the owners of the properties, and that at most, the taxpayers agreed to pay for some of the supplies. The AAT found, on the balance of probabilities, that there were “supplies” by the subcontractors; however, it was of the view that any supplies made by the subcontractors were not made to the taxpayers. Accordingly, it held that the claims for ITCs were not sustainable.

Although it was not required to, the AAT also rejected the taxpayers’ argument that “promissory notes” issued by them to the subcontractors for work done constituted consideration at the time of the supplies. The AAT also affirmed the penalty of 50% of the shortfall amount. The AAT said that the arrangement involved multiple entities, many of them not at arm’s length, and that given the type of arrangement involved and its size, independent advice should have been obtained. Among other things, the AAT noted that the “accountants were too close to the arrangement to give it the proper degree of consideration and dispassionate analysis”. The AAT held that the penalty should not be remitted in the circumstances.

Re Dotrac Pty Ltd and FCT [2014] AATA 336, www.austlii.edu.au/au/cases/cth/AATA/2014/336.html.

Individual working overseas not a tax resident

The AAT has allowed a taxpayer’s objection to amended assessments issued to him for the 2009 and 2010 income years after finding that the taxpayer was not a “resident” of Australia as that term is defined in s 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Background

The Commissioner had issued amended assessments to the taxpayer increasing his assessable income for the 2009 and 2010 income years by $200,540 and $305,516 respectively. The increases were the result of the Commissioner’s inclusion of income derived by the taxpayer from his employment in Saudi Arabia during each of the income years in question. The taxpayer had prepared and lodged his income tax returns for those years on the basis that he was a foreign resident. It was common ground that the taxpayer was domiciled in Australia for each of the income years in question.

In making various findings of fact, the AAT largely accepted the taxpayer’s evidence. The taxpayer was a building and construction project manager and in August 2007 he signed an employment contract with a company (a Saudi Arabian subsidiary of a company group) to work on a project located in Saudi Arabia. When he first travelled to Saudi Arabia in September 2007, the taxpayer had an expectation that the project would last three years. It was also the taxpayer’s expectation that upon completion of the project, he would move on to another project located in Saudi Arabia. While in Saudi Arabia, the taxpayer lived in an apartment situated in a secure residential compound, which was provided by his employer and for which he had exclusivity of occupancy. The taxpayer was single at the time and did not share the apartment with anyone. The taxpayer spent recreational time in Bahrain and holidays in Thailand and Australia, with the greater time spent in Thailand.

The AAT accepted the taxpayer’s reasons for not selling or renting his house located on the Gold Coast while he was employed in Saudi Arabia. The taxpayer had left belongings in the house and had it secured before he left Australia. The AAT accepted that the taxpayer initially decided to retain the house because he was uncertain as to what he would encounter when he took up his employment in Saudi Arabia, but that his reasons later changed when he found that he enjoyed the employment. Among other things, the AAT inferred that the taxpayer could well afford to make such choices given that he was well paid and did not need additional income from renting out the property. The AAT also considered the cost that would have been incurred in obtaining alternative storage for his collection of pistols and rifles as telling against his renting out of the house.

The AAT noted that on occasions when the taxpayer did return to the house during holidays, he never spent more than a few days at a time at the house. The taxpayer returned to Australia in May 2010 at the conclusion of the project and from then on he lived at the house. However, when he did return to Australia in May 2010, he had expected further employment in Saudi Arabia. The AAT noted some discrepancies in the taxpayer’s evidence regarding his holidays but accepted that this was the result of exact details being lost through the passage of time.

On incoming and outgoing passenger cards, the taxpayer had selected “Resident returning to Australia” and “Australian resident departing temporarily”. The taxpayer explained that he thought that, as an Australian citizen, these were the options that ought to be selected. The AAT said: “The options presented by the incoming and outgoing passenger cards, if one is versed in the law with respect to residency, do embrace the situation of a citizen who is a resident of Australia returning after a temporary absence or departing temporarily. Equally though, they do not separately and expressly address the situation of a person who holds citizenship but is leaving Australia to live and work abroad indefinitely or returning temporarily but not intending to give up living and working abroad indefinitely”.

The taxpayer maintained an Australian bank account into which his salary was paid in Australian dollars. The taxpayer did not open a bank account in Saudi Arabia for the purpose of receiving his salary as this would have entailed his being paid in Saudi riyal. There were also local Saudi exchange controls that meant it could have taken months to get the money out of the country if held in a local bank account. The taxpayer also organised for accumulated mail to be couriered to him. The taxpayer did not inform the Australian Electoral Commissioner that he was living in Saudi Arabia.

In lodging the relevant income tax returns, which were prepared with the assistance of a tax agent, the taxpayer had declared that he was an Australian resident with the Gold Coast house as his home address. The taxpayer’s belief was that he was only obliged to lodge an income tax return for his Australian-sourced income. The AAT was of the view that the taxpayer’s affirmative response in respect of residency and the specification of the Gold Coast house as his home address were the result of “inadvertence, probably shared with the tax agent, not a considered manifestation of his intention as to residency”.

Decision

The AAT rejected the Commissioner’s submission that the definition of “resident” in s 6(1) of the ITAA 1936 “should be accorded a wide meaning because it is used in revenue legislation for the purposes of the imposition of tax”. The AAT said the word “resides”, as used in s 6 of the ITAA 1936, bears its ordinary meaning, which is “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”. It added that adopting and applying what was said about statutory construction in Alcan (NT) Alumina Pty Ltd v Comr of Territory Revenue (2009) 73 ATR 256 (in which it was stated that the task of statutory construction must begin with a consideration of the text itself) “should put any contrary notion firmly and finally to rest”.

The AAT said the taxpayer’s presence in Saudi Arabia “was hardly casual or passing. So far as intention is relevant, [the taxpayer] had, at the time when he first left Australia for the Kingdom, a reservation as to whether he would make Saudi Arabia his home for the duration of the [project] and beyond”. The AAT accepted that the taxpayer had then at some point intended to make Saudi Arabia his home for the duration of the project and beyond into the indefinite future (although the AAT noted that it would be difficult, if not impossible, to assign the precise day on which the taxpayer formed such an intention).

The AAT was of the view that by the commencement of the 2009 income year, the Gold Coast house was no longer the taxpayer’s usual place of abode, but rather a convenient place to briefly visit in transit while on holidays and a place to store part of his capital. It said the principal purpose of his visits to Australia was not to resume residency in the Gold Coast house, but rather to catch up with his children and ex-spouse in Canberra. It added that those visits did not make him a resident in Canberra.

The AAT concluded that the taxpayer resided in Saudi Arabia in the 2009 and 2010 income years. It was also satisfied that the taxpayer’s permanent place of abode was in Saudi Arabia for the years in question. The AAT noted that circumstances concerning expected follow-on employment had changed after the project ended and that at the end of June 2010 (or so), the taxpayer’s intention changed and he again made Australia his settled place of abode.

Accordingly, the AAT held that the taxpayer had discharged the burden of proof that the amended assessments were excessive.

Re Dempsey and FCT [2014] AATA 335, www.austlii.edu.au/au/cases/cth/AATA/2014/335.html.

ATO debt collection approach under review

On 26 May 2014 the Inspector-General of Taxation, Ali Noroozi, announced the terms of reference for his review of the ATO’s approach to debt collection.

“Despite the ATO’s debt assistance programs, its approach to collecting taxes has been a persistent source of taxpayer complaint”, Mr Noroozi said. He noted that the ATO’s approach to collecting debts accounted for 23% of all ATO-related complaints received by the Commonwealth Ombudsman in 2012–2013. Furthermore, Mr Noroozi said some stakeholders believe that the ATO has recently taken a firmer approach to debt collection despite continuing economic pressures, while others are of the view that the ATO allows debts to accumulate for too long before taking action.

The Inspector-General has noted stakeholders’ concerns regarding the efficiency and consistency of the ATO’s debt recovery and assistance activities, including reliance on the Business Viability Assessment Tool (BVAT) to inform such activities. Specifically, stakeholders have expressed concern that certain debt recovery activities are disproportionate and have broader impact. Examples of such activities include insolvency proceedings commenced against viable taxpayers, garnishee notices that exhaust bank accounts and concurrent debt recovery action that impedes challenges to the underlying assessments.

The review will, among other things, focus on the ATO’s strategies for managing tax debts, the structure and design of the ATO’s debt recovery and assistance initiatives, appropriateness and consistency of assistance that the ATO offers taxpayers, and the ATO’s use of third party debt collectors. The review will also focus on the proportionality, consistency and effectiveness of the ATO’s debt recovery activities, including its use of garnishee notices, director penalty notices, departure prohibition orders and insolvency actions.

Public consultation closes on 18 July 2014.

Source: Inspector-General of Taxation, Review into the ATO’s approach to debt collection, terms of reference and submission guidelines, www.igt.gov.au/content/work_program/TOR-ATO-debt-collection.asp.

New ATO approach to identifying SMSF risks

The ATO has announced that it will apply a new risk-based approach to its treatment of auditor contravention reports (ACRs) for self managed superannuation funds (SMSFs) based on the overall risk posed by each SMSF.

In edition 30 of the ATO’s SMSF News (released on 29 May 2014), the Commissioner says he will consider multiple indicators and use new risk models to determine the appropriate action to take in relation to each SMSF. The key indicators include non-compliance (with regulatory and income tax matters), information from the SMSF annual return, ACRs and other data including trustee and member records.

Under this new approach, the ATO will respond to all ACRs received with an audit, phone call or letter. This will take place shortly after lodgment in order to provide more certainty to trustees, tax agents and SMSF auditors. The ATO says this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, with many cases therefore warranting less intrusive action.

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

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

SMSF trustee penalties

The ATO notes that while the new SMSF trustee penalties will become available from 1 July 2014, contraventions (such as loans to members or relatives) that already exist on 1 July 2014 will come under the new penalty regime.

 

Source: ATO SMSF News – edition 30, released on 29 May 2014, www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/SMSF-News/SMSF-News—edition-30/?page=10.

New integrity rule targeting dividend washing

The Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014 was introduced into the House of Representatives on 29 May 2014.

The Bill will amend the Income Tax Assessment Act 1997 by introducing an integrity rule to limit the ability of taxpayers to obtain a tax benefit from “dividend washing” (or “distribution washing”). Broadly, distribution washing is a scheme that allows a taxpayer to obtain multiple franking credits in respect of a single economic interest by selling the interest after an entitlement to a franked distribution has accrued and then immediately purchasing an equivalent interest with a further entitlement to a corresponding franked distribution.

Broadly, the amendments in the Bill provide that franked distributions that a taxpayer receives due to distribution washing will not entitle the taxpayer to a tax offset. In addition, the taxpayer will not be required to include the amount of the franking credit in their assessable income. For these purposes, a distribution will be considered to be received as a result of distribution washing where the taxpayer has also received a corresponding distribution in respect of a “substantially identical interest” that the taxpayer sold before acquiring the new interest. Part IVA of the ITAA 1936 will also continue to be applicable where the amendments in the Bill do not negate the benefit.

The Bill also makes various technical corrections to the imputation rules in order to clarify a number of cross-references that relate to offsets.

Date of effect: The distribution washing amendments are proposed to apply with effect from 1 July 2013 (ie the date set out in the original policy announcement of 14 May 2013). The technical amendments to the references to offsets are proposed to generally apply with effect from 1 July 2002 (ie the date when the “misdescribed” cross-references were introduced).

Other important amendments

The Bill also contains the following amendments:

• Protection in respect of announced but un-enacted tax amendments – The Bill proposes to insert s 170B into the ITAA 1936 to provide protection to taxpayers in relation to various tax measures announced by previous governments and that the present government has decided not to implement. The primary means by which protection is provided to a taxpayer who meets the conditions for protection is by preventing the Commissioner from amending assessments in relation to protected positions in a way that would produce a less favourable result for the taxpayer: proposed s 170B(1). The protection provided is limited to the particulars of an assessment that reflect the taxpayer’s anticipation of the impact of an announcement that is listed for the purposes of the provision. All other particulars of the assessment are subject to the usual rules governing amendment of assessments.

Date of effect: Availability of protection will be based on statements made by or on behalf of a taxpayer that relate to the period when an identified announcement was “on foot”. An announcement is considered to have been “on foot” from the day on which it was originally announced by a previous government until 14 December 2013, which is the day the current government announced that the measure would not proceed.

• Medicare levy low-income family thresholds 2013–2014 – The Bill proposes to increase the Medicare levy low-income threshold for families for 2013–2014, as well as the dependent child component of the threshold, as announced in the 2014–2015 Budget. The Bill proposes to amend ss 8(5) to 8(7) of the Medicare Levy Act 1986 to increase the family threshold for the 2013–2014 year to $34,367 (from the current $33,693). It also proposes to increase the dependent child-student component of the family income threshold for the 2013–2014 income year to $3,156 (from the current $3,094).

Date of effect: Applies to the 2013–2014 and later income years.

Source: Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=r5260.

Administrator of deceased estate breached duty

The Supreme Court of Queensland has ruled that an administrator of a deceased estate breached her fiduciary duty by applying for her deceased son’s superannuation benefits to be paid to her personally, and not seeking a death benefit as the legal personal representative of the estate.

Background

In November 2013, the Court granted the applicant Letters of Administration over her son’s estate after he died, aged 40, intestate and without a spouse or children. The net assets of his estate were $80,000 (primarily the proceeds of a life insurance policy), in contrast to his superannuation benefits in three superannuation funds, which totalled $453,749.

As the administrator of the estate, the applicant was aware of her obligations to administer her son’s estate in accordance with the rules of intestacy such that it would be distributed in equal shares between the deceased’s two parents (the applicant and her former husband). However, she applied to the three superannuation funds for any death benefits to be paid to her personally. The applicant did not apply to the superannuation funds for a death benefit to be paid to her as the legal personal representative (LPR) of the deceased’s estate. Each of the superannuation funds determined to pay 100% of the death benefits to the applicant (tax-free) on the basis that she and the deceased were living in an “interdependency relationship”.

The deceased’s father (the respondent) submitted that the applicant had breached her duty under s 52 of the Succession Act 1981 (Qld) to get in the estate of the deceased. The respondent also claimed that the applicant had allowed a conflict of interest to occur by seeking a superannuation death benefit for herself personally, without also doing so on behalf of the estate.

Decision

The Court held that the administrator of the estate had breached her fiduciary duty and s 52(1)(a) of the Succession Act by applying for the death benefits to be paid to her personally, rather than to her as the LPR of the estate. In so finding, the Court ordered the applicant to account to the estate by transferring the $453,749 in superannuation death benefits to the estate (where it would be shared equally with her former spouse under the rules of intestacy).

The Court found that there was a clear conflict of duty and interest, which the applicant had resolved in favour of her own interest. The Court said that an administrator of an intestate estate has a duty to apply for payment of superannuation funds to the estate. While an administrator of an estate has no proprietary right to an interest in a superannuation fund, the Court said an administrator has standing to compel the trustees of the fund to exercise their discretion to pay out the funds pursuant to reg 6.22 of the Superannuation Industry (Supervision) Regulations 1994. The Court said this discretion is one that the deceased member’s personal representative must be under a duty to call on the trustee to exercise.

The Court noted that a person who has fiduciary duties is generally not allowed to enter into engagements in which the fiduciary has or may have a personal interest conflicting with the interests of those whom the fiduciary is bound to protect. An exception to this rule applies where a testator or settlor, with knowledge of the facts, imposes a duty on a trustee that is inconsistent with a pre-existing interest or duty that he or she has in another capacity: Mordecai v Mordecai (1988) 12 NSWLR 58. However, the Court ruled that the exception does not extend to allowing a trustee, by the trustee’s own act, to voluntarily put himself or herself into a new position of conflict.

The Court also observed that the application for Letters of Administration had not sufficiently disclosed that the applicant intended to apply to the superannuation funds for the death benefits to be paid to her personally. In this respect, the Court distinguished the duties of an administrator of an intestate estate (appointed by the Court) from an executor of a deceased estate appointed under a will (where the testator has exercised a testamentary choice and accepted a potential conflict of interest).

McIntosh v McIntosh [2014] QSC 99, www.austlii.edu.au/au/cases/qld/QSC/2014/99.html.

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.

• ATO Compliance Program
• New Tax Rates – Residents and Non-Residents
• Household Assistance Package
• Tax Offsets
• SchoolKids Bonus
• Private Healthcare and Medicare Levy Surcharge changes
• Superannuation
• Are you an employee or contractor?
• Living Away From Home Allowance
• Personal Services Income – ATO Letters
• Reasonable Travel and Overtime Meal Allowances
• New PAYG Instalment Options
• Employment Termination Payments – Withholding Rates

ATO Compliance Program

Another financial year has passed and we are well into the new one. The ATO has released its new Compliance Program for 2012-13. We highlight the main focus areas of the ATO in relation to Individuals, that is, all the things you need to be aware of that the ATO will be focusing on over the next 12 months.

The ATO will be focusing on the following areas:

• Incorrect or fraudulent refunds for over-claims and deliberate fraud (including errors and misunderstanding of entitlements, lack of supporting documentation for certain claims, deliberately false claims and ID fraud);
• Review of work-related expenses for certain occupations with high levels of claims;
• People getting caught up in tax-avoidance schemes; and
• Income that has been omitted including dividends, interest, capital gains and foreign source income.

The ATO will also be targeting the following three professions when it comes to claiming “work-related expenses”:

• IT Professionals;
• Certain Australian Defence Force Members and
• Plumbers who are employees.

The ATO has developed guides for claiming work-related expenses in these three professions to assist members of these professions in claiming the right amounts of expenses they are entitled to and helping them to avoid making mistakes.

To assist taxpayers with their returns, it is a good idea to see a registered tax agent. Also, depending on your circumstances, you should check with your registered agent about when your return is (or was) due.

New Tax Rates – Residents and Non-Residents

In the table below are the new tax rates that affect individuals who are residents and non-residents of Australia from 1 July 2012:

Residents                                                     

Taxable Income	Amount of Tax Payable
$0 – $18,200	Nil
$18,201 – $37,000	19c for each $1 between $18,201 and $37,000
$37,001 – $80,000	$3,572 plus 32.5c for each $1 between $37,001 and $80,000
$80,001 – $180,000	$17,547 plus 37c for each $1 between $80,001 and $180,000
$180,001 and over	$54,547 plus 45c for each $1 over $180,000

Non-Residents

Taxable Income	Rate
$0 – $80,000	32.5c for each $1
$80,001 – $180,000	$26,000 plus 37c for each $1 between $80,001 and $180,000
$180,001 and over	$63,000 plus 45c for each $1 over $180,000

If you are a non-resident and need to apply for a tax file number, the ATO requires new “proof of identity” standards to be met. These are outlined in a new document they have published called entitled “Proof of identity – for individuals and businesses resident outside Australia”. A link to this publication is here (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00124974.htm).

Household Assistance Package

The ATO has published information about the Household Assistance Package that has been made available by the Government as a result of various tax reform measures including the carbon tax. Specific information that affects individuals can be found here (http://www.ato.gov.au/individuals/content.aspx?doc=/content/00322112.htm). Information about certain changes, such as in relation to the Medicare Levy Surcharge and to certain tax offsets, can be found throughout this issue of TaxWise.

Tax Offsets

Below are some of the tax offsets that changed with effect from 1 July 2012:

• Net medical expenses tax offset (NMETO) – a means test has been introduced for this tax offset. For taxpayers with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in the 2012-13 income year), the amount above which a taxpayer may claim NMETO will be increased to $5,000 (indexed annually thereafter). The rate of reimbursement will be reduced to 10% for eligible out-of-pocket expenses incurred.

• Combining of the “dependency tax offsets” – The eight dependency tax offsets have now been consolidated into a single, streamlined and non-refundable offset (including the invalid spouse, carer spouse, housekeeper, housekeeper (with child), child-housekeeper, child-housekeeper (with child), invalid relative and parent/parent-in-law tax offsets). This consolidated offset is based on the highest rate of the existing offsets it replaces, resulting in an increased entitlement for many of those eligible for this measure. Tax offsets for multiple dependants will still be able to be claimed by eligible taxpayers.

• Mature age worker tax offset (MAWTO) – The MAWTO phases out for taxpayers born on or after 1 July 1957. This does not affect any person who currently receives MAWTO (taxpayers who are aged 55 years or older in the 2011 – 12 income year).

SchoolKids Bonus

The new SchoolKids Bonus, which replaces the Education Tax Refund, starts on 1 January 2013 and will be paid each January and July. The SchoolKids Bonus will be paid in two instalments, totalling $410 for each primary school child and $820 for each secondary school child per year. See your tax agent to find out if you are eligible for the SchoolKids Bonus. For more information about the SchoolKids Bonus, visit the Department of Human Services website here (http://www.humanservices.gov.au/customer/services/schoolkids-bonus).

The Education Tax Refund was paid out in full starting from 20 June 2012 to all eligible families and therefore there is no requirement to make a claim for it in the 2012 Income Tax Return.

If you believe you are eligible for the Education Tax Refund and did not receive a lump sum payment, see your tax agent who can assist in investigating this for you.

Private Healthcare and Medicare Levy Surcharge changes

Since 1 July 2012, the private health insurance rebate and who is required to pay the Medicare levy surcharge (which is payable when an individual or family doesn’t have sufficient private hospital cover from a private health insurer) has become means tested. This will apply to all 2013 and later income year tax returns.

The table below shows what percentage rebate certain taxpayers in particular income brackets are eligible to claim and also who has to pay the Medicare levy surcharge (and how much). The three-tiered scaling will likely result in those falling in the higher income brackets having increased private health insurance payments and a higher Medicare levy surcharge obligation (if this applies).

	No change	Tier 1	Tier 2	Tier 3
Singles (income)	≤ $84,000	$84,001 – $97,000	$97,001 – $130,000	≥ $130,001
Families (income)	≤ $168,000	$168,001 – $194,000	$194,001 – $260,000	≥ $260,001
% of insurance premium = rebate*	30%	20%	10%	0%
Medicare levy surcharge %	0%	1%	1.25%	1.5%

*If you are an older taxpayer (65 years or older), the rebate amounts are higher.

The way you claim your rebate (either directly from your private health insurer, through your tax return or from Medicare) should not change.

Superannuation

There are some important things you should know about super:

1. You might be eligible for a low income super contribution – if you have adjusted taxable income of up to $37,000, you may be eligible for the low income super contribution which is a government payment of up to $500 to eligible taxpayers. See the ATO website for more information. (http://www.ato.gov.au/individuals/content.aspx?doc=/content/00323725.htm).
2. You might be able to get a refund of excess concessional contributions tax – the ATO is making a once-only offer to taxpayers for excess amounts of super that have been contributed to their super account on which excess concessional contributions tax may be payable (the annual cap is $25,000 above which a contribution will be considered “excess”). Taxpayers may withdraw the excess amount (if the excess amount is less than $10,000) from their super fund (though the excess amount will be added to their assessable income and taxed at their applicable tax rate).
3.  You should review your super contributions now before 30 June 2013 rolls around – as the super contributions cap is now $25,000 (reduced from $50,000 for taxpayers aged 50 and over), it is wise to monitor the amount of contributions being made to your super fund so you know if/when you may be nearing the $25,000 cap and whether you may be liable for excess concessional contributions tax.

Your tax agent will be able to help you answer all your superannuation-related questions.

It is a good idea to keep an eye on your super contributions and ensure the right amounts are being contributed on your behalf.

MySuper

The Government has also introduced another Bill in relation to the “Stronger Super” reforms in relation to “MySuper”. The Bill imposes various obligations on super funds, particularly where a “MySuper” product is offered, including:

• requiring all superannuation funds to provide life and TPD insurance to members (excluding defined benefit members) on an opt-out basis;
• requiring the disclosure and publication of key information in relation to superannuation funds;
• allowing only funds that offer a MySuper product and exempt public sector superannuation schemes to be eligible as default funds in modern awards and enterprise agreements;

• allowing exceptions from MySuper for members of defined benefit funds; and
• requiring trustees to transfer certain existing balances of members to MySuper.

If the superannuation fund you are a part of is going to offer a MySuper product, you should be aware of the requirements above that the super fund will need to meet.

Are you an employee or contractor?

The ATO has recently put together some tools and comprehensive information to assist businesses and individuals to work out whether they are an “employee” or “contractor”. Links to the tools and information are below:

• Employee or contractor (http://www.ato.gov.au/businesses/pathway.aspx?sid=42&pc=001/003/135)
• Know the difference between employees and contractors (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326433.htm)
• Employee or contractor? Get the facts (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326451.htm)
• Apprentices and trainees are employees, not contractors (http://www.ato.gov.au/businesses/content.aspx?doc=/content/69102.htm)
• Building and construction industry – how to determine if workers are employees or contractors (http://www.ato.gov.au/businesses/content.aspx?doc=/content/61646.htm)
• Common myths about the employee/contractor decision (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326442.htm)
• How to determine if workers are employees or contractors (http://www.ato.gov.au/businesses/content.aspx?doc=/content/4540.htm)
• How to report a business incorrectly treating employees as contractors (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326752.htm)
• Promoting a level playing field for business (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326827.htm)
• When a worker asks to be a contractor (http://www.ato.gov.au/businesses/content.aspx?doc=/content/00326749.htm)

If you are unsure about whether you are an employee or contractor, or whether you could be a contractor rather than an employee, it is a good idea to have a look through the information now available on the ATO website and talk to your registered tax agent about your particular circumstances.

Just because you have an ABN and have given it to the person for whom you are doing work doesn’t necessarily make you a contractor. Therefore, it is a good idea to be clear on what your status is (ie “employee” or “contractor”) to ensure the right amount of tax is being withheld from payments made to you and superannuation guarantee payments are made on your behalf if you are in fact an employee.

Living Away from Home Allowance

The new Living Away From Home (LAFH) allowance provisions began to apply from 1 October 2012. The new LAFH provisions ensure that recipients of the LAFH allowances that meet the requirements will be tax-free and not included in the recipient’s assessable income.

 

Since the previous issue of TaxWise, in which it was noted that the LAFH provisions would be moved into the income tax law and taken out of the fringe benefits tax law, after much detailed consultation with the tax profession, the Government agreed not to complicate things too much and to leave the LAFH provisions within the FBT space, which is where they had always been.

However, the rules still have the effect of limiting access to the concession to employees who are required to live away from a home they maintain in Australia and require employees to substantiate their actual expenditure on food and accommodation in excess of the statutory amount.

The ATO has published detailed information relevant for individuals subject to a LAFH arrangement on their website (see link http://www.ato.gov.au/individuals/content.aspx?doc=/content/00333793.htm).

 

There are also transitional rules which apply to arrangements that were in place at 7.30pm on 8 May 2012. The new rules will apply to these existing arrangements on the earlier of the existing arrangement changing (after 8 May 2012) or 1 July 2014 when the transitional period ends.

If you are subject to a LAFH arrangement, speak to your tax agent to find out how the new rules might affect your current arrangement.

Personal Services Income – ATO letters

In September 2012, the ATO wrote to several taxpayers who have reported personal services income, but who may have incorrectly self-assessed themselves as conducting a personal services income business. If you have received a letter of this kind, it is best to talk to a registered tax agent about what this might mean for you. If you already have a tax agent, your agent should have also received a copy of the letter that was sent to you. It is important to work out whether you have correctly determined if you conducted a personal services business (and have derived personal services income) as your reporting obligations may be affected and it may impact certain deductions you may or may not be able to claim.

Reasonable travel and overtime meal allowances

For the 2012-13 income year, the ATO has released Taxation Determination TD 2012/17 entitled “Income tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2012-13 income year?” which sets out the amounts considered “reasonable” for travel and meal allowances for which there will be no substantiation requirements.

This includes amounts such as:

• 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, drink and incidentals that are covered by the allowance; and
• overseas travel allowance expenses – food, drink and incidentals that are covered by the allowance.

If in your occupation you are entitled to such an allowance, such as truck drivers, you may wish to have a look at the “reasonable” amounts included in the Taxation Determination for which you may not have to keep documentation substantiating the expense. Where your expenses incurred exceed the specified “reasonable” amounts, you will need to keep written records of the expenses incurred.

New PAYG Instalment Options

If you pay PAYG Instalments, there may be an opportunity for you to change to account for your PAYG Instalment obligations on an annual basis rather than the report and pay on a quarterly basis. Your tax agent may already have received a letter advising which of their clients may be entitled to make this change (which could include you). Though the cut-off date was 29 October 2012, this may be something to keep in mind for next year.

Employment Termination Payments – Withholding Rates

New withholding rates that apply to employment termination payments have been set out in a new Schedule issued by the Commissioner. The Schedule sets out the withholding rates that might apply (Nil, 16.5%, 31.5%, 46.5%) to the various components of an employment termination payment (including a benefit received for a genuine redundancy, compensation or similar such payment; payment of unused annual leave and long service leave; a “golden handshake” etc) which is also determined by your age when you receive the payment. The Schedule can be accessed through this link (http://www.ato.gov.au/content/downloads/BUS00319263N709800612.pdf)

If you receive an employment termination payment during the 2012-13 income year, it is a good idea to check the Schedule to make sure the right amount of tax (if any) is withheld from the payment.

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 Hurley & Co Chartered Accountant for advice on specific matters.