Tax news, views and clues November 2016
Budget superannuation changes on the way
The Federal Government has been consulting on draft legislation to give effect to most of its 2016–2017 budget superannuation proposals. Here are some of the key changes.
Deducting personal contributions
All individuals up to age 75 will be able to deduct personal superannuation contributions, regardless of their employment circumstances. Of course, such deductible contributions would still effectively be limited by the concessional contributions cap of $25,000, proposed from 1 July 2017.
Pension $1.6 million transfer balance cap
The total amount of accumulated superannuation an individual can transfer into retirement phase (where earnings on assets are tax-exempt) will be capped at $1.6 million from 1 July 2017. Those with pension balances over $1.6 million at 1 July 2017 will be required to “roll back” the excess amount to accumulation phase by 1 July 2017 (where it will be subject to 15% tax on future earnings).
Concessional contributions cap
This cap is to be reduced to $25,000 for all individuals (regardless of age) from 1 July 2017. The concessional cap will be indexed in increments of $2,500 (down from $5,000 increments). Contributions to constitutionally protected funds and untaxed or unfunded defined benefit superannuation funds will be counted towards an individual’s concessional contributions cap. However, any excess concessional contributions in respect of such funds will not be subject to tax, but instead limit the individual’s ability to make further concessional contributions.
Note that the Government has decided to:
• dump the proposed $500,000 lifetime cap on non-concessional contributions (which would have been backdated to 1 July 2007) – instead, the lifetime cap will be replaced by a reduced non-concessional cap of $100,000 per year for individuals with superannuation balances below $1.6 million;
• not proceed with the proposal to remove the work test for making contributions between ages 65 and 74; and
• defer to 1 July 2018 the start date for catch-up concessional contributions for superannuation balances of less than $500,000.
TIP: The government says it intends to introduce the proposed changes in Parliament “before the end of the year”. It remains to be seen if the changes will pass smoothly through Parliament. In any case, it would be prudent to check in with your professional adviser to see if and how the proposed changes would affect your retirement savings strategy.
Primary producer income tax averaging
Legislation has been introduced in Parliament that proposes to allow primary producers to access income tax averaging 10 income years after choosing to opt out, instead of the opt-out choice being permanent. The Federal Government says this will assist primary producers, as averaging only recommences when it is to their benefit (ie they receive a tax offset) and they can still opt out if averaging no longer suits their circumstances. The changes are proposed to apply for the 2016–2017 income year and later income years.
TIP: Primary producers have to meet basic conditions to be eligible for income averaging. Please contact our office for further information.
Research and development tax incentive rates change
The Federal Government has reduced the rates of the tax offset available under the research and development (R&D) tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points. The higher (refundable) rate of the tax offset has been reduced from 45% to 43.5% and the lower (non-refundable) rate of the offset has been reduced from 40% to 38.5%. Here are some relevant points to note:
• Eligible entities with annual turnover of less than $20 million, and which are not controlled by an exempt entity or entities, may obtain a refundable tax offset equal to 43.5% of their first $100 million of eligible R&D expenditure in an income year, and a further refundable tax offset equal to the amount by which their R&D expenditure exceeds $100 million multiplied by the company tax rate.
• All other eligible entities may obtain a non-refundable tax offset equal to 38.5% of their eligible R&D expenditure and a further non-refundable tax offset equal to the amount by which their R&D expenditure exceeds $100 million multiplied by the company tax rate.
The changes apply from 1 July 2016.
TIP: AusIndustry and the ATO manage the R&D tax incentive jointly. The R&D tax incentive aims to offset some of the costs of undertaking eligible R&D activities. A company must lodge an application to register within 10 months after the end of its income year. Please contact our office for further information.
SMSF related-party borrowing arrangements
The ATO has issued a taxation determination (TD 2016/16) concerning whether the ordinary or statutory income of a self managed super fund (SMSF) would be non-arm’s length income (NALI) under the tax law, and therefore attract 47% tax, when the parties to a scheme have entered into a limited recourse borrowing arrangement (LRBA) on terms which are not at arm’s length.
The ATO has also updated a practical compliance guideline (PCG 2016/5) which sets out the Commissioner’s “safe harbour” terms for LRBAs. If an LRBA is structured in accordance with the guideline, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the NALI provisions (47% tax) will not apply. Trustees who do not meet the safe harbour terms will need to otherwise demonstrate that their LRBA was entered into and maintained consistent with arm’s length terms.
TIP: The ATO has allowed a grace period to 31 January 2017 for SMSFs to restructure LRBAs on terms consistent with the compliance guideline’s safe habour terms (or bring LRBAs to an end before that date). Please contact our office for further information.
Travel expense and transport of bulky tools claim denied
An individual has been unsuccessful before the Administrative Appeals Tribunal in a matter concerning certain deduction claims for work-related travel expenses. The individual was a sheet metal worker whose home was located some 60 km from his employer’s main work site. The individual made a number of work-related deduction claims. However, after various concessions made by both the individual and the Commissioner of Taxation, the remaining issue between the parties was whether the taxpayer was entitled to a deduction for work-related travel expenses.
The man argued that his employer required him to supply his own tools and that they were too bulky to be transported to work other than by car. He also questioned whether his employer provided secure storage facilities for his tools. In refusing the taxpayer’s claim, the Tribunal noted it was the taxpayer’s own admission that it was his own personal choice to transport his various hand tools out of security concerns. The Tribunal also said the taxpayer’s security concerns were “not supported by objective evidence”. The taxpayer’s claim was therefore refused.
TIP: The ATO reminds individuals to make sure they get their deductions right. In certain circumstances, it will contact employers to verify employees’ claims. In this case, the ATO contacted the taxpayer’s employer to check his claims, including whether the employer supplied safe storage facilities.
Important: Clients should not act solely on the basis of the material contained in this article. 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. This article 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 News, Views and Clues October 2016
Personal middle-income tax rate cut on the way
The Federal Government has introduced a Bill which proposes to implement its 2016 Budget proposal to increase the third personal income tax threshold that applies to personal income taxpayers. The rate of tax payable on individuals’ taxable incomes from $80,001 to $87,000 would fall from 37% to 32.5%.
The non-resident tax schedule would also be amended as a result of the Bill, increasing the upper limit of the first income tax bracket to $87,000. A tax rate of 37% would apply to taxable income between $87,001 and $180,000, and the top marginal tax rate of 45% would remain for taxable income over $180,000.
Shortly following the Bill’s introduction in Parliament, the ATO issued new PAYG withholding tax schedules that reflect the lowered personal tax rate in the Bill. Effective from 1 October 2016, employers will be required to lower the amount of tax withheld for affected taxpayers to factor in the new lower tax rate. Any tax overpaid beforehand will be refunded by the ATO on assessment after the end of the 2016–2017 financial year.
Small business tax breaks in the pipeline
A Bill has been introduced in Parliament which proposes to:
- increase the small business entity turnover to $10 million from 1 July 2016;
- increase the unincorporated small business tax discount from 5% to 16% over a 10-year period;
- increase the turnover threshold to qualify for the lower company tax rate; and
- lower the company tax rate on a schedule over 11 income years, reaching a unified company tax rate of 25% in the 2026–2027 income year.
Small business entities with aggregated turnover of less than $10 million would be able to access a number of small business tax concessions, including, among others, immediate deductibility of small business start-up expenses, simpler depreciation rules, and simplified trading stock rules.
TIP: The $2 million threshold for the purposes of the small business capital gains tax concessions will be retained.
The tax discount for unincorporated small businesses – introduced in the 2015–2016 income year – entitles individuals who are small business entities, or who are liable to pay income tax on a share of the income of a small business entity, to a tax offset equal to 5% of their basic income tax liability that relates to their total net small business income. This offset is capped at $1,000. Although the proposed increases in the offset would increase the amount of offset an eligible individual may claim, the offset would remain capped at $1,000.
TIP: With a difficult Senate, the Coalition Government may make further changes in order to pass its Bill.
Please contact our office for further information.
Single touch payroll reporting legislative changes
A Bill to establish a new reporting framework, Single Touch Payroll (STP), has been introduced in Parliament. Under the proposed changes in the Bill, “substantial employers” would be required to automatically provide payroll and superannuation information to the Commissioner of Taxation at the time the information is created. A number of related amendments aim to streamline employers’ payroll and superannuation choice processes by allowing the ATO to pre-fill and validate employee information.
Entities with 20 or more employees (substantial employers) would be required to report the following information to the Commissioner of Taxation:
- withholding amounts and associated withholding payments on or before the day by which the amounts were required to be withheld;
- salary or wages and ordinary time earnings information on or before the day on which the amount was paid; and
- superannuation contribution information on or before the day on which the contribution was paid.
The changes are proposed to apply from the first quarter beginning on or after the day the Bill receives Royal Assent.
In general, STP reporting will commence on 1 July 2018 for substantial employers and the related amendments will apply more broadly from 1 January 2017. In some cases, the Commissioner may defer these start dates by legislative instrument.
TIP: The ATO has issued a consultation paper, published on its website, which seeks comments on the ATO’s proposed administration of STP reporting.
Take care with work-related deduction claims, says ATO
The ATO has reminded individuals to make sure they get their deductions right this tax time. Assistant Commissioner Graham Whyte said the ATO has seen “claims for car expenses where logbooks have been made up and claims for self-education expenses where invoices were supplied for conferences that the taxpayer never attended”.
Mr Whyte said that in 2014–2015 the ATO conducted around 450,000 reviews and audits of individual taxpayers, leading to revenue adjustments of over $1.1 billion in income tax. Mr Whyte said “every tax return is scrutinised”, and if a red flag is raised and the claims seem unusual, the ATO will check them with the taxpayer’s employer. In addition, Mr Whyte reminded taxpayers that this year the ATO has introduced “real-time checks of deductions for tax returns completed online”.
Please contact our office for further information.
ATO eye on SMSFs and income arrangements
The ATO is reviewing arrangements where individuals (at or approaching retirement age) purport to divert personal services income (PSI) to a self managed superannuation fund (SMSF) to minimise or avoid their income tax obligations.
The ATO notes the arrangement it has described in Taxpayer Alert TA 2016/6 and is encouraging taxpayers who have entered into such and arrangement to contact the ATO so it can help resolve any issues in a timely manner.
Where individuals and trustees come forward to work with the ATO to resolve issues, it anticipates that in most cases the PSI distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal tax rate. Issues affecting SMSFs will be addressed on a case-by-case basis, but the ATO will take individuals’ cooperation with it into account when determining the final outcome.
TIP: The ATO has said that individuals and trustees who are not currently subject to ATO compliance action and who come forward before 31 January 2017 will have administrative penalties remitted in full. However, shortfall interest charges will still apply. Please contact our office for further information.
Social welfare recipients data-matching program
The Department of Human Services (DHS) has released details of a data-matching program which will enable it to match income data it collects from social welfare recipients with tax return-related data reported to the ATO. The data matching will assist DHS to identify social welfare recipients who may not have correctly disclosed their income and assets. In addition, data DHS receives from the ATO will be electronically matched with certain departmental records to identify people’s noncompliance with income or other reporting obligations.
DHS expects to match each of the approximately seven million unique records held in its Centrelink database. Based on noncompliance criteria, the DHS anticipates it will examine approximately 20,000 records in the first phase of the project. The category of people who may be affected by the data matching includes welfare recipients who have lodged a tax return with the ATO during the period 2011 to 2014.
Important: 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. This information 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 News, Views and Clues - September 2016
Share economy participants reminded of tax obligations
The ATO has reminded people who earn income in the share economy that they have tax obligations. The type of goods or services you provide, and how much you provide, will determine what you need to do for tax. Popular sharing economy services include:
- providing “ride-sourcing” services for a fare;
- renting out a room or a whole house or unit on a short-time basis;
- renting out a car parking space; and
- providing personal services, such as creative or professional services like graphic design and website creation, or doing odd jobs like deliveries and furniture assembly.
The ATO notes that you need to get an ABN if you are carrying on an enterprise providing goods and services through the sharing economy, and register for GST if:
- your turnover is $75,000 or more per year; or
- you are providing ride-sourcing services, regardless of how much you earn from doing so.
TIP: No matter how much you earn or your reasons for providing goods or services, it’s a good idea to maintain records of your income and expenses, so you can keep track of your activities and deal with tax obligations when they arise.Tax deductions may also be available in certain circumstances. Please contact our office for more information.
Itinerant worker claim denied, so travel deductions refused
An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT), where he argued that he was an itinerant worker and was therefore entitled to claim tax deductions for travel expenses of some $38,000 for the 2011–2012 income year.
The taxpayer worked a number of short-term jobs in various country towns across New South Wales. He and his wife had a house, but they would travel to the work locations, taking their car and a motorhome to live in. The individual argued he was entitled to claim deductions for car expenses and travel expenses such as meals and accommodation.
The AAT found that he was not an itinerant worker and that the expenses were private in nature and therefore not tax deductible. Among other things, the AAT noted
that his duties did not in fact require him to travel between and stay near the different workplace locations in the course of his employment.
ATO flags retirement planning schemes of concern
The ATO has launched the Super Scheme Smart initiative to inform people about retirement planning schemes that are of increasing concern. According to the ATO, people approaching retirement are most at risk of becoming involved in schemes that are “too good to be true”. While retirement planning schemes can vary, you should be aware of some common features of problematic schemes. These schemes generally:
- are artificially contrived and complex, and usually connected with a self managed super fund (an SMSF);
- involve a lot of paper shuffling;
- are designed to leave you paying minimal or no tax, or even receiving a tax refund; and/or
- aim to give you a present -day benefit.
The ATO has previously issued statements about concerning schemes that involve non-arm’s length limited borrowing arrangements, dividend stripping and diverting personal services income.
TIP: The ATO encourages people to report their involvement in such schemes early. In specific circumstances, penalties may be reduced. Please contact our office for more information.
Deductibility for gifts to clients and airport lounge membership fees
The ATO has recently released the following Taxation Determinations:
- TD 2016/14 states that business taxpayers are entitled to a tax deduction for the outgoing incurred for a gift made to a former or current client, if the gift is made for the purpose of producing future assessable income. The gift is not deductible if the outgoing is capital, relates to gaining “non-assessable, non-exempt” income, or is non-deductible under another provision.
- TD 2016/15 states that employer taxpayers are entitled to a tax deduction for annual fees incurred on an airport lounge membership for use by employees, if that membership is provided because of the employment relationship.
Changes to $500,000 lifetime super cap confirmed
The Federal Treasurer has confirmed that there will be some changes to the Government’s proposal for a lifetime cap of $500,000 on non-concessional superannuation contributions. A number of exemptions will be available.
Scott Morrison said in a radio interview that he had previously spoken about the changes and that draft legislation on the measures, to be released soon, will contain a number of changes. He said if someone gets a pay-out “as a result of an accident or something like that, then that is exempted from the $500,000 cap”. He also said that if someone had entered into a contract before Budget night to settle on a property asset out of their SMSF and they use after-tax contributions to settle that contract, “that won’t be included” in the $500,000 cap. Mr Morrison said there also would be “other measures” in the exposure draft legislation.
He effectively ruled out lifting the $500,000 cap amount, saying “the only people that would benefit are people who […] already on average have $2 million in their superannuation scheme, have already put $700,000 in after tax contributions”.
TIP: The ATO can only calculate the amount of your non-concessional contributions available based on the information it has. You may wish to review your own history of contributions. Please contact our office for more information.
Home exempt from land tax for “world-traveller”
An individual has been successful before the Victorian Civil and Administrative Tribunal (VCAT) in seeking the principal place of residence land tax exemption for his home located in Shoreham, Victoria, despite being a “world-traveller” whose wife lives overseas.
In 2003, the taxpayer was left the property in Shoreham in his mother’s will. After moving into the property, he continued his interest of overseas travel, meeting and marrying his now wife, who continues to live in Canada. Broadly, for each of the five tax years in question, the taxpayer spent a couple of months in Australia at the property, with the balance spent mostly in Canada and other overseas destinations. He submitted that he considered the Shoreham property his “home”, where he kept “all his personal treasures”, among other things. He also noted “significant and communal family ties” in Victoria (including his three children and eight grandchildren in Melbourne) and “financial ties” to Australia.
In finding in favour of the taxpayer, VCAT said that in this day and age people are far more mobile than in the past, and it is not unreasonable that someone would have a base at a particular place to which they intend to return and resume occupation. In this regard, the Tribunal was of the view that the land tax exemption applied to the taxpayer’s circumstances.
TIP: Land tax regimes differ from state to state. Please contact our office for assistance or more information.
Important: 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. This information 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 News, Views and Clues - August 2016
ATO small business benchmarks update
The ATO has announced the latest benchmarks for small businesses. Based on the data from 2014 income tax returns and business activity statements, the benchmarks cover over 1.3 million small businesses.
ATO Assistant Commissioner Matthew Bambrick said one of the great things about the benchmarks was that they gave a lot of small-business owners peace of mind.
“If a small business is inside the benchmark range for their industry and the ATO hasn’t received any extra information that may cause concern, they can be confident that they probably won’t hear from us”, Mr. Bambrick said.
Mr. Bambrick said some small businesses outside the benchmark range may simply be incorrectly registered, or the business intent may have changed since starting up. “These types of small administrative errors can be easily fixed by checking the previous year’s tax return to see which business industry code was used and then updating it in the next return and on the Australian Business Register”, Mr. Bambrick said.
TIP: Business owners can use the benchmarks to compare their businesses with other similar businesses. They can also be used by the ATO to identify businesses that may not be meeting their tax obligations.
SMSF early voluntary disclosure service for contraventions
The ATO has introduced a new self managed super fund (SMSF) early engagement and voluntary disclosure service. Each year, an approved SMSF auditor must audit a fund. The auditor is required to report certain regulatory contraventions to the ATO using the auditor/actuary contravention report. The ATO encourages SMSF trustees to voluntarily disclose regulatory contraventions, which they can now do using the ATO’s SMSF early engagement and voluntary disclosure service. This service provides a single entry point for SMSF trustees to engage early with the ATO in relation to unrectified contraventions.
TIP: Before using this service, the ATO says trustees should engage with an SMSF professional to receive guidance about rectifying the contravention so they have a rectification proposal to include with their voluntary disclosure. Please contact us for further information.
New tax governance guide for SMSFs
The ATO has released a new tax governance guide that can be used by SMSFs. The ATO has worked with businesses to design a guide to help private groups with tax governance. The guide also provides practical guidance about the key elements of SMSF governance. When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both the income tax and superannuation laws.
SMSF trustees can use this guide to develop an effective governance framework and to identify ways to improve existing governance practices within their SMSFs. Issues covered in the guide include:
- corporate governance and tax governance;
- starting your business;
- business expansion;
- funding and finance;
- philanthropy;
- succession planning;
- exiting a business;
- retirement planning (covering SMSFs and CGT small business concessions); and
- estate planning.
Property developer entitled to capital gain tax concession
A taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that a commercial property it acquired, developed and later sold for a profit of some $40 million had been acquired as a capital asset to generate rental income, and not for the purpose of resale at a profit. The AAT reached this decision despite indicating that the taxpayer was essentially involved in “property development” activities on a broad analysis of its activities. As a result, the AAT found that the profit of $40 million was assessable as a capital gain and entitled to the 50% capital gains tax (CGT) discount.
TIP: This case is a good example of the need to maintain contemporaneous documentation should there be a dispute with the ATO. The ATO has recently reiterated its focus on trusts developing and selling properties as part of their normal business and incorrectly claiming the 50% CGT discount.
Superannuation concessional contributions caps must be observed
An individual taxpayer has been unsuccessful before AAT in seeking to have excess superannuation concessional contributions for the 2014 financial year ignored. In addition to having a full-time job, the individual also held a number of casual part-time jobs. To grow his retirement savings, he salary sacrificed super, but he did not check on his super balances. In June 2015, the individual was advised by the ATO that he had excess concessional contributions of around $11,000 for the 2014 financial year, an amount which was added back to his taxable income. He was therefore charged interest of $250. The AAT praised the individual’s efforts to save for his retirement, but it said the circumstances did not amount to “special circumstances” in which it could invoke its powers to ignore the excess contributions.
TIP: The taxpayer’s ultimate tax bill in this case would have been the same if he had stayed under the relevant cap, albeit the tax bill would have been met by PAYG deductions over time. Even so, this case is a good reminder for to monitor your super balances to ensure you don’t have a tax burden caused by extra contributions being added back to your taxable income.
Help the kids buy homes, but watch for land tax
A taxpayer has been unsuccessful before the Queensland Civil and Administrative Tribunal in a land tax dispute in arguing that there was a “constructive trust” in relation to three residential properties. The taxpayer, a father, had purchased the properties for each of his three adult children to live in. There were agreements that the children would pay their parents rent and, upon the death of both parents, as specified in mutual wills, the property would be left to the respective child. The Queensland Commissioner of State Revenue assessed land tax on the aggregate value of the three properties as at 30 June 2013 and 30 June 2014 respectively. The Tribunal affirmed the Commissioner’s decision, holding that the taxpayer was the “owner” of the properties and it was not convinced that there was a “constructive trust”. Therefore, it held the exemption under the Land Tax Act 2010 (Qld) to assess separately trust land did not apply. In this case, the Tribunal hinted at the possibility that in future assessments the taxpayer could, on sufficient evidence, persuade the Commissioner or Tribunal otherwise.
TIP: For parents looking to assist their adult children with buying homes, this case highlights the need to consider land tax implications. It is important to note that the land tax regimes differ from state to state. Please contact our office for assistance.
Important: 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. This information 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 News, Views and Clues - July 2016
Tax Time 2016: Take care with work and rental property claims
The ATO encourages people to check which work and rental property-related expenses they are entitled to claim this tax time, and to understand what records they need to keep.
Assistant Commissioner Graham Whyte has reminded taxpayers that there has been a change in the rules for calculating car expenses this year, and people need to use a logbook or the cents-per-kilometre method to support their claims.
“It’s important to remember that you can only claim a deduction for work-related car expenses if you use your own car in the course of performing your job as an employee”, Mr. Whyte said.
The ATO will pay extra attention to people whose deduction claims are higher than expected, in particular those claiming car expenses (including for transporting bulky tools), and deductions for travel; internet and mobile phones; and self-education. Mr. Whyte also noted that “the ATO will take a closer look at any unusual deductions and contact employers to validate these claims”.
The ATO also encourages rental property owners to better understand their obligations and get their claims right. Mr. Whyte said the ATO would pay close attention to excessive interest expense claims and incorrect apportionment of rental income and expenses between owners. “We are also looking at holiday homes that are not genuinely available for rent and incorrect claims for newly purchased rental properties”, Mr. Whyte said.
TIP: The ATO says advances in technology and data-matching have enhanced its ability to cross-check the legitimacy of various claims.
The ATO also reminds people engaged in the share economy (eg ride-sourcing) to include income and deductions from those enterprises in their tax returns.
TIP: Ride-sourcing drivers are likely to be carrying on a business and be eligible for deductions and concessions in their tax returns. This could include depreciation deductions and GST input credits.
SMSF borrowing arm’s-length terms deadline extended
The ATO has extended until 31 January 2017 the deadline for trustees of self managed super funds (SMSFs) to ensure that any related-party limited recourse borrowing arrangements (LRBAs) are on terms consistent with an arm’s-length dealing. The ATO had previously announced a grace period whereby it would not select an SMSF for review for the 2014–2015 year or earlier years, provided that arm’s-length terms for LRBAs were implemented by 30 June 2016 (or non-compliant LRBAs were brought to an end before that date).
The deadline extension to 31 January 2017 follows the ATO’s release of Practical Compliance Guideline PCG 2016/5, which sets out “safe harbour” terms for LRBAs. If an LRBA is structured in accordance with PCG 2016/5, the ATO will accept that the LRBA is consistent with an arm’s-length dealing and the non-arm’s length income (NALI) rules (47% tax) will not apply.
TIP: The ATO requires arm’s-length payments of principal and interest for the year ended 30 June 2016 to be made under LRBA terms consistent with an arm’s-length dealing by 31 January 2017.
Lifetime $500,000 non-concessional superannuation cap
As announced in the 2016–2017 Federal Budget, the Government has proposed a lifetime non-concessional superannuation contributions cap of $500,000 to apply from Budget night (3 May 2016). This means that people who are planning to make non-concessional contributions now need to check their historical non-concessional contributions data back to 1 July 2007 (which will be counted against the $500,000 lifetime limit). To this end, the ATO can calculate non-concessional contribution amounts for the period 1 July 2007 to 30 June 2015, provided that the individuals and funds have met their lodgment obligations.
TIP: The ATO can only calculate the amount of non-concessional contributions based on the information it has. It may be prudent to review your own history of contributions. Please contact our office for further information.
ATO clearance certificates for property disposals
A new foreign resident capital gains withholding tax regime has been introduced. The new rules will apply where real property contracts are entered into on or after 1 July 2016, but will only apply to sales of residential property where it has a market value of $2 million or more. Where the new rules apply, the transaction will incur a 10% non-final withholding amount at settlement.
Withholding does not apply to sales by Australian resident sellers, but these sellers will need to obtain a clearance certificate from the ATO and provide it to the purchaser. Note that Australian resident vendors will need to obtain this clearance certificate before settlement to ensure they do not incur the 10% non-final withholding amount. Vendors can also apply for a variation if they are not entitled to a clearance certificate, if a vendor’s declaration is not appropriate or if 10% withholding is too high compared to the actual Australian tax liability on the sale of the asset.
TIP: The ATO has talked to real estate agents, conveyancers and legal practitioners to ensure the industry is prepared to help its clients meet their withholding obligations.
Hotel owner liable to GST for accommodation supply
A hotel owner has been unsuccessful before the Administrative Appeals Tribunal (AAT) in seeking a GST refund of $476,610. The hotel owner had a management agreement with a hotel operator. Under the agreement, the operator was to “act solely as the agent” for the owner. The ATO ruled that the owner was making a taxable supply of accommodation in commercial residential premises for the purposes of the GST Act. The owner objected, arguing that it had incorrectly accounted for GST.
The AAT said the only issue it was required to determine was whether the supply of accommodation in the hotel by the owner was correctly described as a supply of accommodation in commercial residential premises, provided to an individual by the entity that owns or controls the commercial residential premises. If it was so, then the hotel owner could not claim that the supply was input taxed under the GST law.
The AAT concluded that the supply in this case was made by the hotel owner through its agent, the operator. Accordingly, the AAT affirmed the Commissioner’s decision that GST was payable on the supply of the accommodation.
ATO to make new decision on superannuation death benefit
The Administrative Appeals Tribunal (AAT) has ordered the Commissioner to request that a couple make an application for another private ruling in relation to a life insurance payout they received after the death of their adult son.
In 2013, the couple’s’ son died in a motorbike accident. He was employed as a pilot and up to the time of his death had lived at home with his parents. As administrators of their son’s estate, the couple received a lump sum payment of $500,000 under their son’s life insurance policy, which was part of his employer’s super scheme.
The couple applied for a private ruling that the $500,000 was a superannuation lump sum that was not assessable under the tax law. The Commissioner issued a private ruling to each taxpayer ruling that they were not death benefit dependents.
Although the AAT held that the Commissioner’s ruling was correct, it noted the couple had provided “additional information” asserting they had a close personal relationship with their son. The AAT said that had the Commissioner been provided with that information earlier, he would have asked the couple to make an application for another private ruling. Accordingly, the AAT ordered the Commissioner to request that the couple make another private ruling application.
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 News, Views & Clues - June 2016
Tax incentives to promote innovation
Innovative companies with an interest in getting involved in the “ideas boom” need to be aware of the Government’s proposed tax incentives to help promote innovation. The Government has released draft legislation to implement more of the proposed tax measures announced as part of its National Innovation and Science Agenda (released in December 2015).
One of the tax measures will allow companies that have changed ownership to access past year tax losses if they satisfy a similar business test. Under the current law, companies that have changed ownership must satisfy the same business test to access past year tax losses. This measure is designed to encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities to return to profitability.
The other measure proposes to allow taxpayers the choice to either self-assess the effective life of certain intangible depreciating assets (such as patents or copyrights) or use the statutory effective life. The current law only provides an effective life set by statute. According to the Government, changing the tax treatment for acquired intangible assets will make startups’ intellectual property and other intangible assets a more attractive investment option.
Car expenses and special arrangements for the 2016 FBT year
The ATO has released guidance about using the cents per kilometre basis for claiming car expenses and making fringe benefits calculations.
From 1 July 2015, separate rates based on the size of the engine no longer apply. Taxpayers can use a single rate of 66 cents per kilometre for all motor vehicles for the 2015–2016 income year. The Tax Commissioner will determine the rate for future income years. However, the ATO acknowledges that there has been uncertainty about the correct rate to apply for the 2016 FBT year, and has advised of a special arrangement for 2016 whereby it will also
accept 2016 FBT returns based on the 2014–15 rates (which are 65, 76 or 77 cents per kilometre depending on the engine capacity of the employee’s car).
TIP: For future FBT years, which end on 31 March, the ATO said employers should use the rate determined by the Commissioner for the income year that ends on the following 30 June. For example, for the FBT year ending 31 March 2017, employers should use the basic car rate the Commissioner determines for the 2016–2017 income year.
Holiday homes: tax considerations
Australians who let their holiday homes for only part of the year should be aware of the ATO’s compliance focus on excessive holiday home deduction claims.
The ATO has released guidance on claiming deductions in relation to holiday homes. If a taxpayer rents out their holiday home, they can only claim expenses for the property based on the proportion of the income year when the property was rented out or was genuinely available for rent. Notably, the new guidance indicates what is meant by “genuinely available for rent”. According to the ATO, factors that may indicate a property is not genuinely available for rent include that:
- it is advertised in ways that limit its exposure to potential tenants (for example, the property is only advertised by word of mouth);
- the location of, condition of or accessibility to the property mean that it is unlikely tenants will seek to rent it;
- there are unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out; or
- interested people are turned away without adequate reasons.
TIP: Although it is always prudent to check things over before tax time, holiday home owners may particularly want to take the opportunity to review their circumstances and ensure that any deduction claims are made correctly before “the taxman cometh”.
Individuals caught in “Panama Papers” leak
The ATO has advised that it is investigating more than 800 individuals after a leak of taxpayer data in relation to a Panamanian law firm.
Deputy Commissioner Michael Cranston said that since the completion of the offshore disclosure initiative “Project DO IT”, the ATO has ramped up its compliance work to deal with taxpayers who have failed to disclose offshore income and assets.
Mr Cranston said the ATO has been analysing the latest data against information these taxpayers had reported and against the information the ATO already has. The information the ATO received regards some taxpayers who it had previously investigated, as well as a small number of taxpayers who disclosed their arrangements to the ATO under Project DO IT. The information also regards a large number of taxpayers who have not previously come forward, including high-wealth individuals, and Mr Cranston said the ATO is already taking action on those cases.
ATO safe harbour for SMSF borrowings
The ATO has released guidelines that set out the
“safe harbour” terms on which trustees of self managed superannuation funds (SMSFs) may structure related-party limited recourse borrowing arrangements (LRBAs) consistent with an arm’s-length dealing. The ATO generally takes the view that an SMSF may derive non-arm’s length income (taxable at 47%) if the terms of an LRBA are not consistent with an arm’s-length dealing. If an LRBA is structured in accordance with the ATO’s guidelines, it will accept that the non-arm’s length income (NALI) rules do not apply.
TIP: The ATO previously announced a grace period whereby it will not select an SMSF for review provided that arm’s-length terms for its LRBA are implemented by 30 June 2016, or the LRBA is brought to an end before that date. Importantly, the ATO’s guidelines require arm’s-length payments of principal and interest to be made for 2015–2016 (including where the arrangement is brought to an end). If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not on
arms’-length terms. Rather, trustees who do not
meet the safe harbour terms will need to otherwise demonstrate that their arrangement was entered into and maintained consistent with arm’s-length terms.
ATO’s data-matching net widens
The ATO has announced details of its various data-matching programs. Most of the announcements regard extensions to existing data-matching programs. Records obtained through the programs will be electronically matched with ATO data holdings to identify non-compliance with registration, lodgment, reporting and payment obligations under taxation laws. The following are key points:
- The ATO will acquire details of registered voters on the Commonwealth electoral roll from the Australian Electoral Commissioner. This data-matching program aims to identify taxpayers who are not registered with the ATO when they are required to be.
- The ATO will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016–2017, 2017–2018 and 2018–2019 financial years. This program aims to obtain intelligence to identify risks and trends about contractors who may not be complying with their taxation obligations.
- The ATO will acquire data relating to electronic payments made to merchants through specialised payment systems for the 2014–2015, 2015–2016 and 2016–2017 financial years. This data will be used to detect unreported income and to identify those operating a business but failing to meet their registration, lodgment and payment obligations.
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 News, Views & Clues - May 2016
Tax planning
There are many ways in which entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable income. Taxpayers should be aware that they need to start the year-end tax planning process early in order to maximise these opportunities. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings.
Deferring assessable income
• Income received in advance of services being provided is generally not assessable until the services are provided.
• Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
• A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If disposal of an asset will result in assessable income, the taxpayer may consider postponing the disposal to the following income year.
• Rollover relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.
Maximising deductions
Business taxpayers
• Taxpayers should review all outstanding debts before year-end to identify any debtors who may be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, they may consider writing off the balance as bad debt.
• The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.
• A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
• Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.
Non-business taxpayers
• Non-business taxpayers are entitled to an immediate deduction for assets that are used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
• Self-employed and other eligible people are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the “10% rule”.
Companies
• Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the “benchmark rule”.
• Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates.
Shareholders and entities should consider repaying loans and making payments on time, or have appropriate loan agreements in place.
• Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
• Companies may consider consolidating before year-end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
Trusts
• Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
• Trustees should consider whether a family trust election (an FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and that franking credits will be available to beneficiaries.
• Taxpayers should avoid retaining income in a trust because it may be taxed in the hands of the trustee at the top marginal tax rate.
Small business entities
• From 2015–2016, the tax rate applicable to small business entities that are companies is 28.5% (rather than the standard 30% rate) and other types of small business entities are entitled to a tax discount in the form of a tax offset.
• Small business entities are entitled to an immediate deduction for certain pre-business expenditure incurred after 30 June 2015.
• Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.
• An optional rollover has been introduced for the transfer of business assets from one entity to another for small business owners who change the legal structure of their business.
• A CGT “look-through” treatment for eligible earnout arrangements has been introduced.
• From the 2016–2017 FBT year, small business entities will be able to provide more than one work-related portable electronic device to an employee and claim the FBT exemption for each device, even if the devices have substantially identical functions and are not replacement items.
Capital gains tax
• Taxpayers may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
Superannuation
• Individuals who wish to take advantage of the concessionally taxed superannuation environment should keep track of their contributions.
• Individuals with salary sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
• Individuals earning above $300,000 are subject to an additional 15% tax on concessional contributions. However, despite the extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on their contributions up to the relevant cap.
• Self managed super funds (SMSFs) have been reminded that if they have investments in collectables or personal-use assets that were acquired before 1 July 2011, time is running out to ensure they meet the requirements of the superannuation law for these assets.
Fringe benefits tax
• The rules for individuals claiming car expense deductions have changed. As a result, if employers reimburse expenses relating to an employee’s use of their own car, only two methods are available for calculating the taxable value of this fringe benefit (when employers apply the "otherwise deductible rule").
• A separate gross-up cap of $5,000 has been introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses for certain employees of not-for-profit organisations. Affected individuals may want to discuss it with their employers.
Individuals
• For the 2015–2016 income year, the general tax-free threshold available to Australian resident taxpayers is $18,200.
• Australians who have student debts and are travelling or living overseas will soon have the same repayment obligations as people who are still living in Australia.