Newsletter: July

Removal of the Temporary Budget Repair Levy from the 2017/18 income year

The 2% Temporary Budget Repair Levy (or ‘TBRL’), which has applied to individuals with a taxable income exceeding $180,000 since 1 July 2014, is repealed with effect from 1 July 2017. 

Up until 30 June 2017, including the TBRL and the Medicare Levy, individuals earning more than $180,000 faced a marginal tax rate of 49%.

With the benefit of the removal of the 2% TBRL, from 1 July 2017, individuals with a taxable income exceeding $180,000 face a marginal tax rate of 47% (including the Medicare Levy). 

Editor: Don’t forget to add another 1.5% for the Medicare Levy Surcharge for certain individuals that don’t have Private Health Insurance.

 

Simpler BAS is coming soon

The ATO is reducing the amount of information needed to be included in the business activity statement (or ‘BAS’) to simplify GST reporting.

From 1 July 2017, Simpler BAS will be the default GST reporting method for small businesses with a GST turnover of less than $10 million.

In relation to GST, small businesses will only need to report:

G1 - Total sales

1A - GST on sales

1B - GST on purchases.

This will not change a business’ reporting cycle, record keeping requirements, or the way a business reports other taxes on its BAS.

Simpler BAS is intended to make it easier for businesses to lodge their BAS.  It should also reduce the time spent on form-filling and making changes that don't impact the final GST amount.

The ATO will automatically transition eligible small business' GST reporting methods to Simpler BAS from 1 July 2017.

Small businesses can choose whether to change their GST accounting software settings to reduce the number of GST tax classification codes.

Editor:  Call our office if you need help with the transition to Simpler BAS or to decide whether your business will use reduced or detailed GST tax code settings in its GST accounting software.

 

Changes to the foreign resident withholding regime for sales of Australian real estate

Since 1 July 2016, where a foreign resident has disposed of real estate located in Australia, the purchaser has had to withhold 10% of the purchase price upon settlement and remit this amount to the ATO, where the market value of the property was $2,000,000 or greater. 

As a result of another 2017/18 Budget Night announcement becoming law, in relation to acquisitions of real estate that occur on or after 1 July 2017, the withholding rate has increased to 12.5% and the market value of the real estate, below which there is no need to withhold, has been reduced to $750,000. 

Editor:  Unfortunately, even if a sale of real estate with a market value of $750,000 was to take place between two siblings on or after 1 July 2017 (both of whom have been Australian residents for 50 plus years), withholding must occur unless the vendor obtains a ‘clearance certificate’ from the ATO – despite the two siblings clearly knowing the residency status of each other!

These changes highlight the need to obtain clearance certificates where the vendor is an Australian resident and the real estate is worth $750,000 or more - not a high exemption threshold given the sky-rocketing values of Australian real estate!  If you are buying or selling real estate worth $750,000 or more (including a residential property, i.e., home) please call our office to see if a clearance certificate is needed.

Change to deductions for personal super contributions

Up until 30 June 2017, an individual (mainly those who are self-employed) could claim a deduction for personal super contributions where they meet certain conditions. One of these conditions is that less than 10% of their income is from salary and wages.  This was known as the “10% test”.

From 1 July 2017, the 10% test has been removed.  This means most people under 75 years old will be able to claim a tax deduction for personal super contributions (including those aged 65 to 74 who meet the work test).

Editor: Call our office if you need assistance in relation to the application of the work test for a client that is aged 65 to 74.

Eligibility rules

An individual can claim a deduction for personal super contributions made on or after 1 July 2017 if:

  •          A contribution is made to a complying super fund or a retirement savings account that is not a Commonwealth public sector superannuation scheme in which an individual has a defined benefit interest or a Constitutionally Protected Fund;
  •          The age restrictions are met;
  •          The fund member notifies their fund in writing of the amount they intend to claim as a deduction; and
  •          The fund acknowledges the notice of intent to claim a deduction in writing.

Concessional contributions cap

Broadly speaking, contributions to super that are deductible to an employer or an individual, count towards an individual’s 'concessional contributions cap'. 

The contributions claimed by an individual as a deduction will count towards their concessional contributions cap, which for the year commencing 1 July 2017 is $25,000, regardless of age.  If an individual’s cap is exceeded, they will have to pay extra tax.

Editor:  Call our office to discuss the eligibility criteria and tax consequences of claiming a tax deduction for a personal contribution to super for the year commencing 1 July 2017.

Newsletter: May

Company tax cuts pass the Senate with amendments

Editor: After a marathon few days of extended sittings (the last before the Federal Budget in May), the Government finally managed to get its company tax cuts through the Senate, but it was not without compromise.

The following outlines the final changes to the law, as passed by the Senate, including a recap of which of the original proposals remained intact and also which ones were changed.

Changes to the franking of dividends

Prior to this income year, companies that paid tax on their taxable income at 28.5% could still pass on franking credits to their shareholders at a rate of 30%, subject to there being available franking credits.

However, with effect from 1 July 2016 (i.e., this income year), the maximum franking credit that can be allocated to a frankable distribution paid by a company will be based on the tax rate that is applicable to the company. 

Editor: Please contact this office if you would like to know how these changes will affect your business specifically.

Costs of travelling in relation to the preparation of tax returns

The ATO has released a Taxation Determination confirming that the costs of travelling to have a tax return prepared by a “recognised tax adviser” are deductible. 

In particular, a taxpayer can claim a deduction for the cost of managing their tax affairs. 

However, apportionment may be required to the extent that the travel relates to another non-incidental purpose.

Example – Full travel expenses deductible

Maisie and John, who are partners in a sheep station business located near Broken Hill, travel to Adelaide for the sole purpose of meeting with their tax agent to finalise the preparation of their partnership tax return. 

They stay overnight at a hotel, meet with their tax agent the next day and fly back to Broken Hill that night. 

The full cost of the trip, including taxi fares, meals and accommodation, is deductible.

Example – Apportionment required

Julian is a sole trader who carries on an art gallery business in Oatlands.

He travels to Hobart for two days to attend a friend's birthday party and to meet his tax agent to prepare his tax return, staying one night at a hotel.

Because the travel was undertaken equally for the preparation of his tax return and a private purpose, Julian must reasonably apportion these costs.

In the circumstances, it is reasonable that half of the total costs of travelling to Hobart, accommodation, meals, and any other incidental costs are deductible.

Editor: Although the ATO's Determination directly considers the treatment of travel costs associated with the preparation of an income tax return, the analysis should also apply where a taxpayer is travelling to see their tax agent in relation to the preparation of a BAS, or another tax related matter.

 

 

Newsletter: April

Reduction in FBT rate from 1 April 2017

In conjunction with the introduction of the temporary budget repair levy (of 2%, payable by high income earners), the FBT rate was also increased from 47% to 49% for the 2016 and 2017 FBT years.

However, the FBT rate will revert back to 47% from 1 April 2017.

Editor: This means there will be a discrepancy between the FBT rate and the effective income tax rate for high income earners from 1 April 2017 until 30 June 2017.

This means that any such high-income earners that genuinely and effectively salary sacrifice relevant fringe benefits (e.g., expense payment fringe benefits, such as school fees or residential rent) during that period, so long as their employer is happy to assist, could basically reduce the tax payable on that income by 2%.

Lump sum payments received by healthcare practitioners

The ATO must be concerned about healthcare practitioners receiving lump sums and treating them as capital payments, as they have released a detailed fact sheet setting out what they expect to see in such situations.

If a healthcare practitioner (such as a doctor, dentist, physical therapist, radiologist or pharmacist) gets a lump sum payment from a healthcare centre operator, according to the ATO "it's probably not a capital gain.  It's more likely to be ordinary income".

Specifically, the lump sum will typically be ordinary income of the practitioner for providing services to their patients from the healthcare centre.

Importantly, the mere fact the payment is a one-off lump sum, or expressed to be principally consideration for the restraint imposed, for the goodwill or for the other terms or conditions, does not define it as having the character of a capital receipt.

Editor: If you think this may affect you, we can help you work out what you need to do.

Tax officers "hit the streets" to "help small businesses"

The ATO is visiting more than 400 businesses across Perth and Canberra this month as part of a campaign to "help small businesses stay on top of their tax affairs".

Assistant Commissioner Tom Wheeler said: “Our officers will be visiting restaurants and cafés, hair and beauty and other small businesses in Perth and Canberra to make sure their registration details are up to date.  These industries are on our radar because they have ready access to cash, and this is a major risk indicator.”

“We then work to protect honest businesses from unfair competition by taking action against those who do the wrong thing.”

The industries they are visiting have some of the highest rates of concerns reported to the ATO from across the country.

Planned changes to GST on low value imported goods

From 1 July 2017, overseas clients with an Australian turnover of $75,000 or more will need to register for, collect and pay GST on goods up to $1,000 that they sell to consumers in Australia.

If Australian clients are registered for GST and buy low value imported goods for their business from overseas, they will need to supply their ABN at the time of purchase so they won't be charged GST.

If the Australian business is not registered for GST, they will be treated as a consumer and unable to recover the GST charged by the overseas business.

Company disallowed $25 million of carried forward tax losses

A lack of supporting evidence has led to a company failing to prove it was entitled to claim deductions for tax losses (totalling $25 million) the company incurred for a property development, most notably during the 1990 to 1995 income years. 

The company then claimed these tax losses as deductions on its income tax returns for the 1996 to 2003 income years.

The ATO disallowed the deductions because the company was unable to satisfy either of the tests that companies must satisfy to successfully claim losses incurred in prior years (being the 'Continuity of Ownership Test' and the 'Same Business Test’), and the AAT agreed with the ATO. 

This was basically because the shares in the company could not be traced to the same shareholders that owned shares in some of the loss years.  Further, there were periods of uncertain ownership positions during the relevant timeframe, which meant the AAT could not conclude a 'continuity of ownership' had been established in some cases.  Also, the business has changed in the 1996 income year from property development to investing in units in a trust. 

Editor: It is important to remember that the burden of proving an ATO assessment is excessive rests with the taxpayer. 

Although this burden may prove difficult in cases such as this (i.e., the first claimed loss year was 1990), the AAT noted that a taxpayer has the obligation to make good its case on some “satisfactory basis other than speculation, guesswork or corner-cutting”.

Super changes may require action by 30 June 2017!

Due to the introduction of the new 'transfer balance cap' from 1 July 2017, super fund members with pension balances (in 'retirement phase') exceeding $1.6 million will need to partially commute one or more of their pensions to avoid the imposition of excess transfer balance tax. 

In addition, members in receipt of a transition to retirement income stream ('TRIS') will lose the pension exemption from 1 July 2017.

This means that the future disposal of any assets currently supporting such pensions will potentially generate a higher taxable capital gain (even though the disposal of the asset prior to 1 July 2017 could be fully or partially tax-free, depending on whether the asset is a segregated or unsegregated asset).

Fortunately, to avoid funds selling off assets before 1 July 2017, transitional provisions have been introduced to allow super funds to apply CGT relief in certain situations. 

Although the choice to apply the CGT relief can be made up until the day the super fund is required to lodge its 2017 tax return, in many cases, action must be taken on or before 30 June 2017 for the fund to even be eligible to make that choice. 

In particular, funds calculating exempt pension income using the segregated assets method will generally need at least a partial commutation of the pension.

Editor: Please contact our office if you need any information regarding the super reforms, including what needs to be done to obtain CGT relief (if necessary), whether a TRIS should be commuted to accumulation phase or continued into the 2018 year, and how the new contribution rules will affect contributions in both the current and future years.

Working holiday makers – 2017 early lodgers

The ATO has advised that the recent change to tax for working holiday makers means there are extra steps tax agents need to take when preparing an early 2017 income tax return for these clients.

Editor: We will obviously be able to help you this.  Basically, we will need to provide the ATO with a schedule separately identifying income earned up to 31 December, and then from 1 January onwards, to ensure the correct tax rates are applied (along with any deductions associated with the income period).

Newsletter: February

Changes to the ‘backpacker tax’

From 1 January 2017, tax rates changed for working holiday makers who are in Australia on a 417 or 462 visa (these rates are known as ‘working holiday maker tax rates').

If a business employs a working holiday maker in Australia on a 417 or 462 visa, from 1 January 2017, they should withhold 15% from every dollar earned up to $37,000, with foreign resident tax rates applying from $37,001.

Businesses must register with the ATO by 31 January 2017 to withhold at the working holiday maker tax rate.

If they don’t register, they will need to withhold at the foreign resident tax rate of 32.5% (and penalties may apply to businesses employing holiday makers that don't register).

 

ATO data matching programs

Editor:  The ATO has announced that it will be undertaking the following two data matching programs.

Ride Sourcing data matching program

The Ride Sourcing data matching program has been developed to address the compliance risk of the registration, lodgement and reporting of businesses offering ride sourcing services as a driver.

Editor: 'Ride sourcing' = Uber (basically).

It is estimated that up to 74,000 individuals ('ride sourcing drivers') offer, or have offered, this service.

The ATO will request details of all payments made to ride sourcing providers from accounts held by a ride sourcing facilitator's financial institution for the 2016/17 and 2017/18 financial years, and match the data provided against their records.

This will identify ride sourcing drivers that may not be meeting their registration, reporting, lodgement and/or payment obligations.

Where the ATO is unable to match a driver's details against ATO records, it will obtain further information from the financial institution where the driver's account is held.

Credit and debit card and online selling data matching program

The ATO is collecting new data from financial institutions and online selling sites as part of its credit and debit cards and online selling data-matching programs, specifically:

n  the total credit and debit card payments received by businesses; and

n  information on online sellers who have sold at least $12,000 worth of goods or          services.

 

The ATO will be matching this data with information it has from income tax returns, activity statements and other ATO records to identify businesses that may not be reporting all their income or meeting their registration, lodgement or payment obligations.

 

Can a UPE be written off and claimed as a bad debt?

Editor: A 'UPE' (or 'unpaid present entitlement') arises where a trust makes a beneficiary entitled to an amount of the trust's income (and therefore the beneficiary may have to pay tax on their share of the trust's taxable income that year), but that amount has not been physically paid to the beneficiary.

If the beneficiary never receives payment from the trust, they may want to write their entitlement off as a bad debt, and claim a tax deduction.

The ATO has released a Taxation Determination explaining their view that there is no ability to claim a ‘bad debt’ deduction where a beneficiary of a trust writes off as a bad debt an amount of a UPE.

This is because of the technical wording of the tax legislation regarding claiming deductions for 'bad debts', which requires the debt (e.g., the UPE) to have been previously included in the beneficiary's taxable income – however, a beneficiary is not taxed on the UPE itself.  Instead, the amount of the UPE is used to calculate the amount to include in their assessable income (and this may be different to the actual amount of the UPE).

Example

Archie Pty Ltd (‘Archie’) is a beneficiary of the Linus Family Trust (‘Linus’), which rents out a property. 

In the 2014 income year, Linus’s trust income (made up of net rent) was $25,000, but its net (taxable) income was actually $20,000 (thanks to a 'capital works deduction' of $5,000).

Archie was made presently entitled to 100% of the trust income (i.e., $25,000).  As a result, it was also assessed on 100% of the net (taxable) income of the trust (i.e., $20,000).

The $25,000 was not paid to Archie (i.e., it was recorded as a UPE) and was invested by Linus in a related entity, but during the 2017 income year it was clear the investment had failed and was now worthless. 

Archie was now well aware that Linus was no longer in a position to satisfy the UPE and wrote the $25,000 off as a bad debt.

Can Archie claim a deduction for the bad debt?

No.  While the debt is clearly bad and has been written off as such, no part of Archie’s UPE (of $25,000) was included in its assessable income.  Rather, Archie included its share of Linus’s net (taxable) income of the trust (i.e., the $20,000) in its assessable income.

 

Deductibility of expenditure on a commercial website

The ATO has released a public taxation ruling covering the ATO’s views on the deductibility of expenditure incurred in acquiring, developing, maintaining or modifying a website for use in the carrying on of a business.

Importantly, if the expenditure is incurred in maintaining a website, it would be considered 'revenue' in nature, and therefore generally deductible upfront. 

This would be the case where the expenditure relates to the preservation of the website, and does not:

 

n  alter the functionality of the website;

n  improve the efficiency or function of the website; or

n  extend the useful life of the website.

However, if the expenditure is incurred in acquiring or developing a commercial website for a new or existing business, or even in modifying an existing website, it would generally be considered capital in nature (in which case an outright deduction cannot be claimed).

Editor: Please contact us if you want any guidance about the ATO's latest views on this important issue.

 

Easier GST reporting for new small businesses

The ATO has notified taxpayers that, from 19 January 2017, newly registered small businesses have the option to report less GST information on their business activity statement (BAS).

Therefore, if you plan to register for GST after receiving this Update, we can help you access the reporting benefits of the simpler BAS early.

Editor: From 1 July 2017, small businesses generally will only need to report GST on sales, GST on purchases, and Total sales on their BAS.