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.

Newsletter: November

Survey for SMSFs using LRBAs

The ATO has announced that it will be contacting some SMSF trustees in November 2016 to participate in a survey about the use of 'limited recourse borrowing arrangements' ('LRBAs') to acquire assets for their SMSF.

The ATO will email a sample of SMSFs that reported LRBA assets on their 2015 SMSF annual return to invite them to participate in the survey.

Participation is voluntary, and they assure trustees that responses will remain anonymous and the information gathered from the survey will not be used for compliance purposes.

The ATO encourages any trustees contacted to participate (the survey should only take five to seven minutes), as their feedback will help it to gain a better understanding about the SMSF community’s use of LRBAs.

Editor: The ATO has also issued a new Practical Compliance Guideline and a new Taxation Determination regarding SMSFs that enter into non-commercial LRBAs with related parties (e.g., where a member lends money to their SMSF but does not charge interest).

If you would like to discuss any of these SMSF issues, please contact our office.

 

ATO warning for the building and construction industry

The ATO has reported that the building and construction industry represents a disproportionate amount of its debt book, and has identified worrying trends that affect the industry.

Clients in the industry are encouraged to contact their tax agents regarding outstanding debts, as the ATO may be able to offer a range of payment options to help them get back on track sooner and reduce any interest they may be liable for.

Clients that fail to pay, or make arrangements to pay, may have their outstanding tax debts recovered through a garnishee notice.

 

Renting out a room is rental income

The ATO has issued an information sheet to let taxpayers know that money earned from renting out a room in a house is rental income.

This applies to rooms rented by traditional means or through a sharing economy website or app.

Also, taxpayers can only claim expenses related to the part of the house they rent out (so expenses will need to be apportioned accordingly).

The following example illustrates how the ATO would expect rental deductions to be calculated.

Example: renting out part of a unit or house

Jane has a two-bedroom unit with two bathrooms.  She lives alone and only uses her spare room as an occasional home office, for storage and when she has guests. 

Jane mainly uses the ensuite bathroom.  The second bathroom is accessible from the main areas and mainly used by visitors. 

Jane decides to rent out the spare room on a sharing economy website to earn extra income.

When paying guests come to stay, Jane removes all excess items from the room and does not access the area.

She also gives paying guests access to common areas including the second bathroom, kitchen, living area and balcony, and to her wi-fi.  For the period guests are staying and have access to these, Jane can claim 50% of associated costs.

Jane had the room available and occupied 150 days in the year.  When she is not renting out the room she uses it as storage and a home office.

Claiming Rental Deductions

Jane calculates what she can claim based on the following additional factors:

u      The room is 10 square metres

u      The house is 80 square metres

u      The common areas are 50 square metres

She works out she can claim 17.97% of her general expenses (such as electricity, interest on her mortgage, internet expenses, rates and body corporate fees) after adding the following two calculations together:

n       room occupancy:

–     (10/80 x 150/365) x 100 = 5.13%

n       common areas:

–     ((50/80 x 150/365) x 50%) x 100 = 12.84%.

She can claim 100% of the expenses associated solely with renting out the room, such as the facilitator’s commission or administration fee.

Editor: Note that CGT may also apply if a property used to generate rental income is sold.

 

Living overseas but still taxable here

In a recent case, the AAT confirmed that a taxpayer was a resident of Australia for taxation purposes while he was living in Oman.

The taxpayer had left Australia in January 2008 to work in Oman, and he ended up working 21 months in Oman before returning to Australia permanently in September 2009.

Before leaving Australia, the taxpayer sold an investment property in Queensland, cancelled his Medicare card, cancelled his Australian private health insurance, and had his name removed from the electoral roll.

When he left Australia in January 2008, he completed an outgoing passenger card indicating that he was permanently departing Australia.

However, the ATO was of the view that the taxpayer remained a resident of Australia.  In particular, his wife remained in Australia at a jointly-owned dwelling in Mt Martha, he had returned to Australia for three holidays where he stayed at the Mt Martha home with his wife, he maintained an Australian bank account, and sent money to Australia to help pay his wife’s living expenses and to assist with repaying the mortgage on the home.

The AAT concluded the taxpayer had not severed his connections with Australia and had not established enduring and lasting ties in Oman (and so was still a resident of, and his income was taxable in, Australia).

 

Crucial issue to consider when buying a company

Where a buyer commences to hold all of the shares in a company (including a company acting as trustee of a trust), they are highly likely to be appointed as a director of that company.

Although being a director in itself does not make the director personally liable for the debts of the company, there are two types of tax debts that are major exceptions to this rule, being PAYG withholding (‘PAYGW’) and compulsory employee superannuation guarantee (‘SG’).

That is, directors can be made personally liable for any outstanding PAYGW or SG, even if they were not a director at the time the debt was incurred.

Therefore, a key component of the due diligence process undertaken by a potential purchaser should be an assessment of whether the company is up-to-date with its PAYGW and SG obligations (as part of this, a potential buyer should also consider whether any ‘contractors’ to whom payments were made would be seen as 'employees' in the eyes of the ATO).

The buyer will also ordinarily want the vendor to provide some kind of indemnity in relation to the buyer’s PAYGW and SG exposure. 

Note also, however, that the ‘old’ directors do not cease to have exposure to unpaid PAYGW and SG.  That is, both the ‘old’ and ‘new’ directors are all jointly and severally liable for these debts.  This position does not alter even if a director resigns before the due date for payment of a relevant amount to the ATO.