During June, the Senate finally agreed to pass the small business $20,000 instant asset write-off for the 2024 year. There has also been a number of interesting case decisions on FBT, small business CGT concessions and Part IVA. 

LEGISLATION UPDATE

Instant-asset write-off (IAWO) & Other tax measures

Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 has finally been passed by the Senate. This expands the IAWO to $20,000 for the 2024 income year for small businesses with aggregated turnover of up to $10m.

This means that the small business energy incentive measure and amendments to the ‘non-arm’s length income’ provisions for SMSFs have also been passed.

The lower house has passed Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 which includes a number of tax measures announced in the 2024-2025 Budget. This includes the extension of the $20,000 instant asset write-off for a further 12 months until 30 June 2025, as well as Build-to-Rent measures and the Medicare levy exemption for lump sum payments.

CASE LAW UPDATE

BQKD v FCT – Fringe benefits provided to beneficiaries

A family trust provided luxury cars to 3 brothers who were the directors of the trustee company. The cars were used for business and personal use. The deed allowed the trustee to distribute to a range of family members, and to provide beneficiaries with use of trust property. The brothers ran the trust business but were not employees and shared profits equally. The Commissioner imposed FBT on the taxable value of the cars’ private use on the basis the directors were ‘employees’ for FBT purposes, and the benefits were paid to them ‘in respect of’ that employment.

The AAT held there was no employment relationship. There was no evidence of an employment contract, and the directors sat at the apex of the business rather than being integrated into its hierarchy. Even if they were employees, the benefits were not available to them in connection with their employment. They were helping themselves to benefits because they genuinely believed they were entitled as beneficiaries, not because it was a reward for their work as directors.

Key point: The ATO view has generally been that cars provided to director/beneficiaries will be in respect of employment and therefore subject to FBT.

Moloney v FCT – SBCGT concessions: Market valuation

The taxpayer was a trust which held the shares in a wholly-owned company carrying on a freight business specialising in agricultural products. The trust sold the shares to a new holding company for $3.5m, based on a business valuation prepared by PKF. The small business CGT (SBCGT) concessions were claimed on the capital gain, which reduced the net taxable gain to $nil. On audit, the Commissioner deemed the shares to have been disposed for a higher market value of $10.6m, as determined by KordaMentha. This resulted in failure of the $6m maximum net asset value test, and therefore the SBCGT concessions did not apply.

The AAT agreed that the parties were not acting at arm’s length and so market value could be substituted as the sale price of the shares. However, it preferred the PKF valuation as it took a more realistic approach to the cyclical nature of the agricultural sector and how it affected the business. The SBCGT concessions were therefore able to be applied.

Key Point: It is important that internal restructures and other related party transactions are supported by valuations prepared using appropriate valuation principles in the event of challenge by the ATO.

Ierna v FCT – Part IVA

In another decision, the ATO has been unsuccessful on Part IVA. In this case, a restructure had resulted in pre-CGT unitholders in a unit trust, which operated a business, being issued pre-CGT shares in an interposed holding company with substantial share capital. The Group also had significant Division 7A loans. A capital reduction allowed the share capital to be returned to the shareholders tax-free, and utilised to refinance the Division 7A loans. The commercial basis for the restructure was to corporatise the group and extinguish the loans which had an adverse commercial impact on the business.

The Federal Court held that Part IVA did not apply as it is not sufficient for a taxpayer to have arranged its affairs in a way that derives a tax benefit. The dominant purpose of the restructure was to use pre-CGT assets to repay the loans and not for any entity to obtain a tax benefit. The alternate postulate proposed by the ATO did not achieve the non-tax benefit results achieved by the taxpayer’s scheme.

Section 45B also did not apply as the payment was wholly attributable to share capital and could not be regarded as a substitute for a dividend. Section 45B is an integrity provision to prevent companies returning capital to shareholders in preference to dividends

ATO UPDATES

Rental Properties—Common mistakes

The ATO is warning rental property owners that their tax returns are in the spotlight for 2024, noting that the majority of rental property owners are making errors despite 86% using a registered tax agent. Some of the common errors made include:

• Interest deductions: Redrawing/refinancing a rental property loan, using funds to pay for private expenses, and then claiming all the interest as a deduction instead of apportioning between private and investment components. Repayments must also be apportioned for the life of the loan.
• Body Corporate fees: If a body corporate requires payments to a special purpose fund to pay for a particular capital expenditure, the levy is not deductible until the capital works are complete and the expense billed to the body corporate.
• ‘Double dipping’ on expenses the property manager has arranged and included on the property’s income and expenses report for the year.
• A lack of documentation to substantiate claims of expenses and deductions.
• Borrowing expenses being claimed immediately rather than over a 5-year period or life of the loan.
• Capital purchases being claimed immediately as repairs.

Other Updates

Division 7A: The benchmark interest rate for the 2024–25 income year is 8.77% pa. This is an increase from the prior rate of 8.27%.

2024 tax return changes: All work-related self-education expenses to be claimed at D4 Work-related self-education expenses; new small business energy incentive reporting labels included on all tax return types; new trust distribution labels requiring additional information on capital gains distributed to beneficiaries.

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The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.