During August, the ATO have released a PCG on their approach to the application of Part IVA to 'Personal Services Businesses'. At the State level, a court decision has highlighted the landholder duty risks associated with raising capital in property entities.

LEGISLATION UPDATE

Foreign resident capital gains withholding (FRCGW) regime

The FRCGW regime applies where a purchaser acquires taxable Australian real property or an indirect Australian real property interest from a foreign resident. Treasury has released exposure draft legislation to increase the FRCGW rate from 12.5% to 15% and remove the current $750,000 threshold before withholding applies to purchases of real property and company title interests.

The changes will apply from the later of 1 January 2025 and commencement of the measure.

Foreign resident capital gains tax changes

The Government is consulting on its 2024-25 Budget announcement, seeking to strengthen the foreign resident CGT regime by:

• Clarifying and broadening the types of assets on which foreign residents are subject to CGT; and
• Addressing an integrity risk on sale of indirect Australian real property interests
• Requiring foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO prior to the transaction being executed.

The proposed amendments will apply to CGT events commencing on or after 1 July 2025.

Paid Parental Leave (PPL)

The Paid Parental Leave Amendment (Adding Superannuation for a More Secure Retirement) Bill 2024  has been introduced into Parliament to add a superannuation contribution to the Commonwealth-funded PPL Scheme. The superannuation contribution will be paid in respect of children born from 1 July 2025.

Tax Agent Code of Conduct - Update

The Coalition have filed a disallowance motion in the Senate to the Code of Conduct changes, which will be heard on 10 September 2024. The position of the Greens is not yet known. Meanwhile, the Assistant Treasurer is starting a public consultation on the changes, and has asked Treasury to consider whether changes are required to clarify the intent. The TPB have also started releasing draft guidance on the changes. 

TAX RULINGS, DETERMINATIONS & COMPLIANCE GUIDELINES

PCG 2024/D2—Personal services businesses and Part IVA

The ATO has released draft guidance outlining its compliance approach for arrangements where an entity derives personal services income (PSI) of an individual, but meets the requirements to be a personal services business (PSB). This means that the PSI rules do not apply, and the income is not attributed to the relevant individual. The PCG considers whether arrangements are of low or higher risk in terms of Part IVA applying and the ATO reviewing those arrangements.

The guidelines will not apply where the income of an entity is not PSI (e.g from the sale of goods) or is generated from its business structure (e.g where the entity also has other employees).

The ATO has identified the following as being low risk arrangements:

• The net PSI is distributed to the individual whose personal efforts/skills generated the income
• The remuneration received by the individual is substantially commensurate with the value of their personal services.
• Remuneration paid to an associate for bona fide services related to the earning of the PSI is reasonable for the services provided by them.
• Any timing difference between earning the PSI and distribution to the individual is for reasons outside the control of the entity or can be explained by circumstances not attributable to tax.
• There is a temporary retention of profits to acquire an asset for a clear commercial purpose.

The guidance provides a number of worked examples of low and higher risk arrangements.

 CASE LAW UPDATE

Oliver Hume Property Funds v Cof SR—Victorian Landholder Duty

This case involved a SPV established for the purpose of a property development. After acquiring the property, funds were raised from the issue of shares to 18 investors. The taxpayer was assessed for duty on the basis that the investor interests were aggregated as ‘associated transactions’ and therefore each investor acquired a ‘significant interest’ (being 50% or more). The taxpayer contended that the definition of associated transaction was not satisfied as the investors subscribed for their shares independently of one another and there was no connection between them.

The Supreme Court held that the acquisitions were interconnected as, unless the required funds were raised, all application money were to be returned and no individual acquisition could go ahead. Together, the acquirers had an interest in an entity that was to undertake a single land development project before being wound-up. The effect of the acquisitions of the shares on the same day, and in the same way, was to substantially alter the shareholding in the landholder from being an Oliver Hume entity to an entity owned by a group of private investors.

Key point: The decision highlight the potential complexity and risk in raising capital in entities with pre-existing interests in land.

OTHER UPDATES

Update to employees guide for work expenses

The ATO has updated its guide to help employees decide whether work expenses are deductible and what records to keep to substantiate them. The update include:

• Information on the electric vehicle home charging rate for electric vehicles.
• References to Tax Ruling TR 2024/3 on the deductibility of self-education expenses.
• Common myths about claiming work expenses deductions.

Data-matching program—lifestyle assets and property management

For the 2024 to 2026 income years, the ATO will match insurance policy data for assets over certain value thresholds including caravans and motor homes, motor vehicles, thoroughbred horses, fine art, marine vessels and aircraft. These data will be matched with ATO held data to promote voluntary compliance, assist with profiling of taxpayer’s wealth, identify risks, and assist in debt management activities.   

For the 2019 to 2026 income years, the ATO will match property management data from property management software companies. The purpose is to match with other ATO held data to identify risks, gain insights to help develop and implement strategies, and promote voluntary compliance.

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.