During March, the revised instant asset write-off was passed by the Senate, with increases to both the limit and the businesses that can access the write-off. In addition, the Federal Court has ruled in favour of the taxpayer on two Part IVA cases, and the ATO have started an education campaign on Division 7A. For these and other updates, read our March tax bulletin.

LEGISLATION UPDATE

Changes to instant asset write-off (IAWO)

Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 has been passed by the Senate with the following amendments made to the IAWO:

• Increase of the threshold from $20,000 to $30,000.
• Increase of the aggregated turnover threshold from $10m to $50 million. However, the $10m threshold will still apply to utilise the small business pool.

The IAWO will end on 30 June 2024 (subject to any Budget announcements).

The amendments will need to be passed by the Lower House. The Bill also includes the bonus deduction for energy efficient assets and changes to the rules for non-arm’s length expenses for SMSFs.

Progress of Other Legislation

The following Bills have been referred to the Senate Economics Legislation Committee:

• Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023: Includes measures to expand application of the he existing promoter penalty laws; extend whistleblower protections; implement reforms to the operation and powers of the Tax Practitioners Board (TPB) and allow taxation officers and TPB officials to share protected information with Treasury and professional bodies.
• Treasury Laws Amendment (Delivering Better Financial Outcomes & Other Measures) Bill 2024: Includes amendments to allow superannuation fund trustees to pay a fee from a member's account for personal financial advice about their interest in the fund. A specific deduction will also be provided for financial advice fees charged under this provision against the fund's assessable income.

Treasury has also released exposure draft materials on the implementation of a 15% global minimum tax and domestic minimum tax in Australia.

Not-for-profit (NFP) Self-review returns

The ATO has confirmed the 2024 income tax return lodgement requirements, which include a new requirement for certain entities to lodge a NFP self-review return. Subject to the NFP’s main purpose, it may need to answer questions about prohibition of the distribution of income or assets to members; existing, operating and incurring expenditure in Australia; and charitable purposes.

FBT Alternative records

Legislative instruments setting out records that can be used as an alternative to employee declarations for certain fringe benefits have been finalised. As these will only apply from the FBT year ending 31 March 2025, the relevant declarations will still be required for the 2024 FBT year. The alternative records apply to a large range of benefits, including ‘otherwise deductible’ benefits and travel diaries.

Victorian State Taxes—Commercial & Industrial Property

Legislation to establish an annual tax to replace stamp duty on commercial and industrial property has been introduced to Victorian parliament.  When qualifying land is sold after 1 July 2024, it will transition into the new system with duty payable one last time. Eligible purchasers will have the option of accessing a government-facilitated loan to fund the payment of duty. The new tax will then begin to apply 10 years after land enters the scheme, on a calendar year basis, at 1% of the site value. Land that is exempt land under the Land Tax Act will not be subject to the tax.

https://www.dtf.vic.gov.au/funds-programs-and-policies/commercial-and-industrial-property-tax-reform

CASE LAW UPDATE

Minerva Financial Group and Mylan Australia Holdings — Part IVA

Taxpayers have been successful in two cases in which the Commissioner sought to apply ‘Part IVA’.

The Minerva case involved a stapled investment scheme where, over time, interest flowing from securitisation trusts in a group reduced on its corporate side and increased on its trust side. This allowed interest to flow to the non-resident unitholders at a 10% tax rate, rather than the 30% corporate rate. The Full Federal Court held that Part IVA did not apply as distributions were made in accordance with the terms of the trust and distributing to the non-resident unitholders had real commercial and financial consequences beyond the tax benefit. The Part IVA factors must be considered objectively, rather than any subjective purpose and motivation, and choosing between two options based on tax benefits does not of itself mean the dominant purpose is to obtain a tax benefit.

The Mylan case dealt with the allocation of group debt as part of a global acquisition, which tracked the Australian thin capitalisation limits. The Federal Court reinforced a number of principles from Minerva including that, for the purposes of the ‘dominant purpose’ enquiry, it is not enough merely to point to the fact that less tax has been paid under the form of the transaction that was ultimately chosen and executed. The commercial rationale for related party debt over equity funding was viewed as a critical factor.

Key point: These decisions reinforce the importance of the commercial outcomes that will arise from a scheme where it will also generate tax benefits. It is expected the ATO will appeal these decisions.

Quy v FCT — Individual residency

The taxpayer was an Australian citizen who transferred to the UAE on an employer-sponsored residency permit. His wife accompanied him, but their 3 children, whom he financially supported, remained at their family home in Australia. He maintained 3 cars in Australia and his private health insurance. The taxpayer resided in the same apartment in Dubai for the period of his 5 year assignment, which he paid for but his employer leased. He visited his family each year, but generally spent less than 2 months here, whilst his wife spent most of her time in Australia. The taxpayer was seeking a refund of PAYGW from his income.

The AAT held the taxpayer was a tax resident of Australia in accordance with both the ‘resides’ and ‘domicile’ tests. He maintained an intention to return to Australia and an attitude that Australia remained his home. The relevant factors were the extent of his ongoing connections to Australia, and his intention to retire in Australia. His visa and accommodation in Dubai were tied to the length of his employment assignment and he did not demonstrate any connection with Dubai outside of his employment.

Key point: Residency remains a complex area of law and the decision highlights the difficulty in a taxpayer proving they are a non-resident, particularly if their immediate family remains behind. No progress has been made on proposed changes to the individual residency rules, which seek to simplify this process. 

Bechtel Australia Pty Ltd v FCT — Travel expenses

The taxpayer provided contracting services on a large scale construction project on Curtis Island. Employees were required to work on a FIFO basis, with the taxpayer organising and paying for their travel to and from their point-of-origin airports to Gladstone and Curtis Island to undertake duties. Air travel costs were included in the taxpayer’s FBT assessments, which then objected to the assessments on the basis that the taxable value should be nil under the “otherwise deductible” test.

The Full Federal Court agreed with the Federal Court that the travel expenditure was a prerequisite to the earning of the employee’s income, not expenditure incurred in the course of gaining or producing such income. The travel between the airport and Curtis Island was not travel between 2 places of employment. This is distinguished from John Holland where employees were rostered on to duty as soon as they arrived at their point-of-origin airport. Factors such as the taxpayer’s code of conduct extending to FIFO employees during this travel; the employees were not required to work all the rostered hours on the last day of a roster; and employees living a long distance from Curtis Island as the taxpayer could not source a local workforce, did not convert it to travel in the course of employment.

 Bowerman v FCT —Profit making scheme—Decision impact statement (DIS)

The ATO has issued a DIS on the AAT decision in Bowerman, which considered whether a taxpayer could claim a loss on sale of a residential unit in which she had resided throughout the period of ownership (refer Tax Update - November). The AAT observed that the facts and result were ‘unusual’, and held that the loss was deductible on the basis the acquisition was a commercial transaction. Objective evidence supported the requisite profit-making intention and her intention to live in it was a subsidiary purpose. Therefore, the loss was not private or domestic in nature. The ATO agreed that the AAT’s factual findings were open on the evidence.

The taxpayer accounted on a cash receipt basis and the AAT allowed the loss in the year of sale rather than the year of settlement due to reliance on the ruling TR 97/7 (i.e. completely subjected to the loss and the loss was capable of reasonable estimate). The ATO takes a different view on the interpretation of TR 97/7, but is considering updating it to clarify when a loss (as distinct from an outgoing) has been ‘incurred’ for the purposes of section 8-1.

Key point: The ATO is not likely to change its approaches to the deductibility of investment losses, which generally require a higher bar to evidence a profit-making intention than when a profit has been made. 

OTHER UPDATES

GSTD 2024/1 —Supplies of combination food

The ATO has finalised its view on whether a food item is a ‘combination’ food for GST purposes, following the decision in the Chobani case. Combination food, which includes a taxable food item, is not GST-free to any extent. This is distinguished from a ‘mixed supply’ of both GST-free and taxable foods which can be apportioned.

The ATO has also updated its list of food that is not GST-free, including adding new food and beverage product lines, such as popping balls and pearls, sport or energy gels, and yoghurt with breakfast cereal. The ATO has also updated entries to better explain why they are GST-free.  

Division 7A education campaign

The ATO has launched its Division 7A education campaign with a webinar dealing with technical basics, and the common mistakes being made. The ATO states that most issues it sees could be avoided by:

• Recognising that companies are separate legal entities.
• Keeping, maintaining and retaining adequate records that explain payments.
• Planning ahead in regard to payments and use of company assets by shareholders and associates.
• Maintaining separate bank accounts and loan accounts for individual entities.
• Undertaking basic annual checks to ensure complying loan agreements are in place and minimum yearly repayments made by the due date.

 CONTACT US

If you have any questions in relation to the issues in the bulletin, or any other tax issues, please contact us.

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.