TAX BULLETIN – AUGUST 2020

August has seen the ATO release guidance on a number of issues associated with COVID-19, including when it will require the repayment of JobKeeper overpayments. The JobKeeper scheme has been amended to include employees that were employed by 1 July 2020 and, with Parliament sitting again, the Bill to extend the JobKeeper scheme has been introduced with the new Rules imminent.

STIMULUS PACKAGES UPDATES

JobKeeper Scheme—1 July 2020 employee reference date

Rules have been registered to change the reference date for eligible employees to 1 July 2020, effective from the fortnight beginning 3 August 2020. This will bring in employees that after 1 March 2020 and by 1 July 2020:
– have started employment (if full-time or part-time employees);
– have reached 12 months of casual employment;
– have turned 18 years of age (and were not previously eligible);
– are aged 16 or 17 years and have started living independently or have ceased full time study; or
– became residents or holders of a Subclass 444 (Special Category) visa.

Refer our previous Bulletin for the full details: http://mctaxadvisors.com.au/jobkeeper-eligible-employees/

The August monthly declaration will need to include these employees from Fortnight 10. The August
declaration will include three fortnights—being Fortnights 9, 10 and 11.

JobKeeper Extension

Coronavirus Economic Response Package (JobKeeper Payments) Amendment Bill 2020 is before the
Senate. This is expected to pass quickly. Broadly, the Bill:
– Extends the JobKeeper scheme to 28 March 2021;
– Extends the JobKeeper changes to the Fair Work Act 2009 to 28 March 2021 (excluding some of the annual leave provisions).
– Includes employers that previously qualified for JobKeeper in certain JobKeeper work directives, provided they have a certificate that state they satisfy a 10% decline in turnover test. The
certificate is to be prepared by accountants, tax or BAS agents or company auditors, however there is a carve out for businesses with less than 15 employees that can provide a statutory declaration.

The changes to the JobKeeper Rules and the decline in turnover test for the extension periods will need to be registered as a legislative instrument. We will provide a further update when this occurs.

Land tax relief

Further land tax relief has been announced by the Victorian Government. Landlords of residential and commercial properties who provide a 50% or more rent waiver of at least 3 months to eligible tenants can now claim a 50% waiver of 2020 land tax and defer payment of the remaining amount until 31 March 2021.

Further, owner occupiers of commercial properties can obtain a 25% waiver of 2020 land tax and defer payment of the remaining amount until 31 March 2021 if the business falls within two categories:
– Licensed pub, club or restaurant – Annual turnover of premises no more than $50 million in 2019 and 2020, and reduced by at least 30% since March 2020.
– Other businesses – Aggregated turnover no more than $50 million in 2019 and 2020 and
participating in JobKeeper.

HomeBuilder

Due to Stage 4, the Victorian government has exercised its discretion to allow building to commence within 6 months from signing of contract (rather than 3 months). This is the longest period that this can be extended via the exercise of discretion by the Victorian Government.
Applications are now open: https://www.sro.vic.gov.au/owning-property/australian-homebuilder-grant

LEGISLATION UPDATE

With Parliament sitting again, the following Bills have progressed:
– Treasury Law Amendment (More Flexible Superannuation) Bill has been introduced into the Senate. This Bill extends the bring forward age limit to 65 and 66 years for non-concessional super
contributions and will apply to contributions made from 1 July 2020.
– Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019 awaits Royal Assent. The Bill extends the choice of fund regime to employees covered by enterprise agreements and
workplace determinations made from 1 January 2021.
– Treasury Laws Amendment (2020 Measures No 2) Bill 2020 awaits Royal Assent. This Bill amends the hybrid mismatch rules.

The Senate Economics Legislation Committee report on the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 has been deferred until 12 October 2020. This Bill amends the R&D tax offset to be  13.5% above the entity’s corporate tax rate,  caps refundability at $4 million per annum and increases the R&D expenditure threshold. This Bill is drafted to apply from 1 July 2019.

CASE LAW UPDATE

Joubert and FCT  – Tax Residency

The taxpayer and his family emigrated to Perth in 2010 and he became an Australian citizen in November 2014. In July 2014 he accepted a position in Singapore (initially on a 6-month probation period). The
taxpayer lived in a rented apartment in Singapore, in which he ultimately lived for 5 years, and his wife and children remained in Australia in rented accommodation. His family were financially dependent on the taxpayer. During the 2015 year, he returned to Australia 25 times and was present for 141 days, with his longest absence 38 days.

The AAT held that the taxpayer had not ceased to be a tax resident of Australia according to the ‘resides’ test (whether you reside in Australia under its ordinary meaning). This was supported by his objective connections with Australia and was consistent with the contemporaneous evidence of his intention. It was particularly significant that the taxpayer maintained a family home in Australia to which he returned regularly and frequently to his wife and family.

Key Takeaway: Harding’s case is authority for a taxpayer being able to be resident of a different country while their spouse and family stay in Australia. However, each case will need to be determined based on its own facts.

Fortunatow v FCT – PSI Tests: Unrelated Clients Test

This was an appeal from the Federal Court. The taxpayer was a business analyst operating through a  company. He contracted through an intermediary agency, not directly with clients. He also advertised via LinkedIn. The ATO view was that he did not satisfy the ‘unrelated clients test’ in the PSI rules, which     requires services to be provided as a direct result of making offers or invitations to the public. The       provisions state that merely providing services through an intermediary agency does not constitute an offer to the public.

The Full Federal Court determined the unrelated clients test was not satisfied. It stated that both the AAT and Federal Court’s construction of the provision was too broad. The  provision of services must be a direct result of the offer of service to the public. An offer or invitation which is only made to an intermediary, and is not passed on to, and plays no part in, the client’s decision to procure the relevant services, cannot be said to have directly resulted in the provision of the relevant services. This is because the offer or invitation loses its direct causal effect at the level of the intermediary and the provision of the services can only be seen as the direct result of some other factor such as the intermediary’s
recommendation to the client.

Key takeaway: There needs to be a direct causal connection between the offers to the public and the services provided. Providing services via an intermediary only is unlikely to satisfy this.

Addy v FCT—Working Holiday Visa Rates

The Full Federal Court has overturned the decision of the Federal Court in the Addy case.

A majority of the Full Federal Court held that the working holiday visa tax rates (‘backpacker tax’) can be applied to a British national who was a tax resident of Australia. The Court stated that this didn’t breach the anti-discrimination clause in the Double Tax Agreement as there was no discrimination based on    nationality. Rather, it was because of a particular type of visa and derivation of working holiday income.

The dissenting judgement stated that the visa status cannot sensibly be divorced from nationality. Due to the dissenting judgement, this may be heard by the High Court.

Other Cases

– The Beneficiary and FCT: A taxpayer did not effectively disclaim a trust distribution as written documentation was not prepared until 3 years after becoming aware of the distribution. Further, the taxpayer claimed the PAYG instalment paid by the Trustee as a refund in her own return, which was inconsistent with disclaiming the distribution.
– N&M Martin Holdings Pty Ltd v C of T: Federal Court judge followed the decision in Peter Greensill Family Co Pty Ltd (’Greensill’). A capital gain derived by a discretionary trust from sale of a non-taxable Australian property (‘non-TAP’) asset and distributed to non-resident beneficiary was taxable. Greensill is currently on appeal to the Full Federal Court.
– C of T v Bogiatto: A chartered accountant assisted a number of taxpayers in making R&D claims which were found to be unsubstantiated and excessive. They were held to be a promoter of a tax exploitation scheme.

ATO RULINGS, DETERMINATIONS AND GUIDELINES

Capital Gains not included in FITO limit—TD 2020/7

The ATO have issued Taxation Determination TD 2020/7 regarding the treatment of foreign capital gains on which no foreign tax have been paid for the purposes of calculating the foreign income tax offset (FITO) limit.

Broadly, the FITO limit is calculated by taking the Australian tax payable (actual calculation) and reducing it by the Australian tax that would be payable if both income on which foreign tax has been paid and non-Australian source income were disregarded (hypothetical calculation).

In TD 2020/7, the ATO state that net capital gains do not have a source, and therefore capital gains on foreign assets are not non-Australian source income for the purposes of the hypothetical calculation. This can therefore decrease the FITO limit in cases where foreign capital gains are derived.

This TD only effects capital gains on which no foreign tax has been paid. If foreign tax has been paid on a capital gain this income is still excluded from the hypothetical calculation.

Outbound interest-free loans to related parties—PCG 2017/4DC2

The ATO has issued a proposed schedule to its Practical Compliance Guideline covering its compliance approach to cross-border related party financing arrangements.

An outbound interest-free loan made to a related party may not be considered high risk, as it is comparable to an equity contribution, where:
– The substance of the lending arrangement is an investment of equity; and
– It can be demonstrated that independent entities dealing with each other in comparable circumstances would not have entered into a loan, but would instead, have entered into an equity funding arrangement.

The schedule to the PCG outlines factors the ATO consider relevant in determining whether it is comparable to an equity contribution.

Other ATO Rulings

– Taxation Ruling TR 2020/4 addresses a range of key technical issues that may arise in determining an entity’s arm’s length debt amount for thin capitalisation purposes.
– Practical Compliance Guideline PCG 2020/7 provides administrative guidance in applying the arm’s length debt test, including a risk assessment framework.
– Taxpayer Alert TA 2020/3 concerns arrangements involving interposed offshore entities to avoid interest withholding tax liabilities.

ATO ACTIVITY AND FOCUS

JobKeeper—Clawback of Overpayments

The ATO have also released guidance regarding clawing back overpayments of JobKeeper amounts due to ineligibility, and when it will not seek the amounts to be repaid. The ATO has stated it will typically not require repayment of the amounts where an honest mistake has been made. Factors relevant to whether the ATO will seek repayment include whether:
– The business relied in good faith on a statement made by an employee in their nomination notice.
– The business fully passed on the benefit of the JobKeeper payment to the relevant employee.
– The mistake was made earlier in JobKeeper when there was less public guidance.

A mistake will not be considered honest if, for example,
– The entity nominated employees or eligible business participants that it should have known would not have been eligible.
– The employer has deliberately not met the wage condition.
– There was fraud, recklessness, or intentional disregard for the law.

The ATO also state that, generally, it will not impose administrative penalties for JobKeeper overpayments that were the result of an honest mistake.

Tax Treatment of State Government stimulus measures

The ATO have released guidance on the tax treatment of State Government stimulus measures, which also confirms the State Government Business Support Grants are taxable income. Refer:
https://www.ato.gov.au/General/COVID-19/Government-grants-and-payments-during-COVID-19/

Taxable Payments Annual Reports

The ATO issued a reminder that if businesses pay contractors for certain services, they may have needed to lodge a Taxable Payments Annual Report (‘TPAR’) by 28 August 2020. Relevant industries now include building and construction, cleaning services; courier and road freight; security, investigation and surveillance; information technology and government entities.

The ATO stated that many more businesses will likely be paying contractors when they did not in the past, e.g. restaurants, cafés, grocery stores, pharmacies and retailers have started paying contractors this year to deliver their goods to customers as a result of COVID-19. These businesses may not have previously
needed to lodge a TPAR and may not be aware of the requirement.

In regard to courier services:
– If you sell goods and you provide the option of a delivery service, you are supplying a courier service unless the customer doesn’t have the option to obtain the goods from you any other way.
– However, courier services don’t include delivery of goods your business provides where delivery is the only method your clients or customers have of receiving the goods.

It is noted that a TPAR only needs to be lodged for courier services if the total payments received for these services (i.e. the delivery fees) are 10% or more of  GST turnover.  If the fees are less than 10% of GST turnover , a TPAR does not need to be lodged (but taxpayers can choose to do so).

COVID-19 and Loans on Hold

The ATO have clarified their position on loans that have been put on hold during COVID-19. A debt can be forgiven for tax purposes if, generally:
– the debtor is somehow relieved from the legal obligation to repay it, or
– there is evidence that the creditor won’t insist on repayment or rely on the obligation for repayment.

The ATO have stated that, if a creditor only postpones an amount payable and the debtor acknowledges the debt, a debt is not considered forgiven. This is unless there is evidence that the creditor will no longer rely on the obligation for repayment.

COVID-19 and Trust Liquidity Issues

The ATO recognises that financial institutions may impose restrictions on the way in which a trustee can deal with its assets which prevent it satisfying a beneficiary’s entitlement. If a present entitlement arose before any effect of COVID-19, in circumstances that were not a reimbursement agreement, and a trustee needs to make subsequent arrangements to meet the requirements of the financial institution, these will not invalidate that entitlement or cause s 100A of the ITAA 1936 to apply.

For present entitlements conferred at the end of the 2020 tax year the law will be applied based on the facts presented.

The ATO will not undertake compliance action to consider the validity of a beneficiary’s entitlement, or the application of s 100A of the ITAA 1936, where a trustee is affected by liquidity issues due to COVID-19 and unable to satisfy a beneficiary’s entitlement.

COVID-19 and Car Fringe Benefits

The ATO have issued a fact sheet on FBT obligations for work cars garaged at home due to COVID-19

Where a car isn’t being driven at all or only being used for maintenance purposes:
– Operating Cost method: Provided odometer methods are kept, there may be no FBT liability.
– Statutory Formula method: Car will still be available for private use and an FBT liability will arise.

Where a car is driven for business purposes, the employee should maintain a logbook to determine the reduction in taxable value under the operating cost method. Log books may be adjusted this year to taken into account changes due to COVID-19.
Further detail: https://www.ato.gov.au/law/view/document?DocID=AFS/CAR-FBT-COVID-19/00001

The ATO have also provided guidance on other FBT issues associated with COVID-19, such as providing emergency health care and cancelled events. Refer: https://www.ato.gov.au/General/COVID-19/Support-for-businesses-and-employers/COVID-19-and-fringe-benefits-tax/

Other ATO Activity

The ATO have stated it will not apply penalties to the late lodgement of Business Activity Statements that full due during August and September. It will review this position at the end of September.

The ATO have also indicated that it will look to recommence audits and general work streams in September and October, however this will be subject to the developing pandemic situation.

CONTACT US

For further information on any of these updates, or for general assistance, please contact Our Directors, Jacci Mandersloot or Natalie Claughton.

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.