Tax Bulletin – December 2019

During December, the Senate passed the removal of the main residence exemption for foreign residents, while the Board of Taxation released its reports into the small business tax concessions and the individual tax residency rules. The ATO released its draft ruling on employee transport expenses, as well as finalising a number of rulings including in relation to trust resettlements.

LEGISLATIVE UPDATE

Removal of main residence exemption for foreign residents

The removal of the main residence exemption for non-residents of Australia for tax purposes has now become law.

Non-resident taxpayers who acquired property prior to 9 May 2017 may wish to consider selling during the transitional period, during which the main residence exemption will still be available, which ends on 30 June 2020. After this date, the main residence exemption will only be available in limited circumstances (refer Tax Bulletin—October 2019)

Legislation to be carried forward to 2020 

Parliament will resume on 4 February 2020. Unpassed legislative measures to be carried forward include;
– Anti-phoenixing measures, including the expansion of the DPN regime to GST liabilities.
– Superannuation guarantee amnesty
– Testamentary trust integrity measures

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

PCG 2018/9—Central management & control test for foreign incorporated companies

PCG 2018/9 provides guidelines to identify where a company’s central management and control is  located. The PCG has been updated to provide additional time to foreign incorporated companies with Australian resident directors and/or strategic decision makers to update their governance processes and retain their status as non-resident companies before the  ATO will apply resources to reviewing their tax residency status.  The transitional period for an early balancer taxpayer with a 31 December year end will be extended until 31 December 2020, and to 30 June 2021 for a taxpayer with a 30 June year end.

The updated PCG also identifies low-risk scenarios which are unlikely to attract a review from the ATO. The tax residency status of a company will often be a low risk where the tax outcome may not differ significantly even if it was Australian resident (i.e. where profits would be non-assessable pursuant to the branch profits concession or taxable in any event under the controlled foreign companies rules).        Resources are unlikely to be applied where the tax impact of the foreign company’s tax residency status is low.

LCR 2019/5—Reduced Corporate Tax Rate and Base Rate Entity

LCR 2019/5 finalises the draft law companion ruling on access to the 27.5% corporate tax rate available to a “base rate entity“. This is a corporate tax entity with no more than 80% of its assessable income being “base rate entity passive income” (BREPI) and its aggregated turnover being less than the threshold for the relevant income year ($50 million from the 2019 income year).

The final ruling clarifies the following points which were not included in the draft:
– A corporate tax entity does not include the BREPI or assessable income of any connected entity or affiliate when determining whether it meets the 80% BREPI test.
– Where a franked dividend paid to a trust is streamed to a corporate beneficiary it is not a non-portfolio dividend of the corporate tax entity (as the dividend is not paid to a company that holds a 10% voting interest in the company paying the dividend). It will therefore be BREPI.

TR 2019/D4—Employee deductions

TR 2019/D7 sets out when an employee can deduct transport expenses. This will partially replace the travel expenses draft ruling TR 2019/D6. The deductibility of accommodation, meals and incidental expenses, will be covered in future products. There are a number of differences or additional inclusions in comparison to the previous draft ruling.

– On-call and standby arrangements: The fact that an employee is awaiting a call from their employer to attend a regular place of work does not in itself make travel to that workplace deductible.
– Transport of bulky equipment: Where the nature of the employment creates a practical necessity, explained by work duties, to transport bulky equipment to and from a regular place of work, the transport expenses to/from the place of work may be deductible.
– Two different offices; Where there is discretion to work out of a second office then the transport to an alternative work location is not tax deductible. If an employee is required to attend both offices, however, transport may be deductible.
– Point of hire FIFO workers: The ruling notes that the cost of travel between a ‘transit point’ (where an employee reports for work) and the place where the person carries out their substantive duties will be deductible where it can be said that the employment is the occasion for the expense.
– Remote working: Where the employee is working from home, any travel into the office is private home to work travel (due to the employee’s choice to work from home rather than in the office). Where a home office is the sole base of operation, any travel to perform work duties such as to client premises would be considered tax deductible.

Finalisation of other draft rulings  and determination

The ATO has finalised a number of rulings and determination which are generally in line with their drafts.
– GSTR 2019/2 –supply of intangibles is connected with Australia. Updates the ATO view as to when the supply of intangibles is connected with the ‘indirect tax zone’.
– TD 2019/13 – meaning of employee share trust. Focuses on the meaning of the ‘merely incidental’ requirement.
– TD 2019/14 – Trust split arrangements causing trust resettlements. Confirms the ATO view that a trust split arrangement of the type described in the determination causes a new trust to be settled over some of the assets, thereby triggering a CGT Event.

CASE LAW UPDATE

GSJW v CofT— Release from tax debt

In GSJW v Cof T the taxpayer had brought up-to-date outstanding tax obligations from 1997 to 2015 and paid off the associated primary tax. As at 30 June 2017, the taxpayer had a total debt of $949,365 which was mainly GIC and applied to be released from liability on serious financial hardship grounds.

The taxpayer argued that his ADHD adversely impacted on his ability to comply with his taxation
obligations. His FIFO contract was also coming to an end and his wife was suffering from ill health.

The Tribunal applied the three tests set out in PS LA 2011/17. The taxpayer satisfied the income/outgoings test as even if he was to work another 10 years, he would fall well short of repaying the GIC. The taxpayer’s debts also exceeded his available assets as even if he was to sell both his properties, that would leave him without a home and still materially in debt to the ATO. After weighing up the various tests and factors, it was warranted that the taxpayer was granted a partial release from the eligible debt. This meant he was released from all the GIC component but still had to pay the income tax owing.

BOARD OF TAXATION REVIEWS

Review of small business tax concessions

The Board has issued its report to Government on its review of all small business tax concessions, which includes the following key recommendations:
– The $10m turnover test be extended to the small business CGT concessions and the $6m maximum net asset value test be repealed.
– Repealing the 15-year exemption, active asset reduction and retirement exemption and replacing them with a single exemption subject to a cap.
– Reintroduce loss carry back rules for small businesses.
– Conduct a post-implementation review of the small business restructure regime.

Review of individual residency rules

The Board has also issued its report to Government on its review of the individual residency rules. It makes a number of recommendations around replacing the rules with objective tests which would introduce the concepts of long-term resident, short-term resident and an overseas employment rule.

Update on current reviews

The Government has announced that the Board will undertake a review of CGT roll-over rules. The Board has been requested to identify and evaluate opportunities to rationalise the existing CGT rollovers into a simplified set that are easier to use and interpret. If the Board comes to the view that the system would benefit from additional categories of rollovers, then the Board may suggest these as    options for the Government to consider. In general, the Board’s proposed principles-based rollovers should reduce the regulatory burden on affected businesses, while protecting the tax system against the risk that any CGT deferral becomes permanent.

The Board is asked to report back to the Government by 30 November 2020.

The Board has also prepared a second consultant paper as part of its review of the operation of the  corporate tax residency rules. The paper sets out a number of proposed reform options and also includes additional consultation questions for stakeholder consideration.  The closing date for submissions is 31 January 2020.

MERRY CHRISTMAS FROM MC TAX ADVISORS

Jacci and Natalie would like to thank their clients and contacts for all their support in 2019. We wish you and your families a very Merry Christmas and all the best for 2020.

We look forward to many new tax developments in the year ahead!

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.