TAX BULLETIN – JULY 2020

July has seen the details released of an extended JobKeeper scheme under which payments are to be scaled back and eligibility re-tested. The Victorian State Government has also announced further funding to assist businesses with the worsening impact of Covid-19. ATO activity has included the release of guidance on when it will clawback JobKeeper overpayment amounts.

LEGISLATION UPDATE

With the July sitting of Parliament being cancelled there has been no legislation passed. The next sitting is currently due on 24 August 2020.

STIMULUS PACKAGES UPDATES

JobKeeper Scheme—Extension

The Government has announced an extension of the Job Keeper scheme by 6 months to 28 March 2021 (refer our previous Bulletin for more details).

From 28 September 2020 to 3 January 2021:
– The payment rate of $1,500 per fortnight for eligible employees and business participants will be reduced to $1,200 per fortnight, and a lower payment rates of $750 per fortnight will apply for those that worked fewer than 20 hours per week.
– Businesses and not-for-profits will need to demonstrate that actual GST turnover has declined in the June and September 2020 quarters relative to comparable periods.

From 4 January 2021 to 28 March 2021:
– The maximum payment rate will be further reduced to $1,000 per fortnight and the lower payment rate will be reduced to $650 per fortnight.
– Businesses and not-for-profits will need to demonstrate that their actual GST turnover has declined in each of the June, September and December 2020 quarters relative to comparable periods.

The 20 hours per week requirement will be based on average hours worked during February 2020. The Commissioner will have discretion to set out alternative tests if the hours worked in this period were not usual. The decline in turnover required will be the same as the existing rules, and the Commissioner will have the same discretion to set out alternative tests.

The professional bodies are seeking to be involved in consultation on drafting the rules for the extended scheme, and there is also pressure to continue the full scheme for Victorian business so there is potential for changes to be made to the proposed new rules.

JobKeeper Scheme—ATO Activity and Overpayments

The ATO has written to 8,000 businesses advising that they were ineligible for JobKeeper and their payments will be ceased. However, the ATO have also released guidance on clawing back overpayments 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; or the employer has deliberately not met the wage condition.

The ATO also state that, generally, it will not impose administrative penalties for JobKeeper overpayments that were the result of a mistake. However, administrative penalties will apply if there is evidence of deliberate actions to get JobKeeper payments that an entity would not have otherwise been entitled to.

JobTrainer, apprentice subsidies and JobSeeker

The Federal Government will be establishing a JobTrainer fund in partnership with states and territories to provide access to free, or low cost, training places in areas of identified skills. The fund will provide for around 340,700 additional training places to assist school leavers and job seekers.

The current wage subsidy for apprentices and trainees will be extended by 6 months to March 2021 with eligibility for the subsidy expanded to include medium-sized businesses with less than 200 employees who had an apprentice in place on 1 July 2020. The subsidy covers 50% of the wages paid to apprentices and trainees, up to $7,000 per quarter.

The $550 fortnightly coronavirus supplement payment is to be extended from 25 September to 31 December but the rate will be reduced from $550 to $250 per fortnight. Means testing arrangements and mutual obligation requirements will also be reintroduced.

Other Federal Government measures

Changes to SME loan guarantee scheme: From 1 October until 30 June 2021 the scheme, under which the Government is guaranteeing 50% of new unsecured loans to SMEs, will continue to be available with the following changes:
– extend the purpose of loans able to be provided beyond working capital;
– permitting secured lending (excluding commercial or residential property);
– increasing the maximum loan size to $1m and increasing the maximum loan term to 5 years; and
– allowing lenders the discretion to offer a repayment holiday period.

HomeBuilder: Guidelines and application details now on Vic SRO website

https://www.sro.vic.gov.au/homebuilder-grant-guidelines

Early Release of Superannuation: The application period will be extended from 24 September 2020 to 31 December 2020.

Victorian State Government measures

Business Support Fund Expansion: $5,000 grant available to businesses in metropolitan Melbourne, Mitchell Shire and Regional Victoria due to Stage 3 restrictions. Businesses must be a participant in the JobKeeper Payment scheme and must also;
– employ people, be registered with WorkSafe on 30 June 2020 and have an (ungrouped) annual payroll of less than $3 million in 2019-20; and
– hold an ABN and be registered for GST on 30 June 2020.

Further $5,000 grant available to businesses in metropolitan Melbourne and Mitchell Shire due to Stage 4 restrictions.

Regional Tourism Accommodation Support Program: Funding for accommodation providers in eligible regions effected by cancellations due to Stage 3 restrictions.  The provider must be bookable to public via online booking platform, website or via real estate agent and have an ABN at 30 June 2020.

Other Business Support Funds: Assistance to small businesses in Melbourne’s CBD and a night time economy support program  for the hardest hit businesses in hospitality. No further information is available at this stage.

Payroll Tax Deferral: The existing deferral has been extended and expanded, with eligible businesses with payrolls up to $10 million able to defer their liabilities for the first half of the 2020-21 financial year.

Worker Support Payments : For workers required to isolate due to Covid-19 where they are not on JobKeeper and  have exhausted all sick leave.

Agricultural Workforce Plan: Assists agriculture, food processing and critical food supply chain businesses in rural, regional and outer metropolitan areas in Victoria with recruitment support and financial support for worker accommodation and travel, worker induction and retraining and business adaptation.

CASE LAW UPDATE

Sushi Yachiyo Pty Ltd and CofT — Superannuation Guarantee exclusion

This case considered whether an employee who held a Subclass 457 (Business (Long Stay) visa) was a ‘senior executive’ and therefore excluded from the Superannuation Guarantee (SG) requirements. The ATO contended he was a cook and therefore was not eligible. The taxpayer argued that a verbal
agreement had been made that the employee would hold an executive position and his qualifications, responsibilities and salary were consistent with his role as Chief of Operations.

The AAT held that ‘senior executive’ is intended to capture employees who hold very senior positions in the employer company and have substantial authority and responsibility for decision-making. Although the evidence was that the individual had management responsibilities beyond being a chef, he did not have appropriate qualifications to act as a senior executive.

Key Takeaway: When relying on specific exclusions from the SG rules, employers should ensure
satisfaction of the requirements have been well documented.

Dental Corporation Pty Ltd v Moffet — Whether common law or SG employee

The respondent in this case was a dentist who sold his dental practice but continued to work under a   services agreement which also guaranteed the purchaser a minimum annual cash flow. The agreement stated that the relationship was not one of employment. The dentist resigned and claimed that he had been an employee and was entitled to accrued annual leave, long service leave and superannuation.

The Full Court held that, whilst some aspects of the relationship might have suggested employment they were not predominate. The purchaser was not entitled to tell the dentist how to do his job as he set his own work schedule and leave arrangements. A relevant consideration is also whether the person is working in their own personal business and acquiring goodwill or really working in the other party’s business.

However, the Full Court held that the dentist was an employee under the extended meaning in s.12(3) of the SG Act for a person working under a contract wholly or principally for the labour of that person. This requires an inquiry into the purpose of the contract from the perspective of the person obtaining the benefit of the labour. The services agreement procured the dentist’s personal services as well as his promise that the practice would achieve a minimum cash flow and the Court held that the agreement was substantially “for” his labour.

Key Takeaway: The case is a reminder that even where a common-law employment relationship does not exist, if payment is being made for labour there is a likelihood that a superannuation obligation will arise.

Duncan and FCT — No deduction for settlement payment by director

The taxpayer was employed by and acted as director for companies in a group which went into liquidation, and the taxpayer was made redundant. The liquidators assigned the right to sue directors, including the taxpayer, to recover debts incurred by the group while insolvent. The taxpayer then paid $100,000 in full and final settlement of all legal actions against him in his role as a director for trading while insolvent. The taxpayer claimed a s.8-1 deduction on the basis this was incurred as a result of carrying out his duties as a director in the course of his employment.

The AAT held that the taxpayer did not incur the payment in order to preserve his employment which had ended. Further, the payment was incapable of resulting in any future income for the taxpayer from the group as an employee or a director. Although there was a causal connection between the payment and the derivation of previous income something closer and more immediate was required for the payment to be treated as being incurred in deriving assessable income. The advantage sought by the taxpayer was to avoid litigation and so the payment was made to protect and preserve his reputation and his capacity to earn income in the future. Accordingly, the payment was an outgoing of a capital nature and not deductible.

Chadbourne and FCT — Interest on loans provided to discretionary trust

The taxpayer in this case controlled the trustee of a discretionary trust and was a primary beneficiary. He borrowed funds personally for the purchase by the trust of apartments which were rented out, and took out a margin loan used by the trust to buy shares. There were no formal loan agreements between the taxpayer and the trust. The taxpayer claimed total interest deductions of almost $183,000 over 2 income years. The trust generated no net income in those years due to share trading losses. The ATO disallowed the deductions.

The AAT stated that if the taxpayer could establish a present entitlement to a share of trust net income there would be a sufficient nexus with the interest expenses, even if assessable income was not received in the same year. However, the taxpayer’s control of the trustee did not mean he had a reasonable expectation of sharing in the future income of the trust by way of distributions. As the trustee was required to give genuine consideration to the exercise of its power of appointment of income, there was no certainty it would exercise discretion in favour of the taxpayer. Until the trustee distributed a share of trust income to the taxpayer, his interest in the income was a mere expectancy and he had no right to demand payment of the income.

Key Takeaway: If a discretionary trust is not able to borrow funds in its own name to fund an income-    producing acquisition, these funds should be on-lent to the trust by the borrower at a commercial interest rate.

Decision Impact Statements — Greig v FCT and SWPD v CofT

The ATO has issued decision impact statements in respect of two recent cases.

Greig v CofT: In this case the Full Federal Court allowed the taxpayer deductions for significant losses from share trading activities on the basis that they were a ‘business operation or commercial transaction’. The Commissioner does not believe the decision changes the common-law principles nor is it inconsistent with the existing ATO guidance. The Court had regard to the taxpayer’s extensive business knowledge and experience, the significant commercial steps he took to increase the value of his shares and the scale and periodicity of his overall share-trading activities in reaching its conclusion.

SWPD v CofT: In this case the taxpayer purchased a property covered by native forest, which he intended to harvest, but was sold after 24 years prior to any harvesting taking place. The only activity carried out was maintenance and there had been poor record-keeping. The AAT held that a taxpayer was carrying on a business for small business CGT concessions purposes. The Commissioner considers the AAT applied the correct legal test but that the facts of the case are extreme. To be carrying on a business a taxpayer must do more than passively hold a CGT asset and the Commissioner will still examine cases where a taxpayer asserts they are carrying on a business with little evidence of relevant activities being carried on. The absence of appropriate record keeping will also be a matter of concern to the ATO.

Appeal news—Eichmann v Cof T

The taxpayer has appealed to the Full Federal Court in the decision of Eichmann v CofT, which dealt with whether an asset was an active asset for the purpose of the small business CGT concessions. The taxpayer carried on a business of building, bricklaying & paving through a trust. Land was acquired next to their home and used to store materials, tools, and park work vehicles. The Federal Court held that the land was not an active asset as it was required to have a direct functional relevance to carrying on  the normal day-to-day activities of the business, whereas the use for storage was a preparatory activity. The judge also stated that predominantly the whole of the asset needs to be used in carrying on of a business.

This decision therefore resulted in a potential narrowing of the ability for land to qualify as an active asset and we await with interest for the Full Federal Court decision.

ATO RULINGS AND ACTIVITY

Home office expenses—PCG 2020/3

The ATO has extended the “shortcut” rate for claiming work-from-home running expenses until 30 September 2020 (and will give consideration as to whether this date is extended further). Please refer to our prior bulletins on this method, and note that the other available methods may still be more beneficial for some clients.

Demergers

The ATO has issued TD 2020/3 which finalises its view of the meaning of ‘restructuring’ under the demerger rollover relief provisions. Demerger rollover relief can apply where shareholders receive interests in a demerged entity under a restructuring and ‘nothing else’, and they maintain the same proportional interest holding. The broader the transactions included within a restructure the greater the risk that the interest holder may not meet these requirements.

The Ruling includes examples of when a restructuring may include the subsequent sale of the head entity, such that the nothing else requirement is not met, or a subsequent capital raising by the demerged entity in the context of meeting the proportionality requirement. Based on the final ruling, demerger relief is now only likely to apply in very plain demerger transactions.

Note: It is already difficult for private groups to undertake a demerger transaction unless it is driven principally by commercial requirements. If done for estate planning or other family reasons there is a risk that the ATO will treat the distribution of the demerged entity shares to the shareholders as dividends.

GST withholding regime—transitional rules end

Since 1 July 2018 purchasers of new residential premises and potential residential land have generally been required to withhold an amount at the date of settlement and pay it directly to the ATO. However, this withholding requirement did not apply if the contract was entered into before 1 July 2018.

The ATO has issued a reminder that these transitional provision ended on 30 June 2020 and any contracts that were entered into before 1 July 2018 and have not yet settled will now be subject to the GST withholding rules. Notification requirements must be satisfied by the vendor prior to settlement and the ATO online lodgement obligations must be completed by the purchaser.

FBT car parking threshold

The FBT car parking threshold has increased to $9.15 for the FBT year starting on 1 April 2020 (up from $8.95 for the 2019-20 FBT year). This threshold is relevant in determining whether car parking provided to employees is a fringe benefit.

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.