Tax Bulletin – June 2019

This month three specific ATO Fact Sheets have been released for small businesses. With Parliament resuming we can expect debates and focus on personal tax cuts, however it is also important to remember the tax changes that apply from 1 July 2019 (some for which legislation is yet to be seen).

These, together with a recent cases and ATO Rulings and Guidelines, are covered in our June 2019 Tax Bulletin.

LEGISLATIVE UPDATE

Resumption of Parliament and Personal Tax Rate Cuts

Parliament resumes on 2 July, with the personal tax rate cuts being the main item of interest. Scott Morrison has stated that he plans for the Bill to be in the Senate by Thursday 4 July. While Labor has agreed to Stage 1 and 2, it has stated more time is needed to debate Stage 3 of the plan (which starts in 2024). It is therefore currently unclear whether the Government will be able to pass the Bill based on the support of the cross-benches.

If taxpayers lodge their 2019 tax returns prior to the Bill receiving Royal Assent, the ATO have stated that they will automatically issue Notices of Amended Assessments once the changes become law.

Changes from 1 July 2019

The following previously legislated changes apply from 1 July 2019:
– Payments to employees and contractors will be non-deductible where PAYG withholding has not been reported and paid to the ATO.
– Single Touch Payroll is now mandatory for all employers (subject to certain deferrals).
– Taxable Payment Reporting has been extended to road freight, IT and security providers.

Further, the following changes are due to commence on 1 July 2019, although they are not yet legislated:
– Denial of deductions for holding costs for vacant land.
– Trustee beneficiary reporting for closely-held trusts that have made Family Trust Elections.
– Income for person’s fame or image to be taxed to individual.

CASE LAW UPDATE

Mingos v FC of T — Main residence exemption

In Mingos, the Taxpayer was entitled to the marital residence as part of his divorce settlement, but also had to borrow funds to make cash payments to his ex-spouse and assume the mortgage. As his Trust had borrowing capacity, the property was transferred to the trustee. The trust was a discretionary trust, with the Trust Deed providing that the taxpayer is a member of a class of beneficiaries and the Trustee to have discretion on distribution of income and capital. The property was recorded in the balance sheet of the Trust in the following income years, and on subsequent sale of the property, the  capital gain and its distribution to the Taxpayer were also recorded in the Trust accounts.

The Taxpayer argued that he was not taxable on the gain on the basis that the property was in fact owned by him beneficially, and he was entitled to the main residence exemption. However, the Taxpayer was not able to prove to the Federal Court that he had absolute entitlement to the property. In particular, instructions given to the bank, the terms of the Trust Deed, and the signed Trust accounts were evidence that the Trust owned the property.

Key takeaway: This case is a reminder that it is always preferable to have contemporaneous documentary evidence in support of a factual position. Further, trusts for specific purposes should ensure the trust documents are drafted accordingly.

De Simone v DCT — Director Penalty Notices

In the De Simone case, the taxpayer was issued with a Director’s Penalty Notice (‘DPN’) for unremitted PAYG withholding. The taxpayer contended that historical payments that had been made were for the purposes of meeting the relevant PAYG liabilities and that he had instructed the ATO of this position at the time of making the payments. However, the ATO allocated these payments to older tax debts of the company. The taxpayer then also sought to contend that the payments were not made by the company, but out of his own funds and so should have been applied to extinguish his personal liability rather than allocated to the company.

The Court dismissed the taxpayer’s argument on the basis that the ATO’s allocation of payments complied with the statutory methods and Practice Statement 2011/20. Under the provisions, the Commissioner is not required to take account of instructions of the taxpayer (although, in this case, there was no evidence of such instructions). Further, the Practice Statement provides for the payment of older liabilities first. Some of these payments identified were made prior to the company actually incurring the relevant PAYG withholding liability. They were also made prior to the DPN being issued.

Key takeaway: Where a taxpayer wishes tax payments to be allocated against specific liabilities, it is not only important to instruct the ATO of this position, but ensure the ATO has agree to the allocation. This can become particularly important once a DPN is issued, to ensure payments are allocated to the liability resulting in the DPN.

Seabreeze Estate Unit Trust— GST Margin Scheme

In the Seabreeze case, the taxpayer sold new residential premises under a sale contract which stated the margin scheme applied. The ATO reviewed the transaction (as no GST was reported) and applied GST to the gross sale proceeds on the basis that the sale was ineligible for the margin scheme. The issue revolved around whether the taxpayer acquired the property under the margin scheme (in which case it would be eligible to apply it on sale).

The AAT held that there was sufficient evidence that the taxpayer had acquired the property under the margin scheme, although the relevant page of the land sale contract which would have indicated this choice was not able to be located. The original vendor sold the property for a loss and did not report any GST on its BAS in respect of the sale. The taxpayer only registered for GST a year after the purchase when it started incurring expenses. Further, the taxpayer was a reliable witness and their recollection was that there was no GST on the purchase of the property. It is noted that the property was purchase pre-29 June 2005 when there was no specific requirement for the agreement to use the margin scheme to be in writing.

Key takeaway: Although this case was successful at the AAT based on the surrounding evidence, it is important that taxpayer’s keep contemporaneous documentation at the time of acquiring the property in regard to the GST position on purchase. This can also be said in regard to documenting their intention in acquiring property, or any change in intention, should the ATO review the position on ultimate disposal.

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

PCG 2019/5—Main Residence Exemption on Inherited Dwellings

The ATO have finalised PCG 2019/5 relating to the Commissioner’s discretion to extend the 2 year period for disposing of inherited dwellings in order to claim the main residence exemption. The PCG outlines the factors relevant to the Commissioner exercising the discretion. It also provides safe harbour rules for when the discretion can be automatically applied by the taxpayer.

Please refer to our August 2018 Tax Bulletin for commentary on the draft PCG 2018/D6.

PCG 2017/13 – Sub-Trusts expiring in 2020

PCG 2017/13 provides the ATO guidelines that apply when the term of an unpaid present entitlement (‘UPE’) placed under a ‘sub-trust arrangement’ matures. The PCG has previously provided a concession that allowed arrangements that matured in the 2017 to 2019 years to be placed under 7-year Division 7A loan terms rather than being require to be repaid in full.

In light of the deferral of the Division 7A changes to 1 July 2020, the PCG has been updated to include sub-trust arrangements that mature in the 2020 financial year.

Taxation Ruling TR 2019/5—Effective Lives of Depreciating Assets from 1 July 2019

Taxation Ruling TR 2019/5 has been released which cover the effective life of depreciating assets from 1 July 2019. New effective life determinations have been issued for a range of industries and, accordingly, this Taxation Ruling should be referred to for all assets acquired from 1 July 2019.

PSLA 2009/4 — Commissioner’s General Powers of Administration

The Commissioner may exercise his general powers of administration (’GPA’) not to take compliance    action with respect to certain taxpayers. PSLA 2009/4 outlines details of the powers and circumstances where it may be exercised for the purposes of ATO employees exercising the discretion.

The PSLA has been updated to outline circumstances where ATO employees cannot exercise the discretion and must submit a proposal to the Commissioner (for example, where the policy is unclear, where there are no clear guidelines, or where the proposed resolution may be contentious).

ATO AND GOVERNMENT ACTIVITY AND FOCUS

ATO Fact Sheets – Small Business

Three ATO fact sheets have been released to assist small businesses in claiming deductions in relation to motor vehicle expenses, business travel expenses and home-based business expenses. Key points raised in the fact sheets include:
– Taking into account your business structure when claiming expenses; and
– Apportioning between private and business; and
– The need to keep travel diaries; and
– Impact of claiming home business expenses on the main residence exemption; and
– Keeping records for 5 years.

Australian and New Zealand—Dual Corporate Residency

Following the signing of the multilateral instrument (MLI) which modifies certain tax treaties, the ATO and the NZ Inland Revenue have jointly determined to allow an ‘eligible company’ to self-determine its residency:
– If the company reasonably self-determines its place of effective management (PoEM) to be in Australia, it will be deemed to be a resident of Australia for the purposes of the Australia-NZ tax treaty.
– If the company reasonably self-determines its PoEM to be located in NZ, it will be deemed to be a resident of NZ for the purposes of the Australia-NZ treaty.

There are a number of criteria relevant to determine whether a company is eligible to self-determine its residency. If companies are not eligible, they will need to apply to either the ATO or the NZ IR for a determination of their residency for the purposes of the treaty.

Tendering for Commonwealth Contracts

From 1 July 2019, tenderers and their first tier contractors applying for Commonwealth Government contracts worth over $4m (including GST) must obtain a statement of tax record (STR) showing satisfactory engagement with the tax system. The requirements for a satisfactory STR include:
– Being up to date with registration requirements;
– Having lodged at least 90% of relevant tax returns, BAS and FBT returns due in the last four years;
– Less than $10,000 in outstanding undisputed debt due or a payment plan in place; and
– Additional conditions applying for new Australian businesses or foreign tenderers.

Tax Return Changes

The following new tax return schedule will apply for the 2019 and 2020 year:
– New deduction schedule – The ATO will now receive line entry data for all deductions, including work-related expenses, entered in the tax agent’s preparation software. This is mandatory for 2019 returns.
– New multi-property rental schedule for individuals schedule – This allows for up to 45 properties to be reported into the one rental schedule for individuals. This will be mandatory for 2020 returns, however some software providers may have the schedule available this year.
– New income schedule — This will be mandatory for 2020 returns.

Further, there will be an updated CGT Schedule, as well as an updated schedule for non-resident foreign income. Both of these will be mandatory for 2020 returns.

ATO’s Use of Social Media

The ATO are using social media to determine if people are not reporting all income or incorrectly claiming expenses. For example, the ATO will be look for:
– Lavish lifestyles compared to income levels.
– Posts showing holidays at an investment property where claims are made for 100% deductions.
– Posts showing holidays where claiming as fully deductible business trips.

Fair Work Ombudsman—Uber Driver not Employees

The Fair Work Ombudsman (’FWO’) has investigated the engagement of Uber drivers and found that they are not employees of Uber Australia. This conclusion was based on the determination by the Courts that for an employment relationship to exist there must be, at a minimum, an obligation for an employee to perform work when it is demanded by the employer.  The FWO investigation found that drivers are not subject to any formal or operational obligation to perform work, and have total control over when and how long they work for.

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.