TAX BULLETIN – JUNE 2020

In June, Treasury finally postpone the proposed Division 7A changes which were scheduled to begin on 1 July 2020. With Parliament sitting again, legislation has also passed the Senate, including changes in relation to testamentary trusts and the extension of the $150,00 instant asset write off. The ATO are also starting compliance activity on the stimulus packages.

LEGISLATION UPDATE

Division 7A Changes Postponed

Treasury have announced that the changes to Division 7A have been postponed, and will now apply to income years on or after the date of Royal Assent of the legislation. This is a welcome announcement given the uncertainty this issue has placed on practitioners and their clients.

Further Changes Postponed

Treasury have announced that the following changes will also be postponed to after Royal Assent (previous start dates were 1 July 2019):
– Increasing maximum members in SMSFs from 4 to 6
– Removing CGT discounts for Managed Investment Trusts (‘MITs’) and Attribution MITs
– Changing Petroleum Resource Rent Tax compliance and administration

Further, the following has a start date revised from 1 July 2020 to 1 July 2021:
– Reducing red tape for superannuation funds (exempt current pension income changes)

Superannuation Guarantee—JobKeeper Payments

The Superannuation Guarantee (Administration) Amendment (JobKeeper Payment) Regulations 2020 have been made to exclude the following payments from salary or wages for Superannuation Guarantee purposes:
– Jobkeeper payments to stood down employees (entirety of payment); and
– The excess of the JobKeeper payment over the salary or wages earned by an employee.

The Regulations apply from the commencement of the JobKeeper scheme.

Legislation that is now Law

Treasury Laws Amendment (2020 Measures No 3) Bill and Treasury Laws Amendment (2019 Measures No 3) Bill have both been passed, which have the following changes:
– Extends eligibility for the cashflow boost to include ‘alienated personal services payments’ from which amounts are required to be withheld under Division 13 of the TAA 1953
– Extends the instant asset write-off to assets acquired until 31 December 2020 and improvements to depreciable assets if the acquisition of the asset was originally able to be written off.
– Reduces the GDP adjustment factor applied by the Commissioner to work out the amount of PAYG and GST instalments for the 2021 income year to nil. This means there will be no indexation of instalments for the 2021 year.
– Changes tax concessions for income from a testamentary trust received by minors so that only income derived from assets, or accumulated income generated from assets, is subject to adult
marginal tax rates. The amendments apply in relation to assets acquired by or transferred to the trustee of a testamentary trust estate on or after 1 July 2019.
– Change to the definition of taxi for FBT purposes (from 1 April 2019). Travel by Uber and other ride sourcing services will now qualify for FBT exemptions on the same footing as a traditional taxi.

Legislative Instruments—Single Touch Payroll and Closely Held Employees

The ATO has released draft STP 2020/D3 which will extend the STP exemption for small employers in relation to closely-held payees from 1 July 2020 to 1 July 2021.

STIMULUS PACKAGES UPDATE

HomeBuilder Scheme

The HomeBuilder scheme provides a grant of $25,000 to owner-occupiers (including first home buyers) to build a new home or substantially renovate an existing home. In order to be eligible, the following criteria must be met:
– you are a natural person (not a company or trust);
– you are aged 18 years or older;
– you are an Australian citizen;
– you have taxable income capped at $125,000 per annum (for an individual applicant) or $200,000 per annum (for a couple), based on  2018-19 or 2019-20 tax returns;
– you enter into a building contract between 4 June 2020 and 31 December 2020 to either build a new home as a principal place of residence, where the property value does not exceed $750,000; or substantially renovate your existing home as a principal place of residence, where the renovation contract is between $150,000 and $750,000, and where the value of your existing property  does not exceed $1.5 million; and
– construction must commence within three months of the contract date.

This is a non-taxable payment that will be administered by the State Revenue Offices. Application details will become available via the SRO websites.

JobKeeper Update

Childcare Providers: JobKeeper will cease from 20 July for employees of a CCS approved service and for sole traders operating a child care centre. This change is in conjunction with the federal subsidy ceasing for providers and the introduction of a transitional payment, together with the resumption of paid childcare and the CCS for families.

ATO Compliance Activity: The ATO have been reviewing JobKeeper compliance to ensure all the eligibility criteria is met and there has been no manipulation of turnover to satisfy the decline in turnover test. For entities not eligible for JobKeeper, the ATO has started issuing JobKeeper cessation letters. The ATO will also use data matching sources to determine any fraudulent behaviour in regard to stimulus packages.

Economic Update: The Treasurer’s update scheduled for 23 July 2020 (Parliament will next sit on 4 August 2020). This is likely to include a review of the JobKeeper program and any further changes.

CASE LAW UPDATE

AJ & PA McBride Ltd and FCT — No Deduction for Acquisition of Fencing

A taxpayer purchased a sheep station for $5.6m and sought a private ruling that it was entitled to a deduction under Subdivision 40-F for the fencing on the land, to which it attributed $2.73m of the purchase price. Under 40-F a deduction is allowed for “the amount of capital expenditure you incurred on the construction, manufacture, installation or acquisition of the fencing asset”. The ATO denied the deduction.

The AAT agreed with the ATO. The meaning of “acquisition” in this context involves a fence coming into existence on the land and not just the transfer of an existing fence. The taxpayer also did not incur capital expenditure on a fencing asset, but rather on a sheep station.

Key takeaway: When seeking to depreciate primary production assets under 40-F specific rules apply to each category and these should be considered to ensure the asset or expenditure is eligible for depreciation.

Hiremani and FCT — Travel Expenses

The taxpayer was employed on an IT project that required him to work 12-hour shifts at a time, mostly from home, to release software changes and updates. From time to time he worked at the client or his employer’s office. He sought to claim work-related travel as he lived in Melbourne and drove to Canberra multiple times to perform work in the Canberra office. He considered that it was necessary for him to take his client and employer issued laptops (together with their docking stations), as well as his own laptop. On other occasions he travelled by bus and plane.  

The AAT held that travel expenses were not deductible as they did not relate to travel that was sufficiently connected with the production of income. The only reason the taxpayer travelled from Melbourne to Canberra was because he chose to live in Melbourne. He did not commence his work at home and so was not travelling between 2 places of work during the course of producing his income. Further, the ‘bulky equipment’ exception allowing a deduction for home to work travel did not apply as the AAT was not satisfied the computer equipment could only be transported by car.

The AAT also confirmed the shortfall penalties on the basis that the taxpayer failed to take reasonable care when lodging a tax return claiming very large deductions, without consulting a tax agent and without supporting, contemporaneous documents.

Key Takeaway: Working from home does not necessarily mean travel to a workplace is deductible (refer TR 2019/D7). When using the c/km method, the basis for determining the km’s travelled must still be evidenced.

McAteer and FCT — Home Office Expenses

The taxpayer was a team leader who helped maintain a Bank computer system. For 1 week in 4 he was required to be available 24 hrs a day to attend any problem that may arise with the computer system, and was also a backup for others on the roster. The Bank provided the taxpayer with equipment for use at home and he also used his own computers for work. The taxpayer claimed deductions for occupation expenses referable to parts of his home where work computers had been installed. The ATO disallowed the claim, but allowed certain home office running expenses.

The AAT held it was not practicable for the taxpayer to be located in his employer’s premises throughout the roster period and it was an implicit requirement of his employment that he used his home to some extent to keep equipment to perform his duties when required. It was not a “mere convenience” that he worked at home when rostered on call. Accordingly, he was entitled to a deduction for occupation expenses to the extent the area was set aside exclusively for work, and taking account its floor area and the time it was used for work (other than as a matter of convenience). Other parts of the house were not considered to be part of a home office as they were readily available for family or domestic purposes.

Key Takeaway: In order to claim occupancy expenses a specific area of the home must be set aside and the taxpayer must be required to work from home rather than this being a choice of convenience (Note: the ATO does not view that this would extend to employees working from home due to Covid-19).

Seribu Pty Ltd and FCT —Bitcoin not foreign currency

The taxpayer made a loss dealing in Bitcoin. The ATO ruled that the loss was not deductible under the  foreign currency rules in Division 775 on the basis that a cryptocurrency such as Bitcoin is not a foreign currency. This is the view expressed by the Commissioner in TD 2014/25.

The AAT held Bitcoin is not a foreign currency for Division 775 purposes as the term “foreign currency” is defined as “a currency other than an Australian currency”. In this context, other currency must be an official currency issued or recognised by a sovereign State.

Key takeaway: Gains and losses on bitcoin are taxed on either capital or revenue account under ordinary tax principles.

ATO RULINGS AND ACTIVITY

Division 7A — Extension for 2020 Minimum Yearly Repayments

An application form has been released for taxpayers who are unable to meet their 2020 MYR due to being affected by COVID-19. Where the required circumstances have been met, the Commissioner will exercise his discretion to allow an extension of time to make the repayment until 30 June 2021. For detailed information, read our article here:
http://mctaxadvisors.com.au/division-7a-extension-minimum-yearly-repayments-due-covid-19/

Updated Thresholds and Rates

Division 7A: Benchmark interest rate is expected to be 4.52% for the 2021 income year (down from 5.37% for 2020).

Cents per km rate for cars: 72 cents per km for the 2021 income year (previously 68 c/km for the 2019 and 2020 years).

Car cost limit for depreciation: $59,136 for the 2021 income year to (previously $57,581 since the 2017  income year).

Reasonable travel and overtime meal allowances: The ATO have issued TD 2020/5 which sets out the reasonable allowance rates for 2021 income year.

SMSF LRBAs: The ATO’s safe harbour interest rate is 5.10% for the 2021 income year (down from 5.94% for 2020). Relevant for related-party limited recourse borrowing arrangements used to acquire real   property.

Superannuation funds and non-arm’s length expenditure (NALE)—PCG 2020/5

The ATO have issued PCG 2020/5 setting out its transitional compliance approach for the application of the NALE rules. A super fund may derive non-arm’s length income (NALI) where the fund incurs NALE (or where expenditure is not incurred) in producing income. NALI is taxable at 45%.

The ATO has confirmed that it will not allocate compliance resources to determine whether the NALI provisions apply to a complying super fund for the 2019, 2020 and 2021 income years, where the fund incurred NALE of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund (e.g. non-arm’s length expenditure on accounting services).

However, this transitional compliance approach does not apply where the fund incurred NALE that directly related to the fund deriving particular ordinary or statutory income.

The ATO says PCG 2020/5 should be read in conjunction with Draft Law Companion Ruling LCR 2019/D3.

This compliance approach recognises that super trustees may not have realised that the amendments apply to NALE of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in an income year, noting that it was not explicitly stated in the original LCR.

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.