The ATO have released the long-awaited guidance on the allocation of profits within professional services firms, together with an updated ruling on the personal services income rules. These rulings are an important read for accountants as it relates to both their own firm and to all clients in professional services industries. These and other updates are in our March Tax Bulletin.
The Prime Minister has announced an expansion of the SME Loan Guarantee Scheme available from 1 April 2021 to 31 December 2021 through participating lenders:
– Borrowers can access up to $5 million for terms of up to 10 years (up from 5 years)
– The Government guarantee will be 80% of the loan amount (up from 50%)
– Lenders are allowed to offer borrowers a repayment holiday of up to 24 months
– The interest rate will generally be capped at around 7.5% (previously 10%)
– Loans can be used to refinance existing loans or for a broad range of businesses purposes
The ATO has advised that it is examining a number of integrity issues it has identified with regards to JobKeeper. It has also highlighted other behaviours with which it has concerns, including:
– Tax agents who have provided aggressive planning advice or otherwise facilitated access to JobKeeper to ineligible clients
– Behaviour in the extension periods such as manipulating the timing of billings to meet the decline in turnover test or deliberately assessing employees to a higher payment tier.
– Schemes in relation to employees redundant after 28 March 2021, where wages which are eligible for JobKeeper are paid in substitution for the payment of entitlements when the employment ends.
The ATO has confirmed that acquisition-supplies (such as opening a bank account, entering a loan) made during the commencement of a new business may satisfy the integrity rules for JobKeeper (for eligible business participants) and the Cashflow Boost. This comes after the Inspector General of Taxation’sreview of this issue (refer November 2020 tax bulletin).
The acquisition-supplies need to have been made prior to 1 January 2020, but the taxpayer need not have made a sale of goods or services prior to that date. The ATO will review relevant cases that are put to it and decisions that have previously been challenged, but will not pro-actively identify and review cases. Accordingly, any taxpayers deemed ineligible that fall within this situation should not consider engaging with the ATO.
The AAT has upheld the ATO decision to deny the cashflow boost to a company which lodged its first activity statement, for the March 2020 quarter, on 1 May 2020. A sole trader had transferred his existing construction business to the company and had cancelled his ABN. The company had been incorporated in January 2020, obtained a new ABN and registered for GST.
As the company’s first tax period did not end before 12 March 2020 it could not satisfy the taxable supply notification requirements in the cashflow boost legislation. The AAT confirmed that the legislation could not be interpreted in a manner that would allow this requirement to have been met.
Key takeaway: This would appear to close any further avenues for a taxpayer who did not lodge a BAS prior to 12 March 2020 to claim the cashflow boost.
The taxpayer in Apted was a sole trader who had cancelled his ABN registration but resumed providing services in September 2019. He had failed to reactivate his ABN until late March 2020, which was then activated with an effective date of July 2019.
In a fast tracked decision, the Full Federal Court has disagreed with the AAT that the taxpayer held an ABN at 12 March 2020. However, the Commissioner should have exercised his discretion to extend the time for having an ABN for the purpose of accessing JobKeeper. The Court held that the JobKeeper Rules provided for a broad discretion, and the government announcements and the provisions themselves made it clear that JobKeeper was intended to benefit taxpayers in Mr Apted’s general circumstances. The lack of an ABN was not of itself a proper basis for the Commissioner’s refusal to exercise the discretion.
Key takeaway: The decision confirms it is reasonable for the Commissioner to exercise this discretion where a taxpayer is of the kind intended to benefit from JobKeeper. Any taxpayer in similar circumstances should review any potential application to their situation. These provisions are also relevant for the cashflow boost.
In Kahn and CofT the AAT has upheld the ATO’s denial of a deduction for self-education expenses incurred by an aircraft engineer who had enrolled and then attended training courses after his
employment with an airline had been terminated for disciplinary reasons. He had entered into a dispute resolution process with his employer on the basis of unfair dismissal before ultimately signing a Release Agreement.
Due to the timing of the courses, any connection with assessable income would be with income derived after completion, as the existing employment relationship was in the process of coming to an end. There was no prospect of a continuation of the employment relationship in a way that would have enabled him to attend the courses and to benefit from them in his existing employment.
Key takeaway: This is a reminder that expenses incurred by an employee must relate to current employment to be deductible under section 8-1.
This decision follows an earlier High Court decision in favour of Travelex that foreign currency it supplied to departing travellers at international airports was GST-free. Travelex then successfully amended its GST return to increase the amount claimed for input tax credits. The ATO did not initially dispute that it was obliged to pay interest, just the date from which the interest was payable. However, after the Full Federal Court held that the ATO had no statutory authority to amend the GST return, as the period of review had expired, the ATO appealed to the High Court on the question of whether there was a RBA surplus.
The High Court held that if the ATO allocates an amount it is not legally obliged to pay to a taxpayer, it cannot result in an RBA surplus. As the ATO was not legally obliged to pay the GST refund to Travelex, the allocation of the refund did not result in a RBA surplus and so the ATO was not obliged to pay interest.
The Commissioner has a long-standing administrative practice of processing documents that were not validly amended GST returns. It is unclear whether this practice will change, but it can be expected that the ATO will no longer pay interest on refunds arising on out-of-time amendments.
The ATO has issued a draft tax ruling to replace current rulings on the meaning of personal services income (PSI) and personal services business (PSB).
PSI is where over 50% of income is paid as a reward for an individual’s personal efforts or skills. Income does not qualify as PSI where it is generated from the sale of goods, the use of income-producing assets or from the business structure of an entity. The general rule of thumb for a professional practice entity is that if it has at least as many non-principal practitioners as principal practitioners, income is considered to be derived from a business structure.
The ruling discusses the following issues, and includes a large number of examples:
– Operating through a personal services entity
– Operation of PSB tests (results, unrelated clients, employment and business premises tests)
– Applying to the ATO for a PSB determination
The ruling also discusses the potential application of Pt IVA where the PSI rules do not apply. The ATO will consider factors such as:
– Whether the salary paid to the individual is commensurate with the services provided and the income generated
– Whether the PSE distributes income to associates rather than the individual who provided the services
– Whether salary paid to associates is commensurate with the services provided.
The ATO has issued its long-awaited draft Practical Compliance Guideline on allocating the profits of professional services firms to individual professional practitioners (IPP), which replaces the previous, suspended, guidelines. Professional services firms include (but are not limited to) the accounting, architectural, engineering, financial services, legal and medical professions. The PCG only applies where a practice generates its income from a business structure that is not subject to the PSI regime (NB: refer the rule of thumb regarding business structure referred to in TR 2021/D2). The PCG is intended to apply from 1 July 2021, with a deferred start of 1 July 2023 for arrangements which have a higher risk rating than they had under the previous guidelines.
The PCG requires a professional services firm to firstly pass through the following gateways, prior to assessing its risk under a risk assessment framework:
– Arrangement has a commercial basis for all parties which is appropriately evidenced. There must be a genuine commercial basis for the way in which profits are distributed within the group.
– The arrangement must not contain any of the stated ‘high-risk’ features. These include arrangements in relation to fixed draw or salaried partners.
The risk assessment process requires a score to be allocated to the IPP based on each of the following risk factors:
– The proportion of profit entitlement of the whole of firm group returned in the hands of the IPP. This includes income from the service entity and other associated businesses.
– Total effective tax rate for income received from the firm by the IPP and associated entities (this calculation is detailed in the PCG).
– IPP remuneration as a % of the commercial benchmark for the services provided (optional).
Based on the total score the arrangement will be allocated a risk rating:
Green: ATO will only apply compliance resources to review profit allocation in exceptional circumstances.
Amber: ATO is likely to conduct further analysis and may contact the taxpayer.
Red: Reviews are likely to be commenced as a matter of priority. Cases may proceed directly to audit and the ATO is likely to use formal powers for information gathering.
A number of thresholds and rates have been updated for the 2022 FBT year:
– TD 2021/3: weekly amounts the ATO treats as reasonable for food and drink expenses incurred by employees receiving LAFH allowance fringe benefits.
– TD 2021/4: c/km rates for calculating the value of a fringe benefit for private use of a motor vehicle that is not a ‘car’.
– Record keeping exemption threshold: $8,923 (up from $8,853) for employers who choose not to keep certain records and work out their FBT liability using the taxable value of fringe benefits from an earlier base year when records were kept.
The superannuation contributions have also been increased from 1 July 2021:
– Concessional contribution cap: will increase from $25,000 to $27,500
– Non-concessional contribution cap: will increase from $100,000 to $110,000
– Maximum amount a member aged <65 at the start of the year can contribute under the non-concessional contribution bring-forward rule: will increase from $300,000 to $330,000. (This will extend to people under age 67 once the relevant Bill is passed).
The ATO has issued a fact sheet providing further details on the key changes on the STP reporting requirements that will apply to employers from 1 January 2022. These changes will relate to reporting:
– Employment conditions—including employment basis and other information relevant to how PAYGW was calculated.
– Cessation type – when employee ceases employment)
– Income type & country code—for employee who is an inbound assignee, working holiday maker or Australian resident working overseas.
– Separately itemise bonuses and commissions, directors fees, paid leave, salary sacrifice, overtime, allowances and other amounts (this is for Social Security purposes).
– Salary sacrificed amounts
– Lump sums E and W
– Previous Business Management Software IDs and Payroll ID
– Child support garnishees and Child support deductions:
Following a successful pilot the ATO’s independent review service is now available for eligible small businesses with a turnover less than $10 million. The service provides an additional option to resolve a tax dispute where a taxpayer disagrees with the ATO audit position:
– If an audit is in progress the ATO will offer the opportunity to an eligible taxpayer to request an independent review.
– An independent technical ATO officer reviews the facts and technical merits of the audit position.
– They complete their review before any assessment or amended assessment is issued in relation to the audit.
Taxes eligible for the review are income tax, GST, excise, LCT, WET, and fuel tax credits.
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.