Tax Bulletin – May 2019

May 2019 saw the Coalition win the Federal Election, and the 2019/2020 Victorian State Budget be handed down. These together with a number of cases, ATO rulings and new compliance focuses, are covered in our May Tax Bulletin.

VICTORIAN STATE BUDGET

The Victorian State Budget was handed down on 27 May 2019. Regional Victoria is a ‘winner’ from the Budget, with a number of measures (or exclusions from measures) aimed at boosting regional areas. Howevr, a hit will be taken by foreign property owners  purchasers of ‘super luxury’ cars and land developers.

Land Transfer Duty 

The following changes were announced to Land Transfer Duty:
– There will be a concession on duty for commercial and industrial properties in regional Victoria. The initial concession will be 10% from 1 July 2019, scaling to 50% by 1 July 2023.
– The current corporate reconstruction provisions, which can provide an exemption from duty where land is transferred between members of a corporate group, will be expanded. However, the exemption will be replaced with a concessional rate of 10% of duty otherwise payable.
– While not in the Budget, a change to the economic entitlement provisions were introduced via a Bill a day later. These provisions will be expanded to apply to all types of entities, and the 50% threshold requirement to be removed. This is expected to effect property developers and the use of
development agreements.

Foreign Owners

The Foreign Purchaser Duty on properties purchased in Victoria will be increased from 7% to 8%, applicable from 1 July 2019. Further, the Absentee Owner Surcharge will increase from 1.5% to 2% from 1 January 2020.

Land Tax

In order to address land banking, the exemption for land tax for vacant land attached to a principal place of residence will be removed. This will apply to property owners where the garden, swimming pool or tennis court is on a separate title. Property owners can consolidate titles so as not to fall within these new provisions, however need to consider the effect this has on future plans for sale. Regional Victoria will be exempted from these changes, with the new rules expected to apply to approximately 1,700 properties  across Melbourne.

The Budget also announced a change to the calculation methodology for land tax on heritage listed homes.

Payroll Tax

The following changes were announced to Payroll Tax:
– Payroll tax threshold to be increased to $700,000 by 2023. This will be implemented via two $25,000 increases from 1 July 2021 and then 1 July 2022. This is still lower than the threshold in other States.
– A reduction in the regional payroll tax for eligible businesses to be reduced to 1.2125% by 2023, and the ‘regional employer’ definition simplified.
– The exemption for employees on maternity leave to be extended to cover all parental leave.

Motor Vehicle Duty

Additional duty on motor vehicles will apply from 1 July 2019. The new duty rates for these vehicles will be as follows:
– Used cars greater than luxury car threshold – $10.40 per $200 (to align with current treatment of new vehicles).
– All cars between $100,000 to $150,000—$14.00 per $200;
– All cars over $150,000 – $18.00 per $200.

A concession will be available for ‘green’ or ‘primary production’ vehicles, with duty charged as the rate of $8.40 per $200.

These rates are compared to the current rates of  $8.40 per $200 for new registrations less than the luxury car threshold and all used cars, and $10.40 per $200 for new registrations greater than the luxury car threshold.

A new exemption for motor vehicle duty will be introduced for services demonstrator models for Licensed Motor Car Traders.

Gold Royalty

A new gold royalty of 2.75% will be introduced, however there will be an exclusion for small miners.

FEDERAL ELECTION AND LEGISLATIVE UPDATE

With the Coalition winning the Federal Election, all the concerns  and planning for Labor policies have disappeared. While the Coalition has a majority in the House Representatives, it does not have a majority in the Senate and therefore will need to rely on Labor or Independents to pass legislation.

The expected first hurdle will be the 7-year plan for personal tax rate cuts. With Labor already stating they will agree to the first phase only, and Scott Morrison appearing to want the whole plan passed as one Bill rather than separating it, it seems unlikely that this legislation will pass by 30 June 2019. This means that early lodgers of 2019 tax returns  may not receive the tax cuts at that time.

There are a number of other Budget or Election announcements, and Bills that lapsed on calling the Federal Election, that will also now need to be introduced. It is unclear if the Coalition will continue with all of the lapsed Bills.

Budget and Election Announcements include:
– Superannuation changes for taxpayer nearing retirement..
– The new First Home Loan Deposit Scheme.
– Luxury Car Tax and an increase in refunds for eligible primary producers and tourism operators.

Prior Announcements and Lapsed Bills include:
– Denial of Main Residence Exemption for Non-Residents (appears unlikely to proceed in current form).
– Extension of Trustee Beneficiary for Closely-Held Trusts to Family Trusts.
– Director Penalty Regime for GST, Luxury Car Tax and Wine Equalisation Tax.
– Income for person’s fame or image to be taxed to the individual
– Small Business CGT Concessions not available on Everett Assignments (from 8 May 2018).

CASE LAW UPDATE

Handsley v FC of T — Individual Tax Residency

The Handsley case considered the concept of the ‘permanent place of abode’ for individual tax residency purposes, in light of the recent decision in Harding’s case (refer  February tax bulletin).

In Handsley, the taxpayer left Australia to work overseas. His partner was a foreign national who did not live in Australia, and he had his children, parents and ex-spouse in Australia. The taxpayer intended to leave Australia permanently and make his home in the Philippines, but he did not spend any significant there and had not yet acquired a permanent dwelling. He instead had short-term work contracts in multiple locations across Asia, was provided with short-term accommodation and did not have visas to remain in a country for an extended period.

The AAT held the taxpayer did not have permanent place of abode outside Australia. Although Harding held that multiple temporary places of abode do not preclude this test being satisfied, the AAT held it is necessary for these to be in one location. Therefore, although the taxpayer indefinitely terminated
Australian residency, he had not established a permanent place of abode elsewhere and was still an Australian tax resident.

This case is another reminder that all of the individual tax residency tests need to be satisfied in determining whether an individual is an Australian tax resident. Although he may not have resided in Australia (and therefore did not meet the resides test), he still met the domicile test (which looks at permanent place of abode). It also should be noted that the ATO have sought special leave to appeal to the High Court in respect of the Harding decision.

VCJN v FC of T — Division 7A Deemed Dividend

In the VCJN case, the taxpayer was the sole director and shareholder of two property development companies, one of which had made loans to the taxpayer under a complying loan agreement. The companies had suffered financial distress due to the GFC, and ultimately went into liquidation. In the 2015 income year, the taxpayer ceased to meet his minimum loan repayment (MYR) obligations, resulting in a deemed dividend. The taxpayer sought the Commissioner’s discretion to disregard the dividend on the basis that it arose due to circumstances beyond the taxpayer’s control and the taxpayer would suffer undue hardship (per section 109Q).

The AAT held that the taxpayer chose to expose himself to the consequences of having to make loan repayments in the knowledge that the GFC had impacted on the business of both companies. Taking into accounts the taxpayer’s assets, he had sufficient financial capacity to make the MYRs but has chosen not to. He would also not suffer undue financial hardship if he was treated as having received a dividend on which he had to pay tax. Accordingly, the AAT upheld the ATO’s decision not to exercise the discretion.

Roszkiewicz v FC of T— Timing of assessing salary and wages

In Roszkiewicz, a taxpayer  commenced employment on 7 June 2016, however missed the June pay run. Accordingly, her first pay was in June 2016, and was included on her 2017 PAYG Payment Summary. The taxpayer included the income for the period to 30 June 2016 in her 2016 return, on the basis that it was inaccurate and unfair to include in the 2017 return. The Taxpayer had suffered financial hardship during 2016 and had no other income.

The AAT affirmed that salary and wages are assessable on receipt, even if they relate to a past income year. The AAT stated that personal circumstances are not relevant. Perhaps the most surprising part of this case was that it reached the AAT over taxable income of approximately $4,500.

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

Deductibility of Penalty Interest  —TR 2019/2

A tax ruling has been issued on the deductibility of penalty interest. Penalty interest is an amount payable by a borrower under a loan agreement in consideration for the lender agreeing to an early repayment of the loan. TR 2019/2 considers the potentially relevant provisions, broadly being:
– Section 8-1 – general deduction provision — requires nexus to income; not capital in nature.
– Section 25-25 – borrowing costs—not applicable.
– Section 25-30 – expenses of discharging a mortgage — requires nexus to income; can be capital.
– Section 25-90 — interest relating to foreign income—applies provided other conditions met.
– Disposal of CGT asset — inclusion in cost base if capital in nature and not within another provision
– Disposal of Depreciating Assets — doesn’t fall within cost of asset
– Section 40-880 — Blackhole expense over 5 years but provision of last resort.

The ATO provide a number of examples in the ruling which help illustrate the above, including:
– Refinancing of a loan on a rental property for a lower interest rate will be revenue in nature and deductible under section 8-1 (or section 25-30)
– The discharge of a mortgage for the sale of a rental property will be capital in nature and therefore not deductible under section 8-1. However, it is part of discharge of a mortgage and deductible under section 25-30.
– The discharge of a mortgage for the sale of a private property is capital in nature and does not fall within any of the deduction provisions. Accordingly, it is an incidental cost and part of cost base.

This ruling illustrates the complexity and number of provisions involved in what may ordinarily be considered as a simple query on deductibility.

Law Companion Ruling—Similar Business Test

The LCR for the new Similar Business Test for the company loss rules has been finalised. The Similar Business Test supplements the Same Business Test , which are applied if the Continuity of Ownership Test is not satisfied. The Similar Business Test is aimed at assisting innovation.

In determining whether there is a similar business, regard has to be had to four statutory factors (refer February Tax Bulletin for outline). The LCR discusses these factors and provides useful examples, but also show the subtle differences in applying the test. For example:
– Satisfaction of Similar Business Test: A courier company that delivered office supplies but, following the development of a new bicycle design, now also provides food delivery services to supplement the courier business.
– Failure of Similar Business Test: A courier company notices a growing demand for food delivery services. It purchases insulated boxes and its business becomes predominantly food delivery.

Tax Determinations — 2020 FBT Rates and Thresholds

The Tax Determinations for the 2020 FBT Rates and Thresholds have been released as follows:
– TD 2019/3 — Cents per kilometre rates for private use of motor vehicles other than a ‘car’.
– TD 2019/4—Record keeping exemption threshold.
– TD 2019/5—Indexation for valuing non-remote housing.
– TD 2019/6—Benchmark interest rate of 5.37% (loan benefits and operating cost method for cars).
– TD 2019/7—Reasonable food and drink expenses for employees that are living-away-from-home.

ATO ACTIVITY AND FOCUS

FBT Returns

The ATO has issued a reminder to employers for mistakes that attract their attention with respect to FBT returns. These include:
– Failing to report car fringe benefits or incorrectly applying exemptions or reductions;
– Mismatches between employee contributions reported on the FBT return compared to the income tax return;
– Claiming entertainment expenses as a tax deduction but not correctly reporting them as a fringe benefit, or incorrectly claiming as advertising or sponsorship;
– Incorrectly calculating car parking fringe benefits; not applying FBT to the personal use of an organisation’s assets; and
– Not lodging, or delaying lodgement, of FBT returns to delay or avoid payment of tax.

Cryptocurrency Data Matching

The ATO will collect data from designated cryptocurrency service providers to identify taxpayers who have engaged in the purchaser, sale or transfer of cryptocurrency during the 2015 to 2020 years. It is estimated that records of between 500,000 to 1 million taxpayers will be obtained, and is a reminder that owners of cryptocurrencies need to keep records and report income/losses in tax returns.

TFN Reporting for Close-Held Trusts

The ATO is currently reviewing compliance with trustee obligations, including the lodgement of TFN reports for TFN withholding. Beneficiaries are required to quote their TFN to the trustee to avoid TFN withholding from trust distributions, and the Trustee is required to lodge the report at the end of each quarter than a TFN is quoted. A failure to withhold tax at 47% where no TFN is quoted could result in penalty equal to the amount that that they failed to withhold.

Single-Touch Payroll

The ATO has provided guidance on obtaining a transitional deferral if a client requires further time to get ready for STP.

Employers with 19 or less employees can apply for a deferral from the start date of 30 September 2019, which may be approved immediately, or tax agents can submit a bulk deferral request on behalf of their clients.

Employers with 20 or more employees have more limited reasons for deferral, including transition to a new software, complex arrangements or circumstances beyond their control.

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.