Tax Bulletin – May 2021

Federal Budget – Snapshot for SMEs and Individuals
May 11, 2021
Tax Bulletin – June 2021
July 2, 2021

During May, work-related expenses have again been in the spotlight. An AAT case in relation to work-related expenses has denied voluntary travel costs as a deduction, as it was not directly related to producing assessable income. In addition, the ATO has warned taxpayers not to ‘copy and paste’ prior deductions as circumstances have changed due to Covid-19.  For these and other updates, read our May tax bulletin.

LEGISLATION UPDATE
Treasury Measures (No 3) Bill 2021

Legislation has been passed by the House of Representatives, which includes the following measures:
– Assisting earlier access to the housing market by single parents with dependants
– Tax exemptions for payments made to Thalidomide survivors and for 2021 floods and storms grants
– Increase of medicare levy and levy surcharge thresholds in accordance with CPI

Treasury Measures (No 4) Bill 2021

Legislation has been introduced which includes a number of tax measures:
– FBT retraining exemption: This is in accordance with the draft legislation (refer Tax Bulletin — April 2021). The exemption will apply from 2 October 2020.
– CGT exemption for granny flat arrangements: This is in accordance with the draft legislation (refer Tax Bulletin—April 2021). The exemption will apply to CGT Events which would otherwise arise once the legislation receives Royal Assent.
– Extension of the Low and Middle Income Tax Offset to the 2021-22 income year: The taxable income range and offset amount is unchanged from 2020-21. The offset is not reflected in PAYGW
schedules and the benefit will therefore be received by taxpayers on assessment

This Bill has been referred to a Senate Economics Legislation Committee to report by 11 June 2021.

A Bill has also been introduced to freeze PHI income thresholds for the private health insurance rebates.

JobMaker Hiring Credit—Relaxed reporting obligations

The Commissioner has registered a legislative instrument to allow employers using software solutions that do not support reporting payroll and headcount information through STP, as required to be eligible for the Jobmaker Hiring Credit, to instead report this employee information through ATO Online.

CASE LAW UPDATE
Spencer and FCT—Work related expenses

In Spencer and FCT, the taxpayer worked in a field role for TasWater, which included responding to emergency call-outs. The ATO disputed deductions he claimed for work-related expenses, including the maximum car expenses under the cents per km method for 2 vehicles (which included travel for ad hoc site visits outside of work hours) and home internet and mobile phone expenses above $50.

The AAT allowed travel deductions based on call-outs recorded in his diaries, rejecting the ATO submission that failure to claim reimbursement of these from TasWater, in accordance with its policy, undermined the basis for the claim. However, it held that travel when voluntarily visiting work sites was not in the course of producing his income as it was not required by his employer. The additional claims for internet and mobile phone expenses were also rejected as the taxpayer failed to provide sufficient information to determine the usage that was related to his employment.

Key Takeaway: The ATO may look at an employer’s policies when reviewing deductibility of car expenses, and records are still required even when using the c/km method. The ATO also generally requires a 4-week representative diary per year in order to claim a share of mobile phone and internet expenses.

Mussalli v FCT—Upfront lease payments held to be capital

The Full Federal Court has upheld the Federal Court decision in Mussalli v FCT (Tax Bulletin – April 2020) that upfront payments made by a taxpayer on entering long term leases with McDonalds to operate a number of restaurants were capital. The taxpayer had taken up the option of paying a reduced turnover rent in return for the payments, which it had then claimed over 10 years under section 8-1.

The Court found that the payments had secured the acquisition of a more profitable business structure by reducing ongoing costs. The prepayments were unconnected to the obligation to pay rent as the method of calculation was the same for the different leases regardless of their duration, no new payment would be payable on renewal of the leases, and on an early termination no part of the payment would be refunded.

Key Takeaway: This decision confirms that it is the substance of a payment that is relevant, and that its label is not determinative of its character.

McCarthy and CofT  – Land subdivision and sale taxed as ordinary income

In this case the taxpayer had acquired a tenanted residential property in partnership with her husband. Shortly after settlement they lodged a plan to subdivide the property into two lots. Within 12 months the tenant vacated, the home was demolished and a contract for sale entered into for one lot. The ATO took the view that the sale profit was assessable as income from an isolated, commercial transaction, whilst the taxpayer contended it should be taxed under the CGT provisions as they had intended to hold the property long-term but had realised soon after purchase that this was not financially sustainable.

The AAT found that, based on the evidence, it was clear that the option to subdivide was part of the taxpayers considerations at the time of purchase of the property, which then commenced shortly after. As such, she had a “not insignificant purpose” of profit-making by sale at the time of purchase, which was sufficient for the profit to be treated as ordinary income.

Key takeaway: If a taxpayer acquires an asset with a dual intention of either keeping as a long-term  investment or reselling at a profit this may be sufficient for any profit to be on revenue account. Evidence of initial intention is crucial to support any contention that a profit is on capital account, particularly where a sale takes place within a short time, even if no works have been carried out.

RULING, DETERMINATIONS AND PRACTICE STATEMENTS
TR 2002/05 Addendum —Permanent Establishments

The ATO has issued an addendum to TR 2002/5, which considers the definition of ‘permanent establishment’. This requires both geographical and temporal permanence. The Ruling previously stated that, while conceivable a period of 6 months or more would not constitute temporal permanence, the ATO was unaware of any practical examples. Due to Covid-19 it now accepts that in some limited circumstances a forced presence in Australia for over 6 months was considered temporary. For example, global travel restrictions and lockdowns resulted in many businesses having employees present in Australia when they would ordinarily have been located outside of Australia.

OTHER TAX ACTIVITY & FOCUS
Reasons for a tax decision given by the Commissioner of Taxation

The Inspector General of Taxation has issued an article examining the circumstances in which a taxpayer has a statutory right to receive reasons for a decision from the Commissioner. It notes that reasons are not always required to be provided, but that the Taxpayer’s Charter does set an expectation that the Commissioner will be “open, transparent and accountable” in his dealings with taxpayers. Accordingly, if the Commissioner refuses to provide a taxpayer with reasons, or provides insufficient reasons, and this impedes their ability to understand a decision or weigh up next steps, they should consider availing themselves of their right to complain, either via the ATO Complaints Unit or the IGTO complaints service.

Working-from-home—Temporary shortcut method

The ATO has reminded taxpayers of the temporary shortcut method of claiming working-from-home (WFH) expenses. The shortcut method allows claims to be calculated using an all-inclusive rate of 80c per hour, with the only proof needed being a record of the number of hours worked from home, such as a timesheet. The method can be claimed by multiple people living under the same roof and does not require a dedicated work area. The taxpayer is not able to also claim for any individual WFH expenses, including phone, internet, depreciation of equipment and furniture, heating, cooling and lighting.

Work-related expenses 2021

The ATO is also alerting taxpayers that its sights are set on work-related expenses like car and travel claims that are predicted to decrease in this year’s tax returns. Australians claimed nearly $19.4 billion in work-related expenses in their 2020 tax returns. COVID-19 has changed people’s work habits and the ATO expects their work-related expenses will reflect this. An increase in WFH claims is expected, however, the ATO will then not expect to see the same claims for travel and laundering uniforms. The ATI noted that “you can’t simply copy and paste previous year’s claims without evidence.” The ATO may look at individuals whose deductions are much higher than others with a similar job and income.

Taxation of Cryptocurrency 

The ATO will be contacting taxpayers with cryptocurrency assets to explain their tax obligations and urge them to review previously lodged returns, as well as prompting taxpayers to report their cryptocurrency capital gains or losses in their 2021 tax return. The ATO closely tracks where cryptocurrency interacts with the real world through data from banks, financial institutions, and cryptocurrency online exchanges.

Generally, those who buy, sell, or exchange one cryptocurrency for another, will be liable to CGT. CGT also applies to the disposal of non-fungible tokens. In limited circumstances, cryptocurrency may be a personal use asset.

Tax Practitioners Board—Verifying client identities

The Tax Practitioner Board has released Draft Practice Note TPB(PN) D45/2021 to provide practical guidance to tax agents in relation to verifying client identities. The draft Note specifies the minimum requirements for verifying the identity of a client and lists documents that can be accepted as evidence of a person’s identity. It also sets out the steps a registered tax practitioner should take if they identify discrepancies. This is not based on any specific POI requirements in the TASA but the general provisions a tax agent may breach if they fail to take these measures.

For example, for an individual seeking to engage a tax agent the evidence to be sighted is either an original/certified copy of primary photographic ID (e.g. drivers licence) or both an original/certified copy of primary non-photographic ID (e.g. birth certificate) and secondary ID.

Submissions are due by 10 June 2021.

STIMULUS UPDATE—VICTORIA

Victoria has announced a targeted business support package as a result of the current lockdown:
– Licensed Hospitality Venue Fund: will provide businesses with an eligible liquor licence and food certificate with a $3,500 grant per premises.
– Business Costs Assistance Program – eligible businesses operating in an industry that cannot operate under the state’s lockdown conditions nor work remotely will be offered one-off grants of $2,500.

Applications will open for three weeks from 2 June. Details of each fund’s eligibility criteria have yet to be released.

2021 TAX PLANNING & WHATS NEW IN 2022
Capital Allowances

When calculating tax depreciation for assets acquired in 2021, any of the following measure could apply:
– $150,000 Instant-Asset Write-Off and Backing Business Investment (BBI): Applied at 1 July 2020
– Temporary Full Expensing (TFE): Applies from 6 October 2020. BBI is still relevant if assets do not qualify for TFE (e.g second-hand asset acquired by a medium entity) or a taxpayer makes a choice to apply BBI instead.
– Normal depreciation rules: Applies to assets that are ineligible for other measures, or where a taxpayer makes the choice not to apply other measures to a particular asset.

Note: This is general only and each measure has different eligibility requirements.

An entity in the small business depreciation regime must opt-out to have the choice of which measure to apply to an asset (the 5 year lockout won’t apply). However, they will still need to deduct the closing balance of their small business pool.

An entity may prefer not to apply these measures where, for example:
– They are a trust which would have no distributable income and therefore be unable to pass on franking credits.
– Beneficiaries or shareholders will not be able fully utilise marginal tax rates (and may therefore pay higher tax in the following years).
– A company needs to pay annual dividends to meet Division 7A repayments and full expensing may then cause unfranked dividends in the 2022 year.

Corporate tax, franking rates and loss carry-back

Both the corporate tax rate and the franking rate will decrease from 26% to 25% from 1 July 2021 for ‘base rate entities’.

Companies may be able to choose to utilise the loss carry back rules in the 2021 year for 2020 or 2021 losses to receive a refundable tax offset. Consideration may need to be given to the payment of any dividends prior to year-end as the offset is limited to the balance of the franking account.

Prepayments

Business entities with aggregated turnover of up to $50m (previously $10m) are now also excluded from the prepayment rules from 1 July 2020. These businesses are therefore able to claim a deduction for prepaid expense as long as the eligible service period for the payment does not exceed 12 months.

Superannuation and STP changes

– From 1 July 2020, individuals aged up to 67 at the start of the year are now able to make concessional and non-concessional contributions without meeting the work test.
– From 1 July 2021, employers will need to report their closely held payees through STP. These can be reported each pay day, monthly or quarterly.
– From 1 July 2021 the Superannuation Guarantee rate will increase from 9.5% to 10%.
– From 1 July 2021, if a new employee doesn’t make their choice of super fund an employer will need to obtain details of their existing ‘stapled’ account from the ATO and make payments to this account. This measure has yet to be legislated.

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.