Tax Bulletin – November 2019

November has seen the release of a number of ATO draft taxation rulings, including in relation to labour costs incurred in constructing capital assets, and car parking fringe benefits which could have significant ramifications for employers operating near a car parking station that does not have a purpose of all day parking (eg. a hospital car park). A case and draft ruling on employee work related deductions also highlights the important of substantiation requirements. 

LEGISLATIVE UPDATE

Superannuation guarantee amnesty

The Lower House has passed the SG amnesty bill which will provide a one-off opportunity for employers to claim a deduction for SG charge payments and remove the fees and penalties that would otherwise  apply for historical non-compliance. (Refer Tax Bulletin—September 2019). Labor has not previously supported the Bill and so is likely to require cross-bench support to pass the Senate. Until the legislation is passed, the ATO will continue to apply the existing SG laws for non-compliance.

Other legislation passes the Lower House 

The following legislation has also been passed by the House of Representatives and will now be considered by the Senate, which has four sitting days left for the year:
– Removal of the main residence exemption for foreign residents (refer Tax Bulletin—October 2019)
– Anti-phoenixing measures, including the expansion of the DPN regime to GST liabilities.

CASE LAW UPDATE

Update on Addy v CofT — Working holiday maker tax 

The ATO has responded to the decision in Addy v CofT, where the Federal Court held that the imposition of the working holiday maker tax to an Australian tax resident breached a non-discrimination clause in the relevant Double Tax Agreement (refer Tax Bulletin—October 2019). The ATO states that the decision will only apply to working holiday makers from Chile, Finland, Germany, Japan, Norway, Turkey and the UK (due to the Double Tax Agreements). It also pointed out that many working holiday makers are not tax residents due to the itinerant and temporary nature of their time spent in Australia (for example, Stockton v CofT in Tax Bulletin – October). The ATO has now also appealed the decision to the Full Federal Court. 

Key takeaway: Eligible working holiday makers may wish to await the outcome of the appeal before considering lodging any request for a refund of additional tax paid.

Mingos v FC of T — Main residence exemption

In Mingos v FCofT the taxpayer has lost his appeal to the Full Federal Court that he was entitled to the main residence exemption (‘MRE’) for a property held by his discretionary trust, that had originally been transferred to the trust pursuant to a divorce settlement. The taxpayer argued that either:
– He held an equitable interest in the property which was an ownership interest for MRE purposes; or
– The trustee held the property pursuant to a resulting trust as it did not pay anything to the taxpayer for the property.

The Taxpayer was not able to provide sufficient evidence to support his contentions, which was also inconsistent with contemporaneous records.

Key takeaway: This case is a reminder that where property is held by a trustee for specific purposes care should be taken to ensure trust documents are drafted accordingly and all records and other evidence support this position.

Reid v CofT — Work related expenses

The taxpayer in Reid v CofT worked as a manager for two employers over a number of income years. He had occasionally worked from home with respect to the first employer, whilst with the second employer he was required to work from home as he was not provided with an office space. He had claimed work-related car expenses based on the log book method and home office expenses, including occupancy expenses. The ATO disallowed home office expenses due to insufficient substantiation and limited car expense deductions to the cents-per-km method on the basis the log book was not valid.

The AAT upheld the ATO decision. The log book contained multiple inconsistencies indicating entries were not made as soon as possible after the end of the journey and were inconsistent with other available information. Statements from a work colleague and customer were not sufficient evidence the taxpayer worked at home sometimes for the first employer. Although accepted that he worked from home for his second employer, he did not provide a diary showing his pattern of usage of a home office nor evidence of his expenses. The AAT also upheld 25% penalties on the basis of failing to take reasonable care.

Key Takeaway: It is important that tax agents and their clients are aware of the strict application by the ATO of the substantiation rules and the fact that the ATO will look for external support for claims that taxpayers are required to work from home or travel in the course of their employment.

Healius Ltd v CofT— Lump sum payments deductible

The business of the taxpayer in Healius Ltd v CofT was the provision of premises and services to doctors. The taxpayer paid lump sums to doctors to bring their practices to its medical centre. The contracts indicated they were buying the practice (including goodwill) with the payment based on the number of work hours,  level of practice billings, customers (if relocating nearby) and need at the relevant centre. A doctor would also agree to work at the centre and not provide medical services in a specified radius for an average of 5 years. The ATO argued the taxpayer was in the business of providing medical services and purchases were part of this business structure. As such, the payments were capital in nature and non-deductible.

The Court held that the doctors provided the services in the medical centres, not the taxpayer. As such, a doctor did not sell their practice, but the payment was for agreement to conduct their practice from the taxpayer premises. The taxpayer’s business structure was the medical centres and the payments were seeking customers. The lump sums were a recurrent and ongoing payment, and the 5 year period was not long enough to suggest they were capital. The taxpayer was therefore entitled to a deduction.

Key Takeaways: This is a good outcome for taxpayers with comparable business models, but it is likely the ATO will appeal the decision. From a practitioner perspective, however, the view that they are not disposing of their practice could impact eligibility for various CGT concessions. The ATO view is that many of these lump-sum payments are revenue income to the doctors. If clients are receiving these types of payments, consideration of the underlying contractual arrangements are crucial.

Toowong Pastures Pty Ltd v FCT— Employer subject to SGC

The AAT has found that a worker providing services as part of a building renovations business was an employee, and his employer liable to SGC, on the basis that he performed the work in and for the business of the employer. Relevant factors included no evidence of the worker using things like payment systems or financial records, an absence of risk on the part of the worker, provision of workers’ compensation by the employer, all work being performed by the worker personally, and the worker did not advertise or promote his business to the public.

Key Takeaway: With the potential for a SG amnesty, this is a timely reminder for employers of the broad definition of employee for SG purposes.

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

TR 2019/D4—Employee deductions

TR 2019/D4 has been issued as a guide to the basic principles for the deductibility of employee expenses:
– An expense that is deductible for an employee in one job is not necessarily deductible for another employee holding a similar job.
– Some expense types almost always have a relevant connection to employment activities (e.g. union membership and professional association subscriptions).
– An expense ordinarily of a personal nature may be deductible if there is a close connection between the expense and the work activity (e.g. sun protection for an arborist working outdoors).
– An expense does not become deductible simply because an employer requires or encourages the employee to incur the expense (e.g. wearing particular clothing).
– An expense may be deductible even if the employer does not require or encourage it (e.g. a course to improve the specific knowledge and skills needed to do the job).

TR 2019/D6—Labour costs related to construction of capital assets

TR 2019/D6 explains the ATO view that labour costs incurred specifically for the purpose of constructing or creating a capital asset are non-deductible capital expenses. If a worker has other duties, the labour costs may need to be apportioned. The following examples of a project is provided:
– Capital and Non-Deductible: Centralised project team (specifically employed to manage project and recruit personnel for construction (e.g. Project Manager, Project HR Manager, Project Finance Manager).
– Capital and Non-Deductible: Contractors hired for construction of the capital asset.
– Revenue and Deductible: Roles with incidental activities connected to project (e.g. General Manager, HR Manager, Finance Manager already established within business).
– Revenue and Deductible: Members of project team retained in business operations after project.
– Apportionment Required: Electrician employed to undertake maintenance and construct capital assets, need to apportion between maintenance and construction.

Key Point: Businesses who use employees or hire contractors to construct capital assets, including, for example, the development of software for internal use, will need to consider the impact of this ruling.

TR 2019/D5—Car Parking Fringe Benefits

The ATO has issued a new draft ruling on when car parking fringe benefits are provided for FBT purposes. This represent a change in ATO view in regard to what is a “commercial parking station”, being a permanent, commercial car parking facility that makes all-day parking available to the public for a fee and does this in the “ordinary course of business”. 

What constitutes the ordinary course of business depends on whether the offer of all-day parking is a usual or regular part of business activities, even if it is not the sole business activity. The previous view was that a car parking facility did not qualify as a commercial parking station if it had a primary purpose other than providing all day parking by charging penalty rates significantly higher than the rates charged for all day parking at commercial all-day parking facilities. The ATO now states that a facility can qualify even if it has a purpose other than providing all day parking (e.g hourly parking at a hospital or airport), and even if its fee structure discourages all-day parking through higher fees.

The ATO has also issued a draft update to its FBT Guide for Employers adding practical guidance and examples on applying this view.

Key Point: Employers who are within one km of these types of parking facilities may need to consider if this change in view will result in the provision of car parking fringe benefits becoming subject to FBT.

ATO AND GOVERNMENT ACTIVITY AND FOCUS

Tax Agent and BAS portals now closed

The Old Tax Agent and BAS agent portals closed at the end of November. The ATO focus is on remedying the new portal for the following:
– Deceased estates – allowing agents who are the deceased’s legal personal representative to access information. Clients will be removed from Online services for agents when the ATO receives official notification of their death, with the agent then required to add the client back with a declaration of their status. The ATO has also issued a draft legislative instrument which will allow a taxation officer to disclose protected information to the Estate’s registered tax agent, BAS agent or LPR.
– Tax type summary reports – a new report for PAYG withholding, activity statements and interest information.
– Non-lodgement advice for non-individuals.
– Activity statement account transactions navigation (including GIC).

Private Groups and International Dealings Schedule

The ATO will be reviewing and contacting Private Groups that have not lodged the International Dealings Schedule (IDS) when they have indicated on the income tax return that they must lodge the IDS. The main purpose of this campaign is to obtain the completed IDS, or to find out why it does not need to be lodged.

An IDS is required to be lodged if a company, partnership or trust has dealings with international related parties of more than $2 million in the income year and imposes obligations to disclose information about related-party international dealings.

Private Groups that have dealings with international related parties should consider whether they should be lodging an IDS.

Review of financial and tax advice frameworks

CAANZ, CPA and IPA have announced they will conduct a joint review which will look at revisiting definitions, licensing regimes and harmonising obligations where members operate under multiple regulatory framework to provide advisory services. The accounting bodies are concerned that the “rising costs and complex regulations are driving many professional accountants to question which advisory services they can continue to provide to their clients”.

One of the first areas of focus will be how to support and encourage accountants who practice under a limited or full AFS licence to continue providing financial planning advisory services. Submissions can be made via any of the relevant accounting bodies.

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.