The Government has announced a welcome change to the temporary full expensing rules, and Victoria has released the State Budget. Meanwhile, the AAT has handed down a concerning decision relating to work-related expenses in Lambourne.
The Government has announced that it will be making the following changes to the temporary full expensing measures:
– Businesses will be allowed to opt out of temporary full expensing and the backing business investment incentive on an asset-by-asset basis. This is a welcome amendment as it will allow small businesses the flexibility to smooth out their taxable income across different income years to maximise access to marginal tax rates. It is currently not known whether this choice will also apply to writing off the closing balance of the small business deprecation pool.
– A new alternative test will be available to enable a company that only has an aggregated turnover of more than the eligibility threshold of $5 billion due to the income of an overseas parent or associate to qualify.
We would expect these measures to be introduced when Parliament sits this week.
– The Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020 has received Royal Assent. The related Rules implementing the JobMaker Hiring Credit scheme are still to be finalised (refer Tax Bulletin—October 2020).
– A Senate Committee has recommended that Treasury Laws Amendment (Self Managed
Superannuation Funds) Bill 2020 be passed. This Bill will increase from 4 to 6 the maximum number of allowable members in SMSFs. This would commence from the start of the first quarter after Royal Assent. (This was originally announced in the 2019-20 Federal Budget).
– Treasury Laws Amendment (2020 Measures No. 5) Bill 2020 has been introduced which will make certain State grants non-assessable non-exempt income. At this stage, this will only apply to Victorian business support grants announced from 13 September 2020, with previous grants, or those received from other State Governments, generally subject to income tax.
The Victorian Treasurer has handed down the 2020-21 State Budget, which includes a number of tax relief measures:
– New Jobs Tax Credit—Businesses with Australian group wages less than $10 million will receive a non-refundable payroll tax credit of 10 cents for every $1 of Victorian wages paid in the 2021 and 2022 year that is above the previous year’s wages. There will be special rules for new businesses.
– Payroll Tax— Threshold will be increased to $100,000 for paying on an annual basis (previously $40,000).
– Land Tax – From 1 January 2022 to 31 December 2040 eligible new developments in the build-to-rent sector will receive a 50% land tax discount and be exempt from the Absentee Owner Surcharge (Build-to-rent refers to developments built for the purpose of holding for rental rather than sale).
– Residential land transfer duty—Partial waiver of duty until 30 June 2021 for residential purchases valued at up to $1 million:
– 50% waiver for new built and off the plan homes
– 25% waiver for existing homes
– Commercial land transfer duty—The previously announced 50% concession for commercial/industrial land in regional Victoria will be brought forward to contracts entered into from 1 January 2021.
The taxpayer was a Navy officer who worked as an electronics technician and had additional duties as a fitness leader. He sought to claim various work-related expenses, including clothing, fitness equipment (to be used on the ship in fitness sessions) and other items. The taxpayer had a transaction statement from the clothing supplier, which specialised in naval uniforms that conformed with Navy regulations, but no specific invoices. He contended that it was necessary for him to purchase the other items in order to be able to perform his duties, whereas the ATO contended they were purchased at his discretion.
The AAT held that, as he could not provide sufficient detail with regards to his clothing purchases, it could not assess the nexus to gaining his assessable income. Evidence provided by the Defence Department indicated there was no requirement to purchase the other items to carry out his role. While they may have assisted him to better perform his duties, he was provided with the equipment that his employer considered was required and they were therefore “more akin to providing a benefit to the Navy and his fellow sailors rather being incurred in the course of producing his assessable income”.
The work-related expenses were therefore denied as deductions and the 25% penalty for failing to take reasonable care upheld.
Key takeaway: This appears to be a narrow construction of section 8-1 and the denial of a deduction, and imposition of penalties, for discretionary work-related expenses is concerning. It is hoped this is appealed to the Federal Court or that the ATO issues a decision impact statement limiting its application. We will provide an update on any developments.
This case involved a number of issues, including the capacity in which a corporate trustee held units in a unit trust. The Federal Court determined that units were held in the company’s personal capacity, rather than as trustee of the trust, as it was not validly appointed as trustee. The appointment of the Trustee was ineffective, as was a later resignation of the current Trustee, as the requirements of the trust deed were not complied with. The company was therefore subject to corporate tax on sale of the units.
Key Takeaway: Ensure you are aware of all the requirements set out in the Trust Deed when making changes in relation to a trust.
In November 2017 the ATO issued notices of assessment of SGC to the Applicant in respect of the June, September and December 2016 quarters. In 2018, the employer made an election under the Superannuation Guarantee (Administration Act) 1992 to offset late contributions against the assessed SGC.
The ATO agreed to offset late contributions made before the assessments were issued, but declined to offset contributions made after the assessments were issued. The Applicant submitted that the Act requires the ATO to amend an SGC assessment if a valid election is made to offset late contributions. The AAT held that, as the contributions in question occurred after the date of the original assessment, the Applicant’s election was ineffective.
Key Takeaway: We expect SGC to become a large focus area for the ATO, and therefore this principle may be relevant in practice. Also refer to the update regarding PSLA 2020/4 and SGC penalties.
The taxpayer was granted options to purchase shares in his employer subject to vesting conditions, with 25% of the options to vest each 12 months. The options fell within the ESS tax provisions. The taxpayer’s employment was terminated in the 2015 income year when 25% of the options had vested. The ATO sought to include the option discount in the taxpayer’s income on the basis that the deferred taxing point occurred when his employment was terminated. The taxpayer contended that the discount was not assessable at this time as there was not a real risk he would forfeit the interests and so the taxing point had not been deferred (in which case the discount would have been assessable when the options were granted).
The AAT held that the vesting of the options was subject to reaching each vesting date and continued employment, and the risk the taxpayer could lose his job in the course of a year amounted to a real risk that the conditions of the scheme would result in loss of the interest. The ESS provisions therefore operated to defer inclusion of the discount in his assessable income to the 2015 income year.
– FCofT v Healius Ltd: The taxpayer has applied to the High Court for special leave to appeal. The Full Federal Court held that lump sum payments made by the operator of medical centres to doctors to conduct their practice at those centres were on capital account (Tax Bulletin – October 2020).
– FCofT v Fortunatow & Anor: The taxpayer has applied to the High Court for special leave to appeal. The Full Federal Court held that the taxpayer did not satisfy the “unrelated clients test” under the personal services income provisions (Tax Bulletin – September 2020).
– FCofT v Addy: The taxpayer has applied to the High Court for special leave to appeal. The Full Federal Court held that a resident working holiday maker was required to pay the “backpacker tax” and was not entitled to benefit from the tax-free threshold (Tax Bulletin – September 2020).
– Carter v CofT: The ATO has applied to the High Court for special leave to appeal. The Full Federal Court held that default beneficiaries had effectively disclaimed income of a trust (Tax Bulletin – September 2020).
The ATO has released draft guidance on how the Commissioner will exercise his discretion to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. This was one of the anti-phoenixing measures which came into effect on 1 April 2020.
Draft Practice Statement PSLA 2020/D2 states that the Commissioner will only exercise this discretion where there are reasonable grounds to believe a taxpayer is engaging in high-risk behaviour, e.g phoenix-type activities. The ATO will issue written communication notifying a taxpayer of the amount retained and outstanding notifications to be lodged.
PSLA 2020/4 sets out guidelines for ATO officers on the remission of additional SGC after the end of the SG amnesty. An additional penalty of 200% of the SGC amount is automatically imposed if an employer fails to lodge an SG statement by the due date, but the Commissioner has the discretion to remit the penalty in full or part. Where a historical quarter is assessed for SGC after 7 September 2020, the penalty cannot be remitted below 100% of the SGC unless:
– the employer voluntarily came forward to lodge an SG statement prior to being notified of any ATO compliance action; or
– exceptional circumstances prevented the employer from lodging an SG statement either during the amnesty period or prior to being notified of ATO compliance action.
The PSLA sets out a 4-step penalty remission process, which the ATO considers in making a decision on the remission of the additional SGC imposed.
The Inspector-General of Taxation (IGT) has made comments which potentially broaden the approach to the taxable supply notification requirements to qualify for the cashflow boost, and the JobKeeper scheme as an eligible business participant. The ATO currently considers that a new business that made its first sale after 31 December 2019 is not able to meet the requirements. Under the IGT approach, an entity that was in the process of establishing its business before this date and made a financial supply (such as opening a bank account) has made a taxable supply and may be eligible, subject to ATO discretion.
The ATO has not confirmed it will adopt this approach but has agreed to review cases put to it by the IGT which fall into this category. An entity previously deemed ineligible for cashflow boost or JobKeeper as it had not reported sales pre-1 January 2020, but which did incur eligible costs, may wish to consider seeking a review.
The ATO has detected businesses that have sought to inappropriately take advantage of the benefits of JobKeeper. These business have been required to repay overpayments and in some instances administrative and other penalties have been applied. The ATO has released similar focus areas for the JobKeeper extension, including businesses that:
– Did not meet the decline in turnover test
– Do not meet the wage condition for their employees
– Claim JobKeeper for individuals who are not eligible employees or from whom they do not have a nomination notice
– Claim JobKeeper for more than one business participant (e.g. by disguising them as employees)
– Claim JobKeeper for individuals who are not eligible business participants
The ATO will also be reviewing businesses that:
– Appear to have contrived eligibility for the JobKeeper extension by manipulating their GST turnover to meet the actual decline in turnover tests
– Have claimed the incorrect, higher tier rate for their employees, eligible business participants or religious practitioners when they should have been on the lower tier.
Questions are more likely to be asked where alternative tests have been utilised or businesses have indicated that sales reported at G1 in its BAS are not representative of current GST turnover.
The ATO has advised that it will allow employers until 28 January 2021 (instead of the 14th) to complete their December business monthly declaration for JobKeeper. They will then have until 31 January 2021 to meet the wage condition for the JobKeeper fortnights commencing 4 January and 18 January 2021.
The review of the TPB has been completed and the Government has provided its response to its
recommendations which have, broadly, been supported. Some of the key responses include:
– Tax agent education and experience requirements—the Government will request that the TPB undertake further consultation on contemporary education requirements for tax practitioners. Following this process, the Government will consider if changes to the legislation are required.
– Requirement that an entity has appropriate governance arrangements in place that demonstrate who is accountable for the delivery of tax agent services— Treasury will consult with key stakeholders to develop a proposal that would improve firm/partnership accountability and governance.
– Enactment of legal professional privilege (LPP) provisions in the Taxation Administration Act 1953 and development of a protocol with the ATO—Development of the protocol between the Law Council and the ATO should be progressed and finalised and a similar protocol developed for tax practitioners. Once both protocols have had sufficient time to be considered in operation, the Government will revisit the need for legislative intervention
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.