Tax Bulletin – October 2018

During October the Government issued draft legislation with respect to a number of the measures announced in the 2018/19 Federal Budget. This includes the denial of deductions for holding vacant land and removal of small business CGT concessions for Everett Assignments. Our October Tax Bulletin contains details of these and other developments.

DRAFT LEGISLATION – BUDGET ANNOUNCEMENTS

The Government has released draft legislation for consultation in relation to a number of measures announced in the 2018-19 Federal Budget.

Denial of deduction with respect to vacant land

From 1 July 2019 deductions will be denied for costs associated with holding vacant land. These costs will now generally be included in the cost base of the land. The measures will not apply to companies, super funds (other than SMSFs), MITs or public unit trusts.

Deductions will continue to be available if the land is used to carry on a business by the landholder, their connected entity, affiliate, spouse, or child under 18. A deduction should therefore be available in relation to vacant land leased to related parties for use in their business. No deductions will be available for vacant land leased to an unrelated third party unless the leasing of the land itself is the carrying on of a business.

Land will be considered vacant if there is no substantive permanent building or permanent structure on the land that is in use or ready for use. If a residential premises is being constructed it will be considered vacant until it is lawfully able to be occupied and be available to lease. The rules will also apply where only part of land is vacant to deny a deduction for the relevant proportion of costs.

The measure appears to extend beyond its intention of discouraging landbanking, and could impact owners of genuine farmland where the farming activities are carried on by an unrelated party. MC Tax Advisors intends to lodge a submission with regard to these outcomes.

Circular trust distributions

From 1 July 2019 the circular trust distribution rules are to be extended to ‘family trusts’. These rules currently apply to trusts that have not made a family trust election.

A circular trust distribution is where, say, Trust 1 distributes income to Trust 2, and Trust 2 then distribute this income back to Trust 1, such that there is no ultimate beneficiary. In this case, trustee beneficiary non-disclosure tax will be imposed at 47% on the present entitlement of Trust 1 to the income which it had previously distributed to Trust 2.

No Small Business CGT Concessions for Everett assignments

From 8 May 2018, access to the small business CGT concessions will not be available for capital gains   arising from an ‘Everett Assignment’. This refers to an equitable assignment by a partner of some or all of their interest in a partnership. Under these arrangements, the other party does not become a partner, but becomes entitled to the relevant share of any  income or capital of the partnership.

The small business CGT concessions will not be available unless the asset being transferred equates to an actual membership interest in the partnership.

Work test exemption for recent retirees

From 1 July 2019 individuals aged 65 to 74 with total superannuation balances below $300,000 will be able to make voluntary contributions to their superannuation accounts without being required to meet the work test. A fund will be able to accept contributions for a period of 12 months from the end of the financial year in which the member last met the work test.

Director Identification Numbers & Business Registers

As part of a suite of anti-phoenixing measures, new company directors will soon need to apply for an identification number within 28 days of becoming a director. Existing directors will have 15 months to apply once the scheme commences. A person intending to become a director within 12 months will also be able to apply. There will be civil and criminal penalties for directors who fail to apply for identification numbers, while regulators may also issue infringement notices to those who fail to comply.

It is also intended to combine the company register maintained by ASIC and the Australian Business  Register maintained by the ATO.

LEGISLATIVE UPDATE

Small business tax cuts brought forward

Legislation has been passed to bring forward the reduction in the corporate tax rate for companies with an aggregated turnover of less than $50m who derive no more than 80% of their income as ‘base rate  entity passive income’ (refer August 2018 Tax Bulletin).

The 26% tax rate will now apply for the 2021  income year and 25% from the 2022 income year. The small business income tax offset rate for businesses with an aggregated turnover of less than $5m will increase to 13% and then 16% respectively.   

CASE LAW UPDATE

Personal Service Income Rules

Douglass v FCT involved a taxpayer who provided engineering services through a labour hire firm in a 50/50 partnership with his wife. The ATO affirmed the ATO decision to assess the taxpayer personally on all contract income and impose a 50% penalty for recklessness.

The taxpayer argued that the partnership satisfied the results test under the PSI rules on the basis that it was required under the contract to produce specific project results. However, the AAT held that this was not the meaning of income being paid to produce a result for the purposes of the PSI rules, and that the payments were for the services performed by the taxpayer.

Sharpcan decision & gaming machine entitlements

In CofT v Sharpcan Pty Ltd the Full Federal Court has allowed a hotel taxpayer a full tax deduction for costs incurred to obtain gaming machine entitlements. Previously, these payments have been viewed by the ATO as non-deductible capital costs. Further details of this decision were provided in our earlier newsletter and can be found on our website.  Since that newsletter was issued the ATO has appealed this decision to the High Court. 

Fraud and evasion

The Federal Court case of Nguyen and FCT has confirmed that the onus is on a taxpayer to prove that there is no fraud or evasion whilst upholding amended assessments issued by the ATO.

The taxpayer had been issued with assessments including as income amounts received which she claimed were loans from a friend, casino winnings and gifts from family. The ATO also alleged that there had been fraud and evasion, and imposed penalties on the basis of intentional disregard of the law. This case is also  another reminder of the importance of maintaining contemporaneous records of the source of material bank deposits in the event that the ATO later requires evidence that these are not income.

UPDATES ON OTHER DEVELOPMENTS

Division 7A consultation paper

Treasury has released a consultation paper setting out its proposed implementation of the amendments to Division 7A to apply from 1 July 2019.  Please refer to our separate bulletin on these changes provided with this newsletter and available on our website. We shall provide an update on the measures when the outcome of the consultation process is known.

Extension of time to use business trading name without registration

All businesses have been required to register a business name with ASIC since 2012. However, existing trading names have continued to be displayed on the ABN Lookup website under transitional arrangements which were due to expire on 1 November 2018. This was expected to affect many small business operators that use their name as their trading name without formally registering this as their business name. These arrangements will now be extended a further five years to 31 October 2023. 

Main residence exemption for non-residents

The removal of the main residence CGT exemption for non-residents has been further delayed following  pushback from the expatriate and tax community. The rules were to apply to all sales from 30 June 2019, and would deny the exemption in full if a taxpayer was a non-resident at the time of sale.

In a positive sign, the legislation was removed from the Senate list subject to further consideration by the Government. Suggested changes include resetting the cost base of the property to market value when a person becomes a non-resident or pro-rating the exemption based on days of residency.

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.