Tax Bulletin – October 2019

October has seen the passing of the controversial legislation for the denial of holding costs in relation to vacant land, although many concerns have been addressed with amendments to the legislation. At a TIA conference, the ATO have provided more details on reimbursement agreements and the application to trust distributions within families. 

LEGISLATIVE UPDATE

Denial of deductions for holding costs associated with vacant land

Amended legislation has been passed to deny deductions for holding costs in relation to vacant land from 1 July 2019 (refer Tax Bulletin—July 2019). Land will be vacant if there is no substantive or permanent building structure. If constructing residential premises, land will be considered vacant until it is lawfully able to be occupied and is available for lease.

The measures do not apply to companies or where land is being used by the landholder, or eligible related parties, to carry on a business. Additional exceptions will now also apply where:
– structures were affected by natural disasters or other exceptional circumstances (for up to 3 years);
– the landowner, or eligible related parties, are carrying on a primary production business and leasing the vacant land to another entity; or
– the land is leased on arm’s length terms to an entity which uses it in carrying on a business.

These exceptions do not apply if the land contains residential premises (though the land may not be ‘vacant’ if  these premises are leased, or are available for lease). 

These amendments address many of the concerns we had previously raised with Treasury, particularly for farmers. However, deductions could still be denied if vacant land is leased to a person who is not carrying on business (e.g. horse agistment) or where farmland is leased to adult children on favourable terms.

Draft legislation—Testamentary trusts & excepted income

Draft legislation has been released to limit the tax concessions available to minors in relation to income from a testamentary trust. The purpose of the legislation is to prevent taxpayers obtaining the benefit of the concession by transferring assets unrelated to the deceased estate into a testamentary trust.

Income from a testamentary trust will only be excepted trust income if derived by the trustee from property which satisfies one of the following requirements:
a) the property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person (e.g. as a result of a will)
b) the property, in the opinion of the Commissioner, represents accumulations of income or capital from property that satisfies requirement (a); and
c) the property, in the opinion of the Commissioner, represents accumulations of income or capital from property that satisfies requirement (b) or that has already satisfied this requirement.

Rules for $10,000 cash payment limit exception

Draft rules have been released setting out the exceptions to the $10,000 cash payment limit to commence from 1 January 2020. These include:
– Wholly personal or private transactions. This refers to supplies, acquisitions or gifts that are not made in the course of an enterprise, or the entity reasonably believes this is the case. This exception does not apply to the acquisition of real property.
– Certain financial transactions reporting entities and Government agencies.
– Movement of physical currency from one place to another.
– Digital currency (this could be removed in the future if it becomes appropriate).
– Where there is genuinely no alternative payment method.

Removal of Main Residence Exemption (MRE) for foreign residents

Legislation has been reintroduced to remove the MRE for foreign residents. The MRE will no longer be available if a taxpayer is a foreign resident at the date of disposal and has been for a continuous period of at least 6 years. If the taxpayer has been a foreign resident for less than 6 years, the MRE will only be  available if any of the following occurred during the period of non-residency:
– The taxpayer, their spouse, or a child under 18 had a terminal medical condition
– The taxpayer’s spouse or a child under 18 died
– The sale occurred as a result of a family law order or binding financial agreement.

For property acquired after 9 May 2017 the MRE is removed regardless of the sale date. For pre-9 May 2017 property the MRE will only be removed for disposals taking place after 30 June 2020. There is no pro-rata of the exemption if the taxpayer was a resident at a time during the ownership period.

Other legislation passed—including increase in Luxury Car Tax Refund

Legislation has also been passed for a number of other tax measures as outlined in our July Tax Bulletin. These include the increased luxury car tax refunds of up to $10,000 to eligible primary producers and tourism operators on vehicles purchased from 1 July 2019.

CASE LAW UPDATE

Sharpcan v CofT — Deduction for Gaming Machine Entitlements (GMEs)

The ATO has won its High Court appeal in relation to the deductibility of a payment for GMEs in Sharpcan v CofT. The taxpayer operated a pub in Victoria which derived income from a number of integrated activities including gaming. Under a new licensing regime, 10 year GMEs were allocated directly to operators and the taxpayer acquired 18 GMEs at auction. It sought a deduction for the cost under s8-1 or, alternatively, over 5 years as blackhole expenditure under s40-880.

The High Court unanimously held that the GME purchase price was a once-and-for-all payment for the acquisition of an asset of enduring advantage, which was necessary for it to conduct gaming activities, and was therefore on capital account and not deductible.

Blackhole expenditure can include a cost incurred to preserve (but not enhance) the value of goodwill if it is in relation to a right and the value of the right is solely attributable to the effect it has on goodwill. The High Court held that the GMEs were acquired as an asset to be used in the hotel business, rather than to preserve goodwill, and their value was not solely attributable to the effect they had on goodwill. The cost therefore did not qualify as blackhole expenditure.

Key Takeaway:  This case will assist as a precedent moving forward for capital v revenue issues arising.

GYNW and CofT—Non-arm’s length income NALI

In GYNW and CofT an SMSF in pension mode had acquired 20% of the shares in a private company for a nominal amount based on its assets at the time. The SMSF was connected to an accountant and the   company was controlled by his client. The company then acquired business assets at below market value from related parties, and the taxpayer became an employee of the company. Significant dividends were subsequently paid to the SMSF out of profits generated from the businesses. The ATO sought to tax these dividends on the basis of being NALI and imposed penalties on the basis of recklessness.

The AAT took a broad look at the arrangement and determined that the source of the dividends could not be separated from the non-arm’s length acquisition of the businesses, the purpose and effect of which was to divert income from the previous owner to the taxpayer’s SMSF to confer a benefit to the taxpayer. The ATO decision was therefore upheld, including penalties.

Key Takeaway: The AAT noted the fact that the taxpayer had obtained legal advice did not mean they had taken reasonable care as the advice was not based on a complete understanding of the arrangement.

Hart v CofT—Multiple rollovers & the 50% CGT discount

The decision in Paule v CofT  (refer Tax Bulletin—March 2019) has been upheld by the Full Federal Court. In Hart v CofT (2019) the taxpayer used a series of CGT rollovers to firstly transfer assets to a company, and then roll the shares into a new company, which were then sold for a capital gain. The original assets had been held for more than 12 months, but the rollover shares had been held for only a few days.

Where an asset is acquired under a series of replacement asset rollovers a specific provision deems its  acquisition date to be that of the original asset. However, this deeming rule does not apply if one of the rollovers was under subdivisions 122-A or 122-B (disposal of assets by an individual, trust or partnership to a wholly-owned company) or 124-N (disposal of assets by a trust to a company).

The Full Federal Court held that, as one of these rollovers had been applied as the first rollover in the series, the acquisition date of the sale shares was the actual acquisition date of that first rollover and so the gain was not eligible for the 50% CGT discount.

Key Takeaway:  This case has implications where multiple rollovers are used to restructure (but does not affect restructures using a single rollover).

Residency of working holidaymaker—Stockton and Addy cases

The same judge in the Federal Court has decided two cases in relation to taxpayers who came to Australia on a working holiday visa. Both lived in Australia for 10-12 months and always intended to return to live in their home country.

In Stockton v CofT the taxpayer lived in a series of short-term accommodation, consisting of hostels, airbnb rentals and at friends, in various suburbs in Melbourne and Brisbane. The Federal Court held the taxpayer had no settled employment or place of abode, with no intention of settling in any one location, and so did not ‘reside’ in Australia. Her ‘usual place of abode’ was also at her parent’s home which she had intentionally retained as her residential base. Therefore, although she spent more than 183 days in Australia, the ‘183 day test’ was also not satisfied due to her usual place of abode being outside Australia.

In Addy v CofT the taxpayer based herself in one location living in the same share house, with only brief absences, and had two jobs. In this case it was held that she was a resident of Australia. Most significantly it was held that the imposition of a different tax rate to non-Australian nationals breached a non-discrimination clause in the relevant Double Tax Agreement and the taxpayer should have been subject to the usual resident tax rates.

Key Takeaway: Working holiday makers who qualify as tax residents of Australia and have paid tax at the higher working holidaymaker rate may now be able to request a refund of additional tax paid.

RULINGS, GUIDELINES  & PRACTICE STATEMENTS

TD 2019/D8—Commercial debt forgiveness

TD 2019/D8 deals with the exclusion from the operation of the commercial debt forgiveness rules when the forgiveness is made for reasons of natural love and affection. If the commercial debt forgiveness rules apply on forgiveness of a loan they may result in a reduction of tax losses, depreciation deductions or cost base of assets of the debtor.

The TD provides that a creditor must be a natural person to forgive a debt for reasons of natural love and affection. This means, for example, that the creditor cannot be a company or an individual acting in the capacity of a trustee. This is a change in position by the ATO which had previously issued an ATOID stating that this exclusion could be relied upon by a company.

Other rulings and tax determinations

TD 2019/D10: confirms the ATO view that a foreign sourced capital gain is only included as part of the FITO limit calculation when it has been subject to foreign tax.

GSTR 2006/3DC1: this is an addendum to the guidance on acceptable methods for providers of financial supplies to determine the extent of creditable purpose when calculating input tax credits. This has made a change where taxpayers use a ‘direct estimation method’.

ATO AND GOVERNMENT ACTIVITY AND FOCUS

Air-BNB  –  Data Sharing with ATO

The rental platform, Airbnb has advised its hosts that it is legally required to share certain information with the ATO as part of its data matching program. Starting from the 2016-17 income year the information provide to the ATO will include the hosts’ income per listing, listing dates, enquiry and booking rates and the prices charged or quoted a night.

The ATO has separately confirmed that it will be examining data of around 190,000 taxpayers pulled from online platform sharing sites to identify taxpayers who have left out income or over-claimed deductions.

Super guarantee (SG) opt-out—application process

High-income employees with multiple employers can apply for an SG employer shortfall exemption certificate from 1 January 2020 by submitting the SG opt out for high income earners with multiple employers form (NAT 75067). The certificate can release an employer from their SG obligations for up to 4 quarters in one financial year. A separate application is required for each financial year.

An application for an exemption certificate can only be made in respect of current employers. The form must be lodged at least 60 days before the beginning of the first quarter that the application relates to. However, the ATO will accept applications for the 3rd quarter commencing 1 January 2020  if lodged by 18 November 2019 and for the 4th quarter commencing 1 April 2020 if lodged by 31 January 2020.

The ATO will only issue a certificate if an employee is likely to exceed their concessional contributions cap for that financial year and they will still have at least one employer obliged to make SG contributions.

Reimbursement agreements (section 100A) and trust distributions to children

The ATO has spoken at a recent TIA conference about trusts distributing to adult children who will not obtain the benefit of that distribution (i.e. the distributed amounts are gifted, paid or lent back to the parents). Where this occurs in one year because, for example, parents needs financial help, then no issue may arise. However, if there is a pattern over multiple of years, the ATO may consider this to be a sham or, alternatively, section 100A is likely to apply. Section 100A results in the trust being taxed at the top marginal tax rate on the relevant income. Please contact us if you would like further information.

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.