Several Federal Budget measures have quickly passed through Parliament, including the temporary full expensing and loss carry back rules. Consultation for the JobMaker rules has been released, and recent cases include an interesting GST decision on the subdivision of land by a company.
Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 has received Royal Assent. This Bill introduces a number of Federal Budget measures.
Most businesses will now be able to deduct the full cost of new depreciable assets of any value where they start to hold and use the asset (or have installed ready for use) from 7:30pm (AEDT) on 6 October 2020 and before 30 June 2022. Large businesses (turnover more than $50m) will not be eligible if a commitment was made to acquire the asset pre-Budget time.
Small and medium sized businesses (turnover less than $50m) will also be able to deduct the cost of second-hand assets acquired. Further, small businesses (turnover up to $10m) will deduct the full closing balance of the simplified depreciation pool at the end of the income year until 30 June 2022.
A deduction is also available for any installation or improvement costs incurred after Budget time, including where the asset cost itself does not qualify for full expensing. However, if an asset will not be used principally in Australia or will never be located in Australia, no costs in relation to that asset are eligible.
Note: Businesses do not have a choice whether to apply these deductions.
Businesses that acquired eligible assets under the $150,000 instant asset write-off pre-Budget time will also now have until 30 June 2021 to first use or install those assets (extended from 31 December 2020).
The rules provide a temporary refundable tax offset to companies in business where they offset tax losses against previous profits on which tax has been paid:
– For the 2021 income year: A loss must have been incurred in the 2020 or 2021 income years, and the company had an income tax liability in the 2019 or 2020 income year.
– For the 2022 income year: A loss must have been incurred in the 2020, 2021 or 2022 income years and the company had an income tax liability in the 2019 or 2020 income year or, if the loss year is the 2022 income year, in the 2021 income year.
The company must have lodged its tax returns (or a tax return was not required) for the current year and the previous 5 income years.
Each loss carry back amount (generally being the loss x the tax rate for the loss year) will be allocated to an eligible income year and capped at the tax liability in that year. It will also be capped further at the franking account balance at the end of the loss year.
A company will first be able to make a choice to receive the tax offset on lodgement of its 2021 income tax return (delaying any cash flow benefit until that time).
The legislation also introduced the following Federal Budget measures:
– Accelerating the Personal Income Tax Plan (i.e. personal tax rate cuts).
– Increasing the small business entity turnover threshold for certain concessions from $10m to $50m.
– Enhancing and improving the administration of the R&D Tax Incentive.
The remaining tax and superannuation related Federal Budget measures have not yet been introduced.
Please refer to our Federal Budget Bulletin for details on these measures.
The House of Representatives has passed the Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020. This has been referred to a Senate Committee which is to report by 6 November 2020. However, the hiring credit scheme itself will be established under Rules issued by the Treasurer and the Exposure Draft has been released for consultation. Closing date for submissions is 27 November 2020.
The JobMaker scheme will apply from 7 October 2020 to 6 October 2022. Employers will enrol and report to the ATO. To be eligible, they will need to be registered for PAYGW and be reporting through STP. For each relevant quarter, they will then need to have both an increase in:
– Total employee headcount (minimum of one additional employee) from the baseline at 30 September 2020. This baseline will be adjusted quarterly after the first 12 months; and
– Payroll amount for the reporting period compared to the equivalent number of pay cycles ending on or before 6 October 2020.
The claim cannot exceed the payroll increase for the period. To be eligible for a new employee they must:
– Be aged between 16 and 35 years.
– Have worked for an average of at least 20 hours per week; and
– Be in receipt of income support payments for at least 28 of the 84 days prior to being employed.
Eligible employers will receive up to $10,400 per new position created, calculated as:
– $200 per week if they hire an eligible employee aged 16 to 29 years: or
– $100 per week if they hire an eligible employee aged 30 to 35 years.
An amount can only be received for each employee for up to 12 months.
A large parcel of land had been acquired by a company in 1962. Multiple subdivisions and sales had taken place between long periods of inactivity. The company was registered for GST due to activities unrelated to the land. The land was not used rental or grazing, and no income tax deductions or input tax credits relating to the land had ever been claimed. The company sold 2 lots on which the ATO sought to impose GST on the basis they were sold ‘in the course or furtherance of an enterprise’.
The taxpayer claimed that the sales were made to facilitate the winding up of deceased estates and simplify its affairs. The AAT held that, while there was no positive evidence of a business being carried on, the facts were not inconsistent with the taxpayer acquiring the parent lot with a view to commercial gain. The company had not provided sufficient evidence to exclude the conclusion that it had a commercial purposes (particularly in the context of it being a company) and it was therefore carrying on enterprise.
Key Takeaway: A taxpayer acquiring property should retain contemporaneous evidence of their intentions. It is particularly difficult for a company to prove it holds an asset for a non-commercial purpose.
In Cox v FCT, the ATO has been required to release a taxpayer from tax debt on the basis of serious hardship. The unemployed taxpayer lived in a flat on his property on which he had an unfinished house. His only other assets were a car and tools, and he had other debts. The ATO had denied the release, based on PSLA 2011/17, as he would still be in a cashflow deficit due to his other liabilities, had made no provision for his tax obligations, had a history of failing to make payments and a poor compliance history.
The AAT found that the taxpayer had tried to pay his tax debts when he had spare money and had now engaged a tax agent to assist him in meeting his obligations. He would not be able to repay his full tax debt in his lifetime and would suffer substantial and long-term serious hardship including detriment to his mental health. The debt release would enable him to repay the ineligible debt within a reasonable time and other debts would be more manageable.
Key takeaway: This is a decision that may help other taxpayers obtain release of tax debt from the ATO.
The AAT has held that a service technician was not an employee for the purposes of the Superannuation Guarantee (Administration) Act (SGAA) and therefore not entitled to superannuation contributions. The individual provided repairs and maintenance services and was described as an independent contractor in his contract.
The AAT considered the various employee v independent contractor tests. The tests relating to ‘control’, ‘integration into the organisation of the business’ and ‘exclusivity’ were not conclusive either way. The fact he was required to provide and maintain his own vehicle and some of his tools pointed towards being an independent contractor but not decisively. The key factors pointing towards him being an independent contractor were that most remuneration was paid to complete discrete tasks, he provided his own insurance and was responsible for damages or to redo work. The individual was also not an employee under the extended definition in the SGAA as he had the right to engage sub-contractors, the work was delegable and the contract was therefore not “wholly or principally for the labour of the person…”.
Key Takeaway: The case illustrates that a range of factors must be considered in determining whether an employee relationship exists and a provides a useful guide to their application. Both the formal wording of the contract was relevant as well as evidence of the actual working relationship.
A director of two trustee companies has been denied a deduction for the cost managing the companies’ tax affairs under s25-5 of the ITAA 1997. The AAT held that he was not “complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity”.
As the director had not been appointed as the public officer (and the appointment notified to the ATO) he was not under an obligation with respect to their tax affairs.
The AAT has continued to see a number of individual tax residency decisions.
– Joubert and FCT: A taxpayer who worked overseas for 5 years was a tax resident, principally due to his family and home being maintained in Australia to which he returned regularly and frequently.
– Arjanan v FCofT: The taxpayer worked overseas for 7 months but claimed he had intended to remain for 10 years and only returned to Australia due to poor health. However, all evidence indicated he intended to return to Australia which remained his home and so was also held to be a tax resident.
– Gurney v FCofT: The taxpayer came to Australia on a working holiday visa. He had expected to change those arrangements to indefinite employment, but was unsuccessful and left after 10 months. The AAT accepted his intention based on the evidence and held him to be a tax resident.
The Full Federal Court has denied a company a deduction for lump sums paid to doctors to bring their practices to its medical centre. Its business was the provision of premises and services to doctors. The contracts indicated they were buying the doctor’s practice and the doctor would work at the centre.
The Court found that the lump sum payments were made for doctors to cease an existing practice and to commence trading as part of the centre by adopting the taxpayer’s mode of practice, and to accept a restraint on establishing a competing medical practice. The payments created and protected the goodwill in the centres and therefore had an enduring character. They were not made simply to secure doctors as customers who would pay to use the facilities and support services provided by the centre.
Point to note: When reviewing these arrangement from the perspective of the doctor consideration of the underlying contractual arrangements are crucial as the ATO may still look to treat these lump-sum payments as being on revenue account.
A new alternative decline in turnover test has been introduced where a business had temporarily ceased trading outside the ordinary course of business (e.g. a renovation of premises). The test applies for both the actual and original decline in turnover test, if relevant, where trading ceased for at least a week which at least partially occurred in the comparison period. The alternative comparison turnover is then either:
– Turnover for the same quarter in the previous income year;
– Turnover for the 3 months immediately before the cessation month; or
– Turnover for the month immediately before the cessation month (original test only).
APRA has published a FAQ on the interaction between JobKeeper payments and satisfying the “work test” for the purpose of voluntary superannuation contributions. Where an individual aged 67-74 is stood down from their employment due to the impacts of COVID-19 but is in receipt of the JobKeeper payment, a super fund trustee can accept a personal contribution under the “work test” rules on the basis that the individual should be considered “gainfully employed”.
The ATO has published updated tax withholding schedules. These schedules will apply on a go-forward basis from 13 October 2020. Employers and other payers who are unable to immediately implement these changes into their payroll will have until 16 November 2020 to do so.
The ATO has updated its guidance on satisfying the ‘Business Continuity Test’ (BCT) as a result of the impacts of Covid-19. Examples of COVID-19 impacts on companies include where it suddenly changes its business model or activities, or where a company closes its business. Generally, a company that has completely closed its business with no intention to resume will fail the BCT. However, a company that has temporarily closed its business may still be able to satisfy the BCT. The mere receipt of JobKeeper payments will not cause a company to fail the BCT.
The ATO has warned CFOs not to use artificial mechanisms to take advantage of the carry back of losses and outright deductions for capital assets. The ATO has indicated it will be watching out for:
– Structured transactions where the plant and equipment is not actually used in the business;
– Intellectual property migration with no change in real activity;
– Asset swaps with related parties; and
– Artificial shifting of profits and losses around a group to access the loss carry back.
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.