October 2019
FBT EXEMPTION ‘TAX TRAVEL’ BETWEEN WORK & HOME
On 2.9.2019 the ATO indicated they would not consider whether this exemption could be extended to ride sourcing vehicles simply stating their position was outlined in chapter 20 of their guide to fringe benefits tax.
Deductions for a company or trust home-based business
The ATO have recently outlined their expectations on this topic.
If you run your home-based business as a company or trust, your business should have a genuine, market-rate rental contract (or similar agreement) with the owner of the property. The agreement will determine which expenses the business pays for and can claim as a deduction.
If there isn’t a genuine rental contract, there may be tax implications for you and the business for providing benefits to you.
If you earn personal services income (PSI), you may not be able to deduct some occupancy expenses.
Implications when you are both the business owner and an employee
If you’re both the business owner and also an employee of the business and the business pays for or reimburses you for some of the expenses of running your business from home, you can’t claim a deduction for the expenses in your individual income tax return.
Your business will have to pay fringe benefits tax (FBT) if it pays or reimburses you for the expenses as an employee. Certain exemptions and concessions may apply to reduce your FBT liability. You may need to keep additional records for FBT purposes.
Example: Company with a rental contract
Gary is a music producer who runs his business – Gary’s Tunes Pty Ltd – as a company from the home that he owns.
Gary’s house has a dedicated studio space where he keeps his music recording and editing equipment and computer. He bought these using his company account and only uses them for the business.
Gary’s Tunes Pty Ltd has a formal rental agreement with Gary to hire the studio for $500 per month. The rent covers use of the space and facilities, such as electricity. This is consistent with what it would cost the company to hire a similar studio elsewhere.
Gary’s Tunes Pty Ltd claims tax deductions for:
- rent paid to Gary; and
- the full cost of the music equipment and computer, as each item cost less than $30,000.
Gary must report the rental income that he receives from his company in his personal income tax return. He can claim a deduction for his expenses from making that income.
When Gary sells his house, he may have to pay tax on a portion of any capital gain he makes. The main residence exemption won’t apply to his studio for the periods that he rented it to his company.
If you require guidance in this area, please contact us.
EXCLUSION ORDER TO EXCLUDE CERTAIN ENTITIES FROM A PAYROLL GROUP
Telgrove Pty Ltd t/as P & E Francis Plant Hire v Commissioner of State Revenue [2019] QCAT 199
Given the uniform legislation across most state jurisdictions, this case is relevant elsewhere.
The QLD Civil and Administrative Tribunal set aside the QLD Commissioner of State Revenue’s decision to refuse to make an exclusion order to exclude certain entities from a payroll group. The payroll tax and the penalty the taxpayer paid in full was refunded. The Tribunal took into account that matters favouring grouping (management control and commercial transactions) are significantly outweighed by matters favouring exclusion (lack of other material commercial transactions, lack of shared resources, facilities or services, different management structures, lack of financial interdependencies and lack of a connection between the nature of the businesses).
This case shows how far state jurisdictions can go with data matching group entities which come to their attention. If you are close to the payroll tax threshold also consider that “salaries and wages” has a wide definition including super and fringe benefits. If you require any guidance in this area, please contact us.
BENEFICIARY ASSESSABLE ON CASH DISTRIBUTION FROM A TRUST
Campbell v Commissioner of Taxation [2019] AATA 2043
In this AAT case it was held that the taxpayer, a beneficiary of a New Zealand trust, was assessable under s99B of ITAA 1936 on a cash distribution received from a trust and the amount was not the corpus of the trust. The AAT found that the taxpayer had not provided adequate evidence to discharge their onus of establishing that the issued assessments were excessive. The trust records provided were inconsistent and therefore unreliable and there was no evidence before the AAT to corroborate witness history of the establishment of the trust and the characterisation of the money held herein.
If you are receiving funds from an overseas trust consider requesting financial records from the controllers to establish the character of the payments, if you receive corpus payments) non-assessable capital) the onus of proof is on the taxpayer in the event of an ATO enquiry.
HIRING WORKING HOLIDAY MAKERS
This is an issue many employers face each year as approximately 100,000working holiday makers are employed in Australia.
When a new employee ticks the box at question eight on their Tax file number declaration form declaring they’re a ‘working holiday maker’, you need to:
1. Register
Anyone can hire a working holiday maker but first you’ll need to register to apply the 15% working holiday maker tax rate and declare that you’re aware of your obligations. This includes checking your working holiday maker’s visa status and complying with the Fair Work Act 2009 (where applicable).
If you don’t register you must withhold tax at the foreign resident tax rates and may be subject to penalties.
If you require assistance contact us. Alternatively, or you can register yourself using the ATO Working holiday maker employer registration form online before you make your first payment to them. You’ll need your:
- Australian business number (ABN)/Withholding payer number (WPN)
- entity type
- contact details.
2. Check visa
Confirm your working holiday maker has a valid visa (subclass 417 or 462) by using the Visa Entitlement Verification Online (VEVO) service.
Your employees can do this for you online, or via the myVEVO app, and send you an email verifying their details.
3. 15% working holiday maker tax rate and super
Once you’re registered you can withhold 15% from every dollar your working holiday maker earns up to $37,000. The tax rates change for amounts above this.
You also need to pay eligible super contributions as you normally would. Working holiday makers can claim these super payments back when they leave Australia.
ATO review of its unclaimed superannuation money protocol
In August the ATO commenced a review of its current Unclaimed Super Money (USM) protocol. The protocol provides guidance under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA) in relation to unclaimed money, lost member accounts, inactive low balance accounts, superannuation accounts of former temporary residents and the associated reporting and payment obligations.
While this review will make it easier for affected parties to navigate the ATO website, it is also a timely reminder for all of us to check whether we have any unclaimed superannuation. While you are at it you may also wish to check ASIC’s register of unclaimed monies, if not for yourself but for other family members.
IMPROVING THE INTEGRITY OF AUSTRALIA’S TAX AND SUPERANNUATION SYSTEMS
The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill deals with a number of activities that exploit the taxation system.
The Bill will extend to family trusts, a specific anti-avoidance rule that applies to other closely held trusts that engage in circular trust distributions. This will better enable the Australian Taxation Office (ATO) to pursue family trusts that engage in these arrangements. This integrity measure will apply from 1 July 2019.
In addition, the Bill will strengthen the integrity of the tax system by denying some taxpayers a deduction for expenses associated with holding vacant land. The measure addresses concerns that some people have been improperly claiming deductions for these costs.
There are some exceptions to this measure. The amendments will not apply to expenses associated with holding vacant land if it is used by the owner or a related entity in carrying on their business, including primary production or property development. The amendments will also not apply to corporate tax entities, managed investment trusts, public unit trusts and unit trusts. This integrity measure will apply from 1 July 2019.
The Bill will also improve the integrity of the tax system by providing the ATO with the discretion to disclose to credit reporting bureaus the tax debt information of particular businesses that are not effectively engaging with the ATO to manage their tax debts. This information can only be disclosed when certain conditions and safeguards are met, including that at least $100,000 of the debt is overdue for more than 90 days. In September a senate review committee expressed concerns about legislation.
This Bill being introduced also introduces changes to save businesses time and money through implementing an electronic invoicing framework.
The Bill provides for legislative powers and functions to be conferred to the ATO that allow it to implement an electronic invoicing (e-Invoicing) framework in Australia. Deloitte Access Economics estimates that e-Invoicing could result in economy-wide benefits of up to $28 billion over ten years.
The Bill also contains an important measure to protect workers by closing loopholes that have been used by unscrupulous employers to short-change employees who make salary sacrificed contributions to their superannuation.
LOW INCOME EARNERS MAY NEED TO LODGE
If your taxable income is under the tax-free threshold of $18,200 (before offsets) they may still need to lodge a tax return. Common reasons for this include, if you:
- had pay as you go (PAYG) withheld from payments received during the year;
- had a reportable fringe benefits amount on their income statement or PAYG payment summary;
- had reportable employer superannuation contributions on your income statement or PAYG payment summary;
- made a loss or can claim a loss made in a previous year;
- were an Australian resident for tax purposes and had exempt foreign employment income and $1 or more of other income;
- were entitled to the private health insurance rebate but did not claim your correct entitlement as a premium reduction;
- were a liable or recipient parent under a child support assessment unless both of the following applied:
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- You received one or more Australian Government allowances, pensions or payments (listed on the Individual tax return instructions 2019.
- Your income was less than$25,038.
AAT RULES AGAINST TRUST DISTRIBUTION
Ariss and Commissioner of Taxation (Taxation) [2019] AATA 2598
This case dealt with the following issues:
- Whether trust distributions are ordinary income and/or personal services income.
- Whether part IVA applies.
- Entitlement to income tax deductions.
- Whether applicant entitled to clerical deductions for income attributed to spouse.
- Whether deductions were an unreasonable amount paid to a related person.
- Whether applicant was entitled to deduction for payments made to an associate.
- Whether applicant was entitled to deductions for personal superannuation contributions.
- Entitlement to income tax deduction for travel expenses where reimbursement already made.
- Whether respondent was out of time to amend assessments.
- Limited amendment period.
- Whether Applicant beneficiary under a trust.
- Whether any person entered into or carried out a scheme for the sole or dominant purpose of the individual obtaining a scheme benefit.
This case dealt with whether an I.T. consultant was entitled to receive income through a trust and then split it with his wife. Here we are dealing with the contentious personal services income (PSI) rules.
It is standard practice to set up a trust or company to structure business or professional affairs. The tax rate for small companies (27.5%) compares with the top personal tax rate of 47 per cent (including Medicare levy).
Income from a trust or company may be distributed to different parties, who may also have lower tax rates.
However, the personal service income rules, which are designed stop people diverting income from “personal services” through companies, partnerships or trusts.
Broadly, income is classified as personal services income when more than 50% of the amount received under contract is for the individual’s labour, skill or expertise. A number of other tests can be applied.
In the years ended 30 June 2010 to and 2013 inclusive, Mr Ariss provided services to Wesfarmers Coal Ltd, Fusion Applications, Wesfarmers Resources and Premier Coal.
In the relevant years, Mr Ariss and his wife lodged tax returns declaring distributions of trust income from Agency Resource Management Services (Global) Trust (ARMS). The distributions were the amount invoiced by ARMS to clients for Ariss’s work which clearly, stated “for professional services rendered by Terence Ariss.”
The income split was 70% to Mr Ariss and 30% to his wife.
In 2013, the tax returns were audited by the ATO with amended assessments issued attributing the trust distributions as solely assessable to Terence Ariss as salary and wage income.
Mr Ariss objected to the amended assessment and it and it was up to the AAT to determine how Mr Ariss’s income was to be characterised. The AAT considered the nature of the business, the relationship between Ariss and ARMS and the role undertaken by Ariss’s wife.
Mr Ariss worked on a daily rate which was not dependent on the completion of a project. If a project was not completed, the payments were still made.
The work was undertaken at home in a dedicated home office which had no other purpose.
While Mr Ariss acknowledged it was his work clients were paying for, it was contended he would not have been able to manage his client workload without his wife’s involvement in managing his contacts and his schedule. Mr Ariss also prepared documents, conducted research on Oracle software changes, and administered accounts rendered.
Mrs Ariss was given 30% of the income, irrespective of the hours worked during each payment period.
The AAT used the “results test” to assess Ariss’s income. This stipulates income will not be personal services income if: the income is for producing a result; the individual is required to supply the plant and equipment, or tools of the trade, needed to perform the work; and the individual is liable for the cost of rectifying any defect.
The AAT determined Mr Ariss was paid for performing work and providing services, rather than producing a result meaning the results test was not met.
Mr Ariss also failed the “unrelated clients test”. This requires that an individual’s services are provided as a result of them making offers or invitations to the public at large to provide the service.
The “employment test”, which requires that an individual engages one or more people to perform work was also not met. The AAT tribunal ruled that Ariss had no formal employment arrangement with his wife and she was, in any case, an “associate” for the purposes of the test.
NEW LEGISLATION DEALS WITH THE SUPERANNUATION GUARANTEE’S INTERACTION WITH SALARY SACRIFICED CONTRIBUTIONS
Measures included in Treasury Laws Amendment (2019 Tax integrity and Other Measures No.1) Bill 2019 aims to ensure that salary-sacrificed contributions to an employee’s superannuation fund:
- Will not reduce the ordinary time earnings (OTE) amount, in respect of which an employer should make superannuation contributions; and
- Will not count in assessing whether an employer had a superannuation shortfall in respect of a particular employee.
Employees who have their remuneration set on a total remuneration package (TRP) basis have not had a problem because the employer has a contractual obligation to deliver an agreed value of remuneration, including superannuation contributions. This means the employee’s choice for a sacrifice contribution will usually obtain the intended result of the employer contributing more than the statutory minimum to the superannuation fund.
The Bill aims to ensure that this happens in all cases, regardless of employer policy or how the employee’s remuneration arrangements are structured under their employment contract.
Example of current superannuation law
Tony has quarterly salary of 30,000 and so his quarterly OTE is $30,000. An additional $2750 (calculated as 9.5 percent of the $30,000 OTE) is required to be paid as a superannuation contribution.
However, if Tony sacrificed $1,000 of his salary in return for a superannuation contribution, his OTE for the quarter would reduce to $29,000. The consequences under the superannuation law (but potentially rectified by the employment contract) would be that:
· Contributions would only be required to be calculated on OTE of $29,000; and
· The salary sacrifice contribution of $1,000 could count towards the employer’s contribution obligation in respect of that lower OTE.
Technically, under the current law, the salary sacrifice could result in only $2,755 being contributed to superannuation including the sacrificed $1,000 rather than $3,850 that the employee intended.
The Bill adds back amounts sacrificed for superannuation contributions in the definition of OTE to prevent those amounts from counting towards the employer’s contribution obligation. The effect of the measures in the Bill on Tony’s situation is:
- the employer would be obligated to make superannuation contributions in respect of the sum of Tony’s salary and salary-sacrificed superannuation contribution (i.e. $30,000 in total); and
- the salary-sacrificed contribution of $1,000 does not count towards the employer’s fulfilment of the above obligation.
The result if that Tony’s employer would be required to pay contributions totalling $3,850 where Tony made the $1,000 salary sacrificed election.
SHOPPING SCHEMES TO ILLEGALLY ACCESS SUPER
This is now an area of ATO focus aimed at retirement savings from schemes to illegally access super by:
- generating awareness of these activities;
- reviewing and assessing all new self-managed super funds (SMSFs) before they can be listed on Super Fund Lookup (SFLU);
- working closely with super industry partners to strengthen the rollover process.
Implementing these steps will help prevent the transfer or rollover of funds to SMSFs created for the purposes of illegally accessing super.
If you are approached by anyone suggesting you may access your Superannuation before preservation age, exercise extreme caution. Significant penalties may apply to these funds illegally accessed. In limited circumstances some funds may accessed due to financial hardship, but this must be approved by the ATO.
THE PAY-AS-YOU-GO (PAYG) INSTALMENT SYSTEM
If you received gross business/investment income (instalment income) of $4,000 or more during any given tax year, you will probably receive correspondence from the ATO advising that you have entered the Pay-As-You-Go (PAYG) instalment system.
The PAYG instalment system serves as a method of prepaying the taxes owing in relation to your ‘instalment income’ throughout the year as opposed to waiting until you lodge your tax return and paying the taxes on assessment.
The ATO determines whether you are required to enter the PAYG instalment by reviewing taxable income (excluding net capital gains) reported on the last tax return you lodged and calculating the notional tax liability owing. Tax credits for taxes you have already paid (e.g. PAYG withholding taxes on your salary and wages) are then applied to reduce this notional tax liability,
The ATO system then estimates the taxes you will owe for the year ahead based on that ‘instalment income’ disclosed on your last tax return.
The ATO’s systems automatically issue PAYG instalment correspondence where sufficient levels of any Employee Share Scheme (ESS) income are disclosed on your Australian tax return. PAYG withholding is not deducted from ESS income.
You may choose to either pay the ATO calculated instalment or vary it to a more accurate amount or even to nil (if you are not expecting to receive any ‘instalment income’).
Note there are general interest charges and/or penalties which may apply where your variation is significantly incorrect.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.