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Tax Newsletter – April 2024
March 28, 2024 | 
Author Revised stage 3 tax cuts now law
With the revised stage 3 tax cuts now law, it’s a good time to understand how these changes will affect you and how to plan your taxes for the future more effectively. The new rates will apply from 1 July 2024.
For the current income year, an individual who earns $67,600 annually (the median income from the latest Australian Bureau of Statistics data) will be expected to pay around $12,437 in income tax. With the new tax rates coming in for the 2024–2025 income year, assuming they earn the same amount, they will be paying $11,068 in income tax – a tax saving of around $1,369 for the year, or around $26 per week.
An individual who earns $98,176 annually (the average income from the latest average weekly ordinary time earnings data) will have an income tax bill of around $22,374 for the 2023–2024 income year. However, this will drop to $20,240 when the new rates come into force for the 2024–2025 year, leading to a tax saving of around $2,133 for the year, or $41 per week.
Similarly, an individual who earns $180,000 can expect to see a tax saving of $3,729 for the year, or $71 per week; they will pay income tax of $51,667 for 2023–2024 versus $47,938 in 2024–2025.
These revised tax cuts were introduced as a cost-of-living relief measure by the government to put more money back in the pockets of Australian workers so they can deal with recent skyrocketing inflation. By also giving a proportional tax cut to working holiday makers and foreign residents the government is banking on more spending from that segment which will boost the economy overall.
In association with the revised income tax cuts, the government has also lifted low-income Medicare levy thresholds for eligible singles, families, seniors and pensioners to apply for the current income year, meaning more low-income earners can avoid paying the Medicare levy of 2% on top of their tax, or will pay a reduced amount of levy.
Refresher on deductibility of self-education expenses
With the return of international conferences for various occupations, the deductibility of expenses such as accommodation, meals and course fees related to self-education will once again come into play at tax time. Generally, work-related self-education expenses are tax-deductible if they enhance skills and knowledge, or lead to an income increase related to current income-producing work, for the person claiming the deduction.
Self-education expenses include the costs of courses at an education institution (whether leading to a formal qualification or not), courses provided by a professional organisation or an industry organisation, attendance at work-related conference or seminars, self-paced learning and study tours (whether within Australia or overseas).
Self-education expenses are tax-deductible if your income-earning activities are based on the exercise of a skill, or some specific knowledge, and self-education enables you to maintain or improve that skill or knowledge; and/or the self-education objectively leads to, or is likely to lead to, an increase in your income from your income-earning activities in the future (eg through a real opportunity of promotion, or eligibility for a higher pay grade or bonus).
You cannot deduct self-education expenses if the education is undertaken or designed to obtain employment, obtain new employment, or open up a new income-earning activity (whether in a business or in current employment).
A deduction is also not available if you weren’t undertaking income-earning activities to derive assessable income (either by employment, carrying on a business or other means) at the time you incurred the self-education expense. Additionally, you can’t claim a deduction for any government assistance you receive in the form of rebatable benefits (eg Youth Allowance, Austudy, ABSTUDY).
For self-education expenses that are only partly deductible, you need to apportion the amounts spent and claim only the part that relates to an income-earning purpose.
ATO scrutinising novated leases
The ATO will once again be running its data matching program on novated leases in 2024, covering the 2023–2024 to 2025–2026 income years. This program first commenced in 2021, collecting data from the 2018–2019 income year.
Novated lease data will be collected from various fleet and leasing groups, including McMillian Shakespeare Group, Smartgroup Corporation, SG Fleet Group, Eclipx Group, LeasePlan, Toyota Fleet Management, LeasePLUS and Orix Australia.
The data collected from providers will consist of a range of lessee/employee identification details, employer identifying details and lease transaction details, and it’s estimated that around 240,000 individuals will be affected by the latest data matching program each financial year. The program will allow the ATO to identify and address tax risks such as employers claiming GST credits incorrectly for paying the GST on the purchase of vehicle, risks related to FBT compliance, and employees incorrectly claiming motor vehicle related tax deductions.
The ATO also uses data from this type of program to provide tailored advice and guidance through online messaging prompts when people are completing their tax return, and for targeted prompter campaigns to identify any taxpayers with novated leases who have claimed work-related expenses on their tax returns.
Paying super on expanded government paid parental leave
The Treasurer has announced that the Federal Government will pay superannuation on paid parental leave from 1 July 2025. The intention is that the superannuation will be administered by the ATO, meaning that employers will not have to process these payments on the government’s behalf. Further details of this measure, including cost, will be released in the Federal Budget due to be handed down in May 2024.
The Treasurer has said that this reform builds on the government’s work to “modernise” paid parental leave and expand the payment to cover a full six months by 2026. The expansion to Australia’s Paid Parental Leave Scheme will give families an additional six weeks of paid parental leave in total: an extra two weeks of leave (for 22 weeks total) from 1 July 2024, increasing to 24 weeks from July 2025 and 26 weeks from July 2026.
Employers will continue to be involved in the administration of payments if an employee elects to take eight or more weeks of their entitlement consecutively. For any shorter periods, Services Australia will pay the individual directly.
Small Business Superannuation Clearing House and SMSF bank account validation
To safeguard retirement savings held in self managed superannuation funds (SMSFs) from fraud and misconduct, the ATO is rolling out new security features. One new feature consists of checking for a match between an employee’s SMSF bank account details and the SMSF record when electronic payments are made via the Small Business Superannuation Clearing House (SBSCH). Where there’s a mismatch, the SBSCH cannot accept payments to an employee’s SMSF until the error is resolved.
The SBSCH is a free, online superannuation payments service (part of ATO Online Services) that small businesses can use to pay their super contributions in one transaction. It’s designed to simplify the process of making super contributions on behalf of employees, and is available to small businesses with 19 or fewer employees, or businesses with an annual aggregated turnover of less than $10 million. This service helps reduce the time and paperwork associated with making super contributions for multiple employees across different super funds.
The new security feature, from 15 March 2024, will check whether an employee’s SMSF bank account details match their SMSF records. Where there’s a mismatch, or where an employee has not listed their bank account details, the employer will receive an “invalid super fund bank details” error on the SBSCH payment instruction. According to the ATO, where this error occurs, the SBSCH cannot accept payments to an employee’s SMSF until the issue is resolved.
Once the discrepancy is resolved, employers will be able to update the employee’s SMSF bank details in SBSCH and submit payment instructions. To avoid delays for other employees, however, the ATO notes that SBSCH payment instructions can still be submitted for employees with valid super fund details ahead of resolution of any individual discrepancy.
This security feature is just one of many that the ATO has been rolling out recently to safeguard retirement savings in SMSFs. For example, the ATO now sends rollover alerts to members of SMSFs when a super fund uses the SMSF verification service to verify a fund’s details with the intention to roll super benefits into an SMSF. This can alert members of SMSFs to an unauthorised rollover so they can act to stop it.
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Tax Newsletter – March 2024
Are you receiving personal services income?
Do you earn personal services income (PSI)? While most people may think that it only applies to builders or tradies, the truth is that may also apply to any instance where individuals work and earn income using their personal effort or skills.
PSI generally only applies to individuals who receive more than 50% of their ordinary or statutory income from a contract as a reward for their personal effort or skills. An example that most people would be familiar with is a sole trader tradesperson using their skills to earn income, either directly or through an interposed entity (a PSE). However, PSI can apply to any industry, trade or profession where individuals use their personal effort or skills. This includes so-called “white collar” professionals in IT, finance and medicine, in addition to the construction industry and related trades.
If you earn PSI during the income year, the deductions that can be claimed will be limited to the deductions that you could have claimed if you were an employee (rather than someone earning PSI) and the income earned was salary and wages. This means that, for example, you would be unable to deduct rent, mortgage, interest, rates or land tax in relation to a residence or part of a residence that you use to gain or produce your PSI. This rule applies to all PSI, regardless of whether it is earned as a sole trader or through a company, partnership or trust. To avoid that outcome, individuals/personal services entities (PSEs) can generally self-assess whether they conduct a personal services business (PSB) against four tests. If any one of the four tests is met during an income year, the PSI rules will not apply to limit the deductions available to the individual or PSE.
How much does negative gearing really cost?
Since the government’s announced changes to the Stage 3 tax cuts to give lower income earners more benefits, the chorus of voices advocating for changes to other aspects of the tax system, such as negative gearing, has grown steadily stronger. So how much does negative gearing actually cost the nation each year? The answer to this can be gleaned from the 2023–24 Tax Expenditures and Insights Statement (TEIS) which, somewhat confusingly, contains figures relating to the 2020–2021 financial year.
Put simply, a tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment or the tax benchmark. These expenditures include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.
The TEIS contains detailed breakdown of various categories, including rental property deductions. The ATO estimates that some 2.4 million rental property investors claimed deductions for expenses associated with maintaining and financing property interests, including interest, capital works and other deductions. Collectively for the 2020–2021 financial year, $48.1 billion worth of rental deductions were claimed, resulting in a total tax reduction of $17.1 billion.
Only around half, or 1.1 million, of these rental property investors had a rental loss (negative gearing), which added up to total rental losses of $7.8 billion and provided a tax benefit of around $2.7 billion for the 2020–2021 income year. The other rental deductions category (eg property maintenance, council rates etc) accounted for more than 50% of the amount claimed, with the next largest deduction being interest expenses, coming in at 39%.
Further analysis of the $2.7 billion negative gearing tax benefit (or tax reduction) reveals that 80% went to individuals with above median income (those earning above $41,500) and 37% went to individuals in the top income decile (those earning over $128,000).
Although the TEIS doesn’t provide data on the status of those claiming rental deductions, this can be somewhat inferred by the ages of those claiming the deduction. According to the ATO, more than half of the total negative gearing tax reduction went to individuals between the ages of 40 and 59 years old. Presumably a majority of individuals in this cohort have families, and a good proportion may be either the sole income earner or the primary income earner in their family. This means the bulk of the commentary regarding negative gearing benefiting the rich may be on shaky ground.
However, these contentions aside, with the tax reduction on rental deductions expected to blow out to $28.2 billion by the 2026–2027 income year (from $17.1 billion in the 2020–2021 income year) and it being the second largest tax expenditure (second only to concessional taxation of employer super contributions), it’s likely the calls for changes to negative gearing will only grow stronger in time.
Estate planning considerations
Estate planning is a complex area which requires careful consideration of tax implications. Many issues that affect the distribution of assets to beneficiaries will need to be considered before an individual dies, to ensure undesirable tax consequences are avoided for both the individual and their potential beneficiaries. These include the timing on the transfer of the assets, potential gifts, transfer duties and the use of testamentary trusts.
Typically in terms of capital gains tax (CGT), the transfer of assets upon the death of an individual does not immediately trigger a CGT event; rather, a CGT “rollover” applies. This means that the beneficiaries of the estate do not have to pay CGT at the time of inheritance. Instead, CGT implications are deferred until the beneficiary decides to dispose of the asset.
Generally, beneficiaries inherit the deceased’s assets at their market value as of the date of death, which becomes the cost base for future CGT calculations when the asset is eventually sold. One important exemption to note is the main residence exemption, which can fully or partially shield the deceased’s primary home from CGT, provided certain conditions are met.
While gifts can be made as a part of estate planning before an individual dies, remember that if the gift is an asset (eg property, cryptoassets, shares, etc), CGT will still apply.
Another consideration in terms of the timing of transfers (in particular, of property) is the transfer duty involved at the state or territory level. For example, in New South Wales, if property is received from a deceased estate in accordance with the terms of a will, the beneficiary will pay transfer duty at a concessional rate of $100. However, if the transfer occurs before an individual’s death or not in accordance with a will, normal rates of transfer duty will apply. In that scenario, it would be better to wait to transfer the property. The rules for each state and territory differ, so it’s important to check before making decisions.
For individuals looking to exert more control after their own death, a testamentary trust may be one way of providing a flexible and tax-efficient way to manage and distribute the assets of the estate to beneficiaries. Generally, the terms and conditions of the testamentary trust are outlined in the will of the deceased, including the appointment of trustees and beneficiaries and how the trust assets are to be managed and distributed. The trust itself comes into existence upon the death of the person making the will, and it is separate from the deceased estate for legal and tax purposes.
However, establishing and managing testamentary trusts can involve significant costs, and there is a requirement to carefully draft the trust deed so it includes clear instructions for the establishment and operation of the testamentary trust, in order to avoid possible future disputes. There may also be ongoing legal, accounting and administrative expenses, making testamentary trusts the most complex route to head down.
The specific tax implications of estate planning can vary widely depending on individual circumstances and the state or territory in which an individual lived. This is a complex area where seeking professional advice tailored to the situation is crucia.
FBT electric vehicle home charging rate
With the rise in businesses purchasing electric vehicles (EVs) for the use of their employees, the ATO has finalised its guidelines setting out the methodology for calculating the cost of electricity for FBT purposes when an eligible EV is charged at an employee’s or an individual’s home. The rate of 4.20 cents per kilometre now applies (from 1 April 2022 and for later FBT years). To use this rate, employers will need to keep a record of the distance travelled by the car, and a valid logbook must be maintained if the operating cost method is used.
In terms of FBT, the employer now has the choice of either using the methodology outlined in the guidelines or determining the cost of the electricity by determining the actual cost incurred. Once made, this choice applies to each vehicle for the entire year, although the choice can be changed from one FBT year to another.
Tip: These ATO guidelines only apply to zero emission EVs and not to plug-in hybrid vehicles which have an internal combustion engine, or to electric motorcycles or electric scooters.
A transitional approach applies for the 2022–2023 and 2023–2024 FBT years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by each car and a valid logbook must be maintained if the operating cost method is used.
Employers are reminded that even if an EV is eligible for an FBT exemption, the benefit must still be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined, and where the employee home-charged the EV throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.
Superannuation: pension transfer balance cap 2024–2025
The transfer balance cap which limits the amount of capital that can be transferred into a tax-exempt retirement phase will not increase for the 2024–2025 income year, based on the release of December 2023 consumer price index (CPI) numbers from the Australian Bureau of Statistics (ABS). This means the figure will remain at $1.9 million for the 2023–2024 and 2024–2025 income years.
The transfer balance cap was originally introduced in 2017 as a way to limit the amount of capital that can be transferred into a tax-exempt retirement phase. This was implemented in response to criticism that the superannuation system was being used by the wealthy for estate planning purposes rather than for retirement, and that the soaring cost of tax concessions for fund members threatened the sustainability of the entire super system.
The transfer balance cap was originally set at $1.6 million, and indexation has applied to that cap from 1 July 2021 in line with the CPI in $100,000 increments. As a result, the current transfer balance cap for the 2023–2024 income year is $1.9 million. Based on the release of CPI index numbers from the ABS, this figure of $1.9 million will also apply for the 2024-25 income year, as the CPI figure for December 2023 was not large enough to trigger a $100,000 increase.
The transfer balance cap is a lifetime limit on the amount an individual can transfer into one or more retirement phase accounts. Individuals will have a personal transfer balance cap equal to the general transfer balance cap when a retirement phase income stream is commenced for the first time. For example, if an individual commences a retirement stream in the 2024–2025 income year, their personal transfer balance cap will be $1.9 million.
For individuals who started their retirement phase income stream in an earlier year with a lower general transfer balance cap, if the full amount of the personal transfer balance cap was never used, proportional indexing may apply. This means the individual’s personal transfer balance cap will be indexed based on the highest ever balance in the transfer balance account.
Where an individual exceeds their personal transfer balance cap, the excess is required to be commuted and excess transfer balance tax needs to be paid.
Australia’s love affair with SMSFs continues
Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, so it is perhaps no surprise that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of the control and flexibility offered.
In the five years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876 billion in assets, which accounts for around 25% of all super assets.
It’s important to be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF: trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances.
The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees’ lack of experience or knowledge can lead to poor investment choices. SMSFs also need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members.
There is also a time commitment required to research investments, monitor fund performance and stay updated on regulatory changes. Taxpayers thinking about starting an SMSF should consult qualified advisers for further advice.
Tax Newsletter – February 2024
Proposed changes to stage 3 tax cuts announced
With the government finally caving into pressure to change the stage 3 income tax cuts despite its previous promises to keep the already legislated measures, new proposed tax rates have been flagged to come into place from 1 July 2024, largely – in comparison to the legislated measures – benefiting those earning less than $45,000.
The talk about the stage 3 income tax cuts has reached fever pitch in recent weeks. The changes were originally legislated by the previous Coalition government in 2019 with support of the then Labor opposition . During the 2022 election campaign and since coming into gove rnment , Prime Minister Anthony Albanese had reassured voters on multiple occasions that the stage 3 tax cuts would remain. However, with the recent inflationary stressors, the government has been under increasing pressure to scrap the already legislated tax cuts in favour of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation .
As a refresher, the original stage 3 tax cuts are due to come in place from 1 July 2024, and would benefit individuals that earn above $45,000 of taxable income.
From 1 July 2024 under the already legislated stage 3 tax measures, those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of excess over $45,000. In addition, individuals who earn $200,001 and more will taxed at $51,592 plus 45% of excess over $200,000.
According to the latest ABS data, the median earnings of full-time Australian workers are around $1,600 per week, equating to $83,200 per year. Under the current rates a worker on this median wage would be paying $17,507 in tax, and under the already legislated stage 3 rates for the 2024-2025 income year the same worker would be paying $16,552 (a tax saving of $955).
Of course, as critics of the legislated tax cuts have pointed out, those who earn more will be saving more. For example, the same ABS data indicates that individuals earning $2,820 per week are in the 90th percentile of workers in Australia. This figure equates to annual earnings of $146,640. Under the current tax rates a worker on this wage would be paying around $39,323 in tax, and under the already legislated stage 3 tax rates the same worker would only be paying $35,584 (a tax saving of around $3,739).
This effect becomes even more pronounced at the edge of the stage 3 threshold of $200,000. As currently legislated these individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates versus $51,592 in 2024-2025 under the stage 3 tax cuts).
New proposals
Under the government’s most recent proposed changes, those earning between $18,201 and $45,000 would see their tax rate reduced from 19% to 16%. In addition, those who earn between $45,001 and $135,000 would be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate would be retained but would apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% would remain for those who earn $190,001 and above.
An average worker earning $83,200 per year will be better off under the government’s proposed changes, paying around $15,748 in tax (versus $16,552 under stage 3 and $17,507 under the current rates), and those in the 90th percentile of earners would be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), but would still be better off than under the current system ($39,323 in tax).
The government will now be working to get the proposed changes passed before 1 July 2024 (when the original stage 3 changes were due to apply) .
ATO areas of focus on businesses for the coming year
As we move into 2024, the ATO has highlighted three areas of focus for businesses: taking steps to address cyber security and increased protection of personal data, addressing the growth in the collectable debt book – particularly for small businesses – and improving overall tax performance.
With increased cyber-crimes, scams and hacks occurring in Australia in recent times, like any other large organisation the ATO has taken additional steps to address cyber security and increase protection of personal data to deal with an unprecedented rise in identity-related fraud attempts. For all businesses, the ATO has introduced “client-to-agent linking”, which requires all entities with ABNs (excluding sole traders) to digitally nominate their agent through ATO’s secure online services before the agent can access any data. This will cover approximately 4.7 million businesses
For all individuals interacting with the tax system, the ATO encourages the use of myGovlD. This coincides with the government announcing a tightening of the way in which individuals access their myGov account. Individuals who use their myGovlD to access the ATO’s services will need to use that myGovlD for future logins from now on. In other words, it will not be possible to access an ATO account without it.
In 2024, the ATO will also be seeking to address the growth in the collectable debt book. Currently, the collectable component of debt sits at about $50 billion and consists of mostly self-assessed debt, with small businesses owing 67% of this. According to the ATO, its more lenient approach during the height of the pandemic, under which it chased fewer lodgments and recovered less debt , has now led to a concerning behavioural pattern from some businesses where they deprioritise paying tax and super and increasingly rely on unpaid tax and super to prop up cashflow.
One of the ways the ATO is seeking to level the playing field on uncooperative businesses is the reporting of debt information to credit reporting bureaus. Since 1 July 2023, it has disclosed the debts of more than 10,500 businesses that have significantly overdue undisputed tax debts of at least $100,000.
The takeaway message for businesses, especially small businesses, for this year is to be proactive and engaged with the ATO in terms of any unpaid tax or super debts and keeping data secure.
Employees versus contractors: new rules
Following two prominent High Court decisions which dealt with the distinction between employees and independent contractors, the ATO has sought to provide guidance to businesses in the form of a taxation ruling. The most significant departure from its previous position is that the ATO now considers that various indicators of employment identified in case law, while relevant, should only be considered in respect of the legal rights and obligations between the parties, with the most important factor the holistic consideration of the contract between the parties.
In brief, the High Court’s decisions deal with the distinction between employees and independent contractors in the context of a labour-hire company and two truck drivers operating through partnerships to provide delivery services to their former employer. In the first case, the High Court ruled that a labourer engaged by a labour-hire company to work on construction sites under the supervision and control of a builder was an employee of the labour-hire company.
The High Court noted that this right of control, and the ability to supply a compliant workforce, was the key asset of the business as a labour-hire agency and constituted an employment relationship. That the parties chose the label “contractor” to describe the labourer did not change the character of that relationship, the High Court said. This decision also overruled a earlier Full Federal Court decision which held, after applying a “multifactorial approach”, that the labourer was an independent contractor.
In the second case, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and Superannuation Guarantee (Administration) Act 1992. The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not of employees).
The ATO’s Taxation Ruling 2023/4 now states that whether an individual worker is an employee of an entity under the term’s ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.
In addition, where the worker and the engaging entity have comprehensively committed the terms of their relationship to a valid written contract, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity.
The ruling notes that evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles.
In conjunction with the ruling, the ATO has also released a practical compliance guideline which sets out its compliance approach for businesses that engage workers and classify them as employees or independent contractors.
ATO’s continued focus on illegal early release of super
As a new calendar year commences, the ATO’s priorities in the self managed super fund (SMSF) sector remain consistent. As in previous years, the greatest area of concern for the ATO continues to be taxpayers illegally accessing their super before meeting a condition of release. While it notes that the vast majority of SMSFs follow the rules, those that do not are having a significant impact on the system.
According to the ATO, early withdrawal of super seriously impacts a member’s retirement savings, which can lead to an increased reliance on taxpayer funded pensions (such as the Age Pension) in the future. This is in addition to significant financial and regulatory impacts for individuals, because illegally accessed benefits are assessable as income, and the ATO may apply and seek penalties, interest charges and disqualifications.
In order to weed out the few bad apples, the ATO implemented a program late in 2023 called “illegal early access estimate” which allows it to estimate the amount of retirement money leaving the system before it should. The information from the program informs the ATO of the size, scale and trajectory of the illegal early access risk and gathers intelligence to assist in addressing the issue.
This program will be used in conjunction with preventative approaches such as providing support and guidance products and education courses for new trustees. For example, the ATO continuously improves publications available on its website to support trustees in meeting their obligations at different stages of the SMSF lifecycle. It has also developed several online learning modules focused on the lifecycle of SMSFs, which will go live very soon.
Another preventative strategy employed by the ATO is an initial review of new registrants, which involves a risk assessment of all SMSF registrations to ensure trustees are entitled to set up a fund, and acts as a safeguard against identity fraud.
For new entrants into the SMSF system, the ATO has also tailored the first-time non-lodgers program, which identifies and takes actions against funds that have received a rollover from a member but have not yet lodged their first annual return.
On the topic of compliance action, the ATO has warned that it uses increasingly sophisticated risk detection models which resulted in a significant number of sanctions being applied last year. In 2023, it disqualified 753 trustees – triple the number from 2022
– and raised around $29 million in additional tax, penalties and interest. The use of this detection model is set to continue in 2024.
Tax Newsletter – December 2023
ASIC’s new alert list offers guidance on suspicious investment “opportunities”
As a part of the government strategy to target investment scams, ASIC and the Australian Competition and Consumer Commission (ACCC) – through the newly formed National Anti-Scam Centre – have published an investor alert list which may help consumers to identify whether entities they are considering investing with could be fraudulent, running a scam or unlicensed. While the list is not exhaustive, as new scams are appearing every day, any reduction of consumer harm, financially and non-financially, is surely a positive step.
According to the National Anti-Scam Centre, which commenced operation on 1 July 2023, Australians reported a record $3.1 billion of losses to scams the previous year. The Centre is already making inroads by highlighting the most harmful scams and making it easier for Australians to report scammers, and it will build its capabilities over the next three years, working on a new system to improve scam data-sharing across government and the private sector.
The new investor alert list replaces the previous list of “companies you should not deal with” issued by ASIC, and has the advantage of including both domestic and international entities that regulators are concerned about. These concerns largely relate to entities operating and offering services to Australians without appropriate licenses, exemptions, authorisation or permission. The alert list also includes entities that run impersonation scams, falsely claiming to be associated with legitimate and often well-known businesses.
ASIC recommends conducting the following checks before handing over any investment money:
• Check whether the company or person is licensed or authorised: generally, a company or finance professional must hold an Australian financial services (AFS) licence to issue or sell investments
in Australia, or they must be an authorised representative of an AFS licence holder.
• Understand how the investment works: ASIC recommends obtaining a product disclosure statement (PDS) or prospectus from the public website for the company, speaking to a financial adviser and/or searching ASIC’s Offer Noticeboard.
• Check for common signs of an investment scam: confirm the company’s details through open-source searches and consider calling the number on the public website. Be wary of any offer documents sent by email.
TIP: You can consult the investor alert list at https://moneysmart.gov.au/check-and-report-scams/investor-alert-list.
ATO pauses “debts on hold” awareness campaign
In response to community feedback and perhaps to negative commentary in the media, the ATO has announced it is pausing its “awareness campaign around tax debts on hold”. It notes that the purpose of the letters it sent was to ensure that taxpayers had full visibility of their existing tax debts. Nonetheless, it will undertake a review into its overall approach to debts on hold before progressing any further.
If your small business has tax amounts owing to the ATO and hasn’t received a letter thus far, keep in mind that you may still have a debt on hold.
Many small business debts were put on hold entirely by the ATO (meaning debt amounts were not deducted from tax refunds or credits) during the COVID-19 pandemic’s rapidly changing business conditions, with the intention of giving these businesses a chance to recover and rebuild. The Australian National Audit Office reviewed this approach and found it to be inconsistent with the law, and the ATO then received clear advice that by law, any credits or refunds that a
small business becomes entitled to must be used to pay off (offset) its tax debt. This action is generally automatic, and should apply even where the ATO is not actively pursuing the debt (such as was the case during the height of the pandemic).
Due to the legal requirement for offsetting, small businesses with debts on hold may now find that any credits or refunds from lodged tax returns or BASs may be less than expected, or may even be reduced to zero. After the offsetting, any balance payable relating to your business’s debt on hold will remain on hold until it is paid in full.
You don’t need to actively do anything in relation to offsetting of debts, and you will only need to contact the ATO if you’d like to make payments towards your debt on hold or make a request for the ATO not to offset.
TIP: There are very limited circumstances where the ATO has the discretion not to offset a debt and to instead issue a refund. Contact us to find out more.
The easiest way to check whether a debt on hold exists is through ATO online services. You may need to download a file with all transactions on the applicable account to check, as debts on hold will not show as an outstanding balance on the account (because of their “on hold” status).
It’s important to be aware that debts on hold can be reactivated at any time where the ATO believes that there’s capacity for your business to pay. You will be notified if this is going to happen, usually in writing. A reactivated debt will show as an outstanding balance on the relevant account in ATO online services.
While the ATO acknowledges that its approach to communicating about debts on hold caused “unnecessary distress”, particularly to taxpayers whose debts were incurred several years ago, it has verified that all debts exist and that all taxpayers were previously informed when the debt was originally incurred through their notice of assessment.
Simplified payroll reporting and STP Phase 2: employers take note
While Single Touch Payroll Phase 2 (STP Phase 2) started on 1 January 2022, many digital service providers have a deferral in place to enable them to transition their customers over time. Under STP Phase 2, businesses report certain information directly to the ATO through their payroll software, such as:
• details of the remuneration they pay (eg salary and wages to employees, directors’ remuneration);
• details of PAYG withholding, including how the amounts are calculated; and
• superannuation liability information.
STP Phase 2 doesn’t change which payments employers need to report through STP, but it does change how those amounts need to be reported.
Employers need to take note that STP Phase 2 changes require your input. Carefully review your payroll reporting codes to ensure accurate data submission to the ATO through STP.
You will now start to see BAS data pre-filling by the ATO.It’s important to cross-check the pre-filled information with your payroll records to prove the correct data has been submitted to the ATO and ensure correct withholdings are remitted. Any anomalies you identify may highlight errors in your system configuration.
Don’t forget that when an employee leaves a job, information must be provided in the employer’s STP Phase 2 report, including the employment cessation date and the correct code indicating why the employee left. Details of termination payments must also be reported to the ATO.
$20,000 instant asset write-off for small business: beware timing
Legislation is currently before Federal Parliament that proposes to allow a deduction of $20,000 (up from $1,000) for the instant asset write-off of depreciating assets acquired by small business entities in the period from 1 July 2023.These new rules were previously announced by the Federal Government in its May 2023 Federal Budget.
In the period from March 2020, as part of tax relief measures arising out of the COVID-19 pandemic, temporary full expensing of certain depreciation assets allowed many businesses to write off the entire cost of certain assets. The latest Bill proposes that from 1 July 2023, under simplified depreciation rules, depreciating assets costing less than $20,000 (excluding GST), may be immediately deducted, where the asset is first used or ready for use in the year ending 30 June 2024. Note that depreciating assets that are first used or installed ready for use for a taxable purpose on or after 1 July 2024 will be subject to the $1,000 threshold.
The $20,000 threshold will apply on a per-asset basis, so small businesses will be able to instantly write off multiple assets.
The instant asset write-off rules are available to entities that meet the definition of “small business entity” and where the entity carries on a business with an aggregate turnover of less than $10 million. Connected entities to a small business taxpayer may also need to be considered to qualify for a deduction under the $20,000 instant asset write-off.
Depreciating assets that cost $20,000 or more are allocated to a small business entity general small business pool and can then be deducted at the rates of
15% in the year the asset is allocated to the pool and 30% in subsequent years.
If the balance of a small business entity’s general small business pool is less than $20,000 at the end of the income year ending 30 June 2024, the small business entity will be able to claim a deduction for the entire balance of the pool.
JobKeeper assessment: Treasury report released Treasury has released the Independent Evaluation of the JobKeeper Payment Final Report. The report considers both the impact and processes of JobKeeper. The evaluation assesses the effectiveness of JobKeeper in achieving its objectives, and records lessons learned from the design and implementation of JobKeeper, with a view to informing future policy responses.
JobKeeper was a central pillar of the policy response in Australia to the COVID-19 pandemic. It was a wage subsidy and income support program announced on 30 March 2020, as the third instalment in a series of economic support packages introduced in the space of three weeks. Modifications to policy design, including changes to eligibility criteria and the payment rate and structure, were made following a three-month review. JobKeeper remained in place until 28 March 2021.
The report finds that JobKeeper provided certainty during a crisis, and its take-up was high. It provided support to around four million employees – almost one-third of Australia’s pre-pandemic employment population – and around one million businesses. Credible estimates suggest that JobKeeper preserved between roughly 300,000 and 800,000 jobs.
With a total cost of $88.8 billion, JobKeeper was the one of the largest fiscal and labour market interventions in Australia’s history. The initial six months of the program cost approximately $70 billion. The first and second three-month extensions cost around $13 billion and $6 billion respectively.
JobKeeper was implemented with incredible speed and was well managed, the report finds. The incidence of fraud was low, and in particular lower than for other ATO-administered programs and taxes such as the cashflow boost, GST tax receipts and large corporate groups income tax.
However, the report says, narrow recipient eligibility and exclusions reduced the effectiveness of JobKeeper and had negative economic consequences.
Exclusions based on employee characteristics such as being a short-term casual or temporary migrant worker compromised the efficacy of JobKeeper and “led to worse outcomes”. In particular, the exclusion of short-term migrants from JobKeeper likely reduced the productive capacity of the Australian economy and constrained recovery in some sectors.
The report states that transparency requirements should be built into policy design to “build public trust and enable appropriate scrutiny of public expenditures”. JobKeeper did not include in its design a public registry or disclosure requirement for entities that received the payment.
JobKeeper was a policy designed for an extraordinary situation. While it was justified during the pandemic, such a policy should be reserved for a macroeconomic crisis and is not appropriate for industry or region-specific shocks or downturns in Australia,
Tax Newsletter – October 2023
ASIC calls on lenders to support customers
With the cost of living crisis and increase in interest rates hitting Australian households, there is growing evidence that many are falling into financial stress. It is with this background that the Australian Securities and Investments Commission (ASIC) has issued an open letter to various banks, credit institutions, and lenders, calling on them to ensure that their customers have the appropriate level of support.
ASIC has reminded lenders that under s 72 of the National Credit Code, providers must consider varying a customer’s credit contract if they are notified that these credit obligations are unable to be met. Credit providers must also ensure that credit activities authorised by their licence are engaged in efficiently, honestly and fairly. First and foremost, to meet their obligations, lenders must proactively communicate to customers about the circumstances in which they can seek hardship assistance and the options that are available.
Hardship options may be temporary (eg deferring a payment) or permanent (eg setting up a payment plan or altering/varying loan repayments). Applications for financial hardship will usually be required to provide proof of hardship including reasons for the hardship, current income and other major financial expenses, as well as the level of repayments that can be afforded at the current time.
Customers worried that seeking hardship arrangements will permanently affect their future credit scores can rest easy knowing the effects are only temporary. While hardship arrangements for certain credit products such as loans or credit cards can appear in credit reports, the report will only show the months the arrangement is in place, or if the arrangement is permanent, the month the loan is varied, no other details are included and the listing will be deleted after 12 months.
Where a hardship application is granted, lenders should contact customers as the period of assistance comes to an end, to understand their most up-to-date financial circumstance and consider whether further assistance is required. This includes ensuring that customers understand what happens to any arrears that may exist at the end of the hardship assistance period.
Where a customer’s hardship assistance is denied, written reasons must be provided along with other options including making a complaint to the Australian Financial Complaints Authority (AFCA) about the decision.
Subscriptions included in digital adoption boost: ATO clarification
The ATO has advised that new and ongoing subscription costs can also qualify as eligible expenditure for the purposes of the digital adoption boost. This was not specified in the ATO’s original release on the measure.
The additional 20% tax deduction applies to eligible expenditure incurred by small and medium business entities between 7:30 pm AEDT on 29 March 2022 and 30 June 2023. The boost is for business expenses and depreciating assets and is capped at $100,000 of expenditure per income year. Eligible claimants can receive a maximum bonus deduction of $20,000 per income year.
In its latest release, the ATO states that a good rule of thumb is to consider “if the small business would have incurred the expense if they didn’t operate digitally. That is, if they hadn’t sought to adopt digital technologies in the running of their business”.
Using this rule of thumb, the ATO confirms that these costs are eligible:
- advice about digitising a business;
- leasing digital equipment; and
- repairs and improvements to eligible assets that aren’t capital works.
Whether some expenditure is eligible for the boost will depend on its purpose and its link to digitising the operations of the specific small business. For example, “the cost of a multifunction printer would not be eligible if it were intended to only make copies of paper documents. However, it would be claimable if being used to convert paper documents for digital use and storage”.
Importantly, the ATO states that new and ongoing subscription costs can also qualify as eligible expenditure if it relates to a taxpayer’s digital operations; for example, an ongoing subscription to an accounting software platform for the business would qualify, as would a new subscription for digital content that is used in developing web content to advertise the business.
Small business litigation funding: improvements recommended
A recent Inspector-General of Taxation and Taxation Ombudsman (IGTO) report has recommended improvements to the small business litigation funding program, aimed at delivering better access to justice and fairness for small businesses.
The original intention of the funding program was to mitigate the disadvantage that small business taxpayers face against the ATO, which is a well-resourced and experienced litigant in proceedings which are often complex and costly.
Taxpayers that are self-represented in the Administrative Appeals Tribunal Small Business Taxation Division in disputes with the Commissioner of Taxation are generally eligible for litigation funding where the ATO engages external legal representation. Eligible small business taxpayers will have reasonable costs of engaging an equivalent level of legal representation covered.
The report from the IGTO was mainly based on two completed dispute investigations, where taxpayers expressed concerns that the ATO had attempted to cap the funding to levels below that necessary to run their matter.
There were also questions as to the ATO’s calculation basis for reimbursements which taxpayers were not made aware of when entering these agreements, and the ATO’s “numerous emails to the taxpayers’ legal representatives questioning the bills which … detracted from case preparation”.
The IGTO notes that without the adoption of its suggested improvements to litigation funding by the ATO, further dispute investigations should be expected. Meanwhile, in response, the ATO considers itself to be no longer bound by the original policy intent of the program, and has continued to confine the findings of the report to the two cases investigated, notwithstanding similar ATO actions and decisions that have been subject to further complaints to the IGTO.
However, it is understood that the ATO does intend to consult with stakeholders before committing to any improvements and that the IGTO recommendations contained in the report will be considered as a part of this process. While changes may not be forthcoming for the small business litigation program, the takeaway for taxpayers is that they can always turn to the IGTO, which provides an independent body to investigate the ATO’s decisions.
SMSF compliance activity escalation
The ATO has ramped up compliance activity in the self managed super fund (SMSF) space in response to an increasing number of funds that have been identified as not complying with superannuation obligations. For the 2023 year, the ATO says it has issued double the amount of tax and penalties when compared with the 2022 income year, and the number of disqualifications has tripled.
For the 2023 year, ATO compliance actions included issuing an additional $29 million in income tax liabilities, administrative and tax shortfall penalties, and interest on SMSF trustees and/or members, which is double the amount of tax and penalties the ATO issued in 2022. In addition, a total of 753 trustees were disqualified in the 2023 income year, and that is more than triple the amount of disqualifications in the 2022 income year.
According to the ATO, the most common reason for applying penalties was the illegal early access of super benefits by fund members. It reminds SMSF trustees that they have a responsibility to ensure that members have met a condition of release before any funds are released. Trustees should also be aware that some conditions of release have cashing restrictions which restrict the form of benefit (ie lump sum or pension) or the amount of benefit that can be paid.
Common conditions of release include the fund member having reached preservation age and retired, or commenced a transition-to-retirement income stream; ceasing an employment arrangement on or after the age of 60; being 65 years old even though they haven’t retired; or having died.
If the common conditions of release aren’t met, where a member meets eligibility requirements under certain special circumstances, they are able to have at least part of their super benefits released before reaching preservation age. These special circumstances include that the fund member:
- has terminated gainful employment;
- is temporarily or permanently incapacitated;
- is suffering severe financial hardship;
- meets conditions for compassionate grounds;
- has a terminal medical condition; or
- is taking part in the first home super saver scheme.
Besides targeting illegal early release, the ATO has reminded trustees of SMSFs that their fund must be audited every year by a suitably qualified auditor and an annual return must be lodged by the due date. This blitz on the SMSF compliance is set to continue all through until the end of the 2024 income year, with the ATO explicitly stating it will take “firm action” against trustees who persistently fail to comply with their obligations and seriously breach the superannuation laws.