CURRENCY:

This issue of Client Alert takes into account developments up to and including 23 September 2022.

Keeping you informed about the Federal Budget

Australia’s Labor Government is expected to hand down its Federal Budget for 2022–2023 on the evening of Tuesday 25 October.

The Client Alert team will, as usual, work to bring you a special Budget Extra edition that outlines the key announcements to assist you in dealing with your clients’ queries. You can expect to receive it by the morning after the Budget is handed down.

Bonus deduction for employee training proposal

To stem the tide of the current workforce shortage in many industries, the government has proposed a new temporary initiative that would give small businesses access to a bonus tax deduction equal to 20% of certain employee training expenditure. This proposal is currently in the draft stage and undergoing consultation, and as such any deduction will not be available until the measure becomes law.

As a part of its strategy to address the current skills shortage and future-proof Australia’s workforce by building better trained and more productive workers, the Federal Government has proposed to implement a temporary “skills and training boost” initiative. This initiative proposes to give small businesses access to a bonus deduction equal to 20% of eligible expenditure on certain training for employees, both existing and new, between 29 March 2022 and 30 June 2024.

The bonus deduction would be available to all entities that meet the definition of a small business entity (ie those with an aggregated annual turnover of less than $50 million) in the income year in which the eligible expenditure is incurred.

Under the proposed measure, eligible expenditure would need to satisfy the following criteria:

• expenditure must be for training employees, either in-person in Australia, or online;
• expenditure must be charged, directly, or indirectly, by a registered training provider and be for training within the scope (if any) of the provider’s registration – although any additional costs associated with the provider invoicing through an intermediary such as commissions or other fees would not be eligible for the bonus deduction;
• the registered training provider must not be the small business itself or an associate of the small business;
• the expenditure must already be deductible under taxation law (ie the training must be necessarily incurred in carrying on a business for the purpose of gaining or producing income) – the deductible training may be either an operating expense or of a capital nature, although GST is usually excluded;
• expenditure must be incurred within a specific period (between 7.30 pm legal time in the ACT on 29 March 2022 and 30 June 2024); and
• expenditure must be for the provision of training, where the enrolment or arrangement for the provision of the training occurs at or after 7.30 pm legal time in the ACT on 29 March 2022.

This initiative is only intended to cover employees, and as such, the bonus deduction would not be available for the training of non-employee business owners, such as sole traders, partners in a partnership and independent contractors who are not employees of the business within the ordinary meaning. In addition, the requirement for the expenditure to be incurred on external training means that the cost of any in-house or on-the-job training would not be eligible for the bonus deduction. According to the government, this is because the bonus deduction is not intended to cover general business operating costs.

It’s proposed that training providers wishing to take advantage of this measure must be registered with at least one of the following four government authorities to ensure quality and integrity:

• Australian Skills Quality Authority (ASQA);
• Tertiary Education Quality and Standards Agency (TEQSA);
• Victorian Registration and Qualifications Authority; or
• Training Accreditation Council of Western Australia.

Example

Company A is a qualifying small business entity and has hired a new employee, Trevor. The business is keen to upskill him to take on more complex work. The business pays $5,500 (incl GST) for a course with a registered training provider whose scope of registration includes the specific skill, held on 1 December 2022. The bonus deduction in addition to the $5,000 (excl GST) that Company A can deduct is $1,000 (20% of $5,000).

It should be noted that this proposal is currently in the draft stage and undergoing consultation, and as such the bonus deduction will not be available until the measure becomes law. No timeframes have been given as to when that will occur. However, it is likely that when passed, the legislation will be retrospective (ie it will encompass expenditure between 7.30 pm legal time in the ACT on 29 March 2022 and 30 June 2024).

Crypto reforms: change in consultation approach

With the skyrocketing uptake of cryptocurrency among Australian retail investors, the government is seeking to change its consultation approach to the regulation of cryptocurrency assets. As a part of this new approach, Treasury will prioritise “token mapping” work as the first step in a reform agenda. This aims to identify how cryptocurrency assets and related services should be regulated. Work is then expected to commence in other areas such as a licensing framework, custodian obligations and additional consumer safeguards.

According to the latest Australian Security and Investments Commission (ASIC) report into retail investment, the uptake in cryptocurrency has skyrocketed among Australian retail investors. The regulator found that 44% of those surveyed reported holding cryptocurrency, making it the second most common product type held after Australian shares. At the same time, a quarter of the surveyed investors who held cryptocurrency also indicated that cryptocurrency was the only investment they held.

With this increase in the uptake of cryptocurrency and other related blockchain technology, coupled with the lack of regulation which has allowed scams to proliferate, it will perhaps come as no surprise to learn that the Australian Competition and Consumer Commission (ACCC) estimates that more than $100 million has been reported lost to cryptocurrency investment scams just in the first half of 2022.

In a bid to stamp out these scams, the then Coalition government had commissioned the Board of Taxation to conduct a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia. This review was to focus on the scope of digital transactions and assets without increasing the overall tax burden. Specifically, it was asked to consider:

• the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
• the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
• the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
• the taxation of digital assets and transactions in comparative jurisdictions and consideration of how international experience may inform the taxation of digital assets and transactions in Australia; and
• whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

Various public consultation dates in September 2022, both in person and virtual, have also been announced by the Board of Taxation in relation to the review, with submissions closing on 30 September 2022. The Board is due to report back to the government by the end of 2022.

However, the Labor Government has recently criticised the previous government for “prematurely jump[ing] straight to options without first understanding what was being regulated”. According to the Assistant Treasurer and Minister for Financial Services, this government is seeking to take a “more serious approach to work out what is in the ecosystem and what risks needs to be looked at first”.

As a part of this new approach, Treasury will prioritise “token mapping” work as the first step in a reform agenda. This aims to identify how cryptocurrency assets and related services should be regulated. The next steps in this process will be to identify notable gaps in the regulatory framework, progress a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of cryptocurrency assets and provide additional consumer safeguards.

Treasury will be commencing consultation with stakeholders on a framework for industry and regulators soon by the release of a public consultation paper on “token mapping”. While the Board of Taxation review was not explicitly addressed, it is assumed the review as previously announced will continue.

Sale of principal home: extension of exemption

To reduce the impact of selling and buying a new principal home and to encourage pensioners to downsize, the government, in conjunction with the announcement of its intention to reduce the eligibility age for downsizer super contributions, has introduced a Bill to extend the existing assets test exemption under social security for principal home sale proceeds that an individual intends to use to purchase or build a new principal home. The Bill also seeks to apply the lower deeming rate to the proceeds of sale.

In a bid to support pensioners and in conjunction with the announcement to reduce the eligibility age for downsizer super contributions, the government has introduced a measure to extend the existing assets test exemption under social security for principal home sale proceeds which a person intends to use to purchase a new principal home.

Under the social security system, the level of income support received by individuals depends on their income and assets. For example, for an individual to receive the age pension, Services Australia (Centrelink) will assess the individual’s and their partner’s income from all sources, including financial assets such as superannuation, using deeming. Deeming assumes that a financial asset earns a set rate of income regardless of the actual income generated. Applicants for the age pension also need to pass the assets test, the limits of which change depending on whether they own their own home and whether they are single or in a couple.

Currently, when an age pensioner or other eligible income support recipient sells their principal home to either purchase or build another home, those proceeds are exempt from the assets test for up to 12 months. However, the proceeds will still be subject to deeming. An additional 12-month extension may be granted where the income support recipient has a continued intention to apply the sale proceeds to the purchase, build, rebuild, repair or renovation of a new principal home and has:

• made reasonable attempts to purchase, build, rebuild, repair or renovate their new principal home (eg signing a contract to purchase or renovate etc);
• made those attempts within a reasonable period after selling the principal home; and
• experienced delays beyond their control in purchasing, building, rebuilding, repairing or renovating their new principal home.

The Bill introduced by the government would automatically extend the existing assets test exemption from 12 to 24 months. An additional 12-month extension may also be available in particular circumstances, taking the maximum exemption period to 36 months in total.

It should be noted that only the value of the principal home proceeds that are intended to be used to purchase/build a new home can be exempt. For example, if an individual sells their principal home for $1 million and intends to purchase a new home for $700,000 and use the remaining $300,000 to buy an investment, then the total amount of sale proceeds that can be exempt from the assets test is $700,000, while the other $300,000 is not exempt from the assets test.

In addition to extending the exemption, the Bill also seeks to apply a lower deeming rate to the principal home sale proceeds when calculating deemed income for the period during which the proceeds are exempt from the assets test. For deeming purposes, the threshold is currently $56,400 for an individual and $93,600 for couples. Below those thresholds, the financial assets are deemed to earn at a rate of 0.25%, while anything above those thresholds are deemed to earn 2.25%. If this proposed measure becomes law, the exempt principal home sale proceeds will be treated as a separate pool to the other financial assets and deeming will be calculated at 0.25% instead of 2.25%.

ASIC’s focus on super complaints handling

Recently, the Australian Securities and Investments Commission (ASIC) conducted surveillance to assess superannuation trustees’ compliance with enforceable requirements relating to internal dispute resolution (IDR). The results indicated significant compliance issues and pointed to areas which need to be strengthened. For example, one in three trustees advised ASIC of varying failures in their IDR processes. These included failure to capture complaints, the omission of mandatory content from response letters or failure to send out responses to complainants. Based on these results, further surveillance will be conducted by ASIC.

ASIC is the body responsible for overseeing the operation of Australia’s financial services dispute resolution framework, including the IDR systems of superannuation trustees and other financial firms. This, together with external dispute resolution systems of the Australian Financial Complaints Authority (AFCA), forms the key consumer protection mechanism to ensure all complaints are resolved in a fair and timely manner.

Recently, to gauge the degree of superannuation trustees’ compliance with the enforceable requirements contained in ASIC’s Regulatory Guide 271 Internal Dispute Resolution, initial surveillance was conducted on a selection of trustees and funds. ASIC collected data from a selection of 35 trustees of 38 funds, covering 49,029 complaints received between 5 October 2021 and 28 February 2022. The data was then analysed to determine the status and timeliness of complaints handling, excluding objections to death benefit distributions. The results of this initial surveillance found indicators of significant compliance issues and areas which will need to be strengthened. According to ASIC, RG 271 requires super trustees to record all member complaints, and overall fund data as at 30 June 2021 indicates a complaints rate of 30 per 10,000 members. However, the data from the surveillance showed that 10% of the funds recorded fewer than 10 complaints per 10,000 members, which is significantly lower than the overall rate and may be a result of trustees failing to either record all member complaints or using an inappropriately narrow definition of “complaint”.

In addition, RG 271 has a 45-day maximum period for super trustees to respond to complaints as part of their IDR response (except for complaints regarding death benefit distributions, which have a longer timeframe). Of the 38 funds reviewed by ASIC as a part of this initial surveillance, 2.7% of IDR responses were sent after the 45-day maximum. The concern for ASIC is that super trustees may be over-applying the limited exceptions to the maximum timeframe or not sufficiently monitoring how long complaints take to resolve.

Failures were also detected in the area of informing complainants of delays and in IDR processes. Specifically, RG 271 requires that super trustees notify complainants of delays and their rights to go to AFCA when a written response is not sent within 45 days. The initial review results found that nearly 50% of complainants were not notified of the delay or their rights. Further, one in three trustees advised ASIC of varying failures in their IDR processes, including failure to capture complaints, the omission of mandatory content from response letters or  failure to send out responses to complainants.

In the next stage of the surveillance and based on these results, ASIC will be seeking to check how relevant trustees are addressing concerns identified thus far, and closely examine a smaller subset of trustees. It notes that it will consider regulatory action where appropriate.

Compliance with super laws: ATO’s approach

When it comes to legal compliance by self managed superannuation fund (SMSF) trustees, the ATO’s main focus is on encouraging trustees to comply with the super laws. However, there are occasions when stronger responses are required.

The following courses of action are available to the ATO to deal with SMSF trustees who have not complied with super laws:

• Education direction – the ATO may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The trustee will need to provide evidence they have completed the course. Trustees will also be required to sign a Trustee declaration confirming they understand their obligations as a trustee of an SMSF.
• Enforceable undertaking – an SMSF trustee may initiate a written undertaking to rectify a contravention. The ATO will decide whether or not to accept the undertaking, taking into account factors such as the compliance history of the trustee, the nature of the contravention and the strategies to prevent the contravention from recurring.
• Rectification direction – the ATO may give a trustee, or a director of a corporate trustee, a written direction to rectify a contravention of the super laws. Rectification generally involves putting in place arrangements that could reasonably be expected to ensure there are no further similar contraventions.
• Administrative penalties – individual trustees and directors of corporate trustees are personally liable to pay an administrative penalty for breaches of various provisions of the super laws. Administrative penalties may also be imposed on SMSF trustees if they make false and misleading statements to the ATO. Penalties cannot be paid or reimbursed from the assets of the fund.
• Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened super laws or if the ATO is concerned about the individual’s actions or suitability to be a trustee. It is an offence for an individual to continue to act as a trustee, or as a director of a corporate trustee, if they have been disqualified.
• Civil and criminal penalties – these may apply where an SMSF trustee has contravened certain provisions of the super laws. The ATO will consider the severity of the contravention, the circumstances that led to it and the actions of the individuals involved before instigating civil or criminal prosecution.
• Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance. In this case, the fund remains non-compliant until they receive a notice of compliance. Making a fund non-complying can have a significant financial impact on the SMSF.
• Allowing the SMSF to be wound up – following a contravention, the trustee may decide to wind up the SMSF and roll over any remaining benefits to an APRA regulated fund. However, the ATO may continue to issue the SMSF with a notice of non-compliance or apply other compliance treatments.
• Freezing an SMSF’s assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.

CURRENCY:

This issue of Client Alert takes into account developments up to and including 19 August 2022.

Keeping you informed about the Federal Budget

We expect to see formal confirmation from Treasury soon about when the new Australian Government will hand down its Federal Budget for 2022–2023. Tuesday 25 October is likely for this Labor Budget.

The Client Alert team will, as usual, work to bring you a special Budget Extra edition that outlines the key announcements to assist you in dealing with your clients’ queries. You can expect to receive it by the morning after the Budget is handed down.

Beware of payment redirection scams

The Australian Securities and Investment Commission (ASIC) has warned small and micro businesses to be alert for payment redirection scams. These scams have caused some of the highest losses to businesses in 2021 to the tune of $13.4 million. This figure is likely much higher as, according to research, a third of scam victims do not report their loss. These scams typically involve scammers impersonating legitimate businesses or their employees and redirecting upcoming payments to a fraudulent bank account.

In some cases, this may involve the actual hacking of legitimate business email accounts to send scam emails. Other methods fraudsters use to carry out payment redirection scams include intercepting legitimate invoices and amending bank details before releasing the email to the unsuspecting business customer, and registering email addresses that are very similar to ones from a legitimate business.

According to the most recent scams activity report from the Australian Competition and Consumer Commission (ACCC), redirection scams came only second to investment scams in terms of financial losses at $227 million in 2021. This figure includes data from both individuals and businesses. Research also indicates that a third of scam victims do not make any reports, so the true cost of these scams is likely to be much higher.

However, just looking at the business population, payment redirection scams take the top spot as the type of scam that caused the highest losses. Small businesses had the highest median loss ($3,812 per business) and overall lost a total of $3.5 million. ACCC data also points to false billing scams, which includes payment redirection reports, as a concern.

Overall, for the 2021 income year, 3,624 reports were received by the ACCC Scamwatch program from businesses. Of the total $13.4 million lost by businesses, $7 million can be attributed to micro (0 to 4 staff) and small (5 to 19 staff) businesses.

The most common contact method reported to ACCC for scams was phone or text message, and bank transfers continued to be the most common payment method for scams.

Small businesses should take immediate action if they have inadvertently fallen prey to a scam by contacting their financial institution to see if anything can be done to recover the money, and then reporting the scam to either Scamwatch or the Australian Cyber Security Centre. Financial institutions may be able to find out where the money was sent and block scam accounts. ASIC notes that businesses should also be aware of falling victim to a follow-up scam which may offer to recover your lost money for a fee (ie money recovery scams).

Money recovery scammers will usually target victims of previous scams with the promise of recovering lost money for an up-front payment and/or retrieving detailed personal information. They often contact previous victims uninvited and pose as trusted organisations such as a law firm, the fraud taskforce or a government agency. Some more sophisticated scams will have official-looking websites with fake testimonials.

Once the previous victims are convinced of the follow-up scam’s authenticity, the scammers will ask them to fill out false paperwork or provide identity documents, as well as make a payment. In some cases they may also request remote access to computers and smartphones. Another tactic that these money recovery scammers may use is to make contact and attempt to convince a target that they have unknowingly been involved in a scam and are entitled to compensation or a settlement refund.

Source: https://asic.gov.au/about-asic/news-centre/news-items/asic-warns-small-businesses-to-be-vigilant-about-payment-redirection-scams/

www.accc.gov.au/media-release/payment-redirection-scams-cost-australian-businesses-227-million-last-year

www.scamwatch.gov.au/news-alerts/payment-redirection-scams-cost-australian-businesses-227-million-last-year

TPAR due soon: is your business ready?

The taxable payments annual report (TPAR) is a report that is required to be lodged every year by businesses that have made payments to contractors for building and construction services, cleaning services, courier services, road freight services, IT services and security, investigation or surveillance services. This information is used by the ATO in data analytics to identify non-compliance with a range of tax obligations and used to pre-fill data to assist contractors to lodge correctly the first time. The TPAR for 2021–2022 is due by 28 August 2022.

Contactors or subcontractors, in the context of TPAR, also include consultants and independent contractors, who can operate in a variety of structures such as sole traders (individuals), companies, partnerships or trusts. Where the contractor has issued a business an invoice that includes both labour and materials, the total amount will need to be included in the business’s report.

However, certain payments (such as the following) will not need to be reported in the TPAR:

• payments for materials only;
• payments for incidental labour (ie labour was incidental to the supply of materials);
• unpaid invoices after 30 June each year;
• payments to workers engaged under labour hire or on-fire arrangements;
• PAYG withholding payments;
• payments to foreign residents for work performed in Australia which are subject to PAYG foreign resident withholding (if the payments are not subject to PAYG withholding, they will need to be reported in the TPAR);
• payments to foreign residents for work performed overseas;
• payments to contractors who do not quote an ABN – if an ABN is not provided, the business may be required to withhold an amount from payments and the withheld amount will then need to be reported either on the TPAR or the PAYG payment summary – withholding where ABN not quoted form, not both;
• payments in consolidated groups; and
• payments for private and domestic projects – if you are a homeowner building or renovating your main residence, or a business making payments to contractors for services for private purposes (eg the owner of a cleaning business asking a contractor to clean their main residence).

According to the ATO, around $11 billion a year goes missing in taxes and the TPAR system is just one of the tools used to identify non-compliance and keep things fair for all businesses. In the previous financial year, around $350 billion in payments made to 950,000 contractors was reported through the TPAR. This year, the ATO expects more than 270,000 businesses to complete the report.

TPAR information reported is used by the ATO in data analytics to identify non-compliance with a range of tax obligations, such as lodging income tax returns, reporting the correct amount of income, lodging BASs, being registered for GST when required, and using valid ABNs. This information will also flow through to pre-filling information for sole traders with contracting income, making it easier to lodge correctly the first time. Although businesses will have until 28 August to lodge their TPARs, contractors should ensure that the pre-filled information is complete and finalised before lodging, especially in cases where contracting income from a business or in general has not been reported previously.

Source: www.ato.gov.au/Business/Reports-and-returns/Taxable-payments-annual-report/

www.ato.gov.au/General/Online-services/In-detail/Reported-transactions-in-ATO-online/

www.ato.gov.au/general/gen/removing-tax-deductibility-of-non-compliant-payments/

Tax time focus on rental properties

Rental property income and deduction mistakes continue to be one of the main focus areas for the ATO this tax time. Along with the usual emphasis on including all rental income in the tax return, with all the natural disasters Australians have been experiencing the ATO has issued a reminder that insurance pay-outs may also need to be included. On the expenses side, the ATO warns against including interest related to redraw to purchase a private asset, and immediately deducting the cost of capital works or depreciating assets costing more than $300.

This area of focus for the ATO is no surprise, considering that a recent ATO Random Enquiry Program found that nine out of 10 tax returns that report rental income and deductions contain at least one error.

The ATO warns taxpayers that it receives rental income data from a wide range of sources, including share economy platforms, rental bond authorities of various states, property management software providers and state and territory revenue and land title authorities. This information will then be matched to the information provided by taxpayers on their tax returns, meaning that there is no hiding income from the all-seeing eye of the ATO.

One of the income categories for rental properties that may be important for this year, but that many landlords may not know to include, is insurance payouts. With the La Nina weather event causing flooding along large parts of the country, if you obtained insurance payments in relation to loss of rental income or repairs, that would need to be included.

For those renting out their investment property, their home, or part of their home on a short-term basis on digital sharing platforms such as AirBnB, that income will need to be included, and any expenses will need to be apportioned according to the space rented out. There may also be CGT consequences upon selling the property, so taxpayers will need to be careful.

Joint owners of properties will need to ensure that their income and deductions are in line with the rental property’s ownership interest, which generally depends on legal documents at the time of purchase.

As for expenses, the ATO notes that while some expenses such as rental management fees, council rates, repairs, interest on loans, and insurance premiums can be deducted in the year they are incurred, other expenses, such as borrowing costs, capital works and some depreciating assets can only be claimed over a number of years. Capital works include replacing a roof or a new kitchen or bathroom. Depreciating assets such as dishwashers or ovens valued at over $300 will need to be claimed over their effective life.

In addition, taxpayers should also be aware that if they redraw on a rental property loan for private expenses or to purchase a private asset, the amount of interest relating to the loan for the private expense or asset cannot be claimed as a deduction. There may also be other instances where a deduction in relation to a rental property will be denied, such as when a property is advertised at significantly above reasonable market rate, or where unreasonable restrictions are imposed on potential tenants.

Taxpayers who have sold a property during the 2021–2022 income year will need to be extra cautious, as capital gains is also one of ATO’s focus areas for this year. Those that have rented out a part of their property may only be entitled to a partial main residence exemption, depending on the amount of space rented out.

Source: www.ato.gov.au/Media-centre/Media-releases/Tax-time-focus-on-rental-property-income-and-deductions/

www.ato.gov.au/Tax-professionals/Newsroom/Lodgment-and-payment/Rental-deductions-tips/

SMSF COVID-19 relief measures have now ceased

The ATO has reminded trustees of self managed superannuation funds (SMSFs) that COVID-19 relief measures that previously applied for the 2019–2020, 2020–2021 and 2021–2022 income years no longer apply from 1 July 2022. The relief measures covered a wide range of areas, including residency requirements, rental reductions and waivers, rental deferrals, in-house assets, loan repayments, limit recourse borrowing arrangements, and related party transactions. According to the ATO, SMSF trustees are now expected to comply with all their obligations under tax and super laws, and breaches should be disclosed.

Prior to 30 June 2022, individuals who became stranded overseas due to COVID-19 which caused them to be out of Australia for more than two years could rely on the SMSF residency relief. This consisted of the

ATO not taking any compliance action to determine whether a particular SMSF met the residency test, provided there were no other changes in the SMSF’s circumstances or in the circumstances of a member/trustee.

Since this relief no longer applies, members and trustees of SMSFs who spend an extended period of time overseas may now be affected by the “active member” test and “central management and control” test, respectively. This could cause an SMSF to fail to meet some of the residency conditions to be an Australian super fund for tax purposes, which in turn may see the SMSF lose its complying super fund status and associated tax concessions.

One of the other prominent relief measures provided during the COVID pandemic which has now ended relates to rental relief provided to related parties. The ATO had confirmed that no compliance action would be taken against an SMSF and no auditor contraventions needed to be reported for rental reductions and waivers to related parties provided they were on commercial terms, relief was due to COVID, and that the arrangement was property documented.

Specific Taxation Determinations were also registered for the 2019–2020, 2020–2021, and 2021–2022 income years to ensure that rental deferral offered by SMSFs or a related party to a tenant would not cause a loan or investment to be an in-house asset of the fund provided certain conditions were met.

Again, now that the rental relief has ended, if an SMSF provides rental reductions or waivers to related parties, it may give rise to a reportable contravention of the super laws. For example, the arrangement may not comply with the sole purpose test and/or arm’s length requirements and may also contravene the prohibition on providing financial assistance to a member or a member’s relative. In cases where the SMSF or a related party provides a rental deferral, there may now be a real risk that the in-house asset rules may be breached.

Similarly, the relief measures relating to loan repayment relief provided by an SMSF and SMSF LRBA relief will also no longer apply. Therefore, from 1 July 2022, approved SMSF auditors must report contraventions via the auditor/actuary contravention report (ACR), if such a contravention occurs. Before that happens, trustees of SMSFs are encouraged to use the ATO’s voluntary disclosure service to report any identified contraventions and plan to rectify the contravention as soon as possible. The ATO notes that any voluntary disclosures will be taken into account when determining what action it will take in relation to the contravention.

Source: www.ato.gov.au/General/COVID-19/Support-for-self-managed-super-funds/

Thinking of ditching your SMSF?

Are you having doubts about using a self managed superannuation fund (an SMSF) for your retirement? Whatever your age, if recent market conditions, cost or the amount of administration involved are getting to be too much and you would like to wind up the SMSF, there are several steps involved. Even if you are happy with your SMSF, it may be prudent to ensure that there are no impediments to winding up if something unforeseen happens. An exit plan should be in place as a matter of course.

Winding up an SMSF is not a simple process and requires the trustee to understand the terms set out in the trust deed, dispose of the fund’s assets and finalise compliance obligations, among other things. In some complex cases it may be prudent to seek professional advice.

For most SMSFs, the first step in a winding up is to find out what the fund’s trust deed requires in that event. For example, the trust deed may require that all the assets of the fund be sold, or all ownership transferred to members. Both call for different courses of action by the trustee and have different costs related to them.

Trustees are then required to organise a meeting to ensure that all trustees agree with the winding up decision. This should be documented in the form of meeting minutes and a record kept. Each trustee should also sign the winding up agreement to avoid any potential future disputes over the decision.

Whether the SMSF’s trust deed requires the sale or transfer of assets, the ATO notes that liquidity of assets, including the time required to sell them, and capital gains tax and stamp duty implications should be considered by the trustees. In addition, decisions as to how, when, and how much assets should be sold for should be documented.

Once a sale or transfer has gone through, the trustee should document information such as the buyer or transferee, date, amount and how much the asset was valued at.

The next step in winding up the SMSF is to finalise outstanding tax and compliance obligations, including:

• lodging a transfer balance account report (TBAR) upon ceasing a member income stream (pension);
• issuing various PAYG summary, PAYG withholding payment summary and/or PAYG withholding payment summary annual reports; and
• meeting any PAYG instalment, GST, and BAS obligations.

Final invoices and expenses due to assets sales and outstanding tax liabilities will then need to be paid before the calculation and distribution of member benefits. In instances where a member meets a condition of release, their benefits can either be paid out in cash or rolled over into another complying super fund. Where a condition of release is not met, the member benefit must be rolled over into another complying super fund.

Finally, after member benefits have been distributed, the trustee will need to ensure the SMSF has been audited every year since its establishment and complete one final audit. Once that is complete, the final SMSF annual return can be lodged. The ATO will then confirm through a letter that the SMSF has been wound up, proceed to close the SMSF records on its system, and cancel any associated ABNs.

While loss incurring investments causing the SMSF to be unable to meet ongoing administrative costs could be one of the main driving factors in winding up an SMSF, that is by no means the only factor. Even if you are the trustee of a SMSF with top performing investments, an exit plan should still be a priority. This protects against a multitude of factors such as a change in personal circumstances of trustees (eg failing health or permanent incapacity), disputes between trustees, or where all members have left the SMSF (either through rollover or death).

Source: www.ato.gov.au/Super/Self-managed-super-funds/Thinking-about-self-managed-super/

www.ato.gov.au/Super/Self-managed-super-funds/Winding-up/

ATO reminder to small businesses this tax time

Small businesses are again in the ATO’s sights this tax time, with a focus on stamping out deductions not related to business income, overclaiming of expenses, omission of business income and insufficient records to substantiate claims.

The ATO receives external data from a variety of sources, including the taxable payments reporting system for certain industries. This data can be used to data-match information included in tax returns to ensure completeness and accuracy.

Businesses can only claim what they are entitled to, and the claiming method may differ depending on the type of business structure. For example, sole traders need to claim deductions in their individual tax return in the “Business and professional items” schedule, while partnerships, trusts, and companies need to claim deductions in their respective tax returns.

ATO warns against asset wash sales

With COVID-19 lockdowns and restrictions in the rear-view mirrors of most of the country, the ATO is also beginning to resume ordinary compliance activity levels. One of the many areas it will be paying close attention to this tax time is “asset wash sales”.

Tip: An asset wash sale involves a person or business disposing of assets just before the end of the financial year. After a short period of time, they then reacquire the same or substantially similar assets. The ATO views these transactions as a form of tax avoidance.

Although there may be legitimate reasons for selling and then reacquiring the same or substantially similar assets, a wash sale is different from normal buying and selling as it is usually undertaken for the artificial purpose of generating a tax benefit – such as a capital loss – in the current financial year.

The assets involved in wash sales are not necessarily traditional assets such as shares. Taxpayers could also be disposing of crypto-assets and reacquiring them later as a part of a wash sale. With the price of many crypto-assets at a low ebb, people looking to rid themselves of these assets need to be careful they do not inadvertently attract the attention of the ATO.

To stamp out this behaviour this tax time, the ATO will use analytics to identify wash sales through data from various share registries and crypto-asset exchanges. Where the system identifies a wash sale, the capital loss claimed by the taxpayer in their tax return will be rejected. The Commissioner of Taxation may then make a determination to adjust their tax situation, and compliance action and additional tax, interest and penalties may be applied.

ATO protocol for legal professional privilege

As a part of the ATO’s extensive information-gathering powers, it can compel taxpayers to furnish or produce certain documents. However, information and documents where the underlying communication is privileged do not have to be provided. Legal professional privilege (LPP) operates as an immunity from any obligation to disclose documents created by these powers.

Recently, the ATO released a protocol which contains its recommended approach for identifying communications covered by LPP and making LPP claims. While it’s voluntary to follow the steps outlined, it’s more likely that the ATO will accept LPP claims without further enquiries if the protocol is followed.

The protocol applies to both legal practitioners and non-legal practitioners and all LPP claims, regardless of the firm or business structure within which the service or engagement is provided.

The protocol itself contains three steps for taxpayers who receive an information-gathering notice and wish to make an LPP claim:

• assessing the full situation and all of the communications involved;
• explaining the basis of the LPP claim; and
• advising the ATO how the LPP claim was approached.

Tip: Legal professional privilege is a highly contested area and whether a document or information is subject to LPP can depend on the facts of your individual case. If you’ve been issued a notice under the ATO’s formal information-gathering powers, we can save you time and help you work out which documents are subject to LPP under the new protocol.

Is this the end for stamp duty in New South Wales?

In the NSW Budget handed down on 21 June 2022, the State Government announced plans to make some transfer duty optional from January 2023. However, the scope of the proposal is quite limited at this stage.

The key features announced are as follows.

• First home buyers purchasing properties for up to $1.5 million on or after 16 January 2023 will be able to choose to pay an annual property tax instead of stamp duty.
• There will be a higher rate of annual property tax for investors than for owner occupiers, with rates indexed annually to wage growth.
• The tax will be based on a financial year, unlike land tax, which is based on a calendar year.
• The existing First Home Buyers Assistance Scheme duty concessions for properties valued up to $800,000 will remain.
• The property tax will only be payable by first home buyers who choose it, and will not apply to subsequent purchasers of a property.

Of course, legislation must first be enacted and the details remain to be seen, including the transitional provisions that will apply.

If the announcements become law, by next January NSW will have the existing transfer duty regime, the existing land tax regime and a new annual property tax all running in parallel.

Current compliance issues in the SMSF space

The self managed superannuation fund (SMSF) space has always been a complex area for trustees, beneficiaries and advisers. In the past few years, the ATO has made many concessions and has put compliance action on hold because of COVID-19. However, for the 2022–2023 year and beyond it’s looking to scale up its compliance program as a reaction to indicators of heightened risk in the sector.

Recent statistics indicate that there are around 600,000 SMSFs, with over 1.1 million members holding an estimated total asset value of $876 billion.

While the ATO’s main compliance focus will always be on any activity that puts retirement savings at risk or inappropriately takes advantage of the concessional tax environment, in the near-term it will focus specifically on illegal early release of super in all forms. This is when individuals access their retirement savings before a condition of release has been met. This type of activity is currently on the rise.

One of the big red flags that the ATO looks out for is when individuals establish their SMSF and initiate a rollover but then fail to lodge a corresponding first annual return. This is a good predictor that an illegal early release has occurred, either as a result of deliberate behaviour or participation in a scheme.

New registrants that do not lodge will now be targeted with a “three strikes and you’re out” compliance campaign. The ATO will first issue a “blue letter” that encourages the SMSF trustees to take immediate action to lodge, offering a pathway for those who need support. If no response is received from the blue letter, the ATO will follow up with an “amber letter” warning trustees of the consequences of failing to lodge their return. Finally, if no response is received from the amber letter, a final warning or “red letter” will be issued advising the trustees that the ATO has commenced the disqualification process and will consider other enforcement action.

The ATO issued its first and second batches of “red letters” to funds in early April and June 2022.

SMSF TBAR to be streamlined

In good news for trustees of self managed superannuation funds (SMSFs) and after much community consultation, transfer balance account event-based reporting (TBAR) will soon be streamlined for convenience.

The TBAR allows the ATO to record and track an individual’s balance for both their transfer balance cap and total superannuation balance. That information is not extracted from the SMSF annual return, or any information shared through a rollover. Under the existing framework, an SMSF must report common events that affect a member’s transfer balance account when they happen.

An SMSF may be required to report earlier if a member has exceeded their personal transfer balance cap. For individuals who start their first retirement phase income stream on or after 1 July 2021, their personal transfer balance cap will be $1.7 million.

From 1 July 2023, the TBAR will be streamlined by removing the total super balance threshold and requiring all SMSFs to report 28 days after the end of the quarter in which a reportable event occurred. Some obligations to report earlier will continue.

Under the new streamlined framework, trustees of SMSFs will still be allowed to report transfer account balance events more frequently if they wish. This may be beneficial in instances where members are close to their personal transfer balance cap, and will avoid excess transfer balance determinations.