Super guarantee loophole closed

A superannuation guarantee loophole that allowed employers to use salary sacrificed contributions to make up part of their required super guarantee contributions has been closed. From 1 January 2020, employers must make the full amount of mandatory super guarantee contributions and cannot use salary-sacrificed amounts to reduce those mandatory contributions. Depending on the types of employment agreements between employees and employers, this could mean more money for employees’ retirement.

The concept of super guarantee – the requirement for employers to contribute 9.5% of an employee’s salary or wages into a nominated super account – should be familiar to everyone, particularly anyone who is an employee, as it makes up the bulk of future retirement income. Employees may also be salary-sacrificing amounts of their salary and wages to put extra into their super.

Before this year, a loophole in the law meant that an employee’s salary-sacrificed amounts could be counted towards employer contribution amounts. This allowed a potential reduction in employers’ mandated super guarantee contributions – essentially working against the employee’s intention to add extra to their super. In addition, employers were able to calculate their super guarantee obligations on the lower, post-sacrifice earnings base.

Depending on the type of employment agreement between an employee and employer, this meant that if the employee salary-sacrificed an amount equal to or more than the super guarantee amount the employer was required to pay, the employer could have chosen to not contribute any non-sacrifice amount and the legal requirements of the super guarantee would still be met. It’s important to note that this was not the original intention of the law, and not all employers would make the choice to exploit this loophole; however, where they did, employees who salary-sacrificed could be short-changed and end up with lower super contributions as well as a lower salary overall.

The law has now been changed specifically to close this loophole. From 1 January 2020, amounts that an employee salary-sacrifices to superannuation cannot be used to reduce the employer’s super guarantee charge, and do not form part of any late contributions the employer makes that are eligible for offset against the super guarantee charge. To avoid any possible shortfall in their mandatory super guarantee contribution payments, employers must now contribute at least 9.5% of an employee’s ordinary time earnings (OTE) base to a complying super fund. The OTE base consists of the employee’s OTE and any amounts they sacrifice into superannuation that would have been OTE if the salary-sacrifice arrangement wasn’t in place.

The following simple example illustrates the effect of the old law versus the new law for an employee with an OTE base of $15,000.

Source: Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Act 2019.

ATO tackling international tax evasion

Australian tax residents are taxed in Australia on their worldwide income. While most do the right thing and declare all their income, some try to avoid paying tax by exploiting secrecy provisions and the lack of information-sharing between countries. As the world becomes more interconnected and barriers are broken down, it is inevitable that there are fewer places for the unscrupulous to hide from tax.

With the rise of the global economy and easy flow of money across borders, no country is immune to international tax evasion and money laundering. A recent coordinated effort with Joint Chiefs of Global Tax Enforcement (J5) shows that member countries, including Australia, are doing all they can to protect their tax revenue. This most recent investigation yielded evidence of tax evasion by Australians using an international institution located in Central America.

Tax chiefs from the J5 countries met in Sydney on 17–21 February 2020 to share information about common mechanisms, enablers and structures that are being exploited to commit transnational tax crime. The J5 was initially formed in 2018 to fight global tax evasion and consists of the tax and revenue agencies of Australia, United Kingdom, United States, Canada and the Netherlands. The countries share intelligence on international tax crime as well as money laundering.

The current international investigation started on information obtained by the Netherlands, which led to a series of investigations in multiple countries and concerned an international financial institution located in Central America whose products and services are believed to be facilitating money laundering and tax evasion for customers across the globe.

J5 members believe that through this institution, a number of clients may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime. The enforcement action consisted of evidence, intelligence and information-collecting activities such as search warrants, interviews and subpoenas.

According to the ATO, several hundred Australians are suspected of participating in these arrangements. The ATO is currently proceeding with multiple investigations with support from the Australian Criminal Intelligence Commission (ACIC). In addition, it is encouraging anyone with information about the scheme or other similar arrangements to contact the ATO.

ATO Deputy Commissioner and Australia’s J5 Chief, Will Day, has said, “this multi-agency, multi-country activity should degrade the confidence of anyone who was considering an offshore location as a way to evade tax or launder the proceeds of crime”.

While the J5 is a powerful tool, it is by no means the only one in the ATO’s arsenal. The ATO also has a network of international tax treaties and information exchange agreements with over 100 jurisdictions, and uses them to identify facilitators such as banks, lawyers and financial advisers. Once a pattern has been identified, such as a practitioner with a large number of clients using the same methods to avoid or evade tax, the ATO is likely to look closely at the entire client base.

In recent years over 2,500 exchanges of information have occurred, enabling the ATO to raise additional tax liabilities of $1 billion. The message from the ATO is that anyone with offshore income or assets is better off declaring their interests voluntarily. Those who do so may have administrative penalties and interest charges reduced.

It’s important to keep in mind that holding offshore assets is not just for the wealthy. Australians with migrant backgrounds may not even know they hold offshore assets in some cases, but those assets are still subject to tax law. For example, grandparents or other relatives may start a bank account in an Australian’s name in another country to make contributions celebrating a holiday, birthday or other life event.

Source: www.ato.gov.au/Media-centre/Media-releases/Global-tax-chiefs-undertake-unprecedented-multi-country-day-of-action-to-tackle-international-tax-evasion/.

New measures to combat illegal phoenixing

New laws are now in place to target illegal phoenixing of companies, which by some estimates costs businesses, employees and governments more than $2 billion a year.

While there is no Australian legislative definition of “illegal phoenixing” or “phoenixing activity”, at its core it is understood as the use of serial deliberate insolvency as a business model to avoid paying company debts. To combat this, the new laws target a range of behaviours, including preventing property transfers to defeat creditors, improving accountability of resigning directors, allowing the ATO to collect estimates of anticipated GST liabilities and authorising the ATO to retain tax refunds.

Property transfer to defeat creditors

New criminal offences and civil penalty provisions will apply to company officers who fail to prevent the company from making “creditor-defeating dispositions”, and to other persons (including pre-insolvency advisers, accountants, lawyers and other business advisers) who facilitate a company making a “creditor-defeating disposition”. Liquidators and the Australian Securities and Investments Commission (ASIC) can seek to recover the assets for the company’s creditors, and in some cases creditors can recover compensation from a company’s officers and other persons responsible for making a “creditor-defeating disposition”.

A “creditor-defeating disposition” is defined as disposing of company property for less than its market value (or less than the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. To ensure legitimate businesses aren’t affected by this wide definition, safe harbour has been maintained for genuine business restructures and transactions made with creditor or court approval under a deed of company arrangement.

Accountability of resigning directors

In order to reduce the instances of unscrupulous directors using loopholes to shift the blame, the new laws seek to prevent abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight. Practically, under the new laws, a director cannot resign or be removed by a resolution of company members if doing so would leave the company without a director (unless the company is being wound up).

In addition, if the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation is deemed to take effect from the day it is reported to ASIC. However, a company or director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.

Collection of anticipated GST liabilities

Under the new laws, the ATO can now collect estimates of anticipated GST liabilities, including luxury car tax (LCT) and wine equalisation tax (WET) liabilities. The ATO can also recover director penalties from company directors to collect outstanding GST liabilities (including LCT and WET) and estimates of those liabilities.

Retaining refunds

The new laws also allow the ATO to retain a refund to a taxpayer where that taxpayer has other outstanding lodgements or needs to provide important information.

Source: Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019 (Cth).

Insurance payouts: are they taxable?

In recent months, parts of Australia have been battered by a combination of fire and floods. As people try to piece their lives together in the aftermath, insurance payouts can go a long way in helping rebuild homes and replace lost items. However, if you receive an insurance payout in relation to your business, home business or rental property you need to be aware there may be associated tax consequences.

For example, if you rent out your home or a portion of your home on a short stay website, you may be subject to capital gain tax (CGT) if you receive an insurance payout in relation to that home. Businesses that receive an insurance payment may be subject to varying tax consequences depending on what the payment is designed to replace.

Insurance payouts relating to personal property (including household items, furniture, electrical goods, private boats and cars) and your main residence are not taxed. If you keep a home office or run a business from home and you receive an insurance payout in relation to the property being damaged or destroyed, there may be CGT consequences.

Similarly, if you have a rental property or rented out a room of your main residence which later becomes damaged or destroyed and is subject to an insurance payout, you will need to include the insurance payout amount when you work out whether you have a capital gain or loss. This applies even if you were casually renting out a room, your home or (part of) your farm as short-stay accommodation.

For those operating a business, the tax consequences of an insurance payout are even more complicated depending on what the money received is for. For example, destroyed business premises come with CGT consequences, while any insurance amount you receive for repair of damage will need to be included in your assessable income.

If an amount is received in relation to damaged or destroyed trading stock, it must be included as assessable income. For any depreciating assets used in generating assessable income (eg office equipment), you will need to calculate the difference between the amount received from insurance and the asset book value of the asset at the time it was destroyed. Any excess needs to be included as assessable income, while a deduction can be claimed for any losses.

For depreciating assets in the low-value pool, you will need to reduce the closing pool balance by the amount of insurance payment you receive. In addition, the tax treatment will need to be modified if an asset was partly used to produce assessable income and in a low-value pool.

The tax treatment of insurance payments for work cars is similar to that of depreciating assets, except if you used the logbook method for claiming car expenses. If you used the logbook method, the balancing adjustment amount needs to be reduced by the percentage that you used the car for personal use.

Businesses that correctly informed their insurer of their GST status when they took out the insurance don’t have to pay GST on insurance payout amounts and may be entitled to GST credits for purchases made with those amounts. Small businesses may also be entitled to CGT concessions.

Source: www.ato.gov.au/individuals/dealing-with-disasters/damaged-or-destroyed-property/.

Australia’s independent tax complaints investigator

Do you know who to turn to when you have a complaint about the ATO? Whether you’re an individual or business, the Inspector-General of Taxation and Taxation Ombudsman (IGTO) should be your first port of call. The department has two distinct, yet intertwined, functions.

As the Taxation Ombudsman, the IGTO provides all taxpayers with an independent complaints investigation service. One of the main roles of the IGTO is that it must investigate complaints by taxpayers (or their representatives) where a tax official’s actions or inactions, decisions or systems have affected them personally. As the Inspector-General of Taxation, it also conducts reviews and provides independent advice and recommendations to government, ATO and other departments.

The difference between the two functions is that the Taxation Ombudsman’s investigations and recommendations are likely to be made privately, whereas when the office conducts reviews (not in response to a complaint) as the Inspector-General of Taxation, the investigations and recommendations are public and aimed at improving administration of the tax law.

In the first quarter of 2019–2020 the IGTO received 909 complaints – a 14% increase over the number for the same period in 2018–2019. Of the complaints received so far this year, 82.4% of the complaints received were from self-represented individuals, of whom approximately 10-12% were small business taxpayers. Taxpayers who had a representative were largely represented by a family member or friend, although around a third were represented by an accountant or a tax practitioner.

The top five issues raised in complaints for the quarter remain largely the same as the previous year, covering debt collection, payments to the taxpayer, lodgement and processing, communication, and audit and review. According to the IGTO, issues surrounding debt collection have featured consistently among the complaints lodged since the assumption of the Tax Ombudsman service.

While the IGTO has direct access to ATO officers, records and systems, it cannot investigate how much tax needs to be paid, provide advice regarding structure of tax affairs or assist with decisions made by other government agencies apart from the Tax Practitioners Board. The IGTO can investigate and assist taxpayers with issues including:

• extensions of time to pay;
• the ATO’s debt recovery action;
• delays with processing tax returns;
• delays in ATO communication and responses;
• information the ATO has considered regarding taxpayers’ matters;
• understanding the ATO’s actions and decisions; and
• identifying available options and other relevant agencies that can help.

Taxpayers can approach the IGTO at any stage of their dispute with the ATO, although it is recommended that they first approach the ATO officer/manager assigned to their case, followed by the ATO complaints section, before lodging a formal IGTO complaint.

Complaints can be made online and via phone or post, and services are offered in languages other than English as well as for people who are hearing, sight or speech impaired. The IGTO will require:

• basic personal information including the taxpayer’s tax file number (TFN);
• the main facts, relevant dates and supporting documents;
• an explanation of how ATO actions have caused concern and how those actions have affected the taxpayer; and
• information about what the taxpayer or their representative has done to try to resolve the complaint, the result to date, and the desired outcome from the complaint.

Source: www.igt.gov.au/.

ATO scrutiny on car parking fringe benefits

The ATO has started contacting certain employers that provide car parking fringe benefits to their employees to ensure that all fringe benefits tax (FBT) obligations are being met. Generally, car parking fringe benefits arise where the car is:

• parked on the business premises of the entity providing the benefit;
• used by the employee to travel between home and their primary place of employment and is parked in the vicinity of that employment;
• parked for periods totalling more than four hours between 7 am and 7 pm; and
• a commercial parking station located within 1 km of the premises charges more than the car parking threshold amount.

Employers that meet these conditions are providing parking benefits and have a choice of three methods to calculate the taxable value of the benefits: the commercial parking station method, the average cost method and the market value method.

The method currently under ATO scrutiny is the market value method, which states that the taxable value of a car parking benefit is the amount that the recipient could reasonably be expected to have to pay if the provider and the recipient were dealing with each other under arm’s length conditions. When using this method, the employer must obtain a valuation report from an independent valuer who has expertise in the valuation of car parking facilities and is at arm’s length from the employer.

TIP: Specifically, the ATO is looking at employers that have engaged an arm’s length valuer as required under the market value method. According to the ATO, it has information that valuers in some instances have prepared reports using a daily rate that doesn’t reflect the market value and as such, the taxable value of the benefits is significantly discounted or even reduced to nil.

The ATO notes that just engaging an arm’s length valuer does not mean you’ve met all the requirements for working out the taxable value of the car parking fringe benefits. It is the employer’s responsibility to confirm the basis on which the valuation is prepared and examine any valuation that is suspected to be incorrect or considerably reduces FBT liability.

At a minimum, the ATO requires a valuation report to be in English and to detail the following:

• the date of valuation;
• a precise description of the location of the car parking facilities valued;
• the number of car parking spaces valued;
• the value of the car parking spaces based on a daily rate;
• the full name of the valuer and their qualifications;
• the valuer’s signature; and
• a declaration stating the valuer is at arm’s length from the valuation.

In addition to the valuation report, an employer also needs a declaration relating to each FBT year that includes the number of car parking spaces available to be used by employees, the number of business days, and the daily value of the car parking spaces.

Source: www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Valuing-car-parking-fringe-benefits/.

Foreign residents and the main residence exemption

Laws limiting foreign residents’ ability to claim the capital gains tax (CGT) main residence exemption are now in place. This means that if you’re a foreign resident at the time of disposal of the property that was your main residence, you may not be entitled to an exemption and may be liable for tens of thousands in CGT. Some limited exemptions apply for “life events”, as well as property purchased before 9 May 2017 and disposed of before 30 June 2020.

The restrictions apply to any person who is not an Australian resident for tax purposes at the time of disposal (ie when the contract is signed to sell the property).

According to the ATO, a person’s residency status in earlier income years will not be relevant and there will be no partial CGT main residence exemption. Therefore, not only are current foreign residents affected, but current Australian residents who are thinking of spending extended periods overseas for work or other purposes may also need to factor in this change to any plans related to selling a main residence while overseas.

For current foreign residents, there may still be time to act. You can still claim the CGT main residence exemption if, when the CGT event happens to your property, you were a foreign resident for tax purposes for a continuous period of six years or less and during that time one of the following “life events” happened:

• you, your spouse, or your child under 18 had a terminal medical condition;
• your spouse or your child under 18 died; or
• the CGT event involved the distribution of assets between you and your spouse as a result of your divorce, separation or similar maintenance agreement.

Further, if you purchased your main residence before 7:30 pm (AEST) on 9 May 2017, you may still be entitled to the exemption provided you sell your home on or before 30 June 2020, subject to satisfying other existing requirements for the exemption. If you miss the 30 June window for disposal of the property in 2020, you will not be entitled to the main residence exemption unless one of the listed “life events” occurs within a continuous period of six years of becoming a foreign resident.

Similarly, for properties acquired at or after 7:30 pm (AEST) on 9 May 2017, the CGT main residence exemption will not apply to disposals from that date unless certain “life events” occur within a continuous period of six years of the individual becoming a foreign resident.

It’s important to note that these changes apply even if you die – if you’re a foreign resident for tax purposes at the time of your death, the same foreign resident restrictions will apply to your legal personal representatives, the trustees and beneficiaries of deceased estates, any surviving joint tenants and special disability trusts.

Since this law change is retrospective, the ATO requires foreign residents who acquired property at or after 7:30 pm (AEST) on 9 May 2017 to review their positions back to the 2016–2017 income year and seek tax return amendments where necessary. Foreign residents who purchased their property before 7:30 pm (AEST) on 9 May 2017 and who then dispose of their property after 30 June 2020 will only need to review their positions to the 2020–2021 income year.

The ATo has said it will not apply shortfall penalties and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. Additionally, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend their assessments within a reasonable timeframe of the law cming into force.

Source: www.ato.gov.au/general/capital-gains-tax/international-issues/Foreign-residents-and-main-residence-exemption/.

Warning to watch out for myGov and ATO tax scams

The government’s stay Smart Online website (www.staysmartonline.gov.au/) warns taxpayers that there is a surge in scammers impersonating trusted bodies like myGov and the ATO to trick people into giving them money or personal details. These scams can take the form of emails, text messages and fake myGov login pages.

In June 2019, the ATO received 6,444 reports of tax-time scams that impersonated the ATO. Emails with links to fake myGov login pages were the most widespread email scam in that month.

The trend in scammers demanding ‘debt’ payments via gift cards is also on the rise, with Australians aged 18–44 years making the majority of iTunes payments to scammers ($94,420 in June alone), closely followed by Google Play cards ($27,993).

If someone is unsure about the validity of a tax-related message or phone call, they can contact the ATO Scam Hotline on 1800 008 540.

Stay Smart Online reminds that:

• myGov will never send anyone a text, email or attachment with links or web addresses that ask a person for their login or personal details. Do not click on links in emails or text messages claiming to be from myGov.
• People should always log into their official myGov account to check their tax, lodge their return and check if they owe a debt or are due a refund. Do this by manually typing https://my.gov.au/ into the internet browser.
• Unfortunately, ATO and other scams continue well beyond the 30 October deadline for tax returns, as scammers know many people are waiting for a refund or debt owed. It’s important to watch out for scams throughout the year.

Source: www.staysmartonline.gov.au/alert-service/watch-out-mygov-tax-scams

Tax time updates

ATO has refunded $10 billion so far

The ATO says that $10 billion has been refunded to Australian taxpayers so far this tax time, an increase of over $2 billion from the same time last year, with most returns being processed in under two weeks.

ATO Assistant Commissioner Karen Foat has highlighted that the ATO seeks to process returns as soon as possible, announcing that over four million refunds have already been sent out, compared to over three million refunds issued this time last year.

“Of course, the ATO works around the clock to quickly get refunds in peoples’ hands”, she said. “However, there are some things that taxpayers should take care with to ensure their return is not unnecessarily delayed.

“Firstly, it’s important to check your bank account details are correct, and if you’ve changed accounts recently, take a moment to update your details.

“When refunds get sent to incorrect bank accounts, redirecting them to your new account will take more time. This tax time, we’ve seen some people who are really keen to get their refund, having missed this important step.”

Another big obstacle getting between some people and their return is forgetting to declare some income. Common things people forget to include are rental income, bank interest and government allowances or payments. This is particularly a risk if your tax return was lodged before the ATO’s pre-fill was available.

Source: www.ato.gov.au/Media-centre/Media-releases/$10-billion-back-in-your-hands/.

ATO watching for undisclosed foreign income

The ATO has reminded taxpayers who receive any foreign income from investments, family members or working overseas to make sure they report it this tax time.

New international data-sharing agreements allow the ATO to track money across borders and identify individuals who are not meeting their reporting obligations.

“This year, the ATO has received records relating to more than 1.6 million offshore accounts holding over $100 billion, and is now using data-matching and sophisticated analytics to identify foreign income that has not been reported”, Assistant Commissioner Karen Foat has said.

Under the new Common Reporting Standard (CRS), the ATO has shared data on financial account information of foreign tax residents with over 65 foreign tax jurisdictions across the globe. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets and other income.

“Australians that deliberately move cash overseas in an attempt to hide it should be concerned. Hiding your assets and income offshore is pointless. ‘Tax havens’ are becoming a less effective model as international agreements improve transparency. You can no longer hide money behind borders.”

The ATO also states that apart from a small number of individuals deliberately engaging in tax avoidance, it is concerned about a large number who are unsure of how to meet their obligations.

“If you’re an Australian resident for tax purposes, you are taxed on your worldwide income, so you must declare all of your foreign income no matter how small the amount may be. This may include income from offshore investments, employment, pensions, business and consulting, or capital gains on overseas assets”, Ms Foat said.

Source: www.ato.gov.au/Media-centre/Media-releases/ATO-watching-for-foreign-income-this-Tax-Time/.

Unusual claims disallowed

The ATO has published information about some of the most unusual claims it has disallowed. For example, around 700,000 taxpayers claimed almost $2 billion of “other” expenses including non-allowable items such as dental costs, child care and even Lego sets.

Assistant Commissioner Karen Foat has said a systematic review of claims has found, and disallowed, some very unusual expenses. “These claims add up to a lot of money”, she said. “If the deduction isn’t directly related to earning income, we can’t allow it.”

“A couple of taxpayers claimed dental expenses, believing a nice smile was essential to finding a job, and was therefore deductible. It isn’t!”

“Another taxpayer claimed the Lego sets they bought as gifts for their children. Unsurprisingly, this claim was disallowed.”

The “other” deductions section of the tax return is for expenses incurred in earning income that don’t appear elsewhere on the return – such as income protection and sickness insurance premiums. However, the ATO’s review found some taxpayers were incorrectly claiming a range of private expenses such as child support payments, private school fees, health insurance costs and medical expenses, all of which are not allowable.

“Where people make genuine mistakes, we simply disallow the claim. But when people are deliberately making dishonest claims, particularly for large sums, we will disallow the claim and may impose a penalty”, Ms Foat said.

Finally, the ATO reminds taxpayers that in order to claim an “other” deduction, the expenses must be directly related to earning your income, and you need to have a receipt or record of the expense. If the expense relates to your employment, it should be claimed at the “work-related expenses” section of the return.

Source: www.ato.gov.au/Media-centre/Media-releases/No-smiles-as-dental-expenses-rejected/.

ATO contacting small employers about Single Touch Payroll

From 1 July 2018, employers with more than 20 employees were required to provide real-time reports to the ATO of salary and wage payments, super guarantee contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this Single Touch Payroll (STP) reporting system has extended to all employers.

The ATO has announced it will soon write to small employers (those with up to 19 employees) who have not yet started reporting or applied for a deferral, to remind them of their STP obligations.

Small employers have until 30 September 2019 to start reporting or apply for extra time to get ready. The ATO will grant deferrals to any small employer who requests additional time to start STP reporting.

There will be no penalties for mistakes, or missed or late reports, for the first year, and employers experiencing hardship or who are in areas with intermittent or no internet connection will be able to access exemptions.

The basics of STP reporting

• Each employer needs to report their employees’ tax and super information to the ATO on or before each payday, or authorise a third party such as a registered agent or payroll service provider to report on their behalf. They need to send the information from STP-enabled payroll software.
• When STP reporting is in place, employers no longer need to provide payment summaries to their employees for the payments reported and finalised through STP. Payments not reported through STP, such as employee share scheme (ESS) amounts, still need to be reported on a payment summary.
• Employers no longer need to provide payment summary annual report (PSARs) to the ATO at the end of the financial year for payments reported through STP.
• Employees can view their year-to-date payment information using the ATO’s online services, accessible through their myGov account. They can also request a copy of this information from the ATO.
• Employers need to complete a finalisation declaration at the end of each financial year. The information reported through STP will not be tax-ready for employees or their tax agents until the employer makes this declaration.
• Employers need to report employees’ superannuation liability information – as usually provided to the employees on their payslips – for the first time through STP. Super funds will then report to the ATO when the employer pays the super amounts to employees’ funds.
• From 2020, the ATO will pre-fill activity statement labels W1 and W2 for small to medium withholders with the information reported through STP. Employers that currently lodge an activity statement will continue to do so.

Sources: www.ato.gov.au/Tax-professionals/Newsroom/Digital-interaction-with-us/Contacting-small-employers-about-STP/; www.ato.gov.au/Media-centre/Articles/Transition-to-Single-Touch-Payroll-for-small-employers/; www.ato.gov.au/stpsolutions.

Disclosing business tax debt information: ATO consultation

The ATO has released a consultation paper, The ATO’s administrative approach to the disclosure of business tax debt information to credit reporting bureaus.

In its Mid-Year Economic and Fiscal Outlook in 2016–2017, the Federal Government announced that it would change the law so the ATO could report business tax debt information to credit reporting bureaus (CRBs) where a business consistently does not engage with the ATO to manage a tax debt. It is not currently authorised to report information about tax debt avoidance, because the law contains strict confidentiality requirements for ATO-held taxpayer information.

The ATO has said it “recognises the important role businesses play in the Australian economy [but] when an entity avoids paying its tax debts it can have a significant impact on other businesses, employees, contractors and the wider community.”

The new paper aims to facilitate the consultation process between the ATO, businesses and CRBs, and focuses on the administrative approach the ATO proposes to take once the legislative changes are in place. It also helps explain some aspects of the changes under the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No 1) Bill 2019 (which has passed the House of Representatives without amendment and is currently before the Senate) and the draft legislative instrument, the Draft Taxation Administration (Tax Debt Information Disclosure) Declaration 2019).

If passed in its current form, the Bill will amend the Taxation Administration Act 1953 (TAA 1953) to allow taxation officers to disclose information about business tax debts to CRBs when certain conditions and safeguards are satisfied. The business in question would need to have debt of at least $100,000 overdue by more than 90 days, and have not effectively engaged with the ATO to manage that debt.

The consultation paper sets out the following key practical points:

• Implementation – Under the ATO’s phased implementation approach, the changes will be implemented gradually to ensure that systems, safeguards and processes are robust.
• Whose tax debt may be reported? – The ATO will be permitted, but not required, to report tax debt information about an entity to CRBs where it meets all of the following criteria:
• the entity has an ABN and is not an excluded entity (the ABN and excluded entity test);
• the entity has one or more tax debts totalling at least $100,000, and the amount has been due and payable for (overdue by) more than 90 days (the debt threshold test);
• in determining whether the entity has debts that meet the debt threshold test, the ATO must exclude tax debt amounts that the entity has engaged with the ATO to manage (the effective engagement test); and
• the entity must not have an active complaint with the Inspector-General of Taxation concerning the proposed reporting or reporting of the tax debt information.
• How will businesses be notified? – If all of the reporting criteria are met and the ATO intends to report an entity’s tax debt information to CRBs, the ATO will notify the business in writing at least 21 days before reporting its tax debt information for the first time. This is to allow an additional 21 days for the business to take action (e.g. by engaging with the ATO and/or paying the debt) to prevent its tax debt information from being reported.
• What will be reported? – If a business’s tax debt information is reported to CRBs, the ATO will provide the CRBs with the following:
• unique identifiers for the entity, such as the ABN and legal name;
• the balance of the entity’s overdue tax debts at the time of first reporting;
• regular updates on the balance of the entity’s overdue tax debt until the entity no longer meets the reporting criteria; and
• a notification when the entity no longer meets the reporting criteria.

Source: www.ato.gov.au/General/Gen/Consultation-paper–ATO-s-approach-to-disclosure-of-business-tax-debts/.

Cross-border recovery of tax debts

The ATO has recently updated and reissued Practice Statement Law Administration PS LA 2011/13 Cross border recovery of taxation debts. This practice statement outlines the options available in relation to recovering a tax debt where the debtor is outside Australia, and sets out how the ATO deals with requests from other countries for assistance in recovering a tax debt owing to the other country.

It covers:

• the ATO’s ability to require payment under Australian tax legislation from debt-holders who are overseas (ie the ATO’s garnishee powers);
• trustees’ and liquidators’ ability to recover debts in a foreign jurisdiction, and how the ATO can assist;
• the ATO’s ability to obtain judgment in a foreign jurisdiction to recover debts in that jurisdiction;
• the ATO’s ability to request assistance from foreign jurisdictions.

The ATO may use an exchange of information (EOI) to assist domestic information-gathering and decide which recovery method to use. This can be used when:

• the ATO has no visibility over a debtor’s offshore affairs, and
• the ATO has exhausted domestic options to source the information or verify the debtor’s claims.

The ATO can request assistance from foreign jurisdictions in regard to debt recovery through:

• bilateral treaties with individual jurisdictions that allow for assistance with collection; and
• the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI BEPS), to which multiple jurisdictions are signatories.

The practice statement was originally issued on 14 April 2011, and the updated version is effective from 15 August 2019.

Source: www.ato.gov.au/law/view/document?docid=PSR/PS201113/NAT/ATO/00001.

ATO superannuation focus areas

The ATO has released its presentation to the 2019 Association of Superannuation Funds of Australia (ASFA) National Policy Roadshow outlining emerging superannuation focus areas for 2019–2020. Topics covered included:

• the taxation of compensation received by super funds;
• pension tax bonuses;
• successor fund transfers; and
• the treatment of inactive low-balance accounts.

The ATO also noted the following real-life examples of people interacting with their super in 2018–2019:

• compassionate release of super – the ATO processed more 53,000 applications for the early release of super on compassionate grounds to members who required the money for critical purposes such as medical care and treatment, and it released $456 million as a result;
• Aboriginal and Torres Strait Islander assistance – ATO representatives visited Darwin, Kununurra and Broome with the First Nations Foundation and helped find $4.37 million in lost super for members of those communities;
• downsizer contributions – 4,900 individuals aged 65 and over made super contributions from the proceeds of selling their home, to a total value of $1.1 billion;
• first home super saver (FHSS) scheme – in the first year of the FHSS scheme’s operation, 3,300 people obtained a release of money from their super to purchase their first home, to a total value of $39.4 million.

Lost super

The ATO noted that at 2 July 2019 it held 5.39 million super accounts worth $3.98 billion. Of this money, the ATO estimates it will be able to reunite $473 million with 485,000 fund members using the Protecting Your Super measures (which have been enacted under the recently passed Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019).

The ATO encourages fund members to find out about their lost and unclaimed super through ATO Online via myGov. In 2018–2019, fund members consolidated or transferred over 537,000 accounts worth $4.38 billion using myGov.

Pension cap indexation

The ATO flagged that the pension transfer balance cap (TBC) of $1.6 million could increase on 1 July 2020 or 1 July 2021, depending on when the consumer price index (CPI) number reaches 116.9 (its level was 114.8 as at June 2019). The Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 provides that the general TBC is indexed in increments of $100,000 when the indexation rate reaches a prescribed figure (which is calculated using a formula set out in the law).

While the ATO does not expect indexation to occur until at least 1 July 2021, it is important to consider what the TBC increase this may mean for funds and members. Once the indexation takes place, there will no longer be a single personal TBC that applies to all super members with a retirement phase income stream. Instead, there could be a personal TBC for each member, depending on their individual situation and arrangements. The ATO said it will advise as soon as possible if indexation will apply on 1 July 2020.

Source: https://www.ato.gov.au/Media-centre/Speeches/Other/Superannuation—a-system-in-transition/.

Compassionate release of super only available in limited cases

The ATO has recently seen a significant increase in calls from individuals who were encouraged by their super funds to contact the ATO because they were ineligible for compassionate release of super (CRS). However, in the majority of cases, the individuals concerned were ineligible because they were looking to use their super to pay for general expenses. It is important to note that CRS is only an option for the following expense types:

• medical treatment and transport costs;
• palliative care costs;
• a loan payment to prevent the loss of one’s home;
• costs of modifying a home or vehicle, or buying disability aids, needed because of a severe disability; or
• expenses associated with the death, funeral or burial of a dependant.

The expense must not yet have been paid (eg using a loan, a credit card or money borrowed from family or friends), and the amount of super a person can withdraw is limited to what they reasonably need. There are a range of eligibility conditions for each expense type, set out in detail on the ATO website. Any amounts released early on compassionate grounds are paid and taxed as normal super lump sums.

Source: www.ato.gov.au/Super/APRA-regulated-funds/In-detail/News/Five-grounds-for-compassionate-release-of-super/; www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Access-your-super-early/?page=2#Access_on_compassionate_grounds.

Personal services income rules: unrelated clients test

The Federal Court has set aside an Administrative Appeal Tribunal (AAT) decision that income derived by a business analyst through a company was subject to the personal services income (PSI) rules: Fortunatow v FCT [2019] FCA 1247 (Federal Court, Griffiths J, 12 August 2019).

Background

The taxpayer was a business analyst and the sole director of Fortunatow Pty Ltd. He provided his services through the company to various large organisations such as government departments, universities, banks and utilities. In the 2012 and 2013 income years, the company disclosed income of approximately $166,000 and $121,000 respectively from the provision of his personal services to eight different clients. The company did not pay him any remuneration and he returned no income in his personal tax returns for those years.

The company transferred income generated by the taxpayer’s personal services to a family trust, characterising the amounts as “management fees”. These fees were claimed as tax deductions, effectively reducing the company’s taxable income to nil. The trust income was offset against the trust’s rental losses. As a result, the taxpayer, the company and the family trust all paid zero tax on the income generated by the personal services the taxpayer supplied as a business analyst in 2012 and 2013.

The ATO concluded that the PSI rules in Div 86 of the Income Tax Assessment Act 1997 (ITAA 1997) applied to include all of the income received by the company in the taxpayer’s assessable income for 2012 and 2013. The taxpayer, however, argued that Div 86 did not apply because the unrelated clients test in s 87-20 was satisfied, and therefore the income was from conducting a personal services business.

Under s 87-20 of ITAA 1997, the relevant services must be provided as a direct result of the individual or personal services entity (PSE) – the company, in this case – making offers or invitations (eg by advertising) to the public to provide the services. The individual (or PSE) “is not treated … as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a business of arranging for persons to provide services directly for clients of the entity” (s 87-20(2)).

The AAT (in Fortunatow and FCT [2018] AATA 4621) decided, in favour of the ATO, that the work the taxpayer obtained and carried out in the relevant years was through an intermediary. According to the AAT, the taxpayer was not operating a genuine business as an independent contractor because he, in effect, received referrals from intermediaries (recruitment companies) and allowed those intermediaries to take responsibility for obtaining and dealing with customers.

The issues for determination on appeal were whether the taxpayer made any offers or invitations to the public at large or to a section of the public to provide his services (the fourth element of the unrelated clients test) and, if so, whether the services to the unrelated entities were provided as a direct result of the taxpayer making those offers or invitations (the fifth element of the unrelated clients test).

The taxpayer argued he met the fourth element because of his active profile on LinkedIn and his marketing by word-of-mouth at industry functions. Although the AAT accepted that the taxpayer’s advertising on LinkedIn constituted the making of an offer or invitation to the public, it concluded that the law operates in a way that means the fourth element (and therefore the fifth element) was not satisfied.

Decision

The Federal Court held that the AAT had misconstrued s 87-20(2) of ITAA 1997 and misapplied its interaction with s 87-20(1)(b). In the Court’s view, the exclusion or exception in s 87-20(2) did not apply where there was evidence that the taxpayer (or the company) advertised his services to the public or a segment of the public through a forum such as LinkedIn, and also obtained work through the involvement of an intermediary.

According to the Court, simply because an individual or PSE is able to provide services through an intermediary, such as a recruitment or similar agency, does not constitute the making of an offer or invitation for the purposes of s 87-20(1)(b). More than that is required for the purposes of the unrelated clients test. But that does not mean that the exclusion in s 87-20(2) necessarily applies, as found by the AAT, where an individual or PSE is in fact available to provide personal services through such an intermediary and there is evidence (as in this case) that the individual or PSE has taken other steps to make offers or invitations to the public at large or a section of the public to provide the services.

The Court remitted the matter to the AAT for further reconsideration according to law, as it was not appropriate for the Court itself to resolve the issues remaining in dispute. It said the issues were not straightforward and there was uncertainty about the extent to which the misconstruction may have affected the AAT’s fact-finding.

Warning to watch out for myGov and ATO tax scams

The government’s Stay Smart Online website warns there has been a surge in scammers impersonating myGov and the ATO to trick people into giving them money or personal details. These scams can take the form of emails, text messages and fake myGov login pages.

In June 2019, the ATO received 6,444 reports of tax-time scams impersonating the ATO. Emails with links to fake myGov login pages were the most widespread email scam.

The myGov system will never send texts, emails or attachments with links or web addresses that ask for your login or personal details. Never click on links in emails or text messages claiming to be from myGov.

Always log into your official myGov account to lodge your return and check if you owe a debt or are due a refund. You can do this by typing https://my.gov.au/ into your internet browser’s address bar.

Unfortunately, ATO and other scams continue well beyond the 30 October deadline for tax returns, as scammers know many people are waiting for a refund or information about debts. It’s important to watch out for scams throughout the year.

Tip: More information is available online at www.staysmartonline.gov.au/. If you’re unsure about a tax-related message or phone call, you can phone the ATO’s Scam Hotline on 1800 008 540.

Tax time updates

ATO has refunded $10 billion so far

The ATO says that $10 billion has been refunded to Australian taxpayers so far this tax time, an increase of over $2 billion from the same time last year, with most returns processed in under two weeks. The ATO aims
to process returns as soon as possible, and has announced that over four million refunds have already been sent out, compared to over three million refunds issued this time last year.

TIP: If you haven’t lodged your tax return yet, or you’re waiting on information about a refund or tax debt, we can help – contact us to find out more.

ATO watching for undisclosed foreign income

The ATO has reminded Australians who receive any foreign income from investments, family members or working overseas to make sure they have reported it this tax time.

New international data-sharing agreements allow the ATO to track money across borders and identify people who aren’t meeting their obligations. Under the new Common Reporting Standard (CRS), the ATO has shared data on financial account information with over 65 tax jurisdictions across the globe. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets, and other income.

Tip: If you’re an Australian resident for tax purposes, you are taxed on your worldwide income, so you must declare all of your foreign income no matter how small the amount.

Unusual claims disallowed

The ATO has published information about some of the most unusual claims it has disallowed. Around 700,000 Australians have claimed almost $2 billion of “other” expenses, including non-allowable items such as child care and even Lego sets.

Assistant Commissioner Karen Foat says a systematic review of claims found and disallowed some very unusual expenses. “A couple of taxpayers claimed dental expenses, believing a nice smile was essential to finding a job, and was therefore deductible. It isn’t!”

Tip: The “other” deductions section of your tax return is for expenses incurred in earning income that don’t appear elsewhere on the return – such as income protection and sickness insurance premiums.

ATO contacting small employers about Single Touch Payroll

From 1 July 2018, employers with more than 20 employees have been required to provide real-time reports to the ATO of salary and wage payments, super guarantee contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this Single Touch Payroll (STP) reporting system has extended to all employers.

The ATO is now writing to small employers who haven’t yet started reporting or applied for a deferral, to remind them of their STP obligations.

Tip: Small employers have until 30 September 2019 to start reporting or apply for extra time to get ready.

There will be no penalties for mistakes, or missed or late reports, for the first year, and employers experiencing hardship or who are in areas with intermittent or no internet connection will be able to access exemptions.

Disclosing business tax debt information: ATO consultation

In its Mid-Year Economic and Fiscal Outlook in 2016–2017, the government announced it would change the law to let the ATO report business tax debt information to credit reporting bureaus (CRBs) where a business consistently avoids engaging with the ATO to manage a tax debt.

Tip: The ATO can’t currently pass on this sort of information because Australian law contains strict confidentiality requirements for ATO-held taxpayer information.

The ATO has said it “recognises the important role businesses play in the Australian economy [but] when an entity avoids paying its tax debts it can have a significant impact on other businesses, employees, contractors and the wider community.” It has released a consultation paper to facilitate consultation between the ATO, businesses and CRBs.

If passed in its current form, the amended law would allow taxation officers to disclose information about business tax debts when certain conditions are met. A business would need to have debts of at least $100,000 overdue by more than 90 days, and have not effectively engaged with the ATO to manage that debt.

Cross-border recovery of tax debts

The ATO has also reissued Practice Statement Law Administration PS LA 2011/13 Cross border recovery of taxation debts. This statement outlines options available for the ATO to recover a tax debt where the debtor is outside Australia, and sets out how the ATO deals with requests from other countries for assistance in recovering tax debts owing to the other country.

ATO superannuation focus areas

Lost super

As at July 2019, the ATO held 5.39 million super accounts worth $3.98 billion. It will aim to reunite $473 million with 485,000 fund members using the new Protecting Your Super measures.

Tip: You can find out about your lost or unclaimed super through ATO Online via myGov.

Pension cap indexation

The pension transfer balance cap (TBC) of $1.6 million could increase on 1 July 2020 or 1 July 2021, depending on movement in the consumer price index (CPI). The general TBC is indexed in increments of $100,000 when the indexation rate reaches prescribed figures (calculated using a formula set out in Australian tax law). Once indexation happens, there will no longer be a single TBC that applies to all super members with a retirement phase income stream. Instead, there could be a personal TBC for each member, depending on their individual situation and arrangements.

Compassionate release of super only available in limited cases

The ATO has recently seen a significant increase in queries about compassionate release of super (CRS). In most cases, the people concerned were ineligible because they were looking to use their super to pay for general expenses.

CRS is an option only for very specific unpaid expenses such as medical treatment and transport costs, palliative care costs, loan payments to prevent the loss of your home, the costs of home or vehicle modifications related to a severe disability and expenses associated a dependant’s death.

Tip: Any amounts released early on compassionate grounds are paid and taxed as normal super lump sums.

Personal services income rules: unrelated clients test

The Federal Court has set aside an Administrative Appeal Tribunal decision that income a business analyst derived through a company was subject to the personal services income (PSI) rules.

According to the Court, simply because an individual or personal services entity is able to provide services through an intermediary, such as a recruitment or similar agency, this does not constitute the making of an offer or invitation for the purposes of the relevant legislation. More than that is required for the purposes of the unrelated clients test.

CURRENCY:

This issue of Client Alert takes into account developments up to and including 18 April 2019.

ATO to ramp up ABN investigations and cancellations

The ATO has advised that over the coming months it will be increasing its focus on the bulk Australian Business Number (ABN) cancellation program, to continue “to ensure the integrity of the Australian Business Register”.

The ATO has refined its models to help it identify businesses that are no longer active or whose owners have forgotten to cancel their ABN when they ceased business. Generally, an ABN may be cancelled if:

• the Australian Securities and Investments Commission (ASIC) advises that a company is deregistered;
• the taxpayer advises that they have stopped business in their latest income tax return;
• the business hasn’t reported business income or doesn’t keep its lodgements up to date; and/or
• the taxpayer lodges a final tax return.

As part of the program, ABN holders or those applying for an ABN in certain industries may be contacted and asked to provide evidence to confirm that they’re setting up or operating a business. Evidence may include activities such as:

• advertising, setting up a social media account or a website for the business;
• buying business cards or stationery for the business;
• obtaining business licences or insurance to operate (eg public liability and professional indemnity);
• leasing or buying premises, equipment or stock for the business;
• issuing quotes or bidding for work;
• consulting with financial, business or tax advisers;
• applying for finance; and
• buying a business.

If an ABN is cancelled and the taxpayer is still running a business, or an ABN application is refused, they can object to the decision within 60 days.

Additionally, if an ABN is cancelled and the taxpayer later decides they need it, they can reapply online and will get the same ABN if the business structure has stayed the same. A taxpayer who starts a different business will need to apply online for a new ABN.

Source: www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Bulk-ABN-cancellations/; https://abr.gov.au/About-us/Our-work/ABR-integrity/.

Fringe benefits tax: rates, thresholds and ATO focus for 2019–2020

The ATO has flagged the following FBT issues that are on its radar this year:

• for motor vehicle fringe benefits:

• failing to report such benefits;
• incorrectly applying exemptions; and
• incorrectly claiming reductions;

• for employee contributions, mismatches between the amounts reported on an FBT return and the income amounts on the employer’s tax return;
• for entertainment benefits:

• claiming a deduction but not correctly reporting the expenses as a fringe benefit; and
• incorrectly classifying entertainment expenses as sponsorship or advertising;

• for car parking fringe benefits:

• incorrectly calculating by significantly discounting market valuations;
• incorrectly calculating by using non-commercial parking rates; and
• not supporting claims with adequate evidence;

• not reporting fringe benefits on business assets that are provided for the personal enjoyment of employees or associates; and
• not lodging FBT returns (or lodging them late) to delay or avoid paying tax.

The ATO’s annual rulings regarding FBT rates, thresholds and other amounts have also been released for the 2019–2020 FBT year (1 April 2019 to 31 March 2020).

Cents-per-kilometre rate: vehicles other than cars

Taxation Determination TD 2019/3 sets out the cents-per-kilometre rates for the 2019–2020 FBT year for calculating the taxable value of a fringe benefit arising from private use of a motor vehicle other than a car. These are:

• 55 cents per kilometre for vehicles with engine capacity of up to 2,500cc;
• 66 cents per kilometre for vehicles with engine capacity of over 2,500cc; and
• 16 cents per kilometre for motorcycles.

FBT record-keeping exemption threshold

Taxation Determination TD 2019/4 sets the FBT record-keeping exemption threshold for the 2019–2020 FBT year at $8,714. This is an increase from the threshold of $8,552 for the 2018–2019 FBT year.

Indexation factors for valuing non-remote housing

Taxation Determination TD 2019/5 sets out the indexation factors for the 2019–2020 FBT year for valuing non-remote housing. These are:

• 1.020 for New South Wales;
• 1.019 for Victoria;
• 0.997 for Queensland;
• 1.008 for South Australia;
• 0.937 for Western Australia;
• 1.043 for Tasmania;
• 0.948 for the Northern Territory; and
• 1.028 for the ACT.

Benchmark interest rate

Taxation Determination TD 2019/6 sets the benchmark interest rate for the 2019–2020 FBT year at 5.37% per annum (this is an increase from the rate of 5.20% for the 2018–2019 FBT year). The benchmark interest rate is relevant to calculating the taxable value of car fringe benefits, for employers using the operating cost method, and loan fringe benefits.

Living-away-from-home allowance: food and drink amounts

Taxation Determination TD 2019/7 sets out the weekly amounts the ATO treats as reasonable for food and drink expenses incurred by employees receiving a living-away-from-home allowance (LAFHA) fringe benefit for the 2019–2020 FBT year. These amounts take into account movement in the consumer price index (CPI) and the 2015–2016 Household Expenditure Survey.

Separate reasonable amounts apply for locations within Australia and for overseas locations. For Australian locations, the reasonable weekly amounts for the 2019–2020 FBT year are:

• $269 for one adult;
• $404 for two adults;
• $539 for three adults;
• $337 for one adult and one child;
• $472 for two adults and one child;
• $540 for two adults and two children;
• $608 for two adults and three children;
• $607 for three adults and one child;
• $675 for three adults and two children; and
• $674 for four adults.

For larger family groupings, add $135 for each additional adult and $68 for each additional child. An “adult” for this purpose is an individual aged 12 years or more as at 31 March 2019.

Source: www.ato.gov.au/Business/Business-bulletins-newsroom/Employer-information/FBT-issues-on-our-radar/.

Guidance on when a company carries on a business

On 5 April 2019, the ATO released its long-awaited final ruling on when a company carries on a business for the purposes of:

• the definition of “small business entity” in s 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997); and
• s 23 of the Income Tax Rates Act 1986 as it applied in the 2015–2016 and 2016–2017 income years, when a lower corporate tax rate was available to companies that were small business entities. From 2017–2018, a company needs to satisfy the definition of “base rate entity” to qualify for the lower rate.

Taxation Ruling TR 2019/1 finalises Draft TR 2017/D7, which was confined to whether a company carries on a business for the purposes of the Income Tax Rates Act 1986. While the final ruling has been expanded and restructured, the ATO’s overall approach and conclusions are largely unchanged. In particular, the ATO accepts that a company can be carrying on a business even if its activities are relatively limited and consist of passively receiving investment returns or rent that it distributes to shareholders. However, the ATO cautions that TR 2019/1 only applies to and binds it in relation to the particular sections of the Acts, and that “care must be exercised in applying the reasoning and conclusions expressed in this Ruling when applying other provisions”.

As if to prove this point, Draft Taxation Determination TD 2019/D4 was also issued on 5 April 2019. It states that a company carrying on a business in a general sense (as described in TR 2019/1) but whose only activity is renting out an investment property cannot claim any CGT small business concessions in relation to that property.

Carrying on a business “in a general sense”

Taxation Ruling TR 2019/1 considers whether a company incorporated under the Corporations Act 2001 (other than a company limited by guarantee) carries on a business “in a general sense”. Once this is established for a particular company, it is still necessary to consider the scope and nature of that business when determining the tax consequences of the company’s activities and transactions (eg whether an amount is income or capital).

The ruling emphasises that it is not possible to state with precision whether a company is carrying on a business. As this is a question of fact, the ATO says that the answer ultimately turns on an overall impression of the company’s activities, having regard to the indicators of carrying on a business (as identified by the courts). One key indicator is whether the company’s activities have a purpose of profit. The ATO accepts that where a profit-making purpose exists, it is likely the other indicators will support a conclusion that the company carries on a business.

In the case of limited, proprietary limited and no liability companies, the ATO accepts that these companies would normally be carrying on a business in a general sense if they:

• are established and maintained to make a profit for their shareholders; and
• invest their assets in gainful activities that have both a purpose and prospect of profit.

In the case of a corporate trustee, TR 2019/1 only applies in relation to the activities it conducts on its own behalf. In determining whether the company carries on a business, any activities conducted in its capacity as a trustee are ignored. The ruling also notes that “the same profitable activity undertaken by a trustee is less likely to amount to the carrying on of a business, than if it were to be carried on by a company”.

The example section of TR 2019/1 concludes that the following companies are carrying on a business in the general sense:

• an inactive company that derives interest income from retained profits – the ATO’s preliminary view had been that the company was not carrying on a business;
• a newly formed company investigating the viability of carrying on a particular business, but which derives a small amount of interest income – again, the ATO’s preliminary view had been that the company was not carrying on a business;
• a property investment company that lets out a commercial property, and either manages the property itself or engages a professional property manager;
• a share investment company, whether or not it engages a professional investment advisor and manager to manage its portfolio of shares;
• a company that leases multiple boats to unrelated parties;
• a holding company that only holds shares in a subsidiary, where it invests the shares and also manages the company group; and
• a holding company that holds shares in, and provides loans to, a subsidiary, where it invests the shares and manages the group.

The draft of the ruling had included an example of a family company with income consisting only of an unpaid trust entitlement (UPE) which it reinvested. The draft concluded that if the company did not reinvest the UPE or receive its entitlement in cash, it would not be carrying on a business. This example has been omitted from the final ruling.

Taxation Ruling TR 2019/1 applies before and after its date of issue.

CGT small business concessions

Draft Taxation Determination TD 2019/D4, also issued on 5 April 2019, states that a company carrying on a business “in a general sense” as described in Taxation Ruling TR 2019/1 but whose sole activity is renting out an investment property cannot access the CGT small business concessions in relation to that property. This is because a CGT asset whose main purpose is to derive rent is specifically excluded from being an active asset (s 152-40(4)(e) of the ITAA 1997).

When finalised, the determination is intended to apply both before and after its date of issue.

Source: www.ato.gov.au/law/view/view.htm?docid=%22TXR%2FTR20191%2FNAT%2FATO%2F00001%22; www.ato.gov.au/law/view/view.htm?docid=%22DXT%2FTD2019D4%2FNAT%2FATO%2F00001%22.

Super guarantee amnesty not yet law, but $100 million recovered

The ATO has recovered around $100 million in unpaid superannuation from employers since the 12-month super guarantee (SG) amnesty was proposed on 24 May 2018.

At a Senate Economics Legislation Committee hearing on 10 April 2019, ATO Deputy Commissioner, Superannuation, Mr James O’Halloran estimated that there has been a 10–15% increase in the number of employers that have come forward and self-reported unpaid SG liabilities in response to the SG amnesty, despite it not yet being law.

The amnesty was announced by the government on 24 May 2018 to enable employers to self-correct historical underpayments of SG amounts until 23 May 2019 without incurring additional penalties that would normally apply. Importantly, a tax deduction would be allowed for payments of the SG charge made during the amnesty which would normally be non-deductible.

As at 28 February, Mr O’Halloran said 19,000 employers have come forward within the normal super guarantee charge (SGC) process for reporting unpaid SG contributions. Of the 19,000 employers that have come forward, the ATO believes that 73% are microbusinesses with less than $2 million turnover, 21% are medium businesses ($2 million to $250 million turnover), and 4% are not-for-profits. The average number of employees is 36.

For most of the disclosures, 51% of the payments are in the order of $10,000, while 35% are $10,000-$50,000 and the balance (14%) are over the spread. In terms of significant employers (1,000 to 5,000 employers), 12 employers have come forward for the period. However, the vast majority (93%) are small to medium businesses. Around 85% of the total declaration of the non-payment or the payment of SG (including nominal interest) is less than $50,000.

ATO applying existing law

With the Bill to implement the amnesty – the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018 – lapsing on 11 April 2019 when the Federal Election was called, the ATO must continue to apply the existing law.

The ATO says that employers who make a voluntary disclosure of historical SG non-compliance will not be entitled to the concessional treatment under the amnesty, unless and until the Bill is enacted into law. If the Bill is eventually enacted, the ATO will apply the new law retrospectively to voluntary disclosures made during the amnesty period.

In the absence of law to implement the amnesty, no-one can claim a deduction for SG payments as it currently stands. The ATO also cannot waive the $20 administration fee. However, the ATO still has a discretion to remit the additional Pt 7 penalty (200%) as part of its normal practice for voluntary disclosures under the current law and practice statement.

Mr O’Halloran also noted that many of the employers that have come forward would not be eligible for the amnesty anyway, primarily because they were still currently under audit by the ATO, or had reported outstanding SG in relation to periods after May 2018 that wouldn’t be covered by the amnesty.

TIP: Employers that may be waiting for the amnesty to become law before making a voluntary disclosure should be mindful that they may already be in the ATO’s sights. The introduction of the Single Touch Payroll (STP) regime, and event-based reporting obligations for super funds, means that the ATO will increasingly have more data to identify SG non-compliance much earlier than previously.

While employers who make a voluntary disclosure before the amnesty is passed into law run the risk of never receiving the concessional treatment under the amnesty, they could be in an even worse position when the ATO eventually catches up with them.

In this respect, employers with historical SG non-compliance need to be ready to make a voluntary disclosure (even without the protection of the amnesty) before the ATO begins an audit or review. This should at least place the employer in a better position to request the ATO remit some of the penalties, especially the additional Pt 7 penalty (200%) for failing to provide an SGC statement.

Source: https://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/f882a9f9-8b5f-4cd9-8c6a-13c74e92f58d/toc_pdf/Economics%20Legislation%20Committee_2019_04_10_7061.pdf.

Instant asset write-off with Budget changes now law

The Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Bill 2019 – introduced as Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019) – received Royal Assent on 6 April 2019 as Act No 51 of 2019. The Bill was passed by the Senate with 18 government amendments to implement the changes announced in the 2019–2020 Federal Budget. Those amendments were agreed to by the House of Representatives on 4 April 2019.

As originally introduced, the Bill amends the tax law to increase the threshold below which amounts can be immediately deducted under the instant asset write-off rules from $20,000 to $25,000 from 29 January 2019 until 30 June 2020, and extends by 12 months to 30 June 2020 the period during which small business entities can access the expanded accelerated depreciation rules (instant asset write-off). The Senate amendments to the Bill implement the Government’s 2019–2020 Budget changes so that:

• the write-off is extended to medium sized businesses (turnover up to $50 million), where it previously only applied to small business entities;
• the instant asset write-off threshold increases from $25,000 to $30,000 – the threshold applies on a per-asset basis, so eligible businesses can instantly write off multiple assets.

Small business entities (with aggregated annual turnover of less than $10 million) will be able to immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night (2 April 2019) to 30 June 2020.

Medium sized businesses (with aggregated annual turnover of $10 million or more, but less than $50 million) will also be able to immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night to 30 June 2020. The concession will only apply to assets acquired after 2 April 2019 by medium sized businesses (as they have previously not had access to the instant asset write-off) up to 30 June 2020.

Rental deductions: ATO audits to double

The ATO has warned that it will double the number of audits scrutinising rental deductions this year. It says some tax agents are still claiming travel to residential rental properties for their clients, but from 1 July 2017 taxpayers (aside from excluded entities) were no longer permitted to claim travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.

Assistant Commissioner Gavin Siebert has said that this year the ATO is making rental deductions a top priority. “A random sample of returns with rental deductions found that nine out of 10 contained an error. We are concerned about the extent of non-compliance in this area and will be looking very closely at claims this year”, he said.

The ATO expects to more than double the number of in-depth audits this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others and omitted income from accommodation sharing.

“Once our auditors begin, they may search through even more data including utilities, tolls, social media and other online content to determine whether the taxpayer was entitled to claims they’ve made”, Mr Siebert said.

In 2017–2018, the ATO audited more than 1,500 taxpayers with rental claims, and applied penalties totalling $1.3 million. In one case, a taxpayer was penalised over $12,000 for over-claiming deductions for their holiday home when it was not made genuinely available for rent, including being blocked out over seasonal holiday periods. Another taxpayer had to pay back $5,500 because they had not apportioned their rental interest deduction to account for redraws on their investment loan to pay for living expenses.

If an income-producing asset such as an investment property is damaged or destroyed, the ATO has said the taxpayer will need to work out the correct tax treatment of insurance payouts they receive and their costs in rebuilding, repairing or replacing the assets.

Source: www.ato.gov.au/Media-centre/Media-releases/Tax-office-to-double-audits-of-dodgy-rental-deductions/.

Shortfall penalties reduced under new ATO initiative

The initial results of the ATO’s penalty relief initiative look positive.

Alison Lendon, ATO Deputy Commissioner, Individuals and Intermediaries, has announced that in the first six months of the ATO’s penalty relief initiative, shortfall penalties for “failure to take reasonable care” and “not having a reasonably arguable position” have been reduced by 89.2% for individuals and 83.8% for small businesses. She said thousands of small businesses and individuals have not been penalised for errors on their tax returns or activity statements. Instead, the ATO had shown them what the error was and how they can get it right next time.

The community and tax professionals had told the ATO that people should have a chance when they get their tax wrong, provided there wasn’t a dishonest intent behind their error. Ms Lendon has said the ATO listened and designed “a fair and consistent approach” to certain penalties. With the ATO’s new approach to penalty relief, if it finds an error on a tax return or activity statement during an audit or review, the taxpayer may be eligible for automatic penalty relief. This means the ATO will show the taxpayer where the error was made, won’t apply a penalty and will educate the taxpayer on getting it right.

Examples of use of the initiative include the following:

• An individual incorrectly claimed self-education expenses on their tax return. This error would have usually incurred a penalty of $788.55, but under the initiative, the penalty was not applied.
• A small business owner made an error on their company tax return relating to deductions on motor vehicle and other work-related expenses. Thanks to penalty relief, a penalty of $1,090.13 was not applied by the ATO.

Further information on penalty relief is available on the ATO’s website.

Source: www.ato.gov.au/General/Interest-and-penalties/Penalties/Penalty-relief/; www.linkedin.com/pulse/penalty-relief-experience-lives-up-its-promise-alison-lendon/.

How the ATO identifies wealthy individuals and their businesses

According to the ATO, wealthy individuals are resident individuals who, together with their business associates, control net wealth of $5 million or more. The ATO uses sophisticated data matching and analytic models, drawing on tax returns and referrals from other government agencies or the community, to identify wealthy individuals and link them to associated businesses.

The ATO says it will “engage with” such taxpayers, offering assistance and services to help them “get things right up front”. The ATO can tell them what it knows about them, including its view of their group’s income tax profile, “so you can work with us where needed”.

If the information the ATO holds about a wealthy individual is limited, the ATO says it may contact the individual or their tax adviser to better understand their circumstances, and to confirm or correct its view of the individual’s wealth and group structure. As part of this engagement, the ATO says the individual will “have the opportunity to check if the information we have about you is correct”.

High wealth individuals

Wealthy individuals who control net wealth of $50 million or more are classified as high wealth individuals . Given the importance of this group to community confidence in the tax and super systems, the ATO says it has an ongoing focus on them.

The ATO says if its systems indicate that an individual has effective control of $50 million or more in net wealth, it may ask for validation of the individual’s net wealth. The ATO says it will review any information given by high wealth individuals and update its records as required.

Source: www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-should-know/About-privately-owned-and-wealthy-groups/How-we-identify-wealthy-individuals-and-their-businesses/

Single Touch Payroll reporting for small businesses: get ready!

Legislation has recently passed to bring in Single Touch Payroll (STP) reporting for all small employers (with fewer than 20 employees) from 1 July 2019.

STP is a payday reporting arrangement where employers need to send tax and superannuation information to the ATO from their payroll or accounting software each time they pay their employees. For large employers (with 20 or more employees), STP reporting started gradually from 1 July 2018, and until now it has been optional for small employers.

ATO Commissioner Chris Gordon has said he wants to “reassure small business and give my personal guarantee that our approach to extending Single Touch Payroll will be flexible, reasonable and pragmatic”.

The basics of STP reporting

• With STP reporting, employers no longer need to provide payment summaries to employees for payments reported through STP. Payments not reported through STP, like employee share scheme (ESS) amounts, still need to be reported on a payment summary.
• Employers no longer need to provide payment summary annual report (PSARs) to the ATO at the end of the financial year for STP reported payments.
• Employees can view their year-to-date payment information using the ATO’s online services, accessible through their myGov account, or can ask the ATO for a copy of this information.
• Employers need to complete a finalisation declaration at the end of each financial year.

• Employers need to report employees’ super liability information for the first time through STP. Super funds will then report to the ATO when the employer pays the super amounts to employees’ funds.
• From 2020, the ATO will pre-fill some activity statement information for small to medium withholders with the information reported through STP. Employers that currently lodge an activity statement will continue to do so.

TIP: Contact us today for more information about STP for your business.

Super guarantee compliance:
time to take action

The government’s latest initiatives targeting non-compliance with superannuation guarantee (SG) obligations give businesses plenty to think about. With Single Touch Payroll on the way for small businesses, all employers should take time to review their arrangements for paying employees’ super.

The government is proposing a 12-month “amnesty” for employers to voluntarily disclose and correct any historical underpayments of SG contributions for any period up to 31 March 2018 without incurring penalties or the usual administration fee. This is provided the ATO hasn’t already commenced a compliance audit of that employer. Additionally, employers will be entitled to claim deductions for the catch-up payments they make under the amnesty.

Tip: It’s an important time for businesses to get their SG affairs in order. If you’re an employer with outstanding underpayments of SG contributions, we can assist with the process of making a voluntary disclosure to the ATO.

Proposed increase for small business instant asset write-off

Prime Minister Scott Morrison recently announced the government’s intention to increase the instant asset write-off already available for small businesses from $20,000 to $25,000. Mr Morrison also said that the instant write-off would be extended by another 12 months to 30 June 2020. These measures are expected to benefit more than three million eligible small businesses to access the expanded accelerated depreciation rules for assets costing less than $25,000.

Labor has previously proposed an “investment guarantee” giving all businesses an immediate 20% tax deduction from 1 July 2020 for any new eligible asset worth more than $20,000. This would be a permanent accelerated depreciation measure so that businesses could continue to take advantage of an immediate 20% tax deduction when investing in an eligible asset.

ATO warns about new scams
in 2019

The ATO is warning taxpayers to be alert for scammers impersonating the ATO, using a range of new ways to get taxpayers’ money and personal information.

While the ATO regularly contacts people by phone, email and SMS, there are some tell-tale signs that you’re being contacted by someone who isn’t with the ATO. The ATO will never:

• send you an email or SMS asking you to click on a link to provide login, personal or financial information, or to download a file or open an attachment;
• use aggressive or rude behaviour, or threaten you with arrest, jail or deportation;
• request payment of a debt using iTunes or Google Play cards, pre-paid Visa cards, cryptocurrency or direct credit to a personal bank account; or
• ask you to pay a fee in order to release a refund owed to you.

ATO refers overdue lodgments to external collection agencies

The ATO has recently started referring taxpayers with overdue lodgment obligations to an external collection agency to obtain lodgments on the ATO’s behalf. External collection agencies will focus on income tax and activity statement lodgments, and referral to an external collection agency doesn’t affect a taxpayer’s credit rating.

If your case is referred to a collection agency, the ATO will notify you in writing before phoning you or your authorised contact to negotiate lodgment of the overdue documents and request payment of any debt.

Tip: If your tax return or other ATO paperwork is overdue, don’t panic! We can help work out what you need to do next, and even make arrangements with the ATO on your behalf.

Government consultation on sharing economy reporting

The government has released a consultation paper seeking views on a possible reporting regime to provide information on Australians who receive income from sharing economy websites like Uber, Airtasker, Menulog and Deliveroo.

The ATO and other government agencies currently have limited information about the income of “gig workers” in the sharing economy, and the government’s Black Economy Taskforce recently recommended designing and implementing a compulsory reporting regime. Although there are a lot of issues still to consider, including costs and data privacy, a new regime could mean gig platforms, payment processors or even banks may soon need to report to the ATO and other agencies on gig workers’ income.

Extra 44,000 taxpayers face Div 293 superannuation tax

An extra 44,000 taxpayers have been hit with the additional 15% Division 293 tax for the first time on their superannuation contributions for 2017–2018. This is because the Div 293 income threshold was reduced to $250,000 for 2017–2018 (it was previously $300,000).

Individual taxpayers with income and super contributions above $250,000 are subject to an additional 15% Div 293 tax on their concessional contributions.

Taxpayers have the option of paying the Div 293 tax liability using their own money, or electing to release an amount from an existing super balance, which means completing a Div 293 election form.

Company losses “similar business test” Bill passes

Legislation originally introduced in March 2017 to supplement the “same business test” with a more relaxed “similar business test” has finally been passed.The test will be used to work out whether a former company’s tax losses and net capital losses from previous income years can be used as a tax deduction for a new business in a current income year. It also is relevant to whether a company joining a consolidated group can transfer its losses to the head company of the consolidated group.