Bill to increase Medicare levy

The Medicare Levy Amendment (National Disability Insurance Scheme Funding) Bill 2017 has been introduced to implement the Government’s 2017–2018 Budget announcement to increase the Medicare levy by 0.5% to 2.5% from 1 July 2019 in order to help finance the National Disability Insurance Scheme (NDIS). Nine other Bills have been introduced to increase the following rates that are linked to the top personal tax rate.

TIP: Think you may be affected by personal tax rate changes? Contact us to find out more.

Budget changes to foreign resident CGT: draft legislation

Draft legislation has been released to implement 2017–2018 Federal Budget measures relating to the CGT liability of foreign residents. The measures, which applied from 9 May 2017:

• remove the entitlement to the CGT main residence exemption (MRE) for foreign residents that have dwellings that qualify as their main residence; and
• ensure that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP), the principal asset test is applied on an associate inclusive basis.

Foreign resident CGT withholding: early recognition of tax credit

The Commissioner has made a determination to modify the time at which the vendor is entitled to a tax credit in respect of an amount withheld under the foreign resident CGT withholding rules.

The modification, applicable for transactions entered into on or after 1 July 2016, ensures that, where a settlement period for a transaction covers more than one income year for the vendor, the credit entitlement will be available in the same year as that in which the transaction giving rise to the payment to the ATO is recognised for tax purposes for the vendor.

Further guidance for tax losses via a new “similar business” test

The ATO has released a draft guideline on how they will apply the new “similar business test” to supplement the existing “same business test” used for testing whether a company can utilise an earlier year tax loss.

The draft guideline says the similar business test will operate in a way that is comparable to the same business test, and that the overall business of a company must satisfy the similar business test to access losses. The focus remains on the identity of a business, as well as continuity of business activities to generate assessable income.

ATO increases its scrutiny on work-related expenses

Despite wide publicity on the issue, the ATO has reminded taxpayers that it is increasing its scrutiny on work-related expenses. Last year over 6.3 million people made a work-related expense claim for clothing and laundry expenses, totalling almost $1.8 billion. Common mistakes the ATO has seen include people claiming ineligible clothing, claiming for something without having spent the money, and not being able to explain the basis for how the claim was calculated.

Tip: Unsure about what you can claim as work-related expenses? Talk to us to avoid making a mistake.

Activity statements can now be lodged in advance

The ATO says nil activity statements can be generated early in some cases. Under normal bulk processes, activity statements generally issue from the ATO by the end of the month.

However, the ATO says there may be a specific reason for a business to access its activity statements early, such as: if you are a short-term visitor (for example, you are an entertainer or sports person and will be leaving during the relevant period); or know that you will be travelling when an activity statement is due.

Tip: Activity statements can be generated for up to six months in advance.

New downsizing cap available

If you are aged 65 or over, your home is your main residence for CGT purposes and you have owned it for a minimum of ten years, you could benefit from new draft legislation. You will be able to make additional non-concessional contributions, up to $300,000, from the proceeds of selling your home from 1 July 2018.

The downsizer contribution cap of $300,000 will be in addition to existing caps; the capital must come from the proceeds of the sale price and application must be made within 90 days after the home changes ownership. There will also be exemption from the contribution rules for people aged 65 and above, and the restrictions on non-concessional contributions for people with total super balances above $1.6 million.

Tip: Thinking of downsizing? Speak to us about what this could mean for you in terms of tax concessions.

GST: simplified accounting for food retailers

The ATO has released a draft determination on the choice available to you, if you are a food retailer, to use a simplified accounting method (SAM) to help you to work out your net amount by estimating your GST-free sales and GST-free acquisitions of trading stock.

The Draft SAM is substantially the same as the previous determination it replaces. If you were eligible to use a particular SAM specified in the previous determination, you will continue to be eligible to use that SAM under the draft determination.

Tip: Are you a food retailer? We can help you to use the simplified accounting method for your business.

Super system reforms

Australian Prudential Registration Authority (APRA) has written to RSE licensees setting out its approach to the Government’s super system reforms aimed at enhancing APRA’s prudential powers to improve member outcomes. Under the proposed reforms, the current “scale test” will be replaced with an “outcomes test” requiring MySuper trustees to attest to outcomes promoting the financial interests of members on a broader range of indicators.

Segregated current pension assets

A warning has been issued from the Actuaries Institute that tens of thousands of self-managed super funds (SMSFs) could be at risk of incorrectly claiming exempt current pension income (ECPI) under the ATO’s approach to segregated current pension assets.

First Home Super Saver Scheme – draft legislation

Treasury has released draft legislation to implement the 2017–2018 Federal Budget superannuation measures aimed at improving housing affordability by the establishment of the First Home Super Saver Scheme (FHSSS).

The FHSSS will allow voluntary superannuation contributions made from 1 July 2017 to be withdrawn for a first home deposit starting from 1 July 2018. The scheme provides for up to $15,000 per year (and $30,000 in total) to be withdrawn from superannuation.

Tip: To be eligible to use the FHSSS, a person must be 18 years or over, have not used the scheme before and never have owned property before in Australia.

Super assets total $2.3 trillion at June 2017

APRA has released its Quarterly Superannuation Performance publication and the Quarterly MySuper Statistics report for the June quarter 2017. As at 30 June 2017, superannuation assets totalled $2.324 trillion (up 10% from $2.113 trillion in June 2016).

Total assets in MySuper products amounted to $595 billion (up 25.5% from $474 billion in June 2016). Self-managed super fund (SMSF) assets totalled $697 billion (up 9.8% from $635 billion in June 2016) held in over 596,000 SMSFs, representing 30% of all super assets.

Higher education HELP changes announced

The Government has announced a package of reforms to higher education – the Higher Education Reform Package – to take effect generally from 1 January 2018. Under the package the maximum student contribution will increase from 1 January 2018, but there will be no up-front fees and no deregulation of fees.

A new set of repayment thresholds will be introduced from 1 July 2018, affecting all current and future Higher Education Loan Program (HELP) debtors.

Maximum student contributions will also be increased, phasing in by 1.8% each year between 2018 and 2021 to cumulate in a 7.5% total increase.

TIP: Already have a HELP debt, or thinking about undertaking more study? Talk to us to find out how these changes may affect you.

Super reforms from 1 July 2017

Rolling back excess pension balances

If you are a member of a self managed super fund (an SMSF) you may need to take action before 1 July 2017 to avoid exceeding the new $1. 6 million transfer balance cap. You can do this by requesting that the trustee of your SMSF commutes some or all of your income streams, rolling the amount over as an accumulation interest within the SMSF or withdrawing it from the SMSF as a lump sum.

Capped life expectancy and market-linked pensions

The value of “capped defined benefit income streams” will count towards an individual’s pension transfer balance cap of $1.6 million from 1 July 2017. However, capped defined benefit income streams cannot, of themselves, result in an excess transfer balance. This is because they generally cannot be commuted and cashed as a lump sum. Modified rules that will apply to achieve an equivalent tax outcome for defined benefits.

If a pension or annuity from a life expectancy or market-linked income stream (MLIS) product is payable, a credit arises in the person’s transfer balance account equal to the “special value” of the superannuation interest that supports the income stream.

There will be additional income tax consequences for people with defined benefit pension income exceeding the defined benefit income cap ($100,000 for a financial year).

Death benefits

Where a deceased fund member’s superannuation interest is cashed to a dependant beneficiary as a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account. The amount and timing of the transfer balance credit will depend on whether the recipient is a reversionary or non-reversionary beneficiary.

Draft legislation: LRBA integrity measures for pension cap

New exposure draft legislation contains integrity measures for limited recourse borrowing arrangements (LRBAs) as part of the Government’s super reform legislation.

The exposure draft proposes to include LRBAs in fund members’ total superannuation balance and the $1.6 million pension transfer balance cap. The changes seek to address concerns about SMSF members’ ability to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not currently captured by the transfer balance cap regime. The amendments will only apply in relation to borrowings entered into on or after the Bill is enacted.

Deductions for super funds: major ruling update

The ATO has issued an important ruling to clarify its views on the deductions available for superannuation funds.

Superannuation funds are generally restricted to claiming deductions to the extent that they are incurred in producing assessable income. The new ruling sets out the acceptable methods for apportioning tax deductions for expenses incurred in partly gaining non-assessable income.

The ATO has also clarified its views on deductions for the costs of establishing a fund, managing the related tax affairs and amending trust deeds.

TIP: The ATO has extended the due date for lodgment of 2015–2016 SMSF annual returns from 15 May to 30 June 2017.

Bill to reduce corporate tax rate

The Treasury Laws Amendment (Enterprise Tax Plan No 2) Bill 2017 has been introduced to progressively extend the lower 27.5% corporate tax rate to all corporate tax entities by the 2023–2024 income year. The corporate tax rate will then be cut for all corporate tax entities, phasing down to a 25% tax rate for the 2026–2027 and later income years.

Budget updates

Foreign owners of “ghost” property

The 2017–2018 Federal Budget announced that the Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor.

Tougher residency rules for pensioners

The Government has announced it will revise the residency requirements for claimants of the Age Pension and Disability Support Pension (DSP). From 1 July 2018, claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or DSP, or meet other, more specific, time requirements.

Transfer pricing

Chevron: interest rate on borrowing not arm’s length

In a major transfer pricing judgment, the Full Federal Court has unanimously dismissed Chevron Australia’s appeal, finding that its loan arrangement with its related US company Chevron Texaco Funding Corporation was not at arm’s length and the Commissioner was justified in denying Chevron Australia’s interest deduction claims.

Draft guideline on cross-border related-party financing

The ATO has released a Draft Practical Compliance Guideline that sets out its compliance approach to the taxation outcomes associated with a related-party financing arrangement. It makes no direct reference to the Chevron decision, but has clearly been produced as a risk assessment tool for entities that engage in broadly similar related-party financing arrangements.

The ATO assesses related-party financing arrangement risk using a framework of six risk zones, ranging from white zone (arrangements already reviewed and concluded by the ATO) and green zone (low risk) to red zone (very high risk).

If a related-party financing arrangement falls outside the low risk category, taxpayers can expect the ATO to monitor, test and/or verify the taxation outcomes of the arrangement.

Car expenses for transporting equipment disallowed

A taxpayer working as a stevedore has been denied a deduction for car expenses incurred in transporting equipment to and from work. The Administrative Appeals Tribunal (AAT) decided that it was not necessary for the taxpayer to take home her hard hat, safety glasses, hearing protection or headlight to clean them, and her overalls were laundered by the employer. Accordingly, she could only justify transporting her shirts, trousers and occasional wet weather gear, which were not bulky. The car expenses were therefore not deductible.

TIP: The ATO pays attention to unusual claims when it comes to work-related expenses. We can help you maximise your tax return while staying within the rules.

Draft legislation: financial complaints and dispute resolution

As part of the 2017–2018 Budget, the Government announced that it would create a new one-stop shop for financial disputes – the Australian Financial Complaints Authority (AFCA) – to be established by 1 July 2018. AFCA will replace the existing framework of the Financial Ombudsman Service (FOS), Credit and Investments Ombudsman (CIO) and Superannuation Complaints Tribunal (SCT). These existing bodies will continue to operate after 1 July 2018 to work through their existing complaints. Financial firms will be required to be members of AFCA, and its decisions will be binding on all firms.

Tax assistance for people affected by Cyclone Debbie

The ATO has said it will fast-track refunds for people affected by extreme weather and flooding associated with Tropical Cyclone Debbie and ex-Cyclone Debbie in Queensland and New South Wales, and will allow extra time for those taxpayers and their agents to lodge income tax returns and activity statements.

Tax Commissioner Chris Jordan said taxpayers do not need to apply for a deferral or a faster refund. “If your business or residential address is in one of the identified affected postcodes it will happen automatically”, Mr Jordan said. “We understand that for many people their tax affairs are the last thing on their minds right now. When people are ready, we will make sure they are supported in meeting their tax obligations.”

Automatic deferrals of one month apply for tax lodgment and payment dates for people in the affected postcodes. Employers still need to meet their ongoing super guarantee obligations for employees.

The ATO is offering a range of other support measures, and can help reconstruct tax records where documents have been damaged or destroyed.

TIP: If your personal or business affairs have been affected by Cyclone Debbie, contact us to find out what ATO measures and support you can access.

ATO adds value to developing financial literacy

The ATO is helping teachers add tax and super to their classes this year with dedicated educational resources.

In partnership with the Australian Curriculum, Assessment and Reporting Authority (ACARA) and the Australian Securities and Investment Commission (ASIC), the ATO has developed resources that align to the Australian Curriculum for students in years seven to 10.

“Understanding tax and super is an important skill for young Australians, and we are pleased it is now part of the Australian curriculum”, Assistant Commissioner Kath Anderson said.

The ATO says it wants to make it easy for teachers and students to access information, and now offers online learning and teaching resources, activities, videos and webinars through ACARA’s new Curriculum Connections. School visits can also be arranged to cover topics including tax file numbers, preparing for work and how to lodge a tax return.

Does your business import or export goods and services?

The ATO reminds business owners that if your business imports or exports goods or services in Australia, it is important to be aware of your GST responsibilities so you can get the information on your business activity statement (BAS) right.

Exports from Australia are generally GST-free, but special conditions apply in some situations. For example, if it takes longer than 60 days for you to receive payment for your exports, then GST could be charged.

When importing, you are generally required to pay GST (10% of the value of the taxable importation). This GST is usually paid to the Department of Immigration and Border Protection Service before the goods are released, unless you are part of the deferred GST (DGST) scheme.

Tip: Talk to us to find our more about your GST obligations. The ATO accepts voluntary disclosures about mistakes in GST reporting, and you may find your business is eligible for the DGST scheme.

Senate Committee holds corporate tax avoidance hearing

The Senate Economics References Committee is inquiring into tax avoidance and aggressive minimisation by corporations registered in Australia and multinational corporations operating in Australia, including looking at the adequacy of Australia’s current laws. The Committee held a public hearing in Perth on 28 April 2017, where it heard from representatives of Woodside Energy Limited, BHP Billiton, ExxonMobil Australia, Shell Australia, BP Australia, Chevron Australia, the ATO, the WA Department of Mines and WA Treasury. Discussion of the Petroleum Resource Rent Tax (PRRT) occupied much of the hearing. The Committee is due to report by 30 September 2017.

Higher education HELP changes: faster repayments and threshold changes

The Minister for Education and Training, Simon Birmingham, has announced a package of reforms to higher education – the Higher Education Reform Package – to take effect generally from 1 January 2018. The details announced will be confirmed in the 2017–2018 Federal Budget. They include:

• an increased maximum student contribution from 1 January 2018;
• no up-front fees or deregulation of fees;
• a new set of repayment thresholds from 1 July 2018, changing repayment timings and quantities for all current and future Higher Education Loan Program (HELP) debtors;
• a new minimum repayment threshold at $42,000 of income from 1 July 2018 with a lower 1% repayment rate, and a new maximum threshold of $119,882 of income with a repayment rate of 10%;
• phasing in increased maximum student contributions by 1.8% each year between 2018 and 2021, cumulating in a 7.5% increase; and
• from 1 July 2019, indexation of HELP repayment thresholds, currently linked to Average Weekly Earnings (AWE), will be changed to align to the Consumer Price Index (CPI).

The Minister said that taxpayer-funded student loans stand at more than $52 billion and, without changes to address this situation, around a quarter of that is expected to go unpaid.

Super guarantee non-compliance: Senate Committee report

On 2 May 2017, the Senate Economics References Committee released its report into Superannuation Guarantee (SG) non-payment, calling for the ATO to
take a more proactive stance in identifying and addressing SG non-compliance. As part of its inquiry, the committee heard that employers failed to pay $5.6 billion in SG contributions in 2013–2014, affecting 2.76 million employees who lost over $2,000 on average in a single year.

Other key recommendations include:

• requiring monthly contributions (instead of quarterly);
• removing the current $450 monthly threshold for SG eligibility;
• ensuring salary sacrificed contributions cannot count towards the employer’s compulsory SG obligation, and do not reduce the earnings base upon which SG is calculated;
• strengthening the ATO’s ability to recover SG liabilities through the director penalty notice (DPN) framework to stop directors undertaking fraudulent phoenix activity; and
• amending the Fair Work Regulations 2009 to require payslips to display further details about super contributions.

Illegal SMSF early access scheme leads to $6,000 fine

ASIC reports that a man from South Melbourne has pleaded guilty in the Melbourne Magistrates Court and been fined $6,000 for operating a financial services business without an Australian financial services (AFS) licence. ASIC’s investigation arose from ATO intelligence that raised concerns about the promoter’s conduct. The offence related to a scheme the man promoted and operated to facilitate illegal early release of his clients’ superannuation benefits through the creation of self managed superannuation funds (SMSFs).

Between 2010 and 2012, the man placed newspaper advertisements in Victoria and South Australia offering loans dependent upon future superannuation entitlements. A round-robin scheme was operated whereby the promoter’s clients transferred their superannuation funds into newly created SMSFs. The SMSFs lent funds to a company the promoter operated, and then an amount, less a fee, was loaned by either the company or personally back to the trustees of the SMSF in their personal capacity. The promoter has never been granted an AFS licence or a credit licence and has never been an authorised representative of a licensee. ASIC said the promoter exploited his clients’ trust through an illegal scheme that exposed them to potential legal and financial risk.

ASIC urges consumers to deal only with licensed representatives of the financial services and credit industries.

Ride-sharing drivers must register for GST

In a recent decision, the Federal Court has held that the UberX service supplied by Uber’s drivers constitutes the supply of “taxi travel” for the purposes of GST. The ATO has now advised that people who work as drivers providing ride-sharing (or ride-sourcing) services must:

• keep records;
• have an Australian Business Number (ABN);
• register for GST;
• pay GST on the full fare they receive from passengers;
• lodge activity statements; and
• include income from ride-sharing services in their tax returns.

If you work as a ride-sharing driver, you are also entitled to claim income tax deductions and GST credits on expenses apportioned to the services you have supplied.

TIP: You must register for GST if you earn any income by driving for a ride-sharing service. The usual $75,000 GST registration threshold does not apply for these activities.

Tax offset for spouse super contributions: changes from 1 July 2017

The ATO has reminded taxpayers that that the assessable income threshold for claiming a tax offset for contributions made to a spouse’s eligible superannuation fund will increase to $40,000 from 1 July 2017 (the current threshold is $13,800). The current 18% tax offset of up to $540 will remain in place. However, a taxpayer will not be entitled to the tax offset when their spouse who receives the contribution has exceeded the non-concessional contributions cap for the relevant year or has a total superannuation balance equal to or more than the general transfer balance cap immediately before the start of the financial year when the contribution was made. The general transfer balance cap is $1.6 million for the 2017–2018 year.

The offset will still reduce for spouse incomes above $37,000 and completely phase out at incomes above $40,000.

TIP: Contact us for more information about making the most of super contributions for you and your spouse.

ATO targets restaurants and cafés, hair and beauty businesses in cash economy crackdown

The ATO will visit more than 400 businesses across Perth and Canberra in April as part of a campaign to help small businesses stay on top of their tax affairs. The primary focus is on businesses operating in the cash and hidden economies. ATO officers will be visiting restaurants and cafés, hair and beauty and other small businesses in these cities to make sure their registration details are up to date. These businesses represent the greatest areas of risk and highest numbers of reports to the ATO from across the country, and the visits are part of the ATO’s ongoing program of compliance work.

Super reforms: $1.6 million transfer balance cap and death benefit pensions

Where a taxpayer has amounts remaining in superannuation when they die, their death creates a compulsory cashing requirement for the superannuation provider. This means the superannuation provider must cash the superannuation interests to the deceased person’s beneficiaries as soon as possible. The ATO has released a Draft Law Companion Guideline to explain the treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap that will apply from 1 July 2017.

The Draft Guideline provides that where a deceased member’s superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit will arise in the dependant beneficiary’s transfer balance account. The amount and timing of the transfer balance credit will depend on whether the recipient is a reversionary or non-reversionary beneficiary.

Tip: To reduce an excess transfer balance, you may be able to fully or partially convert a death benefit or super income stream into a super lump sum. Contact us if you would like to know more.

No deduction for carried-forward company losses

The Administrative Appeals Tribunal (AAT) has ruled that a company was not entitled to deductions for carried-forward losses of over $25 million that it incurred in the 1990 to 1995 income years. The AAT found that the company did not satisfy the “continuity of ownership” and “same business” tests that applied in relation to the 1996 to 2003 income years, when it sought to recoup the losses. In relation to the continuity of ownership test, the AAT found that the interests the relevant shareholders held during the loss years were different from their interests recoupment years. The AAT noted that the taxpayer company was obligated to keep appropriate records, even though 25 years had passed since the first claimed loss year (1990). The Tribunal also found that the company had clearly not met the requirements of the “same business” test for the different years in question.

TIP: This decision illustrates the need for companies to keep appropriate ownership records year-by-year to support any future carried-forward loss claims.

Overseas income not exempt from Australian income tax

The Administrative Appeals Tribunal (AAT) has agreed with the ATO’s decision that income a tapayer earned when working for the United States Army was not exempt from Australian income tax. The taxpayer, who was a mechanic and electrician, played a critical role in plant construction in Afghanistan.

While the project the taxpayer worked on met the legal definition of an “eligible project”, the AAT decided that the exemption he had claimed under s 23AF of the Income Tax Assessment Act 1936 did not apply because the project was not one that the Trade Minister had approved in writing, and there was no evidence that the Trade Minister considered it “in the national interest”.

GST on low-value imported goods

A Bill introduced into Parliament in February proposes to make Australian goods and services tax (GST) payable on supplies of items worth less than A$1,000 (known as “low value goods”) that consumers import into Australia with the assistance of the vendor who sells the items. For example, GST would apply when you buy items worth less than $1,000 online from an overseas store and the seller arranges to post them to you in Australia.

Under the proposed measures, sellers, operators of electronic distribution platforms or redeliverers (such as parcel-forwarding services) would be responsible for paying GST on these types of transactions. The GST could also be imposed on the end consumer by reverse charge if they claim to be a business (so the overseas supplier charges no GST) but in fact use the goods for private purposes. If the Bill is passed, the measures would come into force on 1 July 2017.

TIP: The ATO has also released a Draft Law Companion Guideline that discusses how to calculate the GST payable on a supply of low-value goods, the rules to prevent double taxation of goods and how the rules interact with other rules for supplies connected with Australia.

Alternative assessments not tentative: Federal Court

The Federal Court has found that a company’s tax assessments were not tentative or provisional, and therefore were valid.

For the 2011 to 2014 income years, the Commissioner of Taxation had notified the taxpayer, which was the trustee of a discretionary trust, that it was liable to pay tax assessed in two different amounts calculated by two different methods. The Commissioner explained to the taxpayer in writing how the two assessments applied.

The taxpayer argued that the assessments were tentative because, for each year, they imposed two separate and different income tax liabilities on its single trustee capacity. The Court denied this claim, agreeing with the ATO that a trustee’s liability to pay income tax is of a “representative character” and the relevant tax law provisions allow for a trustee’s liability to multiple assessments regarding different beneficiaries’ entitlements to a share of the net trust income. Accordingly, in effect the Court found that the primary and alternative assessments were comparable to assessments issued to two or more taxpayers in relation to the same income in the same income year, and were not liable to be set aside as tentative or provisional.

Re-characterisation of income from trading businesses

The ATO has released Taxpayer Alert TA 2017/1 to say it is reviewing arrangements that try to fragment integrated trading businesses to re-characterise trading income as more favourably taxed passive income. The ATO is concerned with cases where a single business is divided in a contrived way into separate businesses. The business income expected to be subject to company tax is artificially diverted into a trust and, on distribution from the trust, that income is ultimately subject to no tax or to a lesser rate than the corporate rate of tax.

The ATO explains that “stapled structures” are one mechanism being used in these arrangements, but the review will not be limited to arrangements involving stapled structures.

TIP: Taxpayer Alert 2014/1 deals with similar arrangements where trusts “mischaracterise” property development receipts as concessionally taxed capital gains to obtain a lower tax rate.

ATO warning: research and development claims in building and construction industry

The ATO and the Department of Industry, Innovation and Science have released Taxpayer Alert TA 2017/2 and TA 2017/3 as a warning to businesses that are not being careful enough in their claims or seeking to deliberately exploit the research and development (R&D) Tax Incentive program. The alerts relate to particular issues identified in the building and construction industry, where specifically excluded expenditure is being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses who had been incorrectly claiming ordinary business activities against the R&D tax incentive.

Intangible capital improvements made to a pre-CGT asset

The ATO has issued Taxation Determination TD 2017/1. It provides that for the purposes of the “separate asset” rules in the Income Tax Assessment Act 1997 (ITAA 1997), some intangible capital improvements can be considered separate capital gains tax (CGT) assets from the pre-CGT asset to which the improvements are made, if the improvement
cost base is more than the improvement threshold for the income year when CGT event happened, and it is more than 5% of the capital proceeds from the event.

This determination updates CGT Determination No 5 to apply to the ITAA 1997 provisions, without changing the CGT determination’s substance.

TIP: Contact us if you would like more information about how this determination applies to your CGT situation.

Personal services income diverted to SMSFs: ATO extends offer

Since April 2016, the ATO has been reviewing arrangements where individuals divert personal services income (PSI) to a self managed super fund (SMSF). The arrangements, described in Taxpayer Alert TA 2016/6, involve individuals (typically SMSF members at or approaching retirement age) performing services for a client but not directly receiving consideration for the services. Instead, the client sends the consideration for the services to a company, trust or other non-individual entity.

The ATO has previously asked taxpayers to help identify and resolve these issues before 31 January 2016, offering to remit the related penalties. That offer has now been extended to 30 April 2017.

Depreciating assets: composite items

Draft Taxation Ruling TR 2017/D1 sets out the Commissioner of Taxation’s views on how to determine if an entire composite item is a depreciating asset or whether its component parts are separate depreciating assets. The draft ruling says that a “composite item” is an asset made up of a number of components that can exist separately. Whether one or more of the item’s components can be considered separate depreciating assets is a question of fact and degree to be determined in the particular circumstances. For a component of a composite item to be considered a depreciating asset, the component must be separately identifible as having commercial and economic value.

TIP: The draft ruling usefully lists the main principles to take into account when determining whether a composite item is a single depreciating asset or is made up of multiple depreciating assets. Contact us if you would like to know more.

Tax risk management and governance review guide released

The ATO has released a tax risk management and governance review guide to help businesses develop and test their governance and internal control frameworks, and demonstrate the effectiveness of their internal controls to reviewers and stakeholders. The guide sets out principles for board-level and managerial-level responsibilities, and gives examples of evidence that a business can provide to demonstrate the design and operational effectiveness of its control framework for tax risk. The guide was developed primarily for large and complex corporations, tax consolidated groups and foreign multinational corporations conducting business in Australia, but the ATO says the principles can be applied to a corporation of any size if tailored appropriately.

Overtime meal expenses disallowed because no allowance received

A taxpayer has failed in claiming deductions for overtime meal expenses before the Administrative Appeals Tribunal (AAT). The AAT denied his appeal because he was not paid an allowance under an industrial agreement.

The AAT noted that whether overtime meal expenses are deductible according to the tax law depends on whether the taxpayer receives a food or drink allowance under an industrial instrument. The AAT agreed with the Commissioner of Taxation that the taxpayer had not received an allowance of this kind and, in fact, had not received any allowance at all.

Time extension to review objection decisions disallowed – again!

The Administrative Appeals Tribunal (AAT) has refused to allow a taxpayer extra time to apply for review of a decision made by the Commissioner of Taxation. The taxpayer had previously made the same application for an extension, seven years after the Commissioner’s decision, but both the AAT and the Federal Court refused it.

In this later case, the AAT found that the taxpayer’s application should not be allowed because he had still not adequately explained why it took him seven years to ask for an extension and a decision review.

TIP: This decision illustrates that a taxpayer can continue to apply to the AAT for extension of time to apply for review of the Commissioner’s decision disallowing an objection, even after being previously rebuffed. The additional application must include new claims and the taxpayer’s case must have merit.

No deduction or capital loss for apparent guarantee liability

The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the “guarantee deed” that put into question whether the trusts were genuinely subject to a guarantee obligation – including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted.

Taxpayer denied deduction for work expenses of $60,000

The Administrative Appeals Tribunal (AAT) has confirmed that a mechanical engineer with a PhD qualification was not entitled to deductions for various work-related expenses totally approximately $60,000. The expense claims in question (for vehicle, self-education and other work expenses), were denied because the taxpayer was unable to establish the required connection between the outgoing amounts and the derivation of his assessable income as a mechanical engineer. Furthermore, in relation to a range of miscellaneous expenses (such as mobile phone and internet charges, professional membership fees, conference fees and depreciation), the AAT found that most of the deductions were not substantiated with sufficient (or any) evidence. The AAT did not exercise its discretion to allow these deductions on the basis of the “nature and quality” of any other evidence regarding the taxpyer’s incurring the expenses.

TIP: This case clearly shows the importance of properly substantiating any claims you make for work-related expense deductions. Contact us to discuss what documentation you should keep to make tax time easier.