The ATO has issued an alert to warn taxpayers that it is aware of arrangements where a discretionary trust is used to effectively funnel large capital gains to a newly incorporated company that is then wound up to avoid paying taxes.

The ATO says these arrangements concern situations where a trust has generated a small amount of income and a large capital gain during the year. The trust then distributes funds generated by the capital gain, tax free, to one beneficiary, while the newly incorporated company receives the tax liability, but does not have the funds to pay the tax. A liquidator is then appointed to wind up the company.

The ATO says such arrangements may be shams and those involved could face serious consequences under the tax law.

The superannuation law has recently been amended so that the effective contributions tax for certain concessional contributions (up to the concessional cap) has been doubled from 15% to 30% for “very high income earners”, ie those with income (plus relevant concessional contributions) above a $300,000 threshold.

The ATO has recently advised that it will start issuing the first assessments for the new tax in January 2014 for individuals who were above the $300,000 high income threshold for the 2012–2013 income year.

An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in arguing that he was not a resident of Australia for tax purposes during the relevant years. The individual was a mechanical engineer and worked overseas in the 2007 and 2008 income years. The taxpayer argued that in mid-2006 he had formed an intention to live in the United Kingdom, but was ultimately unable to do so due to the failing health of his mother-in-law. The taxpayer eventually returned to Australia in 2009.

The AAT held that the taxpayer had maintained a strong and continuing residency connection with Australia. The AAT noted, among other things, that the taxpayer had maintained an Australian bank account. He had also identified himself as a resident in official immigration arrival and departure cards.

The AAT has held that an individual was a share investor, and not a share trader as claimed, during the relevant years. The individual was a full-time council employee and claimed that he had an arrangement with his employer where he could trade during business hours and then make up the time after hours. The Tax Commissioner argued that the individual was not carrying on a business of share trading and therefore was not entitled to deductions he had claimed on the premise that a business existed.

The AAT held that, overall, the factors pointing against the existence of a share trading business outweighed the factors that were in the taxpayer’s favour. Among various things, the AAT found there was a lack of a regular routine with buying and selling shares in the individual’s case, which pointed towards the transactions being made on a speculative basis. The AAT was also of the view that full-time employment went against the conduct of a share trading business.

The AAT has confirmed a decision of the Tax Commissioner that a husband and wife partnership (which was registered for GST) had an increasing adjustment resulting in a GST payable amount following the purchase of two apartments in a hotel complex.

The original owner of the apartments had previously granted leases in respect of each apartment to a hotel management company that was obliged to operate a serviced apartment business. The partnership had also elected to participate in a scheme that allowed the hotel management company to let the apartments as part of its serviced apartment business in return for income generated by the business. The supply of each apartment was treated as GST-free under the “going concern” concessions in the GST law. Since their purchase, the apartments were operated as part of the serviced apartment business.

The AAT essentially agreed with the Commissioner that the partnership had an increasing adjustment because of continuing input taxed supplies made in relation to the apartments.

The AAT has affirmed the Tax Commissioner’s decision to impose excess non-concessional contributions tax on an individual in relation to excess super contributions he had made in September 2009.

Essentially, the taxpayer had withdrawn and redeposited his superannuation monies in an attempt to mitigate the effects of the global financial crisis. The Commissioner claimed the individual had breached the so-called “bring forward rule”, which provides a $450,000 cap on non-concessional contributions for every three-year period for people under age 65.

The AAT did not accept the individual’s argument that his super fund should have warned him of the danger of breaching the $450,000 limit. The AAT also did not expect the individual to necessarily understand the law himself; however, it did expect that the individual “might have asked for some advice”.

The AAT has held that the Tax Commissioner was no longer bound by a private binding ruling that he had issued to a taxpayer company, because the taxpayer had implemented the scheme differently to the private ruling. As a result that the Commissioner was authorised to issue the taxpayer with fringe benefits tax (FBT) assessments for the relevant years.

Broadly, the private ruling provided that there would be no housing fringe benefit in relation to a home that was half-owned by the company (with the other half owned by a couple, who were also the directors of the company) on the basis that the business use of the home was 50%. However, the AAT considered that, in fact, less than 50% of the home had a “business use”, and therefore the private ruling was not longer binding.

An individual has been unsuccessful before the Federal Circuit Court in seeking a review of the Tax Commissioner’s decision to refuse a tax compromise deal. The individual had taken over his father’s jewellery business, but said he was not aware of the financial mismanagement of the business until unpaid creditors began calling. The taxpayer argued that the Commissioner had not taken into account the ill-health of his father and the effect the global financial crisis had on the business.

However, Court said there was no reason to believe that they were not taken into account by the Commissioner. Further, it held it could not review the Commissioner’s decision as it was not a decision made “under an enactment”.

The ATO has issued a GST ruling that sets out the requirements for adjustment notes under the GST law. An adjustment note reflects the adjustment to the amount of GST charged on a taxable supply as a result of an adjustment event. An adjustment event will result in the original tax invoice issued by the supplier being incorrect. A supplier is required to issue an adjustment note for a taxable supply unless the supply was issued under a recipient created tax invoice. In that case, the recipient of the supply must issue the adjustment note.

The GST ruling outlines when a document is in the approved form for an adjustment note, the information requirements determined by the Tax Commissioner, and when the Commissioner will treat a particular document as an adjustment note even though that document does not meet all of the requirements.

The next Federal Election will be held on 7 September 2013. Both sides of politics have made various announcements and promises. Some of the key announcements to keep in mind include the following:

• Company tax rate cut – On 7 August 2013, the Coalition announced that, if elected, it would cut the company tax rate by 1.5% with effect from 1 July 2015. It said the proposed new company tax rate of 28.5% is part of its “significant tax reform agenda to be delivered within the first term”. Note that the Coalition has also previously proposed a levy on large companies to fund its proposed paid parental leave scheme.
• GST and tax reform – On 7 August 2013, Shadow Treasurer Joe Hockey reaffirmed that the Coalition had “no plans whatsoever to change the GST”. “We are prepared to have a debate about tax reform but any changes arising out of the white paper process would first be put to the Australian people at the next election,” Mr Hockey said.

The ATO has released its compliance program for 2013–2014, setting out key activities and focus areas for the coming year. Some key points include the following:

• The ATO says it will pay particular attention to large work-related expense claims made by: (i) building and construction labourers, construction supervisors and project managers; and (ii) sales and marketing managers.
• This year, the ATO will use new information sources to check correct reporting of: (i) private health insurance rebate claims; (ii) flood levy exemptions; and (iii) taxable government grants and payments.
• The ATO has set up a new taskforce to deal with promoters, individuals and businesses that seek to misuse trusts. The ATO plans to conduct 5,000 data-matching cases and around 700 income tax reviews and audits over the next four years.

The Administrative Appeals Tribunal (AAT) has held that the exclusion in the tax law from the capital gains tax (CGT) small business concessions for assets used “mainly to derive rent” applies even if the assets are used in “carrying on a business” of deriving rent.

In this case, the taxpayer argued that in interpreting the rules, it was necessary to distinguish between those assets used to derive passive investment income such as rental income, and those actively used in carrying on a business. Essentially, the taxpayer argued that the strict view that all properties that are used mainly to derive rent are automatically excluded from the concessions unfairly discriminates against small leasing businesses.

However, the AAT considered that the words in the law must be considered first and that it was not “unduly pedantic to begin with the assumption that words mean what they say”.

An individual employed by a mining company at Port Hedland on a “fly-in fly-out” basis has been unsuccessful before the Federal Court in appealing an earlier decision that refused his deduction claim of $36,000 for accommodation and food against an allowance.

In the earlier decision, it was held that the allowance was properly characterised as a living-away-from-home allowance (LAFHA) under the fringe benefits tax (FBT) rules. As a result, it was subject to FBT in the hands of the taxpayer’s employer, and travel expenses could not therefore be claimed in relation to it. In affirming the earlier decision, the Court said the expenses in relation to accommodation, food and travel were not incurred by the taxpayer in the course of gaining or producing his assessable income. Rather, the expenditure arose from the taxpayer’s decision not live in Port Hedland and to instead travel to Port Hedland on a fly-in fly-out basis.

The AAT has ruled that a taxpayer who was the managing director of a company in various countries from 2002 to 2007, and who was paid an employment termination payment (ETP) when he returned to Australia, was not assessable on the part of the annual and long service leave component of the ETP that was attributable to his foreign service (in view of the exemption in the tax law at the time).

However, the AAT confirmed that he was assessable on the taxable component of the ETP, despite its foreign source, on the basis that he was a tax resident of Australia when the ETP was paid to him.

In a recent decision, the AAT has affirmed the Commissioner’s decision to impose on a taxpayer an administrative penalty at the rate of 50% for “recklessness” in relation to incorrectly claimed input tax credits (ITCs). The taxpayer had lodged a claim in the relevant business activity statement (BAS) for almost $72,000 in ITCs in relation goods said to be from Hong Kong. This was despite the goods never having left the country or having been manufactured.

The taxpayer’s representative claimed that he had relied on telephone conversations with the ATO in which the ATO had allegedly advised to the effect that the taxpayer could claim ITCs. However, the AAT did not accept the taxpayer’s arguments in that regard and affirmed the Commissioner’s decision. The AAT noted, among other things, that the discussions post-dated the filing of the BAS and, accordingly, any advice received at that time could not have influenced the making of a false or misleading statement.

A taxpayer has been unsuccessful before the AAT in arguing that $1.6 million she received from a company run by her (then) husband was provided to her as part of a domestic arrangement with her husband and was not therefore assessable in her hands.

Broadly, the taxpayer contended that she had agreed to finance her then husband’s purchase of shares in the company and that she was behaving as a “good” wife who deployed the resources at her disposal in support of her husband, and that she was not an independent investor in her husband’s business. The AAT did not accept that the taxpayer was simply acting as a supportive spouse who passively received benefits provided to her by her husband under a matrimonial arrangement. The AAT essentially agreed with the Commissioner that the taxpayer was an investor in the business and found that the payments were “income” assessable to her under the tax law.

A trustee of a family trust that operated a construction and earthmoving equipment business has been unsuccessful before the AAT in its claim for fuel tax credits. Following an audit of the business in 2010, the Commissioner refused the credits, citing that records maintained by the taxpayer did not accurately describe the amount of fuel acquired or used, or adequately describe the purpose for which the fuel was used.

The taxpayer acknowledged that there were problems with its recordkeeping but said the difficulties were caused by employee delinquency. Further, it said its true entitlements were actually much greater than the amount claimed. However, the AAT was not satisfied with estimates provided by the taxpayer. It was also critical of the taxpayer’s records, saying they “were a mess”. The AAT affirmed the Commissioner’s decision, as well as the imposition of penalties at 25%.

The Assistant Treasurer, David Bradbury, has announced that the Government will prevent “dividend washing” by introducing a specific integrity rule into the tax law. This follows the Government’s announcement in the 2013–2014 Federal Budget that it will implement reforms to close, with effect from 1 July 2013, a loophole it believes currently enables some investors to engage in this practice.

“Dividend washing” potentially allows investors who undertake certain sophisticated share transactions to receive two sets of franking credits on what is essentially the same parcel of shares. Mr Bradbury says the proposed specific integrity rule will end this practice. He adds that the measure will not impact typical “mum and dad investors” as it will only apply to investors who have franking credit tax offset entitlements in excess of $5,000.

In a recent decision, the Administrative Appeals Tribunal (AAT) has affirmed a decision of the Tax Commissioner to deny a taxpayer’s claim for a personal deduction for interest and bank fees of over $120,000. These were incurred over a two-year period in relation to rental properties purchased by a family discretionary trust that had been set up for that purpose, and of which the taxpayer was the trustee.

The AAT was of the view that the bank had lent the money to the taxpayer in his capacity as trustee of the trust, and not in his personal capacity. The AAT was also not convinced by the taxpayer’s argument that the bank had been mistaken in relation to the legal character of the person to whom it had lent the money. The AAT therefore upheld the Commissioner’s decision not to allow a personal deduction.

A doctor has been unsuccessful before the AAT in arguing that he should be declared a non-resident of Australia for tax purposes. The doctor had been working in East Timor since 2006 and submitted that he “resided” in East Timor as that was where he spent his time and lived.

The AAT heard that the doctor was an Australian citizen and spent nine to 11 months of the year in East Timor, with the remainder of his time spent in Australia and Bali. However, the AAT noted that the doctor owned a property in Australia which the Tax Commissioner described as the “family home”. The AAT also noted that the doctor had a property in Bali which he and his wife called “home”. The AAT found that the doctor “resided” in Australia for tax purposes because the taxpayer had retained a “continuity of association” with Australia.

The AAT has held that a partnership was not carrying on an enterprise and was not entitled to input tax credits claimed in respect of the relevant period.

The taxpayers, a married couple, argued that their partnership had provided handyman and other maintenance services to a hotel, a business they also controlled and which they had taken over from their sons. The AAT was not convinced that the partnership was an entity providing the claimed services to the hotel. Therefore, the taxpayers were not entitled to claim input tax credits during the relevant period.

However, the AAT was of the view that the net amount of GST owed for the relevant period was zero, and not a positive net amount as argued by the Commissioner.

The ATO has advised that, for the income year that commenced on 1 July 2013, the benchmark interest rate to be used in calculating the interest component on the repayment of a private company loan received by a shareholder (or an associate of a shareholder) is 6.20%.

The ATO has announced the amounts that the Commissioner considers are reasonable for the 2013–2014 income year in relation to claims made for:

• overtime meal allowance expenses;
• domestic travel allowance expenses;
• overseas travel allowance expenses; and
• travel allowance expenses for employee truck drivers.

The ATO has announced that the car depreciation limit for the 2013–2014 income year is $57,466.

The Government has recently enacted a number of key superannuation changes. These are discussed below. Importantly, these rule changes are not simple and individuals would be prudent to consider their options before deciding what to do.

Excess concessional contributions

The rules in relation to the taxation of excess concessional contributions have been amended with effect from 1 July 2013. The Government says the new rules will be “fairer for individuals who exceed their annual concessional cap”.

Under the new rules, excess concessional contributions are automatically included in an individual’s assessable income and subject to an interest charge to account for the deferral of tax. Broadly, the new rules ensure that individuals who make excess concessional contributions are taxed on the contributions at their marginal tax rates, rather than at the effective 46.5% tax rate that previously applied for all taxpayers before the changes were introduced.

Higher contributions cap of $35,000

On 1 July 2013, the concessional contributions cap increased from $25,000 to $35,000 for individuals aged 60 years and over. The same threshold will apply from 1 July 2014 for individuals aged 50 years and over.

Under the new cap, eligible individuals will potentially be able to claim greater deductions for superannuation contributions, or salary-sacrifice larger contributions. It is important to note that this temporary concessional cap will cease when the general cap reaches $35,000 through indexation (which is expected to be 1 July 2018).

Extra 15% contributions tax for $300,000+ incomes

From 1 July 2012, individuals earning above $300,000 must pay an additional 15% tax on concessional contributions. That is, the effective contributions tax has doubled from 15% to 30% for concessional contributions (up to the cap of $25,000 or, for older taxpayers from 2013–2014, $35,000) made on behalf of individuals above the $300,000 income threshold.

However, despite this extra 15% tax, it should be noted there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on concessional contributions up to the cap of $25,000 (or $35,000).

The Medicare levy has been increased by 0.5% to help fund the government’s National Disability Insurance Scheme, known as DisabilityCare Australia. This will take the Medicare levy from 1.5% to 2% of taxable income from 1 July 2014.

Under the changes implemented by the government, low income earners continue to receive relief from the Medicare levy through the low income thresholds for singles, families, seniors and pensioners. The exemptions from the Medicare levy for blind pensioners and sickness allowance recipients also remain in place.

The government is seeking to close what it perceives to be a loophole allowing sophisticated investors to engage in what it calls “dividend washing”. The government says “dividend washing” is a process that allows sophisticated investors to effectively trade franking credits, and can result in some shareholders receiving two sets of franking credits for the same parcel of shares.

The government has issued a discussion paper to facilitate consultation and has proposed tax law changes to take effect from 1 July 2013. The changes would aim to prevent shareholders from receiving two sets of franking credits for the same effective parcel of shares through dividend washing, and to ensure that there would be negligible impacts on legitimate market activities.

In the 2013–2014 Federal Budget, the ATO was provided with $67.9 million over four years to undertake compliance activity in relation to trust structures. The taskforce will utilise intelligence systems as well as new tax return labels to gather information.

The ATO says the taskforce will not target ordinary trust arrangements or tax planning associated with genuine business or family dealings, but will focus on what it refers to as “higher-risk taxpayers”. Situations that would attract the attention of the ATO include arrangements where trusts or their beneficiaries who have received substantial income are not registered.

The government has made tax law changes to provide tax certainty for superannuation trustees and deceased estates in situations where a person has died while in receipt of a superannuation income stream.

Investment earnings derived by complying superannuation funds from assets supporting current pensions are generally exempt from tax. However, a draft tax ruling issued by the ATO in 2011 caused some uncertainty over the eligibility of this tax exemption in situations following the death of a member to whom a pension was being paid.

In response to the uncertainty, the government last year announced that it would amend the law from 1 July 2012 to allow the tax exemption to continue following the death of the pension recipient until the deceased member’s benefits have been paid out of the fund (subject to the benefits being paid as soon as practicable).

The Administrative Appeals Tribunal (AAT) has recently affirmed tax assessments issued to a taxpayer after finding that delivery drivers hired by the taxpayer were common law “employees” and not independent contractors.

The taxpayer had contracts to deliver bakery goods to supermarkets and had engaged a number of drivers to make those deliveries. It contended that those drivers were independent contractors and were responsible for their own taxes and superannuation. However, the Tax Commissioner determined that the drivers were common law “employees” of the taxpayer.

Among other things, the Commissioner noted that the drivers did not own or lease their own vehicles, did not control or delegate any of the work, and wore uniforms (vests) identifying the taxpayer’s business name. Based on the evidence before it, the AAT was of the view that the drivers were “employees” of the taxpayer during the relevant period and held that the taxpayer had failed to withhold amounts as required under the pay-as-you-go (PAYG) withholding rules.

A medical doctor has been unsuccessful before the AAT in arguing that the Tax Commissioner should exercise his discretion to allow the doctor to claim non-commercial business losses of his cattle and sheep farming activities against his medical practice income.

The taxpayer had applied to the ATO for a private binding ruling, requesting that the Commissioner allow him to claim the losses from the farming activities against his medical practice income. However, the Commissioner issued a private ruling in which he refused to exercise the discretion sought. Notwithstanding the ruling, the taxpayer then lodged his 2010 tax return and claimed losses in relation to the farming business.

The AAT affirmed the Commissioner’s decision and found that the taxpayer had not discharged the onus of proving that the conditions of the relief sought had been met. Accordingly, the AAT held that the losses incurred must be deferred until those activities produce assessable income against which the deductions could be claimed.

A taxpayer, a retiree, who withdrew and re-deposited his superannuation savings during the global financial crisis has been hit with excess contributions tax of $31,620 after the AAT agreed with the Tax Commissioner that there were no “special circumstances” to disregard the excess contributions under the tax law.

After observing a significant decline in his superannuation savings in a matter of months and following the government’s announcement that it would guarantee bank deposits, the retiree withdrew his superannuation savings in early 2009 and deposited the amounts in term deposits. When the term deposits matured six months later, he re-deposited the money back into his superannuation.

In May 2012, the Tax Commissioner informed the taxpayer that he had exceeded his non-concessional contributions cap for the 2009–2010 financial year. The taxpayer argued that the imposition of excess contributions tax was “unfair” and that he had not obtained a tax advantage.

However, while noting that the taxpayer had made an unfortunate error, the AAT still ruled that there was nothing “unique” or “special” to allow the relief sought. It also considered that it was reasonably foreseeable that the re-depositing would result in excess contributions.

The Government has announced that it will introduce a $2,000 per-person cap on tax deduction claims for work-related self-education expenses. The cap is proposed to apply from 1 July 2014.

In making the announcement, Treasurer Swan said that without a cap, “it’s possible to make large claims for expenses such as first class airfares, 5-star accommodation and expensive courses”. However, the Treasurer said the Government “will consult with employees and employers to better target this concession while still supporting essential training”.

The ATO has recently announced the following new data-matching programs:

• Employers and WorkCover – the ATO will request and collect names and addresses of employers from state and territory WorkCover sources for the 2011 to 2013 financial years. It says the data will be matched to identify employers who might not be complying with their registration, lodgment and payment obligations under tax law.
• Student and temporary work visa holders – the ATO will collect details of student and temporary work visa holders between the period 1 January 2012 to 30 June 2014 from the Department of Immigration and Citizenship for the 2012, 2013 and 2014 income years. The information will be matched to identify non-compliance with tax obligations.
• Online sellers – the ATO will collect information of sellers who have made sales of $20,000 or more in the 2010–2011 income year through various online selling websites. It says records will be matched to identify non-compliance with lodgment, payment and correct reporting obligations under tax law, including undeclared income and goods and services tax (GST) obligations.

The Australian Securities and Investments Commission (ASIC) has warned people to be aware of property spruikers who might be encouraging them to set up a self managed superannuation fund (SMSF) in order to gear into real property.

The warning comes with the release of ASIC’s review of financial advice provided in the SMSF sector. According to ASIC, the majority of advice reviewed was adequate. However, it noted a number of areas requiring improvement, including the need to better inform investors of the risks associated with investments.

The Government has recently made a number of important announcements affecting superannuation. A key proposal announced is that the Government will change the superannuation law to cap tax-free earnings at $100,000. That is, the tax exemption for earnings on superannuation fund assets supporting income streams will be capped at $100,000 per annum per person from 1 July 2014. A tax rate of 15% will apply to fund earnings above $100,000. According to the Government, the measure would affect around 16,000 individuals who have around $2 million in their superannuation funds and an estimated rate of return of 5%.

However, the Government confirmed that withdrawals will continue to remain tax-free for those aged 60 years and over. Presumably, the proposals will be subject to public consultation before implementation.

A taxpayer company has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a claim to secure the capital gains tax (CGT) concessions for small businesses.

In this case, the AAT affirmed the Commissioner’s decision that the taxpayer did not satisfy the “maximum net asset value” test for the purposes of qualifying for the concessions. The AAT found that the individual who controlled the company could not exclude from the test his interest in a Queensland property, which he claimed was used for “personal use and enjoyment”.

The AAT has recently dismissed an appeal by a florist against the Tax Commissioner’s decision to issue income tax and GST assessments following an ATO audit of her florist business.

The taxpayer had reported that the cost of goods sold in her business represented 83% of her reported business income. The ATO had selected the taxpayer for audit because this figure was outside what it considered to be the industry benchmark range of between 44% and 54%.

In this case, the taxpayer was unable, due to a lack of evidence, to prove to the AAT that the assessments were excessive.

The ATO has announced important fringe benefits tax (FBT) rates and thresholds for the 2013–2014 FBT year that commenced on 1 April 2013. Some of the key rates and thresholds include the following:

• The benchmark interest rate is 6.45% per annum. (It was 7.40% per annum for the 2012–2013 FBT year.)
• The record-keeping exemption threshold is $7,779. (It was $7,642 for the 2012–2013 FBT year.)

The ATO has released a Ruling setting out the minimum information requirements for a tax invoice under the GST law. The Ruling also explains the circumstances in which it is not necessary for the supplier to give a tax invoice, and the circumstances in which an input tax credit is attributable to a tax period without the recipient being required to hold a tax invoice for a creditable acquisition.

However, the Ruling states that the recipient must have records to explain its entitlement to an input tax credit for a creditable acquisition.