Yearly Archives: 2013

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Newsletter: December 2013

Tax changes following carbon tax and mining tax repeal

The Abbott government has introduced into Parliament proposed legislation to repeal the carbon tax and the mining tax.

 

Importantly, the Bill to remove the mining tax also proposes to repeal or revise a number of tax and superannuation measures. Key changes include:

  • capital allowances for small business entities – the instant asset write-off threshold will be reduced to $1,000 and the accelerated depreciation arrangements for motor vehicles will be discontinued;
  • company loss carry-back – the repeal of the loss carry-back measure will apply from the start of the 2013–2014 income year;
  • superannuation guarantee (SG) charge – the SG charge percentage will be paused at 9.25% for the years starting on 1 July 2014 and 1 July 2015, increase to 9.5% for the year starting on 1 July 2016, and then gradually increase by half a percentage point each year until it reaches 12% for years starting on or after 1 July 2021; and
  • low income superannuation contribution (LISC) – the LISC will not be payable in respect of concessional contributions made from 1 July 2013.

No GST following purchase of leased apartments

A taxpayer has been successful before the Full Federal Court in a matter concerning a GST assessment following the purchase of three residential apartments. The taxpayer (a company) had purchased the apartments in a hotel complex from the vendor on a GST-free basis as supply of a going concern. The apartments were subject to leases that the vendor had previously granted to a hotel management company, which was obliged to let the apartments as part of its serviced apartment business. The taxpayer had also elected to participate in a “management rights scheme”, which provided the taxpayer a right to income in exchange for allowing its apartments to be used in the serviced apartment business.

 

The Commissioner assessed the taxpayer as having a GST liability of $215,000 (ie an increasing adjustment), which represented 10% of the total purchase price paid by the taxpayer for the apartments. On appeal, the Full Court found that the primary judge had made an error in concluding that, following the sale of the reversion from the vendor to the taxpayer, there was a continuing supply, being the supply of residential premises by lease, by the vendor to the hotel management company. The Full Court said there was no continuing supply in relation to the lease; rather, the supply was the grant of the lease, which did not continue for the term of the lease. As a result, the taxpayer’s objection to the GST assessment was allowed.

 

TIP: At the time of writing it remained unclear whether the Commissioner would apply to the High Court for special leave to appeal against the decision. Assuming that the Full Court’s decision will not be appealed or overturned, purchasers who have previously acquired residential premises as a going concern and then included an increasing adjustment in a subsequent GST return may want to consider whether there is potential for a refund.

 

Note that there are time limits that can restrict entitlement to refunds. Purchasers who are contemplating acquiring residential premises as a going concern should exercise caution until it is clear whether the decision will be appealed, or whether the government may look into introducing amending legislation.

Individual not a tax resident of Australia

An individual taxpayer has been successful before the Administrative Appeals Tribunal (AAT) in arguing that he was not an Australian resident for tax purposes for the relevant years.

 

In June 2006, after his release from jail for drug offences, the man decided he had no future in Australia and moved to Thailand. In 2008, he moved to Bali and obtained the right to live in Indonesia as a retired person. During 2008 and 2010, the man made regular trips back to Australia, but during his last visit he was arrested and charged with possession of a precursor to a dangerous drug. The man was convicted and sentenced to 18 months’ imprisonment.

 

While in prison, the Commissioner commenced an audit of the taxpayer’s affairs and decided that he was an Australian resident with unexplained income, and issued assessments for the 2009 to 2011 income years. The Commissioner also assessed penalties in excess of $350,000. The Commissioner based his decision on documents showing bank interest payments to the taxpayer as well as payments he had made towards the cost of building a boat.

 

However, the AAT was satisfied that the man was not a resident of Australia in the years in question. It said the man had not been residing in Australia since mid-2006 and that he had established a home in Bali from early 2008.

Legal expense deductions to fight ASIC charges refused

A stockbroker has been unsuccessful before the AAT in arguing that legal expenses he had incurred in the 2011 income year were deductible.

 

The taxpayer had incurred legal expenses challenging an ASIC banning order in proceedings before the Federal Court and the Full Federal Court. Both courts dismissed his appeals. The banning order, which became operative from 7 May 2010, prohibited the man from providing financial services for five years. The taxpayer had also incurred legal expenses in defending 20 criminal charges for alleged insider trading; he was eventually acquitted on 17 of the charges, with the remaining three withdrawn by ASIC.

 

The AAT was of view that the legal expenses were not incurred by the taxpayer “in the course” of gaining or producing assessable income. The AAT found that when the taxpayer had incurred the expenses, his position as an authorised representative at the company he worked for had ceased. Accordingly, the AAT held that the expenses incurred in the 2011 income year were not deductible.

Tax debt release based on serious hardship refused

The AAT has affirmed the Commissioner’s decision to refuse to release an individual from his tax liability based on serious hardship grounds. Under the Taxation Administration Act, the Commissioner has a discretion to release an individual from paying a tax liability (in whole or in part) if satisfying the liability would cause that person serious hardship.

 

The man argued that due to his wife’s illness, he had been increasingly required to care for her and their children and that this has reduced his capacity to earn income. The AAT was satisfied that the individual was facing serious hardship in the immediate future in the sense of lacking the means to purchase food, clothing and medical supplies for his family, and other basic requirements such as accommodation. However, it said the serious hardship was not caused by him being required to meet the tax liability. Rather, the serious hardship was due to the taxpayer’s liabilities, of which tax debt was just one, exceeding his assets, and the outgoings required to service those liabilities exceeding his income. As he had not met the relevant criterion, the AAT said it did not have the power to release him from his tax debts.

TIP: Even if the Commissioner is satisfied that serious hardship will result from payment of a tax liability, the Commissioner is not obliged to exercise his discretion in favour of the individual taxpayer. Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. An application for release from an eligible tax liability must be in the approved form.

GST refund request made too late

An individual taxpayer has been unsuccessful before the AAT in seeking a review of the Commissioner’s decision to refuse a GST refund in relation to the June 2004 quarter. The Commissioner had refused the refund on the basis that the taxpayer’s application was made after the four-year cut-off date for the June 2004 quarter (that is, 28 July 2008).

 

The taxpayer explained that due to his ill health and troubles with his then business, he did not get around to lodging tax returns until 2011. The Commissioner acknowledged that the man was owed a refund and had recommended that he approach the Department of Finance and Deregulation to obtain an act of grace payment, but said that because more than four years had elapsed since the time the taxpayer could have claimed the money, there was no discretion that could be exercised in the taxpayer’s favour. The AAT agreed with the Commissioner. It also refused the taxpayer’s request for an extension of time to apply to the AAT for review of the Commissioner’s objection decision (dated 31 October 2011) refusing the GST refund for the June 2004 quarter.

 

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

Newsletter: November 2013

Residency requirement for CGT home exemption failed

The Administrative Appeals Tribunal (AAT) has denied an individual’s claim that an exemption from capital gains tax (CGT) should apply to a property that he and his ex-de facto partner had sold. The individual had purchased land in 2002 with his then partner, and construction of a house on the land commenced in April 2004. However, the couple ended their relationship in September 2004.
Despite this, the individual argued that they had moved into the house in around May or June 2005 to meet the requirements under the law to sell the property without being subject to CGT. The AAT found that the evidence before it failed to establish that the house became the individual’s main residence “as soon as practicable” after construction was completed, and failed to establish that the house continued to be his main residence for at least three months after that. In this case, both requirements had to be met in order for the exemption to apply.

 

 

Parent liable to CGT on half-share of townhouse

An individual has been unsuccessful before the AAT in arguing that he should not have to pay CGT on the sale of a townhouse he owned jointly with his son because, he argued, he was only holding his interest in the property to protect his inexperienced son from selling it on a whim.
The individual had purchased the property for his adult son to live in and transferred the property to himself and his son as joint tenants. After living in the townhouse for a few years, the son moved out to another property. The townhouse was then sold and all of the funds were used to pay down the mortgage on a new property. The individual argued that he received no proceeds from the sale and that he held his interest in the property in trust for his son, or alternatively, that an exemption under the CGT law should apply. The AAT did not accept the arguments and held that as a joint tenant, the individual was liable to CGT on 50 per cent of the net capital gain on the sale.

 

 

Penalty for unsubstantiated work-related deduction claims

The AAT has recently affirmed a decision of the Tax Commissioner to impose a penalty on an individual equal to 50 per cent of the tax shortfall amount arising from deduction claims for work-related expenses that were unsubstantiated.
The individual worked as a cars salesman and in his 2011–2012 tax return made various claims for work-related expenses amounting to around $34,300. The Tax Commissioner determined that most of the claims were unsubstantiated and imposed a penalty of around $6,100, representing 50 per cent of the tax shortfall. The Commissioner also told the AAT that the individual had made similar claims in previous years.
The individual did not dispute that the claims were unsubstantiated, but argued that the penalty was severe and that he was unable to pay an outstanding portion of the penalty of $1,400. The AAT noted, among other things, that the individual did not retain invoices or receipts, or provide satisfactory evidence to substantiate the claims. The AAT was of the view that the individual’s conduct was more serious than mere failure to take reasonable care, and held that the penalty imposed was appropriate.

 

 

No enterprise, so GST credits refused

The AAT has refused an individual’s claim for input tax credits as it found no evidence that the individual was carrying on an “enterprise”. The individual claimed that before she was required to serve a term of imprisonment, she had tried to start a “services business”. She claimed that she had purchased, among other things, two motor vehicles, various office equipment, and business promotional materials. The individual made claims for input tax credits totalling almost $74,000 in respect of the various purchases over four years. However, the individual said the attempts to start the business did not succeed and straddled her term of imprisonment. The individual also claimed that any records she had of the purchases were lost or destroyed, or that she had not been asked to produce documentation by the Tax Commissioner.
The AAT said the individual was given various opportunities to produce documents to back her claims before the hearing; however, it noted that her evidence, being mostly personal testimony, did not satisfy the burden of proof that the Commissioner’s assessment denying the input tax credits was excessive. The AAT found that there was no “enterprise” for the purposes of the GST law and that the decision to deny the input tax credits was correct.

 

 

Special GST clause in contract unclear

A company (a trustee of a family trust) that had sold a property to an individual has been unsuccessful before the Victorian Supreme Court in a matter concerning whether the individual was required to pay GST in addition to the purchase price on the property.
The purchase price was set out in the Particulars of Sale in the contract as $2,250,000. The Supreme Court reviewed the contract, and in particular, a “special condition” dealing with GST. While the Court accepted that the commercial aim of the special clause may have been to allocate responsibility for any GST liability attached to the sale of the property, it considered that the contract said nothing about whether the purchase price in the Particulars of Sale was actually intended to include GST. Further, it could not discern from the special clause any particular contractual intention of the parties. In conclusion, the Court held that the special clause should be removed from the contract. As a result, it said the $2,250,000 amount in the Particulars of Sale should be understood to be inclusive of any GST payable on the sale.
TIP: This case highlights the importance of ensuring that a contract for the sale of property clearly specifies whether the sale is subject to GST and whether the price is GST-inclusive or GST-exclusive.

 

 

Plumbers were full-time casuals, not contractors

The AAT has found that individuals working for a plumbing business were employees of the business and that the business was required to provide superannuation contributions for them. The business argued that the workers were independent contractors and that there was no superannuation requirement.
After reviewing the individuals’ relationship with the business, the AAT was of the view that, effectively, the workers were full-time casuals paid on an hourly rate and not eligible for holiday or sick leave. The AAT considered various factors, including that the individuals all had the same contract (with the same terms) with the business. The AAT said one would expect independent contractors to have differing terms, but the fact that their contracts were the same was “extraordinary”. Another key factor was that the hourly rates charged by the workers to customers were largely set by the business. Overall, the AAT concluded that the workers were employees and affirmed the requirement to pay superannuation.

 

 

ATO warns of schemes to access additional franking credits

The ATO has cautioned taxpayers against trading shares on a special market operated by the Australian Securities Exchange (ASX) with the sole purpose of obtaining additional franking credits. The ATO says these arrangements involve a taxpayer selling shares in a company on the ordinary market after a franked dividend has been announced, and retaining the franked dividends. Then, within days, the taxpayer buys back a similar parcel of shares in the same company on the special market, which also has franked dividends. The ATO says the transactions could constitute “dividend washing” and that the taxpayer could face penalties under the law.
TIP: Dividend washing occurs where shareholders seek to claim two sets of franking credits on what is effectively the same parcel of shares. Taxpayers who are unsure about their own circumstances should seek independent advice or apply for an ATO private ruling.

 

 

ATO focuses on dodgy financial products

The ATO has highlighted areas of concern in relation to certain financial products, particularly a small number of financial products that may offer the promise of tax benefits that may not actually be available to some or all investors who invest in the product.
Key factors that draw the ATO’s attention include suggestions that the investor could obtain tax advantages (that most taxpayers would not in fact receive in their individual circumstances), or that the tax law’s anti-avoidance provisions may not apply.

Newsletter: October 2013

Beware of artificial trust arrangements to avoid tax

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.

 

 

Extra 15% super contributions tax for high income earners

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.
TIP: Taxpayers who exceed the $300,000 high income threshold should consider reviewing their superannuation contributions and salary sacrificing arrangements to take into account any impact of the additional 15% tax.

 

 

Individual found to be an Australian tax resident

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.

 

 

A share investor, not a share trader

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.
TIP: If a taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not a share trader, indexation or the capital gains tax (CGT) 50% discount may apply to reduce the capital gain.

 

 

GST bill following hotel apartment purchases

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.

 

 

No relief from excess super contributions tax bill

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”.

 

 

Departure from private ruling results in FBT assessments

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.

 

 

Tax man’s refusal of tax debt compromise deal

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”.

 

 

GST and adjustment notes

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.

Newsletter: September 2013

Federal Election tax announcements

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.

 

ATO compliance target areas

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.

 

CGT small business concessions denied

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”.
TIP: This case demonstrates the need to be aware of the various conditions required to be satisfied in order to claim the CGT concessions for small businesses. In this case, the key issue was whether three commercial properties that the taxpayer used in carrying on a business of deriving rent qualified as “active assets” and were therefore potentially eligible for the concessions. However, the AAT found that a specific exclusion under the tax law for assets used mainly to derive rent applied. Please contact our office if you would like further information.

 

Deductions for accommodation and food refused

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.

 

Redundancy payment for overseas work assessable

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.

 

 

ATO telephone advice does not excuse wrong GST claim

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.
TIP: Most taxpayers will, often or not, rely on spoken advice. They may contact one of the many enquiry lines that have been set up by various governmental departments, which provide callers with free and quick advice on not only the operation of the law, but also how it is being put into practice within those departments. However, taxpayers need to be cautious about relying on such advice. As the AAT said in this case, given the size of the taxpayer’s claim, “a private taxation ruling, or at least informed professional advice, could and should have been sought”.

 

 

Money from ex-husband’s company assessable

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.

 

 

Poor recordkeeping, so fuel tax credit claims refused

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%.

Newsletter: August 2013

Specific tax rule to prevent dividend washing

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.

 

Individual denied interest deduction

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.

 

Overseas doctor a tax resident of Australia

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.

 

Partnership denied GST credits

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.

 

Division 7A benchmark interest rate

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%.

 

Reasonable travel and meal allowance amounts

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.

 

Car depreciation limit

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

 

Key superannuation changes

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.
TIP: These proposed changes will undoubtedly be welcomed by the 40,000-odd taxpayers who are expected to pay (on average) $1,100 less tax on their excess concessional contributions in 2013–2014.
However, taxpayers on the top marginal tax rate are expected to have a slightly higher tax liability for their excess concessional contributions (due to the additional interest charge).

 

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.
TIP: Eligibility for the higher cap depends on a person’s age on 30 June in the previous income year. This means:

  • persons who were aged 59 years or over on 30 June 2013 are eligible for the higher cap in 2013–2014; and
  • persons who will be aged 49 years or over on 30 June 2014 will eligible for the higher cap in 2014–2015.

Please contact our office if you wish to discuss your eligibility for the higher cap.
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).
TIP: Taxpayers aged 59 years or over on 30 June 2013 should consider reviewing their salary-sacrificing arrangements, deductions for personal contributions and transition to retirement pensions to take into account the higher concessional cap of $35,000 for 2013–2014.

 

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).
TIP: Individuals with incomes above $300,000 may want to consider limiting their concessional contributions to compulsory superannuation guarantee contributions (9.25% for 2013–2014) where such benefits can be packaged in a more tax-effective manner. Alternatively, these individuals may want to consider whether it is more beneficial to instead make after-tax non-concessional contributions.

Newsletter: July 2013

Medicare levy increase to fund DisabilityCare Australia

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.

 

Closing the “dividend washing” loophole

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.

 

ATO taskforce to target trust structures

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.

 

Superannuation income stream following death of member

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).

 

Delivery drivers were common law employees

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.

 

Losses from farming activities to be deferred

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.
TIP: There are rules in the tax law designed to prevent losses from a non-commercial business activity from being offset against income from other sources, unless the activity satisfies one of the commerciality tests, or the Commissioner exercises his discretion to not apply the non-commercial loss rules. However, there are strict requirements surrounding the exercise of this discretion. Note that there are specific exemptions from the non-commercial loss rules for low income primary producers and professional artists.
Also, since 1 July 2009, losses incurred by individuals with an adjusted taxable income of $250,000 or more from non-commercial business activities have been quarantined, even if they satisfy the relevant commerciality tests. The effect is that these individuals are not able to offset excess deductions from non-commercial business activities against their salary, wages or other income. Please call our office for further information.

 

Superannuation redeposit during GFC results in tax hit

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.
TIP: Managing an individual’s contributions caps for any year is a critical consideration to ensure that any tax benefits of superannuation contributions are not later reversed (and punished) via the imposition of excess contributions tax.
Given the constant tinkering with the contributions caps, extreme care is needed with the amount and precise timing of contributions.

Newsletter: June 2013

Cap on work-related self-education deductions

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”.

 

ATO data-matching programs

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.

ASIC warns of property spruikers focusing on SMSFs

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.

 

TIP: Investors should take care when considering advertisements pushing property purchases through SMSFs. A number of key considerations, such as legal obligations, risks and alternatives, should be taken into account before making a decision to invest in property via an SMSF. Please contact our office if you have any questions.

 

Major superannuation reforms announced

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.

 

“Holiday home” included in tax concession test

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”.

 

TIP: The small business CGT concessions are intended to offer small business taxpayers a range of unique tax concessions. However, despite being targeted towards taxpayers who typically have less complicated affairs, the rules are riddled with complexities that may not appear obvious at first glance.

 

Each concession has its own particular rules. However, there are two basic conditions for the relief – either the taxpayer is a small business entity (SBE) or is a partner of a partnership that is an SBE, or the taxpayer satisfies the maximum net asset value test. If you have any questions, please contact our office.

 

Small business benchmarks catch out florist

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.

 

TIP: The Tax Commissioner has warned that businesses operating outside the relevant benchmarks could be subject to ATO review and/or audit, and where the businesses do not have adequate records to substantiate their performance, the ATO will make a default assessment using the appropriate small business benchmark.

 

Businesses may want to consider reviewing their record-keeping practices and assess whether they are at risk of an audit. Please contact our office for further information.

 

FBT rates and thresholds 2013–2014

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.)

GST tax invoice information requirements

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.

 

TIP: In certain situations, it may be difficult to ascertain whether a document is a “tax invoice” that complies with the requirements of the GST law. For example, a “quote” given by a professional or tradesperson to a single recipient would generally not qualify as a “tax invoice”.

 

However, the Tax Commissioner has made a determination to waive the tax invoice requirement to cover particular situations such as “offer documents and renewal offers”. Please contact our office for further information.

 

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.