The Newsletter
Recent Tax Developments
AMENDMENTS TO FAIR WORK ACT UNDER JOBKEEPER 2.0
As part of the Federal Government’s Coronavirus Economic Response Package (JobKeeper Payments) Amendment Bill 2020, new amendments have been made to the Fair Work Act 2009.
This creates two tiers of employers: –
- Employers who meet (or continue to meet) the criteria to receive JobKeeper payments after 28 September 2020 (Qualifying Employers); and
- Employers who previously met the criteria under ‘JobKeeper 1.0’ to access JobKeeper payments, but who do not quality for such payments after 28 September 2020 (Legacy Employers).
For Qualifying Employers, the proposed amendments generally extend the existing rights and obligations that were available under ‘JobKeeper 1.0’ in relation to employees who receive JobKeeper payments (Eligible Employers), for the period until 29 March 2021 (with only minor modifications).
The general payment obligations for Qualifying Employers continue to apply, including that such employers much satisfy the ‘wage condition’ and must meet the ‘minimum payment guarantee’ for each Eligible Employee.
The new provisions for Legacy Employers stipulate they must hold a valid ‘10 percent decline in turnover certificate’ (Deadline in Turnover Certificate), in order to be eligible to issue or seek JobKeeper enabling directions or agreements, at a particular time.
To hold this certificate, a Legacy Employer must satisfy the ‘10 percent decline in turnover test’ for a quarter (relevantly, the 3-month periods ending on 30 June, 30 September, and 31 December). While adopting the definition used in the JobKeeper Rules, this test only requires a 10 percent reduction of projected GST turnover for the relevant period. Decline in Turnover Certificates must be issued: –
- By an ‘eligible financial service provider’ (such as registered auditor, tax agent or accountant) who is not associated with the Legacy Employer (unless the Legacy Employer is a small business employer under the FW Act, in which case statutory declaration can be made for the Legacy Employer); and
- For each relevant quarter. New Decline in Turnover Certificates are required to subsequent quarters.
There will be significant penalties for Legacy Employers who purport to give a JobKeeper enabling direction, if they do not satisfy the 10 percent decline in turnover test at the time the direction was given, and the Legacy Employer knew or was reckless to that fact. Penalties also apply for providing false or misleading information to an eligible financial service provider, for the purpose of obtaining a Decline in Turnover Certificate.
In addition, the Federal Court will have powers to terminate a JobKeeper enabling direction or agreement, if a Legacy Employer who holds a Decline in Turnover Certificate did not in fact satisfy the 10 percent decline in turnover test, at the particular time that the direction was issued or agreement was made.
JobKeeper enabling directions
- Eligible Legacy Employers will be able to issue or seek certain JobKeeper enabling directions or agreements, however these will be in more limited form than for Qualifying Employers and subject to additional conditions. Employers should take advice in the key differences between the JobKeeper enabling directions available to Qualifying Employers and Legacy Employers.
COVID-19 AND CAR FRINGE BENEFITS
This ATO guidance is on determining how your FBT obligations relating to work cars may be impacted by the COVID-19 pandemic, and how to calculate your FBT liability.
Key points
- Your fringe benefits tax (FBT) obligations may be affected if your employees have been garaging work cars at their homes due to the impacts of COVID-19.
- Where a car is not being driven at all, or is only being driven for maintenance purposes, it is accepted that you are not holding the car for the purposes of providing fringe benefits. If you elect to use the operating cost method, and maintain appropriate records, you may not have an FBT liability for a car.
- Certain kinds of cars may also be exempt from FBT even where they are garaged at employee homes.
- If an exemption does not apply and a work car is garaged at your employee’s home, it will be deemed to be available for private use and you may have an FBT liability.
- You can take into account the impact of COVID-19 on the business use of a car if it is being driven during the period it is garaged at home. This will require you to maintain a logbook (or to have kept a logbook in any of the previous four years) which will enable you to calculate your FBT liability.
- Your logbook-keeping requirements will depend on whether you are already maintaining an existing logbook for the year.
- For any car fringe benefits calculated using the operating cost method, you may adjust your business use estimates to reflect changes in your employees’ driving patterns due to COVID-19.
Garaging a car at an employee’s home
Generally, a car fringe benefit will arise where you make a car you own or lease available for the private use of an employee. Where your employee is garaging a work car at home, you may be providing them with a car fringe benefit.
For FBT purposes, a car is a motor vehicle (except a motorcycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers.
If an exemption does not apply, you need to determine the taxable value of the car fringe benefit. It is calculated using either the: –
- statutory formula method – the taxable value is a set formula based on the car’s cost price
- operating cost method – the taxable value is based on the operating costs of the car, reduced by any business use.
Exemption for certain car benefits
In some cases, the use of a car is exempt from FBT. An employee’s private use of a taxi, panel van, or utility vehicle designed to carry less than one tonne is exempt from FBT if its private use is limited to: –
- travel between home and work
- incidental travel in the course of performing employment-related travel; and/or
- non-work-related use that is minor, infrequent, and irregular (such as occasional use of the vehicle to remove domestic rubbish).
If a home-garaged car is not being driven
Where a car has not been driven at all during the period it has been garaged at home, or has only been driven briefly for the purpose of maintaining the car, it will be accepted that you don’t hold the car for the purpose of providing fringe benefits to your employee.
In these situations, provided you elect to use the operating cost method, there will be a nil taxable value for the car and no FBT liability. You need to elect to use the operating cost method in writing before you lodge your FBT return for the year. You should maintain odometer records to show that, during the period the car is garaged, it has not been driven, or has only been driven briefly for the purposes of maintaining the car.
If you do not elect to use the operating cost method, or do not have odometer records, the statutory formula method applies, and you will have an FBT liability for the year. This is because the car is garaged at the employee’s home and is taken to be available for private use.
If a home-garaged car is being driven
If an employee is driving a car for business purposes, and you elect to use the operating cost method, you may be able to reduce the taxable value of the car fringe benefit to take into account this business use. This may include reducing the taxable value to nil if the car is only being used for business travel.
You will only be able to reduce the taxable value if you have logbook records and odometer records for the period in question. If you have not previously maintained a logbook for the car, the logbook will need to be for at least: –
- 12 continuous weeks; or
- until the car stops being garaged at home if this is less than 12 weeks.
Logbook requirements for car fringe benefits
Your logbook requirements will vary depending on whether: –
- you already use the operating cost method and have an existing logbook in place; or
- it is your first time electing to use the operating cost method or it is a logbook year for you.
Generally, if you have used a logbook for the car before, it will be a logbook year if you have not kept a logbook for the car in the previous four years.
If COVID-19 has impacted driving patterns and you have an existing logbook
Where you are already using the operating cost method, you may have an existing logbook in place. You can still rely on this logbook, despite changes in driving patterns due to COVID-19. You must keep odometer records for the year, and these will show how much the car has been driven during the year, including any lockdown period.
You need to make a reasonable estimate of the percentage of business use of the car, taking into account logbooks, odometer records and any changes in the pattern of business use throughout the year, including changes due to COVID-19.
Where your driving patterns and business-use percentage are impacted by COVID-19, you can choose to keep a new logbook provided that the period is representative of your usage throughout the year. This is so, even if it is not a logbook year. This may provide a more accurate base to estimate the business use of the car.
Example 1 – FBT year ended 31 March 2020 – new logbook not kept
An employer uses the operating cost method to value their car fringe benefits. They kept a logbook in the FBT year ended 31 March 2018.
For the FBT year ended 31 March 2020, there is no requirement for the employer to keep a new logbook.
The employees’ driving patterns were not impacted significantly by COVID-19 across the 2020 FBT year, with any impact occurring in March 2020, so the employer decides not to keep a new logbook.
They use the existing logbook, odometer records, employee fuel card records, plus client records to estimate the business use percentage for the year.
Example 2 – FBT year ended 31 March 2021 – new logbook kept
An employer uses the operating cost method to value their car fringe benefits and kept a logbook in the FBT year ended 31 March 2018.
For the FBT year ended 31 March 2021, there is no requirement for the employer to keep a logbook.
However, employee driving patterns have been significantly impacted by COVID-19, and so the employer chooses to keep a new logbook as it provides a more accurate base to estimate the business use of the car. Odometer records of the total kilometres travelled during the logbook period and during the FBT year are also kept.
If it is your first time using the operating cost method, or it is a logbook year for the car
Where it is your first time using the operating cost method or it is a logbook year, you must: –
- keep a logbook recording details of business journeys undertaken in the car for a continuous period of at least 12 weeks (the logbook period must also be recorded in the logbook)
- keep odometer records of the total kilometres travelled in the logbook period, and the total kilometres travelled during the year; and
- estimate the number of kilometres travelled on business journeys during the FBT year.
For this estimate, you must consider all relevant matters including logbook and odometer records, any other records, and any variations in the pattern of business use throughout the year.
If the car was not driven for a period due to COVID-19 impacts, it is recommended that you also keep odometer records to show this.
If COVID-19 impacted driving patterns during the period, you were maintaining a logbook
You may have been in the middle of maintaining a logbook for a 12-week period at the time the COVID-19 pandemic impacted driving patterns. You may be concerned that the resulting logbook does not reflect the business use of the car for the 2020 FBT year.
If you are making a reasonable estimate of the business use, you can adjust the use indicated from the logbook to account for the change in driving patterns from COVID-19 impacts.
However, you must ensure that the logbook still records a period of at least 12 weeks – if the logbook does not reflect a 12-week period you cannot apply it to reduce the taxable value to take business use into account.
Example 3 – FBT year ended 31 March 2020 – logbook impacted by COVID-19
An employer uses the operating cost method to value their car fringe benefits, and the 2020 FBT year is a logbook year. They begin maintaining a logbook on 2 February 2020, meaning the logbook must run for at least a 12-week continuous period to 26 April 2020.
However, from early April, in response to the COVID-19 pandemic, the employees’ car usage changes significantly, and there are few or no business journeys for the final four weeks of the logbook period.
When estimating the business use for the 2020 FBT year, the employer may adjust their estimate to reflect the business journeys recorded in the period of the logbook before COVID-19 impacted driving patterns, to ensure it is a reasonable estimate of the business use across the FBT year.
Reportable fringe benefits
If the value of certain fringe benefits you provide to an individual employee exceeds $2,000 in an FBT year (1 April to 31 March), you must report the grossed-up taxable value of those benefits on their payment summary or through Single Touch Payroll for the corresponding income year (1 July to 30 June). These are called ‘reportable fringe benefits’.
However, where an employee uses a pooled or shared car that results in a taxable fringe benefit, the use of this car is not included for payment summary or Single Touch Payroll purposes.
COMMISSIONER OF TAXATION V FORTUNATOW [2020] FCAFC 139
This case related to personal services income (PSI) rules.
Income is classified as PSI when more than 50% of the income received under a contract is for a taxpayer’s labour, skills, or expertise.
The personal services income rules are integrity provisions which ensure individuals cannot reduce or defer their income tax by diverting income for their personal services through companies, partnerships, or trusts. If the rules apply, the individual is taxed on the income directly.
The rules do not apply if at least 75% of the individual’s personal services income is for producing a result, where the individual supplies all the required “tools of trade” and is liable for rectifying defects in the work. This is known as the “results test”.
To pass the unrelated clients test your PSI must be produced from two or more clients who are not related or connected, and the work must be obtained by making offers to the public or sections of the public.
You pass the test in an income year if you meet both of the following conditions: –
- two or more unrelated clients
- making offers to the public.
You do not pass the unrelated clients test if you source all your work through arrangements such as a labour hire firm.
If you operate through a company, partnership, or trust and you have more than one individual generating PSI, you will need to work out whether you pass the unrelated clients test for each individual. It is possible to be a PSB for one individual but not another.
Making offers to the public
To satisfy this condition, there must be a definite connection between the offer to the public at large and the engagement for the work.
Making offers to the public (or a section of the public) includes maintaining a website, applying for competitive public tenders, or advertising in a newspaper, industry journal or business directory.
The ATO maintains registering with labour hire firms or similar will not meet this condition.
Previously the Federal Court allowed the taxpayer’s appeal from an earlier Administrative Appeals Tribunal (AAT) decision. The Federal Court found the ATO and AAT had applied an exception for services provided through intermediaries (e.g. recruitment agencies) too broadly and instead the Court preferred a narrow interpretation of the exception.
The Full Federal Court has allowed the Commissioner’s appeal holding that one of the requirements to satisfy the unrelated clients test in section 87-20 of the ITAA 1997 which is that services are provided as a direct result of the individual or personal services entity making offers or invitations to the public (subsection 87-20(1)(b), required a client’s decision to obtain the services of the individual/personal services entity be a direct result of the making of offers or invitations.
The Court found a direct causal effect might be shown where it is established that an invitation or offer was comprehended by the client, in the sense of received and digested, and that it had at least some influence on the client’s decision to obtain the services. It was found, none of the clients made their decisions to engage the services of Mr Fortunatow as a direct result of any offer or invitation constituted by Mr Fortunatow’s LinkedIn profile and thus the unrelated clients test was not met.
R & D TAX INCENTIVES GUIDE TO INTERPRETATION
This document published by the ATO in September is essential reading for entities to establish: –
- whether they are eligible for the incentive
- correctly claiming their just entitlements under the incentive.
Given recent legislative changes, it is important to refer to this, prior to making any claims for the year ended 30.6.2020.
LEGISLATION UPDATE: JOBKEEPER 2.0 BILL NOW LAW
The Coronavirus Economic Response Package (JobKeeper Payments) Amendment Bill 2020 passed parliament with amendments on 1.9.2020 and received Royal Assist just prior to us going to press.
The Bill: –
- Extends the current time limit on payment rules authorised by the Coronavirus Economic Response Package (Payments and Benefits) Act 2020, allowing the JobKeeper scheme to be extended to 28.3.2021.
- Amends the tax secrecy provisions in the TAA to allow protected information relating to the JobKeeper scheme to be disclosed to an Australian government agency for the purposes of the administration of an Australian law; and
- Supports the extended operation of the JobKeeper scheme for a further temporary period by providing employers continued flexibility to respond to the impacts of the Coronavirus pandemic while also assisting employees to remain in employment and connected to their workplaces.
The six amendments include minor technical changes regarding the definition of an eligible financial service provider and the 10 percent decline in turnover certificate.
The Bill does not contain the detailed rules which cover eligibility for the JobKeeper payment during the extension period. The rules will be contained in a legislative instrument that the Treasurer will issue in the near future.
CHANGING BUSINESS STRUCTURES
Many small businesses change their business structure from a sole trader to more complex company or trust structures, especially when the environment changes. This can lead to errors.
Some of the common errors identified by the ATO include: –
- reporting income for the wrong entity
- claiming expenses incurred by another entity as business expenses
- personal use of business bank accounts.
If you have incorporated remember that: –
- the company is a separate legal entity from you as a shareholder or director
- money that the company earns, belongs to the company
- the company owns its assets, and they cannot treat them as their own
- if a director or shareholder of a company uses company assets for their personal use, it must be properly treated as a benefit to the director or shareholder. The Division 7A or fringe benefits tax (FBT) provisions could apply if not treated correctly.
If you move to a trust structure, be mindful of a trustee’s responsibilities, including: –
- holding the trust property (including assets, investments, and income) for the benefit of the beneficiaries
- managing the trust’s tax affairs
- paying some tax liabilities.
You should also consider the small business restructure rollover when thinking about restructuring.
THE CRIMES LEGISLATION AMENDMENT (ECONOMIC DISRUPTION) BILL 2020
On 3.9.2020 this was introduced in the House of Representatives. The Bill proposes to: –
- Amend the Proceeds of Crime Act to strengthen and clarify provisions to ensure that law enforcement agencies can restrain and forfeit the profits gained by transnational, serious and organised crime (TSOC) actors.
- Amend the defence of ‘mistake of fact’ as to the value of money or property, ensuring that potential loopholes in the current defence cannot be exploited.
- Creates an additional tier of offences for the highest-level money launderers, who deal with money or property valued at $10 million or more.
- Clarify the definition of the term ‘benefit’ under the Proceeds of Crime Act to include the avoidance, deferral or reduction of a debt, loss, or liability.
- Clarify that all courts with jurisdiction under the Proceeds of Crime Act are able to make orders in relation to property located overseas.
- Enhance the ability of law enforcement to enforce compliance with the information-gathering powers in the Proceeds of Crime Act.
FURTHER DELAYS IN SENATE COMMITTEE REPORT ON R&D TAX INCENTIVE BILL
Presentation of the Senate Economic Legislation Committee’s report on the inquiry into the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 has been extended again from 24.8.2020 to 12.10.2020.
This after two previous extensions… Following the Senate referral of the provisions of the Bill to the Committee on 6.2.2020, the report was supposed to have been presented by 30.4.2020. This date was extended to 7.8.2020 and then further extended to 24.8.2020.
The Bill which contains the May 2018 Federal Budget measures to reform the R&D tax incentive which was passed by the House of Representatives on 10.2.2020.
TAXATION DETERMINATION TD 2020/7
Income tax: can capital gains be included under subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 in calculating the foreign income tax offset limit?
This Determination is in response to some taxpayers incorrectly including foreign capital gains where no foreign tax has been paid as ‘disregarded income’ in their calculation of the foreign income tax offset (FITO) limit and therefore over-claiming FITO.
The effect of this is best outlines in the below example.
Example:
In an income year, an Australian taxpayer (the taxpayer) disposed of a number of CGT assets and recognised the following CGT events (assume all capital assets have been held for less than 12 months): –
- a foreign capital gain of $3,000 in respect of which $630 of foreign income tax was paid
- a foreign capital gain of $20,000, in respect of which no foreign income tax was paid
- an Australian capital gain of $10,000; and
- a capital loss of $15,000.
In determining their net capital gain, the taxpayer applies the $15,000 capital loss against the $10,000 Australian capital gain and $5,000 of their foreign capital gain in respect of which no foreign income tax was paid.
The resulting net capital gain is $18,000 which includes $15,000 of foreign capital gain in respect of which no foreign tax was paid and a $3,000 foreign capital gain in respect of which foreign income tax was paid. This net capital gain does not have a source.
The entire $3000 foreign capital gain in respect of which foreign income tax was paid has been included in the taxpayer’s assessable income. That $3,000 foreign capital gain will be disregarded under subparagraph 770-75(4)(a)(i) for purposes of the FITO limit calculation in section 770-75.
The foreign capital gain amount of $15,000 in respect of which no foreign income tax was paid that was not absorbed by the capital loss cannot be included under subparagraph 770-75(4)(a)(ii) for purposes of the FITO limit calculation in section 770-75, as it is neither an amount of ordinary income nor an amount of statutory income.
Commentary
The detailed reasoning for this is contained in TD 2020/7. The takeout is that considerable care needs to be taken when claiming foreign tax credits in respect of capital gains. In Issue #101 we covered Burton v Commissioner of Taxation (2019) FCAFC 140 22.8.2019 which set an interesting ATO precedent on claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States. In simple terms if you own an asset in the United States and you pay tax there on the capital gain, then you may not be able to claim all the US tax paid as a credit in Australia. This because of the 50% individual capital gains tax discount in Australia.
SMSF REGULATIONS TO ALLOW SIX MEMBERS UNDER NEW LEGISLATION
In September, the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 was introduced. This partially implements the measure to allow an increase in the maximum number of allowable members in self-managed superannuation funds and small APRA funds from four to six. The remainder of the measure will be implemented through regulations. These measures were first mentioned in the May 2018 Federal Budget.
The bill amends the SIS Act, Corporations Act, ITAA1997 to increase members in SMSFs. It also amends provisions that relate to SMSFs and small APRA funds, which will ensure continued alignment with the increased maximum number of members for SMSFs.
SMSFs are often used by families as a vehicle for controlling their own superannuation savings and investment strategies. For larger families, the only real option is to create two SMSFs – in so doing incurring additional costs.
The key differences are shown in the comparison table below and is also detailed in the explanatory memorandum.
| New law | Current law |
| A superannuation fund can only be an SMSF if it has no more than six (6) members. | A superannuation fund can only be an SMSF if it has fewer than five (5) members. |
| Various provisions that apply to small superannuation funds apply to funds with no more than six (6) members. | Various provisions that apply to small superannuation funds apply to funds with fewer than five (5) members. |
In some instances, the number of individual trustees that a trust can have may be limited to less than five or six trustees by state legislation and could prevent some or all members of a fund with five or six members from being individual trustees. In these cases, the members of a fund should use a corporate trustee in order for the superannuation fund to meet, or continue to meet, the amended definition of an SMSF.
Under the updated requirements, a SMSF with one or two directors or individual trustees must have its accounts and statements signed by all of those directors or trustees. For all other SMSFs with between three and six directors or trustees, the accounts, and statements of the SMSF will have to be signed by at least half of the directors or individual trustees.
LEGISLATION PASSES THROUGH THE SENATE TO ALLOW AUSTRALIANS TO CHOOSE THEIR SUPERANNUATION FUND
Legislation giving Australians the power to choose their own superannuation fund, instead of being forced into a fund because of enterprise bargaining agreements passed the Senate on 25.8.2020.
The Treasury Laws Amendment (Your Superannuation, Your Choice) Bill 2019 will allow around 800,000 Australians to make choices about where their hard-earned retirement savings are invested, representing around 40 per cent of all employees covered by a current enterprise agreement.
The Bill addresses the findings of the Financial System Inquiry and the Productivity Commission Inquiry into the efficiency and competitiveness of the superannuation system which found that this reform was ‘much needed’ and that denying choice of fund can discourage member engagement and lead to them paying higher fees.
This reform is also supported by a recent decision of the Fair Work Commission which found that it was detrimental to employees to restrict them from being able to choose their own superannuation fund. Specifically, the Fair Work Commission determined that extending choice of fund to employees who were previously denied choice will prevent them from unnecessarily ending up with multiple superannuation accounts “with all the inconvenience and additional administration costs that this involves”.
These changes also build on the Government’s earlier reforms which protect superannuation accounts from being eroded through the capping of fees on low balance accounts and requiring insurance to be provided on an opt-in basis for new members under 25 years of age.
With around 16 million Australians having a superannuation account and around $2.9 trillion worth of superannuation savings, the Government maintains it will continue to ensure that the superannuation system is delivering for all Australians.
EXTENSION OF TEMPORARY RELIEF FOR FINANCIALLY DISTRESSED BUSINESSES
The Federal Government will continue its regulatory relief for businesses that have been impacted by the Coronavirus crisis by extending temporary insolvency and bankruptcy protections until 31 December 2020.
Regulations will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.
The changes will also extend the temporary relief for directors from any personal liability for trading while insolvent.
These measures were part of more than 80 temporary regulatory changes the Government made designed to provide greater flexibility for businesses and individuals to operate during the coronavirus crisis.
The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions.
These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover.
As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.
Government policy is to continue to help businesses successfully adapt and restructure so that they can bounce back on the other side of this crisis.
bO2 READERS QUESTIONS AND ANSWERS…………..
Question 1
Could you please confirm that the car depreciation cost limit for the financial year ending 30 June 2020 $57,581 plus GST, in other words l can buy a car up to $63,349.
Answer
That is correct – the motor vehicle deprecation cost limit does not include GST.
Question 2
Your advice on how we account for and tax an employee settlement payment following a dispute.
A quick background and extract from the relevant sections of the settlement agreement:
BACKGROUND
- The Employee was employed by the Employer from on or about 14 September 2016 until on or about 8 April 2020 (the Employment), on which date the Employment was terminated (the Termination).
- The Employee has made claims against the Employer alleging, variously, underpayment of wages and entitlements and/or breach of a provision of the Hair and Beauty Industry Award 2020 and/or breach of contract (the Employee’s Claims).
- The Employer denies all the Employee’s Claims.
- Without admission, the parties have agreed to resolve the Employee’s Claims and all matters arising from or in any way related to the Employment on the basis set out in this Deed.
- THE PARTIES AGREE
3.1 In consideration of the Release given by the Employee by virtue of clause 4.1 of this Deed, within 7 days of the Employee serving upon the Employer a properly executed counterpart of this Deed, the Employer will pay to the Employee by direct deposit to a nominated bank account the sum of $7,550.00, less taxation as required by law (the Settlement Sum), in full and final settlement of all Claims.
Could you please advise:
- Do we process this in MYOB as a single line item backpay payment for $7550?
- How much tax is to be deducted? Our lawyer suggests it is likely to need to be taxed in accordance with the Schedule 5 table as a back-payment. The employee has a tax-free threshold.
- Can you confirm that no superannuation guarantee charge applies to settlement payments?
Answer
- Yes, this is a MYOB single line item back payment for $7,550
- Your solicitor is correct – apply the Schedule 5 table as a back payment and ensure adequate tax is deducted.
- No superannuation guarantee payment applies to this post employment settlement as it does not fall within the definition of ordinary times earnings.
Question 3
What are an employer’s obligations regarding employees with student visas?
Answer
If it can be established that they are enrolled to study in Australia on a course that lasts 6 months or more, they may be regarded as an Australian resident for tax purposes.
This means they pay tax on their earnings at the same rate as other residents
So, the normal employer PAYG obligations will apply.
Generally, the terms of the student visa are that they are able to work up to 40 hours a fortnight.
Question 4
This issue is related to the tax deductibility of FY2019 voluntary super contribution for sole trader / individual.
My client is a sole trader owner and made the voluntary super contribution payment (after tax) $25k to ABC complying super fund company with the notice of intent form for FY2019 and claimed for tax deduction in FY2019 income tax return as for the concessional super contribution.
After the lodgement of FY2019 income tax return, client received a letter from ATO that they did not receive the notification from super fund company regarding the above, so tax deductibility of $25k was denied.
The following chronological order of events are based on the information received from complying super fund company (final email received from super fund company at 31st July 2020 after formal complaint was made by my client) and based on the client’s records.
- Client received the letter from the ABC Super fund for the confirmation of receipt of their personal contributions
- Client was informed by super fund company that client received a small super payment from casual employment during the FY2019. So, my client requested ABC Super fund company to refund $159.05 to avoid higher tax (because total super contribution amount became $25,159.05 for FY2019 including voluntary super contribution $25k). If super fund company notified my client about a small super amount earlier or at initial phone discussion(s), my client would pay only the remained balance to match the $25,000.
- Client sent the revised notice of intent form with revised amount $24,840.95 (=$25,000 – $159.05) to super fund company. In addition, ABC complying super fund company never explained my client that refund request was subject to approval.
- Client fully relied on the acknowledgment letter he /she received on August 2020 about the deductibility of voluntary super contribution ($24,840.95).
- Client did not receive the letter or any phone call from ABC super fund company that tax deduction of $24,840.95 was reversed.
- Client received a simple email from ABC super fund company that refund of $159.05 was declined, but it did not mention that tax deduction of $24,840.95 was no longer valid. All I believed was that earlier confirmation of $24,840.95.
- Client decided to change the super fund company to XYZ Super and finally did so on 12/12/2020.
- After client received the letter from ATO regarding the denial of tax deduction for FY2019 voluntary super contribution $24,840.95, client asked Super fund company to check and they advised everything is good as above. Again, ABC Super never advised that tax deduction of $25,000 or $24,840.95 was cancelled / reversed in prior communications.
- XYZ Super fund company is saying that they cannot do anything but telling my client to complain to AFAC. We notified the ATO, but they just advised to contact ABC super fund company.
- ABC Super fund company accepts their miscommunication (but not specifically) and my client is facing a denial of tax deduction $24,840.95 that she/he made for FY2019 income tax return and at the risk of a big tax bill due to the above.
The Old super fund made a serious mistake/miscommunication which resulted in not being taken as tax deductible super contribution.
I understand it is complicated because super balance was rolled over to other super fund later time. That is why client is submitting the complaint to AFAC.
If the client wins the case, will or can super fund be made responsible for their mistake and rectify the issue?
Will the ATO do anything regarding the mistake of super fund company?
Is there anything a tax agent can do to support their client in relation to dealing with the ATO?
Answer
The change of super funds is the complicating factor because if:
- The 15% contributions tax was not deducted by the former super fund.
- XYZ super cannot rectify the error as it relates to 2019 because they did not receive the contribution.
- It now is a case of what has actually transpired.
- Was the contribution dealt with by the old super fund as an allowable deduction with 15% tax being deducted?
- If not, then the error and/or miscommunication cannot be rectified.
Not a great outcome for your client and we are very sorry. The ATO is bound by the law.
While we are not willing to speculate on your client’s prospects with their complaint to the AFAC … if it is found your client has sustained an economic loss through the negligence of the super fund they may be entitled to receive compensation.
Question 5
As a professional Chartered Accountant in practice I have been asked on many occasions as to the following that there is no real guidance by the material released by Government to the following:
Paying the JobKeeper allowance to employees does this payment attract:
- Accrual of Holiday Pay
- Sick Pay
- Super fund contribution
Also, on the Cash Flow contribution by the Government, what are the true criteria that the Government uses to assess the eligibility?
If I can get some clarification it will be appreciated.
Answer
This taxable payment received by the employer maintains the employment relationship and entitlements such as annual leave and sick leave will continue to accrue. The Fair Work Act JobKeeper provisions mean a qualifying employer can:
- Request an eligible employee to take paid annual leave (as long as they keep a balance of at least two weeks)
- Agree in writing with an eligible employee for them to take annual leave at half pay for twice the length of time.
To make an agreement about using annual leave under the Fair Work Act JobKeeper provisions, a qualifying employer needs to:
- Qualify and enrol in the JobKeeper Scheme
- Be entitled to JobKeeper payments for the employee to whom the agreement applies
- Be a national system employer in the Fair Work system
Agreements under the Fair Work Act JobKeeper provisions can only be made about using annual leave, not other types of leave.
Currently any agreements made under the new JobKeeper provisions end on 28.9.2020. Refer also to the article on page 2.
If an employer asks the employee to take annual leave, the employee has to consider the request. They cannot unreasonably refuse it.
Employees who are on annual leave continue to accrue their usual leave entitlements while they are on leave, and the period of leave counts as service.
Superannuation
For payments (or parts of payments) to employees in excess of an employee’s usual wages, superannuation is not required to be paid. This situation may arise where:
- An employee’s usual wages are less than $1,500 per fortnight (superannuation would be payable on the part of the $1500 payment necessary to cover the employee’s wages, but not on ay windfall balance); or
- Employees have been stood down without pay (superannuation will not be payable on the $1500 JobKeeper payment paid to employee as it is not paid as ordinary times earnings for work that has been undertaken).
Otherwise employees will be entitled to statutory superannuation.
We trust this helps.
Question 6
The facts of the matter are as follows:
- Commercial property owned by SMSF,
- SMSF is in full pension,
- SMSF has engaged a real estate agent for management for the property for a percentage of the rent.
My questions are:
- Is it okay for the lessee to pay the rent into the account of the real estate agent company?
- In other words is it legal for the real estate agent company (engaged by the SMSF) , to collect the money on behalf of the SMSF and once they have taken their commission, they transfer the remaining balance into the account of the SMSF?
Answer
We take it that the Real Estate is not an associated party.
This means any relative or business partner of SMSF’s members and/or their families.
On the basis these are arms’ length, commercial dealings then there should not be a problem.
Of course, you would want to establish that you are dealing with a properly licenced real estate agent and that their trust account is independently audited annually.
Question 7
JobKeeper Payments – In respect to SGC superannuation, could you please clarify:
- Is it applicable only on the excess wages over and above the $750.00 per week?
or
- On the hours actually worked.
Naturally, it is assumed that it would not apply to any Top up.
Answer
Superannuation remains payable on ordinary times earnings not the excess over $750 per week.
Using the concept of ordinary times earnings, you are right in saying it is not payable on any top up.
Is superannuation payable on JobKeeper Payments?
Whether superannuation is payable depends on an employee’s salary.
Superannuation is payable according to ordinary rules for payments to employees for ordinary time earnings (even if the funds for those payments are received through the JobKeeper Payment scheme). Therefore, superannuation is still payable for payments made to cover an employee’s usual wages.
Scenario 1 – If an employee ordinarily receives $1,500 or more in income per fortnight (before tax) and is still working: The employee will continue to receive their regular income according to their prevailing workplace arrangements. The JobKeeper Payment subsidy will assist the employer to continue operating by subsidising all or part of the income of the employee.
For example, Anne is a full-time employee who ordinarily earns $3,000 per fortnight before tax. As a result of JobKeeper Payment, her employer continues to pay her $3,000 in wages, but will be reimbursed $1,500 from the government. This means the employer will only pay Anne $1,500 of the $3,000 salary from its own pocket.
Using the example of Anne above, because she ordinarily receives a fortnightly payment of $3,000, superannuation will be payable on her entire salary (even though $1,500 of her salary comes from JobKeeper Payment).
However, based on the information to date, superannuation is not payable for payments to employees which are in excess of an employee’s usual wages. The Government has said that ‘it will be up to the employer if they want to pay superannuation on any additional wage paid because of the JobKeeper Payment’.
Scenario 2 – If an employee ordinarily receives less than $1,500 in income per fortnight (before tax): The employer must pay their employee, at a minimum, $1,500 per fortnight before tax.
For example, Nick is a permanent part-time employee who earns $1,000 per fortnight before tax. His employer continues to pay him $1,000 per fortnight before tax, plus an additional $500 per fortnight before tax, totalling $1,500 per fortnight before tax. The employer will then receive $1,500 per fortnight before tax from JobKeeper Payment which, in effect, subsidises Nick’s entire salary. Nick is $500 better off under this scheme than otherwise.
Using the example of Nick above, the employer will be required to pay the superannuation guarantee on the $1,000 per fortnight of wages he is earning. However, it has the discretion whether to pay superannuation on the additional $500 (before tax) paid under the JobKeeper Payment.
For employees who have been stood down without pay, superannuation is not payable on the JobKeeper Payment.
Question 8
A married couple purchased a house in 1982 (i.e. pre-CGT). In 2008, they moved interstate to look after the husband’s mother.
Their home has been rented continuously since 2008, and they continue to live in rented accommodation interstate (i.e. their PPR). They own no other property and the property is not geared.
In 2019, the house remained tenantless for 135 days, and the property manager has warned them to expect worsening rental conditions going forward when the current lease expires at the end of 2020.
The couple would prefer to leave the house vacant, but doing so would mean they would be faced with a $9,000 vacant residential land tax.
The couple are wondering whether they can rent the house to themselves paying at the lower end of the going market rate, leave the house vacant with no personal use, but possible ‘free’ short term stays by family and friends whilst declaring the rent as income and also continuing to claim depreciation of assets as is being done at present.
Answer
If they rent the house to themselves then there is clearly no landlord/tenant relationship.
In the event this comes to the attention of the ATO, this cannot be effective.
If the property was genuinely on the market for only 15-20% in excess of the standard rent for such a dwelling, then it may not be rented out.
However, it must be genuinely on the market (with evidence available) and there is the possibility a suitable tenant might apply.
In the event of this happening…. It could be viewed as a windfall gain.
In the event the property is not rented out then it is mission accomplished.
Question 9
Here is my case…
GST registered company buys Motorhome for $127,000.
The company intends to rent it partial out or using it to visit clients as the restrictions due to COVID19.
- Will this stand up for GST/Income TAX purposes?
- Is there a limit like for Luxury cars?
- What are the requirements that need to be met e.g. logbook, issuing GST invoices when renting out, what is deductible when using for own company?
Answer
Here you can expect the ATO to be sceptical in the event of an audit. You will be expected to have detailed records outlining the percentage of business use and the commerciality of that business use.
For example, if the motor home travels 900kms to have a short meeting with a prospective small client or existing low $ client at a popular tourist destination, you can expect the claim to be denied.
Clearly an attempt is being made to justify business claims which relate largely to lifestyle decisions.
However, if the travel consistently related to a schedule of well-planned visits showing a full calendar of meetings, demonstrating sound commercial outcomes, there would be a better prospect of success.
Detailed records would need to be kept – ambit claims would be likely to be disallowed.
We note in passing that business has been less mobile during Covid 19 and that zoom meetings have proved highly effective and productive…
You could claim up to the $150k instant asset write-off but it is suggested there would need to be a substantial adjustment for personal use.
Further, unless the enterprise is in the business of renting out motor homes, then rentals would be deemed to be passive income.
There would need to a be a further reduction for the time the motor home was not used for business and was available for rent.
The above comments also apply to the GST claimable on purchase as well as the future outgoings and expenses.
Question 10
I was checking the published information from bO2 site but could not find the content about summary regarding the “Tax on super death benefits – Paid to estate vs beneficiary”, which can be very useful.
Would you please advise if you already have this topic covered in any of the past published document? If yes, please forward it to me or advise me which one it is.
If we do not have one, it will be great to have the summary or table explaining regarding the “Tax on super death benefits – Paid to estate vs beneficiary (i.e. adult)” with current tax rates.
Answer
This is a very timely and helpful question ahead of bonus issue 108 due in December.
We cover binding nominations, superannuation death taxes and estate planning on pages 39 and 42-43 in bonus issue 102.
However, we only cover the tax implications of the superannuation benefits going to a dependent (generally nil)) versus a nondependent (generally 17% or 32%).
This rate of tax is determined as to whether the payment is from the taxed element (17%) or untaxed element (32%).
We also outline the opportunity to pay out the benefit to the fund member while he/she is still alive in the event of terminal illness which should not attract tax.
The safest way to avoid death taxes may be to leave your super to your Estate and put a Superannuation Testamentary Trust in your Will.
We think this what you are driving at and we will cover this is in detail in issue 108.
Question 11
A client of mine was a beneficiary in a will of two blocks of land in which his share 50%. Prior ownership was for a considerable time and there was no reliable value put on the land until disposal by my client.
He received $50,000 on disposal.
Are there any capital gain implications?
Answer
Yes, there are potential capital gains tax (CGT) implications.
If the land was purchased by the deceased prior to 19.9.1985, then your client is deemed to have acquired it at market value at the date of death.
If the land was disposed of shortly thereafter then there should not be a problem.
If not, then a reasonable attempt needs to be made to calculate the capital gain – reference could be made to local real estate agents or registered valuers.
If the land was acquired after September 1985 then your client is deemed to have acquired the asset at the amount paid by the deceased on purchase.
This is readily ascertainable from the relevant State Titles Office.
Of course, purchase costs including stamp duty and legals need to be considered when calculating the cost base. Also selling costs.
Question 12
I am seeking some advice regarding the GST implications concerning land that is subdivided and sold.
My clients are a husband and wife partnership and operate a primary production business growing fruit and a secondary enterprise renting commercial properties.
The partnership has an ABN and is registered for GST in relation to both enterprises.
They also hold several residential properties that are rented to tenants.
One of the residential properties has been owned since 1995 and they are considering demolishing the old house and subdividing the land.
They do not intend to sell each subdivided block at the same time and are likely to spread the sales over several years, mainly to spread any CGT issues.
They have substantial borrowings and intend to use the proceeds of sale of the blocks to reduce debt.
This property is not a business asset involved in either of their business activities.
They have not subdivided and sold blocks before. They would not be building any houses on these blocks and then selling them as a land & house package.
I understand that vacant land sold with the “potential” for a new house to be built may be subject to GST.
My question are as follows:
- Is the sale of vacant land that has the potential for new houses to be built automatically deemed subject to GST?
- If not, what are the circumstances where GST would not be applicable?
- As they would be simply re-organising their investment portfolio, does this influence the issue?
- Does the fact that the land is not a business asset affect the issue?
- Currently, the commercial rentals received are less than $75,000 pa. Would cancelling their GST registration have any effect?
- Do you have any suggestions?
Answer
To answer your questions:
Q1 and 2: The ATO in Miscellaneous Tax Ruling MT 2006/1 considers when an isolated property transaction would result in carrying on an Enterprise. This hinges on whether the land was purchased with the intention of resale at a profit – this would constitute an enterprise. As in your case it would appear the land was purchased as a long term holding, we now consider other factors.
Q3 and Q4: Both circumstances assist the argument of being the mere orderly realisation of an asset.
Q5: The fact that the Partnership of husband and wife is registered for GST is a complicating factor. While you have not considered the primary production turnover, it is accepted that this is GST free. Deregistration from GST may be helpful.
Q6: Carefully review MT 2006/1 which provides comprehensive guidance and contains examples – if still in doubt seek a private ruling from the ATO. You may wish to also review the ATO’s Register of Private Rulings on the subject which shows views which are inconsistent and arbitrary – this really is a grey area… Note that private rulings only apply to the recipient. In supplying the information to the ATO for the Private Ruling consider case law and the guidelines laid down by the ATO.
Question 13
A client of ours has had an employee quit without any notice. Are they able to withhold 1 weeks’ pay?
Answer
They can only withhold 1 week from the employee’s accumulated annual leave. It cannot be withheld from wages for time worked.
Question 14
I own a Practice that is on track to be purchased by a corporate entity which will continue the practice name and business as before, while employing myself and my staff under new contracts.
This is planned to occur late August 2020. The corporate purchaser will be listing a new company name and operating it under this company name, with the same public business name it has always had.
My employees will therefore no longer be employed by my old company, but by the different company, owned by a different entity entirely.
My question relates to my ability to reward very long serving employees with a cash payment that is tax-effective both for them and for myself. I believe I may be able to pay them a redundancy payment with a tax-free limit.
This is calculated from a “base amount” of $10,989 plus a “service amount” of $5,496 which is multiplied by years of service.
Genuine redundancy payments are tax deductible to the employer as well as not assessable for the employee.
My question is whether in my circumstance the ATO will regard such a payment as a genuine redundancy payment?
This is a genuine business sale, with my company no longer employing the employees and myself and my employees becoming employed by another company.
But the business itself will still trade uninterrupted and in this case, the ATO may seek to “look through” the change in entity structure.
Can you give me more clarity as to how the ATO may treat my circumstances?
Answer
Taxation Ruling TR 2009/2 provides guidance in this area.
There are four basic conditions to be met:
- The payment being tested must be received in consequence of an employee’s termination
- The termination must involve the employee being dismissed from employment
- The dismissal must be caused by the redundancy of the employee’s position
- The redundancy payment must be made genuinely because of a redundancy.
All the above would appear to apply here for your arm’s length employees.
However, the situation is not so clear for working directors – particularly if your company continues to operate (see example 6 in the ruling).
The figures you suggest are correct.
Question 15
I received the information from client regarding rental property. This was done by previous tax agents for my client.
Building cost (warehouse) is depreciated at 2% using the diminishing method (no other depreciable item). In my understanding, depreciation rate for capital works generally should be either 2.5% or 4%. Do you know any case of 2% (2% for diminishing method – it means 1% for prime method)?
It was not an accounting entry as the same depreciation amount was used for partnership tax return as well.
– Capital works-special build w/off value was depreciated @ 2% (diminishing method)
Client paid the special levy for roof replacement. Shouldn’t this be depreciated at 2.5% (prime cost method) from the payment date?
Do you think this is possibly a mistake? I think I should update it to 2.5% for past periods. Am I allowed to add the back-dated depreciation amount in next financial period’s tax return?
Answer
The figures you suggest for the capital allowance are correct.
It is possible that you are referring to accounting entries – estimates of useful economic life as opposed to what the Commissioner allows as a tax deduction.
Some entities have two depreciation schedules – one for accounting purposes and one for the tax return with the rates varying on the above basis.
You are right about the roof – a replacement does not constitute a repair and the capital allowance claims should be made at 2.5%.
If the previous roof was listed in the capital allowance schedule this can now be written off.
It is an error and you should go back and make the changes if they fall within the permitted timespan – generally two years from the date of assessment for an individual or four years for a business.
Technically you should go back and amend the relevant tax returns – having said this in practice sometimes these amendments are done in the current year.
Question 16
Scenario: ” A client recently purchased an Accounting firm for $250,000 which settled on 4th of June 2020. On the contract of business purchase the following assets are listed.”
- Computer Equipment – $10,000
- Client List/Books Records – $220,000
- Goodwill – $20,000
My question:
Is Depreciation/Amortisation claimable for tax deduction purposes for any item of the assets listed above?
The previous owner has already claimed 100% depreciation on the computer equipment and the value of client list/books and records is calculated based on the last year gross fees.
Answer
The computer equipment valued at $10,000 may be written off.
It is irrelevant that the assets have been written off by the vendor.
The remainder is essentially goodwill and there is no tax deduction for this – the entire amount should be capitalised.
Question 17
Our Operations Manager is stepping down from his position due to health concerns. We have offered him a new position in the warehouse which he has accepted. However, a question regarding the value of his accrued holidays has come up.
In moving position, upon transition, his new hourly rate is lower than the current rate he is being paid as Operations Manager.
When the Operations Manager moves to the new position and lower hourly rate, what happens to the value of the accrued leave? Does it transition to the lower rate or is it kept at the higher previous rate when he was employed as Operations Manager?
If the Operations Manager is currently being paid $40/hour and has 10 weeks holidays accrued, at the moment his holidays would be paid at this rate (and paid out at this rate if requested).
Once transitioned to the new position, let us say his new rate is $30/hour, are holidays now paid at this rate or the higher amount?
If the higher amount, would this mean that if he were to take holidays, he would get paid his previous hourly rate, instead of the new lower rate? If holidays were paid out would they get paid at the higher rate rather than the lower rate?
Answer
Annual leave if paid prior to the new role would be subject to the Fair Work Act 2009 or relevant award or JobKeeper provisions but if it is paid out prior to him taking the new role then it is at the higher rate.
His annual leave is paid at the salary/ wage he is on at the time he takes it. So, if he takes annual leave after changing into new role and it only pays $30 per hour then that is all his annual leave is paid on.
Question 18
Regarding the JobKeeper payment, as an eligible business participant. How does the director take the money out from the company? As wages, dividend, or director loan?
If we are to take the money as wages and pay PAYG on it, would that be a problem? Because in the eligibility criteria on ATO website, it states that the business participant must not be employed on 1st March 2020. (does it mean that the director then can be employed by the entity after 1st March 2020?)
Answer
As you rightly point out there is a choice for a business owner/company director.
You need to carefully consider the tax implications of each choice.
In the event the company has tax losses and/or franking credits, dividends could be a good choice.
Directors’ loans could be repaid if the company does not need the tax deduction and the company owes the director money i.e. no Div 7A issues.
On the basis the director was not employed on 1.3.2020 but shortly thereafter wages may also be an option.
It is essential that PAYG be deducted from wages.
Question 19
Am trying to find out for my client about the latest on the above mentioned, (X Ltd) – all I can find is that it seems that someone is trying to sue the Estate of the founder.
Client wants to cement a capital loss for use against a potential capital gain this year.
It is my understanding that they need a final letter from the Liquidator before they can do this.
Any advice/direction on finding out the latest on this would be most appreciated.
Answer
The Responsible Entity, X Limited is still under external administration.
The status of your client’s investment may depend upon the year the client invested.
PWC are the administrators and if you are able to get a letter from them declaring the shares or financial instruments are worthless or have negligible value, you may be able to claim the capital loss in 2020-21.
Refer to the PWC website.
Question 20
I have a question regarding sick leave during annual leave.
If during annual leave, an employee becomes sick or needs to care for someone, does the leave stay as annual leave or should it be changed to sick leave?
Answer
It becomes sick leave and not annual leave.
Question 21
Personal Leave
- Previously sick leave was 8 days per year and if the sick leave what not used within the year it dropped off. We have workers that have been with the company at least 10 / 15 years. Can you please advise when Personal Leave actually started accruing? I can only find the Fair Work Act 2009 where it says it “can” accrue not “must”.
- So, if I must go back and calculate the personal leave accrual, what start date will it go from?
- Is there a “Cap”. Previously I thought there was a maximum number of days that Personal Leave can accrue to (i.e. 3 / 6 months). Is there a maximum number of Personal Days?
- Is there a maximum number of Personal Leave time that can be taken in succession? (please assume the worker has been with the company for at least 15 years).
3.1. If so, can the worker then use the remaining days the following year?
Casuals
- Are Permanent Casuals entitled to Long Service Leave? Again, we have casuals with permanent hours that have with the company 10 / 15 years. Will I have to calculate LSL for these workers?
4.1. If so, can you see any ramifications if I transfer them to Part Time employees, which will drop the hourly rate, but be entitled to HP & PL. Can I then calculate the LSL on the hourly rate at time of employment being the Part Time rate?
Answer
Personal Leave
Q1. If they were covered by Federal Awards it was in 1996 that sick leave went to 10 days, if they were covered by Queensland state awards it was 2009 that sick leave increased to 10 days.
Q1.1. 01 January 2009 for state based and 30th June 1996 for federal employees.
Q2. No cap from 1996 Federal/2009 state, the state was a maximum of 13 weeks before 2009.
Q3. They can take as much leave as they have accumulated as long as they have a medical certificate.
Q3.1. Yes.
Casuals
Q4. Causal employees are entitled to LSL since 30 March 1994. For accumulation see link:
Q4.1. If the employees wish to transfer to part time by mutual agreement that is fine then they are entitled to be paid whatever rate of pay they are on when they take the leave, but accumulation would need to be done as per the link in question 4.
Question 22
My question relates to compensation payment for land resumed by government.
We own a holiday unit (not main residence) in a residential building. The government resumed a portion of the common land of the body corporate to widen the main road. The land resumed was part of the swimming pool/recreation area. All owners received payment as compensation with the statement “for loss of amenities”.
My query is – is the compensation amount taxable to us? If so, is it capital gains- declared in the year received?
Answer
You are correct. It is a taxable capital gain assessable in the year of receipt.
Given there can be no replacement asset, there is no prospect of a rollover to defer the liability.
As there may be other issues at play, I would check this with the Body Corporate as they would have received advice on this.
Question 23
Is there any tax or stamp duty payable If a trading company is sold while the shareholders keep its subsidiary?
If you sell the business and the name of the trading company (but keep the shares) can you under such conditions keep the subsidiary (which own properties) without having to pay CGT or S/D, because if not then you would pay these tax & duty to buy something you indirectly own.
Answer
If you sell the shares in the trading company then you lose the subsidiary because it is the head company that holds the shares in the subsidiary.
It is for this reason that we think you are referring to the sale of the business by your head/trading company and not its shares.
This is the only way the shareholders keep its subsidiary.
Stamp Duty applies as the sale of a business is a dutiable transaction and the rate will depend on the state in which the business is located.
As long as all of the things required for the continued operation of the business are sold, then GST may not be chargeable under the going concern exemption.
A subsidiary company owned by the holding or trading company continues to own the properties.
The trading company continues to own the shares in the subsidiary so there are no concerns with a change of ownership in “land rich” corporations.
The sale of the business is irrelevant.
It is clear there has been no change in beneficial ownership and there are no stamp duty concerns.
As this is a major transaction, it is essential you get legal advice on these issues.
Question 24
My client purchased their principal place of residence property all-in for $600,000 in 2014 with $450,000 of bank debt.
The value has increased since 2014 and they have refinanced the bank debt to $750,000.
All the bank debt refinance top-up proceeds have been deposited into an offset account as have all additional savings. Consequently, my client has $700,000 cash in their offset account which they now intend to reinvest into another property asset.
They live in the current property as their principal place of residence.
I have advised my client not to use the funds from the offset for the next investment. Instead, I believe they should split the current loan into a $700,000 limit and $50,000 limit and pay $699,900 into the redraw of the $700,000 limit then redraw these funds to buy a new property, as the interest would then be permitted to be deducted against the income of the new investment.
Please can you confirm my understanding is correct? If my client were to subsequently move out of the current property and no longer use it as his PPR would this have any tax implication on the deductibility?
Answer
The fundamental test for deductibility of interest as consistently applied by the Courts is the “use test” i.e. the use to which the funds have been put.
The asset used for security or the flow of funds out of a carefully chosen account does not overcome this.
In this instance at least $450,000 of the initial money has been used to purchase the principal place of residence (PPR) which is not tax deductible.
The ATO will go back and trace transactions in situations such as these.
There can be real problems with split loans in these cases.
However, if there is $700k in available funds that is solely used for the purchase of the investment property, then we suggest the interest is deductible.
To answer your question… if the clients moved out of the existing PPR and rented it out, the interest relating to your original purchase would be tax deductible.
However, interest on funds drawn down for private purposes such as holidays, lifestyle items is not tax deductible.