The Newsletter
Recent Tax Developments
RETIREMENT ANNOUNCEMENT
It is with warm wishes that we announce that after years of service, our dedicated and hard-working technical writer, Leigh Bernhardt, will be retiring from our publication. Leighs leaving marks the end of an era as his team have been with bO2 Corporate Essentials Pty Ltd since 2011.
Leigh developed many of the resources we now consider the backbone of our product line. We are indebted to his vision and commitment for propelling us to our present position in the industry. His work has assured our success.
We are very excited for Leigh; however, he will be greatly missed here at bO2. His positive attitude and abundance of energy have helped make our office a pleasant place to work. His co-workers also recognise Leigh for being an all -round really great bloke.
While Leigh’s retirement is our loss, he is setting his sights on a well-deserved retirement and spending more time with his recently retired wife, Sandra and their family.
We cannot thank him enough for his contributions.
Leigh’s Corner to become Michael’s Corner…….
We’re pleased to announce that we have appointed Michael Corrigan to take over the reins from Leigh as our new HR/IR and WHS specialist writer and advisor.
Michael is a truly exceptional find in this industry. Bringing decades of experience to bO2 and our members. As well as being a published writer he has an impressive and well-rounded record of over 20 years of human resource and industrial relations experience in public and private sector management, together with experience in the trade union movement. This gives him particular insight into varying and changing workplace issues.
Michael has dealt with a wide range of Industries and is able to provide specialist advice in the Public Sector, Architecture, Construction, Manufacturing, Transport, Hospitality, Retail, Telecommunications, Public and Private Hospitals, Finance, Airlines and Community based organisations.
With his vast amount of experience in Industrial Relations across Australia, Michael has appeared on behalf of clients in the NSW, Queensland, Australian Industrial Relations Commission, Anti-Discrimination Commissions and WorkCover reviews on a raft of issues. Matters appeared for on behalf of clients include but not limited to disputes, wages recoveries, unfair dismissals, award variations, negotiations, discrimination claims and WorkCover Claims.
Michael’s appointment is a clear reflection of our company’s current state; ready to take on the future and fired up after another strong year of growth and success.
Again, a warm welcome to Michael!
ATO RESPONDS TO GLENCORE DECISION
On 3.9.2019, the Federal Court issued a decision on whether dealings between Swiss-based Glencore International AG and an Australian subsidiary breached transfer pricing rules in relation to the sale and purchase of copper concentrate in the 2007 to 2009 years.
The case considers transfer pricing rules (Subdivision 815-A) the object of which is to ensure related Australian and non-resident entities are taxed consistent with the arm’s length principle. The Commissioner had argued before the Court that amendments made to an agreement between Glencore International AG and its Australian subsidiary were not arm’s length dealings. The Commissioner had issued Glencore with three sets of amended assessments that arose as a consequence of this.
The court rejected aspects of the Commissioner’s interpretation of the relevant transfer pricing rules. In doing so the court found that the terms operating between the Australian copper mine and its Swiss trader parent to calculate the price at which the mine sold its entire copper concentrate production were within an arm’s length range.
“The most significant issue in multinational taxation is ensuring that the Australian arms of companies have arm’s length dealings with offshore related parties. Transfer pricing rules ensure these transactions are priced fairly and that multinational companies do not underpay tax in Australia,” Deputy Commissioner Jeremy Geale said.
The ATO will consider this decision and whether an appeal is appropriate.
You may recall that on 14.8.2019, the High Court rejected a move by Glencore to stop the ATO using leaked documents to assess its tax bill.
The High Court ruled unanimously that Glencore could not use “legal privilege” to prevent to ATO accessing key documents.
LOW INCOME EARNERS MAY NEED TO LODGE
If your taxable income is under the tax-free threshold of $18,200 (before offsets) they may still need to lodge a tax return. Common reasons for this include, if you:
- Had pay as you go (PAYG) withheld from payments received during the year.
- Had a reportable fringe benefits amount on their income statement or PAYG payment summary.
- Had reportable employer superannuation contributions on your income statement or PAYG payment summary.
- Made a loss or can claim a loss made in a previous year.
- Were an Australian resident for tax purposes and had exempt foreign employment income and $1 or more of other income.
- Were entitled to the private health insurance rebate but did not claim your correct entitlement as a premium reduction.
- Were a liable or recipient parent under a child support assessment unless both of the following applied:
- -You received one or more Australian Government allowances, pensions or payments (listed on the Individual tax return instructions 2019;
- -Your income was less than$25,038.
Burton v. Commissioner of Taxation (2019) FCAFC 140 22.8.2019
In an interesting case, the Full Federal Court unanimously held that Australian taxpayers entitled to the 50% capital gains tax (CGT) discount only receive a foreign income tax offset (FITO) in respect of half of the US tax paid in respect of gain. By majority, (Logan J dissenting) it decided that article 22(3) of the Australia-US tax treaty did not operate to alter this result.
The taxpayer, in the relevant years was an Australian tax resident. In the 2011- and 2012-income years, he was presently entitled to capital gains made by the trustee of a discretionary trust on the disposal of US assets. The entire gain was subject to US tax, at a concessional rate of 15%.
In Australia, the gain also was treated in a concessional manner, but the mechanics of the calculation differed to the US tax rules. Burton was subject to Australian tax on only half of the gain (due to the 50% CGT discount), which was then subject to Australian tax at normal marginal rates. In calculating the amount of Australian tax payable, Burton sought to apply a FITO for all US tax paid in respect of the underlying disposal of US assets. The ATO argued that he was only entitled to a FITO for half of the US tax paid, given only half of the gain was included in his Australian assessable income.
The court held that this followed from FITO rules that provide that a FITO is available where foreign tax was paid “in respect of an amount that is all or part of an amount included in his assessable income for the year.”
Burton also advanced the argument that article 22 (Relief from double taxation) of the Australia-US tax treaty effectively required that Australia grant a credit for the full amount of US tax paid. As mentioned above on a 2-1 majority basis, the majority held that the reference to “income” in article 22 is to be construed with regard to domestic legislation. As such, because only 50% of the gain was assessable in Australia, article 22 only required Australia to allow a credit for half of the US taxes. As a result, there was no inconsistency between article 22 and the FITO rules.
Given this split decision on the treaty issue, Burton may consider seeking leave to appeal to the High Court, and we will keep you informed on developments.
AAT RULES AGAINST TRUST DISTRIBUTION
Ariss and Commissioner of Taxation (Taxation) [2019] AATA 2598
This case dealt with the following issues:
- Whether trust distributions are ordinary income and/or personal services income.
- Whether part IVA applies.
- Entitlement to income tax deductions.
- Whether applicant entitled to clerical deductions for income attributed to spouse.
- Whether deductions were an unreasonable amount paid to a related person.
- Whether applicant was entitled to deduction for payments made to an associate.
- Whether applicant was entitled to deductions for personal superannuation contributions.
- Entitlement to income tax deduction for travel expenses where reimbursement already made.
- Whether respondent was out of time to amend assessments.
- Limited amendment period.
- Whether applicant beneficiary under a trust.
- Whether any person entered into or carried out a scheme for the sole or dominant purpose of the individual obtaining a scheme benefit.
It is standard practice to set up a trust or company to structure business or professional affairs. The tax rate for small companies (27.5%) compares well with the top personal tax rate of 47 per cent (including Medicare levy).
Income from a trust or company may be distributed to different parties, who may also have lower tax rates.
However, the personal service income (PSI) rules, which are designed stop people diverting income from “personal services” through companies, partnerships or trusts need to be considered.
Broadly, income is classified as personal services income when more than 50% of the amount received under contract is for the individual’s labour, skill or expertise. A number of other tests can be applied.
In the years ended 30 June 2010 to and 2013 inclusive, Mr Ariss provided services to Wesfarmers Coal Ltd, Fusion Applications, Wesfarmers Resources and Premier Coal.
In the relevant years, Mr Ariss and his wife lodged tax returns declaring distributions of trust income from Agency Resource Management Services (Global) Trust (ARMS). The distributions were the amount invoiced by ARMS to clients for Ariss’s work which clearly, stated “for professional services rendered by Terence Ariss.”
The income split was 70% to Mr Ariss and 30% to his wife.
In 2013, the tax returns were audited by the ATO with amended assessments issued attributing the trust distributions as solely assessable to Terence Ariss as salary and wage income.
Mr Ariss objected to the amended assessment and it and it was up to the AAT to determine how Mr Ariss’s income was to be characterised. The AAT considered the nature of the business, the relationship between Ariss and ARMS and the role undertaken by Ariss’s wife.
Mr Ariss worked on a daily rate which was not dependent on the completion of a project. If a project was not completed, the payments were still made.
The work was undertaken at home in a dedicated home office which had no other purpose.
While Mr Ariss acknowledged it was his work clients were paying for, it was contended he would not have been able to manage his client workload without his wife’s involvement in managing his contacts and his schedule. Mr Ariss prepared documents, conducted research on Oracle software changes, and administered accounts rendered.
Mrs Ariss was given 30% of the income, irrespective of the hours worked during each payment period.
The AAT used the “results test” to assess Ariss’s income. This stipulates income will not be personal services income if: the income is for producing a result; the individual is required to supply the plant and equipment, or tools of the trade, needed to perform the work; and the individual is liable for the cost of rectifying any defect.
The AAT determined Mr Ariss was paid for performing work and providing services, rather than producing a result meaning the results test was not met.
Mr Ariss also failed the “unrelated clients test”. This requires that an individual’s services are provided as a result of them making offers or invitations to the public at large to provide the service.
The “employment test”, which requires that an individual engages one or more people to perform work was also not met. The AAT tribunal ruled that Ariss had no formal employment arrangement with his wife and she was, in any case, an “associate” for the purposes of the test.
It ruled that Ariss was not able to establish that the ATO’s amended assessments were excessive or otherwise incorrect.
HIRING WORKING HOLIDAY MAKERS
This is an issue many employers face each year as approximately 100,000 working holiday makers are employed in Australia.
When a new employee ticks the box at question eight on their Tax file number declaration form declaring they’re a ‘working holiday maker’, you need to:
1.Register
Anyone can hire a working holiday maker but first you’ll need to register to apply the 15% working holiday maker tax rate and declare that you’re aware of your obligations. This includes checking your working holiday maker’s visa status and complying with the Fair Work Act 2009 (where applicable).
If you don’t register you must withhold tax at the foreign resident tax rates and may be subject to penalties.
If you require assistance contact us. Alternatively, or you can register yourself using the ATO Working holiday maker employer registration form online before you make your first payment to them. You’ll need your:
- Australian business number (ABN)/Withholding payer number (WPN);
- entity type;
- contact details.
2.Check visa
Confirm your working holiday maker has a valid visa (subclass 417 or 462) by using the Visa Entitlement Verification Online (VEVO) service.
Your employees can do this for you online, or via the myVEVO app, and send you an email verifying their details.
3.15% working holiday maker tax rate and super
Once you’re registered you can withhold 15% from every dollar your working holiday maker earns up to $37,000. The tax rates change for amounts above this.
You also need to pay eligible super contributions as you normally would. Working holiday makers can claim these super payments back when they leave Australia.
ATO REVIEW OF ITS UNCLAIMED SUPERANNUATION MONEY PROTOCOL
In August the ATO commenced a review of its current Unclaimed Super Money (USM) protocol. The protocol provides guidance under the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLMA) in relation to unclaimed money, lost member accounts, inactive low balance accounts, superannuation accounts of former temporary residents and the associated reporting and payment obligations.
While this review will make it easier for affected parties to navigate the ATO website, it is also a timely reminder for all of us to check whether we have any unclaimed superannuation. While you are at it you may also wish to check ASIC’s register of unclaimed monies, if not for yourself but for other family members.
NO LOSS ON REPAYMENT OF FOREIGN CURRENCY DENOMINATED LOANS
Sole Luna Pty Ltd as Trustee for the PA Wade No.2 Settlement Trust (“The Trust”) v Commissioner of Taxation [2019] FCA 1195.
In this Federal Court case it was held that the above Trust, did not incur a deductible foreign exchange loss on repayment of multiple foreign currency denominated loans that were advanced to a wholly owned subsidiary which were made when they were both non-residents. The Court held that the Trust had not incurred a foreign exchange loss as there was no evidence that Australian dollars were used as their respective functional currency and that the taxpayer expected to be repaid in Australian dollars. The Court also held that the Trusts had not incurred a capital loss because of the forgiveness of the balance of the Australian dollar denominated loan.
BENEFICIARY ASSESSABLE ON CASH DISTRIBUTION FROM TRUST
Campbell v Commissioner of Taxation [2019] AATA 2043
In this AAT case it was held that the taxpayer, a beneficiary of a New Zealand trust, was assessable under s99B of ITAA 1936 on a cash distribution received from a trust and the amount was not the corpus of the trust. The AAT found that the taxpayer had not provided adequate evidence to discharge their onus of establishing that the issued assessments were excessive. The trust records provided were inconsistent and therefore unreliable and there was no evidence before the AAT to corroborate witness history of the establishment of the trust and the characterisation of the money held herein.
If you are receiving funds from an overseas trust consider requesting financial records from the controllers to establish the character of the payments, if you receive corpus payments (non-assessable capital) the onus of proof is on the taxpayer in the event of an ATO enquiry.
Telgrove Pty Ltd t/as P & E Francis Plant Hire v Commissioner of State Revenue [2019] QCAT 199
Given the uniform legislation across most state jurisdictions, this case is relevant elsewhere.
The QLD Civil and Administrative Tribunal set aside the QLD Commissioner of State Revenue’s decision to refuse to make an exclusion order to exclude certain entities from a payroll group. The payroll tax and the penalty the taxpayer paid in full was refunded. The Tribunal took into account that matters favouring grouping (management control and commercial transactions) are significantly outweighed by matters favouring exclusion (lack of other material commercial transactions, lack of shared resources, facilities or services, different management structures, lack of financial interdependencies and lack of a connection between the nature of the businesses).
This case shows how far state jurisdictions can go with data matching to identify group entities which come to their attention. If you are close to the payroll tax threshold also consider that “salaries and wages” has a wide definition including super and fringe benefits. If you require any guidance in this area, please contact us.
$30,000 INSTANT ASSET WRITE-OFF
Businesses with a turnover up to $50 million are now eligible for the instant asset write-off. This applies to assets that cost up to $30,000 and were purchased and first used or installed ready for use from 7.30pm (AEDT) on 2 April 2019 to 30 June 2020.
Businesses may purchase and claim a deduction for each asset that cost less than the $30,000 threshold. For example, in the same financial year a business may purchase a new van worth $22,000 and then purchase new equipment at a cost of $14,000. The business can claim both of these as each of the assets are under the $30,000 threshold.
For assets over $30,000 the general depreciation rules apply.
THE ATO’s COMMERCIAL DEAL OFFERING
This program aims to provide certainty on the tax consequences of a proposed transaction before it is entered into.
ATO has advised taxpayers, it may be approached for an opinion prior to the taxpayer committing to a commercial deal. This offer targets privately owned and wealthy groups.
A commercial deal is defined as any significant business transaction that has the potential to impact the structure of the business. Examples given by the ATO includes the following:
- Demergers
- Divesting
- Financial and refinancing
- Initial public offerings
- Mergers and acquisitions
- Private equity
- Restructures
- Sale of business (partial or complete) or business assets
- Sale of commercial property
- Share buybacks
- Takeovers
Ideally the approach should be made pre-deal to work through the tax implications of the proposed transaction. Depending on timing factors it may be possible to provide practical certainty on the tax outcome prior to the proposed deal being completed.
The ATO may also be approached once a deal has been completed to determine how and when the transaction is reported for tax purposes. If an agreement is reached, the ATO will usually follow up the taxpayer to confirm that the transaction was reported as agreed.The aim is to eliminate penalties and interest that may have applied if the taxpayer had reported the tax consequences differently to the Commissioner’s view.
Clearly the benefit of the program is the possibility of reaching mutual agreement concerning the tax consequences prior to lodgement of a tax return, thus enabling tax disputes, reviews and audits to be avoided post-lodgement.
However, a taxpayer should consider the possible consequences of engaging with the commercial deals program but failing to reach agreement on the tax treatment of the transaction.
According to the ATO, 90% of the taxpayers offered this program have taken up the opportunity and that agreement has been reached 80% of the time.
THE PAY-AS-YOU-GO (PAYG) INSTALMENT SYSTEM
If you received gross business/investment income (instalment income) of $4,000 or more during any given tax year, you will probably receive correspondence from the ATO advising that you have entered the Pay-As-You-Go (PAYG) instalment system.
The PAYG instalment system serves as a method of prepaying the taxes owing in relation to your ‘instalment income’ throughout the year as opposed to waiting until you lodge your tax return and paying the taxes on assessment.
The ATO determines whether you are required to enter the PAYG instalment by reviewing taxable income (excluding net capital gains) reported on the last tax return you lodged and calculating the notional tax liability owing. Tax credits for taxes you have already paid (e.g. PAYG withholding taxes on your salary and wages) are then applied to reduce this notional tax liability,
The ATO system then estimates the taxes you will owe for the year ahead based on that ‘instalment income’ disclosed on your last tax return.
The ATO’s systems automatically issue PAYG instalment correspondence where sufficient levels of any Employee Share Scheme (ESS) income are disclosed on your Australian tax return. PAYG withholding is not deducted from ESS income.
You may choose to either pay the ATO calculated instalment or vary it to a more accurate amount or even to nil (if you are not expecting to receive any ‘instalment income’).
Note there are general interest charges and/or penalties which may apply where your variation is significantly incorrect.
bO2 READERS QUESTIONS AND ANSWERS…………..
Question 1
I have a query in relation to Payment Summaries.
We made a back payment to a number of employees in February 2019 which related to the period FY18, 01/07/2017 to 30/06/2018.
We have classed this as a Gross Payment on the Payment Summary and have already posted all payment summaries and uploaded the file to the ATO.
My query is should this back pay be shown in Gross payment or Lump Sum E? And are we required to re issue all payment summaries?
We have contacted the ATO, but they didn’t sound confident and therefore would appreciate your advice with this.
Answer
If a back payment of salary or wages that accrued in a period more than 12 months before the date of payment (February 2019) is made, the payment should be labeled at Lump Sum E.
The ATO may calculate a tax offset on these payments.
If the payment was for a period more than 12 months before the payment, payment summaries should be reissued.
Question 2
If a person works 100% from home (work for tech company) I can see that they can claim not only running expenses but also occupancy (they rent). BUT my question concerns their initial training. This involved them flying from Brisbane to Sydney to do intensive training in head office for a week. It was done at the employee’s own expense and they stayed with family for the week. Flights were also paid for by the employee.
Answer
Rent may be claimed as home office occupancy expenses if your employer does not provide an office. It is important that you apportion the rent between work-related and private use. The apportionment is usually based on a floor area basis (Taxation Ruling 93/30).
You can claim the cost of attending the training sessions that are closely related to your work activities. You may have to apportion the travel expenses between work-related and private purpose.
Question 3
I have a query regarding an employee who was sacked this morning. He started on the 03/06/19, so he is still under his 3-month probation. He has displayed several instances of bad workmanship and he has been absent from work a lot. He didn’t come to work Friday and Monday, his excuse being he was loading a horse into a trailer. He was not sick just didn’t want to come to work. My boss rang him last night and when he found out why he didn’t come to work he sacked him.
My question is: Does he need to be paid his 1-week notice? Also, as it was over the phone, will he still have to come in for a meeting.
Answer
Please see my comments below:
- There is insufficient information to provide accurate advice on this matter.
- Is the employee, casual, permanent part time or full time, on an employment contract, covered by a Modern Award or Enterprise Agreement.
- What are the terms of employment and notice periods in the letter of offer?
- Is there a disciplinary policy and/or termination policy in place, and if so, were all of the steps leading to termination followed, this includes warning the employee on probation that their employment may be in jeopardy if they fail to improve to the required standards?
- Was the process of dismissal in accordance with the Fair Work Act or the Small Business Dismissal Code (whichever is applicable).
- Was the employee afforded due process in the telephone dismissal, from the information provided it is unlikely.
These are serious matters, and failure to follow the correct procedure could result in Adverse Action or Unfair Dismissal claims, generally it is not recommended to terminate employment over the telephone unless there are mitigating or serious circumstances which can be proven beyond doubt.
Question 4
Re: Small Business Write off
A SMSF has a couple of commercial properties. Is registered for GST.
Net assets of $1,000,000.
They have purchased an asset to go onto the buildings of $19,990 (ex GST).
Is the SMSF able to claim the under $30k instant asset write off?
Answer
Self-managed super funds (SMSFs) are not prohibited from carrying on a business, but the business must be:
- -allowed under the trust deed;
- -operated for the sole purpose of providing retirement benefits for fund members.
It would come down to successfully making the argument that the SMSF is “in the business of” to be classified as a small business entity.
The sole purpose test is often the sticking point here, and we would advise against making the claim.
Question 5
We made a back payment to a number of employees in February 2019 which related to the period FY18, 01/07/2017 to 30/06/2018 and also in April 2019 which related to FY19, 01/07/2018 to 30/04/2019.
Should we be including the gross and the super for WorkCover to calculate our premium as it is based on the actual wages for the year even though these payments were one offs.
Answer
WorkCover rules are state based. We believe that you should report the back payments of wages and super on a cash basis (i.e. report in the year they were actually paid to the staff).
As far as forward premium estimates, you would only include payments that are reasonably expected to be incurred for that year.
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Answer
The Government has cut its private health insurance rebate contribution (marginally) but it should not have made that much of a difference at year end.
Ask the client to check the basis their insurer is calculating the rebate as obviously it is not matching with the ATO’s calculation.
Also, double check the codes used at the private health insurance section, remember the ATO assesses eligibility for the level of rebate based on Adjusted Taxable Income.
Question 7
A client purchased a block of land approx. ½ acre for his family home to be built on.
They were living in a rented home.
Marriage breakdown occurs and the block of land is sold.
The landowner/taxpayer is able to demonstrate that he intended to build on it with builders plans etc. Water, Gas and electricity are ready for connection upon construction.
Does the capital gain qualify for the main residence exemption?
I view that the intention to live on the land and that had they have built the planned house they would have claimed main residence exemption from the date the property was purchased if the property had been constructed.
The fact that the marriage breakdown occurs further adds to the property being thought of as the family main residence, (not being built yet) rather than an investment.
The ATO website says no main residence exemption for a vacant block. However, I think this is taken out of context, and should apply to a situation where a taxpayer has purchased a vacant block purely as a speculative investment and already has a main residence.
Your thoughts please.
Answer
Sorry to advise the main residence exemption will definitely not apply in this instance.
Question 8
Please advise on the following regarding payment of wages:
Where a husband is employed as a Sales Representative/ Manager and he is paid the relevant award wage or higher, is it acceptable to employ his wife on a Casual basis and pay her the sales commission or bonuses as a wage that would otherwise be payable to her husband ? The wife would not take an active role in the business other than being a home helper to the husband’s role.
Could this be an ancillary agreement (i.e. an extra remuneration) made after the original employment agreement undertaken with the husband (or may be not?)
Answer
Any employee is required to be paid the minimum award wages and conditions and also the conditions contained in the National Employment Standards (NES).
In the scenario supplied, the casual employee would need to be paid as a casual award employee with the 25% casual loading and a minimum payment per day or call in as a minimum.
The scenario proposed in my view would be in breach of the Fair Work Act and Award provisions.
The payment of sales commissions and their relativity to the applicable Modern Award and wages is complex and requires specific advice.
Any agreement made needs to meet the minimum award requirements and NES and be in the form of an Individual Flexibility Agreement (IFA) and meet the Better Off Overall Test (BOOT).
The Fair Work helpline may be able to assist.
(Tax) –frame of reference
In practice this does occur but as a responsible publication we cannot advocate this as the bonus is solely the result of the husband’s personal endeavour.
In the event of an ATO audit… if the payments could be clearly identified as the husband’s bonus payments then there could be amended assessments.
If you were able to have the wife perform some genuine tasks… perhaps of a marketing nature, then the remuneration paid to her would be a matter for you to determine.
This could be an acceptable outcome for all concerned.
Question 9
My client “Mr C” owns a Pty Ltd company. (S Pty Ltd) He owns 1 Ord Class share.
He wants to give some equity in S Pty Ltd to his employees, (A & B) who are unrelated to him.
He will give them J Class shares – no voting rights but can get dividends, that were created solely for being given to these staff.
He will give A & B each 10 J Class shares with a face value of $10 each.
What will be the journal entry to record the shares being issued?
Dr Unpaid share capital $200
Cr Share Equity J Class Shares $200
Is the Dr entry a loan to employees, as they did not pay for them? Is it a Div 7a loan?
Answer
The journal you suggest is acceptable.
I really don’t view this as an employee share plan question as the recipients receive nothing of real value.
A number of valuations have established that such shares are worthless.
The dividends the staff may or may not receive are entirely at the discretion of your client.
Arguably the shares may have some value on a members’ voluntary liquidation but that would depend upon the underlying net assets and the company’s constitution which would outline any such entitlements
This is a matter your client should carefully consider.
The uncalled capital on the shares has no Division 7A implications as the debit should be placed in the share equity accounts (not the assets) – in any case it is a paltry amount.
Question 10
Relating to CGT and a Property.
If a client initially lives in a house as principal place of residence and then moves out and it becomes a rental property, in determining the cost base for the property are the costs of owing the property (e.g. rates, interest on loan etc.) taken onto account for the period up to the date it becomes income producing ?
Answer
No… personal use assets cannot be eligible for third element cost base additions.
Land and buildings are excluded from the definition of personal use assets.
However, having overcome this we have another problem.
You are seeking third element cost base increases to an exempt asset which by definition (while it is exempt) does not have a cost base.
We refer you to ATO ID 2004/950 still technically valid but superseded by example 65 in the 2009 ATO publication “A guide to capital gains” with annual updates.
Effectively you can use the market value of the property as the cost base when it was first used to produce assessable income from:
-A qualified valuer
-Calculating a valuation based on reasonably objective and supportable data.
So, it would appear that you may still get the uplift to the cost of the home by using market value.
Question 11
One of the employees has retired. His remuneration package included company car. On his retirement he was allowed to retain the car with a market value of $34K as a gift. What is/are the right accounting/taxation treatment of this transaction? What is the correct treatment of the asset itself, do I write it off at the WDV or do I sell it?
Answer
Usually the transfer to an employee of an asset of the employer for less than market value will result in a transfer property benefit for FBT purposes.
Here the taxable value is market value less any employee contribution towards the transfer.
In the event the transfer is part of the employee’s termination arrangements, the transfer is considered to be an eligible termination payment (ETP) by the ATO.
Subsection 27A(8) of ITTA 1936 provides that where a transfer has been made to a person for the purposes for making an ETP, the transfer is deemed to be payment of an amount equal to the value of the property immediately before the transfer.
Subsection 136(1) of the FBTAA defines ‘fringe benefit’ and specifically excludes ETPs (para K).
This means we have cleared the FBT issue.
However, PAYGW will be required from the “payment”.
The time of the payment is when the car is transferred to the retiree.
Assuming he is over 55 then, then the ETP will be taxed at the maximum rate of 15% plus Medicare levy.
The ETP cap for 2019 FY is $210k.
Allowance must be made for this PAYGW by grossing up the value of the car to arrive at a gross ETP amount due to the employee such that the value of the car represents the ‘net’ amount of the ETP.
On the basis written down value equates to market value and in line with normal practices dispose of the asset in the books at WDV.
Effectively this is a sale as title will have to be transferred.
The debit side of the journal is an expense in the P&L being Termination Payment to Mr XYZ.
Question 12
Customer A issues a recipient created invoice to Supplier B. Does Supplier B include the gross sale amount and GST thereon in the relevant BAS and also include a credit for the GST paid by Customer A to ensure GST is not paid twice….
Answer
Yes, as the supplier, B has to declare and remit the GST to the ATO.This is the end of his involvement.
The input tax credit is then claimed by customer A. This is why A issued the recipient generated tax invoice in the first place.
The nature of GST is that it is the end user that ultimately pays to GST.
Question 13
| I have tax essential premium subscription and have a question regarding my clients’ pension from China (they hold a PR visa but not Australian citizens and are AUS tax residents). I don’t report said pension as per ATO ID 2002/337 but noted that the ID has been withdrawn in Dec-2018 so I am wondering if the ATO has changed their view on Chinese pensions and now becoming assessable? |
Answer
Between 2001 and 2016 thousands of interpretative decisions including ATO ID 2002/337 were issued.
In the last three years no more have been issued and the ATO has systematically been withdrawing IDs.
Usually the reason is because guidance is contained elsewhere on the ATO website.
If there has been a change in law or the ATO’s interpretation of the law this is clearly stated on the reason for withdrawal.
This is not the case here and on the basis that tax is payable on the pension in China, then the double tax agreement still applies.
This means the pension should not be taxable in Australia.
Question 14
We are having a bit of an argument in our office over Truck Drivers overnight allowances and we are confused. We have read TD2019/11 and the ATO’s Truck Drivers – Income and work-related deductions.
The scenario is:
My client is a long-distance truck drive that leaves on a Monday morning and returns the following Friday. His employer pays him an overnight travel allowance of $37.61 per night and he is away for 240 night which on his Payment Summary shows a total of $9,026.
As per the ATO Truck Drivers – Income and Work-related deductions he can claim $20 on Breakfast, $25 for Lunch & $45 on dinner and they are they are exclusive and can’t be swapped.
My client does not keep any receipts as once a week his wife prepares all his meal herself when they do the normal shopping and he takes them with him. As he states, it’s very difficult to get decent meals whist you are travelling, and he eats at all different time of the day.
My questions are:
If he keeps the number of meals that he is away for, Breakfast, Lunch and Dinner, can he just claim up to the allowance without keeping receipts?
Do we just claim back what he has been paid by his employer?
I don’t understand why the ATO have these allowances and what they are used for as the TD & other ATO papers really don’t give decent examples of what is acceptable with the ATO and only confuse the issue.
We also have this issue with some of our clients that receive an amount for domestic travel that is less than the ATO reasonable amounts. Once again can we just use the amounts the ATO have published?
Answer
To answer your questions.
- 1)He cannot claim the amounts outlined in para 23 of TD 2019/11 because he has not been paid the permitted full allowance to equal breakfast $25.20 Lunch $28.75 and Dinner $49.60. The amounts of these meals are separate and cannot be aggregated into a single day amount.
- 2)You may cautiously claim back the amount paid by the employer because it is below the above amounts being mindful the client may have to provide a reasonable explanation of the expenses if required by the ATO. If he informs his wife gives him a “packed lunch” then the claims will be denied. See example 3 paras 27-29 of TD 2019/11. In this case a reasonable estimate of the cost of the “packed lunch” will have to be made.
- 3)We don’t disagree with your comment regarding the confusion. However, we think TD 2019/11 (updated each year) is reasonable and attribute the confusion to a lot of misinformation out there in the marketplace and incorrect practices by tax agents. Everyone wants to make a claim but not everyone is paid the required allowance outlined in the relevant annual tax determination.
- 4)Regarding the domestic travel by clients – they can only claim the actual higher cost incurred less the amount paid by the employer. Otherwise cautiously claim the allowance amount paid by the employer.
Note, we have a different situation if the employee receives no allowance and instead incurs costs later fully reimbursed by the employer. In this instance the employee cannot not make any claim.
Question 15
I have question in relation to whether to charge GST on top of the facility fees when on-charging facilities bills such as emergency levy, water use & water excess fees etc. onto our lessee who leases from council?
As all of those costs don’t attract GST but, my understanding is when we are on charging our lessee for leasing council premises under an agency relationship we have to charge GST on top of the emergency levy & water bills, irrespective of whether the lessee is registered for GST or not.
Could you please advise from your experience on this matter and advise whether we have to charge GST on ESL & water bill on the basis of agency relationship as per GST laws?
At this stage we have come across a few lease agreements having a clause about GST, and some don’t! Does the GST law under agency relationship change if the lease agreement is silent on GST?
Answer
You are correct and you should charge GST on the entire amount of the supply which includes the outgoings.
This is because the Council may have to pay GST on these outgoings.
We refer you to GSTD 2000/10 paras 8 to 10.
Question 16
Vehicle purchased 29 October 2012 for $71142. Only $57466 (80.77%) able to be depreciated under luxury car limit.
Balance of WDV written off in 2018 year under SBE immediate deduction with balance of this account then being NIL.
Vehicle sold July 2018 for $22910 (excl. GST).
Amount assessable calculated as $18,504 (ie.80.77% $22910). Is this correct?
Answer
Assuming GST was initially claimed on the basis this is a work vehicle, there are GST implications on disposal.
GST on the sale is 1/11th of $22,910 being $2,083 – note this is calculated on the full amount with no adjustment for the MV depreciation cost limit.
This leaves net proceeds of $20,827.
If there were no second element additions to the cost base of the car i.e. extras and/or improvements, then your 80.77% is correct.
Given the asset was completely written off, 80.77% of $20,827 i.e. $16,822 should be deducted from the balance of the small business asset pool.
If this leaves the pool is a negative amount, then it is this figure that is assessable income.