THE NEWSLETTER
TAX-DEDUCTIBLE COVID-19 PCR AND RAPID ANTIGEN TESTS
The federal government will make COVID-19 tests tax-deductible for Australian individuals and exempt from fringe benefits tax (FBT) for businesses purchased for work-related purposes.
Key points:
- PCR tests and RATs will be tax-deductible, backdated to July 1, 2021
- Australians earning an income taxed at 34.5pc will receive a refund of about $6.90 for every $20 pack of two RATs
- Small businesses will reduce their FBT liability by about $20 for every dual pack of RATs purchased for $20
Initially, the change will see PCR and rapid antigen tests (RATs) become tax-deductible, but the government intends to include future medically approved tests in the scheme.
The legislation will be in effect from the 2021-22 FBT and income years and will be backdated to July 1, 2021.
Australians earning an income taxed at 34.5 per cent (including Medicare levy) will receive a tax refund of about $6.90 for every pack of two RATs purchased for $20.
Small businesses will reduce their FBT liability by about $20 for every dual pack of RATs purchased for $20 and provided to employees.
Treasurer Josh Frydenberg announced the changes to tax legislation in a speech to the Australian Industry Group on 7.2.2022.
BAS DURING COVID
If you lodge your business activity statement (BAS) quarterly, the last one is due on 28 February 2022.
Like many small businesses that continue to be affected by COVID, you may be having trouble meeting your BAS lodgement obligations. If that’s the case, these tips may help prepare your next BAS.
- Even if you have nothing to report, you still need to lodge your BAS as ‘nil’.
- Lodge online, and you may receive an extra two weeks to lodge and pay.
- If you’re reporting and paying pay as you go (PAYG) instalments, you may be able to vary the amount or rate for the current income year. If your business income is reduced, you can lodge a variation on your next BAS or instalment notice.
- Even if you can’t pay in full, it’s essential to lodge on time and pay what you can. Once you lodge and have up-to-date records, you can understand your tax position and find the best support. If you can’t pay in full, payment options are available, and the ATO can assist.
If you’re closing or selling your business, you need to cancel your GST registration. Remember to complete your lodgement and payment obligations before cancelling your GST registration.
Remember, your BAS can be lodged through a registered tax or BAS agent, giving you an additional two-week grace. Not dealing with this important lodgement obligation could result in a fine of $222 for each week you are late. It is essential to lodge on time.
VACCINATION INCENTIVES
Many employers have encouraged employees to get COVID-19 vaccinations with incentives and rewards.
In December, the ATO published a fact sheet outlining COVID-19 vaccination incentives and rewards. Employers providing non-cash benefits such as gift cards, vouchers or raffle prizes to employees will likely be subject to FBT unless the minor benefits exemption or in-house reduction applies.
COVID TESTING
Due to the daily case numbers, some employers have provided COVID testing support to employees due to border restrictions or company safety mandates. ATO guidance has confirmed COVID tests will not attract FBT where:
- Testing is carried out by a legally qualified medical practitioner and is available to all employees.
- Provided infrequently and irregularly and the cumulative value of the tests provided to an employee is less than $300; or
- The test is required for an employee travelling to work due to border restrictions.
TRAVEL
Refer to the below recently finalised ATO rulings and guidance when determining FBT treatment of travel expenses:
- TF 2021/1 – Income Tax: when are deductions allowed for employees’ transport expenses?
- TR 2021/4 – Income tax and fringe benefits tax: employees: accommodation and food and drink expenses travel allowances and living-away-from-home allowances
- PCG 2021/3 – Determining if allowances or benefits provided to an employee relate to travelling on work or living at a location – ATO compliance approach
Given the finalisation of these rulings and changes brought on by COVID-19, employers with mobile workforces should review their travel policies and arrangements. If you are not applying PCG 2021/3, consider the hiatus in extensive executive travel due to the pandemic. Now might be an opportune time for larger companies to revise protocols concerning executive travel. This could reduce FBT.
The PCG sets a “safe harbour” of an aggregate period of fewer than 90 days in an FBT year for presence at a particular temporary work location to be treated as travelling on work. Provided that this requirement is met, the Guideline allows an employee to have numerous short stints of travel of up to and including 21 continuous days. Notably, Fly-in Fly-out or Drive-in Drive-out are excluded from the PCG, so the safe harbour cannot apply in these scenarios.
ELECTRIC VEHICLES
Some employers consider including electric vehicles in their fleet to achieve emission reduction targets.
The FBT legislation was enacted in 1986 and did not contemplate the use of electric vehicles. The ATO currently considers some practical challenges on how to value the vehicle benefits (including substantiation).
Federal Labor targets 50% of new car sales to be electric vehicles by 2030 and has proposed an FBT exemption for electric cars to encourage increased uptake. The intended result is that purchasing or leasing an electric car for use by employees would result in the same outcome as purchasing a dual cab ute.
SIGNING AND SENDING OF ELECTRONIC DOCUMENTS
Around a million businesses will save around $450 million in red tape each year after the Federal Government passed legislation on 10.2.2022 making permanent the temporary changes introduced at the height of the coronavirus crisis relating to AGMs and the signing and sending of electronic documents.
The Corporations Amendment (Meetings and Documents) Bill 2021 amends the Corporations Act 2001, allowing companies and registered schemes to use technology to meet regulatory requirements to hold meetings, such as annual general meetings, distribute meeting-related materials and validly execute documents.
Specifically, the reforms provide greater certainty and flexibility to companies and registered schemes by:
- allowing them to hold physical and hybrid meetings and wholly virtual meetings if expressly permitted by the entity’s constitution.
- ensuring that technology used for virtual meetings will enable members to participate in the meeting orally and writing.
- allowing them to use technology to execute documents electronically, including corporate agreements and deeds.
- allowing them to send documents in hard or soft copy and give members the flexibility to receive documents in their preferred format.
The Federal Government aims to support higher productivity across the economy by ensuring that regulatory settings are fit-for-purpose, providing businesses greater flexibility and utilising technology to meet their regulatory requirements.
HIGH COURT BACKS CONTRACT JOBS
ZG Operations & Anor v Jamsek & Ors [2022] HCA 2
In a landmark decision handed down on 9.2.22, the High Court has backed the right of a business to engage workers outside of minimum wage laws and employment regulations. The decision could result in a surge in independent contracting and support Uber and Deliveroo’s claims that their drivers are not employees.
In a unanimous decision, the High Court held that two truck drivers who worked nine-hour days for a lighting company for almost 40 years under a partnership arrangement were not employees entitled to minimum pay and conditions, including superannuation and annual leave.
Led by Chief Justice Susan Kiefel, a majority of the High Court overruled the long-running approach by some courts to look beyond a worker’s contract to the social reality of the working relationship. Instead, it relied almost solely on the terms of the contract itself.
To quote the judgement, “The employment relationship with which the common law is concerned must be a legal relationship. It is not a social or psychological concept like friendship.”
The decision could effectively mean that if lawyers draft a contract that correctly deals with the key issues, a business can avoid minimum award pay and conditions, workers’ compensation, superannuation, redundancy, and other statutory requirements.
It is anticipated that this outcome will entrench existing independent contracting in industries like transport, construction and the gig economy. Other sectors in the long term may be encouraged to engage more contractors.
This ruling may well feature in the federal election, with the court leaving little option but legislation if unions want to protect workers’ rights from “sham” contracts.
Here are the facts as taken from the court’s summary. The High Court allowed an appeal from a judgment of the Full Court of the Federal Court of Australia. The appeal concerned whether a company engaged two truck drivers as employees or independent contractors.
Between 1977 and 2017, Mr Jamsek and Mr Whitby (“the respondents”) were engaged as truck drivers by a business run by the second appellant (“the company”). The respondents were initially engaged as employees of the company and drove the company’s trucks. However, in 1985 or 1986, the company offered the respondents the opportunity to “become contractors” and purchase their own trucks. The respondents agreed to the new arrangement and set up partnerships with their respective wives. Each partnership executed written contracts with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services. Income from work performed for the company was declared as partnership income for income tax purposes and split between each respondent and their wife.
The respondents commenced proceedings in the Federal Court of Australia seeking declarations in respect of certain entitlements alleged to be owed to them pursuant to the Fair Work Act 2009 (Cth), the Superannuation Guarantee (Administration) Act 1992 (Cth) and the Long Service Leave Act 1955 (NSW). The respondents claimed to be owed those entitlements on the basis that they were employees of the company. The primary judge concluded that the respondents were not employees and instead were independent contractors. The Full Court overturned that decision and held that the respondents were employees regarding the “substance and reality” of the relationship.
The High Court unanimously held that the respondents were not employees of the company. A majority of the Court held that consistently with the approach adopted in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1, where parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.
After 1985 or 1986, the contracting parties were the partnerships and the company. The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. The context in which the first contract was entered into involving the company’s refusal to continue to employ the drivers and the company’s insistence that the only relationship between the drivers and the company be a contract for the carriage of goods. This relationship was not a relationship of employment.
THE COST OF TAX CONCESSIONS EXPLODES
A recent article in the SMH outlined how record low interest rates and government stimulus have helped save the economy from the COVID-19 recession. However, the flip side to this is an explosion in the cost of federal tax concessions.
While this gives the Government something to think about ahead of the 2022/23 budget on 29 March, there is no suggestion of the concessions discussed are under immediate threat.
Figures released by Treasury show the exemption of the family home from capital gains tax (CGT) will in 2021/22 cost a record $64 billion in forgone revenue. It is a $9 billion increase on the forgone revenue estimated for 2020-21, which itself was an $8 billion increase over 2019-20.
The cost of the concessional tax rates on superannuation climbed by $13.5 billion to a record $43.1 billion. The 50 per cent concession on CGT available to individual taxpayers or trusts for assets held longer than 12 months lifted by 21 per cent to cost a record $11.8 billion.
It is hardly surprising property prices and share values have soared due to the various government and Reserve Bank programs put in place to safeguard the economy amid COVID-19. That has driven the large increase in the relative value of the tax concessions around super, the family home and CGT.
The increase in the cost of the superannuation concession can be explained by:
- profit terms in the housing and share markets having more disposable liquid funds to place in superannuation
- the clear incentive for such individuals to maximise concessional (tax-deductible) superannuation contributions, including “catch up” contributions available from 1.7.2018
- Maximising these contributions can lower and, in some cases, eliminate the capital gain tax.
COVID-19 has delivered the largest budget deficits on record. After an $85.3 billion shortfall in 2019-20, it increased to $134.2 billion last financial year and is forecast to edge down to $99.2 billion in 2021-22.
Gross government debt is at $859 billion and is forecast to exceed $1 trillion by the decade.
As always, preparing a Federal Budget is a delicate balancing act, especially with the challenges of COVID-19 and a looming Federal Election.
SUPPORT INVESTMENT AND JOBS
On 10.2.2022, the Morrison Government introduced legislation to create Australia’s first Patent Box to drive more investment, create more jobs and back Australian companies to commercialise their cutting‑edge innovations in Australia.
Under Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022, income earned from new patents that have been developed in Australia will only be taxed at a concessional rate of 17 per cent.
The Patent Box is a part of the Government’s economic plan, announced as part of the 2021‑22 Budget. It will increase investment by incentivising innovative Australian businesses to commercialise their research and development in Australia.
This new concession, provided through Australia’s patent box regime, will support research and development for decades to come, as well as help retains Australian innovations in Australia during commercialisation. It complements the Government’s additional $2 billion investment in the Research and Development Tax Incentive announced in the 2020‑21 Budget.
GETTING IT RIGHT FOR SUPER
Paying super is an integral part of being an employer. While most employers do their best to keep up with paying employees super, things don’t always go to plan.
If you missed or didn’t pay the total amount of your employees’ super guarantee (SG) for the quarter ended 31 December 2021, you’ll need to:
- lodge a Super Guarantee Charge Statement to the ATO by 28 February 2022
- pay the SG charge to the ATO.
By law, the ATO cannot extend the due date to pay SG.
How you calculate the SG charge is also different from how much SG you pay to your employees’ funds. The SG charge is calculated on an employee’s total salary and wages (including overtime and some allowances) and includes interest and an administration fee of $20 per employee per quarter.
Even if you can’t pay the full amount, you should still lodge an SG charge statement by the due date to avoid a late lodgement penalty. The ATO will work with you to find a solution tailored to your situation.
ADDITIONAL SUPERANNUATION GUARANTEE CHARGE (SGC)
PS LA 2021/3 – Remission Of Additional Superannuation Guarantee Charge (SGC)
In what are very trying times, some employers place payment of employees’ statutory superannuation well down the list of priorities. The SGC becomes payable if you fail to pay employees within 28 days of the close of a relevant quarter. It includes the shortfall, a 10% admin fee and nominal interest. The SGC and the severe penalties discussed below are not tax-deductible which worsens matters. It all can become a costly exercise, which employers must consider when deciding whether to make payments on time.
When an employer is liable to pay the superannuation guarantee charge (SGC) for a quarter, a penalty (‘Part 7 penalty’) is payable in addition to the SGC. Generally speaking, The Part 7 penalty equals double the SGC payable by the employer for the quarter (i.e., an additional 200% of the SGC amount).
PS LA 2021/3 provides guidance on the factors ATO staff consider when deciding how much the Part 7 penalty should be remitted. ATO staff must follow the four-step penalty remission process when deciding whether it is appropriate to remit the Part 7 penalty down from 200%. Matters for consideration include the employer’s attempts to comply with their payment and lodgement obligations, their general compliance history, and any other mitigation facts or circumstances.
A one-off amnesty was provided for employers who voluntarily disclosed SGC liabilities for quarters from 1.7.1992 to 31.3.2018 (‘historical quarters’). As part of the amnesty, no Part 7 penalty was imposed for employers who voluntarily disclosed during the amnesty period, ending on 7.9.2020. Where a historical quarter is assessed for SGC after 7.9.2020, ATO staff generally cannot remit the Part 7 penalty below 100% of the SGC unless the employer voluntarily came forward to lodge a superannuation guarantee statement before being notified of ATO compliance action. There must be exceptional circumstances for any prospect of remission of penalties.
SUPPORT FOR FIRST HOME BUYERS AND SUPERANNUATION MEASURES
On 10.2.2022, the Federal Government passed through the Parliament the Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021, which will allow businesses to continue investing in their future and help Australians get into their own home.
The passage of the Bill will help more Australians own their first home by increasing the maximum amount of voluntary contributions that could be released under the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000. Since 1 July 2018, 26,800 new home buyers have released $371 million worth of savings under the FHSSS.
The Bill will also increase the flexibility for older Australians to contribute to their superannuation by reducing the eligibility age for making downsizer contributions into superannuation from 65 to 60 years of age. This will allow more older Australians to consider downsizing to homes that better meet their needs, increasing the supply of larger homes for young families. From 1 July 2018 to the end of January 2022, 36,800 individuals have contributed $8.9 billion to their superannuation under this measure.
The passage of the Bill will also extend the Government’s temporary full expensing regime by 12 months to 30 June 2023
to further support businesses to invest, grow and create more jobs.
The temporary full expensing measure announced in the 2020‑21 Budget allows businesses with an aggregated turnover of less than $5 billion to deduct the full cost of eligible depreciable assets in the year they are first used or installed. This measure applies to over 99 per cent of businesses, employing approximately 11.5 million workers.
The Government’s unprecedented business investment incentives will provide businesses more than $50 billion in tax relief and support around $320 billion worth of investment. This has seen a significant upgrade in the investment outlook, with new business investment forecast to increase 16 per cent over the next two years at its fastest rate since 2011-12 during the height of the mining investment boom.
LEGISLATION TO ENHANCE THE SUPERANNUATION SYSTEM
On 10.2.2022, the Federal Government passed through the Parliament the Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021, which will ensure superannuation continues to work in the best financial interests of all Australians.
The passage of the Bill will provide more flexibility for families and individuals preparing for retirement by allowing individuals aged between 67 and 75 to make non-concessional superannuation contributions under the bring-forward rule. The legislation also supports the repeal of the work test for non-concessional and salary sacrificed contributions made by individuals aged between 67 and 75.
The Bill also delivers on a key commitment in the 2021-22 Women’s Budget Statement by removing the $450 per month income threshold under which employees do not have to be paid the superannuation guarantee by their employer. This will remove an outdated structural feature of the superannuation system and, in doing so, will improve equity in the system.
These superannuation measures will take effect from 1 July 2022.
The Bill will also reduce costs and simplify reporting for superannuation funds by allowing trustees to use their preferred method of calculating exempt current pension income where the fund is fully in the retirement phase for part of the income year but not for the entire income year. This measure will apply for the 2021-22 income year onwards.
The Bill and explanatory material are available on the Parliament of Australia website.
INABILITY TO CLAIM DEDUCTION FOR PERSONAL SUPER CONTRIBUTIONS
Khanna v Coft – No Deduction for Personal Super Contribution – Taxpayer Gave Fund S290-170 Notice Over 1 Year Late
In this AAT case, a taxpayer was unable to claim a deduction for personal super contributions as he was over a year late in giving the required notice to his super fund. To claim a deduction, you need to have given the fund a notice of the amount you wish to deduct and got the fund’s written confirmation. The notice has to be given by the earlier of when you lodge your return, or 30 June the following year. If you have not given the notice, matters cannot be rectified after you have lodged your tax return.
Those on tax agent lodgement programs often lodge their tax returns late in the following year. So, failure to attend to this matter can have serious consequences with ripple effects through your superannuation account, the distinction between concession and non-concessional contributions and the $1.7 million limit for tax-free earnings (to pay pensions). The key here is to carefully consider and respond to the notice as soon as you receive it. While claiming a tax deduction will be the optimal decision in most cases, this will not always be the case. In the event you have filled out the required notice automatically stating you wish to claim a tax deduction, then later find out you do not require a tax deduction, this is sometimes not easy to undo.
PATENT BOX
Following consultation, the Government has made two significant expansions to the patent box:
- allowing patents issued by the United States Patent and Trademark Office or granted under the European Patent Convention to access the regime; and
- allowing patents granted after Budget night to be eligible, rather than only those applied for after Budget night.
Patents must link to a therapeutic good entered in the Australian Register of Therapeutic Goods to ensure the patent box concessions are targeted towards relevant medical inventions. In line with internationally accepted standards and best practices, the legislation has been designed to comply with the principles outlined by the Organisation for Economic Co-operation and Development. The Patent Box is part of the Federal Government’s economic plan to drive more investment and create more jobs.
bO2 READERS’ QUESTIONS AND ANSWERS
Question 1: CGT 15-Year Exemption
Hi, this is a CGT query and whether the respective “partners” are entitled to use the small business 15-year CGT exemption and/or contribute the assessable gain into their respective super funds to gain CGT exemption.
The respective “partners”, say A & B via partner A’s family trust and B via his private company, each hold 50% of the units in a trading unit trust.
The unit trust operates a stock and real estate agent business and personally utilises sale yards owned by A & B (leasehold property in the ACT).
The rates and taxes relating to the sale yards are paid for by the Unit Trust agency business.
The leasehold property that A & B has “owned” for over 15 years was recently sold to another party for different purposes. So not as a going concern. GST has been charged on the transaction.
The net “gain” on the sale is around $680,000… i.e., $340k each before discount.
I’m assuming that A’s net assets, including the share of the Unit Trust and his family trust, would have to be less than $6m. B’s share of the Unit Trust and his family company would also have to be less than $6m for each of them to qualify for the small business test and associated CGT exemption…although if one fails the test…this won’t impact the other?
Answer
We will confine ourselves to general comments with the strong recommendation you get a legal opinion.
First, the active asset test has to be met – In this case, the sales yard was used exclusively by this business for at least 7.5 years, which is a requirement.
If it derived rental income from third parties, then that is an issue.
To establish they were affiliates – you should be able to establish A and B (or immediate family members) were both “significant individuals” of the relevant discretionary trust at the time of sale.
Finally, we confirm the $6 million tests must be met as outlined. If the business turned over less than $2 million per annum, then the $6 million net asset test does not need to be met.
Given we are dealing with a unit trust, CGT event 4 must be considered. In cases such as this, the CGT Small Business Retirement Concession may overcome this.
Question 2: Calculating CGT Liabilities
Can I please get your assistance in this complex matter as my client is considering selling a property he acquired from his father?
In this case, my client, the son, entered an agreement with his father to be added on to his father’s principal residency property “title” back in 2011 for $130,000. My client already owned another property at the time, therefore ruling out principal residency exemptions. My client and his father became joint title holders of that property, and the son needed to be on that title to help his dad out with finance.
The value of that property in 2011 was around $220,000.
In 2019, my client bought the property off his father for a further $95,000 and became the sole title holder. As my client owns other property, it still wouldn’t be his sole principal residency. The value of the property in 2019 was $360,000.
My client is considering selling that property, and the value has risen to $500,000.
His father bought the house back in 2007 for $195,000.
My two questions are:
Will my client be liable for CGT? I’m guessing he would be, and secondly, how would we calculate it, seeing he was part owner and then became 100% owner?
I would kindly appreciate your help with this to advise correctly.
Answer
We confine our comments to your client’s circumstances (the son).
| His cost base is as follows: | |
| 2011 | $130k |
| 2019 | $ 90 |
| Other | $ 30 |
| Total | $ 250k |
The other $30k is for purchase and selling costs, but there may be third element additions to the cost base for renovations etc.
If the property is sold for $500k, there is a potential $250k capital gain to consider.
After the application of the 50% discount, $125k remains.
After checking for capital losses, you should check online whether your client can make catch up superannuation contributions.
This could wipe out most capital gain, but we acknowledge the 15% contributions tax.
Question 3: Rural Property – Future Set Up
I intend to purchase 200 acres of rural residential property within two years. Hopefully, the family will sell it off in 20 acre lots in 10 – 15 years.
My idea is to register Ltd Company to our discretionary trust- holding seven-way membership – 10% self, 20% each for my son and daughter and 12.5% each for 4 X grandchildren.
What is the best advice you can give (tax and future for leaving set up for family)? My date of birth is 7.09.37.
Answer:
This sounds like a passive land holding that will not conduct business.
If you want to be certain that each child/grandchild will receive their designated share of the eventual proceeds, it sounds like a company trustee for a unit trust may be necessary.
Question 4: Cost Base Calculation
A married couple purchased a house in Carlton for $481,750 (incl. stamp duty)
On 10/8/2000, this house was their PPR until 10/8/ 2010. At that time, they sold a 65% share of the Carlton property to their son and his partner for $550,000.
The married couple purchased another property that became their new PPR, which they are still living in. I presume there are no capital gains on the 65% sale transaction.
The son and partner then made this property their PPR.
In November 2020, the Carlton property was sold for $2,388,000 and the agents/legal
Fees were $34,006, making the net sale $2,353,994.
As the married couple only owned 35% of their net proceeds would be $823,988
The married couple spent $145,751 on capital improvements, two-storey extensions etc.
The son and partner paid $53,625 stamp duty on 65% of the market value of the property as at 10/8/20.
According to the council rates and the stamp duty calculator, the market value for the property at the date of sale (10/8/20) was valued at $1,500,000.
What is the cost base for the married couple who owned 35% at the date of sale? (10/8/20)
Answer
The preferred cost base for the married couple is:
Market value at 10.8.2010 35% of $1,500,000 $525,000
The capital improvements are not included because this has already been considered in determining market value.
The total of 35% of the purchase cost…$168,612 plus 35% of the capital improvements being $51,013 gives a cost base of $219,625.
Far better to go with market value.
This assumes there is reliable, objective and independent evidence of the market value being $1.5 million at 10.8.2010.
As the parties to the transaction were associated, OSR Victoria likely determined the market value for stamp duty purposes at 10.8.2010, which should be sufficient evidence.
Question 5: Self-Education Costs
I have a quick question. Can international students on a student visa claim self-education costs or only when their visa status changes to temporary or permanent?
My client has been told by her friends that she can claim her fees, and I said no because she is not working as a nurse, only a personal carer.
Only when she starts working as a nurse can she claim? Please help to explain this.
Answer
You are correct – the studies must directly relate to her current employment.
If their studies are more expansive, as is the case here, there must be the probability that the studies lead to an increase in earnings.
The full facts must be examined: are we dealing with a full-time student who has a part-time, casual position to fund her studies?
If this were the case, the self-education expenditure would be highly unlikely to meet the test and be tax-deductible.
Question 6: Medicare Surcharge
A client has a Medicare levy exemption for 339 days. Being a foreign resident and not entitled to Medicare.
His taxable income is $190,000 for the whole year. He has no private health insurance.
Is he liable for the Medicare levy surcharge?
Answer
If he is subject to the Medicare levy for only 26 days, the same should apply to the Medicare levy surcharge – it should be apportioned.
Question 7: Distribution to Beneficiaries
Family Trust has a Profit of $ 13,824 + Capital Gain $ 4,728 = $ 18,552
Less Cash Flow Boost Non-Accessible ($ 18,908) = ($ 356) L. The Gain is subject to a 50% Discount.
As there is a loss, is there no distribution to Beneficiaries? Or do I have to remove the Gain from the equation and distribute the Gain to the Beneficiaries?
Answer
You are correct – there is no trust distribution for tax purposes.
We take it you have already applied the 50% discount to your calculations.
Question 8: Rural Property Sale/Purchase
Rural property “Carrol” purchased by my father 1924, left to my mother, brother and me not know by me 1976 – left to my two sisters by mother 1983, handled by a solicitor.
I purchased from sister 2002- for $82,000. I am selling the property now – $1.5 mil.
As it has been from one family member to another, are there any capital gains tax or stamp duty issues?
Answer
Given the change in beneficial ownership when you acquired the property, there is no doubt that the property is subject to Capital Gains Tax (CGT).
As you have held the property for longer than 12 months, a 50% reduction applies, meaning only half the capital gain will be assessable.
There are also some further possible exemptions:
- The principal place of residence exemption if you have lived in the property – the value of the dwelling and the surrounding 5 acres may be exempt from CGT.
- If the land was used in farming or any associated business for at least 7.5 years in the period of ownership, allowing it to qualify as an active asset, it is also possible that the CGT Small Business Concessions may apply. This could reduce the capital gain by at least 75%, with the possibility of the capital gain being eliminated.
Question 9: Tax Position – Family Trust
I have a client who has a discretionary family trust that owns a large share portfolio that generates fully franked dividends each year.
No Family Tax Election (FTE) has been prepared or lodged. The two beneficiaries are husband and wife.
Since the 2011 financial year, I have allocated $50000 of fully franked income to their wife.
The ATO has issued Notices of Assessment each year, allowing the franking credits in full with no queries.
I just recently became aware that the franking credits above the $5000 exemption may not be claimed unless there is an FTE in place.
I intend to lodge the due 20/21 wife’s income tax return soon in the same way as in earlier years.
Can you explain the tax position here for me and what options I have from now on to deal with this matter?
Can I prepare the FTE dated 2 July 2011 (for the 10/11 and subsequent financial years) and merely file it with the work papers and Permanent Document File and not lodge it with the 20/21 coming tax return? Or should I lodge it in the 20/21 next to be lodged trust estate tax return? (I do not want to alert the ATO to a problem if possible?)
Answer
As long as distributions have been in the “family group,” it may not be the problem you think.
It would appear that only the husband and wife may have been the only beneficiaries – if this is the case, you can still make an effective FTE.
The income year specified in the FTE must have ended before the FTE is made. An FTE can only be made if the trust passes the family control test at the end of the specified income year.
The FTE can specify an earlier income year from when the election is to commence, provided that from the beginning of the specified income year until 30 June of the income year immediately preceding that in which the election is made, both:
- The trust passes the family control test.
- Any conferrals of present entitlement to income or capital during the period, or actual distributions of such amounts, have been made to the specified individual or members of their family group.
Question 10: Deceased Estate
The company has one shareholder who passed away on 4.6.2018. The shareholder was changed from the deceased to a shareholder, being one of the beneficiaries.
On the advice given, a dividend was declared 26.6.2020 and paid to the Estate 6.8.2020. At the same time, the Estate paid 30% and 40% of the dividend to 2 beneficiaries, and the three beneficiaries left the money in the Estate bank account.
The will state distributions by way of dividends or capital nature to the beneficiaries 40%, 30% and 30%. The beneficiaries decided to change the distribution percentage with a mutual agreement between them.
Is this valid, or do they need a deed of family arrangement?
Estate ITR stated no beneficiaries entitled, and the Estate paid tax. This was done for the Estate to receive concessional income tax treatment.
A further dividend was declared 1.7.2020 by the company and paid 6.10.2020 to the Estate. In the same procedure, two beneficiaries received the distribution from the Estate; the 3rd left his share in the Estate bank account.
As this is the fourth year, the Estate ITR has two beneficiaries receiving the distribution from the Estate; the 3rd beneficiary is entitled to the distribution but decided to leave his share of the distribution in the Estate’s bank account.
Does this mean he has no present entitlement? And the Estate pays the tax for him until such time he decides to take the “money”.
The Estate is going to pay tax on the 3rd share; the other beneficiaries’ distribution is included in their personal ITR.
As mentioned, the company has one shareholder (beneficiaries). When should the company transfer the shares to the Estate, maybe wind up the company?
The deceased shareholder of the company is still the owner of the shares and, in his will states – the shares to be transferred to the Estate. The director/secretary is acting in his capacity as executor (one of the beneficiaries). If the value of the shares is transferred from the company to the Estate, can the Estate pay out the capital proceeds tax-free to the beneficiaries? Provided the will does not state the beneficiaries have an absolute and indefeasible interest in the capital or income of the Estate.
What are the tax implications? I understand Deceased Estate is very complicated, and your advice would be greatly appreciated.
Answer
It is assumed this beneficiary is a person acting in their capacity as the executor of the Estate.
Regarding the advice, you were given. This can represent a payment of corpus to the beneficiaries with no tax implications as the Estate has already paid the tax.
We agree that this makes sense as for the first three tax returns the Estate lodges, the individual tax-free threshold is available, and the trust is then further taxed at individual marginal rates.
Do they need a deed of family arrangement? You may wish to get legal advice on that, but there should be no problems if a mutual agreement exists.
Purely from a taxation perspective, as long as the correct amount of tax has been paid, these private arrangements are unlikely to concern the Commissioner.
Present entitlement can arise when a valid trust distribution is made by way of a minute prior to 30 June in the relevant tax year – a present entitlement may exist when the trust has booked the distribution by way of a loan account.
We need to be clear that the company has a separate legal identity from the deceased and has its own tax issues. How do you deal with the funds in the company when making payments to the Estate?
- By way of dividend to the estate for the amounts representing retained earnings (franked or unfranked)
- Did the company owe the deceased money by way of a loan account? This is now an asset of the Estate and is a tax-effective way of getting money out of the company by repayment of the loan.
- Are any of the company shares pre- CGT (20.9.1985)? We have already mentioned the Archer Bros principle
Yes, some payments will be tax-free as income retains its character as it flows through a trust, e.g., franked dividends or capital loan repayments as above. It depends on the source of the funds and whether the trustee has already paid the tax liability.
Of course, a member’s voluntary liquidation will need to be done for this company.
We are now in the fourth year of the Estate, and below is the relevant tax table to assist you as to the most tax advantageous path to take. This will depend on the beneficiaries’ individual tax circumstances – for tax minimisation and also establish whether the company has significant pre-CGT assets and consider the possible application of the Archer Bros Principal. (Refer to tax tip #66-page 28 issue #0115)
There is an effective choice – if a valid trust distribution has been made, there can be a present entitlement. If he does not wish to take the money and pay the tax, then the trustee can pay the tax on his behalf – of course, the actual payment must be debited to his total entitlement under the will.
The following tax rates apply for deceased estates that continue to be administered beyond the third income year.
| Deceased estate taxable income (no present entitlement) | Tax rates 2020–21 and 2021–22 |
| $0 – $416 | Nil |
| $417 – $670 | 50% of the excess over $416 |
| $671 – $45,000 | $127.30 plus 19% of the excess over $670
If the deceased estate taxable income exceeds $670, the entire amount from $0 will be taxed at the rate of 19% |
| $45,001 – $120,000 | $8,550 plus 32.5 cents for each $1 over $45,000 |
| $120,001 – $180,000 | $32,925 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $55,125 plus 45 cents for each $1 over $180,000 |
Question 11: Personal Services Income
We are a member of your service, and I have a question regarding the attribution of PSI. The PSE is not a PSB, and the attribution rules apply.
If the PSE is a company or a trust, do the payments made to the personal services provider have to be classified as “salary and wages”? Or can it then be accounted for as dividends or trust distributions?
I have reviewed many publications, articles, ATO rulings on PSI; however, I cannot find anything that stipulates the payments must be “salary and wages”.
Income tax is not an issue as 100% is payable by the personal services provider. I am only considering the classification of the amounts attributed to him.
I have a client GP who has been required to operate out of a company/trust and can no longer operate as a sole trader. They do not wish to pay SGC or workers’ compensation on their income, and hence I’m looking at ways to achieve this.
Answer
As you correctly state, the attribution rules apply.
Therefore, you will be correctly attributing all of the entity’s income to the Doctor.
We refer you to old taxation ruling IT 2503 and paras 5-7 where they suggest a bona fide attempt should be made for a medical practice company to “break even.”
They mention this should be done by payment of salary and wages.
The ATO’s concerns have included using the lower company tax rate to defer or avoid higher personal income tax.
Another concern is that personal services income is alienated from other family members.
In practice, if:
There is a company that pays a fully franked dividend to the Doctor the following year after payment of company tax. The ATO may take exception to this as there has been a deferment of tax.
Paying a director’s fee in the year of income without PAYG, which does sometimes occur, is certainly not best practice and frowned upon by the ATO. In any case, if it is a director’s fee, it is subject to statutory superannuation (10%).
However, in a trust structure, 100% of the income could be distributed to the Doctor by way of distribution. Here there has been no deferment or alienation of income. This would be extremely unlikely to attract ATO attention. Your client should consider whether they have adequate work cover insurance.
Question 12: Sale of Rental Property
I’m in the process of preparing to sell a rental property and over the years have been claiming depreciation on the building and plant and equipment. It would appear that I need a clause in the sale contract to specify how much of the sales proceeds relate to buildings and plant and equipment in order to calculate a balancing adjustment on these items on disposal.
I need to clarify. For the rental property I am selling I need to dispose the building and Plant and Equipment WDV (written Down Value) in the Depreciation schedule.
How do I determine the sale proceeds for these items to determine a profit/ loss on disposal?
What I am trying to do is have a consideration equal to the WDV of the building and Plant and fixtures so there is no profit and loss on disposal in the depreciation schedule. Hence the reason for the clause. This is really to protect my own interests and minimise tax. This is totally independent from the CGT calculation.
Could you please assist me with a standard clause?
Is there anything else I need to include in the sale contract as I will be liable for capital gains tax on the property? Note I do not have an ABN.
Answer
Balancing adjustments have not been used for some years and they do not serve your best interests.
Since 1.7.1997 any depreciation and/or capital allowance claimed as a tax deduction reduces the cost base of the asset for CGT calculation purposes.
The purchaser is not likely to be interested in a value for claiming depreciation because although they can claim the building capital allowance (2.5%) … they cannot claim any depreciation on fixtures and fittings on pre-owned residential properties.
In the event this is a commercial property and there is separate movable plant and equipment, then scrap this to get the full tax deduction.
In the event the purchaser may want this plant, take legal advice as to its inclusion on the contract.
Although the cost base is diminished by tax deductions, it’s still advantageous as individuals being assessed on capital gains have a 50% discount on that capital gain if they have held the asset for longer than 12 months.
With respect, this is not independent of the CGT calculation as the depreciation written off to date along with the Div 43 capital allowance (2.5%) reduces the cost base for CGT calculation purposes.
There will be no contention with the buyers as their accountants will be make it clear to them, that no depreciation claims are available on second hand property on the fixtures and fittings.
With regards to the Div 43 capital allowance, they will continue to claim the 2.5% per annum based either on your Quantity Surveyor’s schedule or one they commission.
Question 13: Company Tax Return
The proprietary company (A) is a sole shareholder of another company (B), which runs a retail business.
Company A does not run the business but will receive the dividend from company B in future if B has a profit to distribute. There is no plan for company A to run other business or to earn other income other than future dividends.
Company A has two shareholders, who are the trustee company of two separate trusts.
(i) Company A has a ACN and TFN, however no ABN was applied for yet.
Would you please advise whether ABN is required for the company A in above circumstance?
If yes or no, please provide the link for the information to support it.
(ii) Should we still need to lodge the Company tax return as nil for company A (without ABN) although no dividend was received and no other income during the financial period?
Please note that company A has a TFN but no ABN.
Answer
If company A is not conducting business but is merely a passive investment entity, holding company then there is no need for an ABN as it is not conducting business.
You can lodge a nil return or a “return not necessary” for company A.
Question 14: Division 7a Loan Agreement
A company makes a loan to an associate. Where there is a complying Div 7A loan agreement is the interest expense to the associate tax deductible?
Answer
The fundamental test for deductibility of interest as consistently applied by the Courts is the “use” test… meaning to the use to which the funds have been put.
If the associate has used the funds for personal expenses, then of course a tax deduction cannot be claimed.
If however he has used the funds to fund another business or acquire an income producing asset, then there is the possibility of claiming a tax deduction.
Question 15: Is This Payment Tax-Free?
A client has terminated two builder employees as the next stage of the development is being outsourced to a contracted building company.
One employee was on a fixed-term contract which ended.
The other began with the company on 23/11/15, and the final date is 31/3/2022. This entitles him to pro-rata Long Service Leave.
The company is part of a group with less than 15 employees.
Under the Building and Construction Award 2010, a specific severance/redundancy scheme pays out 8 weeks’ pay for 4 or more years of service. Is this payment tax-free? I have had 2 different answers from the ATO using BAS agent number
I understand the other tax treatment of unused annual leave and unused LSL. I need some help.
Answer
From 1.10.2020 The Building Industry Redundancy Scheme Trust (BIRST) has made changes that see most employees terminated by their employer due to genuine redundancy receive their BIRST payment largely tax free provided they are below pension age.
These changes involved amendments to the BIRST trust deed.
This sounds like a genuine bona fide redundancy and the tax-free limit for 2021-22 is $11,341 plus $5,672 for each year of service.
The fact there is less than 15 employees is not relevant in this instance.
Question 16: Div 7a Loans and Deceased Estate
Late in 2020 we were engaged by new clients, a family of three siblings whose mother had recently passed away, to perform their accounting and taxation work.
Their Father had passed away a few years earlier and consequently they inherited various property investment companies. A number of these Companies had Division 7A loans owing, amounting to a substantial sum. Their previous Melbourne Accountant was not forthcoming in providing us with Div 7A Loan principal and interest repayment Schedules, and therefore we have had to reconstruct these various balances. In doing so we find the deceased mother’s Div 7A Loan still exists on the Balance Sheet as at 30th June 2020.
Our question to you is how do we treat Div 7A Loans relating to the deceased? Are these loans simply forgiven or do they just sit on the balance sheet? If not, are they taken over by their siblings who have to meet ongoing principal and interest repayments?
Answer
I would be getting them off the balance sheet.
The ideal situation would be that the Estate repays the loan.
If they are unable or unwilling to do so, then I would not forgive the loan but write it off as a bad debt being a capital loss.
It is on capital account because clearly the company was not in the business of money lending.
The journal would be:
Dr Capital Loss (Share capital accounts) XXXX
Cr Loan XXXX
We do not believe the deceased estate can be burdened with deemed dividends because:
- The entity to whom the private company is taken to have paid the dividend must be the same entity to whom the private company made the amalgamated loan.
Therefore, for subsection 109E(1) to apply, the private company must have made the loan to the executor of the deceased estate.
Accordingly, as the private company made the loan to the shareholder, the executor of the shareholder’s deceased estate is not treated as having received a deemed dividend in respect of the amalgamated loan.
This interpretation is contained in ATO I.D. 2002/741.