THE NEWSLETTER

Recent Tax Developments

MORE TIME TO LODGE AND PAY YOUR ACTIVITY STATEMENT

You may qualify for an extra two extra weeks to lodge and pay your quarterly activity statement if you lodge it online:

• using the A.T.O. online services for sole traders (you will need a myGov account)
• through the A.T.O. Business Portal
• directly from your Standard Business Reporting enabled software.

Lodging online is easy, quick and secure making it faster to complete future activity statements.

By lodging your activity statement online you can avoid any delay in getting your refund as you will be prompted to correct simple errors while lodging.
Remember to enter amounts as whole dollars – you shouldn’t include cents.

If you can’t pay on time, the A.T.O. can help you. Make sure you lodge your statement by the due date and phone them on 13 11 42 to discuss your circumstances.
You can also set up an automated payment plan online.

TERMS AND CONDITIONS – TWO WEEK DEFERRAL OFFER

If you lodge your quarterly activity statements online, you may qualify for a two week deferral of your activity statement due date. This offer is
ongoing and is subject to the following terms and conditions.

This offer applies to most activity statements for the standard quarters ending 30 September, 31 March and 30 June which have an original due date
of the 28th of the month, following the end of the quarter – that is, quarters 1, 3 and 4 (quarter 2 activity statement lodgers already have eight
weeks to lodge).

This offer does not apply to:

• monthly activity statements
• monthly GST payers with quarterly PAYG instalments (or other quarterly roles) –this includes businesses that are required to or elect to report
  on a monthly basis
• quarterly PAYG instalments for head companies of consolidated groups
• entities with substituted accounting periods that are classified as a large business client (see note below)
• any other clients who do not have an original due date of the 28th
• quarterly instalment notices, for example forms

vR (Quarterly PAYG instalment Notice)

vS (Quarterly GST instalment Notice)

vT (Quarterly GST & PAYG instalment Notice).

A large business client is defined as a client with:

• annual total income in excess of $10 million
• GST turnover of $20 million or more
• annual withholding payments in excess of $1 million, or an entity in a group of companies where at least one member of that group has an annual
  total income in excess of $10 million.

CHECKLIST TAX CHANGES THAT APPLY FROM 1.7.2017

SMALL BUSINESS

• 1)From 1.7.2017, Simplified BAS reporting is applies to small business entities.
• 2)The corporate tax rate for base rate entities is 27.5% from 1 July 2017. A company is a base rate entity if it carries on business and has an
  aggregated turnover for the year that is less than $25m.
• 3)From 1.7.2017, The A.T.O. is able to disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged
  with the A.T.O. to manage these debts.

CAPITAL GAINS TAX

• 1)The C.G.T. main residence exemption is no longer available to foreign and temporary tax residents from 7.30 pm (AEST) on 9.5.2017.
• 2)From 1.7.2017, C.G.T. event E4 will not arise where a trust receives a tax-free gain under the early stage innovation company provisions.
• 3)The C.G.T. foreign resident withholding rate is 12.5% from 1.7.2017 (previously 10%) and the threshold at which the C.G.T. withholding obligation
  applies to Australian real property has been reduced to $750,000 (previously $2m).

FRINGE BENEFITS TAX

• 1)For the F.B.T. year commencing 1.4.2017, the F.B.T. rate is 47%.
• 2)As such concessional tax treatment thresholds for certain employers revert back to $30,000 and $17,000 respectively.

GOODS AND SERVICES TAX

• 1)G.S.T. reporting and record-keeping has been simplified from 1.7.2017 for small businesses with a turnover of less than $10m.
• 2)The definition of “financial supply” has been extended to include the supply of bank accounts and superannuation interests by foreign financial
  institutions from 1.7.2017.
• 3)The G.S.T. treatment of digital currency such as bitcoin will be aligned with that of money from 1.7.2017 to avoid potential double taxation.
• 4)G.S.T. extends to cross-border supplies of services and intangibles, such as digital products, to Australian consumers from 1.7.2017.

RENTAL PROPERTY

• 1)Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property have been disallowed effective 1.7.2017.
• 2)From 1.7.2017, eligibility for deductions for depreciating plant and equipment in a residential rental property will be limited to the taxpayer
  that actually incurred the outlay to purchase the plant and equipment and not to successive investors in the property.

INTERNATIONAL

• 1)The Foreign investment framework will be clarified and simplified with effect from 1.7.2017 to make foreign investor obligations clearer.
• 2)The diverted profits tax (DPT) applies to tax benefits under a relevant scheme derived in income years commencing on or after 1.7.2017.
• 3)Failure-to-disclose penalties have been increased for significant global entities.

SUPERANNUATION

• 1)The low income superannuation contribution scheme is abolished from 2017/18; a low income superannuation tax offset will be available for 2017/18
  and later years.
• 2)The annual cap on concessional contributions has been reduced to $25,000 from 1.7.2017 for all individuals regardless of their age.
• 3)The threshold at which high income earners are liable for Division 293 tax has been lowered from $300,000 to $250,000 from 1.7.2017.
• 4)The restriction on funds accepting fund-capped contributions has been abolished from 1.7.2017.
• 5)A $1.6m transfer balance cap applies to the total amount of accumulated superannuation an individual can transfer into the tax-free retirement
  phase from 1.7.2017.
• 6)From 1.7.2017, the annual non-concessional contributions cap has been reduced to $100,000; individuals with a superannuation balance of more
  than $1.6m are not eligible to make non-concessional contributions from 1.7.2017.
• 7)Eligibility for the spouse contributions tax offset has been extended to individuals whose spouses earn up to $40,000 from 1.7.2017.
• 8)The 10% test to determine an individual’s eligibility for deductions for personal superannuation contributions has been removed from 1.7.2017;
  contributions to certain prescribed funds are not tax-deductible.
• 9)A superannuation transfer balance cap will limit the total amount of accumulated superannuation that an individual can transfer into the tax-free
  retirement phrase from 1.7.2017; excess transfer balance tax is payable for exceeding the cap.
• 10)An individual’s total superannuation balance concept is used to determine eligibility for various tax concessions from 1.7.2017.
• 11)Transitional C.G.T. relief applies for assets transfers in connection with changes to the tax treatment transition to retirement income streams
  and compliance with the superannuation transfer cap.
• 12)The tax exemption for income derived from assets has been changed to apply only to income streams in the retirement phase. Individuals can not
  treat superannuation income stream payments as lump sum superannuation benefits for tax purposes from 1.7.2017.
• 13)The anti-detriment provision, which allows superannuation funds to claim a tax deduction for a portion of the death benefits paid to eligible
  dependants, has been removed effective 1.7.2017.
• 14)The tax on working holiday makers’ superannuation payments when they leave Australia is 65% effective 1.7.2017.

CONFUSION OVER SMALL BUSINESS COMPANY TAX CUTS

In our last issue #088, we indicated that given recent A.T.O. comments there was a possibility that the small business company tax cuts could apply
to passive investment companies.

On 4.7.2017, The Minister for Revenue and Financial Services issued a media release in response to this. The Minister indicated that the policy
decision made by the Government to cut the tax rate for small companies was not meant to apply to passive investment companies.

GUIDANCE ON PROPOSED SIMILAR BUSINESS TEST FOR ACCESSING LOSSES

The A.T.O. released Draft Law Companion Guideline LGG 2017/D6 on 21 July 2017, which provides guidance on the new similar business test currently
proposed by Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017.

Under this new test, a company will be able to utilise tax losses made from carrying on a business against income derived from carrying on a similar
business following a change in ownership or control.

The Draft Guideline provides guidance on what carrying on a similar business means and includes various examples to demonstrate the approach the A.T.O.
will take in assessing whether a company satisfies the similar business test and by reference to the four legislative factors to be taken into
account. In summary, the Draft Guideline indicates that it will be more difficult to satisfy the similar business test if substantial new business
activities and transactions do not evolve from, and complement, the business carried on before the test time.

This is contrasted with the case where a company might develop a new product or function from the business activities already carried on, and this
development opens up a new business opportunity or allows the company to fill an existing gap in the market.

CASE AGAINST SELF-PROCLAIMED HUTT RIVER ‘ROYALS’ COSTS TAXPAYERS $80,000

In our last issue we covered this case; The A.T.O. has spent more than $80,000 in its latest legal fight against the self-proclaimed royal family of
an invented principality in W.A.’s wheat fields.

In June the founders of the Hutt River Province, self-proclaimed former sovereign Prince Leonard Casley and his son Arthur, lost legal action against
the Australian Taxation Office over the payment of eight years’ of income tax, worth more than $3 million.

A.T.O. legal cost summaries, released under freedom of information laws, show two cases against the 91-year-old Prince Leonard, who abdicated from
the throne he established for himself nearly 50 years ago, and his son, Arthur Wayne Casley, have cost taxpayers $81,865.91 to date. And of course
the A.T.O. had no choice but to pursue this course of action; we would expect nothing less.

GREATER REPORTING OBLIGATIONS FOR GROUPS WITH TURNOVER ABOVE $250 MILLION

The A.T.O. will extend the obligation to lodge the reportable tax position (RTP) schedule to companies in economic groups with a turnover greater than
$250million.

The RTP schedule is a schedule to the company income tax return that requires large businesses to disclose their most contestable and material tax
positions. The obligation to lodge the schedule only arises once the A.T.O. has notified the company they are required to lodge an RTP schedule.

The A.T.O. currently targets companies that fall within its ‘higher risk’ or ‘key player’ categories. For income years ending on or after 30.6.2018,
the obligation to lodge the RTP schedule will also apply to companies in economic groups with a turnover greater than $250 million. The A.T.O.
will notify taxpayers that are affected by these changes of their RTP obligations.

Taxpayers will need to use the Guide to reportable tax position 2018 to complete their RTP schedule which will be available from 1.7. 2018.

TOBACCO DUTY HARMONISATION

On 10.8.2017, Parliament passed legislation to ensure that manufactured cigarettes and roll your own (loose leaf) tobacco receives comparable taxation
treatment.

Currently, there is a disparity in the duty applied to cigarettes and loose leaf tobacco. The disparity occurs because the duty on cigarettes is a
set amount per cigarette stick – an assumed 0.8 grams of tobacco. The duty on loose leaf tobacco is applied by reference to weight, at a rate per
kilogram. As the average stick cigarette contains less than 0.8 grams of tobacco, the current rate of duty on loose leaf tobacco is a lower effective
rate than for stick cigarettes.

To correct the disparity, the per kilogram tobacco duty rate will be based on the new assumption that the average cigarette contains 0.7 grams of tobacco
and not 0.8 grams of tobacco as applies under the current rate.

This measure is estimated to deliver $360 million to the Budget over the forward estimates period, and additional G.S.T. revenue of $35 million which
will be paid to the States and Territories to fund essential services.

The adjustment will increase the duty imposed on roll your own tobacco over four years. The first adjustment will occur on 1 September 2017, with further
increases on 1 September 2018, September 2019, and 1 September 2020.

The Federal Government is also boosting efforts to combat trade in illicit tobacco. The 2016-17 announced additional funding of $7.7 million to expand
the Tobacco Strike Team. The Government is developing legislation to enhance penalties for illicit tobacco offences.

 

NEW ZEALAND JOINS AUSTRALIA IN MULTINATIONAL TAX CRACKDOWN

New Zealand’s decision to join Australia in tackling multinational tax avoidance has been welcomed by the Federal Government.

Australia has been a strong advocate for all jurisdictions to adopt these measures.

New Zealand will take action against multinationals that use artificial arrangements to avoid having a taxable presence in New Zealand.

In Australia, the Turnbull Government introduced legislation in 2015, the Multinational Anti-avoidance law (MAAL), that similarly attacks the artificial
commercial structures used by multinationals to escape paying tax here.

Australia has one of the toughest, if not the toughest, anti-avoidance tax regimes in the world.

The Australian people expect all corporations to pay the right amount of tax and this includes multinational companies. Over 30 corporate groups are
currently restructuring, with more to follow. Restructures completed so far have resulted in around $6.5 billion in income per annum now being
included in our tax base.

The A.T.O.’s Tax Avoidance Taskforce estimates this will lead to an additional $100 million in income tax being paid in the first year and over $300
million overall in the first four years after the MAAL came into effect. Notably, the restructuring in response to the MAAL also has had a significant
impact of around $240 million in G.S.T. revenue to the end of 2016/17, to be received by the States and Territories.

The Taskforce has strengthened the A.T.O.’s capacity to identify and crack down on not only tax avoidance by large corporates and multinationals, but
also private groups and high wealth individuals. The Taskforce is estimated to generate a $3.7 billion gain to revenue over the 2016-17/2019-20
forward estimates period.

New Zealand has also announced a measure which makes it easier for tax authorities to deal with companies that do not cooperate with requests for information,
which the Turnbull Government’s Diverted Profits Tax achieves by putting the onus on the multinational to justify its international tax arrangements.

A.A.T. REJECTS TAXPAYER’S CLAIM FOR INPUT TAX CREDITS

GH1 Pty Ltd (in Liquidation) v FCT [2017] AATA 1063

The A.A.T. has affirmed the Commissioner of Taxation’s decision to disallow input tax credits (ITCs) totalling $817,207 for bulk earthwork services
provided in relation to a development project.

The Taxpayer was unable to discharge its burden of proving, on the balance of probabilities, that the Commissioner’s assessment was excessive.

The A.A.T. found:

• the purported ‘tax invoices’ were not evidence of any actual taxable supplies made – the mere existence of a ‘tax invoice’ is not, by itself, sufficient
  to establish that a “taxable supply” (under section 9-5 GST Act 1999) and corresponding ‘creditable acquisition’ (under section
  11-5 GST Act 1999), has, in fact, occurred and
• There was evidence to demonstrate the relevant stages of development works had been completed prior to the dates of the purported invoices, and
  that ITCs in respect of the work were likely to have already been claimed in an earlier income year.

Where supplier loan accounts exist, it is crucial to maintain contemporaneous records sufficient to support ITC claims in circumstances where there
has been no physical payment for supplies. Here consistent and clear record keeping is the key and remember the onus of proof is on the taxpayer.

 

 

CLEARANCE CERTIFICATES

In the May Federal Budget we saw changes to the threshold at which a clearance certificate is required and the amount to be remitted to theA.T.O. if
no certificate is produced.

Developers should note the clearance certificate is valid for any property sold in the 12 months from date of issue. In the event that a project is
delayed an updated certificate will be required.

The changes apply from 1.7.2017, for the prior 12 months the Federal Government had a regime whereby vendors of real estate in excess of $2 million
had to provide purchasers with a clearance certificate on or prior to settlement or purchasers are mandated to retain and remit to the (A.T.O.)
10% of the price.

The key changes from 1.7.2017 are:

• the threshold at which a certificate is required has been reduced to $750,000
• the amount to be retained if a certificate is not produced and remitted to the A.T.O. is now 12.5% of the price

It should be noted foreign resident capital gains withholding clearance certificate application is not property specific.

For developers who have multiple property holdings, the A.T.O. has confirmed that an application can be made on behalf of an entity with an anticipated
settlement date for any property. Once the clearance certificate has issued, the certificate is valid for 12 months for all properties sold in
that 12 month period.

WHAT IS ‘DOMINANT USE’ IN REGARD TO THE PRIMARY PRODUCTION LAND TAX EXEMPTION

Redmadi Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 231

In this N.S.W. case, the Civil and Administrative Tribunal (Tribunal) dismissed the application and affirmed the Chief Commissioner for State Revenue’s
(Commissioner) decision to deny a primary production land tax exemption to a taxpayer on the basis that it was not satisfied that land was used
for the dominant purpose of primary production within the meaning of section 10 AA of theLand Tax Management Act 1956(Act).

Taxpayers using rural land for multiple purposes should carefully consider the position. If the dominant use of the land is for primary
production activities, they will be entitled to a full land tax exemption. However, if there is another dominant use of the land, the
taxpayer will not be entitled to a partial exemption for primary production activities.

The taxpayer owned land on which it ran a farm stay accommodation business and also maintained and bred alpacas, goats and some chickens.

The Taxpayer contended that the land was used during the relevant year for the ‘dominant purpose of the maintenance and breeding of animals for the
purpose of selling them or their natural increase or bodily produce’ (being the alpaca fleece). The Taxpayer argued that the use of the land as
a home stay accommodation business was a non-dominant purpose.

In reaching its decision the Tribunal considered the following factors which supported the view that the land was not for the dominant use of
primary production:

• when the land was purchased it was used for the purposes of, and widely advertised as, a farm stay accommodation business and that has continued
  throughout the Relevant Years
• in the employment contracts of the managers of the accommodation and livestock business, there was no ‘substantial reference’ in relation to duties
  to maintain or care for the animals
• the goats were sold for relatively insignificant amounts and no reliance is place on the sale of chickens or eggs to support the exemption claim
  and
• the tax returns of the Taxpayer for the 2011-2015 Years inclusive show a far greater revenue of activities on the accommodation operations as opposed
  to livestock operations ($1.15 million of revenue compared to $46,000 from sales of alpacas and fleece)

Accordingly the Tribunal concluded that this land was not exempt from land tax. As the exemption requires that the dominant use of the land is for
primary production, the Taxpayer was unable to claim a partial exemption for the portion of the land that was used for primary production activities.

CASH AND THE HIDDEN ECONOMY

Recently the A.T.O. published a fact sheet in which they outlined their sophisticated benchmarking and data matching activities. The following examples
are instructive: 

Example: Unrealistic personal income leads to unreported millions

The income reported on their personal income tax returns indicated that a couple operating a property development company didn’t seem to have sufficient
income to cover their living expenses.

The A.T.O. found their company had failed to report millions of dollars from the sale of properties over a number of years. A large portion of unreported
income had been lost through gambling and significant funds had been sent to an overseas bank account. The couple and their related companies had
evaded paying tax of more than $4.5 million.

They had to pay the correct amount of tax based on their income and all their related companies. They also incurred a variety of penalties, including:

administrative penalties (from the tax assessed on the returns that hadn’t been lodged – a minimum of 75% of the tax assessed)

false and misleading statement penalties (because of their intentional disregard of their tax obligations and lack of cooperation during the audit
– up to 75% of the shortfall of tax on the returns adjusted to their true income).

Example: Data matching uncovers hidden income

A Melbourne restaurant owner was found to have discrepancies between the business’s reported income and the data the A.T.O. received from their bank.

The owner was given the opportunity to let the A.T.O. know if they had made any errors before they started an audit. They consulted their bank and
tax agent and advised that the business had failed to report their entire turnover.

Following discussions, the business owner made a voluntary disclosure correcting the business’s tax returns for three financial years, resulting in
unpaid tax of over $750,000. The A.T.O. accepted this as reasonable because, based on the small business benchmarks; it was equivalent to other
businesses in the same industry with the same turnover range.

Example: Failing to report online sales

A Nowra court convicted the owner of a computer sales and repair business on eight charges of understating the business’s G.S.T. and income tax liabilities.

The A.T.O. investigated discrepancies between income reported by the business and amounts deposited in the business owner’s bank accounts. They found
the business failed to report income from online sales.

The court ordered the business owner to pay over $36,000 in unreported tax and more than $18,400 in penalties. The owner was also fined $4,000 and
now has a criminal conviction.

Example: Benchmarks used to calculate default assessments

A retail butcher shop was significantly outside the benchmark range for the industry.

When reviewing their records, it was clear the owners had failed to maintain the appropriate records as required by law. A number of errors were identified,
including:

• not keeping cash register rolls or point-of-sale system printouts
• not showing evidence of regular till reconciliations to support daily sales records
• inaccurate and incomplete sales records for business income, such as missing sales records for significant trade periods.

The owners weren’t able to explain how the income reported in their business tax returns was calculated. They didn’t have the records to support their
reported income.

The A.T.O. used the benchmarks to recalculate the business’s income, and then adjusted its tax return and the owners’ personal returns based on the
recalculated income. The A.T.O. subsequently issued the business and both owners default tax assessments.

The business owners had to pay tax based on the more accurate income calculated in the default assessments. They also incurred penalties for failing
to take reasonable care to meet their legal requirement to maintain accurate records.

A.T.O. – FOCUS ON CASH ECONOMY

Recently the A.T.O. published a fact sheet titled “Protecting honest business”. As part of their damp down on the black economy the A.T.O. will focus
on businesses that:

• operate and advertise as ‘cash only’
• data matching suggests they don’t take electronic payments
• are part of an industry where cash payments are common
• indicate unrealistic income relative to the assets and lifestyle of the business and owner
• fail to register for G.S.T. or lodge activity statements or tax returns
• under-report transactions and income according to third-party data
• fail to meet super or employer obligations
• operate outside the normal small business benchmarks for their industry
• are reported to them by the community for potential tax evasion – the number of reports the A.T.O. receives indicated that the community is less
  tolerant of unfair practices in these industries.

A.T.O. data analysis indicates that there are more businesses in some industries that have an unfair advantage.

Example 1: Failing to lodge and not reporting cash income

A licensed carpenter failed to lodge tax returns for a number of years. The A.T.O. demanded lodgment and when the tax returns were lodged, it was clear
that income from cash jobs weren’t included.

The A.T.O. conducted an audit for the 2006 to 2013 financial years and found the taxpayer had over-claimed input tax credits in addition to not declaring
cash income. Their record keeping was very poor and they couldn’t explain how some materials and vehicles were funded.

The audit resulted in the taxpayer owing additional tax and penalties of over $190,000.

Example 2: Failing to report cash income

The A.T.O. identified a company in the building and construction industry that hadn’t reported over $970,000 in cash sales over a two-year period.
The omitted income had been transferred into nine personal bank accounts as employee payments, including the company director. The nine employees
also didn’t report this income in their personal income tax returns.

This resulted in over $90,000 G.S.T. payable by the company with failure to withhold penalties of over $200,000 on the wages provided to its employees.

The total shortfall of income tax payable by the individuals was $277,000 and penalties of over $175,000.

The A.T.O. is visiting businesses across Australia as part of their ongoing focus on the cash and hidden economy. They are focusing on businesses advertising
‘cash-only’ or dealing mainly in cash.

The A.T.O. will work with business and industry associations along with local authorities like Chambers of Commerce and councils.

The A.T.O. will be talking to them about:

• why they are focusing on cash
• the benefits of electronic payment and record keeping facilities
• community expectations of paying by card
• their tools and demonstrating how to use them, including online lodgment
• making sure they’re registered correctly
• ensuring all businesses pay the correct amount of tax and super by declaring all their income and knowing what expenses they can claim
• lodging their tax returns and activity statements
• meeting their obligations if they are struggling, taking into account specific circumstances, and helping them get back on track
• any other help they may need.

If a business is deliberately doing the wrong thing, the A.T.O. has an obligation to do something about it; possibly resulting in an audit or even
prosecution.

Hair and beauty industry

Recent A.T.O. activities have resulted in:

• an increase of around 4% in timely lodgement of activity statements compared to the 2015 financial year
• an increase in G.S.T. registrations being corrected
• more timely payments of income tax and activity statement liabilities
• a reduction in outstanding payment obligations
• business owners being supported and educated to make informed decisions about their tax obligations