SPECIAL BONUS ISSUE – SUPERANNUATION (WEALTH ACCUMULATION TIPS)
what’s New in 2017/18?
New Australian Financial complaints authority
Superannuation fund mergers – extended tax relief
Housing affordability measure: reduced barriers to downsizing – contributing proceeds into super
Housing affordability measure: first home super saver scheme.
Regarding
Last year’s changes we outline how these have played out
-Higher SMSF penalties
-SMSF borrowings to count towards $1.6 million balance cap
-Stricter rules for non-arm’s length transactions
We also include five new case studies.
THE NEWSLETTER
SINGLE TOUCH PAYROLL REPORTING
The A.T.O’s introduction of the Single Touch Payroll Reporting (STPR) is set to streamline the way employers report some tax and superannuation
information to the A.T.O. While there will be some immediate administrative benefits for early conformers, the introduction of STPR is compulsory
from:
- o1.7.2018 for businesses that employ more than 20 people
- o1.7.2019 for businesses that employ less than 20 people
Some of the Main Changes Include
- Ordinary Time Earnings, salary or wages and PAYG withholding information will be reported and available to the Commissioner in ‘real time’ when
payroll is periodically processed by the employer - Employers will need to acquire SBR-enabled software to comply with their PAYG withholding obligations
- New employees will be able to prepare TFN declarations and Super Choice forms online
- The STPR reports for PAYG withholding will become the approved form for reporting PAYG withholding (currently this information is in the activity
statements) - Employers that have reported their PAYG withholding obligations via STPR will have their PAYG withholding prefilled by the A.T.O on their BAS
- Large withholders will no longer report PAYG withholding on their activity statement
- Employers will be provided with the option to pay their PAYG withholding at the same time they lodge their STP reports to further align the reporting
and payment of PAYG withholding through the payroll system - Employers will no longer be required to submit an annual PAYG summary report to the A.T.O
It is possible employers may no longer need to provide annual payment summaries to employees who will have access to their payroll information via
their myGov account.
Action to Be Taken
Understanding the changes and how they apply to your organisation and beginning the planning process will help provide a smooth transition to this
new reporting requirement.
Well before the compulsory 1.7.2018 start date for business that employ more than 20 people, your payroll system will need to be STPR enabled to comply
with the new law. Additional costs may be incurred by employers, particularly those that do not currently use software based payroll systems or
out-of-date payroll software systems. There are a range of payroll software providers now working with the A.T.O on product updates from 1.8.2017
to ensure STPR enablement.
Relevant employers should review their company’s SGC and PAYG payroll processes to ensure the treatment of all types of payments and remuneration are
correct well before the two deadlines.
Three Crucial Steps to Get Things Started
- Consult with your accounting software provider to establish the current payroll processing arrangements will support the changes
- Conduct a detailed risk review of your current payroll procedures, including PAYG, superannuation, allowances, payroll deductions and the timeliness
of payments - Your HR processes should be reviewed and monitored to ensure employees are being treated fairly and paid correctly.
THE BUDGET ANNOUNCEMENTS AND THE HOUSING TAX INTEGRITY BILL 2017
The budget announcements directed at housing affordability included two curious measures, one denying travel expenses to inspect a rental property
and the other directed at subsequent owners of rental properties claiming depreciation deductions in excess of the value of assets acquired with
the rental property. Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 containing these measures was tabled on 7 September. Notably, the
provision purporting to implement the second of these proposals is the proverbial sledge hammer to crush a walnut, requiring complex exclusions.
TRAVEL EXPENSES AND RESIDENTIAL PROPERTY
This was announced in the Federal Budget handed down 9.5.2017, a new s26-31 of the ITAA 1997 denies a deduction for to travel incurred in gaining assessable
income from the use of residential premises as residential accommodation from 1.7.2017. Such expenditure cannot form part of the property’s cost
base for capital gains tax purposes.
Exceptions include the expenditure incurred in carrying on a business or by a corporate tax entity. Also, if the premises are also used for other income-producing
purposes then travel for those purposes remains deductible. Apportionment may be possible in the event of mixed travel purposes.
Deductions will remain available for a taxpayer conducting a boarding house or similar type arrangement that constitutes a business. Estate agents
acting on behalf of a landlord client will also be entitled to a deduction. And, where the agent passes on the travel costs in their fees, the
landlord is will not to be denied a deduction.
The availability of travel expenses by a company (although not a corporate trustee) may lead to some planning opportunities depending on a client’s
circumstances.
SHARE CAPITAL – SPECIAL LEAVE APPLICATION REFUSED BY HIGH COURT
In this case, High Court has refused the taxpayer’s special leave application to appeal against the Full Federal Court’s decision Cable & Wireless Australia & Pacific Holding BV (in liquidation) v Commissioner of Taxation [2017] FCAFC 71.
The Full Federal Court held that a ‘buy-back reserve’ account was not a share capital account such that the debit entry to the buy-back reserve did
not record a transaction reducing share capital. Accordingly, the transaction was correctly treated as a dividend that was subject to withholding
tax.
REFORMS TO STOP CORPORATE AVOIDANCE OF EMPLOYEE ENTITLEMENTS AT TAXPAYERS’ EXPENSE
The Government will introduce new laws to stop corporate misuse of the Australian Government’s Fair Entitlements Guarantee (FEG) scheme.
It is clear that some company directors are misusing the FEG scheme to meet liabilities that can and should be paid directly by the employer rather
than be passed on to Australian taxpayers. The FEG scheme is an avenue of last resort that assists employees when their employer’s business fails,
and the employer has not made adequate provision for employee entitlements.
The proposed changes will provide a significant disincentive for employers to exploit the taxpayer-funded scheme and avoid their responsibilities to
their employees. The changes will:
- penalise company directors and other persons who engage in transactions which are directed at preventing, avoiding or reducing employer liability
for employee entitlements - ensure recovery of FEG from other entities in a corporate group where it would be just and equitable and where those other entities have utilised
the human resources of the insolvent entity on other than arm’s length terms - strengthen the ability under the law to sanction directors and company officers with a track record of insolvencies where FEG is repeatedly relied
upon.
Costs under the FEG scheme have dramatically increased in recent years with FEG payments totalling more than $1 billion between 2012-13 and 2015-16.
There is increasing evidence that some employers are deliberately structuring their corporate affairs to avoid paying employee entitlements when
a business becomes insolvent.
The Government’s proposed changes to the Corporations Act will deter those businesses from engaging in practices that inappropriately shift costs onto
FEG, while strengthening the ability to pursue recovery of FEG costs.
These changes will be targeted to deter and punish only those who have inappropriately relied on FEG. They will not affect the overwhelming majority
of companies who are doing the right thing.
These changes build on the Government’s commitment to pursuing recovery of FEG payments from company directors through the FEG Recovery Program, which
was established by the Coalition Government in 2015.
The Government is taking action to ensure employers are held responsible for paying their workers and that taxpayers are protected from corporate abuse
of the FEG scheme.
The legislation will also support the Australian Government’s ‘Comprehensive Package of Reforms to Address Illegal Phoenixing’ announced on 12 September
2017.
R & D FRAUDSTERS IN THE GOVERNMENT’S SIGHTS
The recent successful prosecution against Melbourne tax agent Arjuna Samarakoon for defrauding the Australian Government highlights the Government’s
commitment to ensuring the Research and Development (R&D) tax incentive supports only honest taxpayers.
Mr Samarakoon was charged with money laundering offences after transferring $380,000 from company accounts to his own personal account, and has been
sentenced to 29 months’ imprisonment.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, said criminals who seek to defraud the Commonwealth through fraudulent R&D
tax incentive claims are being put on notice by the Serious Financial Crime Taskforce (SFCT), who are now taking priority action to stamp out this
behaviour.
Businesses undertaking legitimate R&D activities may be eligible to claim a tax offset under the R&D tax incentive. However, these claims must
be for legitimate research and development. The scheme is administered by the Australian Taxation Office (A.T.O) and the Department of Industry,
Innovation and Science (DIIS), and requires applicants to self-assess their eligibility.
The SFCT is actively pursuing taxpayers who make claims which they are not entitled to, preventing the loss of millions of taxpayer dollars.
Currently, there are approximately 15,000 AusIndustry registrants for the R&D incentive and a further 13,000 have already claimed through the A.T.O.
In 2016-17 total R&D tax offsets was $6.1 billion, of which $3.6 billion were refundable offsets. While most of these claims are legitimate,
the Government takes all matters of fraud seriously.
“Unfortunately, there are those who believe they can game the system for their own advantage. Our message to those people is you will be caught, and
you will face the consequences,” Minister O’Dwyer said.
With increased focus from the SFCT, R&D tax offset claims will be scrutinised for blatant abuse.
“Under the SFCT agencies can make better use of their resources, data-matching capabilities and intelligence-sharing relationships to uncover the most
intricately planned tax fraud schemes,” Minister O’Dwyer said.
G.S.T TREATMENT OF DIGITAL CURRENCY
The Treasury Laws Amendment (2017 measures N06) Bill 2017 was introduced into the House of Reps on 14.9.2017. This amends the G.S.T. Act to ensure
that supplies of digital currency receive equivalent G.S.T treatment to supplies of money.
CONSULTATION ON CONSOLIDATION INTEGRITY MEASURES
On 11.9.2017, The Minister for Revenue and Financial Service, the Hon Kelly O’Dwyer MP released draft tax consolidation legislation and an explanatory
memorandum for public consultation.
These important measures restore integrity to the tax consolidation rules, making sure they are operating as intended and providing appropriate tax
outcomes. They continue the work of the Turnbull Government in strengthening our corporate tax system.
The tax consolidation rules allow wholly owned groups to choose to form a ‘consolidated group’ for tax purposes, which is treated as a single entity
for tax purposes.
The Bill contains six measures designed to remove anomalous tax outcomes that arise under the tax cost setting rules when an entity leaves or joins
a tax consolidated group. These measures:
- prevent a double benefit from arising in relation to deductible liabilities when an entity joins a consolidated group;
- ensure that deferred tax liabilities are disregarded;
- remove anomalies that arise when an entity holding securitised assets joins or leaves a consolidated group;
- prevent unintended benefits from arising when a foreign resident ceases to hold membership interests in a joining entity in certain circumstances;
- clarify the outcomes that arise when an entity holding financial arrangements leaves a consolidated group; and
- clarify the treatment of intra‑group liabilities when an entity leaves a consolidated group.
These measures address concerns raised in the Board of Taxation’s post-implementation review of the consolidation rules.
BRACKET CREEPING ME OUT
As Government debt has edged over $500 billion getting the Federal Budget back into surplus has assumed more urgency.
In September the Parliamentary Budget Office (P.B.O) issued a report which showed their 2017-18 Budget medium-term projections report identified
that the projected return to surplus in 2020-21 is predominantly due to a projected increase in personal income tax revenue.
The average tax rate faced by individuals is estimated to increase by 2.3 percentage points over the period from 2017-18 to 2021-22. The report examines
how the projected increase in the average tax rate is expected to vary across individual taxpayers in different parts of the taxable income distribution.
The average tax rate for individuals in every income quintile is projected to increase over the period from 2017-18 to 2021-22. The largest increase
is expected to be faced by individuals in the middle income quintile, whose taxable income is expected to average $46,000 in 2017-18. This group
of taxpayers is projected to face an increase in their average tax rate of 3.2 percentages points by 2021-22, as a higher proportion of their income
is taxed at the 32.5 per cent rate. Their average tax rate is expected to increase from 14.9 per cent to 18.2 per cent.
Increases in the average tax rate of between 1.9 and 2.5 percentage points are projected for individuals in the second, fourth and fifth quintile.
The average tax rate for individuals in the lowest quintile is projected to rise by only 0.2 percentage points because most of their income remains
below the effective tax-free threshold.
Across all quintiles, the largest driver of the increase in average tax rates in expected increases in nominal incomes. This reflects the impact of
bracket creep, on account of both inflation and real income growth. In addition to the effect of nominal income growth, average tax rates are projected
to increase due to policy changes, most notably the policy decision to increase the Medicare Levy from 2019-20.
WHAT DOES THE DEPRECIATION DEDUCTION DENIAL MEAN FOR DEVELOPERS?
We covered this in our budget edition #0087 and property bonus edition #0089. For contracts signed after 9.5.2017, depreciation deductions are no longer
available to purchasers of second hand property. This will be topical for developers trying to sell inner city apartments in the next two years.
It should be stressed that while the housing tax integrity bill has a carve out for new residential premises (s40-27(47), with an oversupply looming
in some markets, developers may decide to lease to a short term tenant in the expectation the market may improve.
The exclusion from the denial of deductions to the subsequent purchase is six months from becoming new.
Purchasers other than owner occupiers i.e. investors need to be aware of these changes and how their after tax net yield is affected. Developers who
hang on to properties in the circumstances above, for more 6 months can expect purchasers to be aware of the changes and have this factored into
negotiations.
Property owners who want to subsequently let out their family home
In this case the tax imperative would be to move into the new premises the old chattels as they will not be tax deductible. This is because the depreciation
deduction denial also applies to an asset that was bought new but used by a landlord for a non-taxable use. An option would be to move out and
purchase new assets – this may not be affordable and /or practicable. And of course, there are some assets that cannot be sensibly removed including
common property. The take out is that developers, landlords and purchasers of second hand properties, need to have a sound understanding of these
changes and how they are affected.
PASSIVE INCOME –SMALL BUSINESS CORPORATE TAX RATE: EXPOSURE DRAFT LEGISLATION RELEASED
We have covered this matter in past tax updates and note that in September, the Treasury released its exposure draft legislation regarding its proposal
to limit the small business corporate tax rate to companies that do not exceed a passive income threshold of 80%.
Currently, a company that carries on business and does not exceed the aggregated turnover threshold (being $25 million for 30.06.2018 and $50 million
for 30.06.2019) is eligible to apply the lower corporate tax rate of 27.5%.
In order to access the lower rate, it is required that a company’s passive income must not be 80% or more of its assessable income in any financial
year. Passive income includes rent, royalties, capital gains, interest (subject to certain exclusions) and trust or partnership income (to the
extent that it consists of passive income).
The proposed amendment:
- Applies retrospectively to 1.7.2016 and therefore may require amendment to tax returns lodged on the premise that pure passive investment companies
were eligible for the lower rate. - A large capital gain could result in a company failing the 80% passive income test, resulting in the standard tax rate of 30% would apply to all
the company’s assessable income for that year. - Those seeking to direct passive income into a trading company must carefully consider insolvency risk and asset protection.
When small companies on the 27.5% tax rate pay dividends, the total tax paid by the company and shareholders will be greater than if the company remained
at the 30% tax rate. In effect, the extra tax arises due to the trapped franking credits in the company which is a real tax cost for the shareholder.
This results because it increases the top-up tax payable by the shareholders, and the 2.5% franking credits left behind in the company are effectively
wasted. This first became apparent in companies with less than $10m turnover that became entitled to the 27.5% tax rate from 1 July 2016. In the
future this problem will be exacerbated when the 27.5% tax rate kicks in for companies with less than $25m turnover for the 2018 financial year
and $50m turnover for the 2019 financial year.
CONSULTATION ON THE DEFINITION OF ‘TAXI’ FOR FBT
The A.T.O is currently consulting on the:
- Definition of ‘taxi’ contained in the Fringe Benefits Tax Assessment Act 1986
- Exemption from fringe benefit tax travel taken to or from work due to illness.
Currently, taxi trips to and from work that are provided to an employee due to illness are exempt from fringe benefits. However, trips taken with ride
sourcing or hire car trips are not.
The A.T.O is inviting comment on extending this exemption by broadening the interpretation of ‘taxi’ to include:
- Vehicles licensed to provide taxi services, including rank and hail services
- Ride-sourcing vehicles
- Other vehicles for hire
Feedback on this consultation closed on 24 October 2017 but we will keep you informed on developments.
bO2 READERS QUESTIONS AND ANSWERS…………
Question 1
Purchase of farming property in May 2013 for $1,600,000 in the family trust. The family trust is a business of primary production. This 160-acre property
has since been rezoned to residential R1 and approximately 800 lots will be available for sale at 550 sq. metre minimum lot sizes.
We plan to sell the 160-acre property prior to development with the Development Control Plan approval by council in approximately 12 months’ time.
My question is, will this property sale be taxed as an active asset being able to access the small business concession. Our income is gross $400,000pa.
well below the threshold to qualify.
Answer
Given the turnover the capital gains tax small business concessions can be accessed if we are dealing with active assets. In the event you have genuinely
conducted a business of primary production and the land has not been mixed use… i.e. partly used for agistment, then the property would
appear to be an active asset. Note than in your particular case the land must have been an active asset (i.e. used in a business) for at least
half the period of ownership. Also “passive income” such as agistment does not meet this test. Of course, if you did the subdivision yourself,
there could be problems, but we note the plan is to sell the land before then. We stress however that specialist advice should be sought as we
do not have the full facts and circumstances.
I have a Corporate Client who is selling off part of a Client Base and I’m unsure of the Tax Consequences, although it does appear to be a CGT Event.
The Sale Price is expected to be $175,000.
A Cost base is yet to be established, but it will probably be between $40,000 and $80,000.
It’s all Goodwill.
The ATO have suggested that TR 1999/16 and TR 2005/16 may help me.
The Corporate Client has been operating for some 13 years.
Answer
Let’s work on the basis that the capital gain is a notional $115k.
Example 2 in TR 1999/16 indicates we are dealing with goodwill, but this would have to be determined and confirmed from the terms and conditions of
the sale.
We do not see how TR 2005/16 is relevant in any way as this deals with PAYG issues.
Given the business has operated for 13 years, we are clearly dealing with a post CGT (Sept ’85) asset and the 15-year retirement exemption does not
apply.
Firstly, are there any capital losses in the company? If so then these should be offset first.
So, to be clear we are now dealing with the CGT small business concessions.
Given all the SBE CGT conditions have been met, you could apply the active asset (AA) concession (50% reduction) but the application of this illustrates
the shortcomings of a company in these instances.
A trust would be effectively able to apply the active asset concession (50%) and then the individual concession (50% of the remaining balance) if the
distribution was made to an individual.
This effectively deals with 75% of the capital gain.
In a company you can only apply the AA concession at company level – you then pay out this component of profit as an unfranked dividend then pay individual
tax or deal with a Div7A issue.
For this reason, many people in this situation decide to apply the retirement exemption which is up to a lifetime limit of $500k per person.
If the significant individual is less than 55 years of age, then this must be paid into a complying super fund with no contributions tax.
If the individual is over 55 years of age, then there is no requirement that the capital gain be paid into a complying super fund – rather it can be
accessed by the individual.
Question 3
Division 7A dividends
There is a small (family) private company and made a profit from the 2015/2016 and paid the company tax. But the company had not enough assets at that
time and eventually made an item of “loan to director” on the FS. In the 2015 /2016, there was no dividend to shareholder (director).
This is the first case for me to deal with it. I have not done well at it.
For your reference, Loan to director: $100,000 for 2015/2016 and expected in $150,000 for 2016/2017.
I would like to know on how to manage with the “loan to director” for the correct company tax return.
Do I have to apply for the Division 7A for the company?
If applied, could you please let me know in detail how to apply for that including the minimum repayment and interest etc…?
Answer
First of all, what are the shareholders’ marginal rates of tax?
It may be better to declare dividends if they have little or no taxable income.
This can be done by crediting their loan accounts – no actual payment needs to be made.
It sounds as of franking credits do exist.
You need to have a complying loan agreement in place and calculate interest on the loan which will depend on the timing of the debits to the loan account.
The first year the loan was advanced incurs no interest.
For your information the benchmark rates of interest are:
2015/16 5.45%
2016/17 5.40%
2017/18 5.30%
The formula in subsection 109E(6) of the ITAA 1936 will be of assistance. We hope this helps.
Question 4
I have a quick question.
I have recently been engaged by a client for casual tutoring services. (18 hours /week).
I travel 3 days per week from my office to the University Campus. The distance is approx. 103klm. I intend using a log book and claim “cents/kilometre”
method. A flat rate of $0.66/klm??
Could you advise if I am doing this correctly?
Answer
Yes, that is correct …. travel between two places of business is a tax deduction. It is fine to claim cents per kilometre but note the limit of 5,000
kilometres per financial year.
Under the existing arrangements you are travelling 618 kilometres a week. i.e. return trip 206 kms (assuming you return to the office) times three.
8 weeks of this will total 4,944 kilometres which will virtually expire the limit.
In view of this keeping a logbook is a good idea. A logbook must be kept for at least 12 consecutive weeks and is valid for:
-5 years or until usage patterns change.
Clearly when this tutoring arrangement ceases usage patterns will have changed. Keeping an ongoing logbook means you may elect to claim a % of business
use for the period these arrangements continue.
Keep your options open.
My client is a NFP and they have salary packages for their Senior Executive Staff that are not as yet at the high-income threshold of $ 142,500. The
salaries incorporate a cash component and then some packages have a non-cash but still monetary attributed value for the use of a Motor Vehicle,
and others have a cash vehicle allowance valued at between $ 12,500 and $ 15,060 dependent upon position.
They pay the wages as per the Transitional Pay Equity order and they are under the Social, Community,Home Care and Disability Services Industry Award.
Their staff specifically respondents to the Community Services Worker Levels.
The question is that overall, as a combined salary annually one would expect that it meets the no disadvantage test as an overall annual package, however
when making such an assessment, would the Commission require or expect the cash component to be as per the specific Award level in the first instance?
I’m not used to seeing executive levels of wages in an award, but this award goes up to $ 102,710.40.
Most of their senior team are Level 6 and the highest level of that classification is $ 87,068.80 as an award rate.The salaries of the staff in question
as a total package are: –
Staff Member A – $ 101,613.50
Staff Member B – $ 111,752.47
Staff Member C – $ 126,812.00
The reason the question has been raised is that while other staff are receiving CPI increases, where staff are employed under these executive salary
package arrangements, there has been some movement over the past few years (2014 – 2017 the executive have had a movement / increase of between
2.19% to 4.35 % at CEO level) where the CPI increases over the same period have been 13.20%.
I know the non-disadvantage test takes into account many other factors however they are not working excessive hours or regular patterns of overtime.
They have flexibility and autonomy to manage their own work schedules so there is no question that the hours expectation is unreasonable or outside
of award terms.
So, to cut a long story short, if these salaries,as in the base salaries for the Executives,fall below the award level due to nominal CPI increases,
does the Board need to increase the base cash component of the Executives to meet the award level or is the package overall considered to still
be “over award”.
Answer
- My preliminary view based on the information provided is that the “no disadvantage test” was part of the superseded Work Choices legislation and
has been replaced with the Fair Work Act 2009 Cth Better Off Overall Test or BOOT which is substantially different. - Application of the BOOT may include the package items mentioned if they are clearly defined in a registered Enterprise Agreement or compliant Individual
Flexibility Agreement, an employment contract may not meet these requirements unless drafted appropriately. - The first test applied under the national Employment Standards (NES) is that the employer is paying