Issue 91 – Tax Saving Tips – February Newsletter

Joshua Easton

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← Issue 91 - Tax Saving Tips 2018


Keris Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCAFC 164 (13.10.2017)

The Full Federal Court has upheld the constitutional validity of s.255-100 of Schedule 1 of the Taxation Administration Act 1953 (Cth). The taxpayer
held a large tract of land with the intention of subdivision and sale.

Before this occurred, the Commissioner gave notice to the taxpayer under s.255-105 requiring it to give security to the Commissioner, by means of a
mortgage over its real estate assets, “for the due payment of a tax related liability”, being the future GST liability the ATO expected to arise
in relation to the sale of the lots. The Court upheld the validity of the notice under s.255-100, distinguishing the requirements in s.255-100
from the statutory contexts of the retention obligations in ss.254 and 255 of the Income Tax Assessment Act 1936 (Cth), as well as the constitutional
validity of s.255-100.

On the GST issue we note in passing that from 1.7.2018, purchasers of new residential properties or new subdivisions will be required to remit the
GST directly to the ATO on settlement. This was announced in the May 2017 Federal in Budget.


On 23.10.2017, The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP released draft legislation and explanatory materials for public

Announced in the 2017-18 Budget, the measures take action to address the growing economic and social problem of the black economy.

The package includes:

  • Banning the manufacture, distribution, possession, use or sale of sales suppression technology. This technology allows businesses to understate
    their income, and has been identified as a risk to the integrity of the tax system in Australia and internationally.
  • Extending the Taxable Payment Reporting system (TPRS) to two high-risk industries – cleaning and couriers – to ensure payments made to contractors
    in these sectors are reported to the Australian Taxation Office (ATO). The TPRS has already improved tax compliance in the building and construction

These Budget measures were included in recommendations from the Black Economy Taskforce’s interim report.

They are an important step in assuring the integrity of our tax system.

The draft legislation and supporting materials is available on the Treasury website.


Granted in Thomas + ANOR v FCT (2017) FCAFC 57

This case dealt with trust franking credit issues and was covered in issue #0087. The High Court has granted the commissioner special leave to appear
the Full Federal Court decision.


If you maintain electronic financial records, the ATO will consider an e-Audit. This involves the use of computer assisted verification (CAV) techniques
to analyse your records.

These techniques may not be appropriate in every compliance or client engagement activity. The ATO may use their information systems risk assessment
(ISRA) tool to assess system risks and as part of assurance and trust activities.


Benefits of Computer Assisted Verification/e-Audit

The use of CAV in audits and other compliance activities has a range of benefits, including:

  • it is cheaper and more efficient to provide information electronically
  • fewer requests to supply paper copies of transactions and reports
  • providing electronic information reduces the time we spend on your premises, minimising disruption to your regular business activities.

A tax officer skilled in e-Audit will also be able to analyse your electronic information more efficiently, accurately and thoroughly than if they
had used manual processes.

The e-Audit Process

The following describes how we work with you when conducting an e-Audit.

Accessing your records

Using formal access powers, the ATO is permitted full and free access to documents required for the purposes of the Acts they administer. ‘Documents’
include electronically stored information.

The ATO will usually seek access to your information through a cooperative approach, and will consult with you on the records required.

Supplying electronic information

When they identify a need for electronic information to be provided, the ATO will schedule a meeting with you to understand the:

  • (accounting and point of sale) systems you use if they have not already done so
  • system architecture diagram
  • format and extent of electronic records available
  • electronic records required
  • documentation available to assist in their analysis – for example, your chart of accounts, reference tables or data dictionary.

Your tax adviser and information technology specialists are welcome to attend this meeting.

The ATO will request that you download a copy of the mutually agreed electronic information from your system to any of the following:

  • a tax officer’s biometric thumb drive
  • a secure drop box via SIGBOX
  • any other agreed medium.

It’s recommended you keep a copy of the electronic information you supply to the ATO for your own records.

Data review and analysis

The ATO use specialised software to verify that the electronic information you provide is accurate and complete. They then conduct a series of tests
on your data to ensure you comply with tax laws and conduct these tests in accordance with the nature of the compliance activity being undertaker.

Specialised software will read the electronic information provided but does not allow any changes to be made to the data you have supplied.

There is no risk to your computer system

The process involves you downloading a copy of the required electronic information. The ATO will not operate your computer system.

When the compliance activity is completed

The original electronic information will be stored as part of a case file kept as a record of the compliance activity.

Information Systems Risk Assessment (ISRA)

The integrity of information systems used to support your business affects the accuracy and completeness of the information you report to the ATO.
They may use our information systems risk assessment (ISRA) tool to assess your system’s risks regarding the correct reporting of your tax and
super obligations.

ISRA is a process that provides a high-level overview of your information systems, using standard questions, enabling us to derive a risk rating for
key elements.

An ISRA is normally undertaken as part of a larger review or audit. If you are a privately owned and wealthy group or a public group, the ATO will
also use our ISRA tool as part of their governance assurance and justified trust models.

Benefits of ISRA

The use of ISRA in audits and other compliance activities has a range of benefits including:

  • providing an efficient way to understand your business, it’s systems and processes
  • highlighting compliance risks, which reduces the scope of any subsequent compliance activity.

The ATO will prepare a final report detailing the findings and incorporating any of your feedback. This includes recommendations to address any issues
identified that may impact on the accuracy and completeness of your reporting of your tax obligations.

The ATO will discuss the results detailed in the ISRA report with you in a final interview and you will have the opportunity to work through the findings
and offer any comments.

Your rights

It is important that you are aware of your rights and obligations when dealing with the ATO. If we advise you that they intend to undertake compliance
activities in relation to your tax affairs, you will be told about your relevant rights and obligations as set out in the taxpayers’ charter.


The ATO was quick to release a detailed statement, regarding the Paradise Papers

The International Consortium of Investigative Journalists (ICIJ) has reported about information they have in relation to offshore law firm Appleby.

The ATO has been working closely for several months with partner agencies here and overseas in anticipation of a data release by the ICIJ. These relationships
have enabled the ATO to commence analysis of the intelligence received to identify possible Australian links.

Deputy Commissioner International, Mark Konza said that the ATO is at the forefront of international co-operation and engagement and is regularly acquiring
new sources of data and intelligence, which bolsters information we already have.

“ATO intelligence on tax avoidance comes from a variety of sources, including from concerned citizens, advisers, partner agencies and international
bodies,” Mr Konza said.

“The data we are receiving from our international and domestic sources is comprehensive and current. This robust intelligence coupled with our powerful
analytics capabilities, assists us to continue to tackle tax avoidance head-on.

“We anticipate further data may be published by the ICIJ and the ATO will continue to work closely with other tax administrations to share intelligence
on advisers operating globally.

“Domestically, we are working with the Australian Criminal Intelligence Commission, the Australian Federal Police, and AUSTRAC to further cross-check
data and build our intelligence base, undertake audits, apply significant tax penalties where appropriate and refer cases to the Serious Financial
Crime Taskforce for criminal investigation.

“Internationally, the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) is already collaborating within existing legal
frameworks following the statement by Appleby last month. JITSIC brings together 37 national tax administrations that have committed to more effective
and efficient ways to deal with tax avoidance.

“As Chair of JITSIC the Commissioner brought member countries together last year to discuss global responses and formalise concrete actions in relation
to the Panama Papers.

“JITSIC member countries will continue to leverage off the success of the Panama Papers and work together to pool resources and share intelligence
to rapidly develop a more accurate picture of what the data is telling us.

“This highlights the ATO’s ability to lead effective multilateral working groups and success in working with international partners to improve the
way in which tax administrations exchange information and to develop a better shared understanding of the types of arrangements used to evade and
avoid tax.

“Given our early analysis of the data and the ability of the JITSIC member countries to come together quickly to build on each other’s intelligence
holdings and insights, I am confident the ATO is in a position to respond decisively to this data release.

“We know and trust that most people do the right thing, and that many taxpayers identified as part of the leak will be meeting their Australian tax
obligations. However, we investigate all leads and have the resources and expertise to take action against taxpayers or intermediaries found to
be caught-up in the illegal use of offshore structures or providers.”

The ATO encourages those who believe they may have undeclared offshore income to contact the ATO and come forward by making a voluntary disclosure.


Kasey Macfarlane, assistant commissioner Superannuation made a speech “SMSFs in the post Superannuation reform environment” on 1.9.2017 of particular
interest were her comments on valuations.

Asset Valuation

A cap on the value that an individual can transfer into the tax-free retirement phase and the consequences that flow if a member’s TSB exceeds the
limit brings asset valuations sharply into focus. The importance of asset valuations based on objective and supportable data cannot be underestimated.

The ATO’s published valuation guidelines for SMSFs still apply in the context of the super changes.

As stated in the guidelines, an SMSF trustee must be able to demonstrate that the value attributed to a particular fund asset has been arrived at using
a fair and reasonable process which:

  • takes into account all relevant factors and considerations likely to affect the value of the asset
  • has been undertaken in good faith
  • uses rational and reasonable processes
  • can be explained to a third party.

Clearly, allocating a value to listed shares and other listed securities, as well as cash is straight forward. But what about other classes of assets?

Real Property

Relevant objective evidence of the market value of real property may include:

  • a valuation undertaken by an independent professional valuer 
  • the purchase price in a contract of sale for a property that has been recently acquired by a fund, say in the last
    six months
  • kerb-side estimation of value by a real estate agent. Often in these circumstances an estate agent will provide
    a range within which they consider the property’s value sits. Ordinarily, provided the valuation attributed to the property by the SMSF trustee
    falls within that range then it’s acceptable to the ATO. However, as a point of caution, we would expect the same value to be attributed to
    the property for all purposes. For example, we would be concerned if a value at the top end of the range was used for transitional CGT-relief
    purposes and a value at the bottom of the range was used for TBC purposes
  • comparable and recent sales results for similar properties. Comparable sales data for recent sale of similar properties
    may be used as objective evidence to support the value attributed to real property held by a fund
  • rates notices. The value of a property as stated on a recent rates notice may also provide further
    objective evidence of a property’s value. However, as a word of caution, it’s important to understand the basis of a rates notice valuation
    before you rely on it. For example, is it a value on an improved or unimproved basis? Similarly, rates valuations are often an estimate of
    a property’s value in terms of its ‘best use’ and may not always be reflective of the market value of a property for super regulatory and income
    tax purposes. Therefore, it may be prudent not to rely solely upon a rates notice valuation; albeit a rates notice might provide useful additional
    supporting evidence as to the reasonableness of a value attributed to real property held by an SMSF
  • property valuation website data. Once again before relying on these types of services, it is important
    to understand the basis underlying the data provided through the relevant services. Often these services provide a statistical average of value
    and don’t necessarily reflect an accurate estimate of a property’s market value. Therefore, once again, whilst they may provide useful additional
    supporting evidence, it would be prudent not to rely solely on information about values provided by these services.

Investments in Unlisted Entities

Often, it’s suggested that the value of investments in unlisted entities can’t be valued because there is no market for this type of investment. The
reality is that these investments must have a value and if they don’t then there is a real question as to why an SMSF would have invested in them
in the first place and what was the purpose in doing so?

The starting point is to obtain the financial statements of the relevant entity and to review the accountant’s and auditor’s report. Relevant factors
to consider are whether or not relevant assets in the entity’s financial statements are recorded at market value. If not, the trustee will need
to obtain objective evidence of the market value of the underlying assets as objective evidence of the value attributed to its unlisted investment.

Any recent sales of the unlisted shares or unlisted units between unrelated parties is also another form of objective evidence that might be used to
support the valuation of an SMSF’s unlisted investments.

Investments in Other Assets

Approaches that can be used to determine or evidence the market value of other SMSF investments such as art and collectables include:

  • for artworks, an appraisal from the gallery from which the item was purchased is appropriate. If it the item was purchased recently then the purchase
    price is also likely to be a reasonable and reliable reflection of the item’s market value
  • in the case of items such as wine and other collectables, it may be necessary to obtain an appraisal or independent valuation. The insurance value
    specified in an insurance contract can also be useful to evidence the value of such items.

The ATO’s valuation guidelines for SMSFs do state that it’s not necessary to obtain an external valuation of assets every year.

However, trustees do need to determine the value of their fund’s assets every financial year. If a trustee is using a past valuation for these purposes
they still need to objectively demonstrate why that past valuation remains appropriate and to provide evidence that supports the contention that
the asset’s value hasn’t significantly changed. This is particularly critical in instances where members are approaching, or are very close to,
relevant caps.

We will closely monitor changes in behaviours in relation to asset valuations in response to the recent super changes. Needless to say, sudden and
significant reductions in SMSF asset valuations will attract our attention and scrutiny, as will the use of different valuations for TBC and TSB
purposes compared to capital gains tax purposes.


Question 1

Mr A has obtained a loan $250k using his residential house as security. For example, he used $100k for personal use and used $150k for investment use.

Unfortunately, his loan statement does not distinguish the monthly interest and principal payment for personal use and investment use.

What’s the best way to calculate the interest and principal payment of investment use for deductibility? Mr A wants to make sure to know the way of
calculation to satisfy the ATO in case of enquiry.


Retain detailed records of the disbursement of funds at the time the loan was taken out. The “use” test as consistently applied by the courts determines
deductibility of interest. You demonstrate that loans have been used to acquire income producing assets by having the written evidence to justify
such a claim in the event of an A.T.O. audit. If 60% of the funds have been applied to genuine investments, then 60% of the interest is tax deductible.

Question 2

Two individual persons want to buy the commercial property together for investment. We would like to know the best business structure for this use
regarding tax minimisation and asset protection.


Here are some variables (not exhaustive)

  • What is the gearing ratio, and will the property be negatively geared?
  • What is the investment horizon and how long do they intend to hold the property?
  • What is the commercial risk profile of the two individuals?
  • Are the two individuals at arm’s length? Meaning they are not family members.
  • What trading, and investment structures do the two individuals have?

The following comments are general in nature…

Given the purchase of a commercial property can involve a substantial investment by the respective parties, a partnership of two individuals is not
advisable. This is because partners can be jointly and severally liable for assets they hold together.

In the event one partner gets into financially difficulties, the investment in the commercial properly by the other partner could be at risk. A partnership
of two discretionary trusts with a clear understanding that the respective trusts only function is to invest in the commercial property, could
be a better option.

If there are substantial negative geared losses a hybrid trust could be considered.

A hybrid unit trust is a mix between a discretionary trust and a unit trust. This means, the beneficiaries of a “hybrid unit trust” have some entitlements
to benefit (generally as to income) that are fixed in their favour by the terms of the trust deed while other benefits (generally as to capital)
will only come their way if the trustee of the trust exercises a discretion in their favour. The trustee has the discretion to distribute income
to the discretionary beneficiaries, and the unit holders then have a right to receive income and capital that has not been distributed to a discretionary
beneficiary. Alternatively, the unit holders may be entitled to all the income of the trust, but may have a right to redeem their units for face
value, at which point the trustee will have complete discretion when distributing income or capital.

Essentially an individual borrows money and buys units in the trust personally, the trust buys an investment property, the individual claims a tax
deduction and when the property is sold any capital gain goes to discretionary beneficiaries.

However, the Australian Taxation Office (ATO) has expressed a concern with hybrid unit trusts. One of their concerns is where units are redeemed for
their face value as the property becomes positively geared. However, their main concern is the possibility of tax avoidance. According to them
the un-commercial use of certain Trusts will provide a scenario in which the distribution of possible income/capital gains to beneficiaries of
the trust who may have a lower tax rate in relation to the expenditure those lower tax payers laid out when purchasing those units. A loss or outgoing
is not deductible where it is incurred to gain or produce benefits for other persons.

A hybrid unit trust is set up to combine the best elements of a unit trust with the best elements of a discretionary trust in the one entity, and has
both unit holders and discretionary beneficiaries. TD2009/17 confirms the ATO’s view that an apportionment is required between interest paid for
income producing purpose (deductible) and interest paid for other purposes (non-deductible).

Question 3

Mr X is working as a contractor (commercial advertisement producer) for overseas clients. Mr X is an Australian and has an ABN (no GST registered).

One of overseas clients in France paid $100k to Mr X to make sure he supports client’s staff can shoot the commercial advertisement in NZ as scheduled.

Some of catering & trip expenses & other payments in France were paid by Mr X (part of contacting terms) as he received the fund from client
for that purpose.

Since Mr X is a sole trader and he receives the fund in Australian business bank account, I believe he needs to include the incomes and expenses in
his tax return although he worked in overseas. Is this correct?

Secondly, Mr X receives the fund from client and this fund is for the project that falls in FY17 and FY18. Can he defer the part of income to next
year’s tax return if project is not finished (this means he had not paid some expenses yet in current financial year).


As an Australian resident he is assessable on global income received, these payments must be properly disclosed in this tax return. It would appear
the G.S.T. implications are that this is not “a supply in connection with Australia” but the precise arrangements would need to be examined.

It would also appear that this is an export of services for G.S.T. again meaning G.S.T. should not be charged on the transactions given Mr X would
now appear to be exporting services.

Regarding a payment received for work not done at 30 June 2017, it is possible that this may be taken out of the P+L and transferred to the liability
section of the Balance Sheet as ‘unearned income’ using the ‘Arthur Murray’ principle.

Question 4

Client is running the business of media agency production, such as assisting the production of commercial advertisement for overseas client.

Client receives the lump sum fund from overseas client and this fund will be used for location fee, travels, accommodation and meal expenses. Meal
expenses for overseas client’s staff (not for client’s employees) can be between 7%-20%.

Generally, meal expenses for clients cannot be deductible because nature of expenses are entertainment expenses. Are there any public ruling(s) that
client can deduct these meal expenses (only for clients) in the media agency production industry? If not, how would you suggest treating these
meal expenses (only for clients) in the media agency production industry?


The fundamental question here is … Are the overseas clients staff here on a work assignment? If the client’s staff are involved in the production
and the payments are in effect a reimbursement for the daily sustenance of these staff, the food or drink provided is consumed because of work
related travel, the food or drinks are not provided by you in order to confer entertainment on clients’ staff. Then in our view, this is not entertainment,
meaning the expenditure is tax deductible without there being any F.B.T. implications.

Question 5

Small Business CGT Replacement Asset Relief J&JH rural partnership sold farming property Dec 2015 and “claimed” active asset replacement relief.
Dec 2017 about to enter into contract for purchase of new farming property, however for asset protection purposes they’re considering purchasing
the replacement asset in a new (yet to be established) family discretionary trust with the J&JH rural partnership leasing the property from
their family trust. Trustee of the family trust will be J&JH Company PL of which J&JH will be directors/shareholders. Would this structure
qualify for the replacement asset relief or will J&JH have to purchase the replacement asset in their own name.


We assume you have applied the small business CGT concessions in the partners’ income tax returns as the partnership itself is not a separate legal

You may also wish to consider whether you have maximised the:

  • 15-year exemption
  • Active asset test
  • Individual 50% deduction
  • Retirement concession

J&JH must purchase the replacement asset in their own name since the CGT event happened in relation to a CGT asset of their individual name in
an income year.

Section 104-198 states that CGT event J5 happens if you choose a small business roll-over under Subdivision 152-E for a CGT event that happens in relation
to a CGT asset in an income year and, by the end of the replacement asset period:

  • a)You have not acquired a replacement asset (the replacement asset), and have not incurred fourth element expenditure in relation to a CGT asset
    (also the replacement asset); or
  • b)The replacement asset does not satisfy the conditions
  • The conditions are:
  • i.The replacement asset must be your active asset; and
  • ii.If the replacement asset is a share in a company or an interest in a trust:
  • 1)You, or an entity connected with you, must be a CGT concession stakeholder in the company or trust; or
  • 2)CGT concession stakeholders in the company or trust must have a small business participation percentage in you of at least 90%

J&JH could use the discounted capital gain to purchase shares in the corporate trustee. However, this defeats the purpose of asset protection.
A unit trust could be considered but again the units would need to be held in the individuals’ names with only limited asset protection benefits.