THE NEWSLETTER
SUMMARY OF 2018 TAX CHANGES
1. Capital Gains Tax
From 01.07.2017, the CGT foreign resident withholding rate is 12.5% this was previously 10% and the threshold at which the CGT withholding obligation applies
to Australian real property has been reduced to $750,000 (previously $2m).
From 01.01.2018 a CGT 60% discount is proposed to be available for a resident individual from investments, either directly through certain trusts in qualifying
affordable housing.
The CGT main residence exemption will no longer be available to foreign and temporary tax residents from 7.30 pm (AEST) on 09.05.2017 – budget night.
From 01.07.2017, CGT event E4 will not arise where a trust receives a tax-free capital gain under the early stage innovation company provisions.
2. Superannuation
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
01.07.2017; excess transfer balance tax is payable for exceeding the cap.
An individual’s total superannuation balance concept is used to determine eligibility for various tax concessions from 01.07.2017.
From 01.07.2017 eligibility for the spouse contributions tax offset has been extended to individuals whose spouses earn up to $40,000.
From 01.07.2017 the tax on working holiday makers’ superannuation payments when they leave Australia is 65%.
Transitional CGT relief is applied for assets transfers, in connection with changes, to the tax treatment of transition to retirement income streams and
compliance with the superannuation transfer cap.
From 01.07.2017 the anti-detriment provision, which allows superannuation funds to claim a tax deduction for a portion of the death benefits paid to eligible
dependants, was removed.
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 01.07.2017.
The low-income superannuation contribution scheme is abolished from 01.07.2017; a low-income superannuation tax offset will be available for 2017/18 and
later years.
The 10% test to determine an individual’s eligibility for deductions for personal superannuation contributions has been removed from 01.07.2017; contributions
to certain prescribed funds are not tax-deductible.
From 01.07.2017, 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 01.07.2017.
The annual cap on concessional contributions has been reduced to $25,000 from 01.07.2017 for all individuals regardless of their age.
From 01.07.2017 the threshold at which high income earners are liable for Division 293 tax has been lowered from $300,000 to $250,000.
3. Small Business and Companies
From 01.07.2017, the concessional corporate tax rate of 27.5% will only be available for “base rate entities”, being entities with no more that 80% of
its income being “base rate entity passive income”.
From 01.07.2017 Simplified BAS reporting applies to small business entities.
From 01.07.2017 the ATO will be allowed to disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged
with the ATO to manage these debts.
4. Goods and Services Tax
GST reporting and record-keeping has been simplified from 01.07.2017 for small businesses with a turnover of less than $10m.
From 01.07.2017 GST extends to cross-border supplies of services and intangibles, such as digital products, to Australian consumers.
The GST treatment of digital currency such as bitcoin has been aligned with that of money from 01.07.2017 to avoid potential double taxation.
From 01.07.2017 the definition of “financial supply” has been extended to include the supply of bank accounts and superannuation interests by foreign financial
institutions.
5. International
From 01.07.2017 the foreign investment framework will be clarified and simplified to make foreign investor obligations clearer.
The diverted profits tax (DPT) applies to tax benefits under a relevant scheme derived in income years commencing on or after 01.07.2017.
From 01.07.2017 failure-to-disclose penalties have been increased for significant global entities.
6. Other Changes
Eligibility for deductions for second- hand depreciating plant and equipment in a residential rental property will be limited for certain types of taxpayers.Generally,
only the entity that actually incurred the outlay to purchase the plant and equipment can claim the deduction and not successive investors in the property,
from 01.07.2017.
Since 01.07.2017, travel expenses related to inspecting, maintaining or collecting rent for a residential rental property have not been deductible.
Managed investment trusts have been allowed to invest in affordable housing since 01.07.2017.
From 01.1.2018, residential properties in metropolitan Melbourne that are left vacant for six months in the calendar year will be subject to a Vacant Residential
Property Tax at a rate of 1% of the property’s capital improved value.
For 2017/18 a new Queensland absentee surcharge applies at the rate of 1.5% of the taxable value of land in excess of $349,999.
Primary producers are allowed to access income tax averaging 10 income years after choosing to opt out, instead of that choice being permanent from 2016/17.
Foreign owners of residential real estate are liable to pay a vacancy fee where a residential property is not occupied or genuinely available on the market
for at least six months in a 12-month period.The fee applies to applications to acquire a residential dwelling or land from 7.30 pm (AEST) on 09.05.2017.
The junior mineral exploration tax credit (JMETC) will replace the exploration development incentive (EDI) from 2017/18.
From 01.07.2017, the Commissioner will limit a taxpayer’s PAYG instalment rate in cases where the normal rules would otherwise produce a very high rate.
GETTINGS GST CREDIT CLAIMS RIGHT
Including GST-free items or claiming credits for ineligible items are common errors when claiming GST credits on a BAS.
You must be registered for GST to claim GST credits.
Only claim goods and services subject to GST
You can only claim GST on goods and services where the supplier has included GST. You should refer to their tax invoices for the amount of GST they paid,
instead of dividing their total business purchases by 11.
Your tax invoices don’t specify the amount of GST paid, you need to take special care work it out. Remember to take into account whether the good or service
is used solely or partly for their business.
Have tax invoices
You must hold valid tax invoices for business purchases over $82.50, including GST. Other documents such as bank statements, purchase orders or delivery
receipts aren’t sufficient to meet the tax invoice requirements.
If this sounds like we are going back to 1999, just prior to the introduction of “GST. 101” then you are right.
Practitioners need to be aware that significant errors are being made by their clients. Taxpayers preparing their own BAS need to have at least a fundamental
understanding of GST. Just prior to the introduction of the GST. the Federal Government embarked on a massive education campaign so that business could
understand the fundamentals….
Almost twenty years on we have had so many new entrants into small business who for one reason or another have not learnt the fundamentals. It is a real
problem and certainly the ATO cannot be blamed because the information is readily available online.
Probably it is the professional advisers who need to be more proactive in the ongoing educative process when errors are detected.
BUDGETING
This is the time of year where some in small business struggle to pay off the December BAS obligations which were due 21. February.In a moment of quiet
reflection that European holiday with the business class seats over Christmas may not have been such a good idea…
The issue here is that PAYG deducted from staff wages and indeed the net GST payable should never be viewed as a net asset. It is merely a temporary cash
asset of the business – there is a corresponding liability – you are merely holding the asset on trust for the Australian Taxation Office. Many small
business owners would do well to remember this.
Of course, there is a key distinction between PAYG deducted from gross wages and the PAYG instalments a business pays on its own estimated taxable income
in the current tax year. The prior year’s taxable income is normally used a guide and along with both forms of PAYG and along with company tax and/or
income tax, it is essential that cash flow budgets be prepared for a business. If the owners have a clear indication of the timing and quantum of future
liabilities, then they are more likely to temper their personal expenditure and have adequate funds when the time comes.
Of course, the cash flow finishes with an estimated profit allowing an estimate to be made of the income tax payable.
In the absence of a cash flow budget, as a rough rule of thumb at least 20 per cent of the surplus cash produced by a business should be put aside to pay
future tax liabilities and professional advisers can certainly assist in this regard by actively encouraging clients to properly budget for these liabilities.
ATO DISCLAIMER ON PRIVATE BINDING RULINGS
Professional advisers and on occasion some taxpayers will review the ATO’s register of private binding rulings (PBRs). This is when they are faced with
circumstances they are unsure of and they are seeking the ATO view on similar circumstances. However, we would posit that “similar” is not good enough.
Carefully consider the ATO disclaimer on the register of PBRs:
“A record in the register is based on the facts of a specific situation as advised to us and reflects our view of the law in force at the time the advice
was issued.
The record is not a publication approved in writing by the Commissioner, and is not intended to provide you with advice, nor does it set out our general
administrative practice.
A record on this register is non-binding and provides you with no protection (including from any underpaid tax, penalty or interest).
In addition, a record on the register is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own
circumstances.”
COMPLEX ISSUE RESOLUTION
This is an ATO initiative available to professional advisers and it may be a far better option than reviewing the register of private binding rulings.
The complex issue resolution service is available to resolve complex administrative issues and tax technical interpretation queries you have been unable
to resolve online or by phone.
§The service is available to all registered agents, legal practitioners and other intermediaries who represent clients in a professional capacity. The
service operates on the understanding that if the ATO needs to discuss client specific details, you have been nominated as an authorised representative
of that client.
You can use this service for complex administrative issues or tax technical interpretation queries you have been unable to resolve online or by phone.
For example:
§Administrative issues, which are outside the norm and not able be resolved by your standard processes.
§General advice about new or changed legislation.
§Complex or multiple, related tax technical issues, for example where there is an interaction between taxes or a variety of concessions/considerations
within a tax.
§General help with legal interpretation – where a decision is required around the ATO view.
The ATO will acknowledge your enquiry within one working day. Their aim to resolve your tax technical issues within five working days. Administrative issues
and complex tax technical queries may take longer to resolve. If this occurs, they will advise you of the timeframe and keep you informed of progress.
ATO TARGETS CASH-ONLY HAIR AND BEAUTY BUSINESSES
Each year, the ATO will focus on certain sectors of the economy perceived as hotbeds of tax non-compliance.
In 2018, the ATO has set its sights on the cash economy, with the hair and beauty sector coming for close attention.
With widespread use of debit and credit cards, the ATO sees cash-only businesses primarily as a way of avoiding tax.
Although it isn’t illegal to operate a cash-only business, the ATO usually uncovers under-reporting of turnover, which in turn results in income tax and
GST being underpaid. In addition, cash-only businesses often fail to account for tax and superannuation properly on their employees’ wages.
STRUCTURED ARRANGEMENTS THAT PROVIDE IMPUTATION BENEFITS ON SHARES ACQUIRED ON A LIMITED RISK BASIS AROUND EX-DIVIDEND DATES
Taxation alert TA 2018/1
The arrangements involve an Australian taxpayer with a long position in Australian shares legally acquiring, but having little or no economic exposure
to, an additional parcel of the same shares and holding those shares over the ex-dividend date. They will typically involve the use of securities lending
arrangements in combination with, repurchase agreements or derivative contracts (contracts), to create what is essentially a circular flow of shares.
Although the Australian taxpayer has no or only nominal economic exposure to the additional parcel of shares on a stand-alone basis, the Australian
taxpayer claims franking credits in respect of both the existing long position and the additional parcel of shares.
Be very cautious if presented with such an ‘opportunity’ taking care to refer to TA 2018/1 while getting independent professional advice.
bO2 READERS QUESTIONS AND ANSWERS…….
Question 1
Part (1) – The Client is 66years old, has madea concessional contribution by way of salary sacrifice to a defined benefit fund since 1/7/2017:
$25,000.
The question:
Is he entitled to get a tax deduction up to $25,000 in the year 2018 income tax? If so, what is the negative effect on his retirement in the near future.
The Fund taxed his contribution 15% ($25,000-$3,750) =$21,250.
Answer – Part (1)
Firstly, as your client is over 65, it is necessary that the “work test” be met in order for a contribution to be made.
If so the client is entitled to a tax deduction but first, consider whether the client needs a tax deduction.
Some or part of this could be characterised as a non-concessional contribution without the need to pay the 15% tax.
You appear to be indicating that the client has already contributed the $25k – so regarding the negative affect on retirement?
Here we assume that you are referring to pension entitlements and we would advise that superannuation fund assets (asset test) and pension streams (income
test) are taken into account by Centrelink when considering eligibility for the age pension.
Part (2) – Thank you very much for your response.
The client met work test and asset test and income test,and getting small amount of prorate age pension:
The question is that:
Concessional contribution to defined benefit super fund entitles him to a tax deduction and,this deduction has a negative effect on his prorate age pension.
If so, can client complete Notice of Intent to claim deduction for personal super contributions.?
response –Part (2)
In the year ending 30 June 2018 your client is able to claim $25k as a tax deduction as you advise he has met the work test….
We assume he will have other assessable income that makes the claiming of the $25k as a tax deduction tax effective.
Also, that he has no employer support – kindly note that $25k is the total limit that includes individual AND employer contributions.
As his tax adviser you will be doing these sums close to the end of the financial year when you have an overview of the situation.
It may be that it is tax effective to claim only a portion of the payment as a tax deduction… and the fund manager should be advised accordingly.
But as you point out…. there are two issues being the tax saving and the effect on the pension.
Regarding whether the super contribution can reduce income for the pension….
The Dept of Human Services website indicates that they look at income only….
For rental property owners and business owners they look at the concept of net income.
So, if your client operates a business it would indicate that a tax deduction could be claimed for eligible super up to the amount that would make net
income nil.
If it were wage or investment income he derived, we suggest that would be another matter i.e. the super deduction would not be taken into account for the
pension income test.
We stress that this is our interpretation and that you or client could well hold another view.
Confirmation could be sought from the Dept of Human Services.
Question 2
I have a client who is over 60 years old and would like to draw out some of his super.
What are the Income tax implication of this draw down – is it tax free or is a portion tax free?
Does the situation change if the taxpayer had their own SMSF which is in pension phase since the member has ceased working and if the member draws out
more than the minimum percentage draw down each year – is this draw down tax free?
Answer
We take it the client is over 60 years of age but less than 65….
The preservation age has been met and the issue now is whether the client has retired.
In the case where a member has reached the age of 60, the retirement condition of release is satisfied where:
-they have ceased a gainful employment arrangement and either of the following circumstances apply
-the person attained age 60 on or before the ending of the employment and
-the trustee is satisfied the person does not intend to work again or be employed for more than 10 hours per week.
Comment: people do change their mind about retirement.
Regarding taxation of benefits… please refer to the table page 11 chapter 2 of our annual publication.
Question 3
Market Values of Properties that were transferred between related persons not at arm’s length…
Capital Gains.
A property was transferred, in stages between related parties not at arm’s length. There were no sales – merely transfers between related persons.
Ultimately, there was a sale of the property.
We are seeking a valid means of ascribing a market value to the intermediate
transfers.
Can you please help?
Answer
You can seek a private ruling from the ATO on the market value of the property. We’ve enclosed a fact sheet for your reference. You can seek assistance
from your tax agent.
Question 4
We have a client who has just sold a commercial property.
The property was split in half, he lived in the back half and rented out the front half to a tenant who operated a retail shop.
My question is should the seller (my client) be charging GST to the buyer?
He was not GST registered.
Answer
Division 38 & 40 of A New Tax System (Goods and Services Tax) Act 1999 contains supplies that are GST free or not subject to GST.
I don’t believe the sale falls into Division 38, which deals with the exemption for a “going concern”. It is not a supply of going concern since only the
property is sold.
Division 40 may have some relevance as the sale of the back half of the property may be input taxed if it is to be used predominantly for residential accommodation.
However, it is not input taxed if it is to be used for commercial purpose.
In GST Ruling GSTR 2000/20, the commissioner considers the phrase ‘to be used predominantly for residential accommodation.
Your client has 21 days to register from the time the property is sold
(S25-1).
Question 5
Property Matter – Trying to “relinquish title and ownership”
The ex-wife and her ex-husband resided in North Queensland during their posting.
Separated over 5 years ago, the ex-wife is still providing support for these homes (2). One previously owned by Partner and one Marital home. The ex-wife
had made capital improvements to his home prior to moving to the second property.
They both reside in NSW; the properties have been rented. The court order for the ex-partner to sell the homes has not eventuated. The ex-wife decided
to sign over the properties to the ex-partner.
The bank will not communicate with the ex-wife, and to settle this issue the ex-partner has raised documents that the ex-wife will have to pay capital
gains on the properties even though she has NOT received any entitlements from the properties.
The ex-wife would like to sign off on the documents. My advice was to obtain professional advice with an expert in this area.
Are you able to refer someone in property/divorce and capital gains for this situation?
What method of capital gains would apply?
Do defence members obtain any exemptions?
The ex-wife has no idea of what values he will be setting out in the contract.
Answer
We realise this is a difficult situation and very stressful for all concerned.
However, it is very respectfully suggested that you may not have sighted all the relevant documents and may not have the full facts.
As the bank will not communicate with the ex-wife, and you say she signed over the properties… then the following may have happened.
Title may have passed to the ex-husband due to a binding order of the Family Court (or similar).
If this happened some time ago then it is the ex-husband’s responsibility to pay the capital gains tax (CGT) – not the ex-wife’s.
There was an effective rollover and the ex -husband is deemed to have a cost base at the original date of purchase.
The exact nature of the documents to be signed by the ex-wife have not been disclosed but legal advice is essential.
We recommend that you contact a reputable family lawyer in a location convenient for the ex-wife so that she may be properly advised.
Question 6
Part (1) – A farming business operates as a family discretionary trust.
The trust holds only bank account, livestock and equipment that is operating assets. The trust holds no land, this is held individually by farm family
members mainly Dad & Mum.
Mum & Dad are trustees and appointers of the trust.
We are now considering adding the Son & Daughter in law as additional trustees and substitute appointers to allow them an interest in the farming business.
They work in the business with Mum & Dad currently receiving a wage.
If we do this is there any implication with disposal and acquisition of Livestock and equipment with current tax values much less than market values?
Answer – Part (1)
We note there is no mention of a company trustee and if they are individual trustees then this is potentially an asset protection issue.
Note that adding more family members as individual trustees just puts more family members at risk.
This is because an individual trustee can be held personally responsible for the debts of the trust.
Of course, if the trustee acts competently, honestly and in good faith then he/she is entitled to be indemnified out of the assets of the trust.
If currently the trustees are individuals, then this need to be addressed.
This matter needs to be looked at holistically as a business succession and estate planning issue.
Who should be the appointor(s) would be part of this.
It is very important and should not be put on the backburner.
In the meantime, the family can have private agreements in place as to the distribution of income.
Part (2) – I am aware of the issues for individual trustees v corporate, but my question is….
If we add a trustee, even change to a corporate trustee, does this constitute a disposal of the livestock and plant within the trust caused by the new
participants?
My opinion is it does not but am looking to confirm this….
response –Part (2)
As long as there is no change in beneficial ownership there is not a disposal.
Effectively this means that so long as the clause of beneficiaries is not altered then there is not a disposal….
In fact, the ATO have indicated that even where you delete beneficiaries there is not a resettlement.
It’s when you alter the deed to add beneficiaries then there is a problem.
New beneficiaries can be used as long as the deed originally contemplated them…. for instance, the new wife of a child of the specified beneficiary
etc.
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Answer
We agree there are no value shifting issues under the buyback and that it would be possible for this to apply only to a portion of the shares.
As nearly all the ATO guidance on this seems to be based on ASX listed shares you should seek a specialist opinion outlining the full facts and circumstances.
On the face of it… this does not appear to be a problem, but care does need to be taken particularly if the company has significant retained earnings.
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Answer
This really depends on what the relevant clause of the lease agreement discloses.
In principle we do not agree with GST being charged on a GST free item such as council rates but as you are going to claim the input tax credit…
it should not be a matter of great concern.
This really just becomes a cash flow timing issue for you.
Although the liability should be passed on to the tenant if the lease specifies, this should only be to the extent that GST is payable.
What we do have an issue with is landlords charging GST on GST, an example of this may be insurance premiums which do attract GST.
The landlord should only charge GST on the net amount.