Issue 94 – Asset Protection Newsletter

Joshua Easton


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← Issue 94 - Asset Protection

THE NEWSLETTER

Editor’s note

So out there at the coal face, what is going on?

Part of the pub or barbeque tack is some bright spark telling others they can claim up to 5,000 business kilometres without substantiation or logbooks,
this equates to a tax deduction of $3,300. This is not quite the case allowing for annual leave and public holidays. An annual claim of 5,000 business
kilometres works out at 110 business kilometres a week. In the event of an ATO audit, you will need to plausibly demonstrate how your motor vehicle
was used on tax deductible work-related journeys up to the number of kilometres claimed. Your employer may well be contacted for verification and your
status in the work place will not be enhanced in the event you have made false or misleading representations to the ATO. 

SUPERANNUATION

If the contributions caps are indexed, why aren’t they increasing for the 2018/2019 year?

Many have asked us this question…

The annual $25,000 concessional contributions cap is indexed, in $2,500 increments, rounded down to the nearest multiple of $2,500. Indexation is in line
with the annual increase in full-time average weekly ordinary time earnings (AWOTE).

The annual $100,000 non-concessional contributions cap is indexed in $10,000 increments, in line with the indexation of the concessional (before-tax) contributions
cap.

Since wages growth has been minimal, and wages would need to grow 10% for the concessional contributions cap to increase to $27,500, as confirmed by the
ATO, Australians are still subject to a $25,000 concessional cap, and hence still subject to the $100,000 non-concessional cap, for the 2018/2019 financial
year.

Wages growth has been static in Australia, and indexation for the contributions is based on the previous calendar year’s movements in AWOTE (June 2017,
and December 2017 movements). So, AWOTE has only increased 2.36%, which means if this level of wages growth continues, we will have a $25,000 concessional
cap for at least 3 more years. We note the recent 3.5% increase in the minimum weekly wage.

KEY CHANGES REGARDING GROUP CERTIFICATES

In the first two weeks of July millions of Australian employees eagerly anticipated the receipt of their annual group certificates (payment summaries)
– many unaware that are receiving this documentation for the last time.

With single touch payroll, group certificates are being phased out in 2018 – 19 for entities with more than 20 employees. When all small employers come
on board in 2020 very few employees will be receiving group certificates.

At the digital era gathers force and the ATO moves ever increasingly toward online tax returns with pre-filling of tax data, the future for the vast majority
of taxpayers looks paperless.

This of course also has major implications for the tax profession. This trend is inexorable with 11 O.E.C.D. nations having finalised online tax returns
for most taxpayers. In New Zealand only around 45% of employed taxpayers choose to prepare a tax return. The essence of single tax payroll is that
businesses disclose any tax deducted from staff salaries in real time – thus negating any need for group certificates. This enables the ATO to more
effectively keep tabs on employers’ compliance with their tax obligations.

We have covered in our last issue the crack down on Work Related Expenses (WRE) our last issue, in the 2018 Federal budget the government allocated an
additional $139 million to achieve this end.

If this does not have the desired effect in raising additional revenue, we see the introduction of a set standard tax deduction for WRE as inevitable.

This has certainly worked overseas and was first raised in the 2010 Henry tax review. Certainly, treasury favours this option. The implications for tax
accountants are not all negative – they will have more time to value add for their business clients taking the opportunity to give them timely business
advice.

Henry Tax Review

Certainly, Treasury favours this option. The implication for tax accountants are not all negative – they will have more time to value add for their business
clients taking the opportunity to give them timely business advice.

TAX CHANGES FOR FOREIGN INVESTORS

On 17.5.2018 the Government released exposure draft legislation and explanatory material for public consultation on the tax treatment of stapled structures
to give effect to the policy announced on 27 March 2018.

This puts into action targeted integrity rules designed to neutralise the tax benefits of stapled structures.

An increasing number of foreign investors have sought to convert trading income into more favourably taxed passive income through the use of stapled structures.
When combined with existing concessions used by foreign pension funds and sovereign wealth funds, some foreign investors are currently paying tax rates
of 15 per cent, or in some cases, far less.

The proposed amendments in the announced package will ensure that:

  • trading income that is converted to passive income will be taxed at the corporate tax rate;
  • foreign investors will no longer be able to use multiple layers of flow-through entities (i.e. trusts and partnerships) to ‘double gear’ their investments
    to generate more favourably taxed interest income;
  • foreign pension fund withholding tax exemption for interest and dividends is limited to portfolio investments only;
  • a legislative framework is created for the existing tax exemption for foreign governments (including sovereign wealth funds), and limit the exemption
    to passive income from portfolio investments; and
  • investment in agricultural land will not be able to access the 15 per cent concessional MIT withholding tax rate. New Government-approved nationally
    significant infrastructure assets may be eligible to access the 15 per cent concessional withholding tax rate for managed investment trusts for
    15 years. This will ensure continued support for the development of nationally significant infrastructure assets that enhance the productive capacity
    of the economy and drive long term economic growth.

To minimise the impact of these changes on existing investments, the proposed amendments include transitional arrangements of seven years (for ordinary
business staples) and 15 years (for economic infrastructure assets).

The stapled structures package is an important integrity measure, and the Turnbull Government is committed to introducing legislation as soon as possible.
To maximise time for consultation, draft legislation will be released in stages.

The released exposure draft legislation contains the first four proposed amendments in the package. Draft legislation on the agricultural MIT changes and
the conditions stapled entities must comply with to access the infrastructure concession and/or transitional arrangements will be released in due course.

ATO PRACTICE STATEMENT + PS LA 2008/6 AS RECENTLY UPDATED

The Law Administration Practice Statement provides guidance to ATO staff involved in matters where there has been, or is suspected to have been, fraud or evasion.

 

This practice statement provides guidance to ATO staff considering fraud or evasion in the context of the unlimited time periods which allow
the Commissioner to amend assessments (or to seek the payment of indirect tax which has been underpaid) due to fraud or evasion.
Fraud and evasion are two separate and distinct concepts.
Fraud – For the purposes of this practice statement, ‘fraud’ may be described as making false statements knowingly or without
belief in their truth (including such as when made recklessly, careless as to whether it is true or false), to deceive the Commissioner. 
Evasion – The threshold for an opinion of evasion is not as high as fraud. A taxpayer’s behaviour may not constitute fraud
but be nevertheless sufficiently blameworthy to constitute evasion.  ‘Evasion’ is best explained by reference to
the judgment of Dixon J in Denver Chemical Manufacturing v. Commissioner of Taxation (Denver) in which his Honour noted it would be unwise
to attempt to define the word ‘evasion’ but nevertheless suggested a ‘blameworthy act or omission on the part of the taxpayer’ was contemplated.
The High Court’s guidance from Denver as to what constitutes evasion, including the notion that some blameworthy act or omission is contemplated,
has been applied by the Federal Court and State Supreme Courts ever since. Refer to Appendix 1 of the Fraud or evasion guideline (period
of review) for an overview of how evasion has been considered by the High Court.

 

An opinion of evasion is a serious matter. It requires culpable conduct of the taxpayer, as described further below. 

What is a ‘blameworthy act or omission’?
The notion of a ‘blameworthy act or omission’:

  • lies somewhere between innocent mistake and intention to defraud
  • usually involves (in a taxation context) making a wrong statement or taking an incorrect position without a credible explanation
  • involves culpable conduct; being something more than mere avoidance or the mere withholding of information or supplying misleading
    information; such as an intention to withhold information from the Commissioner on the basis the Commissioner would likely take
    a different view of the tax outcome if the relevant act or omission (for example omission to disclose information) had not occurred
    and instead accurate representations or disclosures had been made.

The material facts must be examined to assess whether the relevant conduct is ‘blameworthy’. Evasion is to be assessed objectively, based
on the standard of a reasonable person in the position of the taxpayer. In other words, evasion involves conduct that a reasonable person
seeking to comply with their tax obligations would not engage in. 

When does evasion arise in a self-assessment environment?
The leading High Court authorities for the meaning of evasion relate back to periods before the introduction of self-assessment into the tax
system. So, although the meaning of evasion has not changed, the circumstances in which it arises have changed in some cases. Under self-assessment,
taxpayers are not usually required to include detailed information in their tax returns. Consequently, evasion involving deliberate withholding
of information does not usually occur at the return stage. Rather, such withholding of information might occur through a wilful or reckless
failure to keep records or to supply information during the course of a tax audit. It may also occur in relation to a failure to provide
information required by the Commissioner in a fuller return or schedule. However, simpler instances of evasion will arise at the return
stage; for example, where income is intentionally omitted from a tax return with no credible explanation.

 

The policy of Australian taxation law is generally to provide certainty and finality after a specified period, both for the taxpayer and for the Commissioner, regarding the tax liability of the taxpayer for a year of income or an accounting period.

For instance, the statutory time limits that apply for amending income tax assessments (two years or four years) emphasise
our duty to make timely enquiries and appropriate assessments.

The time limits for amending assessments under a self-assessment system are premised on the good conduct of the taxpayer,
tax agents, and others concerned with the assessment.

Fraud and evasion, however, involve culpable misconduct. The exceptions to the statutory time limits that apply where the
Commissioner is of opinion that there has been fraud or evasion make clear that a taxpayer is not entitled to the benefit
of a time limit for an amended assessment if the previous assessment is less than it ought to be (or where refunds
or credits have been over-claimed) because of dishonesty or other blameworthy conduct. 

 

PS LA 2008/6 goes on to emphasise that only senior ATO staff make these decisions in conjunction with ATO policies and practices bearing in mind the weight
parliament has placed on certainty and fairness for taxpayers.

ADVISORY BOARD TO HELP CLAMP DOWN ON THE BLACK ECONOMY 

The Turnbull Government has established a new Advisory Board to support its reform agenda to disrupt the black economy.

Michael Andrew AO, who provided strong leadership to the Black Economy Taskforce in 2017, will chair the Black Economy Advisory Board.

The Advisory Board will include members of the private and public sector who will provide strategic advice on trends and risks in the black economy.

The Advisory Board will also advise the Treasury about implementation of the Government’s decisions attacking the black economy and contribute to a Government
report every five years about new threats emerging in the black economy.

According to Kelly O’Dwyer the Minister for revenue and financial services:

  • The black economy is a serious problem that does harm to the community and honest businesses and deprives the community of revenue needed to support
    vital community services.
  • Honest businesses meeting their tax and other obligations lose out to competitors doing the wrong thing and induce others to begin operating in the
    black economy in order to remain competitive.
  • The Government’s actions include a $10,000 limit on cash transactions, a comprehensive strategy to combat illicit tobacco, reforms to the Australian
    Business Number system, restricting government procurement to businesses that have acceptable tax records, and $315 million in additional funding
    to the ATO to increase its enforcement activity against black economy behaviour.
  • A new black economy standing taskforce, led by the ATO, will also ensure a whole of government approach with agencies sharing intelligence and best
    practice.

The final report of the Black Economy Taskforce, the Government’s response and current consultation are available on the Treasury website.

IMPROVING THE ATTRIBUTION MANAGED INVESTMENT TRUST REGIME

The Federal Government is continuing with important reforms to improve Australia’s taxation regime for the managed funds industry and this committed to
setting an appropriate legislative framework for what is the largest managed funds industry in the South Pacific.

On 18.6.2018, draft legislation and explanatory material for public consultation was released on a package of technical amendments to ensure the new system
for attribution managed investment trusts (MITs) operates as intended. The amendments give effect to my announcement of 19 July 2017.

The amendments will clarify the law, providing industry with increased investment certainty and should assist those entities considering whether to opt
into the attribution MITs regime.

The attribution tax regime was designed to give greater certainty to investors in managed funds, reduce compliance costs for the funds and enhance overall
the competitiveness of Australia’s funds management industry.

NEW LAWS WILL PROTECT YOUR SUPERANNUATION SAVINGS

The Turnbull Government has taken action to protect the hard-earned superannuation savings of millions of Australians from rorts and rip-offs.

The Treasury Laws Amendment (Protecting Your Superannuation Savings Package) Bill 2018 introduced into Parliament on 21.6.2018 includes a range of reforms
which will protect against the undue erosion of superannuation balances through excessive fees and inappropriate insurance arrangements.

The reforms will also, for the first time, provide the ATO with the ability to proactively reunite Australians with their low balance, inactive accounts.

Fee protections

The Bill prevents trustees of superannuation funds from charging administration and investment fees exceeding 3 per cent per year, of the balance of accounts
below $6,000.

The Government’s changes also prevent trustees from charging exit fees when members close or rollover their superannuation accounts, no matter their balance.

These changes will help to prevent erosion of low balance accounts by high passively-incurred fees and will remove a disincentive to superannuation fund
members consolidating and closing unwanted accounts.

Tailoring insurance arrangements in superannuation

Under this Bill, fund trustees are required to provide insurance on an opt in basis only to new members aged under 25 years, members with account balances
below $6,000, and members with inactive accounts, unless a member has directed otherwise.

This will better target default insurance cover and prevent inappropriate erosion of retirement savings by insurance premiums for cover members do not
know they have, that goes beyond what they need, or which they cannot even claim on.

Importantly, members will still be able to obtain insurance cover within their superannuation if they choose to do so – young, inactive and low balance
account holders will still be able to opt in to insurance through superannuation.

These measures address significant issues associated with the current default insurance arrangements in superannuation.

Reuniting your super

The Bill will also further protect accounts below $6,000 from fees and charges by requiring them to be transferred to the Commissioner of Taxation if they
have been inactive for a continuous period of 13 months.

The Government will empower the Commissioner to then proactively pay these amounts, plus those lost accounts already held by the ATO, into the rightful
owner’s active superannuation account.

This will increase the rate of account consolidation across the superannuation industry, reduce the number of inactive low‑balance accounts at risk of
erosion and reduce insurance premium and fee duplication for many members.

It adds to earlier legislation introduced into the Parliament to improve fund governance, transparency and accountability to members, and to provide greater
powers to the regulator to better protect members and their money.

After all, your superannuation is your money.

Harding v Commissioner of Taxation [2018] FCA 837 – Expat resident of Australia

This case looks deal with a taxpayer who was an expat in the Middle East. The Federal Court found that although the taxpayer was not a resident of Australian
according to ordinary concepts, he was found to be an Australian resident as the taxpayer conceded he had retained his Australian domicile in the relevant
year and had no permanent place of abode. He had stayed in the same apartment tower in Bahrain but did not stay in the same fully furnished apartment.

The Court found in the relevant income year Mr Harding did not establish a permanent place of abode in Bahrain. By its character it was a type of premises
used for temporary or transitory accommodation and Mr Harding used it as such. By Mr Harding’s own acknowledgements in his affidavit, his presence
in that accommodation in that years was temporary and only intended to continue until he was joined by his wife and youngest son at which time they
would have acquired permanent accommodation.

So, what is the takeout here?

If, at all possible, make the characteristics of any tenancy permanent – one set dwelling as soon as you leave Australia. It is acknowledged that this
will not always be possible due to contractual constraints.

TAXATION RULING

TR 2018/5

Income tax: Central management and control test of residency

 

 

 

 

 

 

 

 

This Ruling sets out the Commissioner’s view on how to apply the central management and control test of company residency1 following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 ( Bywater ).
A company is a resident or a resident of Australia under the central management and control test of residency if it:

  • carries on business in Australia, and
  • has its central management and control in Australia?
Four matters are relevant in determining whether a company meets these criteria:

 

(1) Does the company carry on business in Australia? (see paragraph 6 of this Ruling).

 

(2) What does central management and control mean? (see paragraph 10 of this Ruling).

 

(3) Who exercises central management and control? (see paragraph 19 of this Ruling).

 

(4) Where is central management and control exercised? (see paragraph 30 of this Ruling).

 

Whether a company is a resident under the central management and control test of residency must be determined by reference to all the facts
and relevant case law.
Does a company carry on business in Australia?

To be resident under the central management and control test of residency, a company must carry on business in Australia.

 

If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within
the meaning of the central management and control test of residency.

 

It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia.
This is because the central management and control of a business is factually part of carrying on that business. A company carrying
on business does so both where its trading and investment activities take place, and where the central management and control of those
activities occurs.

 

Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are
carried on.

 

What does central management and control mean?

Central management and control refers to the control and direction of a company’s operations. It does not refer to a physical location
in which the control and direction of a company is located and may ultimately be exercised in more than one location.

 

The key element in the control and direction of a company’s operations is the making of high-level decisions that set the company’s general
policies and determine the direction of its operations and the type of transactions it will enter. 

 

So, we see that having overseas staff, offices and bank accounts simply does not stop an entity being deemed a resident Australia company

APPLYING GST TO LOW VALUE IMPORTED GOODS

From 1 July 2018, businesses that sell goods into Australia and meet the goods and services (GST) registration threshold of A$75,000 will need to register
and pay GST on goods that are:

  • less than A$1,000
  • imported into Australia
  • not GST-free items (for example, items of food).

 

This change also means Australian-based retailers that drop-ship goods will need to charge GST from 1 July 2018.

Those who buy low value imported goods should not be charged GST if they:

  • are registered for GST
  • import the low value goods for business use in Australia
  • provide their Australian business number (ABN) to the supplier, along with a statement declaring they are registered for GST.

 

In the event you are incorrectly charged GST, you should initially seek a refund from the supplier. In some situations, you may be entitled to claim a
GST credit instead.

It is essential that when claiming a GST credit, that you have a valid tax invoice. Only receipts which contain an ABN are valid tax invoices – even if
they apply GST. Some overseas suppliers may be registered in the simplified GST system and have an Australian Taxation Office reference number (ARN)
instead of an ABN.

REGISTERED CHARITIES NOT REQUIRED TO PAY ASIC LEVY

The Federal Government maintains it is committed to improving consumer outcomes in the financial services sector. The ASIC industry funding model is an
important element in the delivery of this commitment.

Under the ASIC industry funding model, the costs of regulation are borne by those that have created the need for it through the payment of levies, rather
than the Australian public. Industry funding, increases transparency, makes industry more accountable for its behaviour and makes ASIC a stronger regulator.

However, recognising the unique and important role charities play in our society, the Government will absorb ASIC’s costs of regulating the charities sector.
This means that registered charities will not have to pay ASIC levies.

Because of this decision, over 8,000 incorporated registered charities can now direct the fees they would have had to pay to ASIC towards charitable purposes.

The Government appreciates industry’s engagement throughout the development of the industry funding model and its associated Regulations.

This change forms part of a broader set of amendments to the Regulations underpinning the ASIC industry funding model. Further details on these Regulations
and the industry funding model can be found on ASIC’s website.

ENSURING FOREIGN INVESTORS PAY AUSTRALIAN TAX – INTEGRITY MEASURES PAPER RELEASED ON STAPLED STRUCTURES

In March, The Federal government announced a package of measures to reform the tax treatment of stapled structures and similar arrangements. The package
ensures trading income for foreign investors is taxed at the corporate tax rate, and limits access to broader concessions for passive income utilised
by foreign governments and foreign pension funds.

On 28.6.2018, a paper for public consultation was released outlining the conditions stapled entities must comply with to access the proposed infrastructure
concession and transitional arrangements.

These conditions were flagged in the Government’s announcement earlier this year addressing the tax integrity risks posed by stapled structures and provides
a further safeguard against aggressive cross‑staple pricing arrangements during these transition and concession periods.

The conditions include:

  • The extension of existing integrity rules that apply to Managed Investment Trusts (MITs) to ensure that all staples are required to set their rent
    at market prices; and
  • The introduction of statutory caps on the amount of cross-staple rent that can access the concessional rate of withholding tax (available under the
    MIT regime) for new and existing infrastructure projects during the transition or concession period.

Treasury is currently preparing exposure draft legislation on the proposed rules outlined in the paper.

BETTER TARGETING THE RESEARCH AND DEVELOPMENT TAX INCENTIVE

The proposed amendments to the R&DTI form the Government’s response to the recommendations of the 2016 Review of the R&D Tax Incentive and the Innovation and Science Australia 2030 Strategic Plan.

The Turnbull Government is seeking stakeholder feedback on the implementation of the proposed amendments. The exposure draft legislation, explanatory materials
and consultation document are available on the Treasury website. Interested stakeholders
are encouraged to provide their views by Thursday 26 July 2018.

STARTING OR GROWING A BUSINESS STARTS HERE

On 29.6.2018 the Federal Government officially launched the Business Registration Service providing a simpler and clearer way to register a business.

“Every year thousands of new businesses start-up around Australia, and to speed them through this pro