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Practice Update February 2019

Welcome to the Davenports Practice Update for February 2019


Division 293 assessments

The ATO has been issuing ‘Additional tax on concessional contributions (Division 293) assessments’ with respect to liabilities relating to the 2018 income year.

Division 293 imposes an additional 15% tax on certain concessional (i.e., taxable) superannuation contributions.

It applies to individuals with income and concessional superannuation contributions exceeding the relevant annual threshold.

This means that impacted individuals may ultimately pay 30% tax (when the Division 293 tax is combined with the existing 15% contributions tax) with respect to:

  • superannuation contributions made on their behalf as a result of employer super guarantee obligations or effective salary packaging arrangements; or
  • personal deductible contributions.

The ATO reportedly expects to issue about 90,000 assessments during the first two months of 2019.

Payment needs to be made by the due date to avoid any additional interest charges, although alternative payment methods are available (including the ability to release money from any existing super balances).

Editor: More individuals will receive Division 293 assessments (and be required to pay the additional 15% tax) for the 2018 financial year due to a drop in the applicable threshold from $300,000 to $250,000.

Additionally, one of the key ALP tax policies for the upcoming Federal Election includes a further reduction of this Division 293 threshold from $250,000 to $200,000.

Editor: The proposed amendments are intended to apply from 1 July 2019 and will arguably be the most significant tax reforms impacting business and investment clients over the next two years.

At this stage of the consultation process, the Government is currently considering submissions made with respect to these proposals and it is expected that draft legislation, and further clarity, will be available early in the 2019 calendar year.


Claims for home office expenses increased

The ATO has updated the hourly rate taxpayers can use to determine deductions for home office expenses from 45 cents to 52 cents per hour for individual taxpayers, effective 1 July 2018 (i.e., from the 2019 income year).

According to the ATO’s recently updated PS LA 2001/6, individual taxpayers who claim deductions for either work or business-related home office running expenses may either:

  • claim a deduction for the actual expenses incurred; or
  • calculate the running expenses at the rate of 52 cents per hour.

Taxpayers who use the rate per hour method to claim a deduction for home office running expenses only need to keep a record to show how many hours they work from home.

This reduced substantiation requirement can be recorded either:

  • during the course of the income year; or alternatively
  • they can keep a representative four-week diary (where their work from home hours are regular and constant).


MYEFO report

The Mid-Year Economic and Fiscal Outlook (‘MYEFO’) report was recently released.

It indicates that the underlying Budget deficit is expected to be $5.2 billion in 2019 (down from the $14.5 billion deficit estimated in the 2018/19 Federal Budget).

The substantial deficit reduction is reportedly a result of increased tax collections, with individual tax collections up $4.1 billion and company tax collections up $3.4 billion.

Additionally, the MYEFO report also provides a useful snap shot of what the Government is thinking when it comes to tax policy – particularly where previously announced reforms are still pending.

A few tax-related policy updates confirmed in the MYEFO worth mentioning include the following:

  • GST compliance program – The Government is looking to provide $467 million of ATO funding from 2020 to 2024 to fund additional GST-related audits and the development of analytical tools to combat emerging risks to the GST system.
  • $10,000 cash payment limit – The Government will delay the introduction of an economy-wide cash payment limit of $10,000 from the originally proposed 1 July 2019 start date, until 1 July 2020.
  • Abandonment of the proposed changes to intangible asset depreciation – The Government has announced it will not be proceeding with the current proposal to allow taxpayers to self-assess the effective lives of certain intangible depreciating assets.
  • Super access for victims of crimes – The Government proposes to introduce legislation to allow victims of certain crimes (i.e., serious violent crimes) access to their perpetrator’s superannuation to pay any outstanding compensation.
  • Increasing the integrity of limited recourse borrowing arrangements (‘LRBAs’) – The Government is making an adjustment to the previously announced reforms requiring outstanding balances of LRBAs to be included in a member’s total superannuation balance by extending the start date and limiting impacted taxpayers.
  • Superannuation guarantee (‘SG’) penalty increase – Where employers fail to come forward during the 12-month SG amnesty, the Government is proposing to increase the minimum penalty from 50% to 100% of the Superannuation Guarantee Charge.

Editor: Note the required legislative amendments needed to implement the tax concessions promoted by the ATO under the SG amnesty (at the time of writing) is yet to be passed by Parliament.

This is despite the fact that the Government’s proposed SG Amnesty is meant to run from 24 May 2018 to 23 May 2019.


Taxation of income for an individual’s fame or image

The Government has released a consultation paper with respect to the implementation of the 2018/19 Federal Budget announcement relating to the direct taxation of an individual’s fame or image at their marginal tax rates.

The proposed reform aims to ensure that all remuneration (including both cash and non-cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in their assessable income.

Editor: These reforms reflect the Government’s concern that high-profile individuals (including sportspersons, actors and other celebrities) have been ‘taking advantage’ of lower tax rates by licencing their fame or image to another (generally related) entity for the purpose of tax-effective income splitting. 

Following the Federal Budget announcement, the ATO withdrew its draft Practical Compliance Guideline PCG 2017/D11 (the ‘draft PCG’).

The draft PCG had set out a 10% safe harbour for apportioning lump sum payments for the provision of a professional sportsperson’s services and the use and exploitation of their ‘public fame’ or ‘image’ under licence.

In withdrawing the draft PCG, the ATO advised that for the period up to 1 July 2019, it will not seek to apply compliance resources to review an arrangement complying with the terms of the draft PCG if it was entered into prior to 24 August 2018 (i.e., being the date the draft PCG was withdrawn).


ALP key tax properties

Snapshot of the ALP key tax policies

Editor: The Federal Election will be the primary focus over the next few months, with many commentators predicting a possible change in Government. 

As usual, tax policy is a focal point of the political debate.

The table below outlines some of the key ALP tax policies of interest.

Income Tax Reforms

 

Key ALP Tax Policies Comparable Coalition Tax Policies
1.
Restrict deductions on personal tax-related expenses to a $3,000 cap per individual, per year
Ref: Shadow Treasurer’s and Assistant Shadow Treasurer’s joint media release, 13 May 2018
No cap on personal tax-related expenses has been proposed, although the ATO has made adjustments to Item D10 – Managing tax affairs to obtain a more detailed breakdown of what is being claimed by taxpayers at this label from the 2018 ‘I’ returns
2.
Reduce the maximum general CGT discount from 50% to 25%, with exceptions for:

  • grandfathered investments;
  • investments made by superannuation funds (which are effectively taxed at 10% after the CGT discount); and
  • assets of small business owners

Ref: ‘A fair go for Australia’, paragraph 135 and ALP website: Labor factsheet, ‘Positive plan to help housing affordability’

Ref: Shadow Treasurer’s and Assistant Shadow Treasurer’s joint media release, 13 May 2018

The Coalition has not indicated a desire to change the current maximum general CGT discount from 50% for eligible taxpayers
3.

Limit negative gearing to investments in new housing, with grandfathering for pre-existing investments.

Labor has proposed any losses from new investments in shares and existing properties (which we assume includes commercial property) will still be permitted to be used to offset investment income tax liabilities (but not against salary and wages).

Any deferred losses can then be carried forward to offset the final capital gain on the investment.

Ref: ‘A fair go for Australia’, paragraph 135 and ALP website: Labor factsheet, ‘Positive plan to help housing affordability’

The Coalition has not indicated a desire to change  the current negative gearing rules
4.

Remove the ability for certain taxpayers to claim excess imputation credits as cash refunds

Ref: Leader of the Opposition’s media release, 13 March 2018

The Coalition has not indicated a desire to change the current ability for eligible taxpayers (including individuals and SMSFs) to receive cash refunds for excess imputation credits
5.

Apply a minimum tax rate of 30% to all distributions from discretionary trusts(non-fixed trusts) to mature individual beneficiaries (i.e., those over 18)

Ref: ‘A fair go for Australia’, paragraph 131 and

Leader of the Opposition’s media release, 30 July 2017

The Coalition has not indicated a desire to change the current rules in relation to the taxation of discretionary trust beneficiaries at their applicable marginal tax rate
6.

Introduction of an Australian Investment Guarantee from 1 July 2020

This accelerated depreciation for business proposes to immediately allow a 20% write-off for eligible depreciating assets

Ref: Shadow Treasurer’s media release, 13 March 2018

The Coalition has announced that from 29 January 2019, the instant asset write-off threshold for SBE taxpayers will increase to less than $25,000 and this will apply until 30 June 2020 (at which time the immediate write-off threshold presumably goes back to less than $1,000)

Superannuation Reforms

 

Key ALP Tax Policies Comparable Coalition Tax Policies
1.
Lower the non-concessional contributions (‘NCCs’) cap to $75,000 (down from the current $100,000)Ref: ‘A fair go for Australia’, paragraph 41
The Coalition has not indicated a desire to change the current $100,000 NCCs cap (indexed)
2.
Lower the Division 293 tax threshold to $200,000 (down from the current $250,000)Ref: ‘A fair go for Australia’, paragraph 41
The Coalition has not indicated a desire to change the current $250,000 Division 293 tax threshold
3.

Repeal the newly introduced concessional contributions (‘CCs’) catch-up rules

Ref: ‘A fair go for Australia’, paragraph 41

Retain the new CCs five-year catch-up rules for eligible members if they have a total superannuation balance of less than $500,000
4.

Repeal the recent reforms allowing all eligible individuals to claim a tax deduction for personal superannuation contributions

Ref: ‘A fair go for Australia’, paragraph 41

Retain the recently legislated relaxation of the personal superannuation deduction rules (i.e., the removal of the ‘10% test’ from 1 July 2017)
5.

Prospectively restore the prohibition on direct borrowing by SMSFs on housing investments via Limited Recourse Borrowing Arrangements (‘LRBAs’)

Ref: ‘A fair go for Australia’, paragraph 136

The Coalition has not indicated a desire to change the current LRBA rules
6.

End the freezing of the Superannuation Guarantee rate at 9.5% and fast track the employer compulsory contribution percentage to 12% – although firm dates have not been provided

Ref: ‘A fair go for Australia’, paragraph 39

The Coalition has not indicated a desire to change the current 9.5% Superannuation Guarantee rate until the first increase in 2022 (to 10%) begins the gradual progression to 12% by 2026
Posted in Practice Update

Practice Update December 2018

Welcome to the Davenports Practice Update for December 2018


Company loans to shareholders under review

The Government has released a consultation paper outlining proposed reforms to ‘simplify’ the loan agreements that are generally required when a shareholder (or their associate) borrows funds (or receives a payment) from a related company.

Editor: Broadly, where a private company makes a payment or loans funds to a shareholder and/or their associate, the amount will be treated as a taxable unfranked dividend paid to the recipient.

To avoid this, many shareholders enter into complying ‘Division 7A loan agreements’ (basically agreeing to repay the relevant amount within 7 years, or 25 years if the loan is secured).

With this in mind, Treasury is currently looking at (amongst other things):

  • simplifying the Division 7A loan rules by converting to a new 10-year model; and
  • clarifying that distributions from a trust to a ‘bucket’ company that remain ‘unpaid present entitlements’ come within the scope of Division 7A.

Editor: The proposed amendments are intended to apply from 1 July 2019 and will arguably be the most significant tax reforms impacting business and investment clients over the next two years.

At this stage of the consultation process, the Government is currently considering submissions made with respect to these proposals and it is expected that draft legislation, and further clarity, will be available early in the 2019 calendar year.


ATO to send text messages if bank account details incorrect

The ATO has advised that it will send SMS text messages directly to taxpayers where incorrect bank account details were included in their tax returns and they were entitled to a refund.

The SMS will advise impacted taxpayers that:

  • their refund cannot be processed due to incorrect bank account details; and
  • they should phone the ATO on 13 28 61 to correct their details.

If impacted taxpayers contact the ATO with their correct details within seven days, any refund due will be issued electronically.

Editor: In the wake of an increase in recent tax fraud attempts, it is clear that taxpayers need to exercise additional caution when dealing with electronic messaging from (or purportedly from) the ATO.

The authenticity of ATO correspondence can be verified by calling the ATO on 1800 008 540; however, if you are ever unsure about any correspondence received, please contact our office.

 


ATO contact regarding business cars and Fringe Benefits Tax (‘FBT’)

The ATO has recently advised that it will be contacting taxpayers (and tax agents on behalf of their clients) that have been identified as having cars registered in their business name who have not lodged an FBT return.

The ATO has reminded businesses that:

  • a car fringe benefit will occur when a business owns or leases a car and makes it available for an employee’s private travel or use (including garaging the car at or near an employee’s home and making it available for private use); and that
  • business directors are also ’employees’ for FBT purposes.

External collection agencies to enforce ATO lodgement obligations 

The ATO has finalised a trial relating to sending overdue taxpayer lodgement obligations to external collection agencies.

As a result, it may now refer taxpayers to an external collection agency to secure tax return lodgement.

The ATO has stated that it will only refer a taxpayer to an external collection agency where the taxpayer takes no action in response to its initial correspondence letters.


ATO data matching and share transactions

The ATO has extended its data matching program, this time focusing on share data.

The ATO will continue to receive share data from ASIC, including details of the price, quantity and time of individual trades dating back to 2014, with more than 500 million records obtained.

The ATO will use the information to identify taxpayers who have not properly reported the sale or transfer of shares as income or capital gains in their income tax returns.

It seems share transactions are high on the ATO’s priority list, given more than 5 million Australian adults (almost one-third) now own shares.


Improvements to employee share schemes announced

The Government has announced it intends to introduce legislation to improve the ability of small businesses to offer employee share schemes by simplifying the current regulatory framework, and reducing the time and cost burden for businesses by (amongst other things):

  • increasing the value limit of eligible financial products that can be offered in a 12-month period from $5,000 per employee to $10,000 per employee;
  • creating an exemption for disclosure, licensing, advertising and on-sale obligations in the Corporations Act; and
  • allowing small businesses to offer (in most instances) employee share schemes without publicly disclosing commercially sensitive financial information.

ATO guidance regarding ‘downsizer contributions’

The ability to make ‘downsizer contributions’ effectively commenced on 1 July 2018, prompting the ATO to release further guidance with respect to this new superannuation contribution classification.

Editor: This new measure will be of most assistance for individuals approaching retirement, where they dispose of their family home in an effort to ‘downsize’ and they want to contribute part or all of the proceeds to superannuation.

Basically, these measures allow older Australians to make a downsizer contribution where:

  • they are aged at least 65;
  • there was consideration received for the disposal of an eligible Australian dwelling;
  • the contract of sale for the property was entered into on or after 1 July 2018;
  • a superannuation contribution is generally made within 90 days of settlement;
  • the contribution does not exceed the lesser of $300,000 and the proceeds received from the sale of the dwelling;
  • an ownership interest in the dwelling had been held for at least 10 years (usually by the individual making the contribution or their spouse);
  • either a full or partial CGT main residence exemption applies to the disposal of the dwelling;
  • a choice to treat the contribution as a downsizer contribution is made in the approved form; and
  • broadly speaking, it is the first downsizer contribution the taxpayer has made.

Christmas Parties & Gifts 2018

Year-end (and other) staff parties

Editor:  With the well earned December/January holiday season on the way, many employers will be planning to reward staff with a celebratory party or event.  However, there are important issues to consider, including  the possible FBT and income tax implications of providing ‘entertainment’ (including Christmas parties) to staff and clients. 

FBT and ‘entertainment’

Under the FBT Act, employers must choose how they calculate their FBT meal entertainment liability, and most use either the ‘actual method’ or the ’50/50 method’.

Under the actual method, entertainment costs are normally split up between employees (and their family) and non-employees (e.g., clients and suppliers).

Such expenditure on employees is deductible and liable to FBT.  Expenditure on non-employees is not liable to FBT and not tax deductible.

Using the 50/50 method instead?

Rather than apportion meal entertainment expenditure on the basis of actual attendance by staff, etc., many employers choose to use the more simple 50/50 method.

Under this method (irrespective of where the party is held or who attends) – 50% of the total expenditure is subject to FBT and 50% is tax deductible.

However, the following traps must be considered:

  • even if the function is held on the employer’s premises – food and drink provided to employees is not exempt from FBT;
  • the minor benefit exemption* cannot apply; and
  • the general taxi travel exemption (for travel to or from the employer’s premises) also cannot apply.

(*) Minor benefit exemption

The minor benefit exemption provides an exemption from FBT for most benefits of ‘less than $300’ that are provided to employees (and their family/associates) on an infrequent and irregular basis.

The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and gift) are not added together when applying this threshold.

However, entertainment expenditure that is FBT exempt is also not deductible.

Editor:  And ‘less than’ $300 means no more than $299.99!  A $300 gift to an employee will be caught for FBT, whereas a $299 gift may be exempt.

Example: Christmas party

An employer holds a Christmas party for its employees and their spouses – 40 attendees in all.

The cost of food and drink per person is $250 and no other benefits are provided.

If the actual method is used:

  • For all 40 employees and their spouses – no FBT is payable (i.e., by applying the minor benefit exemption), however, the party expenditure is not tax deductible.

If the 50/50 method is used:

  • The expenditure is $10,000, so $5,000 (i.e., 50%) is liable to FBT and tax deductible.

Christmas gifts

Editor:  With the holiday season approaching, many employers and businesses want to reward their staff and loyal clients/customers/suppliers.

Again, it is important to understand how gifts to staff and clients, etc., are handled ‘tax-wise’.

Gifts that are not considered to be entertainment

These generally include, for example, a Christmas hamper, a bottle of whisky or wine, gift vouchers, a bottle of perfume, flowers, a pen set, etc.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

  • gifts to employees and their family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible; and
  • gifts to clients, suppliers, etc. – no FBT, and tax deductible.

Gifts that are considered to be entertainment

These generally include, for example, tickets to attend the theatre, a live play, sporting event, movie or the like, a holiday airline ticket, or an admission ticket to an amusement centre.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

  • gifts to employees and their family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible (unless they are exempt from FBT); and
  • gifts to clients, suppliers, etc. – no FBT and not tax deductible.

Non-entertainment gifts at functions

Editor:  What if a Christmas party is held at a restaurant at a cost of less than $300 for each person attending, and employees with spouses are given a gift or a gift voucher (for their spouse) to the value of $150?

Actual method used for meal entertainment

Under the actual method, for employees attending with their spouses, no FBT is payable, because the cost of each separate benefit (being the expenditure on both the Christmas party and the gift) is less than $300 (i.e., the benefits are not aggregated).

No deduction is allowed for the food and drink expenditure, but the cost of each gift is tax deductible.

50/50 method used for meal entertainment

Where the 50/50 method is adopted:

  • 50% of the total cost of food and drink is liable to FBT and tax deductible; and
  • in relation to the gifts:
    • the total cost of all gifts is not liable to FBT because the individual cost of each gift is less than $300; and
    • as the gifts are not entertainment, the cost is tax deductible.

Editor:  We understand that this can all be somewhat bewildering, so if you would like a little help, just contact our office.


Posted in Practice Update