Quarterly Tax Update Oct – Dec 2017
Here are the key tax updates for the last quarter of 2017:
Application of Company Tax Rates
- The government has decided to scrap plans to introduce changes on a retrospective basis.
- The new 80% passive income test in relation to accessing the lower tax rate for companies will apply from 1 July 2017.
- The concept will still be relevant however in relation to preparing 2017 income tax returns.
Carrying on a Business
- In association with the change in tax rates and the 80% passive income test the ATO has released a Draft Tax Ruling (TR 2017/D7) providing guidance on when a company is ‘carrying on a business’
- The indication is that a company will be carrying on a business if they aim to make a profit and has a genuine prospect of making a profit.
- The draft ruling sets out a number of examples that can be referenced.
Housing Affordability Measures
- Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 has been introduced after being announced in the 2017-18 budget.
- From 1 July 2017 there will no longer be a deduction for travel expenses incurred in relation to deriving income from a rental property.
- The new bill also prevents taxpayers from claiming depreciation deductions on certain assets from 01 July 2017.
- An exposure draft has also been released in relation to the proposed increase of the CGT (Capital Gain s Tax) discount percentage for people who invest in affordable housing. This could potentially tax the total discount from the current maximum of 50% to 60%.
Changes to GST on Certain Property Transactions
- Treasury has released and exposure draft in relation to announcements in the 2017/18 budget in relation to the way GST is collected on certain property transactions
- Under the new rules where an entity makes a taxable supply of property;
- new residential or
- vacant land
The purchaser will be responsible to remit 1/11th of the GST to the ATO
- Where the Developer may be eligible to apply the margin scheme they would then receive refund from the ATO for the difference.
- The Developer is also responsible to notify the purchaser of their obligations and penalties will apply if this is not provided
Property Flipping and CGT
- Applicable where someone buys a property with the intention of carrying out renovations while living in the property and then selling the property once the work is completed (i.e., property flipping).
- Many clients make the assumption that any gain made from the activity will be exempt from tax as long as the property is their main residence for the entire ownership period.
- This is only the case where the property is held on capital account.
- Renovating a property with the intention of selling the property again at a profit could be taxed on revenue account in which case the main residence exemption is no longer applicable.
- The ATO identifies three main scenarios:
- Personal property investor – this is someone who purchases a property with the primary intention of using it as a long-term rental property or private residence.
- Isolated profit making undertaking – this is someone who buys a property with the primary intention of carrying out renovation activities and then selling the property when the work is completed.
- Business of renovating properties – this is someone who undertakes property flipping activities on a regular or repetitive basis and where the activities are organised in a business-like manner.
Payments to Taxi License Holders
- The ATO has released updated guidance on the income tax and GST treatment of payments made by State Governments in relation to taxi and hire car licences.
- Industry assistance payments made to taxi licence holders are ordinary income and taxed on revenue account.
- GST generally won’t apply to these payments.
- In situations where passenger movement levies have been imposed, taxi operators need to include any fees charged to passengers in their assessable income. While GST does not apply to the levy paid to the Government, if it is passed on to passengers GST should apply.
Car Expenses and Ride Sourcing
- A range of issues need to be considered when clients are involved in ride-sourcing activities, including the deductions that can be claimed for car expenses.
- As with any other car expense claims, these need to be made using either the cents per kilometre method or log book method.
- The ATO also provides some examples of situations where travel can be treated as deductible when undertaking ride-sourcing activities.
Taxi Travel and FBT
- Section 58Z FBT Act contains a specific exemption for benefits relating to taxi travel undertaken by employees to or from work or where the travel is due to the illness of the employee.
- The ATO has indicated in its FBT guide that this exemption does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi (e.g., Uber service).
- The ATO has indicated in a paper that it is considering updating its approach and adopting an interpretation that includes ride-sourcing vehicles or other vehicles for hire.
Digital Currency and GST
- The Government has introduced legislation which will ensure that supplies of digital currency are no longer subject to GST.
- The changes are expected to apply to supplies made on or after 1 July 2017.
- In broad terms, the amendments treat digital currency in much the same way as money.
- While supplies of digital currency will generally be disregarded for GST purposes, a transaction will still be recognised in the GST system if digital currency is exchanged for other money or digital currency
- While this might be within the GST system, it could still potentially be treated as an input taxed financial supply.
Expansion of Taxable Payment Reporting System
- the Government announced in the 2017-18 Budget that the taxable payment reporting system that currently applies to businesses in the construction industry would be expanded to include courier and cleaning services.
- The way the new rules will work is that entities that supply courier services or cleaning services will be required to report to the ATO the details of payments made to other entities that relate wholly or partly to courier or cleaning services (respectively).
- The rules will apply to payments made on or after 1 July 2018 and the first report will be due by 28 August 2019.
Research & Development (R&D) Claims Under Increased Scrutiny
- The ATO has indicated it will be increasing its activity around claims made for R&D tax incentives. With the assistance of the Serious Financial Crimes Task Force they are looking to identify serious misuse of the system.
- Of extreme importance is not only meeting eligibility criteria but documentation and support of claims made.
Fixed Trust or Non Fixed Trust
- It can be very difficult for a trust to be classified as a fixed trust for tax purposes unless the Commissioner exercises his discretion
- The ATO has issued a PCG to try and address this issue and remove some of the uncertainty that arises when trying to determine whether a trust is a fixed trust.
- Even if the safe harbour conditions are met, this cannot be relied upon when applying the non-arm’s length income rules for superannuation funds or the holding period rules to claim franking credits that have flowed through the trust.
Foreign Dividends Received Through a Partnership or Trust
- The ATO has finalised its guidance on the application of the non-portfolio dividend exemption rules when dividends paid by a foreign company pass through a partnership or trust rather than being paid directly to an Australian company.
- Subdivision 768-A ensures that dividends paid by a foreign company to an Australian resident company are non-assessable non-exempt income
- The rules allow the exemption to apply where the 10% interest is held directly or indirectly through one or more interposed trusts or partnerships.
- These final TDs explain how the indirect tracing rules operate.
Early Stage Investor Tax Incentive
- As part of the Government’s National Innovation and Science Agenda a number of tax incentives have been introduced to support and encourage investment in innovative Australian businesses.
- Treasury has released exposure draft legislation that would remove some of the restrictions that currently apply under the venture capital investment tax concessions.
- The Government is also planning to make a number of amendments to the early stage venture capital limited partnership rules and the rules dealing with the early stage investor tax offset provisions.
SMSF Event Based Reporting Now Live
- As at 1 July 2017 this came into place even though funds are not required to report events until 1 July 2018, events will need to be reported from 1 July 2017
- To capture these events the ATO has released the Transfer Balance Account Report (TBAR)
- Events include:
- Super income streams in existence pre 1 July 2017
- Income streams that has commenced retirement phase on/after 1 July 2017
- Limited recourse borrowing arrangement payments
- Member commutations
- Compliance with a commutation authority issued by the commissioner
- Personal injury contributions
- Super streams that cease retirement phase
Superannuation Guarantee Changes
- The Fair Work Amendment (Recovering Unpaid Superannuation) Bill 2017 has been introduced to parliament
- The key changes proposed include:
- Improvement of employees to recover unpaid SG
- Employers to notify employees when superannuation has been paid
- Amounts by salary sacrificed are not treated as employer contributions
- Remove the exemptions for employees paid less tan $450/month
- Superfunds required to notify members where an expected contribution has not been received