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🆕 Tax Newsletter – February 2023

This issue of Client Alert takes into account developments up to and including 25 January 2023.

Non-deductible threshold removed for self education expenses

Self education expenses are generally tax-deductible for individuals if there’s a sufficient connection with your income-producing activities.However, until new legislation was recently passed, the amount you could deduct was limited by s 82A of the Income Tax Assessment Act 1936 so that only the amount spent over a $250 threshold was deductible.

This threshold was an artefact from when the self education deduction measure was first introduced more than 40 years ago, alongside a long-repealed concessional tax rebate of $250. The original intention of the deduction limit was to ensure that taxpayers didn’t receive both the tax rebate and a tax deduction for the same set of expenses.

With the non-deductible threshold removed, you will only need to ensure the following applies when you claim a self education deduction:

  • you incurred the expense in gaining or producing your assessable income;
  • the expense isn’t private, domestic or capital in nature; and
  • the deduction isn’t prevented by another provision of the tax law (eg such as some childcare and travel expenses that would previously have been useable to reduce the $250 threshold).

The change applies for tax assessments for the 2022–2023 income year and onwards.

Tip: This change doesn’t affect the types of self education expenses that are deductible. The costs of textbooks, stationery and professional journals will still be deductible, while certain student contributions and payments to reduce HELP, financial supplement and other higher education debts stay non-deductible, as do expenses you incur before commencing an occupation or to help you obtain a new occupation.

Tax debts and relationship breakdowns: a warning

The ability of the Family Court to divide the assets owned personally by a couple – including superannuation – on a relationship breakdown is largely without question. A recent case has now shed further light on the ability of the Family Court to allocate responsibility for payment of the tax debts of either spouse.

A High Court decision in 2018, Commissioner of Taxation v Tomaras, confirmed that tax debts can be apportioned by the courts where a couple’s relationship has broken down. In that case, the wife had failed to pay her tax debts and was out of time to challenge the debt assessments. The husband had been declared bankrupt. As part of the property settlement proceedings, the wife asked the court to order that the husband should become the debtor who would have to pay the ATO.

The court found that one spouse could indeed be substituted for the other in relation to a tax debt like this, but it also confirmed this isn’t always appropriate. Given that the husband was bankrupt and there was no time left to challenge the debt assessments, the court did not exercise its powers to make him liable for the tax debts that had been assessed to the wife.

More recently, the case of Cao & Trong in 2022 further explored the Family Court’s powers in relation to tax debts. In this case, allocation of an amount in the region of $3.1 million was in dispute between the former spouses, the ATO and the Child Support Register.

The ATO was owed more than $7 million in unpaid tax, and in the end the court found that it was entitled to 100% of the disputed amount. In making this finding, the court said that the parties had enjoyed an opulent lifestyle while the debt was due to the ATO, and in fact this lifestyle was mainly possible because they avoided paying the large amounts they owed.

This recent finding is a timely reminder that the ATO can and will intervene in family law disputes to protect the revenue due to the Commonwealth, and that the courts will actively ensure the rights of the ATO are protected and enforced.

Sharing economy reporting regime commences soon

As a part of the Federal Government’s strategy to combat the tax compliance risks posed by the sharing economy, it has passed into law new requirements for operators of electronic distribution platforms to provide information to the ATO on transactions made through their platforms.

An “electronic distribution platform” is one that delivers services through electronic communication (ie over the internet, including through applications, websites or other software) and allows entities to make supplies available to end-user consumers through the platform. A service isn’t considered an electronic distribution platform if it only advertises or creates awareness of possible supplies online, operates as a payment platform or serves a communication function.

Examples of sharing economy electronic platform operators include Uber, Airbnb, Car Next Door, Menulog, Airtasker and Freelancer.

Tip: The new reporting regime applies to platform operators rather than to individuals who use their sites or apps, but if you’re part of the sharing economy it’s still important to give the ATO the right information. If you rent out your home for short stay accommodation, work as a delivery driver or take on side jobs as a freelancer, we can help you keep your tax affairs in order.

Electronic platform operators will soon be required to regularly provide transaction information to the ATO through the Taxable Payments Reporting System (TPRS). The information obtained will be used in ATO data-matching to help identify entities that may not be meeting their tax obligations.

Administrative Appeals Tribunal to be replaced

The Federal Government has announced that it will abolish the Administrative Appeals Tribunal (AAT) and replace it with a new Federal administrative review body. According to Attorney-General the Hon Mark Dreyfus, the AAT’s dysfunction has had a very real cost to the tens of thousands of people who rely on it each year to independently review government-body decisions. A dedicated taskforce within the Attorney-General’s department has been formed, and stakeholder consultation will be held on the design of the new body.

The government has said it will implement a transparent and merit-based appointment process. It has committed to providing additional capacity to enable the rapid resolution of existing backlogs, and to implementing consistent funding and remuneration arrangements to enable the new system to respond flexibly to fluctuating case numbers. Thus far, it has committed to appointing an additional 75 new members to the AAT to deal with existing backlogs.

To ensure the new body is user-focused, accessible, fair and efficient, the government says it will also improve additional support services and emphasise early resolution where possible. A single, modern, reliable and fit-for-purpose case management system will be introduced.

Current cases before the AAT will continue. Taxpayers who have already applied to the AAT for a review of a decision will not need to submit a new application. The government envisages that many current cases before the AAT will be decided or finalised before the establishment of the new Federal administrative review body. Any undecided remaining cases will transition to the new review body when it is established.

SMSF changes and reminders for 2023

If you’re thinking of starting a self managed superannuation fund (an SMSF) in 2023, you need to be aware of the recent changes made by the ATO on fund registration, and the application of the Director ID regime to funds with corporate trustees.

Previously, after an SMSF was established and trustees were appointed, the trustees had 60 days to register the SMSF with the ATO by applying for an Australian Business Number through the Australian Business Register. That application included a section where bank account details of the SMSF could be added, along with other information such as the fund’s Tax File Number.

Due to the recent explosion in fraudulent schemes targeting SMSFs, this feature has been removed in a bid to protect the retirement savings of Australians. New SMSFs will now need to provide the ATO with their bank account details after the SMSF registration process, using the online portal for businesses, via phone, or through a registered tax agent.

If you’re contemplating starting an SMSF with a corporate trustee, you’ll also need to ensure the directors of the corporate trustee apply for Director IDs before their appointment is made through Australian Business Registry Services (ABRS). The Director ID is a unique 15-digit identifier that will follow each individual through their business life and was introduced as a part of a suite of measures to combat phoenixing and other illegal activities. The process is free, simple, online and only requires individuals to confirm their identity. Every individual must apply for their own Director ID, and no one else can apply on their behalf.

📈Tax Newsletter – December 2022

CURRENCY:

This issue of Client Alert takes into account developments up to and including 25 November 2022.

Looming changes for the “buy now, pay later” market

In a bid to protect consumers, the Federal Government has released a consultation paper seeking views on options to regulate the “buy now, pay later” (BNPL) market. Currently the BNPL space is unregulated in Australia and thus not subject to responsible lending standards, despite involving financial products that offer credit. Consumer advocates argue that this regulatory gap has the potential to create harm.

The consultation paper outlines three options, of ascending interventionary levels, for the regulation of the BNPL market, ranging from bespoke affordability assessments to treating BNPL like other credit services.

It has been estimated by the Reserve Bank of Australia that approximately seven million active BNPL accounts made a total of $16 billion in transactions in the 2021–2022 financial year. This accounts for around a 37% increase on the previous year. Low value BNPL products that typically provide a spending limit of $2,000 are the most popular in Australia, although spending limits of up to $30,000 are available from some providers for large ticket items such as home upgrades.

Currently, the BNPL space is unregulated in Australia because it falls under the exemptions available to certain types of credit under the National Consumer Credit Protection Act 2009 (the Credit Act). Due to this exemption, BNPL products are not subject to responsible lending standards or other requirements of the Credit Act. In addition, providers do not need to hold an Australian credit licence (ACL). Perhaps due to this lack of regulation, there has been an exponential growth in the BNPL market in Australia and many other similar unregulated markets. Consumer advocates argue that this regulatory gap has the potential to create harm in the absence of key consumer protections.

Assistant Treasurer and Minister for Financial Services Stephen Jones has said that, at a minimum, the government is looking at “… putting in place some sort of credit checks to ensure that the product is affordable and suitable for the people … We don’t want to see people who are in the same situation they were in the bad old days of the credit card … where they might have had five, six, seven or eight credit cards. No one company knew that the other one had one and this person was just simply unable to pay off their debts … And that’s what we want to address.”

Some of the issues raised by various stakeholders on BNPL schemes include:

  • unaffordable/inappropriate lending practices contributing to financial stress/hardship;
  • poor complaints-handling processes and lack of hardship assistance;
  • excessive/disproportionate consumer fees and charges (eg large default fees relative to size of debt);
  • non-participation in Australia’s credit reporting framework, meaning information is not available for use in credit checks by other lenders;
  • poor product disclosure practices, meaning consumers cannot make informed choices;
  • unsolicited selling targeting consumers and encouraging the use of BNPL for essentials such as groceries and utilities;
  • uncomplicated sign-up to BNPL products, which increases the chances of other consumer harms such as scamming, overselling and financial abuse; and
  • inadequate reverse-charging provisions when goods purchased on BNPL are returned.

To resolve some of these issues, the consultation paper proposes three broad options of varying levels of regulatory intervention. Option 1 would impose a bespoke affordability assessment for BNPL providers under the Credit Act and address any other regulatory gaps in a strengthened industry code to make it fit-for-purpose. Option 2 would require BNPL providers to obtain and maintain an ACL, and in addition, would introduce modified responsible lending obligations under the Credit Act to determine unsuitability combined with a strengthened industry code. Option 3 would impose the strictest regulation, with BNPL providers needing to obtain and maintain an ACL. The existing responsible lending obligations in the Credit Act would also be applied to all BNPL credit, including requirements around reasonable inquiries into a consumer’s financial situation and taking reasonable steps to verify this information.

Submissions on the options paper are open until 23 December 2022.

Source: https://treasury.gov.au/consultation/c2022-338372

https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/buy-now-pay-later-consultations-open

NSW first home buyers: choice of tax

In a bid to encourage home ownership in NSW, the state government has introduced the First Home Buyer Choice scheme, which allows eligible first home buyers a choice between paying an annual property tax or the traditional stamp duty. Eligible first home buyers of residential properties valued at up to $1.5 million or vacant land of up to $800,000 will be able to access the scheme, provided other conditions are met.

The associated Bill has been passed by NSW Parliament, and eligible first home buyers can access the scheme from 12 November 2022. These buyers are required to pay stamp duty on purchases made until 15 January 2023, but will be able to apply for a refund of their stamp duty if they choose to opt into the annual fee. From 16 January 2023, purchasers can opt in to the annual fee directly.

As its name suggests, the First Home Buyer Choice scheme is only available to individual first home buyers over 18 years of age who have not previously owned residential land in Australia. For individuals with a spouse, it is also a requirement that the spouse has not at any time owned residential land in Australia either solely or with another person.

Eligible first home buyers of residential properties of up to $1.5 million or vacant land of up to $800,000 will be able to choose between smaller annual property payments or the traditional stamp duty. Occupation of the property must occur within 12 months of the first home buyer taking possession and must continue for at least six months.

For vacant land purchases, the occupation requirement does not apply if the Chief Commissioner of State Revenue is satisfied that the land is intended to be used as the site of a home and the home will be occupied by a first home buyer as their principal place of residence. The legislation does not specifically detail what documents are required, but presumably entering a contract to build a residence on the vacant land within a reasonable time should suffice.

The Chief Commissioner also has the discretion to vary or waive the occupancy requirements where there are extenuating circumstances.

If the option to pay the annual property tax is elected by the eligible individual, the rate of tax will differ depending on whether the property is owner-occupied or used as an investment after the initial six months occupation requirement. For owner-occupiers, the property tax rates per annum will be $400 plus 0.3% of the home’s land value (as determined by the Valuer General).

In cases where the property is rented out, the property tax rates per annum will be $1,500 plus 1.1% of land value. While the NSW government has committed to not increasing these rates for the first two financial years of operation, from the 2024–2025 financial year property tax rates will be indexed each year, capped at a 4% maximum.

It should be noted that the legislation excludes certain transfers from being “eligible transfers” and thus they are excluded from the scheme. These include business premises, a business, land use for primary production (ie farmland), and holiday homes.

In addition, a point of difference between this legislation and the original stamp duty reform consultation announced earlier in 2022 is that the property tax will now only be payable by first home buyers and will not apply to subsequent purchasers of that property. Initially, the choice to opt in to the annual property tax system would carry on to subsequent purchasers.

The First Home Buyers choice will apply on eligible purchases that settle on or after 16 January 2023. Eligible first home buyers who purchase a property between 11 November 2022 (when the Bill received Assent) and 15 January 2023 will still need to pay stamp duty to complete their purchase. However, from 16 January 2023 they will be able to apply to opt-in to property tax and receive a refund for any stamp duty paid.

A First Home Buyer Choice calculator is available on the Service NSW website at www.service.nsw.gov.au/transaction/calculate-your-property-tax.

Source: www.parliament.nsw.gov.au/bills/Pages/bill-details.aspx?pk=4018

www.nsw.gov.au/media-releases/historic-first-home-buyer-law-passes-parliament

Proposed new method for calculating work from home expenses

Taxpayers could soon be dealing with more paperwork at tax time, or facing the prospect of a lower deduction for work from home (WFH) expenses. The ATO has recently proposed a new revised fixed rate method of calculating WFH expenses for the purposes of claiming a tax deduction from 1 July 2022. The proposed new rate of 67c per hour would replace the previous shortcut method of 80c per hour (which many taxpayers have been using during the COVID-19 pandemic) as well as the previous fixed rate method. It’s important to note that this proposal is still in the draft stage, and open to submissions from interested parties.

Prior to 1 July 2022, people working from home were able to use one of three methods for calculating a deduction for expenses incurred as a result of working from home:

  • the actual costs method, which involved calculating the actual expenses incurred as a result of working from home;
  • the fixed rate method, which allowed 52c per hour for each hour a taxpayer worked from their home office, to cover their electricity and gas expenses, home office cleaning expenses, and the decline in value of furniture and furnishings. In addition, a separate deduction for the taxpayer’s work-related internet expenses, mobile and home telephone expenses, stationery and computer consumables and the decline in value of a computer/laptop could be claimed; and
  • the shortcut method, which was introduced during the COVID-19 pandemic to make it easier for the large proportion of employees suddenly finding themselves working from home. This method allowed taxpayers to claim 80c per hour for each hour that they worked from home and covered all expenses such as phone, internet, decline in value of equipment and furniture, electricity, gas, lighting, and so on.

From 1 July 2022, taxpayers can no longer use the shortcut method of 80c per hour, and the ATO has now revised the fixed rate method. According to the ATO, the revised fixed rate method apportions additional running expenses “on a fair and reasonable basis by using a fixed rate of 67c per hour”. Not only is this rate lower than the 80c per hour used by the shortcut method, but it is also proposed to include energy expenses (electricity and gas), internet, mobile, telephone, stationery, and computer consumables, some of which could have been claimed as a separate deduction under the previous fixed rate method.

The work-related decline in value of any depreciating assets could continue to be claimed as a separate deduction under the proposed fixed rate method, as could other running expenses not specifically outlined. Therefore to calculate the total deduction under this new revised fixed rate method, taxpayers will need to calculate the number of hours worked from home during the income year, and multiply that by 67c per hour. To that figure, the decline in value of depreciating assets and other running expenses which are not included in the 67c base rate can be added, giving a final deduction amount.

Given the continual increase in energy bills and other inflationary pressures, this new proposed fixed rate method is likely to yield consistently lower deductions than if the actual cost method was used. Coupled with the abolition of the shortcut method, this means that taxpayers will either have to accept a lower WFH deduction in the coming years or deal with increased paperwork to be able to claim WFH deductions under the actual costs method.

Considering the proposal

Draft Practical Compliance Guideline PCG 2022/D4 Claiming a deduction for additional running expenses incurred while working from home – ATO compliance approach was released on 2 November 2022. Practical compliance guidelines do have value and a clear place within the ATO’s broader tax compliance framework, particularly in the more factually “grey” areas like transfer pricing, where the precise application of the law can be ambiguous.

However, there are concerns that Draft PCG 2022/D4 may miss the mark in its attempt to simplify matters and provide certainty at the small end of town. Given that the Commissioner of Taxation can only administer – not make – the law, and practical compliance guidelines are just a tool in the ATO’s compliance armoury, the best apparent solution is to simplify personal work-related deductions in our tax legislation.

The proposed method doesn’t simplify things much

To rely on Draft PCG 2022/D4, taxpayers must keep records showing the total number of hours they worked from home during the income year (estimates will not be accepted – only a total record of hours) and one document (eg an invoice) for each additional running expense incurred during the year.

If they also claim a deduction for the decline in value of depreciating assets, they must keep documents that meet the requirements of Div 900 of the Income Tax Assessment Act 1997 (employees) or s 262A of the Income Tax Assessment Act 1936 (those carrying on a business), and records that demonstrate their income-producing use of these depreciating assets.

While this is somewhat less than what would be required if they were to claim their actual additional expenses, the main thing the Draft PCG seems to simplify is what proportion of these costs may be claimed – which is contentious to some to argue it is too low.

The proposed method provides limited protection

The simplified method does not exist in the tax laws. As with all practical compliance guidelines, the ATO is really just promising to not look into these matters in certain circumstances, but is not barred from doing so if an investigation is separately commenced.

If this occurs and the Commissioner and taxpayer disagree about the deductions that many be claimed, the simplified method cannot be relied upon by the taxpayer and they will only be permitted to claim deductions in strict compliance with the law. Relevantly, Draft PCG 2022/D4 provides (emphasis added):

Irrespective of paragraph 5 of this Guideline, if you lodge an objection in relation to your working from home expenses for whatever reason, you cannot rely on this Guideline using the revised fixed-rate method to determine whether you are entitled to a deduction for your expenses. Only the actual expenses you incurred as a result of working from home and for which you have adequate records will be allowed as a deduction.

This is the same way objections regarding working from home expenses calculated using the shortcut method and the fixed-rate method are, and have been, dealt with by the Commissioner.

This is legally correct, but by publishing these practical compliance guidelines and pushing them out to taxpayers, it is arguable that the ATO is effectively seeking to have its cake and eat it too. It gains a flexible policy tool to shepherd taxpayers toward particular modes of compliance, but when push comes to shove, the ATO can disclaim any reliance upon it.

The language used in Draft PCG 2022/D4 is therefore concerning and arguably undermines the reliability of practical compliance guidelines as a tool to provide taxpayers with certainty and comfort that their tax affairs are in order and free from scrutiny.

Are taxpayers being set up to fail?

ATO web guidance in most instances conveys to taxpayers that the simplified method may be relied upon absolutely, with no suggestion that taxpayers may be required to adopt a completely different method if the ATO reviews their affairs. And how many ordinary taxpayers do you think will read Draft PCG 2022/D4 (or the final version), or have ever heard of a practical compliance guideline?

This speaks to a lack of clarity in the reliability of this simplified deduction method and the use of practical compliance guidelines.

Taxpayers and advisors should be wary of overreliance on the relief promised in Draft PCG 2022/D4. Comments on the draft are due by 30 November 2022 and it will be interesting to see what, if any, changes there are in the final version.

Source: www.ato.gov.au/law/view/view.htm?docid=%22DPC%2FPCG2022D4%2FNAT%2FATO%2F00001%22

ABN registration: draft legislation to enforce lodgement and notification compliance

Treasury has released draft legislation which proposes two new grounds under which the Registrar of the Australian Business Register may cancel an Australian Business Number (ABN), as well as containing corresponding provisions for the reinstatement of ABNs cancelled under these new grounds.

The government had earlier announced its intention to “strengthen” the ABN system by imposing new compliance obligations for ABN holders to retain their ABN. Currently, ABN holders are able to retain their ABN regardless of whether they are meeting their income tax return lodgment obligations or the obligation to update their ABN details.

As announced in the 2019–2020 Federal Budget, ABN holders with an income tax return obligation will be required to lodge their income tax return and confirm the accuracy of their details on the Australian Business Register annually. This measure stems from the 2018–2019 Budget measure Black Economy Taskforce: consultation on new regulatory framework for ABNs. The start date of the measure was deferred in the March 2022 Federal Budget.

It is worth noting that there are over nine million active ABN holders.

Cancellation for outstanding income tax lodgement obligations

If enacted, the amendments will provide that the Registrar of the Australian Business Register may cancel a person’s ABN if satisfied that they are required to lodge an income tax return in relation to an income year and the person has not lodged income tax returns in relation to two or more income years where the period specified by the ATO for lodgement has ended.

The income years in which a person fails to lodge their returns do not need to be consecutive years.

This ground for cancellation applies in relation to a failure to lodge tax returns beginning with income years commencing on 1 July 2022. Therefore, the earliest the Registrar may cancel an ABN under this ground is in the second half of 2024, following a person’s failure to lodge an income tax return for the income years beginning on 1 July 2022 and 1 July 2023.

If the Registrar cancels a person’s ABN because of a failure to lodge income tax returns, the Registrar must reinstate the ABN where the Registrar is satisfied that the person has lodged, or has made arrangements with the ATO to lodge, the relevant income tax returns. Where an ABN is reinstated in this way, the reinstatement has effect on and from the day on which the Registrar cancelled the ABN.

However, the draft legislation does specifically block attempts to side-step its intention. The Registrar must not register a person where the person has had a previous ABN cancelled due to failure to lodge income tax returns, but the person has not lodged those returns and has not made arrangements to lodge them. This will prevent a person from simply reapplying and being reregistered.

Cancellation due to failure to confirm accuracy

The amendments will also provide that the Registrar may cancel a person’s ABN if satisfied that the person has not notified the Registrar about still requiring the ABN and the currency of information given to the Registrar. The Registrar’s power to cancel an ABN in this way applies where the ABN holder has not provided a notification within the previous 12 months.

This ground for cancellation applies in relation to an ABN holder’s failure to confirm their details and their continued requirement for an ABN. It can be exercised after 1 July 2024. In effect, this requires an ABN holder to notify the Registrar at least once in the period between the commencement of these provisions and 1 July 2024, and at least once in each subsequent 12-month period.

The Registrar must reinstate the ABN if the person notifies the Registrar with the requisite details, and the reinstatement will take effect on and from the day on which the ABN was cancelled (ie retrospectively).

Proposed dates of effect and submissions

Cancelling a person’s ABN due to their failure to lodge two or more income tax returns applies from income years commencing on or after 1 July 2022.

The Registrar may cancel a person’s ABN from 1 July 2024 following the person’s failure to confirm their details and their need for an ABN within a 12-month period.

Submissions on the draft legislation are due by 29 November 2022.

Source: https://treasury.gov.au/consultation/c2022-332618

www.abr.gov.au/who-we-are/our-work/abr-integrity

A little planning can help avoid an FBT hangover this festive season

Yes, it’s that time of year again! As the so-called “silly season” gets underway, and with many employers reverting to pre-pandemic norms around meal entertainment, it is the perfect time to consider what benefits your business is going to provide to staff and how, with a little planning, employers might be able to avoid an FBT hangover.

During this time of the year, in addition to the typical end-of-year party, we generally see a marked increase in expenditure across meal and recreational entertainment, as well as gifts. This may include:

  • Friday night drinks;
  • team lunches and dinners;
  • client lunches and dinners;
  • attendance at cultural and sporting events (eg horse racing or tennis); and
  • Christmas and other end-of-year gifts (eg vouchers/bottles of wine).

FBT implications: meal entertainment

Under the Fringe Benefits Tax Assessment Act 1986 (the FBT Act), employers must choose how they calculate their FBT meal entertainment liability. Most use either the “50/50” method or the “actual” method, rather than the “12-week” method.

For completeness, it’s important to note that neither of the following should usually be considered meal entertainment, irrespective of the method of calculation used:

  • “sustenance”; and
  • meals while travelling.

Using the “50/50” method

Rather than apportioning meal entertainment expenditure based on the proportion received by employees (and their associates) and non-employees (who aren’t associates of employees) and by reference to where food and drink is actually consumed under the actual method, many employers choose to use the simpler “50/50” method. Under this method, irrespective of where the meal entertainment occurs or who attends, 50% of the total expenditure is subject to FBT and 50% is deductible for income tax purposes. However, the following traps must be considered:

  • the “property exemption” available under the actual method won’t apply – this means even if the function is held on the employer’s premises, the food and drink provided to employees is not automatically exempt from FBT;
  • the minor benefits exemption cannot apply; and
  • the general taxi travel exemption (for travel to or from the employer’s premises) also cannot apply.

Using the “actual” method

Under the “actual” method, only the entertainment provided to employees and their associates is subject to FBT. In addition, where food and drink are consumed by employees on the employer’s premises, there will be no FBT due to the property exemption -– this takes care of Friday night drinks in the office! But usually, the greatest reduction in FBT when using the actual method will come from the “minor benefits” exemption (note that the minor benefits exemption is not as broad for taxpayers who provide tax-exempt body entertainment).

Outside of a handful of exceptions, where a benefit with a notional taxable value of less than $300 (including GST) is provided to an employee or an associate, the minor benefits exemption will generally apply to exempt the benefit from FBT. This being said, it’s important to be cognisant of the following:

  • the frequency and regularity of the minor benefit – the more frequently and regularly a particular benefit is provided, the less likely the benefit will qualify as an exempt benefit;
  • the total of the notional taxable values of the minor benefit and other identical or similar benefits – the greater the total value of minor benefits, the less likely it is that any minor benefit will qualify as an exempt benefit;
  • the likely total of the notional taxable values of other “associated benefits”, ie those provided in connection with the minor benefit – for example, where a meal, which is a minor benefit, is provided in connection with a night’s accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit;
  • the practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits – this would include consideration of the difficulty in keeping the necessary records in relation to the benefits; and
  • the circumstances in which the minor benefit and any associated benefits were provided – this would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be seen as principally being in the nature of remuneration.

Usually, employers would save a considerable amount of FBT using the “actual” method (including removing the end-of-year party!); however, they usually don’t have the time to determine who received the benefit in order to apply the exemption.

FBT implications: recreational entertainment

A common trap is where an employer has an employee who is considered a “frequent entertainer” for meal entertainment purposes and then is automatically considered a frequent entertainer for recreational entertainment, such that the minor benefits exemption is not applied.

As is the case when comparing an end-of-year staff party to regular meal entertainment during the year, attendance at a football match is different from lunch with a client. Accordingly, we recommend reassessing which employees should be eligible for the minor benefits exemption with respect to recreational entertainment.

Also, in valuing the recreational entertainment, particularly where you have a corporate box or a marquee, it may be appropriate to value the benefit using the capacity of the facility, as opposed to the final attendees. This could result in significant FBT savings.

Giving of gifts

Gifts provided to employees, or their associates, will typically constitute a property fringe benefit and therefore be subject to FBT unless the minor benefits exemption applies. Gifts, and indeed all benefits associated with the end-of-year function, should be considered separately to the party itself in light of the minor benefits exemption. For example, the cost of gifts such as vouchers, bottles of wine or hampers given at the function should be looked at separately to determine if the minor benefits exemption applies to these benefits.

Gifts provided to clients are outside of the FBT rules, but may be deductible if they are being made for the purposes of producing future assessable income.

FBT car parking benefits: new draft ruling

Businesses that provide FBT car parking benefits should be aware that the ATO has recently released an updated consolidated draft taxation ruling (Taxation Ruling 2021/2DC1) which incorporates proposed changes to FBT car parking benefits to address the Full Federal Court’s decision in Commissioner of Taxation v Virgin Australia Regional Airlines Pty Ltd [2021] FCAFC 209 (Virgin) concerning the “primary place of employment”. In general, the consolidated draft ruling now considers the primary place of employment to be a broad test that is not limited to the place at which duties are performed.

The ATO has updated a previously issued draft ruling which consolidates proposed changes to FBT car parking benefits as well as addressing the Full Federal Court’s decision in Virgin concerning the “primary place of employment”. When made final, this consolidated draft ruling will replace the previously withdrawn Taxation Ruling TR 96/26 (FBT: car parking benefits) as well as other previously issued drafts.

In Virgin, the Full Federal Court allowed the ATO’s appeal and held that Virgin Airlines provided car parking benefits to its flight and cabin crew in various airports. The case centred around the concept of primary place of employment.

In the first instance, the Federal Court found that where employees operated on only one aircraft during a particular day, that aircraft was their primary place of employment. In addition, it held that where employees operated on more than one aircraft during a particular day, they had no primary place of employment for that day. The ATO disagreed and then appealed to the Full Federal Court.

The Full Court then noted that, under the enterprise agreements covering the flight and cabin crew, they were allocated a “home base” and that numerous rights and obligations were defined by reference to the home base, including rosters, rest periods between “tours of duty” or “trips”, allowances and car parking entitlements. A “tour of duty” was the period commencing when an employee signed on at their home base and ending when they signed off at their home base.

Taking those matters into account, the Full Court concluded that, in relation to each relevant day, an employee’s relevant home base airport was their “primary place of employment” and this was the case even on days when the employee did not attend the home base airport at all. As a result, it found that car parking benefits were provided because the employees’ cars were parked at, or in the vicinity of, the primary place of employment.

The consolidated draft ruling now considers the primary place of employment to be a broad test that is not limited to the place at which duties are performed and includes other considerations such as the place which is primary to an employee’s conditions of employment (rostering, allowances, car parking, etc) contained in their employment contract or industrial instrument.

Generally, where the conditions of employment indicate that a particular business premises are primary to the employee’s employment, those premises satisfy the definition of primary place of employment on a particular day even if the employee performs duties principally at another place on that day.

In situations where an employee performs duties at more than one business premises on a particular day, the consolidated draft ruling notes that the primarily place of employment should be identified through a quantitative and qualitative analysis of the duties performed from, or at, the different business premises.

This new consolidated draft ruling also includes clarification on the meaning of “in the vicinity of” as well as what constitutes a commercial parking station for the purposes of FBT. It is currently open for comment and when made final will apply to parking benefits provided on or after 1 April 2022.

Source: www.ato.gov.au/law/view/view.htm?docid=%22DTC%2FTR20212DC1%2FNAT%2FATO%2F00001%22

www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2021/2021fcafc0209

Tax implications of deferred rent for businesses

As inflationary pressures start to bite, many businesses may be seeking rental deferrals or variations from their landlords to help them through this tough period. However, businesses that are lucky enough to receive a waiver, deferral or variation of rent need to be aware that there may be income tax, GST and perhaps even CGT consequences depending on a number of factors. These include the period of occupancy, whether the rent has been paid and otherwise refunded, how the business accounts for GST, and whether consideration has been provided or a new agreement formed.

If you run a business from rented premises, there may be tax consequences when rent is either waived, deferred or varied under commercial terms due to various circumstances. The tax consequences differ depending on whether the waiver, release or variation is for a past or future occupancy as well as other factors.

In instances where your business owes rent for a past occupancy period which is later waived or released by the landlord, including under bankruptcy or insolvency law, if you have already claimed a deduction for the rent on the business tax return, you will still be entitled to that deduction. However, the unpaid amount will be considered to be a debt forgiveness. This means that the amount will not need to be included in the assessable income of the business but may be offset against amounts that could otherwise be claimed as deductions.

For businesses that have already paid rent for a past occupancy period and claimed a deduction, any amounts waived or refunded will need to be included as assessable income.

Where your landlord waives rent related to a future period of occupancy, the business will not be entitled to a deduction for the amount of rent that would have been paid. The only amount that can be claimed is the amount of rent that the business is required to pay. For example, if a landlord reduces the amount of rent payable from $500 per week to $25 per week, the business is only entitled to claim $25; if the rent payable is reduced to nil, the business is not entitled to a deduction.

For businesses that account for GST on an accruals basis, a waiver or variation of rent payable may lead to GST consequences. If the business has already claimed a GST credit for the rent which is waived or refunded, an increasing adjustment will need to be raised to pay back the credit that was claimed. This will need to be done in the Business Activity Statement (BAS) period in which the business becomes aware of the waiver or receives a refund.

Deferrals, however, generally do not need any GST adjustment. Businesses do need to be aware that if their landlord has changed the rental agreement, including timing or amount of scheduled payments, the GST credit that can be claimed will be based on the new agreement. In addition, if your business had claimed a GST credit for a deferred amount which the landlord later writes off as a bad debt, an increasing adjustment may be required.

Businesses that account for GST on a cash basis need not worry about adjustments as they can only claim GST on the basis of actual rent paid as shown on a tax invoice (ie GST credits cannot be claimed for deferred rent until the rent is actually paid).

Besides the income tax and GST consequences, rental concessions, whether it be a waiver or a deferral given by your landlord, may also have CGT consequences for your business. This may occur if, for example, your landlord has changed the rental agreement for payment or other consideration from the business or has created a new or additional agreement. Where that has not occurred (ie the landlord has given the rental concession on an existing lease without any consideration, payment or new agreement), there will be no CGT consequences.

Future of superannuation

The Federal Government has showed its hand in terms of potential future changes to the Australian superannuation system. The Assistant Treasurer and Minister for Financial Services, Stephen Jones, recently outlined two main areas the government will be focusing on. This includes legislating an objective for super (ie for use in retirement), which will then enable conversations around the taxation of super – in particular tax concessions given to high-asset self managed superannuation funds (SMSFs). The second area the government will seek to tackle is performance tests, on which work has already commenced.

In a recent address, Assistant Treasurer and Minister for Financial Services Stephen Jones outlined the changes the government will be pursuing in terms of superannuation. From its beginnings in 1992, superannuation collectively has become a juggernaut and has grown to encompass over $3.3 trillion in assets held by an estimated 16 million Australians. That figure makes Australian superannuation the world’s third largest pension pool.

As the world’s economy is challenged by war, the effects of the ongoing pandemic, energy scarcity, and possible recession in dominant economies, it is perhaps no surprise that the government is looking to this large pool of money to work in both the national interest and the interests of superannuation members where possible.

To that end, one of the main changes the government will be focusing on in terms of superannuation is to legislate an objective for super. A Bill was previously introduced in 2016 that proposed to enshrine the primary objective of the super system in legislation, which is to provide income in retirement to substitute or supplement the age pension. It would have also required all new Bills relating to super to be accompanied by a statement of compatibility with the objective of the super system. This Bill subsequently lapsed ahead of the 2019 election and was never reintroduced.

Having a clear objective of super, Mr Jones notes, will break the vicious cycle of plans to raid super such as drawing on super to pay for housing, HECS or living expenses, which have all been proposed at various stages in the past few years. According to Mr Jones, once this objective is settled on, important conversations around the taxation of super can also be had.

The government estimates that there are 32 SMSFs with more than $100 million in assets, with the largest SMSF having over $400 million in assets. Industry estimates also indicate that the tax concessions on a single $10 million SMSF could support 3.1 full age pensions. It is with this background in mind that the government is looking to have a conversation around the concessional taxation of these high-asset SMSFs which have an obvious cost to the Budget.

“If the objective of super is to provide a tax-preferred means for estate planning, you could say it is doing its job … Those who support the status quo will need to demonstrate how concessional tax arrangements for high balance super funds meet the common objective. Those who argue for change will need to show how that approach meets the objective”, Mr Jones said

The other change the government is looking to make in the super area will stem from the results of the review into the Your Future, Your Super (YFYS) laws. The YFYS measures were initiated to ostensibly remove “unintended consequences” and keep the focus on “high performance”. A consultation paper has been released and the government has established a technical working group in addition to public submissions and stakeholder consultations.

It should be noted that, paradoxically, in order to conduct the review to keep the focus on high performance, the government paused the extension of the existing Australian Prudential Regulation Authority (APRA) performance test to Choice super products for 12 months. The performance test therefore currently only applies to MySuper products, which represent around $13.7 million accounts. Super members in other types of products will not have access to the same independent APRA performance analysis unless the consultation concludes thus.

According to Mr Jones, “[t]he performance tests, conducted by APRA, must and will continue. Trustees need to be held to account because it is about ‘Your Future’. We also need to ensure members have meaningful information so that they can hold their funds to account and make informed decisions about their retirement.” Hence, it appears that the performance tests will continue in one form or another into the future with perhaps different benchmarks.

Source: https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/address-afr-wealth-and-super-summit-sydney

https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/address-australian-institute-superannuation-trustees

https://treasury.gov.au/consultation/c2022-313936

https://treasury.gov.au/consultation/c2022-333837

 

📈 Federal Budget Update October 2022

PERSONAL TAXATION

Personal tax rates unchanged for 2022–2023

In the Budget, the Government did not announce any personal tax rates changes. The Stage 3 tax changes commence from 1 July 2024, as previously legislated.

The 2022–2023 tax rates and income thresholds for residents are unchanged from 2021–2022:

  • taxable income up to $18,200 – nil;
  • taxable income of $18,201 to $45,000 – nil plus 19% of excess over $18,200;
  • taxable income of $45,001 to $120,000 – $5,092 plus 32.5% of excess over $45,000;
  • taxable income of $120,001 to $180,000 – $29,467 plus 37% of excess over $120,000; and
  • taxable income of more than $180,001 – $51,667 plus 45% of excess over $180,000.

Stage 3: from 2024–2025

The Budget did not announce any changes to the Stage 3 personal income tax changes, which are set to commence from 1 July 2024, as previously legislated. From 1 July 2024, the 32.5% marginal tax rate will be cut to 30% for one big tax bracket between $45,000 and $200,000. This will more closely align the middle tax bracket of the personal income tax system with corporate tax rates. The 37% tax bracket will be entirely abolished at this time.

Therefore, from 1 July 2024, there will only be three personal income tax rates: 19%, 30% and 45%. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30%. With these changes, around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or less.

Low income offsets:

Low and middle income tax offset (not extended)

The 2022–2023 October Budget did not announce any extension of the low and middle income tax offset (LMITO) to the 2022–23 income year. The LMITO has now ceased and been fully replaced by the low income tax offset (LITO).

The March 2022–2023 Budget had increased the LMITO by $420 for the 2021–2022 income year so that eligible individuals (with taxable incomes below $126,000) received a maximum LMITO up to $1,500 for 2021–2022 (instead of $1,080).

With no extension of the LMITO announced in this October Budget, 2021–2022 was the last income year for which that offset was available.

As a result, low-to-middle income earners may see their tax refunds from July 2023 reduced by between $675 and $1,500 (for incomes up to $90,000 but phasing out up to $126,000), all other things being equal.

Low income tax offset (unchanged)

No changes were made to the LITO in the 2022–2023 October Budget. The LITO will continue to apply for the 2022–2023 income year and beyond. The LITO was intended to replace the former low income and low and middle income tax offsets from 2022–2023, but the new LITO was brought forward in the 2020 Budget to apply from the 2020–2021 income year.

The maximum amount of the LITO is $700. The LITO is withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 and then at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

Paid parental leave to be expanded

The Government will expand the paid parental leave (PPL) scheme from 1 July 2023 so that either parent is able to claim the payment, and both birth parents and non-birth parents are allowed to receive the payment if they meet the eligibility criteria. Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time.

From 1 July 2024, the Government will start expanding the scheme by two additional weeks a year until it reaches a full 26 weeks from 1 July 2026. Both parents will be able to share the leave entitlement, with a proportion maintained on a “use it or lose it” basis, to encourage and facilitate both parents to access the scheme and to share the caring responsibilities more equally. Sole parents will be able to access the full 26 weeks.

The amount of PPL available for families will increase up to a total of 26 weeks from July 2026, benefiting over 180,000 families each year. An additional two weeks will be added each year from July 2024 to July 2026, increasing the overall length of PPL by six weeks.

To further increase flexibility, from July 2023 parents will be able to take Government-paid leave in blocks as small as a day at a time, with periods of work in between, so parents can use their weeks in a way that works best for them.

Further changes to legislation will also support more parents to access the PPL scheme. Eligibility will be expanded through the introduction of a $350,000 family income test, which families can be assessed under if they do not meet the individual income test. Single parents will be able to access the full entitlement each year. This will increase support to help single parents juggle care and work.

Increased Child Care Subsidy rate for household income up to $530,000

The Government will provide $4.7 billion over four years from 2022–2023 (and $1.7 billion per year ongoing) to deliver cheaper child care and reduce barriers to workforce participation. This includes $4.6 billon over four years from 2022–2023 to:

  • increase the maximum Child Care Subsidy (CCS) rate from 85% to 90% for families for the first child in care and increase the CCS rate for all families earning less than $530,000 in household income. From July 2023, CCS rates will lift from 85% to 90% for families earning less than $80,000. Subsidy rates will then taper down one percentage point for each additional $5,000 in income until it reaches 0% for families earning $530,000. Families will continue to receive existing higher subsidy rates for their second and subsequent children aged five and under in care, up to 95%;
  • maintain current higher CCS rates for families with multiple children aged five or under in child care, with higher CCS rates to cease 26 weeks after the older child’s last session of care, or when the child turns six years old;
  • task the ACCC to undertake a 12-month inquiry into the cost of child care and the Productivity Commission to conduct a comprehensive review of the child care sector to improve the transparency of the child care sector by requiring large providers to publicly report CCS-related revenue and profits.

The Government will also provide $43.9 millon over four years from 2022–2023 for measures to improve early childhood outcomes for First Nations children.

BUSINESS TAXATION

Previously announced measures: eight abandoned, three deferred

The Labor Government has reviewed a number of tax and superannuation related measures that had been announced by the previous Government, but not enacted. It states in the Budget papers that it will abandon eight of these, while three others will have deferred start dates.

While most of the measures relate to “business taxation”, note that these proposals also include superannuation and personal tax measures.

Finance-related proposals

The following finance-related proposed changes have been abandoned:

  • the 2013–2014 Mid-Year Economic and Fiscal Outlook (MYEFO) measure that proposed to amend the debt/equity tax rules;
  • the 2016–2017 Budget measure that proposed changes to the taxation of financial arrangements (TOFA) rules;
  • the 2016–2017 Budget measure that proposed changes to the taxation of asset-backed financing arrangements; and
  • the 2016–2017 Budget measure that proposed introducing a new tax and regulatory framework for limited partnership collective investment vehicles.

Taxation of financial arrangements technical amendments: start date deferred

The 2021–2022 Budget measure that proposed making technical amendments to the TOFA rules has been deferred from 1 July 2022 to the income year commencing on or after the date of assent of the enabling legislation.

Superannuation and retirement

The following proposed superannuation and retirement related measures have been abandoned:

  • the 2018–2019 Budget measure that proposed changing the annual audit requirement for certain self managed superannuation funds (SMSFs);
  • the 2018–2019 Budget measure that proposed introducing a requirement for retirement income product providers to report standardised metrics in product disclosure statements.

Residency requirements for certain self managed super funds: start date deferred

The 2021–2022 Budget measure that proposed relaxing residency requirements for SMSFs will be deferred from 1 July 2022 to the income year commencing on or after the date of assent of the enabling legislation.

Tax compliance: third-party reporting for electronic distribution platforms, cash payments

The Government intends to defer the start date for the following proposed third-party reporting rules:

  • transactions relating to the supply of ride sourcing and short-term accommodation – from 1 July 2022 to 1 July 2023; and
  • all other reportable transactions (including but not limited to asset sharing, food delivery and tasking-based services) – from 1 July 2023 to 1 July 2024.

The Government proposes to extend the third-party reporting regime to the operators of electronic distribution platforms (EDPs) that facilitate supplies from one entity to another entity. It will cover platforms operating over the internet, including through applications, websites or other software. However, a service will not be considered to be an electronic distribution platform if it only advertises or creates awareness of possible supplies, operates as a payment platform or serves a communications function.

Transactions will need to be reported to the ATO if they involve the provision of consideration by a buyer to a seller for a supply made through the platform by the seller. Transactions that only involve the sale of goods or real property (the transfer of legal title to the goods or real property) or financial supplies will not be captured. The supply must also be connected to the indirect tax zone (ie Australia).

Cash payments proposal abandoned

In addition, the 2018–2019 Budget measure that proposed introducing a limit of $10,000 for cash payments made to businesses for goods and services has been abandoned.

Deductible gifts: pastoral care in schools

The 2021–2022 MYEFO measure that proposed establishing a deductible gift recipient (DGR) category for providers of pastoral care and analogous wellbeing services in schools has been abandoned.

TAX COMPLIANCE AND INTEGRITY

Increased funding for ATO compliance programs

As appears to be standard practice in modern Budgets, the Government will increase funding for the ATO in the following areas. The moral for taxpayers and their advisors is that the ATO will be getting better and better at detecting variances which will require explanation.

Personal Income Taxation Compliance Program

The Government will provide $80.3 million to the ATO to extend the Personal Income Taxation Compliance Program for two years from 1 July 2023. This will focus on key areas of non-compliance, including overclaiming of deductions and incorrect reporting of income (which was the subject of a recent key address by the Second Commissioner). The funding will enable the ATO to modernise its guidance products, engage earlier with taxpayers and tax agents and target its compliance activity.

Shadow Economy Program

The Government will extend the existing ATO Shadow Economy Program for a further three years from 1 July 2023 (read “cash payments”).

Tax Avoidance Taskforce

The Government has boosted funding for the ATO Tax Avoidance Taskforce by around $200 million per year over four years from 1 July 2022, in addition to extending this Taskforce for a further year from 1 July 2025.

The boosting and extension of the Tax Avoidance Taskforce will support the ATO to pursue new priority areas of observed business tax risks, complementing the ongoing focus on multinational enterprises and large public and private businesses.

Modernising Business Registers Program

In a slightly different category, the Government will provide additional ATO and ASIC funding of $166.2 million over four years from 2022–2023 to continue delivery of the Modernising Business Registers program that will consolidate more than 30 business registers onto a modernised registry platform.

Digital currencies not foreign currency

The Budget Papers confirm that the Government is to introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency. The measure has already been released in draft legislation.

By way of background and as a reminder, this will maintain the current tax treatment of digital currencies, including the CGT treatment where they are held as an investment. This measure removes uncertainty following the decision of the Government of El Salvador to adopt Bitcoin as legal tender, and will be backdated to income years that include 1 July 2021.

The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which will continue to be taxed as foreign currency.

SUPERANNUATION

SMSF residency changes delayed

The Government confirmed that the changes to the SMSF residency rules, previously announced in the 2021–2022 Budget to commence from 1 July 2022, will now start from the income year commencing on or after the date of assent of the enabling legislation (yet to be introduced).

These measures propose to relax the SMSF residency rules by extending the central management and control test safe harbour from two to five years, and removing the active member test for both SMSFs and small APRA funds.

Until this 2021–2022 Budget measure is enacted, SMSF trustees need to ensure that they satisfy the current requirements. Even if the central management and control safe harbour is extended to five years from the date of assent, an SMSF trustee still needs to establish (before they leave) that their planned absence from Australia will be “temporary”.

Three-year cycle for SMSF audits will not proceed

The Government will not proceed with the former government’s proposal to change the annual audit requirement for certain SMSFs to allow a three-yearly cycle for funds with a history of good record-keeping and compliance.

The measure, previously announced in the 2018–2019 Budget, was proposed to apply to SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

While the Government did not provide any reasons in the Budget papers for abandoning this proposal, the SMSF audit industry has previously flagged concerns that moving to a three-yearly audit cycle could result in increased non-compliance. The SMSF audit industry had also expressed concern that altering its workflow (and reducing profitability) could potentially lead to a reduction in the number of businesses specialising in SMSF audits and lower quality audits.

Standardised disclosure for retirement income products

The Government also announced that it will not proceed with the proposal to report standardised metrics in product disclosure statements (PDS) for retirement income products.

The former government had proposed to mandate a simplified disclosure document to support the development of the comprehensive income product for retirement (CIPR) framework. The related consultation paper proposed a simplified disclosure document with a range of standardised metrics to assist retirees to assess how a retirement income product aligns with their own preferences in relation to potential income, variations in income, access to capital, death benefits and risk management. The proposed metrics would have been presented as fact sheets to supplement existing disclosure documents.

Super downsizer contributions eligibility age reduction to 55 confirmed

The Government confirmed its election commitment to lower the minimum eligibility age for making superannuation downsizer contributions to age 55 (down from age 60).

The reduction in the eligibility age will allow individuals aged 55 or over to make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their main residence outside of the existing contribution caps. Either the individual or their spouse must have owned the home for 10 years.

As under the current rules, the maximum downsizer contribution is $300,000 per contributor (ie $600,000 for a couple), although the entire contribution must come from the capital proceeds of the sale price. A downsizer contribution must also be made within 90 days after the home changes ownership (generally the date of settlement).

Assets test exemption for two years; deeming rates frozen

The Government also confirmed its election commitments to assist pensioners looking to downsize their homes, by extending the social security assets test exemption for principal home sale proceeds from 12 months to 24 months; and changing the income test to apply only the lower deeming rate (0.25%) to principal home sale proceeds when calculating deemed income for 24 months after the sale of the principal home.

HOUSING MEASURES

Regional First Home Buyers Guarantee Scheme; Housing Australia Future Fund

The Government has announced that it will establish a Regional First Home Buyers Guarantee. Its aim will be to encourage home ownership in regional locations.

It will apply to eligible citizens and permanent residents who have lived in a regional location for more than 12 months to purchase their first home in that location with a minimum 5% deposit. It aims to reach 10,000 places per year to 30 June 2026. It will fund this by redirecting funding from the Regional Home Guarantee component of the 2022–2023 March Budget measure titled Affordable Housing and Home Ownership.

In other measures, the Government will invest $10 billion in the newly created Housing Australia Future Fund, to be managed by the Future Fund Management Agency. Its aim will be to generate returns to fund the delivery of 30,000 social and affordable homes over five years and allocate $330 million for acute housing needs.

The Government will also “broaden the remit” of the National Housing Infrastructure Facility to directly support new social and affordable housing in addition to financing critical housing infrastructure.

New Housing Accord: $350 million in Government funding

The Government announced that it has struck a new national Housing Accord between state and territory governments, investors and other key stakeholders. This Housing Accord sets an initial, aspirational target of 1 million new homes over five years from 2024.

Under the Accord, the Government will commit $350 million over five years to deliver 10,000 affordable dwellings at an energy efficiency rating of seven stars or greater (or a state or territory’s minimum standard). This commitment is in addition to the 30,000 new social and affordable dwellings delivered through the Housing Australia Future Fund. The states and territories will also build on this commitment by providing in-kind or financial contributions that enable delivery of up to an additional 20,000 homes in total.

By delivering an ongoing funding stream to help cover the gap between market rents and subsidised rents, the Government believes it will make more projects commercially viable to attract much-needed investor capital to the sector.

The Government said it has secured endorsement from institutional investors, including superannuation funds, for the Accord. Investors will work constructively with Accord parties to optimise policy settings that facilitate institutional investment in affordable housing.

Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

Finance Update September 2022

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Tax Newsletter – September 2022

CURRENCY:

This issue of Client Alert takes into account developments up to and including 23 September 2022.

Keeping you informed about the Federal Budget

Australia’s Labor Government is expected to hand down its Federal Budget for 2022–2023 on the evening of Tuesday 25 October.

The Client Alert team will, as usual, work to bring you a special Budget Extra edition that outlines the key announcements to assist you in dealing with your clients’ queries. You can expect to receive it by the morning after the Budget is handed down.

Bonus deduction for employee training proposal

To stem the tide of the current workforce shortage in many industries, the government has proposed a new temporary initiative that would give small businesses access to a bonus tax deduction equal to 20% of certain employee training expenditure. This proposal is currently in the draft stage and undergoing consultation, and as such any deduction will not be available until the measure becomes law.

As a part of its strategy to address the current skills shortage and future-proof Australia’s workforce by building better trained and more productive workers, the Federal Government has proposed to implement a temporary “skills and training boost” initiative. This initiative proposes to give small businesses access to a bonus deduction equal to 20% of eligible expenditure on certain training for employees, both existing and new, between 29 March 2022 and 30 June 2024.

The bonus deduction would be available to all entities that meet the definition of a small business entity (ie those with an aggregated annual turnover of less than $50 million) in the income year in which the eligible expenditure is incurred.

Under the proposed measure, eligible expenditure would need to satisfy the following criteria:

  • expenditure must be for training employees, either in-person in Australia, or online;
  • expenditure must be charged, directly, or indirectly, by a registered training provider and be for training within the scope (if any) of the provider’s registration – although any additional costs associated with the provider invoicing through an intermediary such as commissions or other fees would not be eligible for the bonus deduction;
  • the registered training provider must not be the small business itself or an associate of the small business;
  • the expenditure must already be deductible under taxation law (ie the training must be necessarily incurred in carrying on a business for the purpose of gaining or producing income) – the deductible training may be either an operating expense or of a capital nature, although GST is usually excluded;
  • expenditure must be incurred within a specific period (between 7.30 pm legal time in the ACT on 29 March 2022 and 30 June 2024); and
  • expenditure must be for the provision of training, where the enrolment or arrangement for the provision of the training occurs at or after 7.30 pm legal time in the ACT on 29 March 2022.

This initiative is only intended to cover employees, and as such, the bonus deduction would not be available for the training of non-employee business owners, such as sole traders, partners in a partnership and independent contractors who are not employees of the business within the ordinary meaning. In addition, the requirement for the expenditure to be incurred on external training means that the cost of any in-house or on-the-job training would not be eligible for the bonus deduction. According to the government, this is because the bonus deduction is not intended to cover general business operating costs.

 

It’s proposed that training providers wishing to take advantage of this measure must be registered with at least one of the following four government authorities to ensure quality and integrity:

  • Australian Skills Quality Authority (ASQA);
  • Tertiary Education Quality and Standards Agency (TEQSA);
  • Victorian Registration and Qualifications Authority; or
  • Training Accreditation Council of Western Australia.

Example

Company A is a qualifying small business entity and has hired a new employee, Trevor. The business is keen to upskill him to take on more complex work. The business pays $5,500 (incl GST) for a course with a registered training provider whose scope of registration includes the specific skill, held on 1 December 2022. The bonus deduction in addition to the $5,000 (excl GST) that Company A can deduct is $1,000 (20% of $5,000).

It should be noted that this proposal is currently in the draft stage and undergoing consultation, and as such the bonus deduction will not be available until the measure becomes law. No timeframes have been given as to when that will occur. However, it is likely that when passed, the legislation will be retrospective (ie it will encompass expenditure between 7.30 pm legal time in the ACT on 29 March 2022 and 30 June 2024).

Crypto reforms: change in consultation approach

With the skyrocketing uptake of cryptocurrency among Australian retail investors, the government is seeking to change its consultation approach to the regulation of cryptocurrency assets. As a part of this new approach, Treasury will prioritise “token mapping” work as the first step in a reform agenda. This aims to identify how cryptocurrency assets and related services should be regulated. Work is then expected to commence in other areas such as a licensing framework, custodian obligations and additional consumer safeguards.

According to the latest Australian Security and Investments Commission (ASIC) report into retail investment, the uptake in cryptocurrency has skyrocketed among Australian retail investors. The regulator found that 44% of those surveyed reported holding cryptocurrency, making it the second most common product type held after Australian shares. At the same time, a quarter of the surveyed investors who held cryptocurrency also indicated that cryptocurrency was the only investment they held.

With this increase in the uptake of cryptocurrency and other related blockchain technology, coupled with the lack of regulation which has allowed scams to proliferate, it will perhaps come as no surprise to learn that the Australian Competition and Consumer Commission (ACCC) estimates that more than $100 million has been reported lost to cryptocurrency investment scams just in the first half of 2022.

In a bid to stamp out these scams, the then Coalition government had commissioned the Board of Taxation to conduct a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia. This review was to focus on the scope of digital transactions and assets without increasing the overall tax burden. Specifically, it was asked to consider:

  • the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
  • the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
  • the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
  • the taxation of digital assets and transactions in comparative jurisdictions and consideration of how international experience may inform the taxation of digital assets and transactions in Australia; and
  • whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

Various public consultation dates in September 2022, both in person and virtual, have also been announced by the Board of Taxation in relation to the review, with submissions closing on 30 September 2022. The Board is due to report back to the government by the end of 2022.

 

However, the Labor Government has recently criticised the previous government for “prematurely jump[ing] straight to options without first understanding what was being regulated”. According to the Assistant Treasurer and Minister for Financial Services, this government is seeking to take a “more serious approach to work out what is in the ecosystem and what risks needs to be looked at first”.

As a part of this new approach, Treasury will prioritise “token mapping” work as the first step in a reform agenda. This aims to identify how cryptocurrency assets and related services should be regulated. The next steps in this process will be to identify notable gaps in the regulatory framework, progress a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of cryptocurrency assets and provide additional consumer safeguards.

Treasury will be commencing consultation with stakeholders on a framework for industry and regulators soon by the release of a public consultation paper on “token mapping”. While the Board of Taxation review was not explicitly addressed, it is assumed the review as previously announced will continue.

Sale of principal home: extension of exemption

To reduce the impact of selling and buying a new principal home and to encourage pensioners to downsize, the government, in conjunction with the announcement of its intention to reduce the eligibility age for downsizer super contributions, has introduced a Bill to extend the existing assets test exemption under social security for principal home sale proceeds that an individual intends to use to purchase or build a new principal home. The Bill also seeks to apply the lower deeming rate to the proceeds of sale.

In a bid to support pensioners and in conjunction with the announcement to reduce the eligibility age for downsizer super contributions, the government has introduced a measure to extend the existing assets test exemption under social security for principal home sale proceeds which a person intends to use to purchase a new principal home.

Under the social security system, the level of income support received by individuals depends on their income and assets. For example, for an individual to receive the age pension, Services Australia (Centrelink) will assess the individual’s and their partner’s income from all sources, including financial assets such as superannuation, using deeming. Deeming assumes that a financial asset earns a set rate of income regardless of the actual income generated. Applicants for the age pension also need to pass the assets test, the limits of which change depending on whether they own their own home and whether they are single or in a couple.

Currently, when an age pensioner or other eligible income support recipient sells their principal home to either purchase or build another home, those proceeds are exempt from the assets test for up to 12 months. However, the proceeds will still be subject to deeming. An additional 12-month extension may be granted where the income support recipient has a continued intention to apply the sale proceeds to the purchase, build, rebuild, repair or renovation of a new principal home and has:

  • made reasonable attempts to purchase, build, rebuild, repair or renovate their new principal home (eg signing a contract to purchase or renovate etc);
  • made those attempts within a reasonable period after selling the principal home; and
  • experienced delays beyond their control in purchasing, building, rebuilding, repairing or renovating their new principal home.

The Bill introduced by the government would automatically extend the existing assets test exemption from 12 to 24 months. An additional 12-month extension may also be available in particular circumstances, taking the maximum exemption period to 36 months in total.

It should be noted that only the value of the principal home proceeds that are intended to be used to purchase/build a new home can be exempt. For example, if an individual sells their principal home for $1 million and intends to purchase a new home for $700,000 and use the remaining $300,000 to buy an investment, then the total amount of sale proceeds that can be exempt from the assets test is $700,000, while the other $300,000 is not exempt from the assets test.

In addition to extending the exemption, the Bill also seeks to apply a lower deeming rate to the principal home sale proceeds when calculating deemed income for the period during which the proceeds are exempt from the assets test. For deeming purposes, the threshold is currently $56,400 for an individual and $93,600 for couples. Below those thresholds, the financial assets are deemed to earn at a rate of 0.25%, while anything above those thresholds are deemed to earn 2.25%. If this proposed measure becomes law, the exempt principal home sale proceeds will be treated as a separate pool to the other financial assets and deeming will be calculated at 0.25% instead of 2.25%.

ASIC’s focus on super complaints handling

Recently, the Australian Securities and Investments Commission (ASIC) conducted surveillance to assess superannuation trustees’ compliance with enforceable requirements relating to internal dispute resolution (IDR). The results indicated significant compliance issues and pointed to areas which need to be strengthened. For example, one in three trustees advised ASIC of varying failures in their IDR processes. These included failure to capture complaints, the omission of mandatory content from response letters or failure to send out responses to complainants. Based on these results, further surveillance will be conducted by ASIC.

ASIC is the body responsible for overseeing the operation of Australia’s financial services dispute resolution framework, including the IDR systems of superannuation trustees and other financial firms. This, together with external dispute resolution systems of the Australian Financial Complaints Authority (AFCA), forms the key consumer protection mechanism to ensure all complaints are resolved in a fair and timely manner.

Recently, to gauge the degree of superannuation trustees’ compliance with the enforceable requirements contained in ASIC’s Regulatory Guide 271 Internal Dispute Resolution, initial surveillance was conducted on a selection of trustees and funds. ASIC collected data from a selection of 35 trustees of 38 funds, covering 49,029 complaints received between 5 October 2021 and 28 February 2022. The data was then analysed to determine the status and timeliness of complaints handling, excluding objections to death benefit distributions. The results of this initial surveillance found indicators of significant compliance issues and areas which will need to be strengthened. According to ASIC, RG 271 requires super trustees to record all member complaints, and overall fund data as at 30 June 2021 indicates a complaints rate of 30 per 10,000 members. However, the data from the surveillance showed that 10% of the funds recorded fewer than 10 complaints per 10,000 members, which is significantly lower than the overall rate and may be a result of trustees failing to either record all member complaints or using an inappropriately narrow definition of “complaint”.

In addition, RG 271 has a 45-day maximum period for super trustees to respond to complaints as part of their IDR response (except for complaints regarding death benefit distributions, which have a longer timeframe). Of the 38 funds reviewed by ASIC as a part of this initial surveillance, 2.7% of IDR responses were sent after the 45-day maximum. The concern for ASIC is that super trustees may be over-applying the limited exceptions to the maximum timeframe or not sufficiently monitoring how long complaints take to resolve.

Failures were also detected in the area of informing complainants of delays and in IDR processes. Specifically, RG 271 requires that super trustees notify complainants of delays and their rights to go to AFCA when a written response is not sent within 45 days. The initial review results found that nearly 50% of complainants were not notified of the delay or their rights. Further, one in three trustees advised ASIC of varying failures in their IDR processes, including failure to capture complaints, the omission of mandatory content from response letters or  failure to send out responses to complainants.

In the next stage of the surveillance and based on these results, ASIC will be seeking to check how relevant trustees are addressing concerns identified thus far, and closely examine a smaller subset of trustees. It notes that it will consider regulatory action where appropriate.

Compliance with super laws: ATO’s approach

When it comes to legal compliance by self managed superannuation fund (SMSF) trustees, the ATO’s main focus is on encouraging trustees to comply with the super laws. However, there are occasions when stronger responses are required.

The following courses of action are available to the ATO to deal with SMSF trustees who have not complied with super laws:

  • Education direction – the ATO may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The trustee will need to provide evidence they have completed the course. Trustees will also be required to sign a Trustee declaration confirming they understand their obligations as a trustee of an SMSF.
  • Enforceable undertaking – an SMSF trustee may initiate a written undertaking to rectify a contravention. The ATO will decide whether or not to accept the undertaking, taking into account factors such as the compliance history of the trustee, the nature of the contravention and the strategies to prevent the contravention from recurring.
  • Rectification direction – the ATO may give a trustee, or a director of a corporate trustee, a written direction to rectify a contravention of the super laws. Rectification generally involves putting in place arrangements that could reasonably be expected to ensure there are no further similar contraventions.
  • Administrative penalties – individual trustees and directors of corporate trustees are personally liable to pay an administrative penalty for breaches of various provisions of the super laws. Administrative penalties may also be imposed on SMSF trustees if they make false and misleading statements to the ATO. Penalties cannot be paid or reimbursed from the assets of the fund.
  • Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened super laws or if the ATO is concerned about the individual’s actions or suitability to be a trustee. It is an offence for an individual to continue to act as a trustee, or as a director of a corporate trustee, if they have been disqualified.
  • Civil and criminal penalties – these may apply where an SMSF trustee has contravened certain provisions of the super laws. The ATO will consider the severity of the contravention, the circumstances that led to it and the actions of the individuals involved before instigating civil or criminal prosecution.
  • Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance. In this case, the fund remains non-compliant until they receive a notice of compliance. Making a fund non-complying can have a significant financial impact on the SMSF.
  • Allowing the SMSF to be wound up – following a contravention, the trustee may decide to wind up the SMSF and roll over any remaining benefits to an APRA regulated fund. However, the ATO may continue to issue the SMSF with a notice of non-compliance or apply other compliance treatments.
  • Freezing an SMSF’s assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.