{/01529093:1} www. bwslawyers.com.au Brown Wright Stein tax partners: Andrew Noolan E: [email protected] P: 02 9394 1087 Chris Ardagna E: [email protected] P: 02 9394 1088 Geoff Stein E: [email protected] P: 02 9394 1021 Michael Malanos E: [email protected] P: 02 9394 1024 TAX TRAINING NOTES Monthly tax training October 2016 Brown Wright Stein Lawyers Level 6, 179 Elizabeth Street Sydney NSW 2000 P 02 9394 1010 {/01529093:1} www. bwslawyers.com.au 1 Cases .....................................................................................................................................................1 1.1 Ward – excess contributions and special circumstances..................................................................1 1.2 Silver Mines – R&D Concessions......................................................................................................3 1.3 RSPG – GST and apportionment......................................................................................................5 1.4 PBKQ – deductibility of services charges .........................................................................................7 1.5 Landy – permanent place of abode outside Australia .......................................................................9 1.6 ZDCW – Release of taxation debts for serious hardship ............................................................... 11 2 Legislation.......................................................................................................................................... 13 2.1 Progress of legislation .................................................................................................................... 13 2.2 Superannuation reforms – tranche 2.............................................................................................. 13 2.3 Commissioner's remedial power .................................................................................................... 19 2.4 Backpacker tax ............................................................................................................................... 19 2.5 Foreign resident capital gains withholding variations..................................................................... 20 2.6 PAYG Withholding – labour hire arrangements ............................................................................. 20 3 Rulings................................................................................................................................................ 22 3.1 Distributions from foreign companies – participation test............................................................... 22 3.2 Transfer and landholder duty – market value and GST ................................................................. 23 3.3 Fringe benefits for payroll tax purposes ......................................................................................... 23 4 Determinations................................................................................................................................... 25 4.1 Limited recourse borrowing arrangements..................................................................................... 25 5 ATO materials .................................................................................................................................... 27 5.1 Part IVA and GAARs ...................................................................................................................... 27 5.2 ATO proposal – one chance penalty concession........................................................................... 27 5.3 Multinational profit shifting.............................................................................................................. 28 5.4 Substantiation exception for reasonable travel allowance expenses............................................. 30 5.5 ATO on engagement for clients in the building and construction industry with tax debts.............. 30 5.6 SMSF compliance issues ............................................................................................................... 30 5.7 Early engagement for advice.......................................................................................................... 31 5.8 Small business mental health initiative........................................................................................... 31 6 Other materials .................................................................................................................................. 32 6.1 New Zealand 'Netflix' tax ................................................................................................................ 32 Monthly tax training – October 2016 {/01529093:1}Liability limited by a scheme approved under Professional Standards Legislation About Brown Wright Stein Brown Wright Stein is a medium-sized commercial law firm based in Sydney. We provide legal advice in the following areas: Tax Dispute Resolution Corporate & Commercial Franchising Property Employment Estate Planning Elder Law Intellectual Property Corporate Governance Insolvency & Bankruptcy Our lawyers specialise in working with business owners and their business advisors, such as accountants, financial consultants, property consultants and IT consultants – what we see as our clients' 'business family'. We develop long-term relationships which give our lawyers a deep understanding of our clients' business and personal needs. Over the years we have gained a unique insight into the nature of operating owner-managed businesses and the outcome is that we provide practical commercial solutions to business issues. At Brown Wright Stein, we believe in excellence in everything we do for our clients. It's this commitment that enables us to develop creative, innovative solutions that lead to positive outcomes. This paper has been prepared for the purposes of general training and information only. It should not be taken to be specific advice purposes or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained within. All rights reserved. No part of these notes may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without prior written permission from Brown Wright Stein Lawyers. These materials represent the law as it stood on 12 October 2016. Copyright © Brown Wright Stein Lawyers 2016. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 1 1 Cases 1.1 Ward – excess contributions and special circumstances Facts Mr Colin Ward and his wife, Joan, retired in February 2008 and September 2007 respectively after having worked in low paid jobs throughout their lives. Upon retirement they had a combined total of approximately $400,000 in superannuation and approximately a further $70,000. In early 2008 Colin and Joan, concerned about the impact of the global financial crisis on their superannuation savings, withdrew the balance of their superannuation accounts and put them in term deposits. On 9 July 2008 Mr Ward, after seeking advice from Westpac, contributed $450,000 into a BT Super for Life account. Mr Ward did so on the belief that the account paid a fixed interest rate. The $450,000 was contributed under the three year bring forward rule which Mr Ward, being aged under 65, was entitled to utilise. A short time afterwards, Mr Ward became aware that the account did not pay a fixed interest rate and, as the interest rates for the account continued to fall, withdrew his benefits from the account from October 2008 to April 2009 and again placed the proceeds in term deposits. In 2010 the Wards decided to seek further financial advice and were advised to establish a self-managed superannuation fund. In June 2010 the Parr Post Superannuation Fund was established, with Mr and Mrs Ward as trustees and members. Mr Ward provided the new financial adviser with a statement from the BT account. The statement was incomplete and also apparently misleading such that the new financial adviser was not aware of the previous use of the three-year bring forward rule. In August 2010 Mr and Mrs Ward sold their home for $460,000. In September 2010, Mr Ward made a non-concessional contribution of $450,000 to the Parr Post Superannuation Fund, sourced from the term deposits, and Mrs Ward also made a non-concessional contribution of $450,000 to the Parr Post Fund, sourced from the sale proceeds of the Watson property. On 23 November 2012, an excess contributions tax Notice of Assessment was issued to Mr Ward for the year ended 30 June 2011 on the basis that his available cap for that year had been nil by virtue of the contributions made to the BT Super for Life account in July 2008. Mr Ward made an application to the Commissioner for the exercise of his discretion that the excess nonconcessional contributions be disregarded because there were special circumstances. The Commissioner refused to exercise his ‘special circumstances’ discretion. Mr Ward objected to that decision. The objection was disallowed and Mr Ward applied to the Tribunal for review. The Tribunal accepted the following: 1. Mr Ward was an extremely cautious decision maker, who sought to act on the basis of qualified advice and placed significant reliance on such advice; 2. Mr Ward did not set out intentionally to breach the bring forward rule, nor to exceed the contributions cap; 3. the notice provided by BT Super for Life was misleading; 4. the misleading notice induced the incorrect advice provided by the financial planner; 5. the excess contributions tax assessment wiped out the entirety of Mr Ward’s superannuation savings at retirement; 6. the steps undertaken by Mr Ward had been for the purpose of protecting his and his wife’s superannuation savings in light of a volatile economic environment; 7. the outcome was harsh and unfair; 8. the imposition of excess contributions tax on him was the natural and foreseeable consequence of the decisions he and his advisers made, albeit in ignorance. In concluding that there were not special circumstances the Tribunal commented as follows: Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 2 Despite the harshness of its impact upon him, the excess contributions tax imposed on Mr Ward as a consequence of his decisions cannot be said to be anomalous, in the nature, say, of a double penalty or an outcome not reasonably foreseeable. The legislative provisions imposing the excess contributions tax have operated as they were intended to. Had Mr Ward set out deliberately and consciously to build up his superannuation in defiance of the cap, one might regard a ‘penalty’ of $209,250 as a fair outcome; the fact that Mr Ward proceeded with no such defiance of the law in mind does not transform the tax into something unintended. The Tribunal’s statement above was based on its view of the decision of Kiefel J in Groth v Secretary, Department of Social Security [1995] FCA 1708; (1995) 40 ALD 541 which it considered meant that whether there was something unintended had a bearing on how the ‘special circumstances’ test should be applied. Mr Ward then appealed to the Federal Court of Australia with his appeal being heard by the Full Court. Issue Whether the Tribunal had properly concluded that Mr Ward’s circumstances were not special. Decision The Full Federal Court rejected the approach of the Tribunal, finding that the Tribunal erred in proceeding on the basis that because the imposition of the tax was the natural and foreseeable consequence of the decisions of Mr Ward and his advisers, it was necessarily outside the scope of special circumstances. The Court commented as follows on the approach of the Tribunal: 43. In our opinion, the Tribunal erred in law by taking too narrow a view of what may constitute ‘special circumstances’ within the meaning of the statute. This may have been caused by unnecessarily considering factors in isolation before focusing on the entirety of the circumstances said by the Applicant to be special. It was certainly caused, in our opinion, by looking at expressions in other decisions and taking those expressions out of their factual and legal context. The Court provided an indication as to the meaning of ‘special circumstances’ with the following comment: 41. In our opinion, it was open to the Tribunal to find that there were ‘special circumstances’ if it found that the provisions operated on Mr Ward, in his individual circumstances, in an unfair or unjust way because, through a misunderstanding of an adviser by virtue of the misleading notice provided by BT Super for Life, Mr Ward, acting honestly and carefully, accidentally breached the bring forward rule which had consequences disproportionate to the intended operation of the statute. The Court remitted the matter for reconsideration by the Tribunal. COMMENT – The ‘special circumstances’ or ‘exceptional circumstances’ concepts are used in a number of provisions of the tax laws where there is discretion for the Commissioner. An example includes the Commissioner’s discretion for the purpose of the main residence exemption to allow a period longer than a year to acquire a substitute dwelling after a dwelling is compulsorily acquired or destroyed. TIP – the effect of the decision of the Full Court in Ward is that the approach that the ATO and the AAT have traditionally adopted for the ‘special circumstances’ discretion for excess contributions tax is too narrow. It would be prudent to revisit any previous decisions made by the Commissioner refusing to exercise the discretion. Where such a decision was made less than 4 years ago, the taxpayer will be within time to object. Where the time for an objection has passed, it may still be worthwhile to object and request that the Commissioner exercise his power to treat the objection as having been made within time. Citation Ward v Commissioner of Taxation [2016] FCAFC 132 (Robertson, Davies and Wigney JJ, Sydney) w http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/132.html Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 3 1.2 Silver Mines – R&D Concessions Facts In 2006, Silver Mines Limited commenced a business in which it explored for and developed silver mining operations throughout Australia and overseas. From 2006, up until his death in 2010, David Straw was a director of the Silver Mines and was largely responsible for the assessment and evaluation of the geological merit of the silver deposits. At some time in 2008 Silver Mines requested a scoping study be conducted by Lycopodium Minerals Qld Pty Ltd (LMQ) in respect of a silver project being conducted by Silver Mines (Webb's Silver Project); On 2 August 2010, David Straw passed away following which his son, Charles Straw, was appointed Managing Director of Silver Mines. David was 79 years old at the time of his death, had been living in a nursing home and his health has been poor for some time. Silver Mines had taken conscious steps to fill the vacuum of David's involvement by hiring David Hobby as Exploration Manager and lead technical consultant. On 8 March 2011 LMQ issued a scoping study report in respect of the Webb’s Silver Project. In April 2012, Silver Mines, based on a recommendation made in the LMQ Report, requested a further expert report from Core Process Engineering Pty Ltd for the Webb’s Silver Project. On 5 April 2013, CPE issued a Core Processing Engineering Report in respect of the Webb’s Silver Project. From around April 2013 to June 2013, Silver Mines assessed the CPE report and ultimately formed the view it may be able to secure a successful claim for R&D expenditure. On 29 July 2013 and again on 11 February 2014, a competitor, Argent Minerals Limited (Argent) released a press release outlining some of the successful details of its recent R&D claims. From around July 2013 to September 2013, Silver Mines looked into identifying appropriate tax advisors to assist in the provision of suitable R&D tax advice and on 4 September 2013 it received a recommendation that BDO Australia could provide suitable advice. However, Silver Mines ultimately chose not to retain BDO as its proposed fees were unacceptable. In March 2014 Silver Mines engaged Traverse Accountants to act as its tax agent and to provide all relevant advice in relation to the proposed R&D claims. On 28 March Silver Mines became aware that it could request an extension of time to lodge R&D registrations for the 2010-11 year (the deadline had expired on 30 April 2012) and the 2011-12 year (the deadline had expired on 30 April 2013). On 14 May 2014 registration was granted for Silver Mines for the year ended 30 June 2013. On 19 June 2014 Silver lodged an extension of time request to lodge an application for registration for the years ended 30 June 2012 and 30 June 2011. The Minister denied the extension of time requests and Silver Mines applied to the Tribunal for review of those decisions. Issue Whether the Minister should have granted extensions of time for Silver Mines to lodge the R&D applications as follows: 1. for the 2011 year – because the delay was caused by exceptional circumstances; and 2. for 2012 year – because: (a) the act, omission or event that led to the need for an extension was not the fault of Silver Mines; (b) the act, omission or event that led to the need for an extension was not within Silver Mines’ control; and (c) the further period requested is in proportion to the severity of Silver Mines’ level of inability to comply with the statutory timeframe. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 4 Decision The two applications, due to the legislative requirements being different for the two years, involved different tests as follows: 1. 2011 Year: an extension is permitted if there are 'exceptional circumstances'; and 2. 2012 Year: within such further period of time in accordance with the decision making principles. 2011 Year: were there exceptional circumstances? The Tribunal noted that the dictionary definition of the word ‘exceptional’ includes ‘not usual, common or ordinary; uncommon in amount or degree; of an exceptional kind’. Further, the Tribunal referred to the Guide to the R & D Tax Concession (the Concession Guide) published by Innovation Australia and which gives examples of the types of circumstances which Innovation Australia will treat as being exceptional. That guide states that the term ‘exceptional circumstances’ refers to an ‘unforeseen or unforeseeable event or circumstance (or combination of events or circumstances) that was outside the control of the applicant.’ Silver Mines sought to rely upon the meaning given to the phrase ‘exceptional circumstances’ by Kiefel J in Hatcher v Cohn [2004] FCA 1548, which emphasised the importance of giving the term a wide operation. In Hatcher Kiefel J stated that ‘no definition which limits their application should be adopted, unless the limitation appears from the words of the relevant statutory provision’. The Tribunal considered that the statutory scheme in Hatcher was very different to the one in this case. The Tribunal noted that the only grounds that might give rise to a conclusion of exceptional circumstances were the following: 1. the death of David on 2 August 2010 - the Tribunal was not satisfied that this was exceptional circumstances given that David had been living in a nursing home and had been ill for some time. Silver Mines had also replaced his expertise with the appointment of David Hobby. Further, there was no evidence that David was the person responsible for preparing or coordinating Silver Mines applications for registration of R&D activities or any part of those applications; 2. Silver Mines' lack of knowledge concerning the fact of and the detail of the R&D scheme - the problem with this ground was that the evidence suggested that Silver Mines had been aware of the scheme for some time, although it may not have been aware of the ability to lodge an extension request. The evidence suggested that they had been aware since at least July 2013 but that it was only in March 2014 that they engaged Traverse; and 3. the lack of advice from the tax agent and accountant – the Tribunal accepted that the tax agent, auditor and accountant engaged by Silver Mines should have either advised Silver Mines or provided it with sufficient information concerning the R&D concessions. However, the Tribunal appears to have not considered this to be an exceptional circumstance. The Tribunal considered that the only circumstance that might possibly be 'exceptional' was that Silver Mines was not aware of the ability to lodge an extension request. However, the Tribunal noted that this circumstance needed to be the reason for the delay. The Tribunal noted that Silver Mines became aware of the scheme on 29 July 2013 but waited a further seven months before finally lodging its application for an extension reflecting a relaxed attitude to making such an application. For this reasons, the Tribunal was not satisfied that the lack of knowledge as to the ability of the lodge an extension request was the cause of the delay. 2012 Year: Not the fault of Silver Mines and outside its control? Subsection 3.2(2) of the Principles provides that the Respondent: ...may also allow a thing to be given by an interested person within a further period only if the act, omission or event that led to the need for the further period was not the fault of the interested person and was not within the interested person’s control. Silver Mines' primary reason for the delay in relation to the 2012 application was the poor state of advice it received giving rise to a lack of knowledge regarding the R&D scheme. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 5 The Tribunal did not accept that the circumstances were outside of Silver Mines control because it ‘pursued further advice but in such a tardy fashion that the delays cannot be explained on this basis’. The Tribunal further noted that ‘[e]ven after it became aware of the R&D Tax Incentive and that extra time could be sought, the applicant failed to take appropriate steps to inform itself about the nature of the scheme or the circumstances in which it might make a belated application.’ Finally, the Tribunal noted that Silver Mines also took no steps to prudently notify Innovation Australia of its intention to lodge out of time while it awaited the preparation of more formal legal documentation. COMMENT – the time taken by Silver Mines to lodge the applications once it became aware of the concessions was the primary reason why the Tribunal denied the requests for extensions. That subsequent delay appears to have led the Tribunal to conclude that all the earlier reasons for the delay, such as the poor advice and David's death, were not genuine reasons for the failure to lodge on time. Note as well the criticism of the failure to notify Innovation Australia of the intention lodge out of time. Where an objection or extension request is to be filed late, it is worth putting the decision maker on notice or attempting to ask for an extension of time. Citation Silver Mines Limited and Minister for Infrastructure and Regional Development [2016] AATA 707 (DP Deutsch, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/707.html 1.3 RSPG – GST and apportionment Facts RSPG is a member of a GST consolidated group that constructed and operates a retirement village. The case concerned the extent to which acquisitions made during Stage 1 of the construction of the retirement village were to be taken to relate to the making of input taxed supplies under the GST Act. The contractual arrangements that the RSPG group had with residents of the facility were relevant. Residents of the retirement village entered into a Loan Deed, Sublease and Service Agreement with the relevant entities of RSPG's group. Broadly, the terms of these agreements were as follows: under the Loan Deed, the resident lent an interest-free amount to RSPG's borrowing entity until the earlier of the expiry of the sublease or 50 years from the date of the loan deed. The relevant borrowing entity was entitled to set-off amounts owed by the resident against repayment of the loan; under the sublease, the resident paid a fixed rent of $8,000 for the whole term of the sublease for the occupancy of a residential unit; and under the service agreement, the resident paid a once-off non-refundable licence fee in exchange for full and free access to common areas as well as a monthly levy. The facility agreed to provide various services to the resident under this agreement. Input tax credits can be claimed for creditable acquisitions pursuant to sections 7-1 and 11-20 of the GST Act. Under section 11-15(2) of the GST Act, an acquisition is not acquired for a creditable purpose to the extent it relates to the making of input taxed supplies. Input taxed supplies include residential premises supplied by lease (section 40-35 of the GST Act). It was not disputed that the acquisitions for the construction of Stage 1 of the retirement village were acquired partly for a creditable purpose and partly for making input taxed supplies. In such circumstances, a person must apportion its acquisitions between input taxed supplies and its' taxable supplies. RSPG adopted an apportionment methodology based on the apportionment formula in GSTR 2011/1, although it acknowledged that it did not fall within the precise terms of that ruling. The formula used, extracted from GSTR 2011/1, is as follows: Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 6 total value of economic benefits reasonably expected to be obtained from making input taxed supplies divided by total value of economic benefits reasonable expected to be obtained in respect of the arrangement RSPG applied the formula in the following way: Benefit of interest free loan for 1 month (A) + rent (B) divided by A + B + recurrent charges (C) + exit fee (D) + licence fee (E) This formula gave a percentage of acquisitions related to input taxed supplies of 9%. Accordingly, RSPG claimed input tax credits for 91% of the construction costs. The Commissioner did not dispute the apportionment methodology used by RSPG, but contended that the application of the formula was inappropriate as it did not reflect a fair and reasonable apportionment and produced significant distortions in the amount of input tax credits that could be claimed for the following reasons: 1. Benefit of the interest free loan (A): RSPG had contended that the economic benefit of the interest free loan was only one month, because residents had a right to terminate the arrangements on one month’s notice. The Commissioner argued that the value of an interest free loan is the interest saved during the period that the loan continues. 2. Rent and licence fee (B) and (E): The Commissioner highlighted that RSPG had spread the rent over 50 years, so that only 1/50th of the rent appeared in the numerator. This assumed that residents would stay for 50 years, which was contrary to the evidence (the average occupancy of residents was 12 years). Further, the Commissioner noted that RSPG had included the whole of the licence fee in the denominator. This inconsistency in approach effectively led to an increase in the creditable recovery. 3. Exit Fee (D): The Commissioner argued that ‘end of lease payments’ were consideration for the input taxed supply of the residential units to the residents. RSPG’s position was that these were deferred service payments 4. Licence fee (E): The Commissioner accepted that the licence provided to the residents under the Service Agreement was a taxable supply and was not the supply of residential premises, however, argued that the licence was ‘related’ to the supply of residential premises in a ‘substantial’ and ‘real’ way, and that by including the licence fee in the denominator only distorted the resulting percentage. To the extent that an acquisition relates to an ‘input taxed supply’, it is not for a creditable purpose and input tax credits cannot be claimed. As a secondary argument, RSPG also contended that the entire retirement village fell within the definition of ‘commercial residential premises’ used in the GST Act, being similar to a ‘hostel’ or a ‘boarding house’, such that the supply of the premises, and related supplies, were not input taxed. RSPG applied to the Tribunal for a review of the Commissioner's objection decision. Issues 1. Whether the apportionment methodology used by RSPG was appropriate; and 2. Whether the residences in the retirement villages are ‘commercial residential premises’. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 7 Decision Apportionment Methodology The Tribunal rejected RSPG’s claim for input tax credits based on the apportionment methodology it had adopted as such apportionment methodology was not ‘fair and reasonable’. The Tribunal agreed with the Commissioner that 1. the value of an interest free loan is the interest thereby saved during the period that the loan continues and, as the average occupation of twelve years, there is no reason to limit the benefit derived from the loans’ interest free terms to one month; 2. there were a number of inconsistencies in RSPG’s approach. The value of the loan was based on month whereas the value of the rent ($8,000) for the whole of the term although it apportioned by dividing it by the number of years in the term (50) even though no residents actually lived in the units for the full term. By contrast, the full value of the license fee was included in the formula; 3. the end of the lease payment was consideration for the past supply of the input tax units and was not a deferred service fee; 4. that the licence fee related to the supply of the residential premises, an input taxed supply, such that the inclusion of the licence fee in the denominator only distorted the apportionment outcome; 5. It did not seem appropriate to confine the benefit to a loan advanced by only one resident of a unit, even for the average period of twelve years, in light of the evidence concerning replacement of outgoing residents, within a relatively short time, by new residents making new interest free loans. Commercial residential premises The Tribunal also rejected the argument that the entire retirement village should be characterised as commercial residential premises. The Tribunal found fundamental differences between a retirement village and residential premises similar to a hostel or boarding house as contemplated in the definition of ‘commercial residential premises’ in section 195-1 of the GST Act. The Tribunal found that the nature of the rights or interests which the retirement village residents acquired, particularly in respect of their respective units and the security and relative permanency of occupation of those units, were distinguishing features. Citation RSPG and Commissioner of Taxation (Taxation) [2016] AATA 687 (DP Molloy, Brisbane) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/687.html 1.4 PBKQ – deductibility of services charges Facts Service Recipient Pty Ltd and Service Provider Pty Ltd had a common single shareholder and director, Mr Smith, who is a CPA with over 22 years of practising as an accountant. Mr Smith has held various chief financial officer and other senior financial control positions in industry throughout his career. In 2006, he went into private practice and established Service Provider Pty Ltd with a view to providing professional accounting services to small and medium enterprises. Apart from providing traditional public accounting services to clients, Service Provider Pty Ltd was also engaged by clients to provide contract accounting services. Mr Smith established Service Recipient Pty Ltd in order to address concerns following a quality assurance review undertaken by CPA Australia in 2011 with respect to the procedures and practices of Service Provider Pty Ltd. These concerns led to Mr Smith fearing that, in relation to his contract accounting work, an unnecessary administrative burden would be placed on Service Provider Pty Ltd if that was the case, because Service Provider Pty Ltd would be required to issue letters of engagement and letters of advice for each segment of work and additionally maintain detailed work papers. Mr Smith’s solution was for Service Recipient Pty Ltd to undertake the contract accounting work for clients and for Service Provider Pty Ltd to continue to do any public accounting work for clients. However, Mr Smith Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 8 indicated that a complication was that existing clients for whom he undertook contract accounting work could not or would not engage Service Recipient Pty Ltd to do this contract accounting work. As a result, the two companies entered into a Services Agreement under which the Service Provider Pty Ltd agreed to provide Service Recipient Pty Ltd with services for a fee. The Services Agreement contemplated that estimates of charges would be supplied and invoices would be issued. However, Mr Smith stated that, in practice, the parties did not prepare estimates or statements or issue any invoices. Instead, the amounts owing were indicated in the general ledger statements and journaled in loan accounts for the two companies. The Commissioner commenced an audit of Service Recipient Pty Ltd due to a delay in lodging its tax return for the 2012 year. The Commissioner ultimately issued a default assessment on Service Recipient Pty Ltd, which subsequently objected to the default assessment and stated that it had lodged a return on 18 June 2014. The Commissioner subsequently received the tax return on 13 August 2014 in which Service Recipient Pty Ltd reported total income of $293,465 and total expenses of $273,836. Service Recipient Pty Ltd did not claim a deduction for the service charges but claimed deductions for various expense categories, such as workers’ compensation payments and client entertainment expenses. The Commissioner disallowed $25,751 worth of expenses either because they had not been substantiated, or in the case of the entertainment expenses, were not allowable by their nature. On 16 December 2014, the Commissioner issued a notice of amended assessment to Service Recipient Pty Ltd reducing its taxable income to $45,381, with tax payable of $13,614.30. On 20 February 2015, Service Recipient Pty Ltd lodged with the Tribunal an application for review of the Commissioner’s objection decision. Issues Were the expenses deductible? Decision In the Tribunal, Service Recipient Pty Ltd stated that the expense items should have been reported as a service charge and not as individual expenses items and asked that the matter proceed on such basis. The Tribunal agreed with this. The Commissioner conceded prior to the hearing that payments to third party subcontractors were deductible. The Tribunal accepted this concession but commented that such a concession was surprising given that Service Recipient Pty Ltd had asked that the matter be considered on the basis that the 'service charge' between Service Recipient Pty Ltd and Service Provider Pty Ltd was deductible. The Tribunal noted that the process for a taxpayer proving that a default assessment is excessive is different to the process of proving that an ordinary assessment is excessive. In the case of a default assessment, the taxpayer must prove what their actual taxable income was in the relevant year: Commissioner of Taxation v Rigoli [2013] FCA 784. The Tribunal considered that there was insufficient evidence to show that Service Recipient Pty Ltd incurred a service charge in carrying on its business. The Tribunal noted that: 1. there was no evidence to prove that the services were provided; 2. there was no evidence that any service charge was charged by Service Provider Pty Ltd or incurred by Service Recipient Pty Ltd; 3. there was insufficient evidence that Service Recipient Pty Ltd was carrying on a business; 4. the Services Agreement had not been adhered to and, accordingly, it had little probative value as evidence of the arrangements between the parties; and 5. Mr Smith’s explanation that journal entries recorded the service charge which were reflected in the loan accounts of the respective parties also did not satisfy the Tribunal that Service Recipient Pty Ltd had incurred the service charges. The Tribunal noted that journal entries are not of themselves evidence of payment. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 9 Service Recipient Pty Ltd had submitted that the service charges were deductible as a 'Phillips arrangement': Federal Commissioner of Taxation v. Phillips (1978) 8 ATR 783. However, the Tribunal noted that such submissions misunderstood issues in the Phillips case, which primarily concerned whether the service charges were ‘realistic and not in excess of commercial rates’. The Tribunal noted that Phillips is not authority for the proposition that the entire amount of an omnibus service fee paid to a related entity will be deductible for income tax purposes. COMMENT – the important aspect of this case is the extent to which the Tribunal placed little or no emphasis on journal entries. Without invoices and evidence of actual services taking place, it will be difficult to make out that services fees are deductible. Citation PBKQ and Commissioner of Taxation (Taxation) [2016] AATA 681 (SM Lazanas, Sydney) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/681.html 1.5 Landy – permanent place of abode outside Australia Facts Mr Landy was a worksite superintendent and lived with his wife in a home owned by her in Mt Martha, Victoria. In August 2006, he sold a property in Rye, Victoria in which he had previously lived and in December 2007 he sold an investment property in Queensland. On 29 December 2007 Mr Landy entered into an employment agreement with Special Technical Services LLC to work as a site general superintendent at an oilfield in Oman. The terms of the employment agreement included: 1. a three month probation period and a one year term which could be renewed by agreement between the parties; 2. a base salary entitlement plus paid rotational leave of 14 days for every 28 days of work with business class airfares to the nearest hometown airport; 3. a single room bachelor accommodation at the worksite and fully furnished bachelor accommodation for periods spent in a nearby city, Muscat; 4. free of charge food at the worksite and reimbursement for food expenses while in Muscat; 5. after hours use of an STC owned pool vehicle; and 6. termination of employment on one month’s notice. Mr Landy left Australia on 4 January 2008 and commenced work at the Oman worksite shortly thereafter. Before he left Australia Mr Landy cancelled his Medicare, notified his private health insurance fund and requested his name be removed from the electoral roll. On departing Australia Mr Landy indicated on the outgoing passenger card that he was an Australian resident departing Australia permanently. Mr Landy's wife did not accompany him to Oman, however she met him overseas on a number of occasions. Mr Landy's purchased a microwave oven, toaster, coffee machine, bedding and other personal items for his accommodation at the worksite. The room was for his use and he could lock it while away. During his rest periods, Mr Landy stayed in hotels in Oman, Europe, Asia and Australia. Mr Landy travelled to: 1. A European destination at least once; 2. Vietnam at least once; 3. Thailand at least twice. With work colleagues he rented an apartment in Thailand for six months from 26 May 2009 to 26 November 2009. He stayed in the Thailand apartment from 24 June 2009 to 7 July 2009 and from 4 August 2009 to 17 August 2009. The apartment was fully furnished with all fixtures and fittings being rented and Mr Landy kept personal belongings including clothes, equipment and toiletries there; and 4. Australia three times, for which he stayed at the Mt Martha home owned by his wife, with his sons, or in hotels. Mr Landy maintained two collector motor vehicles in Australia which were garaged at the Mt Martha home owned by his wife and his bank account in Australia as it was a joint account with his wife. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 10 Mr Landy remained a director, secretary and shareholder of Bayview Engineering Pty Ltd. His wife was the other director and shareholder in this company. The address of the Mt Martha home owned by Mr Landy’s wife was recorded with ASIC as the company’s principal place of business from 23 June 2009. Mr Landy owned a bank account in Oman into which his wages were paid and obtained a ten year drivers licence in Oman. Mr Landy sent money to Australia to help pay his wife’s living expenses, mortgage liabilities, and travel expenses so she could visit him. Mr Landy became a ‘resident’ of Oman for Oman migration purposes, as this was necessary in order to work there and he could only stay in Oman while working there. Mr Landy's employment in Oman was terminated after 21 months, which was earlier than expected, and he returned to Australia permanently on 14 September 2009. Mr Landy resumed living with his wife at the Mt Martha home. The Commissioner assessed Mr Landy on the basis that he was always an Australian tax resident. Mr Landy objected to the assessment on the grounds that he was a resident or, in the alternative, that: 1. his income was exempt from tax under section 23AG, which at the time provided that foreign earnings derived from a foreign country were exempt as long as you worked in the other country for a continuous period of not less than 91 days and the income was not exempt from tax in that country. It was not clear whether such ground was raised on objection but, in any event, the Tribunal allowed the grounds to be expanded to include this contention upon review in the Tribunal; or 2. that he was deductions pursuant to section 8-1 for meals and incidental expenses of $79,920, Mr Landy's objection was disallowed and he applied to the Tribunal for review. Issues 1. Whether Mr Landy was an Australian tax resident in the period he was working in Oman. 2. Whether Mr Landy's income was exempt under section 23AG. 3. Whether Mr Landy was entitled to a deduction for the meal and incidental expenses as claimed. Decision Residency The Tribunal noted that the question of residency in this case was whether Mr Landy: resided in Australian within the ordinary meaning of that word; or had an Australia domicile and did not have a permanent place of abode outside Australia. The Tribunal considered whether Mr Landy could be said to be residing in Australian within the ordinary meaning of that word in the whole of the period he was working in Oman. The Tribunal noted that Mr Landy had a presence in Oman but very few connections. Mr Landy did not make lasting accommodation arrangements and the accommodation was specifically linked to his employment. Mr Landy travelled when he could such that he was rarely in Oman during 'rest' periods. By contrast, Mr Landy retained an enduring connection with Australia. His family remained here. He came back for regular visits and returned here when his ultimately employment ceased. He had two cars here, a bank account, his interest in Bayview Engineering and he remitted money to Australia for his wife on a regular basis. The Tribunal noted that little emphasis could be placed on the sale of the two properties before his departure to Oman as those properties were not his home at the time of departure. The Tribunal considered that the Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 11 information supplied on the departure documentation when leaving Australia, and the other arrangements that he had terminated, were only reflections of his subjective view of his position and were not determinative. The Tribunal concluded that Mr Landy had not ceased being a resident of Australia in the ordinary sense of the word. The Tribunal also noted that Mr Landy retained an Australian domicile and had not established a permanent place of abode outside of Australia. Accordingly, he would have been an Australian tax resident on this basis even if he was not residing in the Australian within the ordinary meaning. 23AG exemption The key issue for the 23AG exemption was whether the income from the employment was exempt from tax in Oman. At the hearing Mr Landy tried to prove his income was taxable in Oman be producing copies of various Royal Decrees. However, he did not provide any evidence that he paid any tax in Oman. Following the hearing the Commissioner made further submissions that the Royal Decrees produced were not complete, were not operative during the 2009 year. The Tribunal concluded that the Royal Decrees were not sufficient evidence that Mr Landy was taxable in Oman and he would require an opinion from a person with expertise through relevant training or experience as to the effect of the Royal Decrees. Accordingly, the Tribunal was not satisfied that Mr Landy's income was taxable in Oman and rejected his claim for the 23AG exemption. Deduction for meals and incidental expenses The Tribunal noted that there was no evidence that Mr Landy had actually incurred such expenses as claimed. The Tribunal considered that it would be reasonable to infer he would have need to consume food and incidental items, but given the entitlements to free food and food allowances in his contract, it was not possible to infer that he had any such losses or outgoings. The deductions were disallowed. COMMENT – the Tribunal's approach to the information supplied on the departure documentation when leaving Australia, and the other arrangements that he had terminated, indicate that such matters will generally only be held against a taxpayer – where they are completed in a manner suggesting an intention to return – and not in a taxpayer's favour. Citation Landy and Commissioner of Taxation (Taxation) [2016] AATA 754 (SM O’Loughlin, Melbourne) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/754.html 1.6 ZDCW – Release of taxation debts for serious hardship Facts ZDCW, applied to the Commissioner of Taxation to be released from a taxation liability of $130,416.15 as otherwise he would otherwise suffer serious hardship. ZDCW was born in 1948. In 2006 he was diagnosed with Parkinson's disease. At that time, he was employed as a CEO of an organisation and in 2009 his illness forced ZDCW into early retirement. ZDCW received payments under an income protection policy in the years ended 30 June 2010, 2011, 2012 and 2013. He was unaware that the payments constituted assessable income until he received advice to that effect in 2012. On 9 January 2014, ZDCW lodged tax returns for each of the above financial years. On 17 January 2014 the Commissioner issued assessments of those returns. On 2 May 2014, ZDCW applied to the Commissioner for a release from his tax liabilities, but the application was disallowed as was an objection. On 21 October 2014 ZDCW made a second application for release which was also disallowed by the Commissioner as was an objection. ZDCW then applied to the Tribunal for review of the second objection decision. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 12 Issue Would ZDCW suffer serious hardship if he was not released from his tax liability in whole or in part? Decision The Tribunal noted that whether payment of a tax liability would entail serious hardship involves a consideration of the financial affairs of the taxpayer (including financial relations with other members of his/her household) by reference to normal community standards. ZDCW's financial affairs were as follows: 1. he received a retirement benefit of $100 per week; 2. his wife was employed part-time as a guidance counsellor, worked as a marriage celebrant and received a carer's pension; 3. the household derived income from a bed and breakfast arrangement; 4. dividends were paid from shares held in public companies (the exact amounts were unclear); 5. the major liabilities were a mortgage and a line of credit; 6. ZDCW and his wife also had some responsibility for their adult son who suffers from schizophrenia. The Tribunal noted that there was not sufficient evidence to determine whether the household expenditure exceeded the income of the household and that there was no basis to form the view that the household was in financial distress. The Tribunal concluded that ZDCW and his family were 'getting by'. The Tribunal also looked at the assets and liabilities of ZDCW and his wife and concluded that the combined assets of ZDCW his wife (which were valued at $618,699.50) provided sufficient equity for ZDCW to discharge his income tax liability. ZDCW contended that he could not dispose of the two properties that he had an interest in with his wife (being their main residence and a holiday home) to satisfy his tax liability because each of the properties were subject to a mortgage. However, because these mortgages were in favour of his wife and arose out of a Contractual Will Arrangement between ZDCW and his wife, the Tribunal was not satisfied that the properties would not be available to ZDCW to meet his tax liability. Of particular importance was the nature and timing of the Contractual Will Arrangement. The Contractual Will Arrangement involved a Deed for Contractual Will (a contract not to revoke a will or a provision included in the will), an Option Deed granting ZDCW's wife an option to purchase ZDCW's share of each property for $1.00 and mortgages in favour of ZDCW's wife over ZDCW's interest to secure the promise. It was entered into on 23 August 2014 and the Tribunal found that it was entered into without making provision for payment of ZDCW's tax liability. The Tribunal did not accept the Commissioner's submission that the Contractual Will Arrangement was a conscious attempt by ZDCW to put his assets beyond the reach of the Commissioner as there would need to be evidence from ZDCW and his wife before such a finding could be made. The Tribunal concluded that it was not satisfied that ZDCW would suffer from serious financial hardship unless he was released from the tax liability. COMMENT – serious financial hardship is very difficult to establish. The prospects of a successful application will be significantly diminished if the Commissioner considers that other liabilities are being paid in preference to tax liabilities. Citation ZDCW and Commissioner of Taxation (Taxation) [2016] AATA 788 (DP Molloy, Brisbane) w http://www.austlii.edu.au/au/cases/cth/AATA/2016/788.html Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 13 2 Legislation 2.1 Progress of legislation Title Introduced House Passed House Introduced Senate Passed Senate Assented Budget Savings (Omnibus) Bill 2016 31/8 14/9 14/9 14/9 14/9 International Tax Agreements Amendment Bill 2016 1/9 Treasury Laws Amendment (Enterprise Tax Plan) 2016 1/9 Treasury Laws Amendment (Income Tax Relief) 2016 1/9 10/10 10/10 Tax and Superannuation Laws Amendment (2016 Measures No. 2) 2016 14/9 2.2 Superannuation reforms – tranche 2 Treasury has released the exposure draft legislation for tranche 2 of the Government's superannuation reform package. We outlined the details of Tranche 1 of the superannuation reform package in our September 2016 tax training notes. In addition, Government has released fact sheets on some elements of the package that are not outlined in the exposure draft legislation. The exposure draft legislation outlines changes, relevantly, to: Introduce a $1.6 million balance transfer cap; Make changes to concessional superannuation contributions; Introduce a concept of catch-up concessional contributions; Provide for ‘Innovative income streams and integrity’ abolishing the income tax exemption for earnings on a TRIS; Remove the anti-detriment provisions; and Streamline the administration of the Division 293 tax regime (not discussed below). The fact sheets then deal with the above measures, as well as: Modifying the annual non-concessional contributions caps; Introducing the low income superannuation tax offset; Making changes to the deduction provisions for personal contributions; and Making the tax offsets for spouse contributions more broadly available. In the following material we have focussed on the effect on non-defined benefit schemes. Transfer Balance Cap As the Government previously announced there will be a cap of $1,600,000 on transfers to a superannuation income stream account. The value of superannuation interests that support superannuation income streams as at 30 June 2017, together with the commencement value of new superannuation income streams that start after that date, will count towards a person's cap. The transfer balance cap is directed towards net transfers to an income stream and does not value earnings, losses or draw-downs that occur within the pension phase. The EM talks about the transfer balance ‘account’ operating in a way similar to a bank account. Certain amounts transferred in will give rise to a credit and certain amounts transferred out will give rise to a debit. You breach your cap if your account balance exceeds your cap. It will be possible to have a negative balance. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 14 The transfer balance account will be created when a person first receives a superannuation income stream that is in the retirement phase. The new concept of ‘retirement phase’ is introduced into the tax legislation, and is relevant to determining when a fund’s earnings will be tax exempt. Retirement phase is the period during which a superannuation income stream is currently payable, or, if it is a deferred superannuation income stream, when a person has met a relevant nil condition of release. A TRIS is never in the retirement phase (see further below). Credits will arise for: the value of all superannuation interests that support superannuation income streams in the retirement phase the individual is receiving on 30 June 2017; the commencement value of new superannuation income streams (including new superannuation death benefit income streams and deferred superannuation income streams) in the retirement phase that start after that date; the value of reversionary superannuation income streams at the time the individual becomes entitled to them (but with a six month deferred date for the credit); and notional earnings that accrue on excess transfer balance amounts at a compounded GIC rate. Excess transfer balance amounts will be subject to notional earnings calculated in line with the following example. Example from EM Andrew has a personal transfer balance cap of $1.6 million. His SMSF starts a pension for Andrew worth $2 million. On that day, Andrew has an excess transfer balance of $400,000. Andrew realises his mistake 30 days later and decides to make a partial commutation of the pension to remove the excess. Over the course of the 30-day period, Andrew’s transfer balance account was credited with notional earnings of $3,036 (calculated at an assumed GIC annual rate of 9.2 per cent). This brought Andrew’s transfer balance account up to $2,003,036. Andrew calculates his excess transfer balance at the end of the 30-day period and, on that day, makes a partial commutation in return for a superannuation lump sum of $403,036. Andrew receives a debit for that amount in his transfer balance account. This brings his transfer balance account back in line with the $1.6 million transfer balance cap. Andrew cannot make any further contributions to his retirement phase account. Debits will arise for commutations of income streams, for structured settlements, and for some special circumstances (family payment splits, fraud and void transactions under the Bankruptcy Act). A change will be made so that a partial commutation (which will result in a debit to the transfer account balance) will not be counted towards the minimum annual payment requirement for superannuation income streams. Currently the ATO view is that such a commutation does count – see SMSFD 2013/2. The draft EM notes that Government will undertake additional consultation over this point. An individual’s transfer balance account is generally a lifetime account. A modification applies to cease a child’s account that is created when a child starts to receive a superannuation income stream because they receive a superannuation death benefit the child may then start a normal transfer balance account when they retire (we have not discussed these changes further in these notes and further detail can be found on the treatment of children in paragraphs 1.205 – 1.220 of the EM). The general transfer balance cap is $1.6 million for the 2017-18 financial year and is subject to indexation on an annual basis in line with CPI, the indexation will occur in $100,000 increments. The way that amounts transferred in later years will be assessed against the cap will be worked out in an unusual way. The concept is one of ‘proportional indexation’. This will operate by finding the individual’s highest transfer balance, comparing it to their transfer cap on that day, and indexing that amount. That is, no credit will be given for amounts that are transferred back to accumulation phase. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 15 Example from EM Amy first becomes entitled to superannuation income stream benefits in 2017-18. A transfer balance account is created for Amy at that time. Amy’s personal transfer balance cap is $1.6 million for the 2017-18 financial year. Amy’s transfer balance account is credited by $800,000 in 2017-18. At that time, she has used 50 per cent of her $1.6 million personal transfer balance cap. When the general transfer balance cap is indexed to $1.7 million in 2020-21, Amy’s personal transfer balance cap is increased proportionally to $1.65 million. That is, Amy’s personal transfer balance cap is increased by 50 per cent of the corresponding increase to the general transfer balance cap. As such, Amy can now contribute $850,000 without breaching her personal cap. While the transfer balance account is only partially indexed, it is the case that when amounts are credited to the account you only exceed your personal cap balance if you are over your personal cap balance on that date. Example from EM On 1 October 2017, Nina commences a superannuation income stream of $1.2 million. On 1 January 2018 Nina partially commutes her superannuation income stream by $400,000 to buy an investment property. Nina’s transfer balance account on 1 October 2017 was $1.2 million and, on 1 January 2018, it is $800,000 (Nina’s account is debited in respect of the $400,000 partial commutation). In 2020-21, the general transfer cap is indexed to $1.7 million. To work out the amount by which her personal cap is indexed Nina identifies the highest balance in her transfer balance account ($1.2 million), the day on which she first started to have this balance (1 October 2017), and her personal cap on that date ($1.6 million). Therefore Nina’s unused cap percentage on 1 October 2017 is 25 per cent. To work out how much her personal cap is indexed, Nina applies her unused cap percentage to the amount by which the general cap has indexed $100,000 (the indexation increase). Therefore Nina’s personal transfer balance cap in 2020-21 is $1,625,000. In 2022-23, the general transfer balance cap is indexed to $1.8 million. As Nina hasn’t transferred any further amount into retirement phase her unused cap percentage remains 25 per cent. Her personal transfer balance cap is now $1.65 million (25 per cent of the indexation increase of $100,000). In this year, Nina decides to transfer the maximum amount she can into the retirement phase. This will be her personal cap for the 2022-23 year ($1,650,000) less her transfer balance account $800,000. This means Nina can transfer another $850,000 into the retirement phase without exceeding her transfer balance cap. Impact of having an excess balance transfer Where a person exceeds the cap, the consequences will be as follows: 1. the superannuation trustee will be directed to commute the excess amount – this will be known as the ‘crystallised reduction amount’; and 2. the individual will be liable for excess transfer balance tax at 15% on their notional earnings, effectively removing the tax benefit of the income tax exemption that would otherwise apply to earnings. A tax rate of 30% applies to additional excess transfer balance tax assessments the individual receives in a subsequent financial year. A process will be involved where the Commissioner will give a notice to the person who has an excess amount, they can then choose which superannuation income stream will be commuted (if they have more than one) by making an election, and in default of an election being made within 60 days (or such further period as the Commissioner allows) the Commissioner will issue a default commutation authority to the fund specified in the notice. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 16 The notices given by the Commissioner will be able to be objected against within 60 days of the date that the determination is served on the person. If a fund does not comply with a commutation notice then the whole of the account balance of superannuation income stream to which the notice applies will cease to be eligible for an income tax exemption from the beginning of the year to which the notice relates (that is if a notice is given in May 2018 the exemption will not be available for the 2017/18 year). Temporary CGT relief The exposure draft legislation also includes measures to provide CGG relief in relation to assets transferred out of an account in retirement phase to an account in accumulation phase to reduce the fund balance to the capped amount. The CGT relief will depend upon whether the asset was a segregated or non-segregated asset: For a segregated asset a fund can choose to reset the cost base of the asset to its market value at the time it is no longer being used to support a retirement income stream; For a non-segregated asset a fund can choose to reset the cost base of the asset to its market value at 30 June 2017: o The difference between market value and cost base (the gain) will be disregarded forever to the extent the asset was being used to support a retirement income stream; o The gain, to the extent that the asset was not being used to support a retirement income stream, will can deferred until the asset is disposed of or recognised in 2017; o If the asset is not disposed of before 1 July 2027, the asset’s cost base will revert to its original cost base. Transitional rules Transitional rules will apply on 30 June 2017 such that if the transfer cap is breached by less than $100,000 on this date, and the breach is rectified within 60 days then there will not be any amount of notional earnings or an excess balance transfer tax liability to be accounted for. This is on the basis that it will be hard for people to anticipate accurately their retirement phase balances at 30 June 2017. Concessional superannuation contributions and catch ups The cap on concessional contributions for a financial year is to be reduced to $25,000 for all individuals from 1 July 2017. There will no longer be a higher cap for individuals aged 49 and over. However, individuals with a total superannuation balance of less than $500,000 on 30 June of the previous financial year can increase their concessional contributions cap in the next financial year by applying unused concessional contributions cap amounts from one or more of the previous five financial years. An individual can carry forward unused concessional contributions cap amounts from the 2018-19 financial year onwards. That is, the first year that this measure will have practical effect is the 2019-20 financial year. Example from EM Between the 2018-19 and 2022-23 financial years Layla’s concessional contributions and unused concessional contributions cap are as follows: 2018- 19 2019- 20 2020- 21 2021- 22 2022- 23 2023- 24 Concessional contributions $10,000 $10,000 $10,000 $10,000 $10,000 $40,000 Available unused cap $15,000 $15,000 $15,000 $15,000 $15,000 $0 In the 2023-24 financial year Layla makes a deductible personal contribution of $30,000 in addition to her employer’s concessional superannuation guarantee contribution of $10,000 on her behalf. On 30 Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 17 June 2023 Layla had a total superannuation balance of less than $500,000. Assuming the concessional contributions cap is $25,000 (for all years between 2018-19 and 2023-24), Layla will have exceeded this cap by $15,000. However, Layla will be able to increase her concessional contributions cap for the 2023-24 financial year by using $15,000 of unused concessional contributions cap from the 2018-19 financial year. The measures in relation to concessional contribution caps will also see the threshold at which additional tax (Division 293 tax) is imposed reducing from $300,000 to $250,000. The Division 293 tax is payable if an individual’s income for surcharge purposes less reportable superannuation contributions for an income year (broadly their taxable income disregarding investment losses, plus any reportable fringe benefits) and low tax contributions for the corresponding financial year (their concessional contributions less their excess concessional contributions) exceeds the relevant threshold. There are also changes being made to the maximum contribution base for SGC purposes so that the maximum contribution base from 1 July 2017 will be $65,789.47 per quarter. This is a result of the maximum contribution base now being linked to the concessional contributions cap and the charge percentage. Innovative income streams and integrity The changes in the draft bill included changes to allow for ‘innovative’ income stream products that might not require that there be annual payments from a pension. The same part of the bill removes the income tax exemption from assets supporting a transition to retirement income stream (TRIS) from 1 July 2017. Removing the anti-detriment provisions The anti-detriment deductions that have been available if a fund paid a superannuation benefit on the death of a member to benefit their spouse, former spouse or child, where this benefit is greater than it would otherwise be to compensate for income tax paid by the fund in respect of contributions made during the member’s lifetime is being repealed. The repeal applies in relation to superannuation lump sum benefits that are paid because of the death of a member where that member died on or after 1 July 2017. However, from 1 July 2019, it applies to all superannuation lump sum benefits paid after this time, regardless of whether the member died before 1 July 2017. Annual non-concessional contribution caps Government announced that the NCC cap will be reduced to $100,000 from 1 July 2017. The three-year bring-forward rule will remain in place. Accordingly, from 1 July 2017 NCCs of up to $300,000 in a year will be permitted if the bring-forward rule is utilised. Complex transitional arrangements apply where a person triggers the bring-forward rule prior to 1 July 2017 but have not used the entire $540,000 bring-forward cap. A summary of these transitional arrangements are as follows: 1. bring-forward rule invoked in year ended 30 June 2016 - the remainder of their bring-forward NCCs cap at 1 July 2017 is $460,000 less the amount of NCCs that they made in the years ended 30 June 2016 and 30 June 2017; 2. bring-forward rule invoked in year ended 30 June 2017 - the remainder of their bring-forward NCCs cap at 1 July 2017 is $380,000 less the amount of NCCs that they made in the year ended 30 June 2017. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 18 Treasury have represented the bring forward rules in the following fashion: 2015-16 2016-17 2017-18 2018-19 2019-20 More than $460,000 Nil End of transition period $100,000 or 3 year bring forward - More than $180,000 but less than $460,000 Cannot exceed $460,000 from 2015-16 to 2017-18 End of transition period $100,000 or 3 year bring forward - - More than $380,000 Nil Nil End of transition period $100,000 or 3 year bring forward - More than $180,000 but less than $380,000 Cannot exceed $380,000 from 2016-17 to 2018-19 End of transition period $100,000 or 3 year bring forward In addition, the availability of the bring-forward will depend upon the superannuation balance (presumably at 30 June in the preceding income year): Superannuation Balance Contribution and bring forward available Less than $1.3 million 3 years ($300,000) $1.3 - <$1.4 million 3 years ($300,000) $1.4 - <$1.5 million 2 years ($200,000) $1.5 - <$1.6 million 1 year ($100,000) $1.6 million Nil TRAP – the bring-forward rule will still only be able to be accessed by persons who are aged under 65 at the start of the year in which is invoked. Relying on the bring-forward rule for a person aged 65 will lead to excess non-concessional contributions. Introducing the low income superannuation tax offset From 1 July 2017 the Low Income Superannuation Tax Offset will allow a person with an adjusted taxable income of up to $37,000 to receive a refund into their superannuation account, up to a cap of $500. The offset appears to be a refund of the 15% tax that would otherwise apply to concessional contributions. Making changes to the deduction provisions for personal contributions The draft bill is to include rules to remove the 10% test, and to allow all individuals aged under 75 to make concessional contributions up to the cap (with the work test applying from age 65). This measure is to apply from 1 July 2017. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 19 Making the tax offsets for spouse contributions more broadly available From 1 July 2017 the cut-off for the 18% tax offset up of to $540 will be increased from an income threshold of $10,800 to $37,000. The age requirements of the spouse being under 70, and meeting a work test from age 65 will remain. w https://consult.treasury.gov.au/retirement-income-policy-division/super-reform-package-tranche-2 w http://budget.gov.au/2016-17/content/glossies/tax_super/downloads/FS-Super/04-SFSNC_contributions_cap-160930.pdf 2.3 Commissioner's remedial power The Tax and Superannuation Laws Amendment (2016 Measures No. 2) Bill 2016 has been introduced into the House of Representatives. The key feature of the Bill is to provide the Commissioner with a 'remedial power' to allow for a timelier resolution of certain unforeseen or unintended outcomes in the taxation and superannuation laws. The remedial power enables the Commissioner to modify the law. The remedial power can only be validly exercised where: 1. the modification is not inconsistent with the intended purpose or object of the provision; 2. the Commissioner considers the modification to be reasonable, having regard to both the intended purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object; and 3. the Department of the Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth budget would be negligible. Importantly, a modification of the law through the Commissioner's remedial power will not apply to taxpayers who will be adversely affected by it. That is, the modification will have no effect where it would produce a less favourable result than the existing law. The Explanatory Memorandum to the Bill notes that ‘favourable’ is understood in the context of the taxation laws and could mean either that a tax liability is reduced or that the costs of complying with the taxation law are reduced or that, overall, taking into account changes in liabilities and compliances costs, the modification is favourable. Taxpayers will need to self-assess whether a modification is less favourable to it, and whether it must therefore treat the modification as not applying to itself and to any other entity. If an entity is required to treat a modification as not applying, then the Commissioner must also treat the modification as not affecting the entity. COMMENT – given the conditions for the availability of the Commissioner to exercise the power, particularly the requirement that any financial impact be negligible, it will likely only be able to be used in limited circumstances. w http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillhome%2Fr5 685%22 2.4 Backpacker tax In a Media Release on 27 September 2016 the Treasurer announced that from 1 January 2017 the Government will set the tax rate applying to working holiday makers at 19 per cent on earnings up to $37,000, rather than the 32.5 per cent announced in the 2015-2016 Budget, with ordinary marginal tax rates applying after $37,000. There were two other changes announced in this media release: 1. Registration of backpacker employers – employers will be required to undertake a once-off registration with the ATO. Employers who do not register will be required to withhold tax at the 32.5 Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 20 per cent rate. Working holiday makers will be made aware of registered employers via the publication of a list on ABN Lookup; and 2. Tax on backpackers' superannuation when departing Australia – Government will increase the tax on working holiday makers’ superannuation payments when they leave Australia to 95 per cent '[because] … the objective of superannuation … is to support Australians in their retirement, not to provide additional funds for working holiday makers when they leave Australia.' The tax rate on such amounts is currently 38% (taxed element, taxable component) or 47% (untaxed element). w http://sjm.ministers.treasury.gov.au/media-release/104-2016/ 2.5 Foreign resident capital gains withholding variations The Commissioner has issued a Legislative Instrument called PAYG Withholding Variation: Foreign resident capital gains withholding payments - deceased estates and legal personal representatives. The Instrument reduces the foreign resident capital gains withholding to nil in the following circumstances: 1. the legal personal representative is taken to have acquired the relevant asset following the death of the individual; 2. a beneficiary obtains ownership of the relevant asset by way of direct transfer from the deceased or by transfer from the legal personal representative of the deceased; or 3. a surviving joint tenant acquires the deceased joint tenant’s interest in the relevant asset. Generally, from 1 July 2016, any acquisition of Taxable Australian Real Property (TARP) from a non-resident of Australia is subject to a 10% withholding requirement. Since there is no CGT in the above circumstances, the obligation to withhold is unnecessary. Accordingly, the Instrument reduces the withholding to nil. However, the Instrument does not apply where TARP is transferred to a tax advantaged beneficiary within the meaning of section 104-215 of the ITAA 1997 as follows: 1. an exempt entity; or 2. the trustee of a complying superannuation entity; or 3. a foreign resident. TRAP – where TARP is being transferred from a deceased foreign resident to a foreign beneficiary, the foreign resident capital gains withholding still applies. w https://www.legislation.gov.au/Details/F2016L01396 2.6 PAYG Withholding – labour hire arrangements The Commissioner has issued a Legislative Instrument called PAYG Withholding Variation: Labour Hire reimbursements and allowances. The instrument replaces one that was due to expire on 1 November 2016. The Instrument provides that the PAYG withholding for labour hire arrangements is reduced to nil for payments falling within the following classes: 1. reimbursement of actual expenses incurred by a labour hire worker on the condition that: a. the expense that the labour hire worker incurs is related directly to the labour hire worker’s work or services performed under the labour hire arrangement; b. the expenses that the labour hire worker incurred may be able to be claimed as a tax deduction at least equal to the amount of the reimbursement; c. the labour hire worker is able to substantiate the tax deduction claimed; and d. the amount and nature of the reimbursement is shown separately in the accounting records of the payer. 2. allowances as follow: a. a car allowance using the approved cents per km rate up to a maximum of 5,000 business kilometres; b. domestic or overseas travel expenses involving an overnight absence from the labour hire worker’s ordinary place of residence, Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 21 on the following conditions: c. the labour hire worker is expected to incur expenses that may be able to be claimed as a tax deduction at least equal to the amount of the allowance; d. the labour hire worker is able to substantiate the tax deduction claimed; and e. the amount and nature of the allowance is shown separately in the accounting records of the payer. w https://www.legislation.gov.au/Details/F2016L01580 Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 22 3 Rulings 3.1 Distributions from foreign companies – participation test The Commissioner has issued a draft Taxation Ruling, TR 2016/D2, concerning the meaning of ‘at the time the distribution is made’ when applying the 'participation test' for the purpose of the non-portfolio dividend exemption in Subdivision 768-A of ITAA 1997, formerly s 23AJ, ITAA 1936. The participation interest A distribution received from a foreign company is non-assessable, non-exempt income if the recipient has a participation interest in the payer of at least 10%. The participation interest is the amount the recipient ‘holds’ or is ‘entitled to acquire’. The ATO consider that to have a participation interest based on holdings an entity must be a registered member of the foreign company at the start of the day on which the distribution is made. ‘Entitled to acquire’ takes the same meaning as in section 322 of the ITAA 1936 and includes an absolute or contingent right to acquire an interest in the company whether because of any constituent document of the company, by exercising an option or for some other reason. TR 2016/D2 does not consider discretionary trust holdings, or how a participation interest is calculated through an interposed discretionary trust. The time the distribution is made In TR2016/D2 the Commissioner indicates that the ‘time the distribution is made’ is: 1. for a dividend declared, when the liability is discharged (i.e. paid or debited against the equity account); and 2. for a deemed dividend, when the law deems the dividend to have been paid. The Commissioner provides an example of where foreign company declares a dividend to a trust, who then makes a distribution of that dividend to an Australian company beneficiary. The ‘time the distribution is made’ is the time of the initial dividend, not the trust distribution. The Commissioner's example involves a unit trust. Example 3 (from draft ruling) – Distribution made via an Interposed Trust Australian Company holds 70% of the units in Interposed Trust which holds 50% of the ordinary shares in Foreign Company. On 1 April 2016 Foreign Company pays a dividend to Interposed Trust. On 1 May 2016 the trustee of Interposed Trust enters into a contract to sell all of its shares in Foreign Company to a third party. On 15 May 2016 the sale is completed and Foreign Company removes Interposed Trust from its share register. On 30 June 2016 Interposed Trust distributes the dividend from Foreign Company to Australian Company. The participation test is applied on 1 April 2016 (being the date Foreign Company pays the dividend to Interposed Trust) rather than 30 June 2016 (being the date Interposed Trust makes its distribution to Australian Company). On 1 April 2016 Australian Company will have a participation interest of 35% in Foreign Company (being its direct control interest of 70% in Interposed Trust multiplied by Interposed Trust’s direct control interest of 50% in Foreign Company). TIP – when working out the direct participation interest, unlike when working out the interest for the purposes of the small business participation percentage, it is the greater of the capital, voting and dividend rights that is used. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 23 ATO Reference Draft Taxation Ruling TR 2016/D2 w https://www.ato.gov.au/law/view/pdf/pbr/tr2016-d002.pdf 3.2 Transfer and landholder duty – market value and GST The Office of State Revenue has issued a ruling on the interaction between GST and the determination of market value for duty purposes. In particular, the OSR considers whether there can be a GST-exclusive market value. The Chief Commissioner sets out the following guidelines in relation to valuations submitted (with respect to GST): 1. the market valuation must be accompanied by a copy of the instructions given to the valuer; and 2. the market valuation will not be accepted if: a. it is expressed to be on a GST-exclusive basis; or b. the valuer has been instructed to make a determination of the market value on that basis. The Chief Commissioner relies in particular on the decision in Storage Equities Pty Ltd v Valuer-General [2013] NSWLEC 137, in which it was held that while GST may impact upon the market value, it is not a separate amount to be deducted when determining the market value. The Ruling also points out the following about valuations in general from the Storage Equities case: 1. The starting point for determining land value is the test in Spencer v Commonwealth (1907) 5 CLR 418– ‘the price negotiated between a hypothetical willing vendor and a hypothetical willing purchaser, both having access to all current information affecting the property.’ 2. the hypothetical vendor under the Spencer test ‘cannot be assumed to have attributes (e.g. GST registered or selling as a going concern) which affect the GST consequences of the sale for the vendor.’ 3. ‘In determining value by reference to comparable sale transactions, no adjustment should be made to those transactions on account of any GST liability of the vendor.’ The Ruling does finish with the following in relation to commercial property: To take another example a valuer would be entitled, after taking GST into account, to determine the market value of a commercial property by estimating the price it would fetch on a hypothetical sale as a price unaffected by GST, on the basis that the property would ordinarily be sold subject to tenancy as a going concern. In making that determination, the valuer would look to comparable sales of comparable properties, without enquiry into the GST treatment behind the prices for which the comparable properties were sold (see Storage Equities para [48]). In carrying out the hypothetical sale exercise required by Spencer, the valuer would not take into account the particular GST basis on which the vendor might sell the property (see Storage Equities para [46]). The focus should be on the property and prices for which comparable properties have sold, not on the vendor or GST strategies open to it. COMMENT – the important point here is that the valuer should focus on what might be the sale price, rather than whether it is GST exclusive or inclusive. Effectively, any mention of GST in the valuation may result in a question from the OSR. OSR Reference Revenue Ruling No. DUT 045 w http://www.osr.nsw.gov.au/info/legislation/rulings/duties/dut045 3.3 Fringe benefits for payroll tax purposes The Chief Commissioner has amended OSR Ruling PTA No. 003 Version 2 which concerns the proper approach for calculating the value of fringe benefits for the Payroll Tax Act 1997 (NSW). The only amendment to the ruling was in relation to the applicable gross up formula. The ruling now confirms that section 15 of the PTA requires that the following formula be used in grossing up all fringe benefits for payroll tax: Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 24 1 ÷ (1 – FBT rate) This change reflects the increase in the FBT rate from the FBT year ended after 31 March 2015. Previously, the effect of the above formula was that the gross up rate was 1.8692 and that is what was reflected in the ruling previously. The gross up rate is now 2.0802 by applying the above formula. COMMENT – the gross up rate of fringe benefits for payroll tax is the ‘type 2 factor’. The ‘type 1 factor’ that can be used for fringe benefits tax purpose cannot be used for payroll tax. The FBT rate is due to come down to 47% from 1 April 2017. OSR reference Ruling PTA No. 003 Version 2 w http://www.osr.nsw.gov.au/info/legislation/rulings/payroll/pta003v2 Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 25 4 Determinations 4.1 Limited recourse borrowing arrangements The Commissioner has issued Taxation Determination TD 2016/16 concerning when a limited recourse borrowing arrangement entered into where the parties are not at arm's length will lead to the SMSF deriving non-arm’s length income. In TD 2016/16 the Commissioner notes that, where a limited recourse borrowing arrangement (LRBA) is on terms which are not at arm's length, it is necessary to consider the following question: Has the SMSF derived more ordinary or statutory income under the scheme that it might have been expected to derive if the parties had been dealing with each other at arm's length? The Commissioner considers that in order to do this it is necessary to compare the LRBA arrangement with a hypothetical arm’s length borrowing arrangement. If the LRBA could not have been entered into, or would not have been entered into, on terms consistent with the hypothetical arrangement, then all of the income under the scheme will be non-arm’s length income. The Commissioner provides the following example of an SMSF acquiring a commercial property financed by an LRBA and a comparison with a hypothetical borrowing arrangement: Current LRBA (non-arm's length) Hypothetical arrangement (arm's length) Amount borrowed $1,000,000 $700,000 Amount sourced from fund capital 0 $300,000 Interest rate 0% Variable, 5.75% p.a. for the 2015-2016 year Term of the loan 25 years 15 years Loan to Market Value ratio (LVR) 100% 70% Security Mortgage in favour of the Lenders is registered in respect of the asset Mortgage in favour of the Lenders is registered in respect of the asset Personal guarantee No personal guarantees or other security are given to the lenders in relation to repayment of the loan Not required Nature and frequency of repayments No repayment is required until the end of the term of the loan - $0 monthly repayments Monthly repayments of both principal and interest - approximately $5,800 per month at 5.75% p.a. for the 2015-16 year If the Trustee could not or would not have acquired the commercial property under the arm's length hypothetical borrowing arrangement, then any rental income from the property will be non-arm’s length income. The factors the ATO consider are relevant in determining whether an investment could be made are: The terms of the trust deed and governing rules for the fund; Whether the fund has sufficient capital to complete the purchase having regard to arm’s length capital requirements; The ability of the fund to service the debt under the hypothetical arrangement; and Any other legislative impediments such as the implied covenants under the SISA. The factors the ATO consider are relevant in determining whether an investment would be made are: Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 26 Whether the investment is consistent with the fund’s investment strategy; Whether the hypothetical borrowing arrangement would be an optimal use of funds; and Whether the hypothetical arrangement would have been earnings accretive – that is, given the income and the potential for a gain, would there be a gain under the hypothetical arrangement. In the case where the fund could have and would have entered into the hypothetical arrangement the ATO say: Where the SMSF can objectively establish with evidence that it could have and would have entered into the hypothetical borrowing arrangement, a comparison can then be made of the SMSF’s ordinary or statutory income from the scheme (where the parties have not been dealing with each other at arm’s length and have entered into an LRBA on terms which are not at arm’s length) and the income under the hypothetical borrowing arrangement. COMMENT – if the non-arm’s length income provisions do apply to an LRBA undertaken by an SMSF, trustees have until 31 January 2017 to ensure these arrangements are restructured on terms consistent with an arm’s length dealing such as those outlined in PCG 2016/5 or in accordance with terms benchmarked against those offered by a commercial lender in the same circumstances. ATO reference Taxation Determination TD 2016/16 w https://www.ato.gov.au/law/view/pdf/pbr/td2016-016.pdf Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 27 5 ATO materials 5.1 Part IVA and GAARs The Commissioner has updated Practice Statement PS LA 2005/24 concerning application of the General Anti-Avoidance Rule in Part IVA. The updated practice statement follows the amendments made to Part IVA in 2013. The changes to PSLA 2005/24 are as follows: 1. the Commissioner considers that new section 177CB of the ITAA 1936 means that case law on section 177C (which has not been repealed and concerns identifying the tax benefit) is no longer relevant; 2. that the Commissioner has a wide discretion to make Part IVA determinations and raise assessments on a members of a consolidated group, even if the company would not have joined the consolidated group under the Commissioner's alternate to the scheme; and 3. written submissions to the GAAR Panel must be made no later than 14 days before the Panel meets: previously, this was 7 days; 4. taxpayers will have the opportunity the make submissions to the GAAR Panel in the absence of any tax officers who are not Panel members or the decision makers. ATO reference Practice Statement PS LA 2005/24 w http://law.ato.gov.au/atolaw/view.htm?DocID=PSR/PS200524/NAT/ATO/00001#timeline 5.2 ATO proposal – one chance penalty concession The ATO has released a consultation document on a proposal to introduce a penalty concession for first time errors. It is proposed that the concession will be available in the following circumstances: 1. certain small business and individual clients - for false or misleading statements arising out of a failure to exercise reasonable care; and 2. failure to lodge income tax returns or activity statements on time. The chance will apply to the first false and misleading statement or late lodgment that is subject to a penalty. The one-chance time-frame will be refreshed after a ‘set period of time’. The indication is that this would be a three or four year financial cycle. Any taxpayer benefiting from the chance will be notified in writing – presumably much the same as currently, where the ATO chooses not to apply a penalty and advises the taxpayer as such. The ATO states that all clients will receive a clear explanation of how the error occurred and understand what they need to do to get things right in the future. Interest charges will remain payable after the due date for payment. Notably, the chance ‘would not be available to clients who demonstrated reckless or dishonest behaviour and those who disengage and cease communicating with us during an audit or review’. The ATO cites data that shows of all late lodgments, 83% are by small businesses and 11% are by individuals. This is the reason for the focus is on these taxpayers. Closing date for comments and submissions is 24 October 2016. COMMENT – the interaction between the ‘one chance’ concession and the Commissioner's current practice of remitting penalties for taxpayers with good compliance histories is unclear. Further, Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 28 limiting to it to a failure to exercise reasonable care (i.e. it will not apply for recklessness) may mean that the availability of the concession will be limited. w http://lets-talk.ato.gov.au/penaltyconsultation 5.3 Multinational profit shifting The ATO has issued two Taxpayer Alerts concerning multinational profit shifting. TA 2016/10: Cross-Border Round Robin Financing Arrangements In this alert, the ATO considers a simple 'round robin' financing arrangement (Example 1) as follows: 1. A (Australian parent) borrows money from F (foreign entity) to fund an investment in B (Australian Subsidiary). 2. B uses the funds invested by A to invest in F. 3. A claims a deduction for interest payments to F, being interest on funds used to make an investment (in B) with the expectation of a dividend. 4. B receives profit distributions (dividends) from F, which are not assessable in Australia because of Subdiv 768-A (formerly s 23AJ). This arrangement can also take the form of A and B being part of the same consolidated group, both as subsidiaries of a Head Company. The structure is set out in the following flowchart prepared by the ATO: The Taxpayer Alert then considers a similar, yet more complex arrangement (Example 2) using a USregistered partnership, whose partners are Australian entities. As the partners of this partnership are all members of an Australian Tax Consolidated Group, the partnership itself is therefore a member of the Australian Tax Consolidated Group. As a US-registered partnership, it is also a US tax resident and is the head entity of a US Tax Consolidated Group. 1. The US partnership borrows from F (financier) to invest in S (subsidiary). Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 29 2. The US partnership claims interest deductions in Australia (via the head entity of the Australian Tax Consolidated Group) for interest paid to F: ss 8-1 or 25-90. 3. S lends the money back to the US partnership, which then uses the funds to repay F. 4. The US partnership now pays interest to S, which is deductible as interest on an investment loan (the investment in S) or refinancing a deductible loan (the original loan from F). The interest paid to S is the profit of S, which is distributed to the owner of S, being the US Partnership. The income derived by the US partnership from S (who is also a member of the US tax consolidated group, headed by the US partnership) is not assessed in either 1. the US (as the income is derived from a subsidiary and member of the same US consolidated group) or 2. Australia (as the Australian Consolidated Group head entity derives income exempted by Subdiv 768-A (formerly s 23AJ). The structure is set out in the following flowchart prepared by the ATO. The ATO considers that the arrangements are for the purpose of avoiding tax and can be subject to a Part IVA determination as the arrangements either create deductions in Australia or avoid the operation of withholding tax provisions by paying Australian profits out as interest payments, rather than as unfranked dividends. TA 2016/11: Restructures in response to the Multinational Anti-Avoidance Law (MAAL) involving foreign partnerships In this Taxpayer Alert, the ATO is warning taxpayers that, prior to 1 January 2016 (when the MAAL commenced operation) were ‘foreign entities’. The ATO is concerned that such entities have restructured or will restructure, purporting to become ‘Australian entities’ and avoid the operation of the MAAL. Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 30 ATO reference TA 2016/10, 11 w https://www.ato.gov.au/law/view/document?DocID=TPA/TA201610/NAT/ATO/00001 w https://www.ato.gov.au/law/view/document?DocID=TPA/TA201611/NAT/ATO/00001 5.4 Substantiation exception for reasonable travel allowance expenses The ATO has announced that it is undertaking a review of the current substantiation exception for travel allowances. The ATO notes that the exception allows a taxpayer to claim a deduction for travel expenses they incur without meeting the substantiation rules, provided the claim for deduction does not exceed the amount they consider reasonable. The ATO notes that the exception from substantiation for reasonable travel allowance expenses only applies where the person receives a travel allowance for the work related travel to which the claim for deduction relates. The ATO's experience is that this qualification is not well understood. Given this lack of understanding of a long-standing exception, the ATO is undertaking the review to explore ways to improve its guidance and administrative practices in this area. w https://www.ato.gov.au/General/Consultation/What-we-are-consulting-about/Papers-forcomment/Substantiation-exception-for-reasonable-travel-allowance-expenses/ 5.5 ATO on engagement for clients in the building and construction industry with tax debts The ATO has noted that the building and construction industry represents a disproportionate amount of current tax debts. From late September 2016 the ATO will contact tax agents in relation to clients in the building and construction industry who continue to have outstanding tax debts and notes that it wishes to work with agents to support clients. The ATO encourages agents to contact them regarding the outstanding debt and has provided the following contact details: 13 72 86 Fast Key Code 1 2 2 2 from 8.00am to 6.00pm weekdays, and from 10.00am to 4.00pm Saturday. w https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Supporting-the-building-andconstruction-industry/ 5.6 SMSF compliance issues The ATO has published a question and answer series on its website on a range of SMSF compliance issues. Some of the key points made by the ATO are as follows: 1. a trustee must provide requested relevant documents to its SMSF auditor within 14 days of the request being made. Where a statutory time period is exceeded by more than 14 days, the SMSF auditor is required to report the contravention to the ATO via an Auditor Contravention Report; 2. that the current preservation ages as follows: (a) for persons born before 1 July 1960 - 55. (b) for persons born after 30 June 1960 as follows: (c) 56 – for persons born between 1 July 1960 and 30 June 1961; (d) 57 – for persons born between 1 July 1961 and 30 June 1962; (e) 58 – for persons born between 1 July 1962 and 30 June 1963; (f) 59 – for persons born between 1 July 1963 and 30 June 1964; and (g) 60 – for persons born after 30 June 1964. 3. that the temporary budget repair levy of 2% applies to superannuation funds where the top marginal rates applies in accordance with the following table: Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 31 Type of income Rate before 1 July 2014 Rate after 1 July 2014 Income of non-complying super funds 45% 47% Non-arm’s-length income 45% 47% No-TFN-quoted contributions 46.5% 49% w https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/Questions-andanswers/ 5.7 Early engagement for advice The ATO has announced that it is extending its early engagement for advice, previously limited to large businesses, to all business models. Under this approach, you can enter into an early engagement discussion if you are seeking advice for a complex transaction you are considering, or have implemented. Under the early engagement process the ATO will: 1. discuss your request and outline the early engagement process 2. seek your timeframes and critical dates 3. explore the tax issues you are seeking advice on 4. arrange an initial discussion or meeting 5. agree on respective roles and responsibilities 6. request a draft application for a ruling, where relevant, with full and true disclosure and relevant supporting information. w https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/Early-engagement-for-privateadvice/ 5.8 Small business mental health initiative The ATO has announced an initiative for small business clients experiencing mental health issues. The options under the initiative include: 1. hardship priority processing; 2. tailored payment plans; and 3. lodgment and payment deferral. w https://www.ato.gov.au/General/Financial-hardship/Small-business-owners-experiencing-mental-healthissues/ Monthly tax training – October 2016 {/01529093:1} Brown Wright Stein Lawyers © 2016 page 32 6 Other materials 6.1 New Zealand 'Netflix' tax GST in New Zealand now applies to digital and remote services sold to New Zealand residents. The socalled Netflix tax applies to online services such as e-books, music, and video downloads sold by overseas businesses. The new rules came into force on 1 October 2016. w https://www.parliament.nz/en/pb/bills-and-laws/bills-proposedlaws/document/00DBHOH_BILL67682_1/taxation-residential-land-withholding-tax-gst-on-online