IGT Review into the ATO employer obligations compliance activities

On 24 May, an Inspector-General of Taxation (IGT) report was released into the Australian Taxation Office’s (ATO) employer obligations audits.

The IGT review was undertaken in response to concerns raised by stakeholders that the ATO’s approach relies heavily on reporting by employers and employees to identify non-compliance. This review was based on submissions from a wide range of stakeholders, including employers, workers, superannuation funds and tax practitioners as well as their respective representatives.

The IGT said he has sought to minimise the compliance burden on employers – particularly small business – while still ensuring that tax obligations are met. The ATO agreed with some of the IGT’s recommendations so we can expect to see some changes to the compliance obligations of employers.

The IGT report made 11 recommendations which include the following:

  • The ATO should clarify the protection provided to those who use and rely on the ‘Employee Contractor Decision’ tool (which is a tool on the ATO’s website that assists employers in determining whether their workers are employees or contractors). The ATO agreed with this recommendation.
  • In relation to Single Touch Payroll, the ATO should:
    • apply the learnings from the implementation of SuperStream and ensure rigorous testing of third party software
    • seek to reduce employers’ reporting requirements by using the information obtained to prefill fields and
    • ensure that there are appropriate exemptions, at least in the short term, whilst exploring the possibility of providing a low or no cost software for qualifying small employers and an alternative method of electronic access for employers facing technological challenges, through such means as e-kiosks.

The ATO agreed with the recommendation in (a) and (b) but disagreed with (c).

  • The Government should consider expanding the Taxable Payment Reporting System to the engagement of contractors across all industries (currently it is only in building and construction and will be extended to the cleaning industry in 2018) and incorporating it into Single Touch Payroll once the latter has been successfully developed and fully operational.
  • The Government should consider reviewing the Fringe Benefits Tax (FBT) regime with a view to delivering a reduction in compliance costs in the short to medium term as well as longer term fundamental reform. The Government responded that it will consider this recommendation as part of its ongoing work to improve the tax system.
  • The ATO should publicly announce its areas of FBT compliance focus for future years. The ATO agreed with this recommendation.
  • The ATO should seek further means of ensuring superannuation entitlements are paid promptly including the use of deterrents, such as random audits, to curtail the propagation of non-compliance — compliant employers who undergo such audits should be reimbursed for any additional costs. The ATO disagreed with this recommendation and believes random audits use unnecessary costs and time and prefers to continue its targeted audit approach.
  • The IGT recommends the ATO increase employers’ awareness of its differentiated approach to non-compliance with Superannuation Guarantee (SG) obligations and assess the utility of this approach by analysing the results obtained from measuring its effectiveness. The ATO agreed with this recommendation.
  • The ATO should supplement the principles contained in its ‘Our approach to information gathering’ booklet with practical guidance. The ATO agreed and will include practical examples to assist ATO officers undertaking an audit or review.

As the recommendations are an integrated package and given the ATO’s disagreement to some recommendations, concerns have been raised that the full benefit of this review may not be realised.

Practical Compliance Guideline released on corporate tax

On 22 May, the Australian Taxation Office (ATO) released draft Practical Compliance Guideline PCG 2017/D7 which sets out a practical compliance approach that corporate tax entities may choose to use to inform members of the correct amount of franking credit attached to their distribution. The ATO anticipates that the approach outlined in PCG 2017/D17 will reduce compliance costs for corporate tax entities by providing an alternative to seeking an exercise of the Commissioner’s discretion to allow amendment of distribution statements.

This draft Guideline will apply from the first day of an entity’s 2016-17 income year, and will apply to corporate entities where:

  • they have paid a fully franked or close to fully franked distribution at the corporate tax rate of 30% during the period of the 2016-17 income year before the Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 became law on 19 May 2017 and
  • such distribution was over-franked as their corporate tax rate was reduced to 27.5% for their 2016-17 income year.

Importantly, for the 2016-17 income year, a corporate tax entity to which PCG 2017/D17 applies may inform its members of the correct franking credit to which they are entitled under the revised corporate tax rate in writing without reissuing the distribution statement. Further, the Commissioner will not impose penalties on the corporate tax entity for giving a member an incorrect distribution statement provided it gives written notice to each of its members clearly showing the correct amount of the franking credit.

Interested parties are invited to make comments on PCG 2017/D17 by 6 June 2017.

Legislation and government policy

Treasury Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2017 passed

On 24 May, Treasury Laws Amendment (Medicare Levy and Medicare Levy Surcharge) Bill 2017 was introduced and read for the first time before the House of Representatives.

The Bill seeks to amend the A New Tax System (Medicare Levy Surcharge—Fringe Benefits) Act 1999 and Medicare Levy Act 1986 to:

  • increase the Medicare levy and Medicare levy surcharge low-income threshold amounts for individuals, families and individual taxpayers and families eligible for the seniors and pensioners tax offset and
  • increase the phase-in limits as a result of the increased threshold amounts.

The proposed Medicare levy increase has been previously discussed in the Hall & Wilcox 2017 Federal Budget insight.

Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2017 passed

On 25 May, Treasury Laws Amendment (Accelerated Depreciation For Small Business Entities) Bill 2017 was introduced and read for the first time before the House of Representatives.

The Bill amends the accelerated depreciation rules for small business entities to extend by 12 months (to 30 June 2018) the availability of an immediate deduction for:

  • depreciating assets
  • amounts included in the second element of a depreciating asset’s cost and
  • general small business pools

where the amount is less than $20,000, rather than $1,000.

The proposed 12-month extension for small businesses has been previously discussed in the Hall & Wilcox 2017 Federal Budget insight.

Organisation for Economic Co-operation and Development (OECD) releases a discussion draft on the implementation guidance on hard-to-value intangibles

The OECD recently released a public discussion draft which presents guidance on the implementation of the approach to pricing transfers of hard-to-value intangibles (HTVI) described in Chapter VI of the Transfer Pricing Guidelines. HTVIs are intangible assets that have a special character such that no comparable asset exists in the market.  This makes it difficult to produce a valuation and determine an arm’s length price when HTVIs are transferred.

Action 8 of the Base Erosion and Profit Shifting (BEPS) Action Plan mandated the development of transfer pricing rules or special measures for transfers of HTVI aimed at preventing base erosion and profit shifting by moving intangibles among group members.  A BEPS transfer pricing report was produced as a result, but it required that further guidance be produced to assist tax administrators in implementing the HTVI rules. Among other things, one of the key objectives to be addressed in this guidance was the reduction of the risk of economic double taxation that could result from tax administrators making adjustments under the OECDS’s approach for valuing HTVIs.

In line with that objective, the recently released public discussion draft aims to provide answers for tax administrations, such as the ATO, who face difficulties in valuing HTVI’s because of the information asymmetry between the extensive information available to the taxpayer, and the absence of information available to the tax administration, other than what the taxpayer may present.

The public discussion draft outlines the principles that should underlie the implementation of the approach to HTVI, provides examples illustrating the application of this approach, and addresses the interaction between the approach to HTVI and the mutual agreement procedure under an applicable treaty.

However, the public discussion draft does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies.

Interested parties are invited to send comments on the proposed guidance provided in this discussion draft by 30 June 2017.

Case law

The Tribunal to confirm the Commissioner’s assessment of duty on the transfer of land

In Fagridas v Commissioner of State Revenue (Review and Regulation) [2017] VCAT 755, the applicants failed in their appeal to have the Victorian Commissioner of State Revenue refund duty paid on a transfer.

The applicant’s appeal was based on the following two claims:

  • the relevant transfer of land transaction was exempt from duty under section 36A of the Duties Act 2000 and
  • the assessable transaction was a trust distribution rather than a transfer. Therefore, duty was levied on the wrong transaction.

In response to the first claim, the Tribunal Member noted that a necessary element of the applicants’ exemption claim under section 36A of the Duties Act 2000 was that the dutiable property transferred be received by the transferee as beneficiary. However, neither the land transfer nor the contract of sale which preceded it referred to a transfer to the applicants in their character as beneficiaries of the trust. As such, the Tribunal member ultimately found that the transfer was not a transfer to the applicants as beneficiaries of the trust.

In response to the second claim, the Tribunal Member held that the claim was misconceived as it was irrelevant that the applicants may have also incurred a separate duty liability in a transaction involving the same land. Ultimately, only one transaction had been assessed for duty and the Tribunal Member did not find that such transfer was wrongly stamped.