Final Ruling on treatment of long term construction contracts

The Australian Taxation Office (ATO) has finalised Taxation Ruling TR 2018/3, which considers the income tax treatment of long term construction contracts. Specifically, the Ruling explains the methods acceptable to the Commissioner of Taxation for returning income derived from, and recognising expenses incurred in, long term construction projects and acknowledges the new accounting standard AASB 15 Revenue from contracts with customers. The Ruling, which applies to years of income commencing both before and after 7 March 2018, is a rewrite and update of IT 2450, which was withdrawn on 18 October 2017, and consolidates the views contained in various other tax determinations.

The Ruling affirms that the completed contracts method remains unacceptable under income tax law. The Ruling confirms that the introduction of AASB 15 does not necessarily bring into line the accounting recognition of revenue with the tax law. The Commissioner of Taxation also indicates that the emerging profits basis is unacceptable. Instead, it indicates that the principles and practices which apply in recognising, for income tax purposes, the income derived from, and expenses incurred in, long term construction contracts are:

  • All progress and final payments received in a year are to be included in assessable income and income tax deductions allowed for losses and outgoings to the extent permitted by law (the ‘basic approach’).
  • Any method of accounting which has the effect of allocating, on a fair and reasonable basis, the ultimate profit or loss on a contract over the years taken to complete the contract (‘estimated profits approach’) will be acceptable.

The Ruling is substantially the same as the previously issued draft taxation ruling TR 2017/D8.

Senate Estimates Committee hearings

In his opening statement to the Senate Estimates Committee, Mr John Fraser, the Secretary to the Treasury, provided a Budget update and fiscal outlook reporting that the Budget bottom line has improved across the forward estimates from last year’s Budget to the Mid-Year Economic and Fiscal Outlook (MYEFO). The result reflects both lower payments, as well as higher total receipts. As such, the Budget is now projected to return to AUD 10.2 billion surplus in 2020-21. The Secretary noted the passage of the tax reform package in the United States as an important development impacting global growth and policy. He also noted that following these reforms and other planned global corporate tax rate reductions, Australia will have one of the highest corporate tax rates amongst advanced economies.

Treasury, the ATO and the Board of Taxation also appeared before the committee (refer to the transcript of the hearing). Key highlights included:

  • Discussion on proposed corporate tax rate cuts and potential impact on the budget and economy.
  • ATO focus on work-related expenses and preliminary observations from country-by-country reports.
  • Public transparency of corporate tax information, noting the Commissioner’s inability to publish tax loss data.
  • Board of Taxation process for selecting issues for inquiry and matters concerning the proposed mandatory disclosure rules.

Commissioner’s address to the Tax Institute National Convention

The Commissioner of Taxation, Chris Jordan AO, delivered the keynote address to the Tax Institute’s 33rd National Convention. Mr Jordan spoke about the increased ATO attention on undeclared income, unexplained wealth or lifestyle for individuals and small businesses, incorrectly claimed private expenses, unpaid super guarantee, and concentrations of cash-only businesses or those with low usage of merchant banking facilities.

The Commissioner also highlighted the ATO’s recent achievements including:

  • The Tax Avoidance Taskforce. Between July 2016 and December 2017, the ATO has raised AUD 5.2 billion in liabilities against public groups and multinationals.
  • The Multinational Anti-avoidance law (MAAL). This is a significant impact on goods and services (GST) collections with AUD 290 million of additional GST paid in 2016-17 by taxpayers who have restructured to recognise an Australian taxable presence. An additional AUD 206 million in GST has already been collected in 2017-18.
  • Cross-border financing. Building on the decision in the Chevron case, and the cross-border financing practical compliance guideline (PCG), around AUD 80 billion of related party loans have been brought within the PCG framework, with a reduction of about AUD 1.4 billion in interest deductions in 2017-18.
  • Black economy. The ATO visited more than 2,600 businesses across eight locations last year. In the first six months of 2017–18, 5,020 reviews and audits were conducted which resulted in approximately AUD 143 million in tax and penalties.

Opposition to reform dividend imputation system

The Australian Labor Party has announced that it will prevent resident individuals and superannuation funds from obtaining cash refunds for excess franking credits. Charities and not-for-profit institutions, such as universities, are expected to be exempt from these changes. If elected, the policy is proposed to apply from 1 July 2019. For further information on the Labor Party’s policy, refer to this fact sheet.

In addition, the Shadow Treasurer in an address has reiterated the Labor Party’s commitment to reforming negative gearing, capital gains discounts and family trusts, as part of its approach to structural budget repair.

Opposition to provide incentives for new capital equipment investments

The Australian Labor Party has announced that it will create an Australian Investment Guarantee (AIG) that provides accelerated depreciation incentives for new capital equipment investments. If elected, under the AIG, it is proposed that from 1 July 2020, businesses will be able to deduct up to 20 per cent of the value of new eligible investment valued at over AUD 20,000 (with no pooling of assets allowed) in the first year, with the balance depreciated in line with normal depreciation schedules from the first year. Eligible assets include tangible machinery, plant and equipment, non-passenger motor vehicles and intangible investments in knowledge assets such as patents and copyrights. For further information on the Labor Party’s policy, refer to this fact sheet.

Tax treatment of cryptocurrencies

The ATO has updated its guidance on the tax treatment of cryptocurrencies to address some of the common enquiries in relation to cryptocurrency transactions. The guidance addresses issues such as:

  • cryptocurrency as an investment;
  • cryptocurrency and personal use-asset rules;
  • record-keeping;
  • carrying on a business;
  • cryptocurrency for business transactions;
  • paying cryptocurrency as wages or as a salary to employees; and
  • exchanging cryptocurrency.

In addition, the ATO has also commenced public consultation on substantiating cryptocurrency transactions, specifically record-keeping as it relates to cryptocurrency transactions, and practical compliance issues with exchanging one cryptocurrency for another cryptocurrency. Under the ATO’s proposed requirements for record-keeping, taxpayers will need to note the date, the value of the cryptocurrency on the transaction date, what the transaction was for and the identity of the other party to the transaction for every transaction involving cryptocurrency, including exchanging one cryptocurrency for another. Comments are due on 20 April 2018.

We welcome the ATO’s consultation and its updated guidance. There remains a number of matters that are still to be addressed, including issues such as source of gains and losses (relevant for temporary residents), and the taxation of proceeds raised from Initial Coin Offerings (ICOs).

Board of Taxation CEO update

The CEO of the Board of Taxation has released the March update, where the Board’s agenda of work was discussed, including:

  • Post implementation review of contingent consideration rules (earn out arrangements).
  • A review of small business tax concessions.
  • A comparison of taxing rights for real property under Australia’s double tax agreements and domestic laws.
  • A review of tax measures to promote ASX listings of innovation companies.
  • Reviewing fringe benefits tax (FBT) compliance costs, including international comparisons.
  • Taxation and the digital economy; and
  • Reviewing aspects of the taxation of the not-for-profit sector.

The Board also highlighted progress on the contingent consideration project, Sounding Board ideas, the release of the Board’s report on Bare Trusts, the take-up of the Tax Transparency Code (126 organisations have indicated intention to adopt the code and 99 have published reports), and an Australian Accounting Standards Board update on accounting developments and the additional accounting guidance to support the Tax Transparency Code.

ASEAN – Sydney declaration

In a joint statement from the Special Summit – The Sydney Declaration, Australia and the leaders of the Association of Southeast Asian Nations (ASEAN) have agreed to boost trade, investment and business links between Australia and ASEAN.

Tribunal finds that payment made could not be included in CGT cost base

The Administrative Appeals Tribunal (AAT) in Bosanac v Commissioner of Taxation [2018] AATA 472 has affirmed the Commissioner’s decision that a payment made by the taxpayer for ‘consulting’ or ‘completion fee’ was not an incidental cost which could be included in the capital gains tax (CGT) cost base of an investment property as there was a lack of credible evidence to support the claim. The Tribunal also found that, although the base penalty amount which was issued for intentionally disregarding taxation law was not excessive, the Commissioner’s decision to increase the base penalty amount was not justified. The taxpayer has since lodged an appeal to the Federal Court against the Tribunal’s decision.