Draft ruling on treatment of long term construction contracts

The Australian Taxation Office (ATO) has issued a draft taxation ruling TR 2017/D8, which considers the income tax treatment of long term construction contracts. Specifically, the draft 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 (AASB 15). The draft ruling is a rewrite and update of IT 2450, which was published in 1987 and consolidates the views contained in various other tax determinations.

The Commissioner of Taxation continues to affirm that the completed contracts method remains unacceptable under the income tax law. According to the draft ruling, in contracts which extend beyond one income year, it is not permissible to defer the bringing of profits or losses to account until the contract is completed. Instead, 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 draft 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.

The Appendix to the draft ruling sets out a practical administrative approach that the ATO will follow in relation to amending prior year assessments where the estimated profits basis is used and in relation to its interaction with other provisions.

When finalised, the ruling is proposed to apply from 1 January 2018. Comments on the draft ruling can be made until 1 December 2017.

Default beneficiary of trust assessed on trust’s net income

On a matter remitted from the Federal Court, the Administrative Appeals Tribunal (the Tribunal) in Moignard v Commissioner of Taxation [2017] AATA 1661 has held that the taxpayer who was one of three default beneficiaries of a trust was presently entitled to one-third of the income of the trust, and therefore was assessable on one-third of the trust’s net income. The Tribunal was not satisfied that there was a valid distribution of the income of the trust that would have prevented the operation of the default clause in the trust deed. Furthermore, the taxpayer had not effectively disclaimed their entitlement to the distribution.

No present entitlement to net income of trust

The Full Federal Court in Lewski v Commissioner of Taxation FCAFC 145 held that the taxpayer was not presently entitled to any share of the net income of the trust as the alternative resolutions made by the trustee meant that the distribution to the taxpayer was contingent on the occurrence of an event that may or may not take place. In addition, the Full Court held that certain amounts to be paid under a contract were incurred upon execution of the contracts and hence deductible in the year of execution.

Reforms to address illegal phoenix activity

The Federal Government has released a consultation paper on its previously announced reforms to the tax and corporations law to deter and disrupt the core behaviours of phoenix operators, including non-directors such as facilitators and advisers (read the Government’s media release regarding this latest consultation).

This Consultation Paper sought feedback (by 27 October 2017) on a number of law reform proposals which are based on recommendations made by the Government’s Phoenix and Black Economy Taskforces, and covers certain changes to assist the regulators to better target those who repeatedly misuse corporate structures, and to enable them to take stronger action against those individuals.

Expert advisory panel on whistleblower protections

Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has released the terms of reference for, and the membership of, an Expert Advisory Panel on whistleblower protections. The Panel will review and comment on draft legislation, which the Government expects to introduce this calendar year. The legislation will:

●establish whistleblower protections for those who disclose information about tax avoidance and other breaches of tax laws administered by the Commissioner of Taxation; and

●strengthen existing corporate whistleblower protections under statutes administered by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority.

Making it easier to start a new business

The Government has recently commenced public testing of a new service to make registering a business easier and faster. The new business registration service allows businesses to apply for multiple business and tax registrations at the same time online at business.gov.au. The service is being developed collaboratively with the Department of Industry, Innovation and Science, the ATO, ASIC and the Department of the Treasury.

Changes in average personal income tax rates: distributional impacts

The Commonwealth Parliamentary Budget Office (PBO) has released a report into changes in average personal income tax rates: distributional impacts. The PBO’s 2017–18 Budget medium term projections report identified the projected return to surplus in 2020–21 is predominantly due to a projected increase in personal income tax revenue. This latest report analyses the expected increase in average tax rates for individuals in different parts of the taxable income distribution and examines the factors that are driving these outcomes.

Final Budget Outcome 2016-17

The Federal Government has released the Final Budget Outcome 2016-17, which shows the underlying cash deficit at 1.9 per cent of GDP which is a AUD4.4 billion improvement compared with the underlying cash deficit estimated at the time of the 2017-18 Budget. This improvement is stated to be driven by AUD4.1 billion in higher than expected total receipts, and AUD1.2 billion from lower than expected payments. Net Future Fund earnings were AUD860 million higher than expected at the time of the 2017-18 Budget.

Tax receipts were AUD379.3 billion, which was AUD2.1 billion higher than forecast. Higher than expected company tax, goods and services tax receipts, superannuation fund tax receipts and excise were partially offset by lower than expected fringe benefits tax receipts.