Tax Training Notes - May 2018

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 May 2018 Brown Wright Stein Lawyers Level 6, 179 Elizabeth Street Sydney NSW 2000 P 02 9394 1010 www. bwslawyers.com.au 1 Cases .....................................................................................................................................................4 1.1 Constable – land tax primary production exemption.........................................................................4 1.2 Fagridas – duty and property passing to beneficiary ........................................................................6 1.3 Al Haddad – duty and apparent purchaser .......................................................................................8 1.4 Appeal Update – Hart........................................................................................................................9 2 Legislation...........................................................................................................................................11 2.1 Progress of legislation .....................................................................................................................11 2.2 ACT land tax changes .....................................................................................................................11 3 Rulings.................................................................................................................................................12 3.1 Deductibility of travel expenses for rental investment properties....................................................12 3.2 Purchaser's obligation to pay GST on supplies of real property .....................................................13 4 Private Binding Rulings .....................................................................................................................17 4.1 Main residence exemption ..............................................................................................................17 4.2 Property subdivision – revenue v capital.........................................................................................18 4.3 Residency of an individual...............................................................................................................20 4.4 Trust changes and CGT event E1 and E2 ......................................................................................21 4.5 Small business concessions ...........................................................................................................21 4.6 Travel allowance v living away from home allowance ....................................................................22 5 ATO and other materials....................................................................................................................24 5.1 Update on professional practices review ........................................................................................24 5.2 Obligations of tax agents for claims not allowable ..........................................................................24 5.3 Electronic FBT employee declarations............................................................................................25 5.4 New set of industry benchmarks .....................................................................................................25 5.5 Edited versions of private advice ....................................................................................................25 5.6 GST food and beverage search tool ...............................................................................................26 5.7 ATO 'Justified Trust' compliance approach.....................................................................................26 5.8 Foreign Account Tax Compliance Act (FATCA) reporting ..............................................................26 Our tax training notes are edited by Matthew McKee and prepared by members of our tax, property and estate planning team: Amanda Comelli Amanda Teale Helen Young Isabelle Marcarian Matthew McKee Rachel Vijayaraj Taseen Rafi Sam Ayoubi Suzie Boulous Monthly tax training – May 2018 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 8 May 2018. Copyright © Brown Wright Stein Lawyers 2018. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 4 1 Cases 1.1 Constable – land tax primary production exemption Facts Mr Constable, his brother, and his father (until his death in 2016) co-owned a 64.57 hectare land on the South Coast of NSW. The land was purchased by Mr Constable's father many years ago and had no structural improvements on it, other than a power line. The land was timbered and in March 1995, approval was received from the local council to log/harvest the trees on the land. Timber was last harvested from the land in 1996, before which harvesting also occurred in 1988 and the mid 1970's. On 22 June 2009, Mr Constable made an enquiry about the regulation of private native forest activities under the Native Vegetation Amendment (Private Native Forestry) Regulation 2007 with the Department of Environment and Climate Changes (DECC). Mr Constable requested a 5 year PNF Property Vegetation Plan (PVP) to engage in forestry activities over the trees on the land. The DECC forwarded PVP to Mr Constable to be signed and returned. Mr Constable however, failed to return this and it was not signed until February 2017. The DECC withdrew the agreement in March 2017 because no response was provided. From 1 July 2011 to 19 July 2012, 45% of the land was zoned rural, with the remaining 55% zoned urban expansion. On 20 July 2012, the zoning of the land changed pursuant to the local government's planning instrument, under which 67% of the land was re-zoned R2 low density residential, 3% was re-zoned IN1 general industrial, and 30% continued to be zoned rural. Following the 2012 re-zoning of the majority of the land, forestry was no longer a permitted activity or use of the land. Notwithstanding this, sections 106 and 107 of the Environmental Planning and Assessment Act 1979 had the effect of preserving ‘existing uses’ where there was a re-zoning, which included the use of logging timber on the land. The significance of the re-zoning was that for non-rural zoned land to be eligible for the primary production exemption, the land would also have to satisfy the 'commerciality test' in addition to the 'dominant purpose test' pursuant to section 10AA of the Land Tax Management Act 1956 (NSW) (LTM). From November 2013 to April 2015, the land was listed and advertised for sale by tender for $4.5 million. The land was listed together with the adjoining parcel of land, with the listing described in the following terms: This would have to be an opportunity of a lifetime for a prudent investor/developer. Majority zoned R2 (Low density residential) and portion zoned RU1 Rural. This property adjoins existing established housing. R2 zoning permits subdivision to 550m2 subject to council approval. This site will provide up to 1000 residential lots meeting the future housing requirements for the area for the next 20 years, without the need for urban sprawl. On 10 July 2015, the Chief Commissioner notified Mr Constable, his father, and brother that he was reviewing the application of the primary production exemption to the land. As part of the review, the Chief Commissioner issued a questionnaire, in response to which it was stated that logging was anticipated to commence in 12-18 months on the property. The Chief Commissioner issued land tax assessment notices for the 2012 to 2016 land tax years (the Relevant Years) denying the PP exemption. On 20 May 2016, Mr Constable lodged an objected to these assessments, which the Chief Commissioner disallowed. On 17 October 2016, Mr Constable lodged an application for review and commenced the Tribunal proceedings. In January 2017, after failing to meet the estimated selling price of $4-4.5million, the price was reduced and the land remained for sale by tender. In the proceedings, Mr Constable adduced the following evidence to discharge his onus of proof that the dominant purpose test and commerciality test pursuant to the LTM were satisfied: 1. an expert report from Mr Cameron; Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 5 2. an affidavit from Kathleen Kerr, his solicitor outlining the instructions given to Mr Cameron to prepare the expert report; 3. a 'Business Plan' dated May 2016 in relation to the forestry activities on the land, which provided, amongst other things, that the goal of the owners was to manage the native forest sustainably and frugally; and 4. the PVP, though only signed on 9 February 2017 (noting it was issued in 2009). The key evidence was provided in Mr Constable's expert report, which noted the following: 1. it estimated that 89.5% of the land could be commercially exploited for timber harvesting; 2. that a high proportion of the trees on the land were regrowth and should grow into merchantable timber in the next 10 to 50 years; 3. it estimated that revenue from timber sales over a 30 year period ranged between $36,250 and $156,600 earned every 5 or 10 years, depending on the intensity of the harvesting and the area subject to harvest; 4. Mr Constable's comments that he spent 2-3 hours per week on average on forestry activities; 5. in native forestry operations, activities were typically interspersed in time and space, with intense operational activity occurring only occasionally. For example, a forest may be subject to periodic hazard reduction burning, but only harvested once every 30 years. In this context, it noted the history of timber harvesting, with evidence of three commercial harvests occurring in the last 50 years; 6. the land had a small clearing on the corner of approximately 0.5 hectares, which was designated to be a log dump. This was consistent with forestry operations of similar scale; 7. that forestry activities were in evidence on the land, including timber assessment, forest protection, roads, harvesting, silviculture, fire trail maintenance, hazard reduction burning, and pest and weed control; and 8. it concluded that Mr Cameron was satisfied that the forestry operation, as described in the business plan, exhibited traits that would reasonable be expected to be observed in a commercial operation geared towards making a profit, though noting that the business plan was lacking detail in some areas. The Commissioner contended the following: 1. he noted that for forestry to qualify for the primary production under the LTM, there needed to be evidence of ‘cultivation’ of the land as an ongoing activity for the purpose of eventually harvesting the trees for sale. The Commissioner noted that no trees had been harvested or sold since 1996, and that adequate evidence of ‘cultivation’ activities had not been adduced; 2. Mr Constable failed to adduce evidence of having retained existing use rights following the rezoning in 2012, and accordingly, did not prove it was legally possible for him to ‘cultivate’ 70% of the land; and 3. Mr Constable's plan to sell the land in 2013-2014 objectively showed that his dominant purpose for the land was to sell it for low density residential development, being a purpose inconsistent with the purported purpose of harvesting and selling trees. Issues 1. Does the land satisfy the dominant use test for the purposes of the primary production exemption? 2. Does the land satisfy the commerciality test for the purposes of the primary production exemption? Decision SM Higgins affirmed the Chief Commissioner's position, on the basis that Mr Constable failed the commerciality test. Dominant use test In relation to the dominant purpose test, SM Higgins accepted that forestry may fall under s10AA of the LTM, that it is a long-term activity, and the majority of Mr Cameron's findings in the expert report. He also accepted the evidence in the Business Plan and Mr Constable's contentions. On this basis, noting that Mr Constable had managed the land since 1980, concluded that the dominant purpose for the Relevant Years had not changed from previous years, and continued to be the cultivation of native forest on the land. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 6 Commerciality test Mr Higgins noted that the commerciality test has two limbs. Firstly, the land must have a significant and substantial commercial purpose or character. Secondly, the use of the land must be for the purpose of profit on a continuous or repetitive basis. In relation to the first limb, SM Higgins concluded that the re-zoning of the land, and subsequent listing for sale for low density residential development, evidenced that the existing dominant purpose (being the cultivation of native forest) did not have a substantial commercial purpose or character. He concluded that the material for the sale of the land for development showed that the commercial purpose or character became of greater significance and substance than primary production. The Senior Member noted Mr Constable's admission that the land was offered for sale together with the adjoining property to test the market for development of low-density residential buildings. It was not to test the market for native forests. In relation to the second limb, SM Higgins considered that Mr Constable had failed to adduce evidence that the use of land was for the purpose of profit during the Relevant Years. Although noting that the absence of profit does not negate this limb, the Senior Member considered Mr Cameron's expert evidence and the business plan of little assistance, because they were future looking, and thus not relevant to the Relevant Years. Given the 2012 re-zoning and subsequent listing of the land for sale for development, the Senior Member concluded Mr Constable did not discharge his onus and establish the second limb had been satisfied. Citation Constable v Chief Commissioner of State Revenue [2018] NSWCATAD 94 (SM Higgins, Sydney) w http://classic.austlii.edu.au/au/cases/nsw/NSWCATAD/2018/94.html 1.2 Fagridas – duty and property passing to beneficiary Facts On 20 May 1980 the Michalakas Family Trust was settled with Anikk Pty Ltd as trustee and Betty Michalakas as one of the named beneficiaies. In 1982 Anikk purchased land in Box Hill, Victoria on behalf of the Victorian trust. Subsequently, Betty married Athanasios and they had a son George. Athanasios and George became general beneficiaries of the trust as the husband and son of Betty. On 24 February 2012, Anikk mortgaged the land to secure a loan of $1,560,000. By 10 October 2012, Anikk was in default under the mortgage and the mortgagee made a demand for the amount then owing under the loan. The mortgagee entered into possession of the land and on 4 October 2013 entered into a contract of sale to sell the land for $1.9 million to Arvaia Pty Ltd and/or nominee. Prior to settlement Arvaia exercised its right under the contract to nominate Betty, Athanasios and George as purchasers. On 7 March 2014 the mortgagee and Betty, Athanasios and George executed a transfer of land under which it was stated that the mortgagee was exercising a power of sale with the consideration stated to be $1,900,000. The whole of the consideration was retained by the mortgagee in satisfaction of the amounts owing under the loan. The Victorian Commissioner of State Revenue assessed the transfer for duty of $104,500. Betty, Athanasios and George lodged an objection claiming that the transfer was exempt from duty under section 36A of the Duties Act 2000 (Vic). That section relevantly provided as follows: 36A Property passing to beneficiaries of discretionary trusts Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 7 (1) No duty is chargeable under this Chapter in respect of a transfer of dutiable property that is subject to a discretionary trust (the principal trust) to a beneficiary of the trust if— (a) the duty (if any) charged by this Act in respect of the dutiable transaction that resulted in dutiable property becoming subject to the principal trust has been paid or the Commissioner is satisfied that the duty will be paid; and (b) the beneficiary— (i) was a beneficiary [when the property became subject to the principal trust]; or (ii) became a beneficiary after the relevant time by reason of [becoming a spouse or relative of a Specified Beneficiary]; and (c) the transfer is— (i) to the beneficiary absolutely; and… (e) The Commissioner is satisfied that the transfer is not part of a sale or other arrangement under which there exists any consideration for the transfer. Betty, Athanasios and George contended that as Anikk did not receive any consideration, so that the condition in sub-section (e) did not preclude the exemption from applying. The Commissioner disallowed the objection decision holding that for the exemption to apply the transfer to a person who is a beneficiary had to be done in the person’s capacity as beneficiary but in this case the transfer to Betty, Athanasios and George was in their capacities as purchasers under a contract for sale of land. Further, the Commissioner considered that the meaning of consideration was sufficiently wide to capture consideration flowing from the transferor to someone other than the transferee. Betty, Athanasios and George applied to the Victorian Civil and Administrative Tribunal for review of the assessment. Betty, Athanasios and George sought to adduce evidence in the Tribunal proceedings that: 1. Annik had resolved to distribute the property to them prior to the mortgagee taking possession; 2. before the transfer was undertaken, the mortgagee took possession and insisted that a contract be entered into to give effect to the transfer to Betty, Athanasios and George. Journal entries and notes were provided at the hearing that indicated that the director of Annik had decided to make the distribution prior to the mortgagee taking possession. The Tribunal rejected the evidence of the distribution resolutions given the late emergence of such evidence and its ambiguous nature. The Tribunal concluded that, in any event, the transfer was undertaken by the mortgagee pursuant to a power of sale and this was inconsistent with it being a trust distribution. Further, the Tribunal considered that the transfer was for consideration within the meaning of sub-section (e). Accordingly, the Tribunal held the transfer was not exempt from duty. Betty, Athanasios and George appealed to the Supreme Court of Victoria. Issue Whether the transfer of the land to Betty, Athanasios and George was exempt from duty? Decision The Court held that it could not overturn the decision of the Tribunal that a valid resolution to distribute the land to Betty, Athanasios and George had not been made as that was a question of fact and not a question of law. For this reason the Court considered that the appeal had to be disallowed. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 8 In any event, the Court considered that Betty, Athanasios and George had not discharged their onus to show that the conditions for section 36A had been satisfied, in particular because they could not show that the transfers were to them in their capacity as beneficiaries rather than purchasers of the land. Citation Fagridas v Commissioner of State Revenue [2018] VSC 145 (Macaulay J, Melbourne) w http://classic.austlii.edu.au/au/cases/vic/VSC/2018/145.html 1.3 Al Haddad – duty and apparent purchaser Facts On 22 February 2010 Ali Rajab Mohamed Al Haddad entered into a contract to sell his residence in Villawood for $375,000. On 1 April 2010 Ali’s solicitor wrote to the solicitor for the purchaser of the property and sought release of the deposit paid on the transaction: to enable Mr Al Haddad to assist his son, Mohammad Al Haddad, in the purchase of a property On the same day Ali signed an authority instructing his solicitor to forward a cheque for $20,000 to a real estate agent, for the purchase of (the Casula Property) by my son Mohammad Al Haddad On 8 April 2010 Mohammad was granted unconditional approval of a loan from Westpac for $330,000 secured by the Casula property. The loan was in the name of ‘Mohammad Al Haddad’. On 13 April 2010 Mohammad entered into a contract to purchase the Casula property for $457,000 with a deposit of $22,850. The transfer was marked ‘exempt’ from duty on the basis that Mohammad was a first home owner. On 5 May 2010 Mohammad also completed an application for the First Home Owners Grant in relation to the Casula property. That application stated that Mohammad applied in his capacity as a natural person and that the property ‘is not held subject to a trust’. On 6 May 2010 Ali’s sale of the Villawood property was completed, the net proceeds of the sale payable to him being $86,636.97. On 25 May 2010 Ali signed an authority instructing his solicitor to forward the proceeds in that amount: towards the purchase of my son Mohammad Al Haddad of (the Casula property) On 9 June 2010 the purchase of the Casula property was completed. The $7,000 that Mohammad received as a First Home Owners Grant was applied in part payment of the purchase price. Ali also received $10,000 as personal loans which he applied in part payment of the purchase price. On 30 April 2015 (some five years after purchase) a deed of trust was executed between Ali and Mohammad in relation to the Casula property. On 23 July 2015 Mohammad transferred title to the Casula property to Ali for consideration of $350,000. The Chief Commissioner assessed the transfer for duty with the dutiable value being $650,000, with ad valorem duty of $24,740 being payable. Ali made an application for a refund of the duty of $24,740 on the basis that he was the real purchaser and had provided the money for the purchase and any improvements and therefore only $50 duty was payable in accordance with section 55 of the Duties Act 2001 (NSW). That section relevantly provides as follows: (1) Duty of $50 is chargeable in respect of: Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 9 … (b) a transfer of dutiable property from an apparent purchaser to the real purchaser if: (i) the dutiable property is property, or part of property, vested in the apparent purchaser upon trust for the real purchaser, and (ii) the real purchaser provided the money for the purchase of the dutiable property and for any improvements made to the dutiable property after the purchase. (1A) For the purposes of subsection (1), money provided by a person other than the real purchaser is taken to have been provided by the real purchaser if the Chief Commissioner is satisfied that the money was provided as a loan and has been or will be repaid by the real purchaser. On 4 May 2016 the Chief Commissioner rejected the request for a refund of that payment. Ali objected to that decision but the Chief Commissioner disallowed the objection. The Chief Commissioner contended that section 55 did not apply as Ali did not pay the entire purchase price as: 1. $7,000 had been paid by Mohammad by way of the First Home Owners Grant, 2. there was insufficient evidence to establish who paid the Westpac loan; 3. there was insufficient evidence as to the personal loans of $10,000; and 4. there was evidence that Ali and his family had pooled their financial resources and these resources had been applied in repayment of the Westpac loan. Further, the Chief Commissioner considered that no trust existed at the time that the property was purchased and this was required by section 55. Ali applied to the New South Civil and Administrative Tribunal for review of the assessment. Issues Whether concessional duty of $50 was payable on the transfer of the property to Ali? Decision The Tribunal concluded that the transfer was not entitled to concessional duty due to the fact that, as a result of the First Home Owners Grant, Ali did not pay the entire purchase price for the property. However, had it been necessary to consider the further issues, the Tribunal noted that, in favour of the concession applying: 1. there was sufficient evidence that the personal loans were loans to Ali and that they had been repaid such that the loans were treated as a payment of Ali in accordance with section 55(1A) of the Duties Act; and 2. that the pooling of the family’s financial resources did not mean that Ali was not the person making the payments of the purchase price. Citation Al Haddad v Chief Commissioner of State Revenue [2018] NSWCATAD (SM Currie, Sydney) w http://classic.austlii.edu.au/au/cases/nsw/NSWCATAD/2018/91.html 1.4 Appeal Update – Hart Michael Hart’s appeal against the decision of Bromwich J of the Federal Court in Hart v Commissioner of Taxation (No 4) [2017] FCA 572 (see our June 2017 tax training notes) has been disallowed by the Full Federal Court. Bromwich J had upheld assessments issued to Hart, the principal of a law firm, that included amounts of trust distributions from a professional practice trust in his assessable income. The trust distributions had been made subject to complex arrangements involving various entities that Hart controlled. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 10 One issue in the decision at first instance and on appeal was the application of section 101 of the ITAA 1936. That section relevantly provides as follows: Discretionary trusts For the purposes of this Act, where a trustee has a discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises the trustee's discretion shall be deemed to be presently entitled to the amount paid to the beneficiary or applied for the beneficiary's benefit by the trustee in the exercise of that discretion. The Commissioner’s position was that, once a payment of income was made from a trust to a beneficiary, the beneficiary is presently entitled to that income under section 101. At first instance, Bromwich J accepted such a construction of section 101. On appeal, the Full Court concluded that section 101 does not operate on mere payment, rather it requires some exercise of discretion by the trustee to make the payment to the beneficiary. However, the Full Court accepted that the terms of a trust deed may have the effect, and did in this case, that mere payment of a share of income to the person would make them presently entitled to that income. The Full Court noted that there was an additional reason why Mr Hart may be assessable on the amount, being under section 6-5 of the ITAA 1997 as the ‘objective circumstances of their receipt show that the amount derived was likely to have been the product of the appellant’s work as a solicitor and was also relied upon by him for his ordinary expenditure.’ Citation Hart v Commissioner of Taxation [2018] FCAFC 61 (Robertson, Wigney and Steward JJ, Brisbane) w http://classic.austlii.edu.au/au/cases/cth/FCAFC/2018/61.html Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 11 2 Legislation 2.1 Progress of legislation Title Introduced House Passed House Introduced Senate Passed Senate Assented Income Tax Rates Amendment (Working Holiday Maker Reform) 2016 12/10 17/10 7/11 Superannuation (Objective) 2016 9/11 22/11 23/11 Treasury Laws Amendment (Enterprise Tax Plan No. 2) 2017 11/5 8/2 12/2 Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) 2017 14/9 23/10 13/11 Treasury Laws Amendment (2018 Measures No. 2) 2018 8/2 Treasury Laws Amendment (2018 Measures No. 3) 2018 15/2 Treasury Laws Amendment (2018 Measures No. 4) 2018 28/3 Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) 2018 18/10 8/2 12/2 Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) 2018 8/2 1/3 19/3 Treasury Laws Amendment (Tax Integrity and Other Measures 28/3 Treasury Laws Amendment (Working Holiday Maker Employer Register) 2017 16/2 2.2 ACT land tax changes The ACT government has proposed substantial changes to the operation of land tax in the ACT. Land tax is currently imposed on rented residential land or residential land owned by a corporation or trustee. The changes extend land tax to all residential dwellings that are not a person’s principal place of residence and introduce a 0.75% foreign ownership surcharge on residential land. Foreign ownership surcharge The foreign ownership surcharge will impose an additional charge on residential land owned by a foreign individual, foreign corporation or trustee of a foreign trust. A foreign individual means an individual who, on the first day of a quarter, is not an Australian citizen, a permanent resident or ordinarily resident in Australia or an external territory. A corporation will be a foreign corporation if foreign persons, together with their associates, are entitled to cast, or control the casting of, 50% or more of the maximum number of votes at a general meeting of the corporation; or hold 50% or more of the shares in the corporation. A trust is a foreign trust if:  in the case of a fixed trust, 50% or more of the beneficial interests of the trust are held by foreign persons or their associates;  in case of a discretionary trust, foreign persons are persons who may receive capital of the trust either under an exercise of discretion by the trustee or in default of the exercise of such discretion. w http://www.legislation.act.gov.au/b/db_57924/default.asp Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 12 3 Rulings 3.1 Deductibility of travel expenses for rental investment properties The Commissioner has issued a draft ruling concerning the recent changes to the deductibility of travel expenses incurred in gaining or producing assessable income from the rent of residential premises as residential accommodation. Under new section 26-31 of the ITAA 1997 a person cannot deduct a loss or outgoing for travel if is incurred to gain or produce assessable income from certain uses of residential premises as residential accommodation. There are exceptions to this prohibition on deductibility, including if the losses or outgoings are incurred in a business carried on for the purpose of gaining or producing assessable, which the ATO say is a business of ‘property investing or a business of providing retirement living, aged care, student accommodation or property management services’ (noting that this is not the text of the legislation which only requires you carry on a business). The Ruling sets out the Commissioner’s views on the meaning of residential premises, when a person will be regarded as carrying on a business and the application of section 26-31 to expenses that have more than one purpose. Residential premises ‘Residential premises’ for section 26-31 has the same meaning as in the GST Act and means land or a building that:  is occupied as a residence or for residential accommodation; or  is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation. The Ruling notes that, for premises to be residential premises as defined, they must be fit for human habitation. If the premises do not have the features of shelter and basic living facilities are not residential premises. The Ruling provides that an objective consideration of the relevant facts and circumstances is required to determine whether premises are fit for human habitation. The Ruling notes that ‘capable of being occupied’ refers to premises that are designed, built or modified so as to be suitable to be occupied, and capable of being occupied, as a residence or for residential accommodation. The Ruling provides the following example of a residential premise: Example 1: shelter and basic living facilities 13. Julian owns a building that consists of a display area, a storage area, an office, a kitchenette and a toilet. The physical characteristics of the building together with its architectural plan show that the premises were designed as a shop. The building provides shelter and basic living facilities. Julian leases the building to a tenant who furnishes the premises in order to use it as their residence. 14. The tenant's occupation of the shop as a residence means that the shop satisfies paragraph (a) of the definition of residential premises in section 195-1 of the GST Act. Julian cannot deduct his travel expenditure incurred in gaining his rental income from the use of the residential premises as residential accommodation COMMENT – at issue here will be what occurs where a house is rented for commercial use, such as for use as a medical surgery. In this case travel expenses could be denied deductibility. Carrying on a business The Ruling notes that a business is carried on is a question of fact and depends on the circumstances of each case and refers to the indicia set out in Taxation Ruling TR 97/11 being: Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 13  whether the activities have a significant commercial purpose or character;  the existence of a profit-making purpose and a prospect of profit;  the complexity and magnitude of the undertaking;  whether the activities involve a degree of repetition and regularity;  the size and scale of activities;  whether the activities are systematic and organized; and  the amount of time, effort and capital employed. The Ruling notes that the Commissioner will consider the following factors in determining whether a person is carrying on a business of letting residential properties:  the total number of residential properties that are rented out;  the average number of hours per week you spend actively engaged in managing the rental properties;  the skill and expertise exercised in undertaking these activities; and  whether professional records are kept and maintained in a business-like manner. The Ruling also notes that the receipt of income by an individual from a rental property will not generally amount to the carrying on of a business, as compared to where such activity is carried on by a company (the rules do not apply to companies). Travel expenses for more than one purpose Where a travel expense is incurred for more than one purpose, one of which is to gain or produce assessable income from a residential premise used for residential accommodation, the Commissioner considers that a fair and reasonable apportionment of the expense is required under section 26-31 of the ITAA 1997. The Ruling provides the following example: Example 2: mixed-use property 27. Anna owns multiple workshops across Australia as part of her business operations. She owns a twostorey brick shop-house in Melbourne. The building comprises a workshop on the ground floor and an apartment on the first floor. 28. The apartment is rented out separately to a couple, Leon and Michelle. Anna derives assessable income from both her workshop and the apartment. 29. The apartment satisfies the definition of residential premises within the meaning of the GST Act. 30. Anna travels from her hometown in Canberra to her property in Melbourne for the sole purpose of carrying out maintenance on the walls and roof of the building. This maintenance activity is related to gaining or producing assessable income from both the workshop and the apartment. 31. Anna incurs airfare costs associated with this travel. Anna must apportion her travel expenditure on a fair and reasonable basis to determine how much is deductible. 32. Anna cannot deduct her travel expenditure to the extent that it reasonably relates to gaining or producing assessable income from using her apartment for residential accommodation. She can only deduct the amount that reasonably relates to gaining or producing assessable income from her workshop ATO reference Law Companion Ruling LCR 2018/D2 w https://www.ato.gov.au/law/view/document?DocID=COD/LCR2018D2/NAT/ATO/00001 3.2 Purchaser's obligation to pay GST on supplies of real property The Commissioner has issued a draft ruling on various aspects of the new requirement of purchasers to remit an amount for GST on certain supplies of real property. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 14 Transitional arrangements The Ruling notes that the new requirements do not apply to contracts entered into before 1 July 2018 if consideration for the supply (other than a deposit) is first provided before 1 July 2020. The Ruling states that the Commissioner will consider that contracts have been entered into before 1 July 2018 where:  the parties exchanged between the parties prior to 1 July 2018; or  where the contract is being executed in counterparts, the vendor communicated their execution of the contract to the buyer prior to 1 July 2018. Supplies subject to new requirements The Ruling notes that the purchaser will be required to remit an amount for GST where the supply is a supply of 'new residential premises' or the land is:  'potential residential land';  included in a property subdivision plan;  the property does not contain any building that is in use for a commercial purpose; and  the purchaser is not registered for GST or does not purchase the property for a creditable purpose. Potential residential land is 'land that it is permissible to use for residential purposes, but that does not contain any buildings that are *residential premises'. If it is permissible to use the land for residential purposes under the land use and planning laws, even if it can be used for other purposes, the land will be potential residential land. The Ruling provides the following example: Example 2 - Potential residential land with purchaser payment 66. Development Co discovers that the local council has recently changed its by-laws to allow for smaller lots in the area. To take advantage of the by-law change, Development Co purchases a vacant block of land, that is zoned to allow residential use, and that does not contain any buildings, with the intention to subdivide it into two lots. They carry out their plan, have the plan of subdivision registered, and proceed to make taxable supplies of both lots of vacant land. 67. Development Co enters into a contract with Emma to sell one lot for $350,000. The sale is not under the margin scheme. Emma is not carrying on an enterprise. Emma pays a 10% deposit with the balance due at settlement. The contract of sale includes the required notice advising Emma of the requirement to make a payment to the ATO of an amount under section 14-250. Development Co also informs Emma that she will be required to make a payment of $31,818 to the ATO, which is 1/11th of the contract price of $350,000, on or before settlement takes place. The withholding obligation would not apply if the purchaser was registered for GST and entitled to a full input tax credit. Time of payment The Ruling notes that the time for payment is as follows: 1. where the supply is not between associates, on or before the day on which consideration is first provided for the supply; or 2. where the supply is between associates, on or before the day the supply is made. Where the contract is an instalment contract, the GST must be paid on or before the first instalment. This is contrasted with payments that are ‘genuine deposits’, which are not treated as consideration. The Ruling provides the following examples: Example 4 - Instalment contract sale with first payment a deposit Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 15 70. Hillside Co enters into a contract with Farm Co to buy vacant land. Both entities are registered for GST and the land is potential residential land. Hillside Co plans to construct residential premises on the land and make them available for rent (not for a creditable purpose). 71. The contract price is $33 million, which is inclusive of GST, and is payable as follows: a deposit of $3 million is payable on entry into the contract with the balance to be paid in quarterly instalments of $6 million. Hillside Co has been notified by Farm Co that they will be required to make a payment of 1/11th of $33 million, which is $3 million, to the ATO. 72. Hillside Co is not required to make any payment to the ATO when it pays the deposit of $3 million to Farm Co. However, when Hillside Co pays the first instalment (of five instalment payments due under the contract) of $6 million, Hillside Co is also required to pay $3 million to the ATO. This is because this is the time when Hillside Co has first provided any consideration to Farm Co. Example 5 - Instalment contract sale with first payment not a deposit 73. Assume the same facts from Example 4, except that $15 million is to be paid at entry into the contract with the balance to be paid in three semi-annual instalments of $6 million. 74. The first payment is a part-payment of the instalment contract and Hillside Co is required to pay $3 million to the ATO and $12 million to Farm Co. The Ruling notes that whilst the amount to be paid is usually 1/11th of the consideration for the supply, in certain circumstances the amount will be different and provides the following table: If: Then the amount to be paid by the purchaser is: None of the following circumstances in this table apply (that is, the general rule ) 1/11th of the 'contract price' or 'price' The margin scheme applies to the supply 7% of the 'contract price' or 'price' The supply is between associates and is without consideration or is for consideration that is less than the GST-inclusive market value of the supply 10% of the GST-exclusive market value of the supply (a) The supply is only partly a supply of new residential premises or potential residential land to which section 14-250 applies, and (b) it is practicable to ascertain the portion of the consideration that relates to the supply of new residential premises or potential residential land to which section 14-250 applies when consideration is first provided A 'reduced amount' which is the proportion that relates to the supply to which section 14-250 applies of the amount otherwise determined in the relevant circumstance of this table There are multiple recipients (not joint tenants) For each recipient, the proportion of the supply that is deemed to be made to them of the amount otherwise determined in the relevant circumstance of this table] Refund of amounts incorrect paid The Ruling notes that the vendor may apply for a refund if a purchaser has incorrectly paid an amount to the ATO and the Commissioner will pay a refund where he is satisfied that it would be fair and reasonable to do so. However, a refund is unlikely to be made to the vendor where the amount was paid to the ATO was incorrect on the basis that it was a non-taxable supply. In such case, the purchaser may apply for a refund. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 16 COMMENT – the importance of these measures is that in the short term the ATO can be expected to delay issuing refunds of GST remitted by purchasers while they satisfy themselves of a vendor’s entitlement to a refund of some or all of the amount paid by the purchaser. This means when constructing a cash flow for a development you should consider ‘back ending’ the GST refunds in relation to such remittances by 3 to 6 months. ATO reference Law Companion Ruling LCR 2018/D1 w https://www.ato.gov.au/law/view/document?docid=COD/LCR2018D1/NAT/ATO/00001 Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 17 4 Private Binding Rulings 4.1 Main residence exemption Facts The taxpayer purchased a property that was less than 2 ha with the intention of making it their main residence. At this time, the taxpayer was acting as live in carer for relatives and was residing in their home. The relatives were heavily dependent on the taxpayer and the taxpayer continued to reside with them to assist with their daily needs. The taxpayer decided to rent out their property to a friend for approximately 12 months. The taxpayer was allowed to come and go from the property and make improvements in preparation of moving in. The taxpayer paid all utilities for the property. The taxpayer then moved into the property. Subsequently, health of the taxpayer's relatives health deteriorated and they asked the taxpayer to reside with them again. The taxpayer moved back into the relatives home. The taxpayer rented out the property for a period of less than 6 years. The taxpayer sold the property. Issue 1. Whether the taxpayer was entitled to a full main residence exemption 2. Whether the taxpayer was entitled to a partial main residence exemption Decision and reasons The Commissioner ruled ‘No’ to the first question and ‘Yes’ to the second question. The Commissioner noted the two relevant issues were whether the taxpayer moved into the dwelling as soon as practicable and the application of the absence rule. The Commissioner ruled that the taxpayer did not move in as soon as practicable as, whilst he or she was looking after relatives at the time they purchased the property, they rented out the property and it was a number of years before he or she moved into it. Accordingly, for the period which it was rented out to the taxpayer's friend, the property was not the taxpayer's main residence. The Commissioner explained that, in respect of the absence when the taxpayer moved back in with his or her relatives, the income producing use was covered by the absence rule such that, as the period of the absence was less than 6 years, the income producing use was disregarded. Accordingly, the Commissioner noted that the capital gain or loss is calculated using the following formula: Capital gain or loss amount X non-main residence days / total ownership period days The non-main residence days would be the total number of days between when the taxpayer purchased the property and when they first occupied it. ATO reference 1051310494626 w https://www.ato.gov.au/rba/content/?ffi=/static/rba/content/1051310494626.htm Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 18 4.2 Property subdivision – revenue v capital Facts The taxpayer is not registered for GST. The taxpayer acquired a property of approximately 2ha and located in a residential growth area. The taxpayer undertook substantial renovations of the property and installed new fencing and driveway. The taxpayer entered into an agreement with the local council to rehabilitate and replant native trees. The property was the taxpayer's main residence and the surrounding land was also used for small scale breeding of livestock. The property was located close to a livestock farm which prevented further development of the property, however, the farm was subsequently sold meaning that the development restriction was lifted. The surrounding area was becoming developed and the taxpayer no longer enjoyed the same level of amenity. The taxpayer approached a number of developers in relation to the sale of the property but these approaches were unsuccessful. A developer has an offer to acquire the property, conditional on future development approval. The taxpayer consented to the developer lodging a plan of subdivision which includes their property. The taxpayer entered into an agreement with the developer to: 1. split the costs of the application, civil works and sales; 2. to pay a management fee for the developer to perform the activities on their behalf. The property will be subdivided into a number of additional lots with the existing dwelling retained on its own lot. The total area for development is 1ha with the second ha being returned to council as open space. The combined number of lots will be eighteen. The costs of the subdivision will be financed by the taxpayer obtaining a loan from the Developer's financing institution. The taxpayer has appointed a property agent to manage and sell the developed lots. The sales will include the lot containing the taxpayer's current residence. Sales are either 'house and land packages' or 'land only'. A sealed road will be built to access the subdivided lots. The taxpayer will remain the registered owner of the land after the subdivision. The taxpayer has not undertaken property development previously and does not plan on doing so in the future. Issues 1. Whether the profit from the sale of the subdivided lots be treated as ordinary income as a result of carrying on a business of property development. 2. Whether the profit from the sale of the subdivided lots be treated as ordinary income as a result of an ‘isolated transaction’ carried out for profit and commercial in character. 3. Whether the profit from the sale of the subdivided lots be treated as statutory income under the capital gains tax provisions as a result of a realisation of a capital asset. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 19 4. Whether the supply of subdivided lots from the land would be a taxable supply for GST. Decision and reasons The Commissioner ruled ‘No’ to the first question, ‘Yes’ to the second question, ‘Yes’ to the third question and ‘Yes’ to the fourth question. Carrying on a business The Commissioner noted that whether a business is being carried on is a question of fact and degree and requires a consideration of a number of indicia. The Commissioner referred to the decision in Stevenson v. Federal Commissioner of Taxation (1991) 29 FCR 282 where taxpayer had owned farming land for many years who then scaled back his farming activities and commenced subdividing the land in stages. The taxpayer:  advertised the development himself;  did not engage the services of any particular real estate agent to assist him;  dealt personally with prospective purchasers;  did some of the physical work himself and fixed the sale price for the subdivided lots, being 220 lots. In Stevenson, it was held that the taxpayer was carrying on a business. The Commissioner considered that in these circumstances no business was being carried on as: 1. whilst the taxpayer is undertaking some of the activities in relation to the project, they are not of the level or scale as those undertaken by the taxpayer in Stevenson; 2. transactions are not being entered into on a continuous and repetitive basis; and 3. it is a small, one off project that is not being carried out in a manner similar to other property development businesses. Profit making undertaking or plan The Commissioner noted that, where a capital asset is dedicated to a profit making undertaking or plan, it may commence to be on revenue account in accordance with the decision in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247. The Commissioner considered that in considering all the circumstances the intention for holding the property has changed upon the commencement of the subdivision activities to a profit making undertaking. Some of the key circumstances noted by the Commissioner were as follows:  there is a coherent plan for the subdivision of the property into eighteen lots and this is more complex than what would have been involved in the disposal of the land as a whole;  the whole property was subdivided and not in pieces;  the cost to subdivide the property will be more than the market value of the unsubdivided value of the property;  there is a demonstrated intention to profit from the subdivision of the property and the transaction has been undertaken in a commercial manner;  the taxpayer is borrowing a significant amount to fund the subdivision of the property;  the taxpayer has engaged the services of various professionals who will undertake various activities in relation to the subdivision;  the decision to pursue the subdivision shows a choice to engage in exposure to the risks of the development, including the profits, losses and its general success for the purpose of maximising the potential profit made on the sale of the sale lots. Capital gains tax The Commissioner noted that the sale of the lots would be taxable under the capital gains tax provisions but subject to the anti-overlap rule to extent that the profit from the sale of the sale lots is included in the taxpayer's assessable income as ordinary income. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 20 Taxable supply The Commissioner noted that the sale of the lots would be taxable supplies if the taxpayer was making them the supplies in the course or furtherance of an enterprise. This depended upon whether the supply of the sale lots was being done in the form of 'an adventure or concern in the nature of trade' noting that an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business, but which has the characteristics of a business deal. The Commissioner considered that the following factors are important in determining whether development activities conducted on a property, previously used as a place of residence and hobby farm, are an adventure or concern in the nature of trade:  whether there has been a change in use or purpose of the land;  whether the development activity is significant;  whether there is a coherent and complex plan for the subdivision of the land  the extent of the size and scale, and the profit sought or gained; and  whether the legal and financial control and commercial risk rests with the landowner to maximise profit. Considering these indicia, the Commissioner concluded that the activities of the taxpayer amounted to 'an adventure or concern in the nature of trade' so that, if the taxpayer met the projected annual turnover test of $75,000 (based on the projected sale price of the lots), they would be required to be registered for GST so that supplies made would be taxable supplies. ATO Reference 1051303645955 w https://www.ato.gov.au/rba/content/?ffi=/static/rba/content/1051303645955.htm 4.3 Residency of an individual Facts An Australian citizen, who appears to have been born overseas, travels overseas to care for an elderly parent who has become ill. They originally live with the parent in their home until the parent is admitted to a nursing home. Once the parent has been admitted to the nursing home the person begins to rent a property. Their visa in the foreign country is a tourist visa and only allows them to remain in the country for 90 days, at which time they leave the country then re-enter in order to renew the visa. The person intends to return to Australia once the parent passes away, they visit the nursing home on a daily basis. The person owns an Australian property which is rented out, and the income from the property is used to support their lifestyle. The person has never been an Australian Government employee. Issues Is the person a resident of Australia? Decision and reasons The ATO state, without much analysis in the edited version of the PBR, that the person does not satisfy any of the four tests of residency. In finding the person is a non-resident, they state: Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 21 You have been living in Country B since early 201A and will continue to live there with no set date to return; currently your visa allows you to remain until early 201F. You have stated that you will continue to stay in Country B until your parent passes away. COMMENT – the impact of the ruling will be that the person is taxed at a higher rate on their Australian rental income. ATO ref 4110038207194 w https://www.ato.gov.au/rba/content/?ffi=/static/rba/content/4110038207194.htm 4.4 Trust changes and CGT event E1 and E2 Facts A trustee intends to, by way of deed, amend the terms of a trust so that two original appointors are removed, and two beneficiaries are excluded from benefitting. The trust deed empowers the trustee to make these changes. Issues Do the changes being made to the trust result in CGT events E1 (creation of a trust over an asset) or E2 (transferring an asset to an existing trust) occurring? Decisions and reasons The ATO note that their views on whether there is a CGT event are set out in TD 2012/12 which was issued following the decision in Clark in the Full Federal Court. Paragraph 1 of TD 2012/21 provides that CGT events E1 and E2 do not happen if the terms of a trust are changed pursuant to a valid exercise of power unless:  The change causes the existing trust to terminate and a new trust to arise for trust law purposes, or  The effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust. The TD includes an example where a trustee executing a resolution to remove a beneficiary can occur without triggering CGT events E1 or E2. Consistent with that position the ATO do not consider that the deed here will result in either CGT event occurring. While the deed changes both the appointors and also provides that an appointor’s LPR may in some instances act in their stead the ATO do not consider that it triggers either CGT event. The ATO conclude that ‘Because the changes will not result in subjecting any trust assets to a separate charter of rights and obligations, or give rise to the conclusion that they have been settled on terms of a different trust, CGT events E1 and E2 will not happen.’ ATO Reference 5010046025025 w https://www.ato.gov.au/rba/content/?ffi=/static/rba/content/5010046025025.htm 4.5 Small business concessions Facts Two taxpayers, labelled A & B, owned shares in a company called X, 50/50. X was entering into a sale contract to sell its assets to a company called Z. The assets being sold were business records, contracts, goodwill, seller intellectual property, and all other assets owned or used by X in connection with the business. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 22 The proceeds of sale consisted of an up-front amount plus 45% of the ‘Direct Annual Contribution’ being the gross revenue from transferred clients less third party supplier and out of pocket payments related to the clients and employee costs plus on-costs. The 45% amount would be paid based on the Direct Annual Contribution for each 12 month period up to 31 August 2010. There was a cap on the consideration receivable of $3 million. The net assets of X and any entity connected with it did not exceed $6 million just before entering into the agreement. The arrangement appears to have been entered into on or around 1 September 2017. Issues Are the small business CGT concessions available and will look-through earnout right treatment be available? Decisions and reasons The ATO considered that the small business CGT concessions would be available as the entity satisfied the maximum net asset value test, and because what was being disposed of were CGT assets that were active assets. In relation to the look-through earnout right treatment the ATO noted that to be treated as such a right it was necessary that:  The right is a right to future financial benefits that are not reasonably ascertainable at the time the right is created;  The right is created under an arrangement involving the disposal of a CGT asset;  The disposal causes CGT event A1 to happen;  Just before the CGT event, the CGT asset was an active asset of the entity that disposed of the asset;  All of the financial benefits under the right are to be provided over a period ending no later than five years after the end of the income year in which the CGT event happens;  The financial benefits must be contingent on the economic performance of the CGT asset or a business for which it is expected that the CGT asset must be an active for the period to which those financial benefits relate;  The value of those financial benefits reasonably relates to that economic performance; and  The parties to the arrangement deal with each other at arm's length in making the arrangement. The ATO considered that the conditions above were met and that in particular the first condition was met as the financial benefits were not reasonably ascertainable, and the second to last one was met as the ‘…yearly payments are subject to the economic performance of the sold assets as per the asset sale agreement.’ COMMENT – care needs to be taken with earnout payments that the payment ‘reasonably relates’ to the performance of the asset sold. If there were other adjustments in calculating the Direct Annual Contribution mentioned above, it might result in the amount paid not reasonably relating to the performance of the asset sold. ATO Reference 1051300275402 w https://www.ato.gov.au/rba/content/?ffi=/static/rba/content/1051300275402.htm 4.6 Travel allowance v living away from home allowance Facts An employer pays an employee an allowance in connection with their working in remote locations. The projects on which the employee works only have a limited life. They pay employees an allowance if the employee covers their own accommodation cost that covers the cost of the accommodation and their meals. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 23 Where the employer pays the cost of the accommodation the employer pays an allowance to only cover meal costs. The employee looked at in the ruling is only away from home for 51 nights and is not accompanied by their family, and stayed in shared accommodation with two bedrooms, two bathrooms, a living area, kitchen and laundry. The employee usually lives in a location where their family continues to reside. The employee returns to the family home on weekends and does not relocate any personal effects to the work location. Issues Are the payments made a LAFHA? Decisions and reasons The ATO do not consider the payments made are LAFHAs. The ATO refer to their draft views set out in TR 2017/D6 where they consider the following factors relevant to whether someone is living away from home:  the time spent working away from home;  whether the employee has a usual place of residence at a previous location;  the nature of the accommodation; and  whether the employee is, or can be, accompanied by family or visited by family or friends. While the ATO consider the nature of the accommodation to be in the nature of a home and the employee has another place they usually reside at, so that the employee could be living away from home, they consider the time spent away short (the examples in the ruling treat anything less than 3 months as short), their family not visiting them, them not relocating any personal effects, and the limited life of the projects on which they work means the allowance is not a LAFHA. As the amount is not a LAFHA the ATO consider the amounts paid to be travel allowances. ATO Reference 1051302502568 w https://www.ato.gov.au/law/view/document?docid=EV/1051302502568 Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 24 5 ATO and other materials 5.1 Update on professional practices review On 4 May 2018 the ATO published an update on their review of their professional practices guidelines. They state that they are consulting with interested parties over what should be done with the guidelines. In relation to people who have ordered their affairs in reliance on the now withdrawn guidance the ATO state: Those who have entered into arrangements before 14 December which comply with the guidelines and do not exhibit high risk factors can rely on those guidelines. Arrangements entered into prior to 14 December exhibiting any of the high risk factors may be subject to review. We encourage those who are uncertain about how the law applies to their existing circumstances to engage with us as soon as possible. High risk factors are said to ‘include’ related party financing and SMSFs. The ATO state that their concerns over arrangements they have seen include (it is not clear whether all of these factors are high risk factors):  Lack of any meaningful commercial purpose regarding arrangements including, but not limited to a. disposal of an equity interest through multiple assignments b. the creation of new discretionary entitlements such as Dividend Access Shares c. utilising amortisation leading to differences between tax and accounting income.  Disregard for CGT consequences and inappropriate use of CGT concessions.  Assignments where profit sharing is not directly proportionate to the equity interest held.  The creation of artificial debt deductions.  Undertaking an assignment to dispose of an equity interest to a self-managed super fund.  Assignments where the arrangement is not on all fours with the principles of Everett and Galland. COMMENT – part of the ATO focus is likely to disappear with Government removing the ability to access the small business CGT concessions when ‘Everett’ assignments occur on or after budget night 2018. w https://www.ato.gov.au/Business/Income-and-deductions-for-business/In-detail/Professional-firms/Assessingthe-risk--allocation-of-profits-within-professional-firms/ https://www.ato.gov.au/Business/Income-and-deductions-for-business/In-detail/Professional-firms/Everettassignments/ 5.2 Obligations of tax agents for claims not allowable In guidance last updated in March 2018 the ATO address two issues that often face practitioners – whether to include a claim that is clearly not allowable, and what to do if a client instructs you to include a false claim. On the first point the ATO state that ‘You must not knowingly include a claim in a tax return that is clearly not allowable.’ They mention sanctions that could be imposed by the TPB in relation to such conduct if you are a registered tax agent. Their example of a clearly non-allowable amount is: For example, you must not include a claim for total work-related expenses (other than car, meal allowance, award transport payments allowance and travel allowance expenses) that exceeds $300 if you have not reasonably ascertained that your client has kept evidence to prove the total amount. In relation to false claims they state: If your client instructs you to include a false claim, advise them of their responsibility to lodge a correct tax return and the possible consequences of not doing so. Also explain your responsibility as a professional registered tax agent. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 25 Try to persuade your client to exclude any false claims. If they insist on lodging a false tax return, neither you nor your staff should have anything further to do with the preparation of that tax return. w https://www.ato.gov.au/Tax-professionals/Your-practice/Tax-and-BAS-agents/Practice-administration/ 5.3 Electronic FBT employee declarations The ATO has published guidance on its website concerning electronic FBT declarations. Though FBT declarations received from employees do not have to be provided to the ATO, employers must retain the declarations as part of their business records. The ATO notes that employers can now receive and maintain FBT declarations electronically, as long as the declaration: 1. is signed by the employee using an electronic signature; 2. is provided using a secure system that clearly identifies the employee. A secure system can be one which requires a personal identification number, access code or password to use; and 3. indicates the employee’s approval of the information. w https://www.ato.gov.au/Newsroom/smallbusiness/Employers/Electronic-FBT-employee-declarations-make-- cents-/ 5.4 New set of industry benchmarks The ATO has released new industry benchmarks and a set of small business benchmarks. The small business benchmarks focuses on small businesses with a turnover range up to $15 million. The new benchmarks are based on:  tax returns and related schedules collected from individuals, partnerships, companies and trust from the 2015-2016 financial year; and  activity statements for the 2016-2017 financial year. For the first time, the ATO has combined together the data for all the entities into one set of benchmarks. COMMENT – as the ATO uses these benchmarks when selecting which taxpayers to review or audit, checking the performance of clients' businesses against the industry benchmarks is useful way of managing their audit risks. w https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/New-set-of-industry-benchmarks/ 5.5 Edited versions of private advice The ATO has announced changes to the publication of edited versions of written private advice (rulings). All existing edited versions of written private advice have now been moved to the ATO Legal database. Previously edited versions of written private advice were located on the register of private binding rulings. From mid-May 2018, the ATO have advised they will only publish new edited versions of private written advice. In addition, the ATO will: 1. archive edited versions of written private advice after four years; 2. remove edited versions of written private advice after fifteen years; and 3. highlight edited versions of written private advice scheduled for removal The ATO will decommission the register of private binding rulings in June 2018. Monthly tax training – May 2018 Brown Wright Stein Lawyers © 2018 page 26 w https://www.ato.gov.au/Tax-professionals/Newsroom/Your-practice/EVs-of-private-advice-moved-to-our-Legaldatabase 5.6 GST food and beverage search tool The ATO has introduced a new online search tool to enable taxpayers to search food and beverage products to determine whether they are taxable or GST-free. The GST food and beverage search tool lists products that the ATO has previously classified under the detailed food list. Previously, a taxpayer could locate the relevant product in the 88-page detailed food list ruling. The GST food and beverage search tool allows a taxpayer to type in a keyword for a product and lists whether the product is GST-free or taxable and the legislative basis for this determination. You can still use the GST food and beverage classification tool in the event the relevant product is not listed in the GST food and beverage search tool. w https://www.ato.gov.au/Calculators-and-tools/GST-food-and-beverage-search-tool/ 5.7 ATO 'Justified Trust' compliance approach The ATO has released publications on the 'Justified Trust' initiative affecting the top 100 public and multinational taxpayers. The Justified Trust initiative is based on a concept from the Organisation for Economic Cooperation and Development that seeks to build and maintain community confidence that taxpayers are paying the right amount of tax. The ATO adds that the main difference between other compliance approaches and the Justified Trust is the focus on tax governance with the Justified Trust approach. w https://www.ato.gov.au/Business/Large-business/Justified-trust/ 5.8 Foreign Account Tax Compliance Act (FATCA) reporting The ATO has published detailed guidance on its website concerning the requirements of FATCA reporting. Under the FATCA Agreement between Australia and the United States, non-exempt Australian financial institutions need to report to the ATO each year about certain financial accounts held with them by US tax persons. The FATCA reporting period is 1 January to 31 December. The report is due to be lodged by 31 July the following year (although it may be possible to apply for an extension of time). ATO Reference: Foreign Account Tax Compliance Act reporting (4 May 2018) w https://www.ato.gov.au/Business/Third-party-reporting/FATCA-Reporting/