Tax-related changes announced in 2016-17 MYEFO
The 2016-17 Mid-Year Economic and Fiscal Outlook (MYEFO) was released on 19 December 2016. Several new tax-related measures were announced including:
• Introducing a specific measure preventing the distribution of franking credits where a distribution declared by a company to its shareholders outside or additional to the company’s normal dividend cycle (a special dividend), to the extent it is funded directly or indirectly by capital raising activities which result in the issue of new equity interests. Examples of capital raising activities include an underwritten dividend reinvestment plan, a placement or an underwritten rights issue. This measure will apply to distributions made after 12:00pm (AEDT) on 19 December 2016. It is proposed to address the issues raised by the ATO in Taxpayer Alert TA 2015/2: Franked distributions funded by raising capital to release credits to shareholders.
• Increasing the value of the Commonwealth penalty unit from AUD180 to AUD210, with effect from 1 July 2017.
• Changing the way fringe benefits are treated for the calculation of several tax offsets from 1 July 2017 by modifying the meaning of ‘adjusted fringe benefits total’ so that the gross rather than the adjusted net value of reportable fringe benefits is used. ‘Adjusted fringe benefits total’ is used to calculate a taxpayer’s entitlement for the low income superannuation tax offset, the seniors and pensioners tax offset, the net medical expenses tax offset and the dependent (invalid and carer) tax offset and the amount of offset available. Fringe benefits received by individuals working for public benevolent institutions, health promotion charities and some hospitals and public ambulance services will not be affected by this change.
• From 1 July 2017, measures will allow the ATO to disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage these debts. This measure will initially only apply to businesses with Australian Business Numbers and tax debt of more than AUD 10,000 that is at least 90 days overdue.
Deductibility of expenditure on a commercial website
The ATO has issued Taxation Ruling TR 2016/3 which discusses the Commissioner of Taxation’s final view on the deductibility of expenditure on a commercial website.
The ruling applies existing income tax concepts of capital and revenue to characterise the different types of costs that may be involved in development and maintaining a website. The ruling provides PwC 13 TaxTalk Monthly February 2017 numerous examples to help illustrate the application of the principles expressed in the ruling and also to highlight some of the challenges involved in categorising website expenditure including website content, leased websites, microsites and modifications to an existing website. The ruling does not cover expenditure on computer hardware, cross-border issues where a business is carried on outside of Australia, when software is trading stock and the Research and Development concession.
Draft ruling on composite items and identifying depreciating assets
The ATO has released draft taxation ruling TR 2017/D1 dealing with the treatment of composite items for the purposes of working out capital allowance deductions on depreicating assets. The draft Ruling sets out the Commissioner's views on:
• determining whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets for the purposes of Division 40
• whether an 'interest in an underlying asset' for the purposes of section 40-35 of the ITAA 1997 requires an entity to have an interest in all or any parts of a depreciating asset.
According to the draft ruling, a composite item will be considered a depreciating asset if the component is capable of being separately identified or recognised as having commercial and economic value. The draft ruling provides guiding principles which are taken into account as part of the functionality test to determine whether a component of a composite item can be separately identified as a depreciating asset.
The draft ruling also considers whether modifications or alterations of an existing asset can itself be treated as a separate depreciating asset and also discusses whether intangible depreciating assets and jointly held tangible assets are capable of being recognised as separate depreciating assets.
The draft ruling replaces Taxation Determination TD 2002/5 (now withdrawn) which explained what is considered to be a ‘distribution line’ in the electricity distribution industry for depreciation purposes. Arrangements covered by TD 2002/5 are now covered in the new ruling. Comments on the draft ruling can be made until 17 February 2017.
Draft taxation ruling on earnout arrangements withdrawn
The long outstanding draft tax ruling (TR 2007/D10) which deals with the capital gains tax (CGT) consequences of earnout arrangements has been withdrawn. The ATO indicates that this draft ruling was withdrawn because most earnout arrangements created on or after 24 April 2015 will qualify for look-through treatment under new Subdivision 118-I of the Income Tax Assessment Act 1997 (ITAA 1997). In other cases, taxpayers can still rely on TR 2007/D10 for earnout arrangements created on or before 7 December 2016, being the date of withdrawal of the draft ruling. The withdrawal notice also confirms that there has been no change to the Commissioner's view on the CGT consequences for earnout arrangements that do not satisfy the requirements for look-through treatment under Subdivision 118-I of the ITAA 1997.
ATO issues guidance on foreign trusts and capital gains
The ATO has issued the following draft taxation determinations dealing with foreign trusts and the interaction with the capital gains tax (CGT) rules:
• Draft Taxation Determination TD 2016/D4 sets out the ATO’s preliminary view that the residency assumption in section 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply for the purposes of section 855-10 of ITAA 1997 which disregards certain capital gains of a foreign trust.
Accordingly, in calculating the net income of a foreign trust under section 95(1) of the ITAA 1936, a capital gain or capital loss which happens in relation to an asset that is not 'Taxable Australian Property' is disregarded in accordance with s855-10 of the ITAA 1997. However, if an amount attributable to the gain is paid or applied for the benefit of a resident beneficiary of the foreign trust, the amount may be included in the beneficiary’s assessable income under section 99B of the ITAA 1936.
The draft taxation determination rejects an alternative view that section 855-10 of the ITAA 1997 only applies to disregard the amount of a capital gain or capital loss from non-taxable Australian property that is reflected in the amount of net income that otherwise falls to be assessed to a trustee of a foreign trust under section 115-222 of the ITAA 1997. Comments can be made until 3 March 2017. PwC 14 TaxTalk Monthly February 2017
• Draft Taxation Determination TD 2016/D5 provides the Commissioner’s preliminary view that where an amount included in a beneficiary’s assessable income under section 99B(1) of the ITAA 1936 had its origins in a capital gain from non-Taxable Australian Property assets of a foreign trust, the beneficiary cannot offset capital losses or access the CGT discount in relation to the amount.
The Commissioner has supported this view by referring to paragraphs 99B(2)(a) and (b) of the ITAA 1936 which make reference to a ‘hypothetical taxpayer’ who is a resident but which do not specify the characteristics of that taxpayer including whether an entity would be eligible for the CGT discount.
The draft determination does recognise alternative views regarding the hypothetical taxpayer test and whether it can be assumed that the other characteristics of the taxpayer can be taken into account. Comments can be made until 3 March 2017.
When both Determinations are finalised, it is proposed that they will apply both before and after its date of issue.
Black Economy Taskforce established
On 14 December 2016 the Minister for Revenue and Financial Services announced the establishment of a taskforce to crackdown on the black economy. The Taskforce, to be chaired by the former chair of the B20 anti-corruption taskforce, Mr Michael Andrew AO, will consider measures that have been employed overseas and will seek to identify policy responses which take advantage of emerging technology. The Taskforce will also consider ways to change community attitudes about the black economy and will look at both positive incentives as well as sanctions. An interim report will be provided to the Government in March 2017 and a final report will be provided by October 2017. Submissions to the Black Economy Taskforce can be made until 17 February 2017.
ATO data matching program – Ride sourcing
The ATO’s latest data matching program will acquire data to identify individuals that may be engaged in providing ride sourcing services during the 2016/17 and 2017/18 financial years. Details of all payments made to ride sourcing providers (ie a driver) from accounts held by a ride sourcing facilitator will be requested from a financial institution.
IGOT review of Taxpayers' Charter and Taxpayer protections
The Inspector General of Taxation (IGOT) released his report in relation to the review of the Taxpayers’ Charter and taxpayer protections. The review, which examined concerns raised by stakeholders regarding the ATO’s adherence to the Charter, its currency and effectiveness, made a number of recommendations including:
• education for taxpayers, tax practitioners and ATO staff about the Charter and increased awareness of the availability of compensation for defective administration
• increased guidance on the Model Litigant Obligation (MLO) and improve investigations of alleged MLO breaches to address perceptions of bias and lack of independence.
The IGOT has also examined an emerging area of concern in relation to the ATO’s exchange of taxpayer information with foreign revenue authorities and recommended that the ATO increase public guidance on its approach particularly with respect to data security, notification to taxpayers where their information is being exchanged and opportunities for them to consider that information.
The ATO has either agreed in full, in part or in principle to the recommendations however as noted in the report, the ATO’s level of agreement and their accompanying commentary create a level of uncertainty as to how and to what extent the recommendations would be implemented.
New Parliamentary inquiries
The following new Parliamentary inquiries have been recently established:
• The House Standing Committee on Tax and Revenue has commenced an inquiry into taxpayer engagement, with a particular focus on how individuals and small businesses interact with the tax and superannuation system. As part of this inquiry, the Committee will examine the prevalence and impact of the ‘cash economy’ on the tax system; the contemporary use of information and communication technology by the ATO and comparative tax administrators to deliver services; and behavioural insights from other service delivery agencies including possible ways to better inform taxpayers to help them PwC 15 TaxTalk Monthly February 2017 make decisions in their best interests. Submission to the inquiry can be made until 9 February 2017.
• The House Standing Committee on Economics will recommence its previous inquiry on tax deductibility. This inquiry was formed to examine some options to simplify the personal and company income tax system, with a particular focus on options to broaden the base of these taxes in order to fund reductions in marginal rates. Matters to be examined include the personal tax system as it applies to individual non-business income, with particular reference to the deductibility of expenditure of individuals in earning assessable income; and the company income tax system, with particular reference to the deductibility of interest incurred by businesses in deriving business income.
• The Senate Economic Committee will inquire into the non-payment of superannuation guarantee. This inquiry was formed to examine the impact of non-payment of the Superannuation Guarantee (SG). The Inquiry has a broad focus but will make particular reference to the economic impact of non-payment of SG, the accuracy and adequacy of data collected and the role and effectiveness of the ATO in the monitoring, investigation and recovery of unpaid SG. Submissions can be made to the inquiry by 17 February 2017. The Committee is due to report by 22 March 2017.
Annual threshold for accessing the small business CGT concessions
The Federal Court of Australia in Doutch v Commissioner of Taxation  FCAFC 166 has dismissed the taxpayer’s appeal and upheld the decision of the Administrative Appeals Tribunal that receipts in respect of fuel disbursements were ordinary income that the entity derived “in the ordinary course of carrying on a business”. This meant that the taxpayer's aggregated turnover (s328-120 of the ITAA 1997) exceeded the AUD 2,000,000 annual threshold and the taxpayer did not meet the requirements for the small business Capital Gains Tax concessions.
Wine Equalisation Tax Reforms
On 2 December 2016 the Government announced reforms to the Wine Equalisation Tax Rebate, including changes to the eligibility criteria for the Rebate scheme that will apply from 1 July 2018. In addition, the Rebate cap will be reduced from $500,000 to $350,000 effective from 1 July 2018, which is a year later, and a higher cap, than announced in the 2016-17 Federal Budget. A further $100,000 per annum will be made available to producers who exceed the Rebate cap through a new Wine Tourism and Cellar Door grant.
Launch of ATO Public advice and guidance digital community
The ATO has recently launched the Public advice and guidance digital community on its Let's Talk website. This is a new way for the ATO to engage with the community to understand the issues that are important to taxpayers and to help the ATO better target its advice and guidance. The ATO is currently seeking feedback on ATO guidance on the Investment Manager Regime and on its current tax ruling (TR 93/30) dealing with Home Office Expenses.