Federal Budget 2024–25: Changes to foreign resident CGT scope

Written by: Letty Chen | Senior Tax Writer

The Budget announcement

In the 2024–25 Federal Budget, the Government announced that it will make changes to the foreign resident CGT regime to  ‘strengthen’ it and provide greater certainty about the operation of the rules. The proposed amendments will apply to CGT events happening on or after 1 July 2025.

The proposed amendments will:

  • clarify and broaden the types of assets that foreign residents are subject to CGT on
  • amend the point‑in‑time principal asset test to a 365‑day testing period
  • require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.

The Government has not released technical details of these propose changes, although the Budget papers indicate the intentions of the amendments:

The measure will ensure that Australia can tax foreign residents on direct and indirect sales of assets with a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents. The new ATO notification process will improve oversight and compliance with the foreign resident CGT withholding rules, where a vendor self‑assesses their sale is not taxable real property.

These reforms will also improve certainty for foreign investors by aligning Australia’s tax law for foreign resident capital gains more closely with OECD standards and international best practice.

This article will look at the current rules and where the changes may potentially be implemented.

The foreign resident CGT regime

Taxable Australian property

Australian residents are subject to CGT on all of their CGT assets worldwide unless an exception applies to the asset. Foreign and temporary residents are subject to CGT only on five prescribed categories of CGT assets, which all have some connection to Australia — known as ‘taxable Australian property’ (TAP). More accurately, Div 855 of the ITAA 1997 does not impose a positive taxation obligation in relation to TAP, but rather, the provisions allow the taxpayer to disregard a capital gain or capital loss if the CGT asset is not TAP.

TAP includes:

  • taxable Australian real property (TARP), defined as
    • real property situated in Australia — such as a house, apartment, commercial building or land — and includes a lease of land in Australia; or
    • a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.
  • an indirect interest in Australian real property (see below)
  • a CGT asset that the taxpayer has used to carry on a business through a permanent establishment in Australia
  • an option or right over one of the above
  • a CGT asset in respect of which an individual taxpayer had chosen to disregard a capital gain or capital loss upon ceasing residency
    • CGT event I1 happens to all of an individual’s CGT assets when they cease residency, except an asset which is TAP or in respect of which the individual chooses to disregard the capital gain or capital loss until they dispose of it or they resume residency.

It appears the Government intends to broaden the types of assets which are TAP. This may take the form of adding one or more new categories, and/or an existing category may be expanded — for example it may be possible that the indirect interest in Australian real property tests are relaxed such that more interests involving land which do not satisfy the current tests (see below) will be treated as TAP. It is clear from the Budget papers that the focus of a potential redefinition of TAP will be direct and indirect interests in Australian land (i.e. not merely shares in Australian companies which do not have Australian real property holdings).

note iconNote: The TAP rules came into effect on 12 December 2006. Previously, foreign residents were subject to CGT on a wider range of CGT assets — which had the ‘necessary connection’ with Australia, including real property and shares or units in Australian entities (with exceptions). Perhaps the Government intends to cast the CGT net back to some or all of the range of assets captured under the former ‘necessary connection’ concept.

An indirect interest in Australian real property

A taxpayer has an indirect interest in Australian real property if:

  • the taxpayer and their associates together own 10 per cent or more of another entity (which may or may not be an Australian resident) — the ‘non-portfolio interest test’
  • the market value of the assets of that entity is mainly attributable to Australian real property — the ‘principal asset test’.

The non-portfolio interest test

A taxpayer’s membership interest in the entity will be an indirect Australian real property interest at a particular time only if it passes the non-portfolio interest test either:

  • at that time; or
  • throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time.

An interest will pass the test at a time if the sum of the ‘direct participation interests’  held by the taxpayer and its associates in the entity at that time is 10 per cent or more.

The taxpayer’s direct participation interest in an entity essentially reflects the taxpayer’s direct control interest in the entity, which is broadly:

  • for a company or partnership — the greater of the percentage entitlement to the share capital, or voting rights, or distributions of capital or profits
  • for a trust — the greater of the percentage entitlement to trust income or trust capital.

While the Budget announcement does not specifically refer to an intention to alter the non-portfolio interest test, it may nevertheless be possible that the Government amends it in the broader aim of capturing more indirect interests in Australian land by, for example, extending the 12 month period or lowering the 10 per cent threshold.

The principal asset test

A taxpayer’s membership interest in the entity will be an indirect Australian real property interest at a particular time only if it passes the principal asset test at that time.

The test is passed if the sum of the market value of the entity’s assets that are TARP exceeds the sum of the market value of the entity’s assets that are not TARP.

The Budget papers clearly indicate the Government’s intention that the relative market values of the entity’s TARP and non-TARP assets — and whether the entity’s underlying value is principally derived from Australian real property — will be tested over a 365-day period rather than only at the time of the CGT event (the sale or transfer of the membership interest). This may mitigate the potential to manipulate asset holdings just before a sale of the interests or the unintended effects of market fluctuations.

Foreign resident reporting

At present the only targeted reporting regime for foreign residents selling TAP (other than the usual income tax return disclosures pertaining to all CGT events for all taxpayers) is the foreign resident CGT withholding obligation — imposed on the purchaser and not the foreign resident vendor — which applies to disposals of:

  • TARP with a market value of $750,000 or more (proposed to reduce to $0 from 1 January 2025)
  • indirect Australian real property interests
  • options or rights to acquire any of the above.

The current withholding rate is 12.5 per cent of the first element of cost base in the purchaser’s hands — generally the purchase price (proposed to increase to 15 per cent from 1 January 2025). The purchaser is obliged to remit the withheld amount to the ATO and the vendor may claim it as a credit against their tax liability when they lodge their tax return disclosing the disposal of the asset.

There are circumstances in which the withholding obligation will not apply. Relevant to this Budget announcement, the foreign resident vendor may provide the purchaser with a declaration confirming that the membership interests they are disposing of are not indirect Australian real property interests.

The Budget announcement indicates that the Government will implement a new reporting regime for foreign residents disposing of shares and other membership interests exceeding $20 million in value. Prospective vendors will be required to notify the ATO prior to the transaction being executed. While the Budget papers are silent as to potential details, it is very likely that reportable membership interests will need to be indirect Australian real property interests given that the Budget papers note that the purpose of the proposed obligation is to improve compliance with the foreign resident CGT withholding rules. The ATO would then be able to data match the pre-sale notification with withholding amounts remitted. Given the $20 million threshold, the notification obligation is clearly not intended to affect the vendors of interests in many small businesses.

2024-25 Budget infographic

Federal Budget Aag 2024 25

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Federal Budget 2024-25: $20,000 instant asset write-off extended to 30 June 2025

Written by: Letty Chen | Senior Tax Writer

The Budget announcement

In its 2024–25 Federal Budget handed down on 14 May 2024, the Government announced that it will extend the $20,000 instant asset write-off threshold for one year until 30 June 2025.

While the measure is described as an ‘extension’, it is worth noting that – as at 17 May – the currently legislated threshold for 1 July 2023 to 30 June 2024 is $1,000! The Government has previously proposed a $20,000 threshold for 2023–24 which it intends to enact.

The current position

What is the instant asset write-off for small businesses? The provisions in Subdiv 328-D of the ITAA 1997 allow an eligible small business entity (SBE) taxpayer (annual turnover of less than $10 million) to bring forward 100 per cent of the depreciation deduction of the cost of an eligible asset to the current income year rather than writing it off over multiple years.

The standard and legislated threshold is $1,000 — that is, eligible assets with a cost of less than $1,000 may be fully depreciated in the year in which the taxpayer starts to use the asset, or have it installed ready for use, for a taxable purpose.

To encourage business investment and spending, since 2015 the Government has progressively and temporarily increased the threshold to various higher thresholds, cumulating in an ‘uncapped’ measure (i.e. all eligible assets regardless of cost could be immediately written off) from 6 October 2020 to 30 June 2023. Between 2 April 2019 and 30 June 2023, medium sized entities (turnover $10 million to less than $50 million) and large businesses (turnover $50 million to less than $500 million) also had access to some form of an instant asset write-off at thresholds of $30,000, $150,000 or uncapped at various times (legislated outside of the Subdiv 328-D small business rules).

All of these temporary expansions to the write-off ended on 30 June 2023. From 1 July 2023, the threshold for SBEs reverted to $1,000. Medium and large businesses no longer had access to an immediate deduction. At time of writing this is the current status as legislated.

In last year’s Federal Budget, the Government announced that it would temporarily increase the threshold to $20,000 (from $1,000) from 1 July 2023 to 30 June 2024.

Legislation to give effect to this change has not passed Parliament. Indeed, on 27 March the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 was amended by the Senate to increase the $20,000 threshold to $30,000 and to extend the measure to medium entities with turnover of $10 million to less than $50 million, and returned to the House of Representatives for consideration. On the morning after the Budget, 15 May, the House disagreed to the Senate amendments and the Bill — with the original $20,000 threshold — was returned to the Senate. The next day,16 May, the Senate rejected the Bill again and insisted on its proposed amendments.

So, in summary:

  • the currently legislated instant asset write-off position is: uncapped for 2022–23 and $1,000 threshold from 1 July 2023
  • the Government’s proposals: $20,000 threshold from 1 July 2023 to 30 June 2025 (no extension to medium sized businesses) and revert to $1,000 from 1 July 2025
  • the Senate’s proposed amendments: $30,000 threshold and extension to medium sized businesses from 1 July 2023 to 30 June 2024. No indication as to whether it would support the Government’s $20,000 proposed threshold from 1 July 2024 to 30 June 2025.

This current state of play creates uncertainty for businesses planning the timing of their capital expenditures in the lead-up to 30 June 2024.

note iconNote:
The House of Representatives will return on 28 to 30 May. There are more sitting days for both Houses of Parliament in June. This article will be updated for any legislative developments since the time of writing.

Implications of a $20,000 threshold 1 July 2023 to 30 June 2025

Assume that Parliament enacts the Government’s proposals of a temporary $20,000 threshold for both 2023–24 and 2024–25 — that is, the instant asset write-off threshold is uncapped for 2022–23, then $20,000 for 2023–24 and 2024–25, then reverts to $1,000 from 2025–26.

note iconNote:
If a $30,000 threshold is legislated for 2023–24 and $20,000 for 2024–25, the below analysis still stands except for the higher threshold for the current year. If the extension to medium sized entities is also enacted, then based on previous similar temporary extensions, most likely it will take the form of a modification of the general capital allowances rules in Div 40 of the ITAA 1997.

Immediate deduction

An SBE will be able to deduct the taxable purpose proportion of the cost of the asset in 2023–24 or 2024–25 if:

  • it is the year in which the SBE starts to use the asset, or has it installed ready for use, for a taxable purpose — this is not necessarily the same year in which the SBE started to hold the asset
  • the taxpayer is an SBE for that year and the year in which it started to hold the asset
  • the cost of the asset at the end of the income year is less than $20,000 — this looks at the total cost and not the taxable purpose portion of the cost.

If the SBE holds the asset by 30 June 2025 but has not yet started to use the asset, or have it installed ready for use, for a taxable purpose by that date, it will not have access to the $20,000 threshold. Similarly, if the taxpayer was not an SBE in the year it started to hold the asset but becomes an SBE when it begins to use the asset, it will not be eligible for the immediate deduction.

An immediate deduction will also be available for the second element of the cost — of less than $20,000 — for an asset where the first element of the cost has been immediately written off.

Temporary suspension of lock-out rule

The lock-out rule applies to SBEs that are eligible for but choose to opt out of Subdiv 328-D. under the default arrangements, the taxpayer cannot again apply the provisions for a period of five income years after the first later year in which the taxpayer could have made the choice.

However, under transitional rules enacted with the temproary threshold increases, SBEs are currently not required to apply the lock-out rule to income years that end on or after 12 May 2015 but on or before 30 June 2023. Assuming the Government’s proposals are enacted, the lock-out rule should be deferred for a further two years until 30 June 2025.

SBEs will be able to opt back into applying Subdiv 328-D to access the threshold during the 2014–15 through to the 2024–25 income years. The lock-out rule will start to apply again from the first income year that ends after 30 June 2025, i.e. from 2025–26.

The lock-out rule will not prevent a taxpayer from opting back into the rules in 2021–22 to 2024–25 if they previously opted out within the last five years.

2022 Icons (1)Implications
A choice not to use the small business capital allowance rules in the 2024–25 income year will lock them out of the rules until the 2029–30 income year. Accordingly, careful consideration should be given to any choice made in the 2024–25 income year.

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Federal Budget Aag 2024 25

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Federal Budget 2024–25 — promise of cost of living relief

On 14 May 2024, the Treasurer, Jim Chalmers, will deliver his third Federal Budget for the Albanese Government. The first two Federal Budgets focused primarily on relief and repair to manage inflation. The Treasurer has promised that the upcoming Budget:

… will take a responsible, sensible and a balanced approach. The primary focus in the Budget is on inflation in the near term and then growth in the medium term. It will be an inflation‑fighting and future‑making budget. It will be a budget suited to the cross currents and the conditions that we confront.

There will be cost‑of‑living help for people doing it tough. For businesses, there will be key investments in a Future Made in Australia.

Economic landscape

The past few years have seen the devastation of floods and bushfires, once-in-a-century global pandemic, followed by the most significant international energy crisis in 50 years. The combined impact of these events resulted in economic consequences on supply chains, energy prices, inflation and interest rates. On a global front, Australia is continuing to face ongoing uncertainty from persistent inflation in North America, growth slowing in China and other major economies, the UK and Japan both finishing the year in recession and the persistent tensions in the Middle East and Eastern Europe.

Inflation is moderating but still high compared to the target range of 2 to 3 per cent required by monetary policy. The CPI rose 3.6 per cent to the March 2024 quarter. Annual CPI inflation was down from 4.1 per cent in the previous quarter and has fallen from the peak of 7.8 per cent in December 2022.

According to the ABS, the Governments cost of living policies directly took pressure off inflation. The Energy Bill Relief Fund offset the electricity prices rises, Commonwealth Rent Assistance reduced the impact of rent rises and Childcare subsidy reduced the cost of childcare. The surplus in the 2023-24 Federal Budget, the first in 15 years, took some pressure off inflation. The Treasurer has stated that the Budget will focus on easing cost of living pressures, not add to them.

To help Australians with the cost of living, the Government has already legislated tax cuts for all 13.6 million Australian taxpayers from 1 July 2024.

Challenges for businesses

Australian retail turnover fell in March 2024, indicating consumers are spending less as cost of living pressures remain high. High interest rates are placing cashflow strains on businesses who are servicing debt. Supply chains disruptions are leading to lost sales or higher expenses. The shift from information technology to artificial intelligence is necessitating business to embrace technology. Labour and skills shortage is resulting in employers incurring greater costs to hold onto employees or to upskill them.

Government is supporting businesses in the form of the National Skills Agreement to ensure businesses have access to a skilled workforce, the Australian Cyber Security Strategy to assist businesses to work smarter and safer online, Industry Grow Program to support innovation and growth and small business energy incentive to assist with the energy transition.

The Prime Minister’s vision for a Future Made in Australia involves rebuilding the manufacturing sector with investment in clean energy.

Pre-Budget announcements … what we already know

On the tax front, there have not been any pre-Budget announcements or ‘leaks’ other than the Treasurer noting that there will be tax measures to incentivise investment that is in line with the Government’s Future Made in Australia economic objectives. He also flagged other tax changes but there is no detail about what those might be.

Currently before Parliament are temporary changes to the instant asset write-off currently before Parliament — that is, an increase to the threshold from $1,000 to $30,000 and the extension of the measure to businesses with annual aggregated turnover of less than $50 million. These changes, if passed, will only be in place for 2023–24. The industry is waiting for Tuesday night to see if the Government will make these changes permanent.

Apart from the Future Made in Australia plan, other economic measures which have already been announced include:

  • reforms to strengthen Australia foreign investment framework — introducing a risk-based approach to review foreign investment proposals, to ensure they are not contrary to the national interest
  • reducing compliance costs for businesses — abolish hundreds of nuisance tariffs; clarify and improve the regulatory approvals process; provide some direction and certainty in the financial sector; and work towards a better way of assessing mergers and acquisitions
  • cap HELP indexation rate at the lower of either the Consumer Price Index or the Wage Price Index with effect from 1 June 2023
  • Commonwealth Prac Payment — to support students undertaking mandatory workplace placements required for university and vocational education and training qualifications
  • incentivise Australians to train in areas the economy needs them most, with $88.8 million for 20,000 additional Fee‑Free TAFE training places to increase the pipeline of workers for construction and housing.

Recent tax and superannuation changes and announcements … state of play

This is a good time to take stock of the status of measures which were announced at or since last year’s Federal Budget.

For a more comprehensive summary of legislative developments during 2023 refer to this Banter Blog article.

Tax measures recently implemented or announced

Significant tax policy decisions which have been made since the 2023–24 Federal Budget include the following:

  • individual tax cuts to help with the cost of living (legislated)
  • changes to fees for foreign investors (legislated)
  • denying deductions for ATO interest charges (proposed)
  • modernising the luxury car tax for fuel-efficient vehicles (proposed).

Key tax policy decisions that were previously announced and are now law include:

  • the digital games tax offset
  • skills and training boost
  • technology investment boost
  • cash flow relief for small and medium businesses by reducing the GDP adjustment factor for working out PAYG and GST instalments
  • improving integrity in relation to off-market share buy-backs and franked distributions funded by capital raisings
  • tax transparency for multinationals — disclosure of information of subsidiaries and amendments to the thin capitalisation rules.

Previously announced tax policy decisions that are still before Parliament include proposals to:

  • increase the instant asset write-off threshold from $1,000 to $30,000 for small and medium businesses entities and to extend the measure to medium entities with turnover of less than $50 million
  • provide small and medium businesses with access to a bonus deduction equal to 20 per cent of the cost of eligible assets or improvements to existing assets that support electrification or more efficient energy use
  • implement a petroleum resource rent tax deductions cap
  • abolish the Administrative Appeals Tribunal and establish the Administrative Review Tribunal
  • strengthen the integrity of the tax system, increasing the power of regulators and strengthening regulatory arrangements.

The Government has announced it would not proceed with the Modernising the Business Register Program.

Tax policies that are in the consultation phase include:

  • international tax — country-by-country reporting and global and domestic minimum tax
  • investment in housing — build-to-rent tax concessions
  • exempting lump sums payments in arrears from the Medicare levy
  • strengthening the integrity of the tax system — tax regulator information gathering powers review and regulation of accounting, auditing and consulting firms in Australia.

Superannuation measures recently announced

Key superannuation policy decisions which have been taken since the 2023–24 Budget include the following proposals:

  • deduction of adviser fees from superannuation — increase accessibility and affordability of personal financial advice
  • victims’ and survivors’ access to offenders’ superannuation
  • superannuation payments on government Paid Parental Leave from 1 July 2025.

Previously announced superannuation policy decisions which are not yet law include proposals to:

  • reduce the tax concessions available to individuals with total superannuation balances exceeding $3 million
  • restrict the operation of the non-arm’s length expense rules for complying superannuation entities
  • legislate the objective of superannuation.

Consultation has been undertaken for payday superannuation and amendments to the transfer balance credit provisions for successor fund transfers.

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TPB’s draft guidance on new breach reporting obligations

The Tax Practitioners Board (TPB) has released long-awaited draft guidance on the new breach reporting obligations due to commence 1 July 2024 setting out its preliminary views on key aspects of the rules and its proposed compliance approach.

The new rules

The Treasury Laws Amendment (2023 Measures No. 1) Act 2023 introduced significant changes to the Tax Agent Services Act 2009 (TASA) in relation to the regulation of tax agents.

Amongst other things, the Act imposes new mandatory notification requirements — from 1 July 2024 — for a registered agent who has committed a significant breach of the Code of Professional Conduct (the Code) or who becomes aware of a significant breach of the Code committed by another registered agent.

A registered agent will be required to:

  • provide written notification to all of their current clients about the findings of the Board’s investigation
  • report to the Board where the registered agent has reasonable grounds to believe that they have breached the Code, and the breach is a significant breach
  • notify the Board, in writing, if they have reasonable grounds to believe that another registered agent has breached the Code, and the breach is a significant breach
    • if the registered agent is aware that the other agent is a member of a professional association accredited by the Board, the agent must also notify the professional association of the breach.

The TPB’s package of draft guidance materials comprise an exposure draft information sheet (the draft Information Sheet), a summary document and a high-level decision tree. These documents explain the TPB’s preliminary views in relation to:

  • the additional breach reporting obligations, supported by practical case studies
  • when the obligations apply
  • what constitutes a significant breach
  • the timeframe for reporting a significant breach
  • what happens if a significant breach is not reported.

This article summarises the TPB’s preliminary views in relation to the application of the law. Refer to this previous Banter Blog article for a general overview of the breach reporting legislation and to the package of TPB draft materials for detailed commentary supporting its views.

While the legislation refers to registered tax (and BAS) agents, the draft guidance generally refers to registered tax (and BAS) practitioners. In this article the terms agents and practitioners are used interchangeably and refer to both registered tax and BAS agents.

Legislative references are to the Tax Agent Services Act 2009 (TASA) and the Tax Agent Services Regulations 2022 (TASR).

Comments and Submissions
1Address: Tax Practitioners Board, GPO Box 1620, Sydney NSW 2001
2Email: tpbsubmissions@tpb.gov.au
3Due date: 28 May 2024

The decision tree

Decision Tree

Key points — TPB draft guidance

Given the amount of material in this article and in the TPB’s draft guidance package, here is a short summary of the key points to note.

Test Doc 1
Test Doc 2

What is a ‘significant breach’ of the Code?

The law defines a significant breach of the Code as a breach which:

  • constitutes an indictable offence, or an offence involving dishonesty, under an Australian law
  • results, or is likely to result, in material loss or damage to another entity (including the Commonwealth)
  • is otherwise significant, including taking into account any of the following:
    • the number or frequency of similar breaches by the agent
    • the impact of the breach on the agent’s ability to provide tax agent services
    • the extent to which the breach indicates that the agent’s arrangements to ensure compliance with the Code are inadequate, or
    • is of a kind prescribed by regulations.

2022 Icons (4)Important
Determining if a breach of the Code is a ‘significant breach of the Code’ must be decided on a case-by-case basis, having regard to the particular facts and circumstances.

The TPB states that the breach reporting obligations do not make a distinction between ‘actual’ or ‘alleged’ breaches. However, registered tax practitioners must have reasonable grounds to believe there has been a significant breach. They do not need to have conclusive proof, but they must have a solid foundation or basis for their belief, supported by appropriate facts and evidence.

If a breach is covered by more than one arm of the definition, a tax practitioner only needs to report the breach to the TPB and the relevant professional body (where relevant) once.

Indictable offences and dishonesty

Breach 1

Offences may include, but are not limited to, those involving fraud (including social security and tax fraud), theft/stealing, money laundering, bribery and corruption, embezzlement, dealing with proceeds of crime, dishonest use of position, knowingly making false or misleading statements, cyber-crimes and unlawfully obtaining or disclosing information.

‘Indictable offence’ is not defined in the TASA or TASR. As such, the term is given the meaning provided by the relevant criminal law of the Commonwealth, State or Territory law that applies to the offence. Whether an offence is an ‘indictable offence’ will therefore vary according to the jurisdiction. Generally speaking, indictable offences are the more serious criminal offences heard in a higher court, such as the District or Supreme Court, and may require a trial by judge and jury.

The TPB considers that the meaning and scope of the term ‘dishonest’ is determined by reference to its ordinary meaning and community standards, subject to any express definition that applies in the criminal law relevant to the offence. The conduct giving rise to the offence must include an element of ‘dishonest’ conduct.

Material loss or damage to another entity

Breach 2

The TPB considers that ‘loss or damage’ captures any detriment, disadvantage, injury, harm or cost to another entity resulting, or likely to result, from the breach, provided it is considered ‘material’. It covers both financial and non-financial ‘loss or damage’.

For example, it may include a financial loss to a client, damage caused to the reputation of a client or the Commonwealth, a loss of privacy, breach of confidential information, or unauthorised disclosure of a client’s identity, and loss or damage in the form of adverse impacts on the health and wellbeing of clients as the result of a tax practitioner’s conduct.

In relation to materiality, a registered tax practitioner may also not be aware of, or in a position to appreciate, the exact nature and scope of the loss or damage, including how and to what extent it has impacted the other entity. The TPB considers that loss or damage will be ‘material’ if a reasonable person, having the knowledge, skill and experience of a registered tax practitioner, would expect it to be of substantial import, effect or consequence to the other entity.

The TPB considers that a breach will ‘result’ in material loss or damage to another entity, if there is a sufficient connection or relationship between the breach and the loss or damage, such that it can be said that the loss or damage is a consequence, outcome or effect of the breach. For a breach to be ‘likely’ to result in material loss or damage, the loss or damage needs to be a probable consequence, outcome, or effect of the breach, not just a mere possibility. If a reasonable person, having the knowledge, skill and experience of a registered tax practitioner, would expect the loss or damage to result from the breach in the sense of it being a real and not remote possibility, this will be sufficient.

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Otherwise significant

Breach Dot Points

The TPB considers a breach of the Code to be ‘otherwise significant’ if the practitioner considers it is still sufficiently important, serious or material for it to be reported, taking into account the particular circumstances, notwithstanding the fact it is not covered by indictable offence or material loss or damage provisions. This will be the case if the breach (or potential breach) reflects, or is capable of reflecting, on a tax practitioner’s fitness and proprietary for registration, and their conduct more broadly as a registered tax practitioner in providing tax agent and BAS services to a competent standard.

The number and frequency of similar breaches

The greater the number or frequency of similar breaches, the more likely it may be that the breach is significant. Even if a breach, when considered by itself, is minor in nature, it may still be ‘significant’ when considered against the background of other similar breaches.

The impact of the breach on the tax practitioner’s ability to provide tax agent or BAS services

If a registered tax practitioner considers the breach will or may negatively impact their, or another tax practitioner’s, ability or capacity to provide the tax agent or BAS services covered by their registration, this may indicate that the breach is ‘significant’.

The extent to which the breach indicates that the tax practitioner’s arrangements to ensure compliance with the Code are inadequate

If the nature of the breach itself, or the circumstances surrounding the breach, indicates that there are broader systematic issues with the arrangements that a tax practitioner has in place to ensure compliance with the Code, it is more likely that the breach will be ‘significant’.

note iconNote
Registered practitioners are not limited to the above factors. They can take into account any factor they consider relevant, which may include the:

        • nature and scale of the tax practitioner’s business
        • number of clients involved
        • complexity of the arrangements
        • loss or potential financial or non-financial loss to clients
        • vulnerability of affected clients
        • impacts and harm on the tax system more broadly.

The conduct of another registered agent

The TPB recognises that establishing whether a breach is ‘significant’ in relation to the conduct of another registered tax practitioner may be more difficult. However, provided there are ‘reasonable grounds’ to conclude that the breach is ‘significant’, and they can substantiate their reasoning, this will be sufficient.

For example, a registered tax practitioner may be operating in a small firm and have knowledge or reasonable grounds to make that conclusion about the professional conduct of their partner. In another circumstance, a registered tax practitioner may be apprised of another tax practitioner’s misconduct by virtue of a review or report, including via an audit, an internal review, or a ‘due diligence’ analysis associated with the purchase or sale of a business.

The TPB encourages registered practitioners to report in ‘finely balance circumstances’ or where they are undecided as to whether a breach is otherwise significant but have reasonable grounds for suspecting it may be.

Breaches prescribed by the TASR

Currently there are no breaches prescribed in the TASR as being ‘significant breaches’.

What does ‘reasonable grounds to believe’ mean?

A registered tax practitioner must have ‘reasonable grounds to believe’ that they or another registered tax practitioner has breached the Code and that the breach is a significant breach.

In the TPB’s view it is clear that the phrase ‘reasonable grounds to believe’ requires the registered tax practitioner to have a sound foundation or basis in the circumstances on which to credit or form their belief that they, or another tax practitioner, has breached the Code and that breach is ‘significant’.

Further, it is established in case law that when legislation uses the term ‘reasonable grounds’ to describe a basis for a state of mind, for example, in forming a belief about a matter, there needs to be an existence of facts which are sufficient to induce that state of mind in a reasonable person.[ Whether a person has reasonable grounds for a belief is an objective test and it is irrelevant whether the person subjectively believes they have reasonable grounds. A ‘reasonable belief’ is generally considered to infer a higher threshold than a ‘reasonable suspicion’.

The foundation or basis for the belief does not need to be established to a high evidentiary standard. There does not have to be conclusive proof. It is sufficient if a reasonable person, possessing the required knowledge, skill and experience of a registered tax practitioner would, when objectively considered, form the belief on the same grounds in the same circumstances.

Generally, the TPB would expect registered tax practitioners to be aware of the facts and circumstances surrounding a breach of the Code by their own conduct and be well-placed to make an assessment about whether notification to the TPB is warranted.

Whether a registered tax practitioner has ‘reasonable grounds to believe’ that another tax practitioner has breached the Code, and the breach is significant, may be more difficult to establish.

Factors to consider may include:

  • the source of the information and the credibility and reliability of that source/information
  • whether there is independent evidence, verification or corroboration of the breach
  • the circumstances in which the tax practitioner became aware of the breach, including the nature of the relationship between the registered tax practitioners
  • the proximity of the registered tax practitioner to the conduct of the other practitioner (for example, through business dealings, mutual clients or working relationships)
  • whether, and to what extent, the tax practitioner made reasonable enquiries or sought advice to ascertain whether a breach occurred
  • whether there are any alternative reasonable explanations that could counter the allegation that a significant breach has occurred.

Banter Blog IconWarning
If a registered practitioner has based the belief on hearsay, gossip or the opinion of third parties and has not made further enquiries or obtained independent verification or advice to substantiate the belief, this will not be sufficient for them to have ‘reasonable grounds’ for that belief.

Frivolous, vexatious or malicious reports

The TPB will assess the information provided and make further enquiries (as appropriate) to ensure the reporting of a significant breach relating to another tax practitioner’s conduct is reasonable and is not frivolous, vexatious or malicious.

The TPB may take action against the notifying tax practitioner if the TPB considers that a breach report is frivolous, vexatious or malicious, for example, if the claim involves the making of a false or misleading statement. Such situations may raise issues about the notifying tax practitioner’s compliance with other requirements of the TASA.

Timeframe for notification

Significant breaches of the Code must be notified to the TPB and applicable professional association (where relevant) within 30 days of the day on which the registered tax practitioner first has, or ought to have, reasonable grounds to believe that they have breached the Code and that breach is significant, or that another registered tax practitioner has breached the Code, and that breach is significant.

The term ‘have’ looks at the point in time when the registered tax practitioner actually forms the view that there are reasonable grounds for believing that a significant breach has occurred. That is, when they first have a sound foundation and basis for the belief.

The phrase ‘ought to have’ looks at the point in time when the tax practitioner is objectively taken to have reasonable grounds for believing that a significant breach has occurred. The test is an objective one, which considers when a reasonable person in the same position as the registered tax practitioner with knowledge of the same facts and circumstances, and having made reasonable enquiries, is likely to have reasonable grounds for the belief.

If there are multiple grounds supporting the belief, and these grounds become evident at different times, the 30-day timeframe runs from when the tax practitioner first had sufficient grounds for the belief.

If a reasonable person in the same position as the registered tax practitioner would have had reasonable grounds to believe that a significant breach had occurred at an earlier time than when the tax practitioner actually formed the belief, the notification period runs from that earlier point in time.

If a tax practitioner does not comply with the 30-day notification period, they must still report the breach. The tax practitioner must give reasons for the delay in notifying the breach and support their claim with appropriate evidence and facts. The TPB will take this information into account when assessing the report and determining the appropriate compliance action to take.

What if the breach has already been reported?

If a registered tax practitioner has actual knowledge that a significant breach of the Code has already been reported by another tax practitioner, the TPB will not, as a general rule, take any compliance action if they do not report the breach, where the practitioner:

  • believes the information provided to the TPB about the breach, including the details of the breach, to be accurate
  • has no further material information to add about the breach.

A practitioner may have actual knowledge that the breach has already been reported because, for example, the breach was reported by a member of the same firm or the TPB has publicly released information about the breach.

What if the breach has been remedied?

A registered tax practitioner still has an obligation to report a significant breach if the breach has been ‘rectified’, or they have taken steps to address or remedy the breach. Rectification of a breach is a factor the TPB may take into consideration when deciding what further action it might take.

How to report

Notifying the TPB

Relating to own conduct: use the Notify a change in circumstances form

Relating to the conduct of another registered tax practitioner: use the Online Complaints form

Notifying a professional association

If a registered tax practitioner has reasonable grounds to believe that another practitioner has breached the Code and it is a significant breach, and the other practitioner is a member of a registered professional association recognised by the TPB, they must notify that association of the breach in writing.

Here is a list of recognised professional associations that are accredited by the TPB.

The TPB Register may include information about whether a registered tax practitioner is a member of an association. The TPB does not generally verify membership details. In some cases, the association website may provide a list of members.

Implications for client confidentiality and legal professional privilege

Under Code item 6, registered tax practitioners must not disclose information relating to the affairs of a client, or former client, to a third party unless they have obtained the client’s permission, or they have a legal duty to do so.

Notifications under the breach reporting regime may involve the disclosure of client information. However, as these disclosures are required by law, they will generally be covered by the legal duty exception. As such, breach reporting disclosures will be compliant with Code item 6.

The TASA, including the breach reporting obligations and Code item 6, does not override the law relating to legal professional privilege (LPP). As such, registered tax practitioners should consider whether LPP applies before providing information to the TPB and associations and if so, whether they wish to waive LPP.

Consequences for non-compliance

The TPB will adopt a transitional approach to enforcing compliance with the breach reporting obligations, focusing first on consultation, education and building awareness, and making improvements in voluntary compliance, supervisory and regulatory systems.

A failure to comply with any of the breach reporting obligations is a breach of s. 8C of the Taxation Administration Act (which makes it an offence to refuse or fail to notify the TPB when and as required under a taxation law) and of Code Item 2 (the registered practitioner must comply with the taxation laws in the conduct of their personal affairs). It is also a factor that may be taken into consideration when determining whether a registered tax practitioner continues to meet the ‘fit and proper’ registration requirement.

Each breach will be considered on a case-by-case basis. The TPB will take a pragmatic and risk-based approach to assessing non-compliance and determining the appropriate compliance action to take.

TPB’s approach to investigating breach notifications

A significant breach reported by a registered practitioner will not automatically trigger a formal investigation.

The TPB will undertake a preliminary analysis of the breach notification, make relevant enquiries and use information available to us to assess and validate the potential breach and mitigate the risk of frivolous, vexatious or malicious claims.

In deciding whether to commence a formal investigation, the TPB will consider several factors including, but limited to, the following:

  • nature of the breach
  • seriousness of the breach and level of risk involved
  • number and frequency of breaches
  • whether there is sufficient evidence to support the breach notification
  • in the case of a breach notification about another tax practitioner, the circumstances surrounding the making of the notification and relationship between the parties
  • compliance history of the registered tax practitioner
  • whether the breach has been rectified or remedied or any steps taken to address it
  • nature and scale of the tax practitioner’s business
  • number of clients involved
  • impact or harm to clients and the tax system more broadly
  • whether the breach notification is otherwise frivolous, vexatious or malicious based on the information provided
  • if a breach is reported outside the 30-day notification period, the reasons for any delay in reporting the breach, and any consequences for TPB investigation and other agencies as a result of the delay.

Identification of reporting practitioner and whistleblowing protections

2022 Icons (4)Important
When making a report, tax practitioners will need to identify themselves to the TPB to comply with their obligations. That is, breaches cannot be reported anonymously.

Subject to the passage of Treasury Laws Amendment (Tax Accountability and Fairness) Bill 2023, tax practitioners may be eligible for the extended tax whistleblower protections that are proposed to commence from 1 July 2024. These proposed changes seek to provide protections for disclosures by eligible whistleblowers to the TPB relating to the misconduct of tax practitioners. Eligible whistleblowers will have their identity protected, unless it is to an authorised body, or with the whistleblower’s consent.

TPB case studies

The draft materials contain six case studies. These are briefly summarised below (see the ED for the full case studies).

Case study 1 — reasonable grounds to believe tax practitioner does not meet ongoing registration requirement

David is one of two nominated supervising agents of a registered tax agent company and employs 10 staff to provide tax agent services on behalf of the company.

The other nominated supervising agent went on maternity leave. The remaining staff all have less than 2 years’ experience. David did not nominate a replacement supervising agent.

David received client complaints about the quality of work. David discovered that a number of staff oversights and errors had occurred, quality checks and controls had not been updated to reflect the change in supervising agents, and staff training had ceased.

David had reasonable grounds to believe that the company had breached its ongoing registration requirement to have a sufficient number of individual registered tax agents to provide tax agent services to a competent standard and to carry out supervising arrangements, and as such, was also in breach of Code item 7. David also had reasonable grounds to believe the breach was significant given that the breach resulted in material loss to the clients, a number of clients were impacted, the ability for the company to provide a competent service was impacted and the company’s arrangements to ensure compliance with the Code were inadequate.

note iconNote
As seen in this example, the registered tax practitioner that is the subject of the mandatory notification may be a registered company or partnership, i.e. practitioners are not limited to reporting significant breaches of an individual practitioner.

Case study 2 — conduct equates to a significant breach

Ivan is the sole director of a registered tax agent company. Over 12 months, Ivan lodged false BAS without the knowledge or authorisation of more than 10 clients. The ATO cancelled the lodgments.

Ivan subsequently misappropriated client refunds by nominating them to be paid into his own bank account. Further, he put a number of clients at risk when he shared his credentials used to access ATO systems with another individual.

Ivan was aware that he had breached the Code, or had reasonable grounds to believe that he had breached the Code and the breach was significant, nothing the:

  • breach may constitute an offence involving dishonesty under an Australian law, as misappropriation of client funds involves dishonest conduct
  • breach of client confidentiality was likely to result in material loss or damage to the clients
  • lodgment of false BAS was likely to result in material loss or damage to the Commonwealth
  • breach would have been considered ‘otherwise significant’, given the impact of the breach on Ivan’s ability to provide tax agent services and the extent to which the breach could be said to indicate inadequate arrangements to ensure compliance with the Code.

Case study 3 — conduct does not equate to a significant breach

Samantha is an employee of a registered tax agent company. The company received a complaint from a new client that identified several issues concerning BAS services provided by Samantha:

  • Samantha had not passed on the client’s most recent tax refund in a timely fashion
  • Samantha had failed to provide the client with a finalised copy of the client’s return and Notice of assessment
  • client instructions and interactions were not documented properly.

After further investigation, the company discovered that this was a once off occurrence and no other clients had been impacted.

While Samantha’s behaviour may be considered to be a breach of Code item 7 as she had failed to provide tax agent services competently, the breach does not equate to a significant breach of the Code, noting the breach:

  • does not constitute an indicatable offence, or an offence involving dishonesty, under an Australian law,
  • has not resulted, nor is it likely to result, in a material loss or damage to the client
  • is not considered to be ‘otherwise significant’ given it was a once-off, had not impacted Samantha’s ability to otherwise provide tax agent services, and was not indicative of any systemic issue that would result in non-compliance with the Code.

Case study 4 — tax practitioner, through credible information, is aware that another tax practitioner’s conduct equates to a significant breach

Colin is a registered tax agent in a medium sized accounting firm. Colin became aware, through former clients of a former colleague, that the former colleague has been depositing client tax refunds into his own personal business account. The tax practitioner has breached Code Item 3 as he has failed to account to clients for money held on trust.

Colin is also aware that the former colleague has been misleading clients into believing their tax returns had been lodged and advising them that they owed tax, money which was then paid to the tax practitioner, and used for the tax practitioner’s own benefit.

Colin followed up these complaints by checking the firm’s working files and online records which confirmed false or fraudulent lodgments.

Colin has reasonable grounds to believe that the other agent has breached multiple Code items and the breaches are significant, taking into account the following:

  • it appears the tax practitioner may have committed an offence involving dishonesty under an Australian law, having misappropriated client funds
  • the misappropriation of funds has resulted in, or is likely to result, in material loss or damage to the tax practitioner’s clients
  • the breach is otherwise significant given the behaviour has been ongoing for some time and involves multiple breaches of the Code.

Case study 5 — tax practitioner, through ‘gossip’ thinks that another tax practitioner’s conduct may equate to a significant breach

Brittany attends monthly discussion group sessions with other registered BAS agents. She is also a member of an online forum that discusses new and emerging issues.

At a recent discussion group session, Brittany overheard two attendees gossiping about how their mutual acquaintance, an individual known to Brittany, has been falsifying their CPE certificates and had made false statements to the TPB to hide the fact that they had not completed their CPE.

Brittany made no further enquiries regarding what she had overheard. She also did not have any independent evidence to suggest that the individual had in fact falsified their CPE certificates.

While Brittany thinks that the conduct may equate to a significant breach of the Code, her belief is founded solely on the gossip overheard at the group discussion session. She would not be considered to have reasonable grounds to believe that the individual had breached the Code.

Case study 6 — a direct competitor of another practitioner, makes a vexatious unsupported claim

Tamara is a registered tax agent in a large well-known accounting firm. Max, a registered tax practitioner in another leading accounting firm known to be in direct competition with Tamara’s firm, recently took over one of her clients. Tamara was unhappy to have lost this client.

Tamara overhears a discussion between colleagues regarding the fact that the client’s change in firms had come as a surprise given the rumours that had been circulating that Max had been involved in fraudulent tax claims.

Tamara decides to report a breach of the Code. The accompanying information provides very little detail and contains a number of statements that do not appear to be supported in any way.

The TPB makes initial enquiries with Tamara. It becomes clear that she is basing her view solely on the hearsay, speculation or the unsubstantiated opinion of her colleagues. The history to the takeover and competition between the firms may also have a bearing on the credibility of the notification made and increases the potential for it to be vexatious.

The TPB does not have any information to indicate that Max has a history of non-compliance with the TASA or taxation laws.

The TPB is not satisfied there are reasonable grounds for the belief that there has been a significant breach. They decide not to commence a formal investigation.

 

May V2

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Trust tax return changes from 1 July 2024

Ahead of the 2024 tax lodgment season, the ATO has recently published an update on its trust administration changes for trustees, beneficiaries and tax agents which will take effect from 1 July 2024. These changes form part of the Modernisation of Trust Administration Systems (MTAS) project and will affect lodgments for the 2023–24 and later income years.

At time of writing the 2024 tax return stationery — which will incorporate the below changes — has not been released.

Changes to 2024 trust tax returns

The changes to begin on 1 July 2024 include:

  • modifying the labels in the statement of distribution in the trust tax return to improve the reporting of beneficiary details
  • introducing a new schedule (trust income schedule) that all trust beneficiary types who receive trust income will need to lodge with their tax return — this will assist correct reporting and facilitate consistency of reporting across all beneficiary types
  • adding new data validations to the trust tax return form in the practitioner lodgment service — to strengthen the integrity of data reported through the lodgment process.

How the changes will affect …

Trustees

Trustees will notice that four CGT labels have been added to the statement of distribution section of the trust tax return. These changes will enhance the trustee’s ability to appropriately notify beneficiaries of their entitlement to income, and support the calculation of their CGT amount in their tax return.

note iconTip
To support beneficiaries in correctly completing the trust income schedule in their tax returns, it is recommended that the trustee provides them with a copy of the trust statement of distribution to the extent that it relates to their entitlement.

Beneficiaries

The trust income schedule will be a new form lodged with the income tax return.

The trust income schedule replicates the fields from the statement of distribution. The beneficiary can copy the information across.

note iconTip
The beneficiary should ask the trustee for a copy of the trust statement of distribution.

A distribution of trust income received from a managed fund should also be included in the new trust income schedule. The trust income schedule instructions will show how the information on the tax statement provided by the managed fund is reported on the trust income schedule.

If the beneficiary lodges via myTax, there will be messages that prompt them about potential trust income reporting.

If the beneficiary lodges via a tax agent, the new trust income schedule will be integrated into their existing lodgment software.

Tax agents

The ATO is adding:

  • four CGT labels into the trust tax return statement of distribution
  • data validations in the practitioner lodgment service to ensure accurate reporting.

2022 Icons (4)Warning
The tax agent will not be able to submit without completing the necessary information.

The trust income schedule will now support the reporting of beneficiary trust income. The new schedule:

  • will not replace any existing trust income labels in beneficiary income tax returns
  • is intended to support existing reporting obligations:
    • for individual beneficiaries, and will be incorporated into the existing income details schedule
    • for non-individual beneficiaries — via a new schedule lodged with each beneficiary income tax return.

Beneficiaries will be able to get the information required in the trust income schedule from the trust. As the trust income schedule has been designed to align to the information on the trust statement of distribution, the agent should encourage their trustee clients to provide beneficiaries the information required to complete the trust income schedule as early as possible.

About the MTAS project

The MTAS project was announced in the 2022–23 Federal Budget as the ‘Digitalising trust income reporting and processing’ measure. The project aims to:

  • streamline the taxpayer lodgment experience
  • improve the quality, accuracy and integrity of annual income tax return information reported by trustees and beneficiaries
  • enable the ATO’s compliance activities to be better informed.

As the MTAS project progresses, further changes will be implemented.

In March 2022, ahead of the Budget announcement, the former Treasurer announced the following:

Digitalising trust income reporting

The Government will develop systems to ensure all trusts will have the option to lodge income tax returns electronically. Digitalising the reporting of trustee and beneficiary obligations will reduce errors and processing times and create capacity to pre-fill beneficiaries’ tax returns.

This measure will facilitate electronic lodgement for up to 30,000 trusts that currently lodge by paper. There are just under 1 million trusts and around 1.8 million beneficiaries in the Australian tax system.

New systems are expected to be in place by 1 July 2024.


May V2

Click here to register for one of our upcoming sessions.

Click here to learn more about our June Online Special Topic, Trust streaming revisited.

 

Two company announcements: 3 April 2024

TaxBanter joins Count

As of 1 March, TaxBanter has officially joined the Count family of brands, marking a significant development in the tax education landscape. The acquisition significantly expands Count’s investment in leading Australian brands serving accounting and financial advice firms. In addition to TaxBanter, Count now offers the following resource services:

We will continue to prioritise supporting our clients’ education needs, and look forward to our enhanced capabilities with our new affiliates in the coming months.

Lee-Ann Hayes appointed as new Head of Tax Education

We are thrilled to announce Lee-Ann Hayes as our new Director, as well as Head of Tax Education. She has a long history with TaxBanter, deep relationships with many clients and a bold vision for the future of tax training.

Questions or feedback?

We’d love to hear from you. Please direct your questions to enquiries@taxbanter.com.au or give us a call at 1300 TAX CPD.

Tb Socials Templates Schedules (6)

 

Revised Stage 3 personal tax cuts now law

On 27 February 2024, Parliament passed the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 (the Bill) containing the Government’s revisions to the Stage 3 personal tax cuts, which take effect from the 2024–25 financial year. At time of writing the Bill is awaiting Royal Assent.

The original Stage 3 tax cuts formed part of the Personal Income Tax Plan implemented by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

In late January 2024 the Government revealed the details of its proposed changes to the Stage 3 tax cuts by way of an announcement and information resources on the Treasury website.

On Monday 5 February, the Government released exposure draft legislation. The Bill was introduced into the House of Representatives the next day, 6 February.

This article was originally published upon the release of the Treasury material and prior to the release of the Bill — it has been updated to take into account the contents of the Bill as passed and the accompanying explanatory materials.

Also refer to the following Treasury resources:

This article summarises the changes to the tax brackets and tax rates and illustrates the potential implications for taxpayers with a range of taxable incomes.

note iconNote:
The Government will also increase the Medicare levy low-income thresholds for 2023–24. This article will not cover this proposed change. See the Treasury Laws Amendment (Cost of Living – Medicare Levy) Bill 2024, which was also passed by Parliament on 27 February and is now awaiting Royal Assent.

From 1 July 2024, the revised Stage 3 tax cuts will:

  • reduce the 19 per cent tax rate to 16 per cent
  • reduce the 32.5 per cent tax rate to 30 per cent
  • increase the threshold above which the 37 per cent tax rate applies from $120,000 to $135,000
  • increase the threshold above which the 45 per cent tax rate applies from $180,000 to $190,000.

There will be no change to the current tax-free threshold of $18,200 or the tax-free threshold of $416 on eligible income under the taxation of minors rules.

No taxpayer will pay more tax than that which would apply under the 2023–24 rates but higher income taxpayers will receive a lower tax cut than under the previous Stage 3 plan.

Taxpayers with taxable incomes up to $45,000 will benefit from a reduction of their marginal tax rate from 19 per cent to 16 per cent (maximum tax saving of $804). Under the previous Stage 3 plan, there was no change to the current (2023–24) tax bracket ($18,201 to $45,000) or marginal tax rate (19 per cent).

Middle income taxpayers will receive an extra tax cut of $804 (on top of the tax cut they would have received under the previous plan).

The benefit of the changes (in comparison to the previously legislated Stage 3 plan) cuts out at taxable incomes of approximately $147,000 — taxpayers at this income level will be $36 worse off under the changes (albeit with a saving of $3,729 from 2023–24 rates).

For taxpayers with taxable incomes of $200,000 and above, the tax cut will be worth $4,529 instead of $9,075 — i.e. the Stage 3 benefit will be cut by half.

note iconNote:
This article only considers the implications for resident individuals and ignores the effect of Medicare levy, the low income tax offset, and any other income tested levies, offsets and rebates on a taxpayer’s overall tax position.

A comparison of previous vs new tax rates

Resident individual tax rates 2020–21 to 2023–24 Stage 3 not yet implemented
Table 1

Resident individual tax rates 2024–25 formerly legislated Stage 3 tax plan
Table 2

Resident individual tax rates 2024–25 revised Stage 3 tax plan
Table 3 W Circles

What are the differences in outcomes between the former and new Stage 3?

Some of the key implications of the changes to the legislated Stage 3 tax plan are as follows:

  • The marginal tax rate will be reduced from 19 per cent to 16 per cent for taxpayers with taxable incomes between $18,201 and $45,000.
  • The upper income threshold for the 30 per cent tax bracket will be reduced from $200,000 to $135,000.
  • The current (i.e. up to 2023–24) marginal tax rate of 37 per cent for taxpayers with taxable incomes between $135,001 and $180,000 will be retained.
  • The marginal tax rate for taxpayers with taxable incomes between $180,001 and $190,000 will increase from 30 per cent to 37 per cent.
  • The marginal tax rate for taxpayers with taxable incomes between $190,001 and $200,000 will increase from 30 per cent to 45 per cent.

There will be no change to the tax-free threshold of $18,200 or the top marginal tax rate of 45 per cent for taxpayers with taxable incomes over $200,000.

All taxpayers will receive a tax cut compared to 2023–24 but taxpayers with taxable incomes of approximately $147,000 and higher will receive a lower tax cut under the changes as compared to the formerly legislated tax rates.

On a taxable income of $146,000, the tax liability under current law is $35,392 vs under proposed changes is $35,358 (a $34 benefit under the proposed change). On $147,000, tax liabilities are $35,692 vs $35,728 (a $36 detriment).

How the changes will affect taxpayers

The following examples set out the tax liability that would arise for a given taxable income under the current (2023–24) tax rates, the formerly legislated Stage 3 rates from 2024–25 and the revised Stage 3 rates from 2024–25.

Assume that each taxpayer’s taxable income is the same in 2023–24 and 2024–25.

note iconNote:
The Treasury’s tax cut calculator takes into account the basic tax scales, low-income tax offset (as applicable) and the Medicare levy. As mentioned above, the following illustrative examples only take into account the basic tax rates. Therefore the outcomes from the Treasury’s calculator will not be the same as what is represented below.

Blog Icon ReferenceReference:
See the Government’s fact sheet for detailed distributional tables setting out the impact of the revised Stage 3 plan at a multitude of taxable incomes for single and dual income households.

Taxpayers in the 16 per cent tax bracket

Abbie’s taxable income for 2023–24 and 2024–25 is $30,000.

Abbie Table

Taxpayers in the 30 per cent tax bracket

Ben’s taxable income for 2023–24 and 2024–25 is $55,000.

Ben Table

Cameron’s taxable income for 2023–24 and 2024–25 is $75,000.

Cameron Table

Dana’s taxable income for 2023–24 and 2024–25 is $90,000.

Dana Table

Evie’s taxable income for 2023–24 and 2024–25 is $100,000.

Evie Table

Frank’s taxable income for 2023–24 and 2024–25 is $125,000.

Frank Table

Greg’s taxable income for 2023–24 and 2024–25 is $135,000.

Greg Table

Taxpayers in the 37 per cent tax bracket

Hannah’s taxable income for 2023–24 and 2024–25 is $150,000.

Hannah Table

note iconNote:
The benefit of the new changes begins to cut out at just under $147,000. Taxables with taxable incomes of $146,000 will benefit under the new changes by $34 as compared to the formerly legislated Stage 3 rates. However, taxpayers with taxable incomes of $147,000 will receive a tax cut that is $36 less than that which would arise under the formerly legislated Stage 3 plan.

Izzy’s taxable income for 2023–24 and 2024–25 is $170,000.

Izzy Table

Jaclyn’s taxable income for 2023–24 and 2024–25 is $185,000.

Jaclyn Table

Ken’s taxable income for 2023–24 and 2024–25 is $190,000.

Ken Table

Taxpayers in the 45 per cent tax bracket

Leonard’s taxable income for 2023–24 and 2024–25 is $200,000.

Leonard Table

Mark’s taxable income for 2023–24 and 2024–25 is $250,000.

Mark Table

Natasha’s taxable income for 2023–24 and 2024–25 is $300,000.

Natasha Table

Olivia’s taxable income for 2023–24 and 2024–25 is $500,000.

Olivia Table

Pete’s taxable income for 2023–24 and 2024–25 is $1,000,000.

Pete Table

Changes to non-resident tax rates

Non-resident individual tax rates 2020–21 to 2023–24 Stage 3 not yet implemented

Z Table 1

Non-resident individual tax rates 2024–25 formerly legislated Stage 3 tax plan

Z Table 2

Non-resident individual tax rates 2024–25 revised Stage 3 tax plan

Z Table 3

Changes to working holiday maker tax rates

Working holiday maker tax rates 2020–21 to 2023–24 Stage 3 not yet implemented

Z Working Holiday 1

Working holiday maker tax rates 2024–25 formerly legislated Stage 3 tax plan

Z Working Holiday 2

Working holiday maker tax rates 2024–25 revised Stage 3 tax plan

Z Working Holiday 3

March Schedule

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New ATO ruling on depreciation of composite assets

The ATO has recently finalised TR 2024/1 titled Income tax: composite items — identifying the relevant depreciating asset for capital allowances (the Ruling). The Ruling sets out the relevant principles identified by the Commissioner to assist in determining whether a composite asset is just one depreciating asset or a number of separate depreciating assets for tax depreciation (Div 40 of the ITAA 1997) purposes.

The Ruling was originally issued in draft seven years ago as TR 2017/D1 and reissued as an updated draft last year as TR 2023/D2.

The relevance of composite assets

A ‘depreciating asset’ is defined in the tax law as ‘an asset with a limited effective life that can reasonably be expected to decline in value over the time it is used’ but does not include land, an item of trading stock, or intangible assets not listed in the legislation.

A composite asset is an asset that is comprised of multiple components that are capable of separate existence.

The question arises as to how to deal with composite assets for the purposes of claiming a depreciation deduction.

The law states that:

… whether or not a particular composite item is a depreciating asset or whether its components are depreciating assets is a question of fact and degree which can only be determined in light of all the circumstances of the case. [Emphasis added.]

The Ruling

The Commissioner’s view is that in order for a component — or more than one component — of a composite item to be considered to be a depreciating asset, the component must be capable of being separately identified and recognised as having commercial and economic value.

Purpose or ‘functionality’ is generally a useful guide in identifying the depreciating asset and identifies the following main principles that are to be taken into account in determining whether a composite item is a single depreciating asset, or more than one depreciating asset:

Table 1

The Ruling also considers the following issues:

  • modifications to a depreciating asset
  • jointly held tangible assets
  • intangible assets.

Practical examples

The Ruling contains 14 practical examples, including the following:

Example 2

Example 6

Further resources & learning

The ATO’s guidance on the depreciation of composite assets will be covered in our upcoming Tax Fundamentals workshops.

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Tax Expenditures Statement

The Government has released its 2023–24 Tax Expenditures and Insights Statements (the TEIS). The TEIS provides estimates of the revenue forgone from tax expenditures, along with distributional analysis on large tax expenditures and commonly utilised features of the tax system.

The TEIS reports information about revenue the Government does not collect through tax expenditures such as:

  • concessional rates that reduce the rate of tax that applies to certain groups or types of incomes
  • exemptions that exclude certain groups from paying tax on income they receive
  • allowances, credits or rebates that either deduct amounts of income from the tax base or refund a portion of taxes already paid
  • tax deferrals that postpone paying of taxes until a later date.

A tax expenditure arises where the tax treatment of a class of taxpayer or an activity differs from the standard tax treatment (tax benchmark) that would otherwise apply. Tax expenditures can include tax exemptions, some deductions, rebates and offsets, concessional or higher tax rates applying to a specific class of taxpayers, and deferrals of tax liability.

Revenue forgone estimates reflect the existing utilisation of a tax expenditure and do not incorporate any behavioural response which might result from a change in or removal of the existing tax treatment. They measure the difference in revenue between the existing treatment and benchmark tax treatment, assuming taxpayer behaviour is the same and the existing tax treatment is removed entirely. A positive tax expenditure reduces tax payable relative to the benchmark. A negative tax expenditure increases tax payable relative to the benchmark.

Revenue forgone estimates are not estimates of the revenue impact if the tax expenditure was to be removed. In practice, taxpayers would alter their behaviour in response to the change of a policy. In many cases, an expenditure would be replaced or substituted with an alternative policy that is designed to achieve a similar objective, reducing the net impact.

The top 10 tax expenditures by revenue foregone for 2023–24 are:

  1. concessional taxation of employer superannuation contributions — $28,550m
  2. rental deductions — $27,100m
  3. main residence exemption — discount component — $25,000m
  4. main residence exemption — $22,500m
  5. concessional taxation of superannuation entity earnings — $20,050m
  6. CGT discount for individuals and trusts — $19,050m
  7. deductions for work-related expenses — $10,800m
  8. income tax exemption for NDIS amounts — $10,480m
  9. GST exemption on food — $9,100m
  10. accelerated depreciation for business entities — $7,400m

 

Other notable tax expenditures and revenue forgone are:

  • simplified depreciation rules — $3,800m
  • lower tax rate for small companies — $3,400m
  • temporary loss carry-back for certain incorporated entities — $2,990m
  • concessional taxation of personal superannuation contributions — $1,750m
  • deductions for costs of managing tax affairs — $1,600m
  • capital works expenditure deductions — $1,450m
  • concessional taxation of capital gains for superannuation funds — $1,300m
  • small business CGT 50 per cent reduction — $990m
  • small business CGT 15-year exemption — $930m
  • small business CGT retirement exemption — $670m
  • additional deduction for digital adoption expenses — $550m

See the TIES for the full list.

March Promo

 

 

Proposed new Stage 3 personal tax cuts now revealed

The Government has now confirmed the details of its proposed revisions to the Stage 3 personal tax cuts, which take effect from the 2024–25 financial year.

The currently legislated Stage 3 tax cuts form part of the Personal Income Tax Plan implemented by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Refer to the following Treasury resources:

Draft legislation has not been released. Parliament resumes on Tuesday 6 February 2024.

This article summarises the proposed changes to the tax brackets and tax rates and illustrates the potential implications for taxpayers with a range of taxable incomes.

note iconNote
The Government will also increase the Medicare levy low-income thresholds for 2023–24. This article will not cover this proposed change.

From 1 July 2024, the revised Stage 3 tax cuts will:

  • reduce the 19 per cent tax rate to 16 per cent
  • reduce the 32.5 per cent tax rate to 30 per cent
  • increase the threshold above which the 37 per cent tax rate applies from $120,000 to $135,000
  • increase the threshold above which the 45 per cent tax rate applies from $180,000 to $190,000.

There will be no change to the current tax-free threshold of $18,200.

No taxpayer will pay more tax than that which would apply under the 2023–24 rates but higher income taxpayers will receive a lower tax cut than under the existing Stage 3 plan.

Taxpayers with taxable incomes up to $45,000 will benefit from a proposed reduction of their marginal tax rate from 19 per cent to 16 per cent (maximum tax saving of $804). Under the currently legislated Stage 3 plan, there is no change to the current (2023–24) tax bracket ($18,201 to $45,000) or marginal tax rate (19 per cent).

Middle income taxpayers will receive an extra tax cut of $804 (on top of the tax cut they would have received under the currently legislated plan).

The benefit of the proposed changes cuts out at taxable incomes of approximately $147,000 — taxpayers at this income level will be $36 worse off under the changes (albeit with a saving of $3,729 from 2023–24 rates).

For taxpayers with taxable incomes of $200,000 and above, the tax cut will be worth $4,529 instead of $9,075 — i.e. the Stage 3 benefit will be cut by half.

note iconNote
This article only considers the implications for resident individuals and ignores the effect of Medicare levy, the low income tax offset, and any other income tested levies, offsets and rebates on a taxpayer’s overall tax position.

A comparison of current vs proposed tax rates

Resident individual tax rates 2020–21 to 2023–24 — Stage 3 not yet implemented
Table 1

Resident individual tax rates 2024–25 currently legislated Stage 3 tax plan
Table 2

Resident individual tax rates 2024–25 proposed revised Stage 3 tax plan
Table 3

What are the differences in outcomes between the existing and proposed Stage 3?

Some of the key implications of the proposed changes to the legislated Stage 3 tax plan are as follows:

  • The marginal tax rate will be reduced from 19 per cent to 16 per cent for taxpayers with taxable incomes between $18,201 and $45,000.
  • The upper income threshold for the 30 per cent tax bracket will be reduced from $200,000 to $135,000.
  • The current (i.e. up to 2023–24) marginal tax rate of 37 per cent for taxpayers with taxable incomes between $135,001 and $180,000 will be retained.
  • The marginal tax rate for taxpayers with taxable incomes between $180,001 and $190,000 will increase from 30 per cent to 37 per cent.
  • The marginal tax rate for taxpayers with taxable incomes between $190,001 and $200,000 will increase from 30 per cent to 45 per cent.

There will be no change to the tax-free threshold of $18,200 or the top marginal tax rate of 45 per cent for taxpayers with taxable incomes over $200,000.

All taxpayers will receive a tax cut compared to 2023–24 but taxpayers with taxable incomes of approximately $147,000 and higher will receive a lower tax cut under the proposed changes as compared to the currently legislated tax rates.

On a taxable income of $146,000, the tax liability under current law is $35,392 vs under proposed changes is $35,358 (a $34 benefit under the proposed change). On $147,000, tax liabilities are $35,692 vs $35,728 (a $36 detriment).

How the proposed changes will affect taxpayers

The following examples set out the tax liability that would arise for a given taxable income under the current (2023–24) tax rates, the legislated Stage 3 rates from 2024–25 and the proposed revised Stage 3 rates from 2024–25.

Assume that each taxpayer’s taxable income is the same in 2023–24 and 2024–25.

note iconNote
The Treasury’s tax cut calculator takes into account the basic tax scales, low-income tax offset (as applicable) and the Medicare levy. As mentioned above, the following illustrative examples only take into account the basic tax rates. Therefore the outcomes from the Treasury’s calculator will not be the same as what is represented below.

Blog Icon ReferenceReference
See the Government’s fact sheet for detailed distributional tables setting out the impact of the proposed Stage 3 plan at a multitude of taxable incomes for single and dual income households.

Taxpayers in the 16 per cent tax bracket

Abbie’s taxable income for 2023–24 and 2024–25 is $30,000.

Table 4

Taxpayers in the 30 per cent tax bracket

Ben’s taxable income for 2023–24 and 2024–25 is $55,000.

Table 5

Cameron’s taxable income for 2023–24 and 2024–25 is $75,000.

Table 6

Dana’s taxable income for 2023–24 and 2024–25 is $90,000.

Table 7

Evie’s taxable income for 2023–24 and 2024–25 is $100,000.

Table 8

Frank’s taxable income for 2023–24 and 2024–25 is $125,000.

Table 9

Greg’s taxable income for 2023–24 and 2024–25 is $135,000.

Table 10

Taxpayers in the 37 per cent tax bracket

Hannah’s taxable income for 2023–24 and 2024–25 is $150,000.

Table 11

note iconNote
The benefit of the proposed changes begins to cut out at just under $147,000. Taxables with taxable incomes of $146,000 will benefit under the proposed changes by $34 as compared to the currently legislated Stage 3 rates. However, taxpayers with taxable incomes of $147,000 will receive a tax cut that is $36 less than that which would arise under the legislated Stage 3 plan.

Izzy’s taxable income for 2023–24 and 2024–25 is $170,000.

Table 1a

Jaclyn’s taxable income for 2023–24 and 2024–25 is $185,000.

Table 1b

Ken’s taxable income for 2023–24 and 2024–25 is $190,000.

Table 1c

Taxpayers in the 45 per cent tax bracket

Leonard’s taxable income for 2023–24 and 2024–25 is $200,000.

Table 1d

Mark’s taxable income for 2023–24 and 2024–25 is $250,000.

Table 1e

Natasha’s taxable income for 2023–24 and 2024–25 is $300,000.

Natasha

Olivia’s taxable income for 2023–24 and 2024–25 is $500,000.

Olivia

Pete’s taxable income for 2023–24 and 2024–25 is $1,000,000.

Pete

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