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The tax status of COVID-19 grants [updated]

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Editor’s note: This article will be updated whenever the Treasurer makes a new declaration that certain grants are non-assessable non-exempt income. This article has been updated as of 24 November 2022.

The State and Territories have provided a range of grants to businesses affected by COVID-19 trading restrictions.

Section 59-97 of the ITAA 1997 provides that such a payment is non-assessable non-exempt income if it meets certain criteria, including that it was announced on or after 13 September 2020. The grant must be received in the 2020–21 or 2021–22 income years.

The most recent declaration of eligible grants was made on 17 November 2022.

Eligibility criteria

Conditions for the payment

The payment must be received under a grant program administered by a State or Territory, or an authority of a State or Territory.

The taxpayer must receive the payment in the 2020–21 and 2021–22 income years. That means any grant paid before 1 July 2020 is assessable.

The concessional tax treatment was originally legislated to only apply for the 2020–21 income year. Schedule 1 to the Treasury Laws Amendment (COVID-19 Economic Response) Act 2021, which received Royal Assent on 30 June 2021 as Act No. 71 of 2021, extended the concessional tax treatment to include qualifying grants received in the 2021–22 income year. The amendments also ensured that eligible taxpayers with a substituted accounting period are also able to take advantage of the NANE income status of grant payments.

Conditions for the taxpayer

A taxpayer is eligible for the NANE tax treatment where:

  • it carries on a business in the current year;
  • one or both of the following applies:
    • the taxpayer carried on a business in the previous income year and its aggregated turnover for that year was less than $50 million; and/or
    • the taxpayer’s aggregated turnover for the current year is likely to be less than $50 million.

This is based on the requirements in ss. 59-97(1)(d) and (2) that the taxpayer must be either:

  • a small business entity (SBE) as defined in s. 328-110 of the ITAA 1997; or
  • an SBE if the $10 million threshold was instead $50 million.

Conditions for the grant program

The grant program must be declared — under s. 59-97(3) — to be an eligible program. It does not matter whether the declaration is made before, on or after the day the taxpayer receives the payment.

A grant program is declared — by legislative instrument — to be an eligible program if it satisfies all of the criteria. There is no Ministerial discretion to not declare an eligible program.

The eligibility criteria are that:

  • the program was first publicly announced on or after 13 September 2020 by the State, Territory or authority that is administering it;
  • the program is responding to the economic impacts of COVID-19;
  • the program is directed at supporting businesses:
    • who are the subject of a public health directive applying to a geographical area in which the businesses operate;
    • whose operations have been significantly disrupted as a result of the public health directive;
  • the State, Territory or authority has requested the program to be declared to be an eligible program.

Grants which are declared NANE income

The grants which have been declared eligible for NANE treatment are listed in the following legislative instruments:

Covid Grants Blog Table Nsw

Vic Covid Grant Blog Table 2 Nov 2022 (2)

Covid Grants Table Sa

Qld Table Grants Blog

Act Table Grants Blog

Links to all State and Territory grants

Here are the links to each State and Territory’s webpage setting out the available business supports. (Not all of these grants will necessarily be eligible for NANE treatment.)

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 16 locations across Australia. Click here to find a location near you.

We’ll cover these grants (and other new announcements) in full at our upcoming Public Offer Sessions:

Online training

  • December Online Tax Update

Personalised training options

We can also present these Updates at your firm, or through a private online session, with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also reach us our BDM Caitlin Bowditch at 0413 955 686 for an in-depth chat of your training needs.

 

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services by clicking here.

Post-Budget stocktake of unenacted tax measures

Posted on by thriveadmin

The Treasurer, Dr Jim Chalmers, handed down the Albanese Government’s first Federal Budget last night (Tuesday 25 October 2022). You will have already received our special Budget Night documents summarising the key announcements in the tax and superannuation space, and a quick reference timeline that sets out the proposed application dates at a glance.

For your convenience, the links to these documents are here:

We have also prepared a handy Budget infographic, which is at the end of this article.

The above downloads set out all you need to know about what was in the Budget that is relevant to the tax profession. But new announcements do not render previous ones forgotten. This article will provide a status stocktake of previously announced measures.

Budget announcements — tax measures that will not proceed

While there are no big-ticket tax and superannuation revelations for individuals, family groups and SMEs, the Budget documents do provide certainty about which previously announced — but as yet unlegislated — measures will not proceed:

  • self-assessment of the effective life of certain intangible depreciating assets
  • amendments to the debt/equity rules
  • changes to the Taxation of Financial Arrangements (TOFA) rules
  • changes to the taxation of asset-backed financing arrangements
  • introduction of a new tax and regulatory framework for limited partnership collective investment vehicles
  • changes to the annual audit requirement for certain SMSFs
  • introduction of a $10,000 limit for cash payments made to businesses
  • introduction of a requirement for retirement income product providers to report standardised metrics in product disclosure statements
  • establishment of a deductible gift recipient category for providers of pastoral care and analogous well-being services in schools.

Budget announcements — tax measures to be deferred

The Budget documents also confirm that the start dates for the following proposed measures will be deferred to allow sufficient time for legislation and implementation:

  • the introduction of a sharing economy reporting regime for:
  • ride-sourcing and short-term accommodation — from 1 July 2022 to 1 July 2023
  • all other reportable transactions — from 1 July 2023 to 1 July 2024
  • see the Treasury Laws Amendment (2022 Measures No. 2) Bill 2022, currently before the Senate
  • the relaxing of SMSF residency requirements — from 1 July 2022 to the income year commencing on or after Royal Assent
  • the technical amendments to TOFA rules — from 1 July 2022 to the income year commencing on or after Royal Assent.

Before the Budget: initiatives of the previous government

The Budget documents are silent on some key tax matters which have previously been flagged for attention, including:

  • Division 7A reform
  • Individual tax residency rules — see the Board of Taxation report here
  • Company tax residency rules — see the Board of Taxation report here.

As expected, and as confirmed by the Treasurer himself before Tuesday night, the Budget does not include any changes to the legislated stage 3 personal tax cuts which are due to commence on 1 July 2024.

There was also no announcement about the SBE instant asset write-off threshold which is due to revert to $1,000 on 1 July 2023. While $1,000 is the threshold in statute, due to various temporary incentives it has not been less than $20,000 since before 12 May 2015. It is currently uncapped until 30 June 2023.

Upon coming into office in May as a first-term government, Labor inherited many unenacted measures initiated by the previous Morrison Government.

When the 46th Parliament was dissolved on 11 April 2022, 250 Bills before Parliament lapsed and are therefore not proceeding unless re-introduced.

The following Bills which lapsed when Parliament was dissolved have been reintroduced as indicated below or have yet to be reintroduced.

Treasury Laws Amendment (2021 Measures No. 7) Bill 2021 Proposed to extend the Taxable Payments Reporting System to the sharing economy (including ride-sourcing and short-term accommodation) and to remove the $250 non-deductible threshold for work-related self-education expenses — now included in Treasury Laws Amendment (2022 Measures No. 2) Bill 2022, introduced on 3 August 2022
Treasury laws Amendment (2020 Measures No. 4) Bill 2020 Proposed to make refunds of large scale generation shortfall charges NANE income; and to facilitate the closure of the Superannuation Complaints Tribunal (which has been legislated)
Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 Proposed to insert the Patent Box regime as new Div 357 of the ITAA 1997
Treasury Laws Amendment (Streamlining and improving economic outcomes for Australian) Bill 2022 Proposed to enable SBEs to apply to the Small Business Taxation Division of the Tribunal for an order staying operation or implementation of decisions of the Commissioner that are being reviewed by the Tribunal — now included in Treasury Laws Amendment (2022 Measures No. 2) Bill 2022
Treasury laws Amendment (Modernising Business Communications) Bill 2022

 

 Proposed to amend the Corporations Act 2001 to, among other things:

  • allow all documents to be signed or executed electronically
  • allow certain additional categories of documents to be sent electronically
  • mend the criteria with which an entity must comply before it is relieved from its obligations to provide a document to a member.

The tax measures announced by the previous Government in its last federal Budget 2022–23 on 29 March 2022 and which had bipartisan support may be re-introduced into Parliament by the new Government.

Proposed measure Current status
Small business technology boost — a bonus 20 per cent tax deduction for eligible expenditure incurred between 7.30 pm (AEDT) on 29 March 2022 and 30 June 2023 on expenses and depreciating assets that support digital operations Consultation on Draft legislation Treasury Laws Amendment (Measures for consultation) Bill 2022: technology investment boost closed on 19 September 2022.
Small business skills and training boost — a bonus 20 per cent tax deduction for eligible expenditure incurred between 7.30 pm (AEDT) on 29 March 2022 and 30 June 2024 on external training delivered to employees by providers registered in Australia Consultation on Draft legislation Treasury Laws Amendment (Measures for Consultation) Bill 2022: skills and training boost closed on 19 September 2022
Patent box expansion — proposed Div 357 of the ITAA 1997 Bill implementing this lapsed
Reducing regulatory burden for Australia’s foreign investment framework Implemented by the Foreign Acquisitions and Takeovers Amendment Regulations 2022
Strengthening the Australian Business Number System Deferral of a measure announced in the
2019–20 Budget
Modernisation of PAYG instalment systems — allowing companies to pay their PAYG instalments based on current financial performance Due to commence from 1 January 2024
Digitalising trust income reporting and processing

Further training for your team 

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 16 locations across Australia. Click here to find a location near you.

Online training

Personalised training options

We can also present these Updates at your firm or through a private online session, with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also reach us at 0413 955 686 for a chat about your training needs and how we can assist you.

Our 2022-23 Federal Budget Infographic

When is the sale of a taxpayer’s home subject to CGT?

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It is commonly understood that the sale of a taxpayer’s private home is exempt from CGT … but this is not always the case. So what are the circumstances in which the sale of a property in which the taxpayer had lived may give rise to a tax liability?

The main residence exemption

The main residence exemption (MRE) in Subdiv 118-B of the ITAA 1997 provides a full or partial exemption in respect of a capital gain or loss that a taxpayer makes from a CGT event (e.g. a disposal) happening to their ‘dwelling’.

The MRE only applies to an individual taxpayer.

A ‘dwelling’ is defined as including a unit of accommodation that is:

  • a building or is contained in a building, and consists wholly or mainly of residential accommodation, or
  • a caravan, houseboat or other mobile home.

The dwelling also includes any land immediately under the unit of accommodation.

If the taxpayer has lived in their dwelling for the entire period of ownership and has not used the property for income-producing purposes then the taxpayer will be eligible for a full tax exemption.

However the exemption is reduced in some circumstances. The calculation of a partially taxable gain may also be adjusted.

When a partial exemption may apply

Using the dwelling for income-producing purposes

A partial exemption applies if the dwelling was used for the purpose of producing assessable income during all or part of the period of the taxpayer’s ownership.

This may include:

  • using part of the property for a home-based business, or renting out a room, while the taxpayer is living in the property
  • using the property for short-term rental (e.g. Airbnb) during periods when the taxpayer is away on holidays
  • renting out the property when the taxpayer has moved somewhere else.

The reduction in the MRE takes into account the amount of time that the dwelling was used for income-producing purposes as well as the proportion of the property (which may be measured in different ways, e.g. by area) which was used for those purposes.

When a dwelling is not the taxpayer’s main residence

The extent to which the taxpayer can access the MRE depends on the proportion of their period of ownership in which the dwelling is the taxpayer’s ‘main residence’.

The tax legislation does not define ‘main residence’ but the ATO will consider a dwelling to be the taxpayer’s main residence if:

  • the taxpayer and their family live in it
  • the taxpayer’s personal belongings are in it
  • it is the address the taxpayer’s mail is delivered to
  • it is the taxpayer’s address on the electoral roll
  • services such as gas and power are connected.

The length of time the taxpayer stays in the dwelling and whether they intend to occupy it as their home may also be relevant.

A taxpayer’s home will be their main residence from the start of their ownership period, provided they move in ‘as soon as practicable’.

If there is a delay moving in because of illness or other unforeseen circumstances — the dwelling will still qualify as a main residence, provided the taxpayer moves in as soon s the cause of the delay is remove (e.g. when they recover from the illness).

If the taxpayer cannot move in because the property is being rented to someone else — the property does not become the taxpayer’s main residence until they move in.

There are specific situations in which a taxpayer may treat a dwelling as their main residence for a period even if they were not living there during that period — see below for a list — so the taxpayer may be able to access a full exemption, or a greater partial exemption., than would otherwise be the case.

Adjacent land over two hectares

Generally the maximum area of land adjacent to the dwelling covered by the MRE rules is two hectares, less the area of the land immediately under the dwelling. Land outside this area is not eligible for an exemption even if it is wholly used for private purposes.

When the dwelling is treated as the taxpayer’s main residence even if they are not living there

The MRE legislation contains special rules under which a taxpayer may choose to treat a dwelling as their main residence for a certain period of time even if they are not living in it during that time:

  • if they move out of the dwelling and use it for income-producing purposes — for a maximum period of six years
  • if they move out of the dwelling and does not use it for income-producing purposes — indefinitely
  • where the dwelling is subject to a compulsory acquisition, or loss or destruction — up to four years before acquiring a replacement dwelling
  • if they move house — for up to six months where the taxpayer has not disposed of the old dwelling
  • where the taxpayer’s spouse resides in a different dwelling — the spouses may choose to nominate the same or different dwellings as their main residence
  • where the taxpayer’s dependent child resides in a different dwelling — the taxpayer must choose one of the dwellings as the main residence of both
  • where the taxpayer acquired their interest in a dwelling in a marriage breakdown — the taxpayer inherits the former owner (former spouse)’s main residence history
  • inherited dwellings — the taxpayer may be eligible for the full or partial MRE even if they have never lived in the inherited property.

In most (but not all) cases, where the taxpayer treats a particular dwelling as their main residence during a period of time, they cannot also treat another dwelling as a main residence during that same period of time.

Adjustments to proceeds and cost base

If the MRE applies only partially or not at all, a taxable capital gain will need to be calculated. There are some situations in which the proceeds or the cost base requires adjustment.

Capital proceeds

Generally, the capital proceeds from a CGT event are the sum of:

  • the money the taxpayer has received, or is entitled to receive
  • the market value of any other property the taxpayer has received, or is entitled to receive.

A taxpayer may wish to transfer their interest in their family home to an adult child for either no proceeds, or less than market value proceeds in a non-arm’s length arrangement. A market value substitute rule ensures that in calculating the capital gain or loss, the capital proceeds are taken to be equal to the market value of the dwelling at the time of the disposal.

Cost base

The cost base of the dwelling comprises five elements:

  1. The total of the money the taxpayer paid, or is required to pay, and the market value of any other property the taxpayer gave, or is required to give.
  2. Incidental costs (e.g. stamp duty, legal fees).
  3. Costs of ownership (e.g. interest, rates and land tax, repairs and insurance).
  4. Capital expenditure incurred to increase or preserve the dwelling’s value.
  5. Capital expenditure incurred to establish, preserve or defend the taxpayer’s title to the dwelling.

Certain amounts are excluded from being included in cost base, including amounts which the taxpayer could have deducted (e.g. capital works deductions during a period when the property was rented out).

The first element of the cost base and reduced cost base of the dwelling is its market value at the time of acquisition if:

  • the taxpayer did not incur expenditure to acquire it
  • some or all of the expenditure incurred to acquire it cannot be valued, or
  • it was acquired in a non-arm’s length transaction.

Some or all of the above may apply where for example the taxpayer had acquired the property from their parents at non-arm’s length terms.

Where the dwelling has been used for income-producing purposes, the total cost base is treated as the market value of the dwelling at the first time it was used for those purposes.

Where the taxpayer acquired the dwelling, or a part interest in the dwelling, in a marriage breakdown that was subject to the marriage breakdown CGT roll-over, the first element of the cost base is equal to the total cost base in the hands of the transferor spouse.

Where the property was inherited through a deceased estate:

  • a post-CGT dwelling that was the deceased’s main residence and was not being used for income-producing purposes — the market value on the day of death
  • any other post-CGT dwelling — the cost base in the hands of the deceased on the day of death
  • a pre-CGT dwelling — the market value on the day of death.

Upcoming CGT Training

Need a further understanding of CGT? We will cover it in full at our 2-day Tax Fundamentals workshops, taking place this spring in Melbourne and Sydney.

One of our most popular offerings, Tax Fundamentals covers nine key topics in detail in an engaging, supportive environment while using real-life scenarios and case studies.

We’re currently offering 2 for 1 pricing, along with group discounts – so get in quick!

Melbourne  |  12-13 October  |  info and registrations > registrations closing soon
Sydney  |  16-17 November  |  info and registrations > 

Key topics covered: 

Prefer online learning? Check out Tax Fundamentals Online.

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services here.

Audit Office report into ATO engagement with practitioners

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Recently the Australian National Audit Office (ANAO) released its performance audit report into the ATO titled Australian Taxation Office’s Engagement with Tax Practitioners.

About the audit

Reviews in 2015 and 2018 of the ATO’s engagement with and support for tax practitioners identified concerns with the ATO’s transparency, communication and level of service. The ATO’s engagement with tax practitioners was identified by the Joint Committee of Public Accounts and Audit as an audit priority of the Parliament.

The objective of the audit was to assess the effectiveness of the ATO’s engagement with tax practitioners in achieving efficient and effective taxation and superannuation systems.

To form a conclusion against the objective, the following criteria were adopted:

  • Does the ATO have an effective strategic framework for engaging with tax practitioners?
  • Does the ATO effectively engage and consult with tax practitioners in developing its strategy, services and support?
  • Does the ATO provide effective services and support for tax practitioners?

The audit methodology included:

  • review of ATO documentation such as strategies, plans, meeting minutes and papers, reporting and internal briefings
  • meetings with ATO officers
  • meetings with the Tax Practitioners Board
  • meetings with external stakeholders — tax practitioners, tax-related professional associations and officers from the Inspector-General of Taxation
  • a survey of 5461 tax practitioners
  • review of 87 citizen contributions to the audit and five submissions from tax-related professional associations.

Audit conclusion

The ATO is largely effective in implementing its tax practitioner engagement activities. The development of a strategic and performance framework for tax practitioner engagement would allow the impact on the efficiency and effectiveness of the taxation and superannuation systems from the ATO’s engagement activities to be assessed.

The ATO has a partly effective strategic framework for engaging with tax practitioners. While there have been various engagement objectives and documented strategies over time, these are not always clearly aligned to demonstrate how the strategies contribute to achieving the engagement objectives. Coordinated strategic planning is developing. The implementation of tax practitioner targeted strategies has not always been supported by documented implementation planning. External performance reporting on tax practitioner engagement is limited in scope. The ATO does not have a fully formed performance framework to assess the effectiveness of its strategic approach to engaging with tax practitioners.

The ATO has a largely effective approach to consulting tax practitioners to inform the development of its strategy, services and support. There is an entity-level consultation framework and there are tax practitioner consultation channels, including standing and special purpose consultation groups. Tax practitioner consultations reviewed by the ANAO are broadly consistent with Australian Public Service standards for engagement. The ATO has an established process for identifying consultation participants, although criteria supporting the selection of consultation group members are not defined. The ATO publicly reports key messages from its consultation group meetings and provides some public information about the outcomes of its consultation activities. The ATO has not comprehensively reviewed the effectiveness of its tax practitioner consultation practices.

The ATO provides largely effective services and support for tax practitioners. The ATO plans, although it does not always review the effectiveness of, its communications to tax practitioners. Two key tax practitioner programs reviewed as part of the audit are supported through largely effective communications. The ATO monitors the performance of its tax practitioner enquiry channels in terms of timeliness of response. Monitoring of service quality through the channels, including whether enquiries were satisfactorily resolved by skilled staff, is less evident. Digital services for tax practitioners are largely fit for purpose.

Recommendations

Recommendation no. 1

In finalising its overarching tax practitioner engagement strategy, the ATO more clearly link its strategies to its tax practitioner engagement objectives and better communicate its strategic engagement approach with tax practitioners.

ATO response: Agreed.

The ATO will more clearly link its strategies to tax practitioner engagement objectives and better communicate its strategic engagement approach with tax practitioners.

Recommendation no. 2

The ATO develop a performance framework that provides a basis for assessing its performance in engaging with tax practitioners to achieve efficient and effective taxation and superannuation systems.

ATO response: Agreed.

The ATO will develop a performance framework that provides a basis for assessing its performance in engaging with tax practitioners to achieve efficient and effective taxation and superannuation systems.

Recommendation no. 3

The ATO document selection criteria to support transparency, consistency and diversity in selection of tax practitioners for standing and special purpose consultation groups.

ATO response: Agreed.

The ATO will document selection criteria to support transparency, consistency and diversity in selection of tax practitioners for standing and special purpose consultation groups.

Recommendation no. 4

The ATO consult with tax practitioners to better understand their concerns regarding the registered agent phone line and use this feedback to guide the development of future service offerings.

ATO response: Agreed.

The ATO agrees that it will consult with tax practitioners to better understand their concerns regarding the registered agent phone line and use this feedback to guide the development of future service offerings.

The ATO’s response

The ATO welcomes this review and the report’s finding that the ATO is largely effective in implementing its tax practitioner engagement activities.

Tax practitioners are one of the ATO’s key partners and we value the strong collaborative relationship that exists. We are very proud of our engagement with tax practitioners and we are pleased the audit recognises the strength of our approach to consultation and the services and support we offer to tax practitioners.

We note the period covered by the audit was one during which tax practitioners and the ATO encountered unprecedented impacts and challenges arising from COVID-19. We are proud of the way we worked with the tax profession to deliver critical stimulus measures to the community, and immediate and tailored support for tax practitioners and their clients.

The ATO is focussed on continuous improvement and provision of contemporary products and services to tax practitioners and their clients. The report makes four recommendations which are agreed by the ATO. We will take on board the report’s findings as we continue to refine and improve the ways by which we engage with tax practitioners.

Information from the report

Resources and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 16 locations across Australia. Click here to find a location near you.

Upcoming Public Offer sessions:

Online training

Personalised training options

We can also present these Updates at your firm, or through a private online session, with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also reach us at 1300 TAX CPD for a chat about your training needs and how we can assist you.

 

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services by clicking here.

Professional profit allocation arrangements — ATO to contact ‘higher risk’ practitioners

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Allocation of professional profits — ATO to commence contacting practitioners

The ATO has announced that it will be contacting some individual professional practitioners (IPPs) — who may be in a higher risk category — to find out more about their profit allocation arrangements and assist them with using PCG 2021/4 (the Guideline), which came into effect on 1 July 2022.

The ATO will contact IPPs who may be in a higher risk category to:

  • understand their unique arrangements and structures
  • provide them with practical assistance and guidance about how they can mitigate any risks that may present.

There is a dedicated team responsible for the oversight and management of profit allocation arrangement risks. If an IPP wishes to discuss their profit allocation arrangement with the ATO, they can email ProfessionalPdts@ato.gov.au.

About the Guideline

PCG 2021/4 is about arrangements where:

  • taxpayers redirect their income from a business or activity to an associated entity
  • that income includes income from their professional services
  • the outcome is that they significantly reduce their tax liability.

PCG 2021/4 applies from 1 July 2022. The Guideline replaces the web material published in 2015, Assessing the Risk: Allocation of profits within professional firms guidelines, which was suspended in December 2017.

ATO guidance on the application of the Guideline, including detailed examples, is available here.

The gateways

The IPP must assess if their arrangement is commercial and does not have high-risk features. The IPP must pass these ‘gateways’ before they can apply the Guideline.

Commercial rationale gateway

The IPP must assess if their arrangement is commercial. An arrangement that shows a lack of commercial rationale can:

  • seem more complex than necessary to achieve the relevant commercial objective
  • appear to serve no real purpose other than to gain a tax advantage
  • have a tax result that appears to be at odds with its commercial or economic result
  • result in little or no risk in circumstances where significant risks would normally be expected
  • operate on non-commercial terms or in a non-arm’s length manner
  • present a gap between the substance of what is being achieved and the legal form it takes.

No high-risk features gateway

The IPP must also assess that your arrangement does not have high-risk features.

Arrangements with high-risk features can:

  • have financing arrangements relating to non-arm’s length transactions
  • exploit the difference between accounting standards and tax law
  • be materially different in principle from Everett and Galland (refer to Everett assignments for information on high-risk features of Everett assignments)
  • involve multiple classes of shares and units, including creating discretionary entitlements such as dividend access shares
  • involve multiple assignments or disposals of an equity interest
  • misuse the superannuation system, including assignments or disposals of an interest to associated SMSFs
  • distribute income to entities, other than the IPP, with losses.

Consequences

Risk assessment framework

Where the IPP has passed both gateways, they can self-assess against the risk assessment framework.

1.     Complete the risk assessment scoring table

If the IPP returns 100 per cent of the profit entitlement from the firm in their tax return, they are automatically int eh green zone and do not need to assess against the other risk assessment factors.

The total effective tax rate is the average rate of tax for the entire income received from the firm by the IPP expressed as a percentage. It is calculated using the following formula:

Total tax paid by the IPP, and associated entities of the IPP, on professional firm income
÷ Total firm income collectively received × 100

The total effective tax rate excludes any levies such as Medicare levy.

2.     Work out the risk zone

* The IPP can self-assess against the risk assessment factors 1 and 2 only, only if it is impractical to accurately determine an appropriate commercial remuneration against a benchmark for risk assessment factor 3.

The ATO is likely to further analyse the facts and circumstances of the arrangement or initiate compliance activity if either the:

  • IPP’s profit allocation arrangement exhibits high-risk features, or
  • arrangement has a moderate or high-risk rating.

Certainty for 1 July 2017 to 30 June 2024

The IPP can continue to rely on the suspended guidelines for 1 July 2017 to 30 June 2022 if their arrangement:

  • complies with the suspended guidelines
  • is commercially driven
  • does not exhibit any of the high-risk factors outlined in the No high-risk features gateway.

The arrangement will be considered low risk for 1 July 2017 to 30 June 2022.

The IPP may find that your arrangement was low risk under the suspended guidelines but has a higher risk rating under PCG 2021/4. If so, the IPP can continue to apply the suspended guidelines until 30 June 2024. If the IPP wishes to transition their high-risk rating arrangement to a lower risk zone they can email ProfessionalPdts@ato.gov.au.

Further resources and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. You can also browse our recording library for past topics if you need to catch up!

Online training

Face-to-face Tax Workshops

Our Public Session Tax Updates are available across 16 locations nationally and are presented monthly. Click here to find a location near you.

Personalised tax training

We can also present these Updates at your firm (or through a private online session) with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also call us at 1300 TAX CPD if you have any questions, or to discuss your training needs.

 

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services by clicking here.

Crypto will not be ‘foreign currency’: Draft tax legislation

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[lwptoc]

On 6 September 2022 the Government released exposure draft legislation titled Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation treatment of digital currency (the draft Bill) which proposes to exclude crypto assets, such as Bitcoin, from being treated as a ‘foreign currency’ for Australian income tax purposes.

In practical terms, the proposed legislative amendments will not change the ATO’s current approach. However it will provide legislative certainty and clarity and reduce the need for taxpayers to rely on their own and the ATO’s application of the existing foreign currency definition to the particular characteristics of a crypto asset.

Consultation feedback is due by 30 September 2022.

Context of proposed amendments

The Legislative Assembly of the Republic of El Salvador recognised bitcoin as an unrestricted legal tender by legislative decree which took effect on 7 September 2021. As an unintended consequence of this, there is the potential that bitcoin may be a ‘foreign currency’ for the purposes of the ITAA 1997 due to its status as a legal tender in El Salvador.

This is inconsistent with current policy intent. Bitcoin and other similar digital currencies were never intended to be foreign currencies for Australian income tax purposes.

Without clarification of the tax treatment of bitcoin and digital currencies, there would be uncertainty about the status of these assets for Australian income tax purposes.

See the Government’s media release announcing the proposed amendments on 22 June 2022.

The draft Bill

The draft legislation relies on amending the existing definition of digital currency in the GST Act before adopting it as an exclusion from the definition of foreign currency in the ITAA 1997. To achieve this, the draft Bill proposes to:

  • amend the definition of foreign currency in the ITAA 1997 to exclude digital currencies. The definition of digital currency has been adopted from the GST Act
  • amend the GST Act definition of digital currency to ensure it excludes government-issued digital currencies and includes digital currencies that are not government-issued but have been adopted as a legal tender
  • amend the ITAA 1997 to include a power to make regulations to provide for further exclusions from the definition of foreign currency in the ITAA 1997.

Implications
Digital currencies (such as bitcoin) will not be foreign currencies for the purposes of the ITAA 1997, even if they are adopted as a legal tender by a foreign jurisdiction.

Despite bitcoin being adopted as a legal tender and therefore potentially being considered a currency, it is decentralised, and it is not issued by, or controlled by, any government. In contrast, what are commonly referred to as ‘central bank digital currencies’ are a government-issued digital form of money that will continue to be money, not digital currency.

The proposed legislative changes

Section 995-1 of the ITAA 1997

Current definition of ‘foreign currency’

‘foreign currency’ means a currency other than Australian currency.

Proposed definition of ‘foreign currency’

foreign currency means a currency other than:

Proposed definition of ‘digital currency’

digital currency has the same meaning as in the *GST Act.

(There is no current definition.)

Section 195-1 of the GST Act

Current definition of ‘digital currency’

‘digital currency’ means digital units of value that:

Proposed definition of ‘digital currency’

(Note: proposed changes are marked in bold.)

‘digital currency’ means digital units of value that:

The definition of ‘money’ in s. 195-1

Proposed new para. (j)

Regulation 196.1.01 of the GST Regulations

Proposed new definition of ‘foreign currency’

foreign currency means a currency other than:

Retrospective application

The amendments to the definition of ‘foreign currency’ in the ITAA 1997 are proposed to apply in relation to income years that include 1 July 2021 and to subsequent income years.

The purpose of applying the amendments to income years that include 1 July 2021 is to ensure consistent tax outcomes for all taxpayers, including those with substituted accounting periods.

The amendments to the GST Act and GST Regulations are proposed to apply in relation to supplies or payments made on or after 1 July 2021, to align their application with the application of the amendments to the ITAA 1997.

Retrospective application is necessary to clarify that the tax treatment of digital currencies that applied prior to 7 September 2021 (the date at which the El Salvador decree took effect) continues to apply after that date.

Further recommended resources

Crypto — state of (tax) play

Posted on by thriveadmin

TaxBanter is presenting the webinar Cryptocurrency … the state of play on 31 August in response to client demand.

Cryptocurrency transactions are one of the ATO’s four tax time priorities in 2022. Accountants need to know right now what they should do to manage these transactions. In the webinar, presenters George Housakos and Nicole Rowan will be focusing on:

  • The different types of cryptocurrency and digital assets
  • Tax treatment of crypto and digital asset transactions
  • Record keeping considerations
  • Challenging scenarios that might not be specifically envisioned by current tax laws.

In the Australian tax legislation there is no taxing regime specific to crypto assets. Practitioners and their clients must interpret and apply the existing rules in the context of crypto transactions.

The ATO has in recent months expanded its suite of non-binding general website guidance, some of which is outlined in our previous Banter Blog article Crypto assets — proposed tax amendment and current ATO guidance.

However, there is still a dearth of binding guidance. To date, the ATO has only issued four Taxation Determinations and one GST Ruling, eight years ago in 2014. This article will briefly outline the four Determinations, which set out the Commissioner’s views on the application of the existing law to bitcoin in the areas of:

  • foreign currency (Div 775 of the ITAA 1997) — TD 2014/25
  • CGT asset (s. 108-5 of the ITAA 1997) — TD 2014/26
  • trading stock (Div 70 of the ITAA 1997) — TD 2014/27
  • property fringe benefit (FBTA Act) — TD 2014/28

In the webinar the presenters will explain these Determinations and discuss the tax issues arising from crypto assets which the Commissioner has not yet clarified.

(Note: GSTR 2014/3, released with the Determinations, will not be covered in this article.)

 Critical point
All four of the Determinations relate to bitcoin specifically and not cryptocurrencies generally. The principles covered in the Determinations may also apply to particular cryptocurrencies other than bitcoin. However taxpayers and their advisers will need to consider any material similarities and differences between the cryptocurrency and bitcoin that may be relevant to the application of the Commissioner’s rulings.

Bitcoin Tax Determinations

What is bitcoin?

The non-binding Explanation section of TD 2014/25 sets out in detail the ATO’s view of ‘what is bitcoin’ for the purposes of the Determinations.

The key points include the following:

  • the Bitcoin system is decentralised in that it is not under the control of a central authority
  • the value of bitcoin is not derived from gold or government fiat, but from the value that people assign it
  • the process through which bitcoin are created and enter into circulation is called ‘Bitcoin mining’, which involved using special software to solve complex cryptographic equations for a reward of receiving a specified number of newly created bitcoin
  • bitcoin that are already in circulation can be acquired either by exchanging ‘national’ or ‘fiat’ currencies for them through an online exchange, or by accepting them as a gift or in exchange for goods and services
  • bitcoin are sent and received via a Bitcoin address, which is a long alphanumeric string used by the network as an identifier
  • Bitcoin uses public key cryptography to make and verify digital signatures used in bitcoin transactions
  • each user is assigned a ‘public/private’ keypair which is saved in that person’s ‘Bitcoin wallet’
  • to transfer bitcoin, a person creates a transaction message with the number of bitcoin to be transferred and signs the transaction with their private key
  • a bitcoin is only accessible by the person in possession of the private key that relates to the Bitcoin address associated with that person’s bitcoin holdings. Accordingly, a bitcoin consists not just of the numerical amount (or balance) of bitcoin and the Bitcoin address to which they are associated, but also the related private key that allows the holder to do anything with those bitcoin.

Foreign currency — TD 2014/25

TD 2014/25 — Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997?

Legislative reform to provide clarity
In June 2022, the Government announced that it will amend the tax law to legislate the current administrative arrangements to provide clarity that crypto assets will not be regarded as a foreign currency for tax purposes.

This clarification will deliver a consistent tax requirement for crypto asset holders and will be backdated to 1 July 2021 for the avoidance of ambiguity.

The Government’s announcement follows the decision by the Government of El Salvador to allow Bitcoin as legal tender.

Until the proposed change is legislated, the current law applies.

The Commissioner’s ruling

Bitcoin is not a ‘foreign currency’ for the purposes of the foreign currency rules in Div 775 of the ITAA 1997.

Non-binding explanation

How is ‘foreign currency’ relevant?

Division 775 provides rules for recognising foreign currency gains and losses for income tax purposes. To the extent that a foreign currency gain would be included in a taxpayer’s assessable income under Div 775 and another provision of the Tax Acts, the gain is only included in the taxpayer’s assessable income under Div 775. There is a corresponding rule to prevent a double deduction in relation to a foreign currency loss.

Determining whether a bitcoin is ‘foreign currency’ or ‘currency’ as those terms are used in the income tax law requires consideration of the characteristics of bitcoin.

The Commissioner considers that bitcoin does not constitute ‘currency’ nor ‘foreign currency’ in the context in which those terms operate for the purposes of Australian tax law. It is not ‘foreign currency’ for Div 775 purposes.

Income tax consequences

As bitcoin is not a foreign currency, Div 775 does not apply and transactions involving bitcoin give rise to the same tax consequences as other barter transactions.

A taxpayer that receives bitcoin as payment for goods or services they provide as part of their business, or uses bitcoin to make purchases for their business, is required to include the arm’s length Australian dollar value of their bitcoin transactions in calculating their assessable income.

The Australian dollar value of bitcoin may increase or decrease between the time a taxpayer acquires and disposes of bitcoin. Whether such fluctuations give rise to ordinary income or CGT consequences will depend on the particular facts and circumstances of the taxpayer.

CGT asset — TD 2014/26

TD 2014/26 — Income tax: is bitcoin a ‘CGT asset’ for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997?

The Commissioner’s ruling

Bitcoin is a CGT asset for the purposes of s. 108-5(1) of the ITAA 1997 (the definition of ‘CGT asset’).

Non-binding explanation

Is bitcoin a CGT asset?
The term ‘CGT asset’ is defined in s. 108-5(1) as:

  • any kind of property, or
  • a legal or equitable right that is not property.
Is bitcoin ‘any kind of property’?

The relevant relationship in the nature of property that must be considered is the relationship between:

  • the object or thing, bitcoin, being the digital representation of value constituted by three interconnected pieces of information (a Bitcoin address; the Bitcoin holding or balance in that address; and the public and private keypair associated with that address), and
  • the bundle of rights (hereafter referred to as ‘Bitcoin holding rights’) ascribed to a person with access to the bitcoin under the Bitcoin software and by the community of Bitcoin users.

The most important of these Bitcoin holding rights are the rights of control over one or more bitcoin in the holder’s Bitcoin wallet, e.g. the capacity to trade a bitcoin for other value or use it for payment. These rights, however, do not amount to a chose in action as a Bitcoin holding does not give rise to a legal action or claim against anyone.

However, there are other factors that support the conclusion that Bitcoin holding rights are proprietary in nature. The most compelling is that bitcoin are treated as valuable, transferable items of property by a community of Bitcoin users and merchants. There is an active market for trade in bitcoin and substantial amounts of money can change hands between transferors and transferees of bitcoin.

As the Bitcoin software prescribes how the transfer and trade of bitcoin can occur and transactions are verified through the Bitcoin mining process, Bitcoin holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable.

In weighing all these factors it is considered that Bitcoin holding rights amount to property within the meaning of s. 108-5(1)(a). As such, a person holding a bitcoin is considered to hold a ‘CGT asset’.

CGT consequences of disposing of bitcoin

The disposal of bitcoin to a third party gives rise to CGT event A1. A taxpayer will make a capital gain from CGT event A1 if the capital proceeds from the disposal of the bitcoin are more than the bitcoin’s cost base. The capital proceeds from the disposal of the bitcoin are the money or the market value of any other property received (or entitled to be received) by the taxpayer. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the bitcoin will be included in the cost base of the bitcoin.

Section 118-20 reduces any capital gain made by a taxpayer by an amount that is included in the taxpayer’s assessable income under another provision of the tax law, e.g. ordinary income.

A capital gain made from a personal use asset (a CGT asset used or kept mainly for personal use or enjoyment) is disregarded if the first element of the cost base is $10,000 or less. Any capital loss made from a personal use asset is disregarded.

Bitcoin as a personal use asset

Whether or not bitcoin is used or kept mainly for personal use or enjoyment will depend on the particular facts and circumstances of each case. Relevant considerations include the purpose for which the bitcoin was acquired and kept, as well as the nature of the property acquired when the bitcoin is disposed of (for example, whether the bitcoin is used to purchase an investment). Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use.

  • An example of where bitcoin would be considered to be a personal use asset is where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music. If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets.
  • An example of where bitcoin would not be a personal use asset is where an individual taxpayer mines bitcoin and keeps those bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.
Gains instead assessable as ordinary income?

In the case of an isolated transaction that is not carried out as part of a business operation, the Commissioner considers that a gain will generally be ordinary income where the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction.

Particularly relevant factors are the amount of money involved in the mining (or acquisition) and disposal of the bitcoin, the magnitude of the profit sought or obtained, the length of time the bitcoin is held before disposal and whether that bitcoin has no other immediate use other than as an object of trade.

For example, where a taxpayer mines a small amount of bitcoin as a hobby and after two years decides to sell the bitcoin for a small profit in order to purchase a more stable investment item, the gain will be assessed under the CGT provisions, not as ordinary income. Further, as the bitcoin were used to purchase an investment, the capital gain will not be disregarded under the personal use asset exception.

If, on the other hand, a taxpayer acquires bitcoin with the purpose of profiting from it upon a commercial transfer, a gain made on its disposal will be assessable under s. 6-5 and any capital gain arising under CGT event A1 will be correspondingly reduced under s. 118-20.

Trading stock — TD 2014/27

TR 2014/27 — Income tax: is bitcoin trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997?

The Commissioner’s ruling

Bitcoin, when held for the purpose of sale or exchange in the ordinary course of a business, is trading stock for the purposes of s. 70-10(1) of the ITAA 1997.

Non-binding explanation

Is bitcoin ‘trading stock’ for the purposes of s.70-10(1)?

 Definition — trading stock
The term ‘trading stock’ is defined in s. 70-10(1) as:

    • anything produced produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business; and
    • As bitcoin is property for tax purposes (TD 2014/26), bitcoin is ‘trading stock’ for the purposes of s. 70-10(1) where it is held for the purpose of sale or exchange in the ordinary course of a business.

Bitcoin held by a taxpayer carrying on a business of mining and selling bitcoin, or a taxpayer carrying on a Bitcoin exchange business will be considered to be trading stock. Further bitcoin received as a method of payment by any business that sells goods will also be considered to be trading stock of that business where the bitcoin is held for the purposes of sale or exchange in the ordinary course of the business.

Property fringe benefit — TD 2014/28

TD 2014/28 — Fringe benefits tax: is the provision of bitcoin by an employer to an employee in respect of their employment a property fringe benefit for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

The Commissioner’s ruling

The provision of bitcoin by an employer to an employee in respect of their employment is a property fringe benefit for the purposes of s. 136(1) of the FBTA Act.

Non-binding explanation

Is the provision of bitcoin a property benefit?

 Definition — Property benefit
‘Property benefit’, as defined in s. 136(1), ‘means a benefit referred to in section 40, but does not include a benefit that is a benefit by virtue of a provision of Subdivision A of Divisions 2 to 10 (inclusive of Part III)’.

Bitcoin is not a benefit described in Divs 2 to 10.

Section 40 provides that where a person (the ‘provider’) provides property to another person (the ‘recipient’), the provision of the property ‘shall be taken to constitute a benefit provided by the provider to the recipient’.

Property as defined in s. 136(1) means ‘intangible property’ and ‘tangible property’. Both of these terms are separately defined.

Bitcoin is not tangible property for the purposes of the FBTA Act. Nor is bitcoin real property and bitcoin holding rights are not a chose in action. However as the definition of intangible property also includes ‘any other kind of property other than tangible property’, bitcoin will fall within this definition. The provision of bitcoin by an employer to an employee is therefore a property benefit.

Is bitcoin a property fringe benefit?

Definition — Property fringe benefit — s. 136(1)
A fringe benefit that is a property benefit.

A benefit will not be a fringe benefit if it is ‘salary or wages’ (see the exclusion in the definition of ‘fringe benefit’ in s. 136(1)).

Section 12-35 of Schedule 1 to the TAA, which provides that an entity must withhold an amount from salary or wages, will not apply to require withholding on ‘a payment in so far as it consists of providing a non-cash benefit’. Section 995-1 of the ITAA 1997 defines the term ‘non-cash benefit’ as ‘property or services in any form except money’.

As bitcoin is not money but is considered to be property for tax purposes, bitcoin satisfies the definition of a ‘non-cash benefit’ and it is excluded from PAYG withholding. This exclusion from PAYG withholding means that bitcoin is not ‘salary or wages’ within the definition of that term in s. 136(1) and accordingly is not ‘salary or wages’ for the purposes of the exclusion in the definition of ‘fringe benefit’.

Accordingly, the provision of bitcoin by an employer to an employee in respect of the employee’s employment will be a property fringe benefit.

FBT consequences

The employer is liable to pay FBT on the taxable value of the property fringe benefits. Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable and is not exempt income of the taxpayer under s. 23L(1) of the ITAA 1936.

Further info and training

Our upcoming webinar will also touch on GST and SMSF issues relating to cryptocurrency.

ATO guidance on GST and digital currency is available here.

ATO guidance on SMSF investment in crypto assets is available here.

ATO items for consultation — August and September 2022

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The ATO has updated its ‘Planned consultation’ webpage to outline the items on which it plans to seek formal comment in August and September 2022.

These items will be released in the form of draft Determinations, draft Rulings, draft Practical Compliance Guidelines, draft Addendums or draft updates to existing Rulings and Determinations.

Note:
The list is subject to change.

Items for consultation in August 2022

Use of an individual’s image by related entities

The ATO will release a draft Determination which will set out the Commissioner’s preliminary view on how s. 6-5 of the ITAA 1997 applies to arrangements where an individual with fame establishes a connected entity and enters into an agreement with that entity granting it non‑exclusive use of their name, image, likeness, identity, reputation and signature. This draft Determination will update the view previously expressed in draft Practical Compliance Guideline PCG 2017/D11 Tax treatment of payments for use and exploitation of a professional sportsperson’s ‘public fame’ or ‘image’, which was withdrawn on 24 August 2018.

GST treatment of financial supplies

The ATO will release a draft Addendum to GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions to reflect changes in the GST law (e.g. changes to the GST legislation applicable to cross-border supplies, and in relation to digital currency), and contains some proposed changes to modernise parts of the Ruling.

Items for consultation in September 2022

Taxing US and UK resident financial institutions under US and UK taxation conventions

The ATO will release a draft update to TR 2005/5 Income tax: ascertaining the right to tax United States (US) and United Kingdom (UK) resident financial institutions under the US and the UK Taxation Conventions in respect of interest income arising in Australia. The draft update will clarify certain aspects of the second limb of the definition of ‘financial institution’ which is used in Australia’s double-tax conventions with the US and the UK.

Residency tests for individuals

The ATO will release a draft Taxation Ruling to provide the Commissioner’s preliminary guidance to individuals to enable them to self-assess their residency status.

The new guidance will consolidate the current rulings on the residency tests for individuals — IT 2650 and TR 98/17 — and add new guidance to reflect the changes in the interpretation of ‘place of abode’ since the decision in Harding v FCT [2018] FCA 837. These changes are intended to clarify the law regarding how taxpayers self-assess residency and reduce uncertainty and the need for further engagement with the ATO.

NOT YET LAW
The Board of Taxation’s Review of the income tax residency rules for individuals, which was delivered to the Government in August 2017, makes 11 recommendations to Government. The Government has not yet taken a position on the recommendations.

Beneficiary’s share of the net income of a trust estate — present entitlement

The ATO will release a draft update to Taxation Determination TD 2012/22 Income tax: for the purposes of paragraph 97(1)(a) of the ITAA 1936 is a beneficiary’s share of the net income of a trust estate worked out by reference to the proportion of the income of the trust estate to which the beneficiary is presently entitled? The draft update will amend the Determination to take into account the decision in Lewski v FCT [2017] FCAFC 145 (Lewski).

Background
In Lewski, the Full Federal Court held that amounts payable by a trust under two contracts for the purchase of an aged care facility and aged care business were incurred in the year in which the contracts were entered into and not at the completion date of the contracts despite certain future contingencies being contemplated in the agreements.

The Taxpayer was not presently entitled to a share of the income of two trust estates as:

    • the distributions were contingent on the Commissioner not amending the relevant trust’s net income
    • the Taxpayer’s purported disclaimers to her interests in the trusts were not effective as her husband had been acting as her agent and his knowledge, actions and inaction were attributable to her.

Car parking fringe benefits

The ATO will release a draft Addendum to TR 2021/2 Fringe benefits tax: car parking benefits following the decision by the Full Federal Court in FCT v Virgin Australia Regional Airlines Pty Ltd [2021] FCAFC 209.

Background
In this case, the Full Federal Court considered the requirement in the car parking fringe benefit rules in s. 39A of the FBTA Act that the work car park must be ‘located at or in the vicinity of the primary place of employment’. The Court determined that for each employee of the Taxpayers, their ‘home base’ airport was their primary place of employment — however, an employee’s ‘home base’ may not necessarily be the predominant location from which their duties were performed.

TR 2021/2 will be amended to confirm the Commissioner’s views on the meaning of ‘primary place of employment’ for the purposes of the car parking benefit provisions in the FBTA Act.

In addition, the draft update to Chapter 16 — Car parking fringe benefits (on the ATO’s legal database) will be finalised to provide practical guidance on the application of the law, to complement TR 2021/2.

Commissioner’s discretion to determine that an entity does not control another entity

The ATO will release a draft Determination to set out the Commissioner’s preliminary view on the meaning of ‘control’ for the purpose of exercising the discretion under s. 328-125(6) of the ITAA 1997.

Background
Section 328-125 outlines the meaning of ‘connected with an entity’ under the small business entity rules. Under s. 328-125(6), if the control percentage that a taxpayer holds in an entity is at least 40 per cent, but less than 50 per cent, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its affiliates.

GST and residential colleges

The ATO will release a draft Practical Compliance Guideline on GST and residential colleges. This draft Guideline is intended to replace the Residential Colleges GST Tool which will be discontinued from 31 December 2022. The draft Guideline will set out the Commissioner’s proposed compliance approach for universities and residential colleges supplying accommodation, meals, tertiary residential college courses and religious services to resident students, and claiming input tax credits.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. You can also browse our recording library for past topics if you need to catch up!

Online training

Face-to-face Tax Workshops

Our Public Session Tax Updates are available across 16 locations nationally and are presented monthly. Click here to find a location near you.

Personalised tax training

We can also present these Updates at your firm (or through a private online session) with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also call us at 1300 TAX CPD if you have any questions, or to discuss your training needs.

 

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services by clicking here.

Tax Time 2022: ATO focus on rental properties

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We hope you enjoy our 2022 Tax Time content series.

Related content:

The ATO has issued a release notifying taxpayers that ‘income and tax deductions from rental properties’ is one of the four key areas the ATO is focusing on during Tax Time 2022. In particular, the ATO is concerned about the omission of rental income and deliberate over-claiming of rental deductions.

The ATO’s random enquiry program has found that 90 per cent of tax returns that reported rental income and deductions contain at least one error. This outcome is even though most rental property owners use a registered tax agent.

The ATO is urging rental property owners to ensure they carefully review their records before declaring income or claiming deductions, and for registered tax agents to ask a few extra questions of their clients.

We don’t expect agents to be Sherlock Holmes, but we do expect them to ask the right questions to ensure their client’s return is right.

– Assistant Commissioner Tim Loh

NoteNote

Within the random enquiry program, the ATO randomly selects and profiles a sample of individual taxpayers who are not in business. Tax return data is matched to third party data. Verified taxpayers are not manually reviewed. The remainder of the sample progress to a review (the random enquiry program).

Include all rental income

The ATO receives rental income data from a range of sources including sharing economy platforms, rental bond authorities, property management software providers, and state and territory revenue and land title authorities.

Include all rental income, such as from renting out a holiday home, short-term rental arrangements and renting part of a home. Other rental-related income such as insurance payouts and rental bond money retained are also included.

Further, income and deductions must be in line with an owner’s interest in the property, which should generally mirror the legal documents.

Claiming correct deductions

It is critical to understand not only whether an expenditure is deductible but also when an amount is deductible.

Some expenses can be claimed immediately, such as rental management fees, council rates, repairs, interest on loans and insurance premiums.

Other expenses such as borrowing expenses and capital works are claimed over a number of years. Depreciating assets such as a new dishwasher or new oven costing over $300 are also claimed over their effective life.

Note

The cost of a depreciating asset is immediately deductible in the year incurred is available where:

    • the cost of the depreciating asset is $300 or less
    • the taxpayer uses the asset mainly for the purpose of producing assessable income that is not income from carrying on a business
    • the asset is not part of a set of assets the taxpayer starts to hold in the income year that costs more than $300
    • the asset is not one of a number of identical or substantially identical assets the taxpayer starts to hold in the income year that together costs more than $300.

Refinancing or redrawing on a rental property loan for private expenses such as holidays or a new car, means that the amount of interest relating to the loan for the private expense cannot be claimed as a deduction.

Rental expenses that are not deductible

A taxpayer cannot claim a deduction for the decline in value for assets in an existing residential rental property if the contract to purchase that property was entered into on or after 7.30 pm (AEST) on 9 May 2017.

Travel expenses related to a residential rental property are also not deductible. Travel expenses include the costs you incur on car expenses, airfare, taxi, hire car, public transport, accommodation and meals to:

  • inspect, maintain or collect rent for your rental property
  • travel to any other place as long as it is associated with earning rental income from your existing rental property (for example, visiting your real estate agent to discuss about your current rental property).

Where there is rental income from a holiday home, Assistant Commissioner Tim Loh’s advice is that:

You can claim expenses for the property to the extent that they are incurred for the purpose of producing rental income, not where your family and friends stayed in the property for a mini getaway at mate’s rates, you use it yourself, say at Christmas, or you stopped renting the property out.

Other circumstances in which deductions cannot be claimed include pretending that the property is available for rent when it really is not — for example by advertising significantly above a reasonable market rate or by placing unreasonable restrictions on potential tenants.

Selling a rental property

When a taxpayer sells a rental property, CGT needs to be considered.

If the property used to be the taxpayer’s home, they may be entitled to claim the main residence exemption in relation to part of the capital gain (or even the whole gain, depending on the application of the six-year absence rule).

It is also important to note that when selling any property for a contract price of $750,000 or more, vendors must obtain a ‘clearance certificate’ from the ATO and provide it to the purchaser, otherwise 12.5 per cent of the consideration will be withheld by the purchaser — and remitted to the ATO — under the foreign resident capital gains withholding rules.

 Frame Tip

Clearance certificate applications can take up to 28 days to process so to avoid delays, sellers should apply as early as practical using the online form. Having tax affairs up to date, including all lodgments, helps speed up the assessment of an application and a certificate being issued.

Good record keeping

Records of rental income and expenses should be kept for five years from the date of the lodgment of the relevant tax return or for five years after the disposal of the property, whichever is longer.

Adequate records should demonstrate how the expense was incurred and the extent they relate to producing rental income. They must include the name of the supplier, amount of the expense, the nature of the goods or services, the date the expense was incurred, and the date of the document.

Most common mistakes

The random enquiry program found that the rental component of the individuals not in business net tax gap is estimated at $1.5 billion. The most common reasons for tax return adjustments to rental items are a lack of, or incorrect, apportionment of expenses. The ATO also sees mistakes relating to capital works and capital allowance deductions.

The ATO has provided some rental deductions tips for tax practitioners assisting their clients:

  • apportion deductions according to the share of ownership
  • taxpayers can only claim expenses for a rental property that are incurred in producing rental income
    • check if there are any periods when the property wasn’t being used to produce income
    • ensure deductions for the property expenses are reduced for periods your clients
      • use or reserve the property
      • allows friends or family to rent it at mates rates
      • have unreasonable conditions on the property
  • record deductions for each rental property separately
  • check if repairs or maintenance should be capital works that need to be claimed over a period of time
  • set up a depreciating asset schedule to keep track of certain items.

In addition, if the taxpayer has updated their mortgage over the rental property, the practitioner should ask them if the loan also covers personal items and purposes — if so, the interest expenses need to be apportioned.

Tax Time toolkit for investors

As part of its Tax Time suite of guidance, the ATO has released the Tax time toolkit for investors for 2022. The fact sheets relating to rental properties include:

References – More information

ATO fact sheet Residential rental properties.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. You can also browse our recording library for past topics if you need to catch up!

Online training

Face-to-face Tax Workshops

Our Public Session Tax Updates are available across 16 locations nationally and are presented monthly. Click here to find a location near you.

Personalised in-house training

We can also present these Updates at your firm (or through a private online session) with content tailored to your client base – please contact us here to submit an expression of interest or visit our In-house training page for more information. You can also call us at 1300 TAX CPD to discuss your training needs.

 

Our mission is to offer flexible, practical and modern tax training across Australia – you can view all of our services by clicking here.

Tax Time 2022: Implications of international travel restrictions

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[lwptoc]

We hope you enjoy our 2022 Tax Time blog series.

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The international travel restrictions, including quarantine, vaccination and COVID-19 testing as a result of the COVID-19 pandemic over the past two years disrupted the plans and intentions of many individuals to live in a one country or another at a particular point in time.

The ATO released Tax Time 2021 guidance to assist taxpayer and practitioners in considering the impact of delayed international travel on Australian tax obligations. The worldwide travel disruptions continued well into the 2021–22 income year, so with Tax Time 2022 now upon us, it is an opportune time to revisit this guidance.

Lodging Australian tax returns

An Australian resident for tax purposes is taxed on income from worldwide sources.

A non-resident, or foreign resident, is taxed on Australian sourced income, including capital gains from CGT assets which are taxable Australian property.

An individual may need to lodge an Australian tax return for 2021–22 if:

  • they are an Australian resident for all of the income year
  • they became an Australian resident during the income year
  • they ceased to be an Australian resident during the income year
  • they are a foreign resident who earned income that is taxable in Australia.

Change of tax residency due to COVID-19

The ATO guidance states that if a taxpayer is a foreign resident in Australia temporarily for some weeks or months due to COVID-19, they will not become a tax resident if they:

  • usually live overseas permanently
  • intend to return there as soon as they are able.

However, the individual will need to review their residency status if they:

  • end up staying in Australia for a lengthy period
  • do not plan to or do not return to their country of residency when they are able to do so.

Relevant facts and circumstances include the individual’s:

  • intention and purpose of coming to and remaining in Australia
  • living arrangements while in Australia
  • family and business/employment ties in Australia.

Note

The taxpayer choosing to stay in Australia when they were able to leave is a factor that will point towards them being a resident. This includes if they have been able to leave but did not do so, because of conditions or restrictions that apply, or may apply, such as quarantine requirements on re-entering Australia.

Factors to consider in determining whether the individual had been able to leave Australia include:

  • government restrictions prevented the taxpayer from leaving Australia or entering the foreign country
  • a lack of commercial flights.

Implications for residents affected by COVID-19

Temporarily overseas

If the taxpayer usually lives and works in Australia but was temporarily overseas due to COVID-19, their Australian tax obligations do not change.

Implications for foreign residents affected by COVID-19

Note

A double tax agreement may apply to a foreign resident in respect of Australian sourced income taxed in both countries under domestic law.

Source of employment income

For a foreign resident, in some circumstances the employment income they earn working remotely from Australia may not have an Australian source.

Employment income

Foreign sourced employment income the taxpayer earns while in Australia temporarily will generally be paid leave or salary or wages.

If the foreign resident usually works overseas and earns foreign sourced employment income and they have been on paid leave in Australia, the income from the foreign employer for this leave is not from an Australian source and it is not assessable in Australia.

Salary or wages earned from continuing foreign employment working remotely while in Australia temporarily

The source of income depends on the facts.

The ATO accepts that if the remote working arrangement is short term — three months or less — the income from that employment will not have an Australian source.

For working arrangements longer than three months, the individual’s circumstances need to be examined to determine if their employment is connected to Australia.

The taxpayer’s employment income is likely to have an Australian source if:

  • they had chosen to stay in Australia despite being able to leave
  • they agree with their employer that Australia can be their usual place of work until they travel again.

This is because Australia is no longer a place where the taxpayer temporarily and unexpectedly performs their work, but a usual and longer-term place of employment.

However, the individual’s employment income may not have an Australian source where the following apply:

  • the only thing that has changed about their employment is that they are now doing it from Australia
  • there are no other connections to Australia
  • they intend to, and do, leave Australia as soon as they can
  • the country in which they normally reside does not have a double tax agreement with Australia (which may deem the employment may deem the employment income to have an Australian source).

Effect of a double tax agreement

Australia’s DTAs provide that, in certain circumstances, employment income earned by a resident of another country while working in Australia for a short period is not taxable in Australia (the short-term visit exception).

If the short-term visit exception does not apply, the employment income may be deemed to be from sources in Australia.

Generally, employment income will not be assessable in Australia if:

  • the taxpayer is not present in Australia for more than 183 days in aggregate
  • the taxpayer’s salary and wages are paid by, or on behalf of, an employer that is not a resident
  • the taxpayer’s salary and wages are not deductible against the profits of an Australian permanent establishment of their employer.

The conditions vary between DTAs.

SMSF residency relief

An SMSF must be an Australian resident superannuation fund at all times during the income year to be a complying superannuation fund. The SMSF must meet three residency conditions.

If a trustee is stranded overseas due to COVID-19 restrictions, and this causes them to be out of Australia for more than two years, this may affect whether the fund meets the residency conditions. In particular, it may affect whether the:

  • central management control of the fund is ordinarily in Australia
  • fund satisfies the active member test.

Provided there are no other changes in the SMSF or relevant circumstances affecting other conditions, the ATO will not take any compliance action to determine whether the fund meets the residency test.

This is one of the administrative relief measures for SMSFs which apply for the 2019–20, 2020–21 and 2021–22 income years.

Further info and training

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