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Issue with agents accessing information of deceased taxpayers to be resolved

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On 13 January 2020, the Commissioner registered a Legislative Instrument CRP 2020/1 titled Taxation Administration (Remedial Power — Disclosure of Protected Information by Taxation Officers) Determination 2020 (the Legislative Instrument). An accompanying Explanatory Statement was previously released with the draft of the Legislative Instrument. As explained below, the earliest this instrument can take effect is 13 May 2020.

The effect of the instrument is to consider representatives of an executor or administrator of a deceased estate a ‘covered entity’ to ensure that an ATO officer does not commit an offence when protected information of the deceased is disclosed to the following:

  • a registered tax agent or BAS agent of an executor or administrator of the deceased’s estate; or
  • a legal practitioner representing an executor or administrator of the deceased’s estate in relation to the deceased’s affairs relating to one or more taxation laws.

Note:
In this article, a registered tax agent, registered BAS agent and legal practitioner are collectively referred to as ‘representatives’ of the executor or administrator of the deceased estate.

The tax obligations of an executor or administrator

Executor vs administrator

An ‘executor’ of a deceased estate can be appointed only under a Will. If the individual died intestate (i.e. without a valid Will), the next of kin (generally the spouse, a child or another close family member of the deceased) may be appointed by the Court as the ‘administrator’ of the estate.

The tax law (see s. 995-1 of the ITAA 1997) refers to ‘an executor or administrator of an estate of an individual who has died’ as a ‘legal personal representative’ (LPR).

The LPR must administer and finalise the estate in accordance with the terms of the Will or under the laws of intestacy (as appropriate). The estate is finalised when all debts — including taxation liabilities — have been settled and all assets sold or distributed.

Tax issues arising up to the date of death

For tax issues of the deceased individual arising up to the date of death, the LPR must (as relevant):

  • notify the ATO of the death, including providing the death certificate and proof that the LPR has authority to deal with the tax affairs of the deceased person;
  • lodge any outstanding prior year income tax returns or prior period business activity statements (BASs) of the deceased person;
  • lodge a final (date of death) income tax return, or a non-lodgment advice, on behalf of the deceased person as necessary;
  • lodge a final BAS for the concluding tax period (which ends the day before the death) and cancel the deceased’s GST registration (assuming they were registered for GST).

For an executor or administrator of a deceased estate, managing the affairs of the deceased includes a range of final tax obligations which can be complex. The Commissioner recognises that it is desirable that executors and administrators be able to obtain assistance from representatives in finalising the tax affairs of the deceased where necessary.

Tax issues arising after the date of death

For tax issues that arise for the deceased estate after the death of the individual, the LPR must:

  • apply for a TFN for the deceased estate if estate tax returns need to be lodged;
  • apply for an ABN for the deceased estate if the enterprise that the deceased carried on will continue to be carried on by the LPR;
  • prepare and lodge trust tax returns for the deceased estate if necessary;
  • pay tax on behalf of beneficiaries who are not presently entitled to the income of the estate (as the trustee is subject to tax on the estate’s taxable income if no beneficiary is presently entitled to a share of the income of the estate);
  • pay tax on behalf of certain beneficiaries who are presently entitled to the income of the estate — such as minors, legally incapacitated or non-residents;
  • prepare and lodge BASs for the deceased estate if necessary.

Why is there a problem with the ATO disclosing the information? 

Disclosure of protected information

Section 355-25 of Schedule 1 to the TAA provides that, unless an exception applies, it is an offence, punishable by two years’ imprisonment, for an ATO officer to disclose ‘protected information’ to entities other than the entity to whom the information relates, or a ‘covered entity’.

What is protected information?

‘Protected information’ — under s. 355-30 of Schedule 1 to the TAA — means information that:

  • was disclosed or obtained under or for the purposes of a taxation law (other than the Tax Agent Services Act 2009);
  • relates to the affairs of an entity; and
  • identifies, or is reasonably capable of being used to identify, the entity.

For example, protected information might include:

  • interest and dividend income derived from investments that were held by the deceased individual;
  • salaries and wages and associated PAYG withholding amounts related to employment services rendered by the deceased person; or
  • PAYG instalment amounts paid by the deceased person before they died.

All of this information is necessary for the registered tax agent to complete the deceased individual’s final tax return and the estate’s tax returns.

Note:
Tax file numbers do not constitute protected information because they are not, by themselves, reasonably capable of being used to identify an entity.

Who is a covered entity?

Broadly, an entity is covered by s. 355-25(2) in relation to protected information that relates to another entity (the ‘primary entity’) where the covered entity is:

  • the primary entity’s registered tax agent or BAS agent;
  • a legal practitioner representing the primary entity in relation to taxation laws;
  • a public officer of the primary entity;
  • a representative of the primary entity where the primary entity is an incapacitate entity;
  • the legal personal representative of the primary entity;
  • the guardian of the primary entity where the primary entity is a minor or suffers from mental incapacity;
  • a member of the same consolidated group or multiple entry consolidated group as the primary entity; or
  • a representative of the primary entity who has been nominated by the primary entity to act on that entity’s behalf with respect to protected information.

Note:
The ATO has stated that in limited circumstances it may need to speak directly to a person who is not the executor or administrator — but this does not extend to providing broader information that would assist in the administration of the estate. Further, the ATO will not record the person or any nominated representatives as an authorised contact for the deceased estate.

Exceptions

An exception from the general prohibition on disclosing protected information to persons other than covered entities may be available under s. 355-50, if an ATO officer can make an assessment that a specific disclosure is to be made in the performance of their duties as an ATO officer.

The circumstances in which this exception is available are limited, and include (but are not limited to) where the disclosure is made:

  • to any entity, court or tribunal for the purposes of legal proceedings;
  • to any entity for the purpose of enabling the entity to understand or comply with taxation laws;
  • a board that is performing a function or exercising a power under a taxation law;
  • to Government Ministers.

Further, eligibility for exception must be assessed on a case by case basis.

Post-date of death information

Where the executor or administrator manages income after the person’s death (e.g. where they continue to run a business for the deceased estate) and applies for a trust tax file number, they can appoint a legal practitioner or tax agent as an authorised contact.

The authorised contact can access information of the deceased estate trust only, being information obtained by the ATO after the individual’s death.

Pre-date of death information

Relevant to this article, under s. 355-25(2) an ATO officer can provide protected information of a deceased person to an executor or administrator of an estate of an individual who has died.

However, such information cannot be provided to a representative appointed by an executor or administrator of the deceased person’s estate, except in limited circumstances.

As a result, an executor or administrator of a deceased estate is in a more disadvantageous position compared to other entities that are able to appoint representatives to assist them in understanding and complying with their tax obligations.

But we used to be able to access this information … what’s changed?

As discussed above, ATO officers are bound by strict taxpayer confidentiality laws. Currently, the operation of these laws means that while the executor or administrator can access the tax information of the deceased person from the ATO, the representatives of the executor or administrator cannot do the same.

That said, agents were previously able to access the tax information of the deceased person from the ATO via the former Tax Agent Portal or the BAS Agent Portal — this should never have been allowed to occur. So when the ATO migrated agents onto the new Online services for agents, representatives can no longer access this necessary information unless they are themselves the LPR.

The ATO has recognised that, often, it will be more efficient if the representatives are able to obtain the necessary information directly from the ATO, including electronically through Online services.

Exercising the Commissioner’s remedial power

The Legislative Instrument sets out the Commissioner’s exercise of his remedial power to modify the operation of s. 355-25(2) of Schedule 1 to the TAA.

Section 370-5 of Schedule 1 to the TAA gives the Commissioner a remedial power to determine, by Legislative Instrument, a modification of the operation of a provision of a taxation law if:

  • the modification is not inconsistent with the intended purpose or object of the provision;
  • the Commissioner considers the modification to be reasonable, having regard to various matters (i.e. the intended purpose or object of the provision, and whether the cost of complying with the provision is disproportionate to that intended purpose or object);
  • any impact of the modification on the Commonwealth budget would be negligible.

Section 17(1) of the Legislation Act 2003 requires that the rule-maker is satisfied that appropriate and reasonably practicable consultation has been undertaken.

The Legislative Instrument

The Legislative Instrument recognises that an executor or administrator of a deceased estate effectively ‘stands in the shoes’ of the deceased individual — i.e. they assume the rights, burdens and obligations of the deceased person.

By allowing ATO officers to disclose the deceased person’s protected information to a representative, the executor or administrator can be represented in performing their duties in the same way that the deceased person could have if they were alive.

The Legislative Instrument notionally amends s. 355-25(2). There will be no textual amendment to the legislation, but rather, the instrument modifies and clarifies the operation of the provision, so that representatives of an executor or administrator of a deceased estate will be considered a covered entity.

Specifically, s. 355-25(2) has been notionally amended to include a provision stipulating that where the primary entity is an individual who has died, the following are covered entities:

  • a registered tax agent of an executor or administrator of the primary entity’s estate;
  • a registered BAS agent of an executor or administrator of the primary entity’s estate;
  • a legal practitioner representing an executor or administrator of the primary entity’s estate in relation to the primary entity’s affairs relating to one or more taxation laws.

Note:
The provision of a deceased person’s information directly to a registered tax agent, BAS agent or legal practitioner will only be lawful if a grant of probate or letters of administration has been obtained. This is in accordance with the ATO’s existing policy whereby it will disclose protected information to anyone until probate or letters of administration have been granted to confirm that they are legally recognised to administer the estate.

The modification is not inconsistent with the intended purpose or object of the provision

The Commissioner considers the modification is not inconsistent with the intended purpose or object of the provision.

The policy intent of Subdiv 355-B — and in particular, s. 355-25(2) — indicates that the covered entity exceptions have been drafted as a practical pathway for ATO officers to determine whether an agency relationship exists, while still recognising the need for taxpayers to be able to be represented in their dealings with the Commissioner. It was also considered important to permit disclosures to legal practitioners who might not be considered an agent under the common law, but who otherwise might have a legitimate need to access a taxpayer’s information in their capacity as a representative of a taxpayer.

The Commissioner considers that had these particular circumstances of a representative of the executor or administrator of a deceased estate been considered at the time the law was drafted, the law would have been drafted differently. It would have provided for this circumstance while still upholding the key principle of the protection of taxpayer information.

Modification is reasonable

The Commissioner recognises that managing the affairs of the deceased can be complex, that the passing of a deceased person can be a stressful and emotional time, and that executors and administrators often need to be able to obtain assistance from their representatives in finalising those affairs.

The Commissioner considers the modification to be a reasonable measure to ensure that the taxpayer confidentiality provisions avoid creating unintended outcomes for executors or administrators of a deceased estate.

The modification will significantly reduce the administrative burden for an executor or administrator of a deceased estate in finalising the tax affairs of the deceased. It will enable them to be represented by a registered tax agent, BAS agent or legal practitioner in their dealings with the Commissioner, placing them in a similar position to other taxpayers.

Application date

The modification of s. 355-25(2) applies in relation to a disclosure of information that occurs on or after the commencement of the Legislative Instrument.

The Legislative Instrument cannot commence until before the first day that it is no longer liable to be disallowed under s. 42 of the Legislation Act 2003 which in turn provides that a House of the Parliament has 15 days to disallow a Legislative Instrument. Based on the limited Parliamentary sitting days scheduled for 2020, this means that the Legislative Instrument cannot take effect before 13 May 2020.

Implications
Until the Legislative Instrument takes effect, registered agents of an executor or administrator of a deceased estate will have to continue to rely on the executor or administrator to provide protected information.

ATO administrative changes

The ATO removes access to a client when it receives official notification of their death.

Since December 2019, agents who use Online services for agents and who are also the executor or administrator of an estate can add the deceased person as a client.

Once the Legislative Instrument takes effect, agents will be able to add a deceased person as a client and access their records. Legal practitioners will also be able to be added as authorised contacts on the deceased person’s records.

Query
While it is pleasing to see a favourable ATO response to this issue, there has been no mention of any lodgment extension for affected date of death returns or of the ATO’s position on remitting GIC and penalties for late lodgments arising from this issue. It would be disingenuous for the ATO to impose interest and penalties for failing to lodge a date of death return on time when it is not legally allowed to provide the information necessary to prepare and lodge the return.

In the interim, the ATO has developed a Deceased estate data package. This provides an extract of information of the deceased, which will be provided directly to the executor or administrator. They may then pass the information on to the tax agent or legal practitioner to assist in administering the deceased estate.

Deceased estate data package

The Deceased estate data package will contain the following information (where it exists):

  • individual tax return information for the last three income years;
  • an extract of income and investment data for the last three income years;
  • an extract of notices of assessment issued for the last three income years;
  • copy of the most recent statement of account;
  • any outstanding ATO debts;
  • any superannuation accounts identified;
  • payroll data received for the current year.

The executor or administrator can request a package by:

  • phoning 13 28 61
  • writing to:

Australian Taxation Office
GPO Box 9990
[insert the name and postcode of your capital city]

A tax agent or legal practitioner representing the executor or administrator can also request that the package be sent to the executor or administrator. However, under current law, the package cannot be sent directly to the tax agent or legal practitioner.

Registered tax agents can request a package via Online services for agents.

TaxBanter is positioning itself for the future – two announcements from our Director

Posted on by thriveadmin

TaxBanter becomes part of Knowledge Shop

Last week, we became part of Knowledge Shop (a wholly owned subsidiary of ASX listed Easton Investments) with Knowledge Shop acquiring a 60% share in TaxBanter (ASX announcement).

The synergy between TaxBanter and Knowledge Shop was too good to ignore with a similar culture and passion for the profession.

All of us at some point in time need to identify what is needed for the future. Knowledge Shop delivers the resources and support we need to drive TaxBanter’s future trajectory in a way we could not do alone or with a different partner.

For TaxBanter and our clients, it is business as usual. You will continue to work directly with the TaxBanter team, under the TaxBanter brand, with the same people delivering the quality of products and services we are known for. The acquisition is a strategic move.

Refreshing the TaxBanter brand

We’re excited to announce a new look for TaxBanter.

Over the years, TaxBanter has grown in size and expanded our product offering to meet the evolving needs of our clients but our look was inconsistent with our position as an industry leader.

Throughout the past few months, we’ve updated our brand (website, logo, colour palette, and imagery) to reflect who we are today. The process forced us to question who we are, what we represent, and the value we provide to clients. We’re proud of the modern, flexible, practical and relevant company we are and hope that you feel the new look reflects this.

Questions or feedback?

We’d love your feedback.  If you have any questions or concerns, please contact us on
03 9660 3500 or at enquiries@taxbanter.com.au.

All the best,

Neil Jones
Managing Director, TaxBanter

Draconian and retrospective CGT main residence exemption changes become a reality

Posted on by thriveadmin

NOTE: In this article, all section references are to the Income Tax Assessment Act 1997.

Background

On 9 May 2017, as part of the 2017–18 Federal Budget, the Government announced that it would make changes to the CGT main residence exemption (MRE). On 23 October 2019, the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 (‘the Bill’) was introduced into Parliament. On 5 December 2019, the Bill was passed by the Senate without amendment, and was enacted on 12 December 2019 as Act No. 129 of 2019 (’the Act’).

Schedule 1 to the Act contains measures to deny the MRE to taxpayers who — at the time of the CGT event (i.e. when they enter into a contract to sell a dwelling that has been their main residence) — are a non-resident for tax purposes (hereafter referred to as simply ‘non-resident’).

Amendments to give effect to these measures were previously proposed in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability No. 2) Bill 2018 (‘the original Bill’) which was introduced into Parliament on 8 February 2018 and was before the Senate when Parliament was prorogued prior to the 2019 Federal election. Accordingly, the original Bill lapsed on 1 July 2019 with the commencement of the 46th Parliament.

The measures were announced in the 2017–18 Federal Budget in the following brief terms:

The Government will extend Australia’s foreign resident capital gains tax (CGT) regime by: … denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30 PM (AEST) on 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019; …

The Government announced on 18 December 2017, as part of the Mid-Year Economic and Fiscal Outlook 2017–18, that following consultation the Government amended the proposal so that ‘temporary tax residents’ who are Australian residents will be unaffected. This ensures that only Australian tax residents, including temporary residents, can access the MRE. Accordingly, only foreign residents (i.e. non-residents) are affected by this measure.

Date of effect

These measures apply to CGT events happening on or after 7.30 pm (AEST) on 9 May 2017.

A transitional rule will not deny the MRE to taxpayers who held the dwelling immediately before 7.30 pm (AEST) on 9 May 2017 if:

  • they are non-residents at the time of the CGT event;
  • they held an ownership interest in the dwelling at all times from immediately before the announcement until immediately before the CGT event happens; and
  • the CGT event happens on or before 30 June 2020.

This allows affected taxpayers until 30 June 2020 to sell their former homes without being subject to the new measures (the original Bill proposed a transitional period ending on 30 June 2019). The listing and sale of a property can take, on average, around 80 days, so affected taxpayers considering selling their properties ahead of 30 June 2020 to avoid being subject to the new measures will ideally need to list their properties by March 2020.

While these measures appear to commence on 9 May 2017, the practical effect is that it could result in the retrospective denial of the MRE as far back as 20 September 1985: the commencement of the CGT regime and the MRE. Under these amendments, the availability of the MRE to a taxpayer is based on their tax residency status at the time of the CGT event, irrespective of the use of the dwelling or the taxpayer’s residency status throughout the ownership period.

Senate committees

Senate Economics Legislation Committee

The Senate Economics Legislation Committee, which reported on the original Bill on 23 March 2018, made the following recommendations:

Recommendation 1

The committee recommends that the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.

Recommendation 2

The committee recommends that the [bill] be passed.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills, which reported on the Bill on 13 November 2019 (Scrutiny Digest Number 8), made the following remarks:

1.90 The committee has a long-standing concern about provisions that apply retrospectively, including provisions that back-date commencement to the date of the announcement of particular measures (i.e. ‘legislation by press release’), as such an approach challenges a basic value of the rule of law that, in general, laws should only operate prospectively. The committee has particular concerns where legislation will, or might, have a detrimental effect on individuals.

…

1.92 The committee notes that, in this case, the bill that first contained this measure—the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018—was introduced almost nine months after the budget announcement on 9 May 2017, and this bill was introduced well over two years after the announcement.

…

1.94 With respect to the amendments in Schedule 1, the explanatory memorandum states that the measures need to generally apply from the date of announcement to prevent opportunities for affected taxpayers or entities to dispose of their dwelling or assets to avoid application of the measures.

…

1.97 The committee reiterates its long-standing concerns that provisions with retrospective application (including where provisions are back-dated to the date of announcement of an initiative) challenge a basic value of the rule of law that, in general, laws should only operate prospectively.

1.98 In light of the explanation provided in the explanatory memorandum as to the retrospective application of the amendments proposed by the bill, the committee draws its scrutiny concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of applying the amendments in the bill on a retrospective basis.

Comment
The Standing Committee for the Scrutiny of Bills was concerned about the retrospectivity arising from back-dating the provisions to the date of announcement — the Bill was ultimately passed by the Senate 940 days after the date on which the measures were first announced.

However, the Committee, and the Senate more broadly, has overlooked the more fundamental retrospective nature of these amendments; that is, that the capital gain is required to be calculated using the original cost base, thereby taxing what were previously exempt capital gains from up to 3½ decades ago (i.e. since 20 September 1985).

Example to illustrate the effect of the provisions

An Australian taxpayer, Ozzie, has always been an Australian tax resident. He bought a dwelling in Australia on 1 July 1986 for $100,000 and used it as his home; to date, it has never been rented out, and the dwelling has always been his main residence.

On 30 June 2016, after deciding to accept a job overseas, Ozzie relocated offshore for an indefinite period and became a non-resident. At the time he relocated, Ozzie’s home was worth $2.2 million.

Ozzie decides to stay overseas. Five years later, on 30 June 2021, he sells the dwelling that, prior to moving overseas, had been his home for 30 years. Because Ozzie is a non-resident at the time of the CGT event, he is not entitled to the MRE — at all. Accordingly, he will have a taxable capital gain of $2.4 million.

This may be depicted as follows:

Ozzie cannot:

  • claim a partial MRE for the number of days he actually lived in the dwelling;
  • continue to treat the dwelling as his main residence after he vacates it (under the absence rule in s. 118-145) — which would otherwise allow him to continue to treat the dwelling as his main residence for up to 6 years if he rents it out or indefinitely if the property is not used for an income-producing purpose; or
  • if he had rented the property in 2016 when he departed Australia — reset/uplift the cost base of the dwelling to its market value (MV) on the date he first began to rent it (where that use occurs for the first time after 20 August 1996) under s. 118-192.

This is because all these concessions are contained in the MRE rules in Subdiv 118-B that rely on the taxpayer being entitled to claim a partial MRE — and Ozzie is not entitled to any MRE.

CGT event I1 not applicable

CGT event I1 (s. 104-160) happens when an individual stops being an Australian resident, causing a deemed disposal of their CGT assets at their market value and allows the taxpayer to choose to defer the tax on these assets.

However, CGT event I1 does not happen when Ozzie stops being an Australian resident, because CGT event I1 applies only to CGT assets that are not taxable Australian property — in this case, Ozzie’s dwelling continues to be taxable Australian property and therefore remains within the Australian CGT regime.

What about the CGT discount?

Ozzie will have a taxable capital gain of $2.4 million, without access to any MRE. Is he entitled to any CGT discount as a non-resident? Non-residents have not been entitled to the CGT discount since 8 May 2012.

Under s. 115-115:

  • As Ozzie became a non-resident after 8 May 2012, he is entitled to a reduced discount, based on the number of days he was a resident. The law requires the calculation to be performed based on the number of days, so 10,957 days as a resident out of 12,783 days of total ownership is 0.8571 × 50% discount = 42.85% — because Ozzie was a resident for 30 years out of 35 years of ownership, he will be entitled to a CGT discount of 42.85% instead of the full 50% discount.
  • Had Ozzie become a non-resident before 8 May 2012, he would have been entitled to apportion the CGT discount by applying it only to that part of the capital gain which accrued to 8 May 2012 by determining the market value of the property on 8 May 2012. Ozzie did not become a non-resident until 2016, so this market value rule is not available to him.

Life events and ‘excluded foreign residents’

The Act contains new measures which allow a non-resident to continue to access the MRE for CGT events concerning certain ‘life events’ if they have been a non-resident for a continuous period of no more than six years at the time of the CGT event. This is referred to in the legislation using a double negative — i.e. a person who is not an ‘excluded foreign resident’.

An ‘excluded foreign resident’ is someone who has been a foreign resident for a continuous period of more than six years. Importantly, an ‘excluded foreign resident’ is not able to access the MRE even if certain life events occur to them.

The new measures do not apply if:

  1. the person is not an ‘excluded foreign resident’ (i.e. has been a non-resident for no more than six years); and
  2. they satisfy the ‘life events test’.

A person satisfies the ‘life events test’, at the time the CGT event happens, if:

  1. they have been a non-resident for a continuous period of no more than six years; and
  2. during their period of foreign residency:
    • either they, their spouse or child under 18 years of age had a ‘terminal medical condition’ (see below);
    • the taxpayer’s spouse or child under 18 years of age dies; or
    • a CGT event occurred in relation to a family law matter (see below).

Terminal medical condition

A ‘terminal medical condition’ is defined in regulation 303-10.01 of the Income Tax Assessment Regulations 1997 and requires that two medical practitioners certify that death is likely to result from the illness or injury within 24 months of the certification.

There is an additional requirement in the case of a child under 18 years of age that the child was suffering from a terminal medical condition during at least part of the period of foreign residency (i.e. they cannot have suffered from that condition only while the taxpayer was a resident).

Marriage or relationship breakdown

This life event requires that the CGT event occurs because of a matter referred to in s. 126-5(1) (about marriage or relationship breakdown) involving the taxpayer or their spouse. Importantly, even if one of the matters in s. 126-5(1) has occurred during the period of foreign residency, the MRE will not be available if the CGT event does not occur because of one of those matters.

Unresolved issue

Under s. 118-178, where a property is transferred from the taxpayer’s former spouse or partner (hereafter referred to as simply ‘former spouse’), and there was a CGT roll-over under Subdiv 126-A (about marriage or relationship breakdown):

  1. the taxpayer is taken to have acquired the property when their former spouse acquired it (‘the acquisition time’); and
  2. from the acquisition time until the time the taxpayer’s former spouse’s ownership interest ended:
    1. the taxpayer had used the property in the same way that their former spouse used it; and
    2. the property had been the taxpayer’s main residence for the same number of days as it was their former spouse’s main residence.

Example — treatment under the current law

Mark and Kellie were married for 15 years. Following their divorce, Mark transferred the ownership interest he held in a property to Kellie. She is taken to have acquired the property when Mark acquired it, and pursuant to the CGT roll-over in Subdiv 126-A and s. 118-178, she is taken to have:

  • acquired it for what he paid for it;
  • used the property in the same way Mark did; and
  • the same main residence days as it was Mark’s main residence.

Accordingly, if the property was only ever used as Mark’s main residence, Kellie will be taken to have acquired it when Mark acquired it for what he paid for it, and (assuming she lives in the property as her main residence until she sells it), she will be entitled to a full MRE. If Mark had rented the property before he transferred it to Kellie, she would have a partial MRE.

Issue

Say, following the divorce and transfer of the property from Mark to Kellie, Mark becomes a non-resident. What is the impact on Kellie when she subsequently sells the property after continuing to treat the property as her main residence throughout her ownership period?

Treatment under the new law

The Act is silent on its interaction with s. 118-178 which deals with the application of the MRE following a previous roll-over under Subdiv 126-A.

There are two possible interpretations:

1. Mark’s foreign residency status has no impact on Kellie’s tax position

As the CGT event (i.e. the sale of the property) happens to Kellie, and not to Mark, his residency status is irrelevant to her eligibility for the MRE. This means that Mark’s main residence days continue to be taken to be her main residence days, and (on the above facts) she would be entitled to a full MRE on sale.

2. Mark’s foreign residency status impacts on Kellie’s tax position

Although the CGT event happens to Kellie, and not to Mark, he is a non-resident at the time of the CGT event. Accordingly, Mark’s main residence days are ‘zeroed out’ and Kellie is unable to recognise his main residence days. This would result in Kellie being entitled to only a partial MRE on sale.

If this second interpretation is correct, residents could be taxed on the sale of their homes transferred to them following a marriage or relationship breakdown by their former spouse, due to the foreign residency status of their former spouse.

This raises the following dilemmas:

  • How will Kellie determine that Mark is a non-resident at the time the CGT event happens to her? She may have no knowledge of his whereabouts, and his working overseas does not automatically lead to the conclusion that he is a non-resident.
  • When working out an equitable allocation of the marital assets, how will the Family Court and lawyers determine a fair settlement when the tax liability on the eventual sale of the property cannot be determined at the time of the settlement because it is contingent on the residency status of the former spouse perhaps many years later?

Determining the CGT cost base

To correctly calculate the capital gain, Ozzie will need to determine the cost base of the property. This will be a major issue for many affected taxpayers who may never have kept records of these costs because they didn’t think it was necessary; after all, everyone knows that the sale of a dwelling that is your main residence is exempt from CGT.

Ozzie could not have foreseen all those years ago that the Government would retrospectively deny him the MRE, causing the sale of his home to be taxable in the future due to his foreign residency status.

Ozzie will need to determine the following cost base elements:

Element of cost base Explanation
1st element Purchase price of the property
2nd element Acquisition (and selling) costs such as stamp duty and conveyancing services (details of selling costs are more likely to be available because they are incurred at the time of the sale)
3rd element Holding/ownership costs, such as interest, rates, insurance, and repairs and maintenance, but only where the property was acquired after 20 August 1991
4th element Improvements, such as renovations or other improvements
5th element Rarely applicable in these cases as it relates to capital expenditure incurred to establish, preserve or defend title to the asset.

If Ozzie is unable to substantiate each element of the cost base of the property, he cannot simply use an estimate of these amounts. Accordingly, there is a risk that his taxable capital gain will be larger than should otherwise be the case due to a lack of substantiation. Contrast this with a taxpayer who acquires a dwelling after these changes are enacted with the knowledge that, under the new rules, there is a possibility that they will not be entitled to the MRE — they would be in a better position to prospectively retain all relevant cost base records from the date of acquisition to maximise their cost base and minimise their eventual taxable capital gain.

What if Ozzie moves back to Australia?

If Ozzie moves back to Australia after 30 June 2020 and re-establishes himself as a resident, then sells the dwelling, he would not be a non-resident at the time of the CGT event and he would be entitled to the MRE. Accordingly, he could access a partial MRE, the absence rule in s. 118-145 and the cost base-market value deeming rule in s. 118-192 as applicable.

Paragraph 1.24 of the Explanatory Memorandum to the Act explains that the general anti-avoidance rules in Part IVA may be applied to arrangements that have ‘been entered into by a person for the sole or dominant purpose of enabling that person or another person to obtain the [MRE]’. There is no prescribed period that a person would need to return to Australia for to re-establish their residency; this is question of fact.

What if Ozzie dies while he is overseas?

If Ozzie dies while he is overseas, his interest in the dwelling will pass to the beneficiaries (hereafter simply referred to as ‘the beneficiary’) of his deceased estate in accordance with the wishes set out in his Will (or according to the laws of intestacy of the relevant jurisdiction if he dies without a valid Will).

Ozzie is not an excluded foreign resident at the time of his death

Assume that Ozzie dies as a non-resident on 3 June 2020.

The main residence days of a non-resident who dies may be recognised by a beneficiary of the person’s estate or a person surviving the non-resident provided the person had not been a non-resident for a continuous period of more than six years. This effectively means that a person’s foreign residency status at the time of their death will have no impact under the new measures on a deceased estate or a beneficiary of that estate where the person dies in the first six years of being a non-resident.

As Ozzie is not an excluded foreign resident — because he had not been a foreign resident for more than six years at the time of his death — the MRE accrued by Ozzie for the property continues to be available to the beneficiary of his estate.

However, the beneficiary is denied any additional component of the MRE that they accrued in their own right if they are a non-resident at the time a CGT event occurred to the property.

Ozzie is an excluded foreign resident at the time of his death

Assume that Ozzie dies as a non-resident instead on 3 June 2023.

Ozzie is an excluded foreign resident — because he has been a foreign resident for more than six years at the time of his death — so any portion of the MRE accrued by Ozzie for the property is not available to the beneficiary of his estate.

This means that despite Ozzie residing in the property for 30 years as a resident, because he was a non-resident when he died his beneficiary may not be able to claim any MRE — it will depend on their residency status at the time of the CGT event:

  • If the beneficiary is a resident at the time of the CGT event, they will be entitled to the MRE that accrues in their own right, but not that of Ozzie.
  • If the beneficiary is a non-resident at the time of the CGT event, they will not be entitled to any MRE; not for the period that Ozzie resided in the dwelling, nor for the period following his death. This is irrespective of the beneficiary’s use of the dwelling or the beneficiary’s residency status throughout the ownership period.

This means that if the deceased was a non-resident at the time of death, and the beneficiary is a non-resident at the time of the CGT event, no MRE is available to the beneficiary.

Ozzie is a resident at the time of his death

Had Ozzie been a resident at the time of death (i.e. he re-established his residency before he died and was not an excluded foreign resident at the time of death), the MRE accrued by Ozzie will continue to be available to his beneficiary to the extent of:

  • the period during Ozzie’s lifetime that he used the dwelling as his main residence;
  • the period that occurs within two years of Ozzie’s death (or within such longer period allowed by the Commissioner); and
  • the period following Ozzie’s death where the dwelling was the main residence of Ozzie’s spouse (assuming he had one) immediately before his death and/or an individual who had a right to occupy the dwelling under Ozzie’s will, regardless of the residency status of that spouse or individual.

However, the beneficiary — to whom the ownership interest in the dwelling passed under the will (but falling short of having a right to occupy the dwelling under the will) — is denied any component of the MRE that is attributable to the period following death when they lived in the dwelling as their main residence if they are an excluded foreign resident at the time of the CGT event.

So to summarise, if Ozzie’s beneficiary is:

  • a resident at the time of the CGT event (i.e. on 12 November 2022) — they continue to be entitled to the MRE for any part of the exemption that they accrue in their own right (the cost base for the beneficiary will be Ozzie’s cost base immediately before his death);
  • a non-resident at the time of the CGT event — they will be denied any component of the MRE that they accrued in their own right.


Is the MRE available to a beneficiary of a deceased estate who inherits the dwelling?

^    Or within such longer period allowed by the Commissioner.
*     Subject to normal MRE rules.

What if Ozzie returns to Australia to die?

Assume that in February 2020 Ozzie is diagnosed with a terminal medical condition. He decides to return to Australia for medical treatment and to be close to his family and friends. Ozzie returns to Australia but is immediately confined to a hospital bed, where he spends the next four months until his death in June 2020.

While in hospital, Ozzie — as part of attending to his estate planning and financial affairs — may arrange to sell the property before his death. Alternatively, he may still own the dwelling at the time of his death.

If Ozzie is a resident at the time of the CGT event or his death, he is entitled to the MRE, including the absence rule under s. 118-145. But if he is a non-resident at the time of the CGT event or his death, he is not entitled to any MRE.

Ozzie dies without ever moving back into his home. Is Ozzie a resident or non-resident at the time of the CGT event or the time of his death? This is a question of fact, but it may be problematic to establish that Ozzie has re-established his residency simply by virtue of his presence in Australia while he seeks medical treatment. A relevant question would be whether he intended to return to live overseas following his treatment.

Note
In the case of Subrahmanyam and FCT [2002] AATA 1298, the Tribunal concluded that a taxpayer who was in Australia for medical treatment was a resident under the 183-day test on the basis that her ‘usual place of abode’ is not outside Australia. The taxpayer, who had been a medical practitioner in Singapore, moved to Australia almost four years before her death for medical treatment. She maintained her contacts in Singapore and visited many times. She sold her home in Singapore and the proceeds of sale were invested in an Australian interest-bearing account.

Suggested improvements

Over 2½ years, the author of this article raised the retrospectivity issue repeatedly with Treasury, the Government, the Opposition, the cross-benchers in the Senate, as well as in social media and mainstream media.

The author suggested to Treasury that the policy could be altered to make it more equitable for Australian expatriates, so that the MRE could still generally be denied to non-residents, but that if the non-resident had previously been an Australian resident taxpayer, either one of the following concessions could be allowed:

  1. reset the cost base of the property to its market value on the day they become a non-resident so that the capital gain is calculated only on the increase in value since they ceased to be a resident — this is based on s. 118-192. In Ozzie’s case, this would equate to a taxable capital gain (before the CGT discount) of $300,000 instead of $2.4 million; or
  2. allow a partial exemption for the number of days the taxpayer was a resident and lived in the dwelling as their main residence — this is based on s. 115-115. In Ozzie’s case, this would reduce the taxable capital gain of $2.4 million by more than $2 million ($2.4m × 30/35 years — using the number of years instead of days for simplicity).

However, the legislation as enacted contains neither of these two concessions.

Options available to affected taxpayers

Now that these measures are law, it is important to understand the options available to affected taxpayers.

They:

  1. can sell the property by 30 June 2020 (i.e. enter into a contract by this date) provided they held the property immediately before 7:30pm on 9 May 2017;
  2. can re-establish their residency status before they sell the property (noting that Part IVA will be applied to contrived arrangements entered into with the sole or dominant purpose of accessing the MRE;
  3. may be eligible for the MRE if they are not an excluded foreign resident (have been a non-resident for no more than six years) and they satisfy the ‘life events test’.

Final comment

These measures are draconian, retrospective and unfair to Australian expatriates, and thousands of taxpayers will be unfairly taxed on capital gains that accrued when they were residents and lived in their homes.

Removing the MRE retrospectively is equivalent to:

  • calculating the GST under the margin scheme on land acquired before 1 July 2000 based on the original cost of the land rather than the value of the land as at 1 July 2000;
  • removing the exemption for pre-CGT assets and applying the changes only to CGT events that apply after a certain date (say, 1 July 2025) — the prospective application of the CGT event date would only tax any asset sold from that date but would have the effect of eventually remove the pre-CGT asset exemption for all assets by using the original cost base;
  • changing the speed limit on an 80 km/h road that you’ve been driving on for the past 20 years to 50 km/h, applying the change with effect from 10 years ago, then issuing speeding fines to any driver who in that period exceeded the now 50 km/h speed limit.

Under the Rule of Law, the law should be capable of being known to everyone, so that everyone can comply. A law that applies retrospectively is not capable of being known, understood, or complied with at the time taxpayers enter into arrangements. Retrospective changes that adversely affect taxpayers should never be passed by our Parliament.

It is grossly unfair that all these years affected taxpayers have operated under laws which exempted their home from CGT and now, due to their status as a non-resident, that exemption is denied.

The only sensible outcome was to apportion the capital gain to exempt any period of residency; however, our calls have fallen on deaf ears. Attention must now turn education, information and the onerous requirements of record-keeping to correctly establish the cost base.

Tax Yak – Episode 35: Year-end wrap

Posted on by thriveadmin

In this final episode of Tax Yak for 2019, Robyn yaks with TaxBanter director, Neil Jones, about the past few months of the 46th Parliament and how the tax landscape looks heading into 2020.

Host: Robyn Jacobson

Guest: Neil Jones

Recorded: 17 December 2019

Tax Yak – Episode 34: Deceased estates

Posted on by thriveadmin

It is said that nothing in life is certain but death and taxes.

In this episode of Tax Yak, Robyn yaks with BNR Partners Managing Director and Estate Taxation Specialist, Ian Raspin, about his broad and deep experience in advising on the taxation issues associated with deceased estates.

Host: Robyn Jacobson

Guest: Ian Raspin

Recorded: 11 November 2019

Tax Yak – Episode 33: Running a modern day tax practice

Posted on by thriveadmin

Running a modern day tax practice is no challenge for the light-hearted. In this episode of Tax Yak, Robyn yaks with Planet Consulting Founder and Principal Consultant, Rob Pillans, about the challenges facing practitioners running a practice in the current tax landscape.

Host: Robyn Jacobson

Guest: Rob Pillans

Recorded: 11 November 2019

Superannuation Guarantee Amnesty (reintroduced) — Q&A

Posted on by thriveadmin

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Background

On 18 September 2019, the Government announced that it was reintroducing the one-off Superannuation Guarantee Amnesty (the Amnesty) that was originally announced on 24 May 2018. On the same day, the Government introduced the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill) into Parliament. The proposed amendments allow non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992.

Amendments to give effect to an SG Amnesty were previously proposed in the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (the 2018 Bill) which was before the Senate when Parliament was prorogued prior to the 2019 Federal election, and which lapsed on 1 July 2019 with the commencement of the 46th Parliament.

Note
For the sake of space and expression, the proposed Amnesty will be hereafter referred to as simply ‘the Amnesty’.

The amendments as reintroduced are the same as those in the 2018 Bill, except in relation to the following:

  • while the start date for the Amnesty is still 24 May 2018 as originally announced, the Amnesty is proposed to end six months after the day the Bill receives Royal Assent (previously, the Amnesty period was to last for 12 months and end on 23 May 2019); and
  • once the Amnesty has ended, the Commissioner’s ability to remit penalties for historical SG non-compliance imposed on employers with a historical SG shortfall that is not disclosed during the Amnesty will be limited.

The Bill is currently before the House of Representatives, so the Amnesty does not yet have the force of law.

Even though the Amnesty is not yet law, a number of technical questions have arisen since the Amnesty was first announced on 24 May 2018.

Note
This blog will not repeat in detail the technical content of our previous discussion on the Amnesty. For an explanation of the workings of the Amnesty please see our previous blog posted on 1 November 2019.

Overview of current SGC components

Under s. 17 of the Superannuation Guarantee (Administration) Act 1992 (SGA Act), if an employer has one or more individual SG shortfalls for a quarter, the employer is liable for the SG charge (SGC) comprising:

  • the total of the employer’s individual SG shortfalls (based on total salaries and wages not ordinary times earnings) for the quarter;
  • the nominal interest component for the quarter (imposed at the rate of 10 per cent calculated from the start of the quarter); and
  • the administration component for the quarter (being $20 per employee per quarter).

The employer is also liable for:

  • a Part 7 penalty for failing to lodge an SG statement, equal to double the amount of the SGC, i.e. 200 per cent of the SGC payable (the penalty may be partially remitted) — s. 59 of the SGA Act; and
  • the general interest charge (GIC) on the unpaid amount.

Further, aside from the GIC on any late payment of the SGC, any amounts payable are non-deductible including the Part 7 penalty.

Questions on the SG Amnesty

For how long is the Amnesty available?

Subject to the passage of legislation, the Amnesty will be available from 24 May 2018 to six months after the day the Bill receives Royal Assent.

What period is covered by the Amnesty?

The Amnesty applies to previously undeclared SG shortfalls for any quarter starting no earlier than 1 July 1992 and ending no later than 31 March 2018. The Amnesty will not be available for SG non-compliance that occurs in relation to a quarter starting on or after 1 April 2018.

What concessional treatment does an employer receive if they make a disclosure to the ATO under the Amnesty?

Employers who voluntarily disclose previously undeclared SG shortfalls during the Amnesty period and before the commencement of an examination of their SG will:

  • not be liable for the administration component and penalties that may otherwise apply to late SG payments; and
  • be able to claim a deduction for catch-up payments made in the Amnesty period.

Employers will still be required to pay all employee entitlements, including:

  • the unpaid SG amounts owed to employees;
  • the nominal interest; and
  • any associated GIC.

What happens if an employer makes a disclosure to the ATO while the Amnesty does not yet have the force of law?

If the legislation is enacted

If the Bill is enacted, the Amnesty will apply retrospectively (i.e. from 24 May 2018), and the concessional treatment outlined above will be available to the employer if they disclose and pay during the period starting 24 May 2018 and ending six months after the day the Bill receives Royal Assent.

In the meantime…

The deductibility and removal of the administration component proposed in the Amnesty depend on the passage of legislation. Until this occurs, the ATO must continue to apply the current law which means that:

  • the administration component of the SG charge remains payable; and
  • deductions cannot be claimed.

Notably, although the ATO has a discretion to remit the Part 7 penalty (see practice statement PS LA 2011/28 and draft practice statement PS LA 2019/D1), the ATO does not have any discretion regarding the imposition of the administration component.

Accordingly, the ATO will continue to apply, and require payment of, the administration component unless and until the Bill is enacted. Once that occurs, we would expect the ATO to remit/refund the administration component to those employers who are eligible for the Amnesty.

If the legislation is not enacted

If the Bill is not enacted, and an employer has made a disclosure to the ATO on or after 24 May 2018:

  • any self-assessments that anticipated the new law will need to be reviewed to ensure they included the administration component (employers will be required to pay the administration component);
  • any contributions and payments made under the Amnesty will not be tax-deductible; and
  • Part 7 penalties will be imposed but may be remitted by the ATO.

Employers will not be able to receive a refund for payments made under the Amnesty if the Bill does not pass, as these amounts were always payable under the existing law.

What happens if the employee is now aged 75 years or over, or is aged 65-74 and doesn’t pass the work test?

Consider the situation where the employee was less than 65 years of age, or was aged 65–74 and passed the work test (set out in item 2 of the table in Reg. 7.04(1) of the SIS Regs) in the income year that the employer should have correctly paid the SG contributions, but is now aged 75 years or more, or is aged 65–74 and does not satisfy the work test, in the 2017–18, the 2018–19, or the 2019–20 income year, when the employer makes an Amnesty payment. The individual may or may not still be employed by the employer. Could this affect whether the superannuation fund is able to accept the contribution?

The Bill does not contain any amendments to the characterisation or treatment of payments made under the Amnesty; they are payments of SGC (if paid to the Commissioner) or contributions to a complying superannuation fund (if paid directly to the fund). Both of these options will meet the definition of mandated employer contributions for the purposes of a fund’s ability to accept contributions for a member aged 75 or more, or 65–74 where the work test is not satisfied.

Regulation 5.01 of the SIS Regs defines mandated employer contributions to relevantly include contributions made by an employer that:

  1. reduce the employer’s potential liability for SGC;
  2. are payments of shortfall components.

Where an employer makes a payment under the Amnesty:

  • to the ATO — these are ‘payments of shortfall components’ under Part 8 of the SGA Act and fall within the second point above;
  • directly to a superannuation fund — they are making contributions and claiming the late payment offset under s. 23A of the SGA Act. The contributions reduce their ‘potential liability for SGC’ and fall within the first point above.

In other words, Amnesty payments are mandated employer contributions so the age of the employee or their circumstances will not prevent the superannuation fund from accepting Amnesty payments.

Note
Where an employer has made a payment to the ATO under the Amnesty and the employee is over 65, the employee can request the ATO pay these amounts directly to them under s. 65A of the SGA Act. If this occurs, the ATO will manage the payment in line with other ATO-held superannuation, which can be applied for via myGov or downloadable forms.

What happens if the employee is now a non-resident?

Consider the situation where the employee is a non-resident for tax purposes in the 2017–18, the 2018–19, or the 2019–20 income year, when the employer makes an Amnesty payment. It is assumed in this discussion that the individual is no longer employed by the employer. This will affect how the ATO manages the Amnesty payment.

If the employee was originally a non-resident

As mentioned above, the Bill does not amend the characterisation of the Amnesty payment.

If the employee was a former temporary resident, the Amnesty amount paid to the ATO is treated as though it were paid as unclaimed money under s. 65AA of the SGA Act. In this case, the ATO can pay this amount directly to the employee as a departing Australia superannuation payment (DASP). For more information on DASPs, see the ATO’s fact sheet (QC 24169).

If the employee was originally a resident

If the employee was not a former temporary resident, the ATO will need to pay the amount to a complying superannuation fund for the employee, or to the Superannuation Holding Accounts Special Account (SHASA) if the ATO cannot identify a fund for the employee. If the amount is paid into the SHASA, the employee will only be able to request direct payment of the amount in certain circumstances including if the employee is over 55 years of age.

The ATO will take steps to identify a superannuation fund for the employee, or information for direct payment where appropriate. The employee may provide information to facilitate this process.

Note
Amnesty payments made to the ATO will be deductible to the employer (provided they are made in the Amnesty period) irrespective of whatever ultimately happens to the amounts once they reach the ATO.

What happens if the employee is now deceased?

Consider the situation where the employee was alive in the income year that the employer should have correctly paid the SG contributions but is now deceased by the 2017–18, the 2018–19, or the 2019–20 income year, when the employer makes an Amnesty payment. This will affect how the ATO manages the Amnesty payment.

Notwithstanding that the employee is now deceased, the employer remains liable for the SGC for a shortfall that relates to a deceased employee (see ATO ID 2014/31). This is because s. 15B of the SGA Act (from 1 January 2006) extends the application of s. 19 of the SGA Act to treat former employees as employees. The SGA Act does not define former employee so the term takes its ordinary meaning. It is therefore possible for a deceased employee to meet the common law meaning of former employee.

Further, the death of an employee subsequent to when the original SG shortfall arose doesn’t prevent the employer from being eligible for the Amnesty in respect of that employee.

Where an employer pays the SGC to the ATO, and the relevant employee is deceased, the ATO pays the money directly to the employee’s legal personal representative (LPR) in accordance with s. 67 of the SGA Act. Accordingly, where an employer makes an Amnesty payment to the ATO in respect of a now deceased employee, the ATO will pay the amount directly to the employee’s LPR.

Note
Under s. 23(9A) of the SGA Act, a contribution made to the LPR of a deceased employee is taken to have been a contribution made by the employer to a complying superannuation fund for the benefit of the employee.

Reopening the estate – how is the Amnesty payment managed by the LPR? 

Generally, once a deceased estate has been fully administered and closed, it stays that way. However, there are times when an estate must be reopened, such as when more assets are discovered. This is one of those situations … even if the deceased estate was fully administered many years before the Amnesty payment is received by the LPR. No time limits apply on reopening a deceased estate.

Once the LPR receives the Amnesty payment from the ATO, the LPR will need to refer to the Will of the deceased to determine who is entitled to the amount.

Any binding death benefit nomination (BDBN) made by the deceased will be irrelevant because a BDBN constitutes instructions to the trustee of a superannuation fund as to where the death benefits should be paid by the trustee of the fund. In this case, the Amnesty payment bypasses the superannuation fund and is paid directly to the LPR.

What is the tax treatment of the payment to the LPR?

An amount paid to the LPR of the deceased under s. 67 of the SGA Act is a superannuation death benefit (item 7 of the table in  s. 307-5 of the ITAA 1997), even though it is paid directly to the LPR and not the superannuation fund.

Section 302-10 of the ITAA 1997 sets out the treatment of the superannuation death benefit that the LPR receives in their capacity as LPR.

To the extent that … .. the beneficiary is a death benefits dependant of the deceased … the beneficiary is not a death benefits dependant of the deceased
Treatment of superannuation death benefit under s. 302-10 The benefit is treated as if it had been paid to the LPR as a person who was a death benefits dependant of the deceased.

No one is taken to be presently entitled to that amount which has the effect of making the LPR the relevant taxpayer.

 The benefit is treated as if it had been paid to the LPR as a person who was not a death benefits dependant of the deceased.

No one is taken to be presently entitled to that amount which has the effect of making the LPR the relevant taxpayer.
Tax treatment of the benefit The benefit is neither assessable income nor exempt income of the LPR (under s. 302-60).

i.e. the Amnesty payment is tax-free to the LPR.

 The taxable component of the benefit is assessable income of the LPR (under s. 302-145).

i.e. the Amnesty payment is taxable to the LPR.

The LPR will be entitled to a tax offset that ensures that the rate of tax on the elements taxed and untaxed in the fund does not exceed 15 per cent and 30 per cent respectively.

The detailed tax treatment of superannuation death benefits is beyond the scope of this blog.

Important
The definition of a death benefits dependant is set out in s. 302-195(1) of the ITAA 1997 and means:

    1. the deceased person’s spouse or former spouse;
    2. the deceased person’s child aged less than 18;
    3. any other person with whom the deceased person had an interdependency relationship under s. 302-200 just before they died; or
    4. any other person who was a dependant of the deceased person just before they died.

The Commissioner notes in TD 2013/12 that paras. (c) and (d) above require the relationship to which they refer to exist just before the deceased person died. However, paras. (a) and (b) do not refer to the time as at which a person’s satisfaction of either of those paragraphs is tested.

Clarification of this issue is important because an employer may make an Amnesty payment to the ATO which is then paid to the LPR, and the LPR will need to determine whether the payment is tax-free (if it is taken to be made in respect of a beneficiary who is a death benefits dependant) or taxable (if it is taken to be made in respect of a beneficiary who is not a death benefits dependant). A beneficiary may have been a death benefits dependant at the time of death (e.g. because they were 16 years of age) but is no longer a death benefits dependant by the time the LPR receives the Amnesty payment from the ATO (e.g. because they are now 21 years of age).

The Commissioner’s position (at para. 5 of TD 2013/12) is that:

… on the basis that the definition of a ‘death benefits dependant’ relates to ‘a person who has died’, the relevant time as at which a person’s satisfaction of either of paras. (a) or (b) of that definition is to be tested is logically related to the time the deceased person died.

This means that the time at which the LPR determines whether or not the beneficiary is a death benefits dependant (which will determine the tax treatment of the payment) is just before the deceased person died not at the time of the Amnesty payment.

What is the employee’s LPR is now deceased?

The ATO will generally pay the amount to the LPR of the LPR. However, in Victoria, this is only in the case of executors (see s. 17 of the Administration and Probate Act 1958 (Vic)), i.e. executor of executor, not executor of administrator or vice versa. Further, this is only in the case of the death of a sole executor.

This is also subject to the terms of the Will (i.e. does the Will set out who will act if the executor dies), and you should refer to the state legislation applicable in your jurisdiction.

Are Amnesty payments subject to payroll tax and WorkCover?

The definitive answer to this question will depend on, and vary with, State and Territory legislation. However, it is likely that Amnesty payments will constitute ‘taxable wages’ for payroll tax and WorkCover purposes. There appear to be no provisions in the relevant legislation which contemplate a federal amnesty nor treat an Amnesty payment paid in 2017–18, 2018–19, or 2019–20 as not forming part of that year’s wages for payroll tax and WorkCover purposes.

The correct payment of SG contributions at the time may not have caused the employer to exceed the payroll tax threshold in earlier income years, however a large one-off Amnesty payment could cause an employer to exceed the relevant payroll tax threshold in 2017–18, 2018–19, or 2019–20 which would otherwise not have been exceeded.

Can I make the Amnesty payment directly to the superannuation fund or does it have to go to the ATO?

An employer can either pay the SGC to the ATO or make an offsetting contribution directly to a superannuation fund under s. 23A of the SGA Act.

Offsetting contribution under s. 23A

Under s. 23A of the SGA Act, an employer has up to four years after the employer’s original assessment for a quarter is made to make an irrevocable election to offset a late payment against the SGC.

There is a timeframe for late payments to be treated in this way. The offset is available only for late payments made after the 28th day after the end of a quarter (i.e. the due date for the SG contribution) but before the earlier of lodging an SG statement or receiving a default assessment from the Commissioner.

ATO’s previous guidance

The ATO previously advised — when the 2018 Bill was before Parliament — that where an employer can pay the full SG shortfall amount for a period they should pay the amount directly to the employee’s superannuation fund, but where the employer is not able to pay the full SG shortfall amount for a period they should pay the ATO.

The ATO has not republished this guidance at the time of writing.

I am a closely held employer. Can I use the Amnesty for myself?

Nothing in the Bill limits the availability of the Amnesty to employers who have only arm’s length employees. Accordingly, a closely held employer may have paid salary or wages, or directors’ fees to the business owner but never paid, or not paid all of the requisite, SG contributions.

Provided there is written evidence of a genuine salary/wage or director’s fee, the employer could (and should) make an Amnesty payment that is fully deductible, is excluded from the business owner’s Div 293 income and won’t cause the business owner to exceed their concessional contributions cap (see below).

What happens if I exceed my concessional contributions cap because of an Amnesty payment?

Where an employee exceeds the concessional contributions cap because of an Amnesty payment, the Commissioner can exercise his discretion to disregard the contributions made under the Amnesty.

Important
Where an employer pays the SGC to the ATO, the employee will not need to apply for the Commissioner’s discretion. The exercise of the Commissioner’s discretion to make a determination to disregard the excess contribution will be streamlined by allowing the Commissioner to make such a determination on the Commissioner’s own initiative (i.e. a ‘blanket determination’ for affected employees).

However, where an employer pays the SGC directly to an employee’s superannuation fund, the employee will need to inform the ATO of the payment by applying for an exercise of the Commissioner’s discretion under s. 292-465 of the ITAA 1997.

I can deal with the SGC issue by not claiming a tax deduction for a late SG payment, can’t I?

The SGA Act provides that an employer reduces their SGC liability by:

  1. paying correct SG contributions into a complying fund for their SG employees by the 28th day following the end of a quarter (failure to do this makes them liable for the SGC); or
  2. electing to treat a late payment to a superannuation fund as an offsetting contribution under s. 23A of the SGA Act.

Both options require the employer to advise the ATO by lodging an SG statement and result in the payment (together with the relevant components and penalties) being non-deductible.

It is a common misconception that a late SG contribution (i.e. one paid after the 28th day of the month following the end of the quarter) — even a contribution paid one day late — is non-deductible.

Nothing in the ITAA or the SGA Act treats a contribution as non-deductible just because it’s late.

Under the ITAA 1997:

  • s. 290-10 prevents a deduction for contributions except under Div 290;
  • s. 290-60 allows an employer to deduct contributions made to a complying fund for SG employees;
  • s. 26-95 denies a deduction for the SGC.

Where an employer has an SG shortfall (whether due to late payment or non-payment), they are liable for the SGC which, under self-assessment, requires them to disclose this to the ATO by:

  • paying the SGC (comprising the SG shortfall, the nominal interest and the administration component as discussed above) — failure to do this subjects the employer to the GIC and could give rise to the issue of an estimate under Div 268 or a director penalty notice under Div 269 of Schedule 1 to the TAA 1953; and
  • lodging an SG statement — failure to do this subjects the employer to the 200 per cent Part 7 penalty.

A late SG contribution is deductible, unless it is SGC (s. 26-95). Crucially, the ITAA cannot be used to manage an SGC issue; merely adding back a late contribution for income tax purposes does not deal with the SG shortfall.

A late contribution:

  • may be eligible for treatment as an offset under s. 23A of the SGA Act (conditions apply, see below);
  • can be managed by the proposed SG Amnesty, which will necessitate making a disclosure and payment during the Amnesty period, however, this will result in the contribution effectively being paid twice.

What happens if I don’t come forward during the Amnesty?

Employers who are not up-to-date with their SG payment obligations to their employees and who don’t come forward during the Amnesty may face higher penalties in the future.

When the 2018 Bill was before Parliament, the ATO advised that, generally, a minimum penalty of 50 per cent of the SGC will be applied to employers who could have come forward during the Amnesty but did not (although the particular circumstances of each case will be considered by the ATO). The ATO has not re-announced this guidance at the time of writing.

Further, the Bill proposes that from the day after the Amnesty period ends, the Commissioner’s ability to remit Part 7 penalties on an employer that has failed to disclose to the Commissioner information that is relevant to the amount of the employer’s SG shortfall for a historical quarter covered by the Amnesty will be restricted. The Commissioner will not be able to remit penalties below 100 per cent of the SG charge payable. This restriction will not apply if the Commissioner considers that there were exceptional circumstances that prevented the employer from disclosing SG non-compliance.

Remember that extensive payroll reporting through Single Touch Payroll, which is now mandatory for all employers (other than those with closely held payees who have until 1 July 2020 to start reporting), will allow the ATO even greater transparency over employers’ payroll obligations …

… so now is the time to get your house in order.

 

 

The proposed Superannuation Guarantee Amnesty — reintroduced

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On 18 September 2019, the Government introduced the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill), which allows non-complying employers to self-correct any unpaid superannuation guarantee (SG) amounts dating back to 1992 under a one-off SG Amnesty (the Amnesty).

On 19 September 2019, the Senate referred the Bill to the Economics Legislation Committee for inquiry. The Committee released its report on 11 November 2019, and recommended that:

  • the Bill be passed; and
  • the ATO develops and implements a communication strategy to maximise employer awareness and engagement with the SG Amnesty.

The Committee is confident that the one-off Amnesty provides the best opportunity to address historical SG non-compliance. The Committee heard evidence that the Amnesty will leave no workers worse off and will result in more individuals receiving their full entitlements than would do so if the Amnesty was not in place.

Amendments to give effect to an SG Amnesty were previously proposed in the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018 (the 2018 Bill) which was before the Senate when Parliament was prorogued prior to the 2019 Federal election, and which lapsed on 1 July 2019 with the commencement of the 46th Parliament.

Note
For the sake of space and expression, the proposed Amnesty will be hereafter referred to as simply ‘the Amnesty’.

The amendments as reintroduced are the same as those in the 2018 Bill, except in relation to the following:

  • while the start date for the Amnesty is still 24 May 2018 as originally announced, the Amnesty is proposed to end six months after the day the Bill receives Royal Assent (previously, the Amnesty period was to last for 12 months and end on 23 May 2019); and
  • once the Amnesty has ended, the Commissioner’s ability to remit penalties for historical SG non-compliance imposed on employers with a historical SG shortfall that is not disclosed during the Amnesty will be limited.

This article explains how the Amnesty will operate once it becomes law.

Why is there a need for the Amnesty?

The original announcement of the Amnesty on 24 May 2018 by the then Minister for Revenue and Financial Services, Kelly O’Dwyer, was unexpected.

The then Minister’s media release explained that:

[the Government is] introducing this one-off Amnesty to allow employers to wipe the slate clean and pay their workers what they’re owed. All Australian workers should be paid the entitlements they are owed.

According to the media release, the ATO estimated that in 2014–15, around $2.85 billion in SG payments went unpaid. The latest estimate of the SG gap available from the ATO is $2.3 billion for the 2016–17 income year.

The Amnesty was one measure among a suite of reforms to protect SG entitlements by:

  • giving the ATO the ability to seek court-ordered penalties for employers who continue to ignore their obligations;
  • requiring APRA-regulated superannuation funds to report contributions more frequently to the ATO;
  • implementing real-time reporting of payroll and superannuation information through; and
  • improving the effectiveness of the ATO’s various recovery powers, including director penalty notices.

The reintroduction of the proposed legislative amendments into Parliament was announced by Senator Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology. The Minister’s media release states that since the Amnesty was initially announced on 24 May 2018, over 7,000 employers that were eligible for the original Amnesty have voluntarily disclosed historical unpaid SG, and the ATO estimates that an additional 7,000 employers will come forward due to the extension of the Amnesty. It is expected that around $160 million of SG will be paid under the Amnesty.

How does the Amnesty work?

When is the Amnesty effective?

The Amnesty period:

  • commences on Thursday 24 May 2018 (being the date that the Amnesty was announced and on which the 2018 Bill was introduced into Parliament); and
  • ends six months after the day the Bill receives Royal Assent.

The Amnesty applies only to disclosures of previously undeclared SG shortfall amounts that are made during the Amnesty period. T disclosures must relate to a quarter in the period starting when the SG regime commenced and all subsequent quarters until and including the quarter starting on 1 January 2018 — that is, the period from 1 July 1992 to 31 March 2018. This is an astonishing 26 years.

Important
The benefits of the Amnesty will not be available for SG non-compliance that occurs in relation to a quarter starting on or after 1 April 2018.

When is an employer eligible for the Amnesty?

To be eligible for the Amnesty, an employer must:

  • voluntarily disclose SG shortfall amounts, relating to any period from 1 July 1992 to 31 March 2018, within the Amnesty period (24 May 2018 to six months after the day the Bill receives Royal Assent);
  • disclose SG shortfall amounts that have not previously been disclosed;
  • make the payment of the SG shortfall amount during the Amnesty period; and
  • not have been previously informed that the ATO is examining (or that it intends to examine) the employer’s SG compliance for the relevant quarter.

According to the Explanatory Memorandum (EM) to the Bill, an ‘examination’ of an entity’s affairs includes reviews, audits, verification checks, record-keeping reviews/audits and other similar activities.

An employer may still qualify for the Amnesty if it has previously made disclosures about an SG shortfall for a quarter but comes forward with information about additional amounts of SG shortfall for that quarter.

What are the benefits to the employer?

Overview of current SGC components

Under s. 17 of the Superannuation Guarantee (Administration) Act 1992 (the SGA Act), if an employer has one or more individual SG shortfalls for a quarter, the employer is liable for the SG charge (SGC) comprising:

  • the total of the employer’s individual SG shortfalls for the quarter;
  • the nominal interest component for the quarter (imposed at the rate of 10 per cent calculated from the start of the quarter); and
  • the administration component for the quarter (being $20 per employee per quarter).

The employer is also liable for:

  • a Part 7 penalty for failing to lodge an SG statement, equal to double the amount of the SGC, i.e. 200 per cent of the SGC payable (the penalty may be partially remitted) — s.59 of the SGA Act; and
  • the general interest charge (GIC) on the unpaid amount.

Further, aside from the GIC on any late payment of the SGC, any amounts payable are non-deductible including the Part 7 penalty.

Important point regarding non-deductibility of late contributions

It is a common misconception that a late SG contribution (i.e. one paid after the 28th day of the month following the end of the quarter) — even a contribution paid one day late — is non-deductible.

Nothing in the ITAA or the SGA Act treats a contribution as non-deductible just because it’s late.

Under the ITAA 1997:

  • s.290-10 prevents a deduction for contributions except under Div 290;
  • s.290-60 allows an employer to deduct contributions made to a complying fund for SG employees;
  • s.26-95 denies a deduction for the SGC.

Where an employer has an SG shortfall (whether due to late payment or non-payment), they are liable for the SGC which, under self-assessment, requires them to disclose this to the ATO by:

  • paying the SGC (comprising the SG shortfall, the nominal interest and the administration component as discussed above) — failure to do this subjects the employer to the GIC and could give rise to the issue of an estimate under Div 268 or a director penalty notice under Div 269 of Schedule 1 to the TAA 1953; and
  • lodging an SG statement — failure to do this subjectsthe employer to the 200 per cent Part 7 penalty.

A late SG contribution is deductible, unless it is SGC (s. 26-95). Crucially, the ITAA cannot be used to manage an SGC issue; merely adding back a late contribution for income tax purposes does not deal with the SG shortfall.

A late contribution:

  • may be eligible for treatment as an offset under s.23A of the SGA Act (conditions apply, see below);
  • can be managed by the proposed SG Amnesty, which will necessitate making a disclosure and payment during the Amnesty period, however, this will result in the contribution effectively being paid twice.

Offsetting contribution under s. 23A

Under s. 23A of the SGA Act, an employer has up to four years after the employer’s original assessment for a quarter is made to make an irrevocable election to offset a late payment against the SGC.

There is a timeframe for late payments to be treated in this way. The offset is available only for late payments made after the 28th day after the end of a quarter (i.e. the due date for the SG contribution) but before the earlier of lodging an SG statement or receiving a default assessment from the Commissioner.

Administration component will be waived

Where an employer makes a voluntary disclosure under the Amnesty, the administration component of $20 per employee per quarter will not be payable in respect of SG shortfalls for employees who are included in that disclosure.

 

Example 1.1 from the EM
An employer with 100 employees for a quarter covered by the Amnesty previously had individual SG shortfalls identified in respect of 40 of those employees for the quarter.

Prior to the Amnesty, the employer’s SG shortfall (calculated in respect of the 40 employees) included an administration component for each of those employees.

During the Amnesty, the employer discloses that they recently became aware of a small individual SG shortfall in respect of all 100 of their employees. For the original 40 employees, this amount was in addition to the individual SG shortfalls originally identified.

As this disclosure occurred under the Amnesty, the employer does not have an administration component included in their (increased) SG shortfall for the quarter. However, the employer still has an administration component in respect of the original 40 employees.

 

Part 7 penalty will not apply

The Part 7 penalty will not be applied to catch-up SG payments made during the Amnesty period.

The Part 7 penalty is imposed at 200 per cent but the Commissioner has a discretion to remit this penalty. See practice statement PS LA 2011/28 and draft practice statement PS LA 2019/D1.

Catch-up SG payments will be deductibile

Catch-up SG payments made during the Amnesty period will be tax deductible, i.e. in the 2017–18, the 2018–19, and/or the 2019–20 income years. This includes payments made to the ATO in the form of the SGC, as well as contributions made directly to their employees’ superannuation funds that an employer has elected to offset against the SGC under s. 23A of the SGA Act.

If the employer enters into a payment plan with the ATO (see below) that extends past the end of the Amnesty period, any payments made after that date will not be deductible.

What must an employer do?

An employer must disclose to the Commissioner information related to an SG shortfall for the relevant quarter(s) and pay the outstanding SG amounts.

Calculating the amount payable

The employer must pay the SG shortfall plus the nominal interest component from the start of the relevant period to the date on which the SGC is payable. This ATO calculator may assist.

Further, the ATO will still impose GIC that accrues on the SG shortfall.

Paying the outstanding amount

The employer can ‘make good’ the SG shortfall by making a payment or a contribution:

  • the employer can pay the SG shortfall, the nominal interest and the GIC directly to the ATO — this is termed a payment; or
  • the employer can pay the SG shortfall, the nominal interest and the GIC directly to the employee’s superannuation fund as an offsetting contribution (see below) — this is termed a contribution.

There are two options for paying the outstanding SG amount and lodging the information with the ATO.

If the employer is able to pay directly to the superannuation fund(s)

Where the employer can pay the full SG shortfall amount directly to the affected employees’ superannuation fund(s), the employer needs to complete an approved form and submit it to the ATO.

Note
When the 2018 Bill was before Parliament, the ATO released an SG Amnesty fund payment form which could be submitted electronically through the Business Portal, Tax Agent Portal or BAS Agent Portal. At the time of writing, the ATO has not reinstated the form on its website.

The employer must pay the full SG shortfall amount — including the nominal interest component — directly to the superannuation fund(s) on the same day that the form is lodged.

This option would be suitable in circumstances where the SG shortfall relates to current or recent employees and the employer is able to confirm that the superannuation account information in their records is up to date.

Further, this method is permitted only in relation to periods for which the employer had not previously been assessed for the SGC.

If the employer cannot pay directly to the superannuation fund(s)

Where the employer is unable to pay the full SG shortfall amount directly to the affected employees’ superannuation fund(s), it needs to lodge the approved form with the ATO.

In this case, payment is not made to any superannuation funds but to the ATO. The ATO will contact the employer to arrange a payment plan. The employer may start payment before the ATO makes contact in order to reduce the GIC.

This option would be suitable where the affected employees have since departed the organisation and the employer is unable to ascertain their current superannuation account details.

The employer must use this method in the following circumstances:

  • where the employer cannot pay the full SG shortfall amount to the superannuation fund(s); and
  • in relation to periods where the employer had already lodged an SG statement or received an SGC assessment.

Failure to pay

An employer may no longer qualify for the Amnesty if it:

  • does not pay the SGC amount outstanding; and
  • either:
    • does not enter into a payment plan; or
    • fails to comply with the terms of a payment plan that has been entered into.

If an employer is notified by the ATO that it is no longer eligible for the Amnesty, they may need to renegotiate the payment plan to remain eligible.

When an employer no longer qualifies for the Amnesty in respect of a period, the ATO will amend the SGC assessment for the period to include the administration component, and Part 7 penalties (at the rate of 200 per cent of the SGC amount) may apply. Future payments of the SG amounts will not be deductible.

Defaulting on a payment plan may also expose the employer to other debt recovery action.

Commissioner’s ability to remit Part 7 penalties restricted

The Bill proposes that from the day after the Amnesty period ends, the Commissioner’s ability to remit Part 7 penalties on an employer that has failed to disclose to the Commissioner information that is relevant to the amount of the employer’s SG shortfall for a historical quarter covered by the Amnesty will be restricted.

The Commissioner will not be able to remit penalties below 100 per cent of the SG charge payable. According to the EM, this restriction is intended to strengthen the operation of the Amnesty by providing employers with higher minimum penalties for failing to come forward during the Amnesty.

Note
The restriction on remission of penalties will not apply if the Commissioner considers that there were exceptional circumstances that prevented the employer from disclosing SG non-compliance.

How are employees affected?

The employees will receive the SG shortfall amount plus the nominal interest component.

Notably, employees will also receive the GIC that accrues on the SG shortfall amount.

The proposed amendments ensure that employees are not disadvantaged as a result of the Amnesty by having late payments of SG covering a number of years possibly resulting in excess concessional contributions.

Commissioner’s discretion to disregard or reallocate a contribution

If an employee exceeds their concessional contributions cap ($25,000 for 2017–18, 2018–19 and 2019–20) due to contributions made under the Amnesty, the Commissioner may exercise his discretion to disregard these contributions:

  • where the employer pays the SGC amount to the ATO — the employees will not need to apply for the discretion under s.292-465 of the ITAA 1997 (as they ordinarily would). The exercise of the Commissioner’s discretion to make a determination to disregard the excess contribution will be streamlined by allowing the Commissioner to make such a determination on the Commissioner’s own initiative (i.e. a ‘blanket determination’ for affected employees);
  • where the employer pays the SGC amount directly to the superannuation fund — the employee will need to apply for the discretion under s. 292-465 of the ITAA 1997 and will not be covered by the ‘blanket determination’ mentioned above.

Employees will not be liable for Div 293 tax

Contributions made under the Amnesty do not count towards the employee’s income or contributions for Div 293 purposes (which taxes the contribution at the rate of 30 per cent where the individual’s income for this purpose exceeds $250,000).

This ensures that an employee cannot exceed their concessional contributions cap or be liable for a Div 293 tax liability as a result of their employer making a payment or contribution under the Amnesty.

The future impact

The EM identifies the estimated gains to revenue over the forward estimates period:

2018–19 2019–20 2020–21 2021–22 2022–23 Total
$43m ($10m) $32m $22m $12m $99m

 

Presumably, the anticipated revenue comprises tax on superannuation fund earnings arising from the catch-up SG amounts paid during the Amnesty period. The estimated $43 million revenue in 2018–19 would also include the contributions tax revenue expected to arise from the payments of historical SG shortfall amounts before the Amnesty ends. It is unclear why there is a negative revenue impact in 2019–20.

What should employers do?

While the Amnesty allows the employer to either make payments of SG shortfall amounts directly to the ATO, or make an offsetting contribution directly to the employee’s superannuation fund, it is expected that most employers would pay the SG shortfall amounts to the ATO and not directly to the superannuation funds. An expected consequence would be that, through the Amnesty, the ATO will acquire the details of those employers who have been non-compliant in the past — whether deliberately or through misinformation. The ATO has made it clear that will be no second chances for these employers in the future. Once the Amnesty period ends, full SGC penalties will apply, including a minimum 50 per cent penalty on top of the SGC amount payable.

Single Touch Payroll, which is now compulsory for all employers (other than those with closely held payees who have until 1 July 2020 to start reporting), will help ensure that the ATO can identify non-compliance faster and more easily than it has in the past.

Further, while the Amnesty is optional for employers, whether an employer decides to take advantage of it or not will have a bearing on the consequences if future ATO activity identifies a historical shortfall (i.e. an employer’s failure to make a disclosure under the Amnesty will affect the penalties they face if the ATO subsequently determines that they have not complied with their SG obligations).

Previously, when the 2018 Bill was before Parliament, the ATO had warned that where employers do not self-correct SG shortfalls during the Amnesty, they may face higher penalties in the future. The ATO advised that, in determining any remission of the Part 7 penalty, the ATO will take into account the employer’s ability to access the Amnesty. While the Commissioner must consider the particular circumstances of each case, generally a minimum penalty of 50 per cent of the SGC will apply to employers who could have disclosed during the Amnesty but chose not to. Note that at the time of writing the ATO has not reinstated this previous guidance.

The Amnesty is not yet law!

At the time of writing, the Bill was before the House of Representatives. Both Houses of Parliament are next scheduled to sit from Monday 25 November to Thursday 28 November 2019 — this is the earliest time that the Bill could be passed.

Where an employer chooses to disclose and pay historical unpaid SG before the Bill becomes law, the ATO must apply the current law and therefore the ATO will treat this as a standard voluntary disclosure of an unpaid SG amount. This means that the ATO will impose Part 7 penalties and the administration component, and the catch-up payment will not be deductible to the employer.

If and when the Amnesty becomes law, it would be expected that the ATO will communicate to employers that have already paid the full SGC how it would refund the administration component and Part 7 penalty to those employers that are eligible for the Amnesty. Depending on the timing, employers may also need to amend their tax returns to claim a tax deduction for the payment.

All employers should be encouraged to pay their workers’ entitlements in full regardless of any potential tax benefits. An employer’s obligation to pay SG amounts is not a tax akin to payroll tax or Workcover. It is remuneration paid to their employees for their services — albeit paid to their superannuation funds rather than directly to the employees.

We shall monitor the progress of the Bill and report any developments in a future post or via our LinkedIn account.

 

 

Tax Yak – Episode 32: Happy 1st Birthday Tax Yak (Current Tax Landscape)

Posted on by thriveadmin

Join us in celebrating Tax Yak’s 1st Birthday.

In this episode of Tax Yak, Robyn yaks with TaxBanter director, Neil Jones, about the first few months of the 46th Parliament and the current tax landscape.

Host: Robyn Jacobson

Guest: Neil Jones

Recorded: 16 October 2019

The small business tax concessions

Posted on by thriveadmin

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In May 2018, the Board of Taxation (the Board) commenced a review of the small business tax concessions (the Review). Dr Mark Pizzacalla, the Chair of the Review and a member of the Board, recently confirmed in a TaxBanter Tax Yak Podcast (episode 30, recorded on 18 September 2019) that the Board has now concluded its review of the concessions available to small businesses and provided its final report to Government. The report has not yet been publicly released.

This article summarises the suite of small business concessions in the taxation laws, as well as concessions which have been extended to medium-sized businesses.

What is a ‘small business’?

A small business entity for tax purposes

Division 328 of the ITAA 1997 sets out a number of tax concessions that are available to a ‘small business entity’ (SBE).

An SBE is defined in s. 328-110. A taxpayer is an SBE for an income year where:

  • it carries on a business in the income year; and
  • one or both of the following applies:
    • the taxpayer carried on a business in the previous income year and the aggregated turnover for that year was less than $10 million; and/or
    • the taxpayer’s aggregated turnover for the current year is likely to be less than $10 million.

* Prior to 1 July 2016, the turnover threshold for an SBE was $2 million.

Definition
An entity’s aggregated turnover (s. 328-115) for an income year is the sum of the annual turnovers of the entity, its connected entities and its affiliates. It excludes, broadly, income derived from dealings between these related parties.

An entity’s annual turnover (s. 328-120) for an income year is its total ordinary income derived in the ordinary course of carrying on a business. It excludes non-assessable non-exempt income, sales of retail fuel and GST. Income derived from dealings with associates is taken into account at arm’s length value, and income must be annualised using a reasonable estimate where the entity did not carry on business for the whole of the income year.

While this definition of an SBE — and the turnover threshold of $10 million — applies for most small business tax concessions, some concessions are subject to a lower turnover threshold which many SBEs cannot access, and some concessions are subject to higher thresholds and are therefore available to businesses that are not ‘small’ businesses. The eligibility thresholds of the concessions discussed below range from $2 million to $50 million, which adds complexity to concessions purportedly designed to simplify the tax system for smaller businesses.

The small business market

According to the ATO, there are approximately 3.8 million small businesses — i.e. turnover of less than $10 million — including 1.6 million sole traders. In an industry speech delivered in May 2019, Deputy Commissioner Deborah Jenkins said that small businesses:

  • employ more than 5.5 million people;
  • contribute $380 billion to the national economy;
  • comprise more than 99 per cent of all Australian businesses;
  • contribute 15 per cent of total income tax and 23 per cent of total GST collected by the ATO;
  • owe $15 billion in collectable debt, accounting for almost two-thirds of all debts owed.

‘Small business’ under other laws

The concept of ‘small business’ differs across not only the various taxation regimes, but also between different laws and regulators.

Common definitions include the following:

Australian Bureau of Statistics (ABS)

The ABS defines a small business as one that employs less than 20 people.

Fair Work Australia (FWA)

For FWA purposes, a ‘small business employer’ is one with fewer than 15 employees (s. 23 of the Fair Work Act 2009). Amongst other things, a small business employer is subject to different unfair dismissal rules (s. 388), and is exempt from an obligation to make redundancy payments (ss. 119 and 121).

Australian Securities and Investments Commission (ASIC)

For corporations law and ASIC purposes, a ‘small proprietary company’ is defined in s. 45A(2) of the Corporations Act 2001 (CA) as a company which satisfies at least two out of three threshold tests in relation to the income year. Most small proprietary companies are exempt from the requirements to prepare financial reports in accordance with Part 2M.3 of the CA.

The thresholds were doubled — by regulation — with effect from 1 July 2019.

Test Threshold pre- 1 July 2019 Threshold from 1 July 2019
Annual revenue of less than: $25 million $50 million
Consolidated gross assets of less than: $12.5 million $25 million
Number of employees at the end of the income year is fewer than: 50 100

Tax concessions for small business

Income tax concessions

1.Threshold – aggregated annual turnover < $50 million

The corporate tax cuts and instant asset write-off were originally legislated to provide tax relief for small businesses. By the end of the 2018–19 income year, both of these concessions had been extended to entities with annual aggregated turnover of less than $50 million.

Lower company tax rates

Prior to 1 July 2015, the corporate tax rate was 30 per cent for all companies. Since the 2015–16 income year, a lower tax rate has been available for eligible companies that do not exceed the relevant turnover threshold, amongst other conditions. Originally designed to provide tax relief for smaller companies, the legislated tax cuts are now available to companies with an aggregated turnover of less than $50 million.

For the 2015–16 and 2016–17 income years, the lower corporate tax rate was available to SBEs as defined in s. 328-110. From the 2017–18 income year, the lower corporate tax rate is available to an entity that is a ‘base rate entity’ (BRE). Under the definition in s. 23AA of the Income Tax Rates Act 1986, a company is a BRE for an income year if:

  • no more than 80 per cent of its assessable income for the income year is ‘base rate entity passive income’ (as defined in 23AB of the Income Tax Rates Act 1986); and
  • its aggregated turnover for the income year is less than the relevant threshold for that year.

The following table summarises the lower corporate tax rates and the aggregated turnover thresholds that apply for each income year.

Income year < Aggregated turnover threshold Lower tax rate
2015–16 $2 million (SBE) 28.5%
2016–17 $10 million (SBE) 27.5%
2017–18 $25 million (BRE) 27.5%
2018–19 to 2019–20 $50 million (BRE) 27.5%
2020–21 $50 million (BRE) 26%
2021–22 and later $50 million (BRE) 25%

 

Instant asset write-off

Under the instant asset write-off rules, an eligible business can immediately deduct the cost of a depreciating asset where the cost of the asset is less than the relevant threshold, and the taxpayer acquires the asset, and first uses the asset or installs it ready for use, within a certain date range.

Before 7.30pm (AEDT) on 2 April 2019, the concession was only available to SBEs under s. 328-180 (i.e. aggregated turnover of less than $10 million). From that time, s. 40-82 of the ITAA 1997 extends the availability of the concession to ‘medium-sized businesses’ with an aggregated turnover of between $10 million and less than $50 million until 30 June 2020.

The eligibility criteria have changed over the years, as summarised in the below table.

Acquisition date range Asset costs* less than … Taxpayer’s aggregated turnover is less than …
From 1 July 2020 (unless extended again) $1,000 N/A
7.30pm (AEDT) 2 April 2019 to 30 June 2020 $30,000 $50 million
29 January 2019 to before 7.30pm (AEDT) 2 April 2019 $25,000 $10 million
1 July 2016 to 28 January 2019 $20,000 $10 million
7.30pm (AEST) 12 May 2015 to 30 June 2016 $20,000 $2 million
1 January 2014 to before 7.30pm (AEST) 12 May 2015 $1,000 $2 million
1 July 2012 to 31 December 2013 $6,500 $2 million
1 July 2011 to 30 June 2012 $1,000 $2 million

* Cost excludes GST where the entity is registered for GST and entitled to claim an input tax credit.

Note
If an entity seeks to use the instant asset write-off, they must use the pooling rules in Subdiv 328-D of the ITAA 1997 for any assets whose cost exceeds the above thresholds (currently $30,000). See Simplified depreciation — pooling below.

2.Threshold – aggregated annual turnover < $20 million

Eligibility for the research and development (R&D) tax incentive does not rely on the SBE definition (whether or not modified) unlike the other statutory concessions discussed in this article. However, the concession available nonetheless depends on the company’s turnover and amount of R&D deductions.

R&D tax incentive

Section 355-100 of the ITAA 1997 sets out the rules relating to a company’s entitlement to the R&D tax offset.

A company is entitled to a refundable tax offset equal to 43.5 per cent of its R&D deductions if:

  • its eligible notional R&D deductions are between $20,000 and $100 million; and
  • its aggregated turnover for the income year is less than $20 million.

A 38.5 per cent non-refundable tax offset applies in other circumstances. Further, the rate of the offset is reduced to the company tax rate for the portion of the company’s eligible notional R&D deductions that exceed $100 million.

3.Threshold – aggregated annual turnover < $10 million

The following concessions adopt the s. 328-110 definition of SBE without modification as part of their eligibility criteria.

Simplified depreciation – pooling

Subdivision 328-D of the ITAA 1997 allows an SBE to choose use a ‘general small business pool’ for depreciation purposes (s. 328-185). Broadly, the costs of the SBE’s depreciating assets (other than those eligible for immediate write-off) are allocated into a single pool. The pool is depreciated as a single asset at a rate of 30 per cent diminishing value each year (15 per cent in the year in which an asset is first allocated).

Simplified trading stock rules

Subdivision 328-E of the ITAA 1997 modifies the trading stock rules in Div 70 of the ITAA 1997. Under s. 328-285, an SBE can choose not to account for their trading stock for an income year where the difference between the value of the trading stock on hand at the start and end of the income year (based on a reasonable estimate) is not more than $5,000.

Small business restructure roll-over

The small business restructure roll-over in Subdiv 328-G of the ITAA 1997 allows an SBE to access a roll-over where the SBE transfers the ownership of its assets without changing the ultimate economic ownership, as part of a genuine restructure.

The roll-over disregards the gains and losses that arise as a result of the transfers of CGT assets, depreciating assets and trading stock, and ensures that the restructure is tax-neutral.

Under s. 328-430, each party to the transfer must either:

  • be an SBE;
  • has an affiliate that is an SBE;
  • is connected with an entity that is an SBE; or
  • be a partner in a partnership that is an SBE.

NOT YET LAW
Exposure draft legislation titled Treasury Laws Amendment (Measures for a later sitting) Bill 2019: miscellaneous amendments — released on 6 September 2019 — proposes to amend s. 328-430(d) of the ITAA 1997 to allow an entity that is connected with or an affiliate of an SBE to access the small business restructure roll-over in relation to an interest of the SBE even if the small businesses entity has aggregated turnover of between $2 million to $10 million. Currently, while the roll-over is available to the entity carrying on the business, entities associated with an SBE were only able to access the roll-over if the SBE was a CGT SBE — i.e. had an aggregated turnover of less than $2 million.

Immediate deduction for professional expenses for start-ups

Section 40-880(2A) of the ITAA 1997 allows an immediate deduction for certain costs incurred in starting up a business. The expenditure must be fees for relevant professional advice, or government fees, taxes and charges.

Immediate deduction for prepayments

Under s. 82KZM of the ITAA 1936, if an SBE makes a prepayment for the doing of a thing that is not to be wholly done within 13 months, then the deductibility of the prepayment is apportioned over the period to which is relates (unless it is excluded expenditure, e.g. an amount less than $1,000).

Two-year amendment period

The time period within which the Commissioner may amend an assessment is reduced from four years to two years for an SBE (s. 170 of the ITAA 1936).

4.Threshold – aggregated annual turnover < $5 million

When the turnover threshold for the definition of an SBE was increased from S2 million to $10 million with effect from 1 July 2016, the eligibility threshold for the small business income tax offset was increased to only $5 million. The discount rate which determines the amount of the offset has been legislated to increase in line with the reduction in the tax rate for companies.

Small business income tax offset

Individuals who derive net business income from an unincorporated small business — i.e. income from sole trading activities, and distributions of business income directly from partnerships and trusts — with an aggregated turnover of less than $5 million (since 2016–17) are eligible for a discount on the income tax liability on that business income. The discount is available in the form of a tax offset and it is capped at $1,000 per taxpayer per year.

Section 328-355 of the ITAA 1997 provides that in order for the individual to be eligible for the tax offset, the relevant business (individual, partnership or trust) must be an SBE as modified by s. 328-357 of the ITAA 1997, which reduces the turnover threshold from $10 million to $5 million.

The discount rate is as follows:

Income year Aggregated turnover threshold Discount rate
2015–16 $2 million 5 per cent
2016–17 to 2019–20 $5 million 8 per cent
2020–21 13 per cent
2021–22 and later income years 16 per cent

 

5.Threshold – aggregated annual turnover < $2 million

The $2 million turnover threshold — an alternative to the $6 million maximum net asset value test — to access the small business CGT concessions did not change when the SBE definition was amended to include entities with an aggregated turnover of less than $10 million from 1 July 2016.

Small business CGT concessions

Division 152 of the ITAA 1997 contains the four small business CGT concessions: the 15-year exemption, the 50 per cent reduction, the retirement exemption and the replacement asset roll-over.

Section 152-10 sets out the basic conditions which must be satisfied in order to access any of the concessions. They include that the taxpayer is a ‘CGT small business entity’ (CGT SBE), which is an SBE, assuming that the turnover threshold was $2 million instead of $10 million. Where the taxpayer passively holds the CGT asset which is used in a business carried on by an affiliate or a connected entity, the affiliate or the connected entity must be a CGT SBE.

Other concessions

The following concessions (some are which are legislative and some of which are administrative) all have an eligibility threshold of aggregated turnover of less than $10 million.

GST
  • Simpler BAS
  • Accounting for GST on a cash basis (s. 29-40 of the GST Act)^
  • Annual private apportionment of input tax credits (s. 131-5 of the GST Act)^
  • Paying GST by instalments (s. 162-5 of the GST Act)^

^ Also applies to entities that do not carry on a business (e.g. a not-for-profit) and the annual GST turnover does not exceed $2 million.
FBT
  • Car parking exemption (s. 58GA of the FBTA Act)
  • Work-related devices exemption (s. 58X of the FBTA Act)
Superannuation

Also applies to businesses with 19 or fewer employees even if they do not meet the turnover test.
PAYG instalments

This applies to a company that is an SBE, is an annual payer, and has business and/or investment income of $2 million or less (as well as other entity types)

Single Touch Payroll reporting concessions

Single Touch Payroll (STP)  — in Div 389 of Schedule 1 to the TAA — became mandatory for small employers (i.e. employers with fewer than 20 employees on 1 April 2018) on 1 July 2019, but the ATO granted an extension until 30 September 2019.

The ATO has provided reporting concessions for ‘micro employers’ and employers with ‘closely held’ payees. While there is no turnover threshold to be eligible for these reporting concessions — and there is no requirement that an eligible employer be a ‘small business’ (however defined) — in practice, it is likely that most eligible employers would be smaller businesses.

Employers with closely held payees

A closely held payee is one who is not at arm’s length from the employer, e.g.:

  • family members of a family business;
  • directors or shareholders of a company;
  • beneficiaries of a trust.

The STP reporting concessions available to employers in respect of their closely held payees are as follows:

Deferred start date

Small employers are not required to report information related to closely held payees until 1 July 2020. However, information in relation to all arm’s length employees must be reported from 30 September 2019 (or a deferred start date granted by the ATO).

Implications
The employer will still need to provide the closely held payees with a payment summary by 14 July 2020 and lodge a Payment summary annual report (PSAR) with the ATO by 14 August 2020 in respect of the 2019–20 income year.

Quarterly reporting

When small employers begin to report closely held payees from 1 July 2020, they may choose to report information relating to those payees quarterly. The quarterly STP report will be due at the same time as the business’s quarterly BAS.

The employer will need to make reasonable estimates each quarter of the amounts paid to closely held payees, using one of the following methods:

  • total withdrawals taken by the payee (other than dividends or repayment of liabilities);
  • 25 per cent of the total salary or directors’ fees from the previous income year;
  • varying the previous year’s amount (to account for trading conditions) within 15 per cent of the total salary or directors’ fees for the current income year.

Information related to arm’s length payees must be reported at the time of payment.

Note
Employers that have only closely held payees, and meet a compliance test (broadly, that they are up to date with their PAYG and tax return compliance), are currently eligible for the closely held lodgment concession for the PAYG withholding payment summary annual report (the PSAR). The due date of the PSAR under the concession is the due date of the employer’s tax return. Otherwise, the PSAR is due on 30 September where the employer lodges through a registered agent, or 14 August for self-lodgers and all large withholders.

Employers that report information relating to all of their employees under STP are not required to lodge a PSAR.

Micro employers

A micro employer is one with one to four employees. They may choose to use any of the following options for simplified STP reporting:

No cost or low cost STP solutions

Micro employers who do not need payroll or accounting software can choose a simple no cost or low cost (i.e. $10 per month or less) STP solution.

A list of these solutions is available on the ATO website.

Quarterly reporting

Micro employers can choose to report quarterly through a registered tax or BAS agent until 30 June 2021. The STP report is due each quarter at the same time as the employer’s quarterly BAS is due.

The registered agent must have applied for the concession on behalf of the employer by 30 September 2019.

A micro employer is not eligible for this concession if it has amounts owing to the ATO that are not subject to a payment plan, or has outstanding lodgment obligations.

The Board’s review

In May 2018, the Board released its Review of Small Business Tax Concessions — Consultation Guide (the Consultation Guide).

The Consultation Guide lists the principles which the Board developed to evaluate the current and future suite of tax concessions for small business:

  1. Concessions should be designed having regard to the small business life cycle.
  2. Concessions can assist with small business cash flow.
  3. Concessions should relieve the compliance burden for small business.
  4. Concessions should promote growth and innovation.
  5. Concessions should be targeted and affordable.
  6. Concessions should not incentivise complex structuring.

Consultation questions

The Consultation Guide contains 14 questions for consultation.

    1. What tax issues are of particular concern for small businesses?
    2. What do you regard as the most useful or effective small business tax concessions? Why?
    3. What opportunities do you see for improving existing small business concessions?
    4. Which current small business concessions are not working and/or should be removed? Why?
    5. What ideas do you have for new concessions that could help small businesses?
    6. Do you agree with the reform principles outlined in this document? Are there any other principles that should be considered? Why?
    7. Should certain principles be prioritised over others? Why?
    8. What are the objectives of small businesses using a particular legal structure (companies, trusts, partnership, sole trader)?

8.1       What are the main objectives businesses have when they seek structuring advice (for example, reducing tax liabilities, succession planning, asset protection, etc.)?

8.2       Relative to other factors, how important is reducing tax liabilities?

    1. Are small business tax concessions skewed to specific parts of the small business lifecycle? If so, should they be refocused and in what way?
    2. Generally, tax concessions are broadly based and apply across different sectors of the economy. Should there be small business tax concessions for specific sectors? If so, why?
    3. Does the small business eligibility criteria (for example, the $2m turnover threshold for small business CGT concessions) influence you to not want to grow your business?

11.1    Are there alternative mechanisms to phase-out small business tax concessions as opposed to a hard cut-off?

    1. What changes to the tax system would make it simpler and reduce the compliance burden for small business?
    2. Should the definition of small business for tax purposes be changed? If so, how?
    3. Does technology make it easier to comply with your tax obligations and access small business concessions? Why or why not?

What will be in the Board’s report?

The objectives and scope of the Review (see page 13 of the Consultation Guide) indicate what will be in the Board’s final report.

It will contain recommendations on how to efficiently target tax relief to small business. Where appropriate, the Board will suggest approaches that minimise any revenue cost.

The scope of the Review was for the Board to:

  • determine the effectiveness of the current small business tax concessions;
  • examine whether the current mix of small business tax concessions:
      • represents the best distribution of current Government expenditure on small business tax concessions;
      • are commercial appropriate in the context of the various stages of the small business life-cycle;
  • consult the small business community to gauge views on the current suite of small business tax concessions;
  • consider relevant international experience and identify best practice initiatives.

Note
The Board’s Review does not cover the STP reporting concessions or the dispute resolution and guidance mechanisms outlined in this article.

Tax guidance and dispute resolution for small business

There are a number of services dedicated to assist small businesses to handle their tax and superannuation affairs.

Tax guidance

Small business newsroom

The ATO has a website which contains information, webinars and support specifically for small businesses.

National Tax Clinics

The National Tax Clinic program is a Government-funded initiative. The clinics are offered across 10 universities around Australia. Unrepresented small businesses, individuals and not-for-profits can receive free tax and superannuation advice and support from students studying tax-related courses, under supervision of a qualified clinic manager.

Small business assist – live chat

The ATO hosts the Small Business Assist service which includes:

  • a Live Chat function — for GST, ABN, AUSkey, BAS, account enquiries and to update details, available from 3.00pm to 8.00pm (AEDT) Monday to Friday and 10.00am to 2.00pm (AEDT) on Saturday; and
  • an after hours call back service — to book a time to speak to the ATO from 6.00pm to 8.00pm Monday to Thursday.

Dispute resolution assistance

Dispute assist

The ATO’s Dispute Assist service is a free service to help unrepresented individuals and small businesses that lodge objections and are suffering from significant or exceptional circumstances.

In-house facilitation

Individuals or small businesses can use the ATO’s in-house facilitation service. This is a mediation process where an impartial, professionally trained ATO facilitator assists in resolving the dispute.

Independent review — small business pilot

On 1 July 2018, the ATO commenced a 12-month pilot to offer an independent review service to eligible small businesses disputing income tax audits in Victoria and South Australia. The pilot has been expanded to eligible small businesses nationally, and extended until 31 December 2020. From 1 October 2019, the scope has been expanded to include some GST and indirect tax audits.

An independent technical officer from outside the audit area reviews the merits of the audit position before the assessment or amended assessment is issued. Small businesses will be notified by their audit case officer if they are eligible to participate in the pilot.

Small Business Concierge Service

The Office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) assists small businesses to resolve disputes. Its Small Business Concierge Service helps small businesses decide if an application to the Tribunal for review of an ATO decision is an appropriate pathway to resolution. The Concierge Service will guide and support the small business through the Tribunal process, including a one-hour consultation with an experienced small business tax lawyer for $100.

Small Business Taxation Division of the Tribunal

The Small Business Taxation Division of the Tribunal came into operation on 1 March 2019. It features a lower application fee, a dedicated case manager, and decisions to be issued within 28 days of a hearing.

The ATO will be represented by internal ATO officers (other than in exceptional cases). The officers will be drawn from the independent Review and Dispute Resolution business line.

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