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Tax Yak – Episode 48: When is an individual taxpayer a resident for taxation purposes?

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When is an individual taxpayer a resident taxpayer? This is a question fraught with complexity. The team discuss the four tests legislated and reflect on guidance issued by the courts in relation to the application of these tests.

Subsequently Lee-Ann and the Michaels discuss the recent changes proposed by the board of taxation and how this has worked in other common law jurisdictions which used to rely on the same tests as Australia

Host: Lee-Ann Hayes, Senior Tax Trainer @ TaxBanter

Guests: Michael Bode & Michael Messner, Senior Tax Trainers @ TaxBanter

Recorded: 29 October 2020

Loss carry back for companies

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[lwptoc]

An optional, temporary loss carry back for companies has been introduced by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020, which received Royal Assent on 14 October 2020. The Act inserts new Div 160 into the ITAA 1997. This article outlines the key elements of the new loss carry back.

What is the loss carry-back?

Eligible corporate tax entities can elect to ‘carry back’ a tax loss incurred in the 2019–20 to 2021–22 income years and offset it against the income of the 2018–19 or later years, generating a refundable tax offset in assessments for the 2020–21 and 2021–22 income years.

Eligibility requirements

The company

An entity must be a corporate tax entity throughout the income year for which it elects to claim the carry back and throughout the period it is seeking to carry back the loss.

    Definition — corporate tax entity
‘Corporate tax entity’ is defined in s. 960-115 of the ITAA 1997 to be an entity that is a company, a corporate limited partnership or a public trading trust. In this article, the term ‘company’ is used to refer to all corporate tax entities.

Further, the company must satisfy one of the following:

  • it is a small business entity (SBE) for the income year as defined in Subdiv 328-C; or
  • it would be an SBE for the income year if the SBE annual aggregated turnover threshold was $5 billion instead of $10 million.

That is:

  • the company carries on a business in the income year;
  • one or both of the following applies:
    • the company carried on a business in the previous income year and its aggregated turnover for the previous year was less than $5 billion; and/or
    • the company’s aggregated turnover for the income year is likely to be less than $5 billion.

The relevant income years

The loss carry back can be claimed in 2020–21 or 2021–22 (known as the ‘current year’).

The loss must be incurred in the 2019–20 or the 2020–21 income years. If the current year is 2021–22 then the loss year can also be the 2021–22 income year.

Eligible losses

The loss carry back applies only to tax losses and not capital losses.

Other losses that cannot be carried back are:

  • losses which have been transferred between companies in the same foreign banking group;
  • losses which have been transferred by a joining entity to the head company of a consolidated group;
  • losses which arose as a result of excess franking offsets.

Tax lodgment and liability requirements

It is a requirement that the company has satisfied its lodgment requirements or assessments have been made for the current year and each of the five income years before the current year (unless the entity was not required to lodge an income tax return for the year).

The company must have had an income tax liability for any or all of the following income years:

  • the 2018–19 income year;
  • the 2019–20 income year;
  • if the current year is the 2021–22 income year and it is a loss year — the 2020–21 income year.

Making a choice

To carry back a loss, the company must make a ‘loss carry back choice’ for the current year. The choice must be made in the ‘approved form’ which will usually be the company’s tax return.

Amount of the loss carry back tax offset

The amount of the loss carry back tax offset that can be claimed for the income year is the lesser of the following:

  1. The sum of the ‘loss carry back tax offset components’ for:
  • the 2018–19 income year;
  • the 2019–20 income year;
  • if the current year is the 2021–22 income year — the 2020–21 income year.
  1. The company’s franking account balance at the end of the current year.


The loss carry back tax offset component

The company’s ‘loss carry back tax offset component’ for an income year is so much of its income tax liability for the year that does not exceed:

  • if the company chooses to carry back only one tax loss to the income year — the amount worked out at Step 3 of the method statement below; or
  • if the company chooses to carry back tax losses for two or three loss years to the income year — the sum of the amounts worked out at Step 3 of the method statement below.

If the company does not choose to carry back any tax losses to the income year, then its loss carry back tax offset component is nil.

The method statement

Step 1 — Start with the amount of the tax loss the company has chosen to carry back to the income year.

Step 2 — Reduce the Step 1 amount by the company’s net exempt income for the year (but not to the extent the net exempt income has already been utilised).

Step 3 — Multiply the Step 2 amount by the corporate tax rate for the loss year.

Step 4 — The company’s loss carry back tax offset component for the income year is so much of its income tax liability for the income year as does not exceed the Step 3 amount.

Limitation to the offset

Income tax liability

The value of the amount carried back to an income year is limited by the available income tax liability of that income year. Each part of a tax liability can be used only once.

When working out the loss carry back tax offset component for 2021–22, the company must disregard so much of the tax liability for the gain year as has previously been included in a loss carry back tax offset component  for 2020–21.

Franking account balance

The loss carry back tax offset for an income year is limited to the company’s franking account at the end of that year. This ensures that the company cannot apply the balance of credits in the franking account to frank distributions to shareholders and also claim the refundable offset for the same year.

      NoteNote
When a company receives a tax refund as a result of the offset, this will give rise to a debit in the company’s franking account.

Integrity rule

An integrity rule denies the loss carry back tax offset where there has been a change in control in the company arising from a disposition of membership interests which was done with a purpose of gaining access to the tax offset.

The Explanatory Memorandum to the Act states that ordinarily a change of control that arises from generational change or as a result of the breakdown of marital and personal relationships within family owned CTEs would not indicate that there was a purpose of obtaining a tax offset.

Companies must self-assess whether the integrity rule applies to their circumstances.

NoteNote
Losses that cannot be carried back as a result of the integrity rule can still be carried forward and claimed as a deduction against income of future years, provided that the company satisfies the continuity of ownership or business continuity tests.

Further info

Supported by comprehensive training materials, our November Tax Update training session will ensure you are fully informed of:

  • how to claim the refundable tax offset;
  • the implications for the franking account;
  • practical examples for calculating the offset;
  • how to make the choice to carry back a loss;
  • carrying back a loss to multiple income years; and
  • the integrity rule.

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements.

We present these monthly online, and also offer face-to-face Public Sessions at locations across Australia. Click here to find a location near you.

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

Eichmann wins – Land used to store tools, equipment and materials is an active asset

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[lwptoc]

Background

Eichmann v FCT [2020] FCAFC 155 (Eichmann’s case) is about whether a block of land used by a building, bricklaying and paving business connected to the Taxpayer for the storage of work tools, equipment and materials was an ‘active asset’, defined in s. 152‑40 of the ITAA 1997, for the purposes of the small business CGT concessions. The case stems from the Taxpayer’s objection to a private ruling in which the Commissioner ruled that the land was not used in course of carrying on a business and therefore was not an active asset.

Facts

The Taxpayer and his spouse ran a business of building, bricklaying and paving, through their family trust (the Trust), with an aggregated turnover of less than $2 million for the 2016–17 income year. The Taxpayer and his spouse were beneficiaries of the Trust.

From 1997 until October 2016, the Taxpayer owned a block of land (‘the Property’) adjacent to his family home in Mooloolaba, Queensland. The Property had located on it two 4 metre × 3 metre sheds, as well as a two metre high block wall and a gate.

The Taxpayer used the Property for the following purposes:

  • the two sheds were used for the storage of work tools, equipment and materials;
  • the open space was used to store materials that did not need to be stored under cover (including bricks, blocks, pavers, mixers, wheelbarrows, drums, scaffolding and iron);
  • work vehicles and trailers were parked on the Property.

The Taxpayer collected tools and other items from the Property on a daily basis, and sometimes visited the Property a number of times a day in between jobs. On occasion, some preparatory work was done on the Property. There was no business signage on the Property.

Following the sale of the Property in the 2016–17 income year, the Commissioner in a private binding ruling (‘the Private Ruling’) ruled that the Taxpayer was not entitled to the small business CGT concessions in respect of the sale of the Property because it was not an ‘active asset’ within the meaning of that term in s. 152-40(1)(a).

The Tribunal’s decision

The Tribunal set aside the Commissioner’s objection decision, finding that:

  • the Commissioner had erred in determining that the Property did not satisfy the requirements for being an ‘active asset’ for the purpose of the small business CGT concession provisions;
  • there was nothing in the definition of ‘active asset’ in s. 152-40(1)(a) which required the use of the land to be integral to the process by which the business was carried on;
  • it was clear on the facts that the Taxpayer used the land for the purpose of operating his business.

The Federal Court’s decision

Following an appeal, the Federal Court (Derrington J) held that:

  • the Tribunal had erred in determining that land used by the Taxpayer to store materials, tools and other equipment satisfied the requirements for being an ‘active asset’;
  • for an asset to be an active asset it must be used ‘in’ the course of carrying on a business which requires that the use has a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or producing of assessable income;
  • in the Taxpayer’s case, the uses to which the land was put were preparatory to the undertaking of activities in the ordinary course of business — the storage itself was not an activity ‘in the ordinary course of’ the Taxpayer’s business.

In reaching this decision, Derrington J agreed with the Tribunal that there is no requirement that the use of the asset is ‘integral’ i.e. critical or fundamental to the business processes.

Relevant legislative provisions

Section 152-35(1)(b) provides that a CGT asset will satisfy the active asset test if the taxpayer:

  • owned the asset for more than 15 years; and
  • the asset was an active asset for a total of at least 7.5 years, during the test period.

 

Definition — Test period

The ‘test period’ begins when the taxpayer acquired the asset, and ends at the earlier of a ‘CGT event’ or, if the business ceased to be carried on in the 12 months before that CGT event, the cessation of the business.

The term ‘active asset’ is defined in s. 152-40, the relevant parts of which are replicated in the following table:

Full Federal Court’s decision

Mckerracher, Steward and Stewart JJ unanimously held that the Property was an active asset. Relevantly, the judges made the following observations and findings:

  1. The small business CGT concession provisions should be constructed beneficially rather than restrictively in order to promote the beneficial purpose of the concessions.
  2. The language of s. 152-40(1)(a) relevantly requires ascertaining three matters: the use of a particular asset; the course of the carrying on of a business; and then whether the asset was used in the course of the carrying on of that business. These inquiries involve issues of fact and degree. As these three matters should be applied widely, in the spirt of the beneficial construction, it is sufficient if the asset is used at some point in the course of the carrying on of an identified business.
  3. Section 152-40(1)(a) does not require the use of the relevant asset to take place within the day to day or normal course of the carrying on of a business. Nor does the provision require a relationship of direct functional relevance between the use of an asset and the carrying on of a business.
  4. Applying s. 152-40(1)(a) to the ruled facts, the taxpayer’s property was used in the course of carrying on the relevant business of building, bricklaying and paving on a daily basis.

The Full Federal Court also observed that the ruled facts could have been clearer and, with the benefit of hindsight, could have had more detail to address the specific issues before the court. The judgment notes:

That is not meant as a criticism of the Commissioner’s staff. They cannot be expected to predict all of the legal arguments that might subsequently be made in relation to the facts they identify in a ruling. But it does suggest that the rulings system contained in Div. 359 of Sch. 1 to the Taxation Administration Act 1953 … will not always be an apt mechanism to address disputes concerning facts, and even issues of characterisation of those facts.

Take-aways

Facts are critical in a private ruling application. Much of this dispute centred on the particular facts and the application of the law to them. By being very clear with the facts presented to the Commissioner in the ruling process, the Taxpayer may avoid unwanted disputes with the Commissioner. In this regard, the broad parameters of the business should be set out with great specificity in an application for a private binding ruling.

The small business CGT concession provisions are to be applied beneficially. Much emphasis was made in this case as to the beneficial nature of the relief provided by the small business CGT concessions. The Full Court concluded that:

… a beneficial construction of legislation may, in our view, legitimately influence constructional choices in a given case which arise from the use of generalised language to describe a necessary connection between two things; here those two things are the use of an asset and the carrying on of a business.

The final, and arguably the most important, take-away is that the determination of whether an asset is used in the course of carrying on a business involves:

  1. identifying the use of a particular asset;
  2. identifying the course of the carrying on of a business; and
  3. then determining whether the asset was used in the course of the carrying on of that business.

Accordingly the following assets, where they are not directly used in the actual production activity but are used in the course of the business generally, can — subject to meeting all of the requirements in s. 152-40(1)(a) — be active assets:

  • land that a taxpayer uses to store tools, equipment and materials needed on a daily basis for its business;
  • a separate warehouse in which a taxpayer stores raw or finished goods for its business; and
  • land used by a taxpayer to operate an office with staff to manage its business affairs.

Federal Budget 2020-21 tax measures have passed Parliament

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[lwptoc]

Federal Budget 2020–21

On Tuesday, 6 October 2020, the Treasurer handed down the Government’s Federal Budget
2020–21.

TaxBanter Resources:

The key tax announcements in the Budget included the following:

  1. Bringing forward the second stage of the Personal Income Tax Plan by two years to 2020-21.
  2. Introducing a temporary loss carry-back for companies for losses incurred from 2020 to 2022.
  3. Increasing the small business entity (SBE) turnover threshold to $50 million for certain tax concessions.
  4. Allowing a temporary full expensing of depreciating assets from Budget night.
  5. Refining the R&D Tax Incentive from 2021-22.

On 9 October 2020, the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Bill 2020, which implements all of the above measures, passed both Houses of Parliament without amendment. It received Royal Assent on 14 October 2020.

Bringing forward personal income tax cuts

Previously legislated Personal Income Tax Plan

The enactment of the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (21 June 2018) implemented the Government’s seven-year Personal Income Tax Plan. Subsequently, the Treasury Laws Amendment (Tax Relief So Working Australians Keep More of Their Money) Act 2019 (5 July 2019) amended aspects of the legislated Plan. Together, the Acts implemented the following measures:

  • the introduction of a temporary Low and Middle Income Tax Offset (LMITO) capped at $1,080 — in addition to the existing Low Income Tax Offset (LITO) — for the 2018–19 to 2021–22 years;
  • replacement of the LMITO and LITO with a new LITO — to be increased from $645 to $700 from 1 July 2022 — for the 2022–23 and later income years;
  • changes to the marginal tax rates and income thresholds — with effect from the
    2018–19, 2022–23 and 2024–25 income years respectively.

Stage 1 of the three-stage plan applied from the 2018–19 income year.

The new law

The Bill brings forward Stage 2 of the Personal Income Tax Plan by two years, from 1 July 2022 to 1 July 2020, comprising:

  • an increase in the top income threshold of the 19 per cent tax bracket from $37,000 to $45,000;
  • an increase in the top income threshold of the 32.5 per cent tax bracket from $90,000 to $120,000;
  • an increase in the LITO from $445 to $700.

In addition, the LMITO will be retained for 2020–21.

Newly legislated personal tax rates — 1 July 2020 to 30 June 2022

Low Income Tax Offset

From 1 July 2020, the maximum amount of the LITO will increase from $445 to $700. The LITO will be withdrawn at the rate of 5 cents per dollar for taxable incomes between $37,500 and $45,000, and 1.5 cents per dollar from $45,000 to $66,667.

Low and Middle Income Tax Offset

The LMITO applies to taxable incomes up to $126,000. The minimum offset is $255 for taxable incomes of $37,000 or less. The maximum offset is $1,080 for taxable incomes between $48,001 and $90,000.

The LMITO will be retained for 2020–21 and then removed from 2021–22.

Temporary loss carry-back

Corporate tax entities with an aggregated turnover of less than $5 billion will be able to apply tax losses against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made.

Tax losses for the 2019–20, 2020–21 or 2021–22 income years can either be:

  • carried forward and deducted against income derived in later income years; or
  • carried back against income of the 2018–19 and later income years to produce a refundable tax offset.

The carry back is notional — it is not necessary to amend the prior year return. The benefit is received in the assessment for the year in which the election is made.

The tax refund will be limited by requiring that the amount carried back is not more than the earlier taxed profits and that it does not generate a franking account deficit. Subject to these requirements, there is no set monetary cap on the amount of loss that can be carried back or the amount of refundable tax offset that can be received.

Making the election to carry back losses

The tax refund will be available on election by eligible businesses when they lodge their 2020–21 and 2021–22 tax returns.

If the election is not utilised, or to the extent that there are not sufficient taxed prior year profits to allow full carry back of a loss, any losses not carried back are carried forward in the usual manner.

Increasing the SBE turnover threshold to $50 million

The SBE turnover threshold will be increased from $10 million to $50 million.

Eligible businesses — i.e. businesses with an aggregated annual turnover of more than $10 million but less than $50 million — will have access to up to ten small business tax concessions in three phases, as outlined below.

The eligibility turnover thresholds for other small business tax concessions not mentioned below (e.g. the small business CGT concessions and the small business income tax offset) will remain at their current levels.

Phase 1 — from 1 July 2020

Entitled to immediate deductions for:

  • eligible start-up expenses;
  • eligible prepaid expenditure.

Phase 2 — from 1 April 2021

Exempt from FBT on the following benefits provided to employees:

  • car parking;
  • multiple work-related portable electronic devices (e.g. phones or laptops).

Phase 3 — from 1 July 2021

Entitled to:

  • access the simplified trading stock rules;
  • remit PAYG instalments based on GDP adjusted notional tax;
  • the two-year amendment period for income tax assessments for income years starting from 1 July 2021;
  • monthly settlement of excise duty and excise-equivalent customs duty on eligible goods.

In addition, the Commissioner’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the aggregated annual turnover threshold of $50 million.

Temporary full expensing of depreciating assets

Businesses with aggregated annual turnover of less than $5 billion will be entitled to deduct the full cost of eligible capital assets in the year they are first used.

The immediate deduction will be available for eligible capital assets acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022.

Full expensing in the year of first use will apply to:

  • new depreciating assets;
  • the cost of improvements to existing eligible assets; and
  • for small and medium sized businesses (aggregated annual turnover of less than $50 million) — second-hand assets.

NoteNote:
Businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the instant asset write-off.

Extended application of instant asset write-off

Eligible businesses that acquire eligible new or second-hand assets under the $150,000 instant asset write-off by 31 December 2020 will have an extra six months, until 30 June 2021, to first use or install those assets.

Simplified depreciation pools

SBEs with aggregated annual turnover of less than $10 million will be entitled to deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended.

Refinements to the R&D Tax Incentive

From 1 July 2021, certain aspects of the previously proposed changes to the R&D Tax Incentive will be refined. The previously announced changes are proposed in the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, which was introduced into Parliament on 5 December 2019 and is currently before the Senate.

For companies with aggregated annual turnover of less than $20 million, the refundable R&D offset is being set at 18.5 percentage points above the claimant’s company tax rate, and the $4 million cap on annual cash refunds will not proceed.

For companies with aggregated annual turnover of $20 million or more, the Government will reduce the number of intensity tiers from three to two. The R&D premium ties the rates of the non-refundable R&D tax offset to a company’s incremental R&D intensity, which is R&D expenditure as a proportion of total expenses for the year.

The marginal R&D premium for these companies will be as follows:

Further information and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements.

Supported by comprehensive training materials, our Tax Update training sessions ensure you are fully informed of:

  • ATO announcements and rulings
  • Court and AAT decisions
  • Proposed changes to the tax law
  • Emerging Tax Issues

We present these monthly online, and also offer face-to-face Public Sessions at locations across Australia. Click here to find a location near you.

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

2020-21 Federal Budget at a glance infographic

I’ve been out of the tax game for a while … surely nothing has changed?

Posted on by thriveadmin

Changes in the tax landscape, big and small

Almost invariably, the quick ‘introduce yourself’ at the start of every one of TaxBanter’s Tax Fundamentals sessions reveals a participant who is getting back into the game after a stint on the bench. Whether it has just been relatively short period of parental leave, or a more substantial period working in an area outside tax, the seemingly rhetorical question often uttered is, ‘how much could possibly have changed’?  The answer usually surprises.

TaxBanter’s business is about this change.  In the 2019 calendar year the Tax Update comprised 570,088 words, on 1,623 pages, and this was in a ‘slow year’ due to the federal election. So far this year TaxBanter has producted 491,495 words over 1,208 pages — (on target) even though there has been an economic meltdown and a slowdown of the Courts.

Whilst many tax changes are considered a ‘simplification’ or a ‘better targeting’ of the law and accordingly are relatively small in nature, incrementally they all add up.  These teamed with larger ‘integrity’ type changes can result in significant knowledge gaps.

So what has changed?

Whilst the above figures show the volume of change in even just one year, the following table outlines, from a tax fundamentals perspective, a selection of notable changes occurring in the past five years.

Change Details Effective start time
Income
Domicile test for residency The first statutory residency test for an individual includes a person whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.

The Full Federal Court decision in Harding v FCT [2019] FCAFC 29 determined that ‘place of abode’ refers not only to a dwelling but can also refer to a country.

 Interpretation of existing law
Working holiday maker tax regime Rather than determining whether a ‘working holiday maker’ is a resident or not for tax purposes (and therefore which scale of tax rates apply), individuals holding a subclass 417 visa, a subclass 462 or certain bridging visas are instead subject to an income tax rate of 15 per cent for taxable income up to $37,000 — i.e. no tax-free threshold. The rates applicable to income above this amount are the same as the ordinary marginal income tax rates. 1 January 2017
Deductions
Travel to inspect rental properties Subject to exclusions, travel expenditure incurred in gaining or producing assessable income from residential premises is not deductible and is not recognised in the cost base or reduced cost base of the property for CGT purposes. 1 July 2017
Deductions for vacant land A deduction for a loss or outgoing incurred in relation to the holding of land on which there is no substantial and permanent structure is now available only in certain circumstances, such as where the land is in used, or available for use, in carrying on a business or for expenses incurred by specific entities such as a company.

Denied deductions can be included in the cost base of the asset.

 1 July 2019
Capital Allowances
Instant asset write off Whilst an instant deduction for ‘low-cost’ assets has been a key feature of the small business depreciation rules since their commencement, from 1 July 2015 there is ‘increased access’. ‘Increased access’ has taken the form of an increase in both the amount that can be immediately deducted and the turnover threshold for a business to be eligible.

Depending on when the asset was acquired and installed ready for use and the turnover of the entity, the amount of an immediate deduction has increased as follows:

*      Up until 1 April 2019 available to SBEs only

**  From 2 April available to business with turnover up to $50 million

*** From 12 March 2020 business with turnover up to $500 million can access the measure

See Banter Blog article $150,000 instant asset write-off extended to 31 December 2020

 Various
Investment incentive A time-limited investment incentive of a deduction for 50 per cent of the cost of an eligible asset first held and started to be used in the period with existing depreciation rules applying to the balance of the cost is available for businesses with a turnover of less than $500 million. 12 March 2020 to 30 June 2021
CGT
Foreign residents and the main residence exemption (MRE) The MRE will no longer be available for an individual who is a foreign resident at the time the relevant CGT event happens to their dwelling.  There are some limited exclusions and a transition rule for CGT events that happen before 1 July 2020.

See Banter Blog article Year end 2020 tax planning – foreign residents and sale of main residence

 7:30 pm (AEST) on 9 May 2017
GST
‘Netflix tax’ — GST on imported services and digital products Broadly, these changes amended the GST Act in relation to supplies of digital products to:

  1. make all supplies of things, other than goods or real property connected with the indirect tax zone, where they are made to an Australian consumer; and
  2. shift responsibility for GST liability from the supplier to the operator of an electronic distribution platform (EDP).
 1 July 2017
GST on low value imported goods This amendment ensures that GST is payable on certain supplies of low value goods that are purchased by consumers and are imported into Australia.

The amendments:

  • make supplies of goods valued at $1,000 or less at the time of supply connected with the (indirect tax zone) ITZ if the goods are, broadly, purchased by consumers and are brought to the ITZ with the assistance of the supplier; and
  • treat the operator of an EDP as the supplier of low value goods if the goods are purchased through the platform by consumers and brought to the ITZ with the assistance of either the supplier or the operator.
 1 July 2018
Withholding for GST on supplies of new residential premises Purchasers of new residential premises and new subdivisions of potential residential land are required to make a payment of part of the purchase price to the ATO for the GST component of the supply.

The amount to be paid by the purchaser is generally 1/11th of the ‘contract price’ — unless the margin scheme applies, the supply is between associates, or there are multiple different types of supplies or multiple purchasers.

 1 July 2018
FBT
Exempt work-related items — portable devices Small business entities (SBEs) are able to provide more than one work‐related portable device to employees, even if the devices perform substantially similar functions. Other employers are limited to one device per FBT year. 1 April 2016
Commercial car park interpretation The ATO has changed, and as such widened, its position on what constitutes a commercial car park for the purposes of the FBT car parking fringe benefits rules.  In Draft Ruling TR 2019/D5 the Commissioner’s preliminary position is that a car park, which satisfies all other requirements, can still be considered a ‘commercial parking station’ even if:

  • its contractual terms restrict who may use the car park, provided any member of the public that accepts these restrictions can use the car park;
  • its fee structure discourages all-day parking with higher fees.
 1 April 2021
Superannuation
Superannuation overhaul — Fair and Sustainable Superannuation As part of the ‘Fair and Sustainable Superannuation’ legislative package, changes were made to the superannuation system including:

  • the introduction of a $1.6 million transfer balance cap to limit the amount of capital individuals can transfer to the retirement phase;
  • a reduction to the annual concessional contributions cap to $25,000 and a reduction to the Div 293 tax threshold to $250,000;
  • a reduction to the annual non-concessional contributions cap from $180,000 to $100,000;
  • a limit on non-concessional contributions for individuals with a transfer balance cap of $1.6 million; and
  • the removal of the ‘10 per cent maximum earnings as an employee test’ for individuals making personal concessional contributions.
 1 July 2017
Catch-up concessional contributions Individuals who have a total superannuation balance of less than $500,000 on 30 June of the previous year can increase their concessional contributions cap in the next financial year if they have unused concessional contributions cap amounts from the previous five financial years. 1 July 2018
Non-arm’s length income (NALI) A superannuation entity’s NALI now includes income where expenditure incurred in gaining or producing it was not an arm’s length expense (known as non-arm’s length expenditure or NALI).

This includes circumstances where no expense was in fact incurred, but might be expected to have been incurred if the transaction was on arm’s length terms.

 1 July 2018
Salary sacrifice and superannuation guarantee (SG) Broadly, the legislation now ensures that:

  • amounts salary sacrificed by an employee into superannuation cannot be used by the employer to reduce the minimum amount of SG that must be paid; and
  • SG is paid on the pre-salary sacrifice base — this is achieved by including salary or wages sacrificed to superannuation in the base for calculating an employer’s SG obligations.
 1 January 2020
Multiple employers and SG The SGA Act allows individuals to ‘opt out’ of the SG regime to avoid unintentionally breaching their concessional contributions cap when they receive superannuation contributions from multiple employers. These employees can apply to the Commissioner for an ‘employer shortfall exemption certificate’. The effect of the Certificate is that an employer’s maximum contribution base is nil in relation to the employee for the quarter to which the Certificate relates. Accordingly, the employer will not be liable for SG charge (or face other consequences under the SGA Act) if they do not make contributions on behalf of the employee for the quarter. 1 July 2018
Deductions for superannuation contributions made through the Small Business Superannuation Clearing House (SBSCH) In Practical Compliance Guideline PCG 2020/6 the Commissioner states that he will not apply compliance resources to determine which income year an employer can deduct superannuation contributions made through the SBSCH to a superannuation fund or RSA where:

  • the payments to the SBSCH were made on behalf of employees before close of business on the last business day of the income year;
  • at the time of making the payments, all relevant information to enable the SBSCH to process the payments was provided;
  • the payments are not dishonoured by the superannuation fund or RSA or returned to the employer;
  • the employer would otherwise be entitled to an income tax deduction.
 Ongoing
Business structures
SBE definition The aggregated turnover threshold for access to most small business tax concessions has been increased to $10 million. However, the aggregated turnover threshold for access to:

  • the small business tax offset — has been increased to $5 million; and
  • the small business CGT concessions — has been retained at $2 million.

NoteNote: On 2 October 2020, the Treasurer announced that from 1 July 2020 this threshold will increase to $50 million. This announcement will form part of the Federal Budget on 6 October 2020.

 1 July 2016
Base rate entity (BRE) and the corporate tax rate From 1 July 2017, the concept of a ‘base rate entity’ has been introduced into the tax law and is relevant for determining eligibility for the lower corporate tax rate.

A base rate entity is a company that:

  • has an aggregated turnover less than the aggregated turnover threshold – which from 1 July 2018 is $50 million; and
  • 80 per cent or less of its assessable income is BRE passive income.
 1 July 2017
Corporate tax rate for imputation purposes In calculating the maximum franking credit that can be allocated to a company distribution, the definition of the corporate tax rate for imputation purposes requires the entity to make the following additional assumptions:

  • that its assessable income for the income year is equal to its assessable income for the previous year; and
  • that its BRE passive income for the income year is equal to its BRE passive income for the previous year.
 1 July 2017
Tax Administration
Foreign Resident Capital Gains Withholding Payments Where a foreign resident disposes of certain taxable Australian property, the purchaser must withhold 12.5 per cent of the first element of cost base (i.e. usually the purchase price) from the sale proceeds and pay that amount to the ATO.

There are a number of exclusions, including a where the market value of the CGT asset is less than $750,000, and the CGT asset is:

  • taxable Australian real property — e.g. real estate in Australia; or
  • an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.

NoteNote: For the 2016–17 income year, the withholding rate was 10 per cent and the de minimis threshold for certain assets was $2 million.

 1 July 2016
Single Touch Payroll (STP) The STP reporting framework require the real-time reporting of withholding payments, amounts withheld, salary or wages and ordinary time earnings, and superannuation contributions, including salary sacrificed contributions, at the time of withholding or payment.

Subject to some limited exceptions, all employers need to use STP to report the above amounts to the ATO.

 1 July 2018
No tax deduction for non-compliant payments A tax deduction for a payment:

  • of salary, wages, commissions, bonuses or allowances to an employee;
  • of directors’ fees;
  • to a religious practitioner;
  • under a labour hire arrangement; or
  • for a supply of services — excluding supplies of goods and supplies of real property— where the payee has not quoted its ABN,

is denied if the associated withholding obligations have not been complied with.

 1 July 2019

 

What does the future hold?

Some of the changes which have occurred  have not yet taken effect, and some have been proposed but not legislated.

Legislated changes

Resident individual tax rates

Company tax rate and maximum franking rate for BREs

Rate of superannuation guarantee charge (SGC)

Proposed changes

Division 7A

Back in the 2016–17 Federal Budget (handed down on 3 May 2016) the Government announced that it would make targeted amendments to improve the operation and administration of Div 7A by:

  • introducing a self-correction mechanism for inadvertent breaches of Div 7A;
  • introducing appropriate safe-harbour rules to provide certainty;
  • simplifying Div 7A loan arrangements; and
  • making a number of technical adjustments to improve the operation of Div 7A and provide increased certainty for taxpayers.

The start date of these proposed changes has been deferred several times. Most recently, on 30 June 2020, the Assistant Treasurer announced the start date would again be revised, to income years commencing on or after the date of Royal Assent of the enabling legislation.

Increasing the SMSF membership limit

There is a current proposal to increase the maximum number of allowable members in SMSFs and small APRA funds from four to six. Whilst this measure was initially proposed to commence from 1 July 2019, the Assistant Treasurer on 30 June 2020 announced a deferral of the start date to Royal Assent of the enabling legislation.

Where can I get more information?

Federal Budget webinar – 7 October

On Wednesday 7 Oct, we will be facilitating a Federal Budget webinar with our Managing Director Neil Jones at 10am – we’ll cover the implications of the news, along with a live Q&A so you can get around the latest changes. You can attend live or listen to the recording post-session.

Click here for more info.

Tax Fundamentals Online

Our Tax Fundamentals Online program is geared for recent graduates, those returning to the profession and anyone wishing to get a refresher in the world of tax. It’s a nine-module, interactive course that you can finish in your own time.

It covers:

  • Deductions
  • Assessable income
  • Depreciation rules
  • Capital Gains Tax (CGT)
  • Business and investment structures
  • Goods and Services Tax (GST)
  • Fringe Benefit Tax (FBT)
  • Superannuation
  • Tax Administration

Click here for more info or to register for the program.

What tax initiatives will be in next week’s Federal Budget?

Posted on by thriveadmin

The Treasurer will deliver its 2020–21 Federal Budget at 7.30pm (AEDT) next Tuesday, 6 October 2020. Back in March, the Government announced the deferral of the Budget — from its usual calendar place on the second Tuesday of May — due to the unprecedented economic uncertainty during the early stages of the Coronavirus crisis in Australia.

In early September, Australian Bureau of Statistics data showing that Australia’s Gross Domestic Product has decreased in two consecutive quarters — by 0.3 per cent in the March 2020 quarter and by seven per cent in the June 2020 quarter — confirmed that Australia is in recession. This news follows the revelation in the Treasurer’s Economic and Fiscal Update on 23 July 2020 that Australia’s estimated budget deficit for 2020–21 will be a record-breaking $184.5 billion.

The need for the Government to implement an economic recovery plan is clear. On 26 September 2020, the Prime Minister indicated that next week’s Budget will contain the necessary initiatives to enable Australia to get back on a growth path, and foreshadowed that the Budget will ‘have the most unprecedented investment in Australia’s future that [Australia] has ever seen’.

As always, the specific Budget initiatives will be a closely guarded secret until Budget night. In the meantime, here is a quick round-up of some tax and superannuation measures which may (or may not) feature in next Tuesday’s announcements.

  • Will the next stage of legislated personal tax cuts be brought forward?
  • Will corporate tax rates be further lowered to encourage inbound international investment?
  • Will an investment allowance (to allow a deduction of more than 100% of the asset’s cost, not to be confused with the temporary investment incentive) be introduced to encourage business investment in income-producing assets?
  • Will the temporary $150,000 instant asset write-off threshold be extended beyond 31 December 2020?
  • Will there be further tax incentives and concessions for small businesses?
  • Will the details and start date of Division 7A changes be confirmed?
  • Will the Board of Taxation’s recommendations for reform to the corporate tax residency and the individual tax residency rules be implemented?
  • Will the legislated increases to the rate of compulsory superannuation guarantee be deferred?
  • Will the findings of the Retirement Income Review be released, and if so, will the Government commit to any of its recommendations?
  • Will there be temporary FBT concessions for meals and entertainment to assist the hospitality industry?
  • Will the Medicare levy be increased to fund aged care?
  • Will the ATO receive extra funding to increase its economic stimulus and black economy compliance activities?
  • Will there be further Federal Government assistance for Victorian businesses and industries hardest hit by the prolonged Coronavirus crisis?

The 2020–21 Federal Budget documents will be available for download from www.budget.gov.au from 7.30pm (AEDT) on Tuesday, 6 October 2020. We will be tweeting live during the event – find us on Twitter at @taxbanter.

Join Neil Jones, Managing Director of TaxBanter, at 10am (AEDT) on Wednesday, 7 October 2020 as he analyses the previous night’s tax and superannuation Budget announcements and what they mean for your practice and your clients. We’ll also hold a Q&A session to cover any questions our attendees have.

For more info or to register, use this link or click the image below.

 

The new alternative decline in turnover test — what’s changed?

Posted on by thriveadmin

[lwptoc]

On 23 September 2020, the Commissioner registered the Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Alternative Decline in Turnover Test Rules (No. 2) 2020 (the Instrument), accompanied by an Explanatory Statement, which sets out the Commissioner’s alternative decline in turnover tests where there is not an appropriate comparison period in 2019 for the purpose of an entity satisfying both the new ‘actual decline in turnover test’ and the original decline in turnover test for fortnights starting on or after 28 September 2020. Under the extended JobKeeper scheme, entities must satisfy the new actual decline in turnover test that uses the current GST turnover, and also still satisfy the original decline in turnover test that uses projected GST turnover. Entities already enrolled in the JobKeeper scheme before the extension have already satisfied the original decline in turnover test, and only need to satisfy the new actual decline in turnover test.

Background

On 15 September 2020, the Treasurer registered a Legislative Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 8) 2020 (the Amendment Rules No. 8), which amends the Legislative Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020. The latter instrument, as amended, is referred to as ‘the JobKeeper Rules’ in this article. (Note that, at time of writing, this hyperlinked version of the JobKeeper Rules has not been updated to incorporate the changes made by the Amendment Rules No. 8.)

The Amendment Rules No. 8, in giving effect to a number of changes to the JobKeeper Scheme, relevantly introduced:

  • two extensions to the JobKeeper scheme — Extension 1 from 28 September 2020 to 3 January 2021, and Extension 2 from 4 January 2021 to 28 March 2021 (collectively referred to as the ‘extended scheme’); and
  • a requirement to re-test a business’s eligibility each quarter based on a new ‘actual decline in turnover test’, in addition to having to satisfy the original decline in turnover test.

More information about the legislated extended scheme is available in our previous Banter Blog articles JobKeeper 2.0 is now law, JobKeeper employee eligibility date changed to 1 July 2020 and JobKeeper changes: What’s new in JobKeeper 2.1?.

About the Instrument

Under the JobKeeper Rules, the Commissioner has a discretion to determine an alternative decline in turnover test in circumstances where there is no appropriate comparison period in 2019. This discretion applies in relation to both the original decline in turnover eligibility test and the new actual decline in turnover test.

On 23 April 2020, the Commissioner registered a Legislative Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Alternative Decline in Turnover Test Rules 2020 which set out the alternative tests for the original decline in turnover test in respect of seven categories of entities. This instrument will be repealed on 27 September 2020 and replaced by the Instrument.

The ATO has released website guidance on the alternative actual decline in turnover test.

NoteNote
The new actual decline in turnover test has not replaced the original decline in turnover test. An entity that becomes eligible for JobKeeper for the first time on or after 28 September 2020 must pass the original test as well as the new test (in practice, if the entity satisfies the new test, it should also satisfy the original test). An entity that was enrolled in JobKeeper prior to 28 September 2020 does not need to satisfy the original test again.

The new actual decline in turnover test is applied separately to each of the extension periods.

Categories of entities to which an alternative test applies

The seven categories which may use an alternative test in respect of the extended scheme are:

  1. Business commenced after the first day of the relevant comparison period but before 1 March 2020
  2. Business acquisition or disposal that changed the entity’s turnover
  3. Business restructure that changed the entity’s turnover
  4. Business that has had a substantial increase in turnover
  5. Business affected by drought or natural disaster
  6. Business that has an irregular turnover
  7. Sole trader or small partnership with sickness, injury or leave.

Key changes from the original alternative test

ATO guidance on the operation of the original alternative test for each of the seven categories is available here.

The Instrument retains the seven categories and modifies the alternative tests for the extended scheme. The main modifications are outlined as follows.

Alternative actual decline in turnover test will apply for a quarter

The alternative test for the actual decline in turnover test will only apply for a test quarter and comparison quarter, and not for a comparison month. This is because the turnover test period (and relevant comparison period) for the basic actual decline in turnover test can only be a quarter and not for a calendar month.

The Instrument contains modifications where the relevant comparison period is a calendar month, which will only be relevant for the original decline in turnover test.  Practically, if an entity satisfies the new actual decline in turnover test (using a quarter as the test period) they will generally also satisfy the original decline in turnover test (the only exception being certain Universities).

References to current GST turnover

The Instrument amends a number of references to ‘turnover’ to ‘current GST turnover’. The actual decline in turnover test only compares the current GST turnover of the turnover test period to the current GST turnover of the comparison test period. The original decline in turnover test allows projected GST turnover of the turnover test period to be compared to the current GST turnover of the comparison period.

Further adjustments for bushfire or drought affected entities

For each category, further adjustments are made where the entity qualified for the ATO’s bushfire or drought lodgment concessions.

For Categories 6 and 7, these additional adjustments have been amended so that, under the new alternative test, the months covered by the ATO’s bushfire or drought concessions are excluded from the test unless they are the only months available. The exception (italicised) was already available in the alternative tests for most other categories.

Changes specific to Category 1 — new businesses

The former alternative test applied to entities that commenced business after the relevant comparison period and before 1 March 2020. The new alternative test applies to entities that commenced business after the first day of the relevant comparison period and before 1 March 2020.

Changes specific to Category 2 and 3 — business acquisitions, disposals and restructures

The former alternative test applied where the relevant restructure happened after the relevant comparison period and before the turnover test period. The new alternative test applies where there was a relevant restructure at, or after, the start of the relevant comparison period and before the turnover test period.

The former alternative test required that entities with multiple acquisitions, disposals and restructures use the period after the last of the sequential transactions. This requirement has been removed.

Changes specific to Category 4 — substantial increase in current GST turnover

The former alternative test applied where the entity’s turnover increased by the relevant percentage in the 12, six or three months immediately before the applicable turnover test period. The new alternative test retains this rule but introduces a new alternative option to test the increase in current GST turnover in the 12, six or three months immediately before 1 March 2020.

Changes specific to Category 6 — irregular turnover

The former alternative test applied for the quarters ending in the 12 months immediately before the applicable turnover test period. The new alternative test applies to the consecutive three-month periods — instead of the quarters — ending in the 12 months immediately before the applicable turnover test period, or 1 March 2020.

Changes specific to Category 7 — sole traders and small partnerships

Under the former alternative test, where the comparison period was a quarter, the entity was to multiple by three the current GST turnover from the month immediately after the month in which the sole trader or partner returned to work. Under the new alternative test, the entity is to multiple by three the current GST turnover from the month immediately before the month in which the sole trader or partner did not work.

Practical examples

Refer to the Explanatory Statement to the Instrument for nine practical examples of how the new alternative decline in turnover tests apply.

Further info

Looking for further information on the JobKeeper extensions? Check out our recent webinar, JobKeeper Extended, where we walk through the implications and provide guidance on the recent changes. You can also check out our monthly Tax Updates, where we cover the legislation changes that will affect you and your clients the most.

JobKeeper extension — Commissioner’s determinations

Posted on by thriveadmin

[lwptoc]

On 15 September 2020, the Treasurer registered the Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 8) 2020 which sets out the rules for JobKeeper 2.0 — i.e. the extension of the JobKeeper scheme from 28 September 2020 to 28 March 2021.

These JobKeeper extension rules allow the Commissioner to exercise a discretion to make specific rules in relation to certain aspects of the extended scheme. On 16 September 2020, the Commissioner registered the following Legislative Instruments:

  1. the Coronavirus Economic Response Package (Payments and Benefits) (Timing of Supplies Made and Decline in Turnover Test) Rules 2020 (No. 1) (the Decline in Turnover Test Determination)
  2. the Coronavirus Economic Response Package (Payments and Benefits) Higher Rate Determination 2020 (the Higher Rate Determination)
  3. the Coronavirus Economic Response Package (Payments and Benefits) Alternative Reference Period Determination 2020 (the Alternative Reference Period Determination).

This article summarises each of these Determinations. The Decline in Turnover Test Determination is relevant for working out whether the entity is eligible for JobKeeper during each of the two extension periods, while the Higher Rate Determination and the Alternative Reference Period Determination assist the entity in determining the payment rate that applies to specific classes of eligible individuals.

See our previous Banter Blog article JobKeeper 2.0 is now law for an overview of JobKeeper 2.0. A recording of our JobKeeper Extended webinar, which was presented on 16 September 2020, is available for purchase through this link.

1. The Decline in Turnover Test Determination

The background

From 28 September businesses will need to apply a new actual decline in turnover test in respect of each quarter — in addition to the existing decline in turnover eligibility test.

The new ‘actual decline in turnover test’ will operate as follows:

To pass the test, the entity’s turnover must have declined by 50 per cent, 30 per cent or 15 per cent (as applicable) between the comparison period and the test period.

The Commissioner has the discretion to determine that certain supplies or classes of supplies are to be treated as being wholly or partly made at a particular time.

The effect of the Determination is to set out the time or times a supply is treated as being made for the purposes of calculating an entity’s current GST turnover in a test period.

NoteNote:

The ATO has released website guidance in relation to this Determination. The website also states that the ATO will publish further guidance on the alternative tests for the actual decline in turnover test soon.

When supplies are made during a test period

In calculating the current GST turnover, a supply is treated as being made at a time in the test period to the extent the GST payable on the supply would be attributable to that test period if:

  • the supply was a taxable supply;
  • the GST was payable on the supply by that entity; and
  • any reference to a tax period was a reference to the test period.

The effect is that supplies are allocated to a test period to the extent that any GST payable would have been attributable to that test period if the supply was a taxable supply. Once the supply, or part of the supply, is allocated to a test period then the corresponding value of the total supply or of the part of the supply is used to calculate the current GST turnover.

Increasing or decreasing adjustments, and adjustments for bad debts, are excluded from the GST turnover calculation under the Determination.

Accounting method

The Determination provides rules regarding the basis of accounting that an entity is required to use — i.e. either a cash or non-cash (accruals) basis.

The rules are as follows:

See the Explanatory Statement to the Determination for a detailed practical example.

2. The Higher Rate Determination

  1. From 28 September 2020, the JobKeeper payment rate will be split into a Tier 1 rate (i.e. the higher rate) and a Tier 2 rate (i.e. the lower rate) as follows:

The two-tier payment system will apply to each employee based on their total working hours in the applicable ‘reference period’ (see the Alternative Reference Period Determination section below).

The higher rate applies to eligible employees if the total hours of work, paid leave and paid absence on public holidays for their employer in any reference period was 80 hours or more. Otherwise, the lower rate applies.

Where the hours in a reference period for a class of individuals are not readily ascertainable, the Commissioner has the power to determine specified circumstances in which the higher rate is taken to apply to individuals in that class. In the Higher Rate Determination, the Commissioner has determined specified circumstances in which the higher rate will be taken to apply.

NoteNote:

The ATO has released website guidance in relation to this Determination.

Class of individuals where hours are not readily ascertainable

The Determination applies in respect of individuals for whom their employer:

  • does not have any record of the hours of the relevant kind in a reference period; or
  • has incomplete records of those hours in a reference period.

This class includes individuals paid salary, wages, commission, bonus or allowances that are not tied to an hourly rate or contracted rate, where there are no (or incomplete) records of the relevant hours. It is expected that employers would be less likely to have records of the hours worked by these types of employees and as such the Determination may apply to determine if the higher rate applies.

The Determination does not apply to an employee if their employer can readily ascertain the employee’s total hours of work, paid leave and paid absence on public holidays in a reference period.

Specified circumstances in which the higher rate is taken to apply

If an employer determines that an employee satisfies any of the following three tests, the higher rate will apply.

See the Explanatory Statement to the Determination for five practical examples.

First specified circumstance — $1,500 or more in salary, wages, commission

The higher rate applies to employees where, in a reference period, the sum of the following amounts totalled $1,500 or more:

  • gross salary;
  • wages;
  • commission;
  • bonus payments;
  • allowances; and
  • fringe benefits or superannuation contributions provided under an effective salary sacrifice agreement.

NoteNote: Consistent with the Superannuation Guarantee rules, any amount paid to ‘top-up’ an employee salary to satisfy the wage condition is excluded from this calculation.

Second specified circumstance — employment conditions

The higher rate applies to employees if a written industrial award, employment contract or similar instrument governs their employment relationship and under that agreement an employee was required to work 80 hours or more in a reference period (including paid leave and paid absence on public holidays).

Third specified circumstance — reasonable assumptions

The higher rate applies to employees if it can be determined, based on reasonable assumptions, that an employee’s hours in a reference period were 80 hours or more (including paid leave and paid absence on public holidays).

This test also requires that the hours are not readily ascertainable. While this is satisfied where the hours are not readily ascertainable, it is also satisfied where, while the hours could be readily ascertainable (albeit in the absence of complete records of the hours worked), the steps necessary to determine the hours are not reasonable having regard to the burden it would place on the employer.

In either circumstance, employers must make reasonable assumptions to estimate whether the employee’s hours in a reference period were 80 hours or more. For assumptions to be reasonable, they must be based on verifiable information. This could include information on how an employer’s business usually operates, such as the ordinary business hours, average staffing level in any given week, common shift lengths for certain types of employees and the average number of shifts of employees.

3. The Alternative Reference Period Determination

Background

The payment rate that is applicable to each eligible individual is determined based on their total working hours in the applicable ‘reference period’. Broadly, the individual is entitled to the higher payment rate where they performed relevant work for at least 80 hours during their reference period.

The reference period (the standard reference period) for an individual is as follows:

The Commissioner has the power to determine that an alternative reference period applies to a specified class of individuals where he considers that the standard reference period may not be suitable. The Determination sets out these circumstances and the alternative reference periods that apply in those circumstances.

NoteNote:

The ATO has released website guidance in relation to this Determination.

Eligible employees

The Determination sets out the alternative reference period for four classes of eligible employees. Where more than one alternative reference period applies to an employee, the employee can meet the 80 hours threshold to qualify for the higher payment rate under any applicable alternative reference period.

Class 1 — Hours not representative

This class includes an eligible employee in respect of which:

  • the total number of hours of work, of paid leave and of paid absence on public holidays, was less than 80 hours in the standard reference period; and
  • that total number of hours, when compared to earlier 28-day periods ending at the end of a pay cycle for the employee, was not representative of the employee’s total number of hours in a typical such 28-day period.

A comparison must be made to earlier 28-day periods, being:

  • earlier 28-day periods ending at the end of a pay cycle for the employee; and
  • dependent on the entity reasonably establishing the employee’s usual hours over an established work pattern (i.e. a typical such 28-day period).

Employers can look back to earlier 28-day periods in which any circumstances that affected the number of hours in the standard reference period did not exist to identify a typical 28-day period.

Common reasons the total number of hours in the standard reference period are not representative of typical hours include:

  • the employee took various types of unpaid leave during the standard reference period for any reason, for example, sick leave, parental leave and emergency services leave during bushfires;
  • the employee’s total number of hours during the standard reference period were affected due to the employer conducting business or some business in a declared drought zone or declared natural disaster zone;
  • the total number of hours worked by an employee during the standard reference period varies due to rostering schedules, such as fly-in-fly-out employees; or
  • the employee worked less hours in the standard reference period despite generally working on average 80 hours or more hours over earlier periods.
Alternative reference period

The alternative reference period that applies to an eligible employee is the 28-day period ending at the end of the most recent pay cycle for the employee before 1 March 2020 or 1 July 2020 in which the employee’s total number of hours of work, of paid leave and of paid absence on public holidays was representative of a typical 28-day period.

Class 2 — Not employed during all of the standard reference period

Class 3 — First pay cycle ended on or after 1 March / 1 July 2020

The alternative reference period is the same as for Class 2 above.

Class 4 — Employee of a business changing hands or transferred

This class of employees comprise employees of a business which changed hands or who were transferred within the same wholly-owned group after 1 March or 1 July 2020, where the JobKeeper Rules allow them to be treated as having been employed by their current employer at the earlier time.

The hours worked for the previous employer cannot count towards the 80 hour threshold.

The alternative reference period is the same as for Class 2 above.

Eligible business participants

The Determination sets out the alternative reference period for three classes of eligible business participants. Where more than one alternative reference period applies, the business participant can meet the 80 hours threshold to qualify for the higher payment rate under any applicable alternative reference period.

Class 1 — Hours not representative

This class of individuals includes an eligible business participant where the total number of hours the eligible business participant was actively engaged in the business in February 2020:

  • was less than 80 hours; and
  • when compared to earlier 29-day periods (each wholly within a calendar month), was not representative of the eligible business participant’s total number of those hours in a typical such 29-day period.

To determine the alternative reference period, the following must be identified:

  • any circumstances that caused their total number of hours of active engagement in the standard reference period not to be representative of their total number of those hours in a typical 29-day period;
  • the most recent 29-day period wholly within a calendar month before 1 March 2020 in which any of those circumstances did not exist.

That most recent period will be the alternative reference period.

For example, if the eligible business participant was absent through sickness in February 2020, causing that month not to be representative of a typical month, the alternative reference period would be the most recent 29-day period (wholly within a calendar month) in which they were not sick.

Class 2 — Commenced participation in February 2020

The alternative reference period is the 29-day period starting on the day the individual first began to satisfy the business participation requirement for the entity.

Class 3 — Affected by drought or other natural disaster

This class comprises eligible business participants where the entity conducted some or all of its business in a declared drought zone, or declared natural disaster zone, during February 2020.

The alternative reference period would be the most recent 29-day period within a calendar month ending before 1 March 2020, during which the entity did not conduct business or some of its business in a declared drought zone or declared natural disaster zone.

Eligible religious practitioners

The Determination sets out the alternative reference period for two classes of eligible religious practitioners.

Class 1 — Hours not representative

This class of individuals includes an eligible religious practitioner where the total number of hours they spent doing relevant activities in February 2020:

  • was less than 80 hours; and
  • when compared to earlier 29-day periods (each wholly within a calendar month), was not representative of the eligible religious practitioner’s total number of those hours in a typical such 29-day period.

Relevant activities are activities done:

  • in pursuit of the individual’s vocation as a religious practitioner; and
  • as a member of the registered religious institution.

The alternative reference period is the most recent 29-day period wholly within a calendar month ending before 1 March 2020 during which the eligible religious practitioner’s total number of hours spent doing relevant activities was representative of the eligible religious practitioner’s total number of those hours in a typical 29-day period.

Class 2 — Commenced activities in February 2020

The alternative reference period is the 29-day period starting on the day the eligible religious practitioner first commenced doing those activities.

Further info

Looking for further info on JobKeeper 2.0? Check out our latest webinar, JobKeeper Extended.

JobKeeper 2.0 is now law

Posted on by thriveadmin

[lwptoc]

Editor’s note

The ATO has subsequently advised that for the JobKeeper fortnights starting 28 September 2020 and 12 October 2020 only, employers will have until 31 October 2020 to meet the wage condition for all employees included in the JobKeeper scheme.


JobKeeper 2.0 — Legislative Instrument registered

On 15 September 2020, the Treasurer registered a Legislative Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 8) 2020 (the Amendment Rules No. 8), accompanied by an Explanatory Statement, which amends the Legislative Instrument titled the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020.

The Amendment Rules No. 8 give effect to the following changes to the JobKeeper Scheme which were announced on 21 July 2020 and 7 August 2020, being the introduction of:

  • two extensions to the JobKeeper scheme beyond the former end date of 27 September 2020;
  • a two-tier payment rate system;
  • eligibility rules for the two payment tiers based on the number of hours worked during the relevant reference period; and
  • a requirement to re-test a business’s eligibility each quarter based on a new ‘actual decline in turnover test’.

NoteNote – Recent developments

The changes to the JobKeeper scheme

This article provides an overview of the key changes to the JobKeeper Payment scheme introduced by the Amendment Rules No. 8.

Extensions to the JobKeeper scheme

There will be two extensions to the JobKeeper scheme — which was previously legislated to end on Sunday 27 September 2020 — as follows:

Payment rates

From 28 September 2020, the payment rate will be split into a Tier 1 rate (i.e. the higher rate) and a Tier 2 rate (i.e. the lower rate). Further, both Tier 1 and Tier 2 payment rates will be reduced in two tranches as follows:

The payment rates apply to all individuals eligible for JobKeeper payments — i.e.  eligible employees, eligible business participants and eligible religious practitioners.

NoteNote:
In this article, a reference to an eligible employee includes a reference to an eligible business participant and an eligible religious practitioner unless stated otherwise. Similarly, a reference to an eligible employer includes a reference to an eligible business (of which the individual is a business participant) and a registered religious institution unless stated otherwise.

How to determine which payment tier applies

The two-tier payment system will apply to each employee based on their total working hours in the applicable ‘reference period’.

The reference period

The reference period for an individual is determined as follows:

An alternative reference period

The Commissioner may determine that an alternative reference period applies to a specified class of individuals where he considers that the relevant reference period set out above may not be suitable.

The payment tiers

The payment tiers will apply as follows:

NoteNotes

  • To be eligible for the Tier 1 rate:
    • an employee only needs to satisfy the 80-hour requirement in respect of one reference period where both reference periods (i.e. pre-1 March 2020 and pre-1 July 2020) apply;
    • a business participant must also make a declaration that they had actively engaged in the business for at least 80 hours during the reference period to the entity (or in the case of a sole trader, to the Commissioner); and
    • a religious practitioner must also make a declaration that they had done relevant activities for at least 80 hours during the reference period to the entity.
  • Where the pay cycle for the employee is longer than 28 days, a pro-rata proportion of the total hours of the employee in the pay cycle is to be used.
  • The Commissioner has the discretion to determine specified circumstances in which the higher rate applies to a class of individuals.

The employer’s obligations

The employer must:

  • notify the Commissioner of the payment rate that applies to each individual; and
  • other than a sole trader — notify the individual of the payment rate within seven days of notifying the Commissioner.

The actual decline in turnover test

From 28 September business will need to apply a new actual decline in turnover test in addition to the existing decline in turnover test.

The new ‘actual decline in turnover test’ will operate as follows:

Implications
Key differences to the existing decline in turnover test include that:

    • current (i.e. actual) GST turnover is used instead of projected (i.e. estimated) GST turnover; and
    • the test period is a quarter with no option to choose a calendar month.

Commissioner discretion

The Commissioner may determine that certain supplies or classes of supplies are to be treated as being wholly or partly made at a particular time.

The Explanatory Statement notes that it is expected the Commissioner will determine that most or all supplies will be treated as being made at a time in the period to which they are attributable for GST reporting purposes — i.e. it is likely that businesses will generally be able to assess eligibility based on details reported in their Business Activity Statement (BAS).

ATO guidance

At the time of writing, the ATO has not released details of whether and how the Commissioner will exercise his discretionary powers under the Amendment Rules No. 8 or how it intends to administer aspects of the extensions.

The ATO will update its JobKeeper Payment webpages (QC 62125) when more information becomes available. TaxBanter will communicate key developments through our social media channels and through this blog. You can subscribe for updates at the bottom of this page, and follow us on LinkedIn so you don’t miss out!

Upcoming webinar

Upcoming webinar
Interested in learning more about the JobKeeper extensions? Join two of our Senior Tax trainers on Wednesday, 16 September. We’ll cover:

    • JobKeeper 2.0
    • the Fair Work 10 per cent decline in turnover test for legacy employers
    • the tax practitioner’s role in assisting legacy employers
    • and more

You can learn more about JobKeeper Extended here or through the link below.

Do home office expense claims affect the main residence exemption?

Posted on by thriveadmin

[lwptoc min=”3″]

Working from home — the new normal

Due to the COVID-19 public health crisis, many taxpayers commenced working from home for the first time during 2020.

Deductions for ‘home office expenses’ may be available under s. 8-1 and Div 40 of the ITAA 1997 (general deductions and depreciation respectively).

The question addressed in this article is whether, and to what extent, claiming home office expense deductions in 2020 and 2021 will affect the homeowner’s ability to claim the CGT main residence exemption (MRE) upon the future sale of their home.

Tax advisers are aware that the MRE may be reduced where the taxpayer’s home has been used for an income-producing purpose. The critical feature of this rule is that the test does not focus on the income that is derived from the home, but the interest that is deductible (or notionally deductible) against that income.

Types of home office expense deductions

Deductions incurred in working from home are available where:

  • an area of the home is used as a ‘place of business’;
  • a room is used as a ‘study’, ‘home office’ or other ‘work area’ as a matter of convenience; or
  • no particular area of the home is used, but work is performed at home.

Whether an area of a home is a place of business is a question of fact. A place of business is most likely to exist where an area of the home is set aside for carrying on a business by a self-employed person or for use as a taxpayer’s sole base of operations for income producing activities e.g. where no other location is provided to an employee by their employer.

An area that has been set aside in a home will, or is more likely to, have the character of a ‘place of business’ if the area is:

1. clearly identifiable as a place of business;
2. not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
3. used exclusively or almost exclusively for carrying on a business; or
4. used regularly for visits of clients or customers.

TR 93/30 sets out the Commissioner’s view on when an area of a home is considered to be a place of business.

Home office expenses fall into two broad categories:

  • occupancy expenses — relating to the ownership or use of a home which are not affected by the taxpayer’s income earning activities (e.g. rent, mortgage interest, municipal and water rates, land taxes, house insurance premiums);
  • running expenses — relating to the use of facilities within the home (electricity charges for heating/cooling and lighting, cleaning costs, depreciation, leasing charges, cost of repairs).

The Commissioner is of the view that in most cases the apportionment of expenses attributable to a place of business should be made on a floor area basis and, where the place of business only existed for part of a year, also on a time basis (TR 93/30).

The following table sets out when occupancy costs and running expenses may be deductible:

Do home office expense claims affect the main residence exemption

(A) Where the taxpayer merely sits in a room with their family and at the same time does some work-related activity, the expenditure for lighting and heating/cooling retains its private or domestic character and is therefore not deductible. For example, where a teacher marks school work in the lounge room where other family members are watching television (TR 93/30).

For a contemporary example of the application of the home office expense deduction rules, see the recent Tribunal decision in McAteer and FCT [2020] AATA 1795. The taxpayer was a database team leader who worked from home at various times from certain areas of his home, including one area which was a dedicated home office. The Tribunal found that the taxpayer was entitled to claim home occupancy expenses in respect of the home office, and remitted the matter to the Commissioner to determine the appropriate apportionment based on floor area and time.

The CGT impact of working from home

In summary:

  • where the taxpayer has a place of business in their dwelling and claims occupancy expenses — the taxpayer’s entitlement to the MRE will be reduced proportionately; and
  • where the taxpayer does not have a place of business in their dwelling and only claims running costs — working from home has no impact on the taxpayer’s entitlement to the MRE.

These outcomes are explained below.

A partial main residence exemption

A capital gain that a taxpayer makes from the sale of a dwelling that is their main residence is exempt from CGT under the MRE in Subdiv 118-B of the ITAA 1997.

However, under s. 118-190, only a partial MRE is available where, had the taxpayer incurred interest on money borrowed to acquire the dwelling, the taxpayer could have deducted some or all of the interest.

Under this interest deductibility test, the taxpayer needs not have actually incurred and deducted interest expenses. It is sufficient that notional interest would have been deductible.

In the context of home office expenses, the interest deductibility test can only be satisfied if occupancy costs were deductible — i.e. only where part of the dwelling was a place of business. (Other applicable situations may include where part of the dwelling is rented out for a tenant’s exclusive use.)

The deductibility of running expenses does not affect the MRE because loan interest is not deductible as a running cost. Further, the deductibility of any other type of expense against the income is not relevant to the MRE.

The capital gain or capital loss is increased by an amount that is reasonable having regard to the extent to which the taxpayer would have been able to deduct that interest — see the below example.

NoteNote

The absence rule in s. 118-145 may also apply to affect the calculation of the capital gain or loss if the taxpayer had moved to another dwelling for a period of time.

Example

Basic case

Clare owned a house for 10 years and it was her main residence for the entire ownership period. The cost base of the house was $400,000. She sold the house for $700,000 and made a gross capital gain of $300,000 (ignore transaction costs for this example). Clare had used 15 per cent of the house as a doctor’s surgery during the 10 years. She had claimed 15 per cent of the mortgage interest incurred in relation to the house as an occupancy expense deduction for each of the 10 income years.

Disregarding s. 118-190, Clare would be entitled to a full MRE and her taxable gain would be nil.

On applying s. 118-190, Clare increases her capital gain of nil by 15 per cent as follows:

Increase in capital gain = $300,000 × 15% = $45,000

Clare’s capital gain (before CGT discount) is therefore $0 + $45,000 = $45,000.

Variation — place of business for part of ownership period

Clare did not use her home for income-producing purposes for the first two years of ownership. She established her surgery — the place of business — at the beginning of the third year.

Disregarding s. 118-190, Clare would be entitled to a full MRE and her taxable gain would be nil.

On applying s. 118-190, Clare increases her capital gain of nil as follows:

Increase in capital gain = $300,000 × 15% × 8/10 = $36,000

Clare’s capital gain (before CGT discount) is therefore $0 + $36,000 = $36,000.

Costs of ownership — impact on CGT

If a taxpayer acquired the property after 20 August 1991, the cost base will include third element costs — i.e. costs of ownership. These costs include:

  • interest expenses incurred on:
    • the mortgage over the property;
    • borrowings to refinance the mortgage;
    • borrowings to finance capital expenditure incurred to increase the property’s value;
  • costs of maintenance, repairs or insurance; and
  • rates or land tax.

These costs are deductible as occupancy costs to the extent that they are incurred in relation to a place of business within the taxpayer’s home. The non-deductible portion is added to the cost base.

Example — costs of ownership

As a variation to the basic case example above, assume that Clare’s ownership costs amounted to $30,000 per year. She was entitled to deduct $30,000 × 15% = $4,500 per year as home office expenses.

The remaining 85 per cent — i.e. $25,500 — were added to the cost base of the dwelling as third element costs.

Capital gain on disposal = $700,000 less [$400,000 +( $25,500 × 10 years)] = $700,000 less $655,000 = $45,000.

Disregarding s. 118-190, Clare would be entitled to a full MRE and her taxable gain would be nil.

On applying s. 118-190, Clare increases her capital gain of nil by 15 per cent as follows:

Increase in capital gain = $45,000 × 15% = $6,750

Clare’s capital gain (before CGT discount) is therefore $0 + $6,750 = $6,750.

Variation — cost base exceeds consideration

As as further variation, assume that Clare’s ownership costs were $50,000 per year. she was entitled to deduct $50,000 × 15% = $7,500 per year as home office expenses.

The remaining 85 per cent — i.e. $42,500 — were added to the cost base of the dwelling as third element costs.

Cost base at time of disposal = $400,000 +( $42,500 × 10 years) = $842,500

The cost base ($842,500) exceeds the consideration ($700,000). The capital gain is reduced to nil but no capital loss arises. This is because a reduced cost base for the purposes of calculating a capital loss excludes third element costs.

On applying s. 118-190, the increase in Clare’s capital gain = $0 x 15% = $0

Therefore Clare has no capital gain or capital loss arising from the disposal where the inclusion of the costs of ownership in the cost base ensures that the cost base is equal to or exceeds the consideration.

Further information

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