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New requirements for tax agents to report ‘significant’ ethical breaches by other agents

Posted on by Vic Stevens

On 16 November 2023 the House of Representatives agreed to the Senate amendments to the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023. The Bill received Royal Assent on 27 November 2023. 

Schedule 3 to the Bill — in particular the Senate amendments — introduces significant changes to the Tax Agent Services Act 2009 (TASA) in relation to the regulation of tax agents.

One of the major changes introduced by the Senate is that — from 1 October 2024 — the leadership of tax practices with more than 100 employees will be ineligible to be appointed to the Tax Practitioners Board (the Board). This new law means that the leadership of mid-tier and large accounting and law firms cannot be appointed while they are in the leadership role or within six months of receiving benefits from the practice after their departure.

In addition the Senate amendments impose new mandatory notification requirements — from 1 July 2024 — for a registered agent who has committed a significant breach of the Code of Professional Conduct (the Code) or who becomes aware of a significant breach of the Code committed by another registered agent.

Leadership of large tax practices ineligible to be appointed to the Board

The amendments introduce new restrictions in relation to appointments to the Board.

Table 1

Table 2

A Board member must be a ‘community representative’

In appointing an individual as a Board member, the Minister must be satisfied that the individual is a community representative.

An individual is a community representative if they are not any of the following:

  • a partner in a partnership that is a prescribed tax agent
  • an executive officer of a company that is a prescribed tax agent
  • a former partner in a partnership that is currently a prescribed tax agent, if the individual is receiving regular and ongoing benefits, or has within the last six months received a material benefit, from the partnership
  • a former executive officer of a company that is currently a prescribed tax agent, if either:
    • the individual is receiving regular and ongoing benefits, or has within the last six months received a material benefit, from the company, or
    • the individual holds shares in the company

A prescribed tax agent is a company or partnership that is a registered tax agent or BAS agent and has more than 100 employees.

An executive officer of a company means a director, secretary or senior manager (within the meaning of the Corporations Act 2001) of the company.

Mandatory notifications of significant breaches of the Code

The Senate amendments also introduce new requirements into the Code of Professional Conduct (the Code) for mandatory notification of breaches of the Code. These requirements commence 1 July 2024.

Notifying clients of Board’s investigation findings

A registered agent will be required to provide written notification to all of their current clients about the findings of the Board’s investigation.

Notifying the Board of own significant breaches

The existing rules require registered agents to notify the Board of certain changes of circumstances relating to the registration of the individual registered agent, or a partner or director in the case of a partnership or company.

The Senate amendments now mandate reporting to the Board where the registered agent has reasonable grounds to believe that they have breached the Code, and the breach is a significant breach.

Notifying the Board of other agents’ significant breaches

Registered agents must notify the Board, in writing, if they have reasonable grounds to believe that another registered agent has breached the Code, and the breach is a significant breach.

If the registered agent is aware that the other agent is a member of a professional association accredited by the Board, the agent must also notify the professional association of the breach.

What is a significant breach of the Code?

A significant breach of the Code is defined as a breach which:

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

At time of writing the Board has not provided any guidance in relation to what would constitute a significant breach of the Code.

Consequences of not complying with the new notification requirements

The new notification requirements form part of the Code in Div 30 of the TASA. The Senate amendments do not introduce new consequences for non-compliance with the Code (including the new notification rules).

Where the Board finds that a registered agent has failed to comply with the TASA it may impose one or more of the following administrative sanctions:

  • a written caution
  • an order requiring the tax practitioner to:
    • respond to requests and directions from the Board
    • complete a course of education or training
    • only provide certain services
    • provide services only under supervision
  • suspension of registration for a certain period
  • termination of registration.

Details of an administrative sanction (other than a written caution) are listed against the agent on the TPB Register.

(Note that civil penalties only apply to specific types of contraventions listed in the TASA, including providing services while unregistered, making a false or misleading statement to the Commissioner, employing or using the services of an entity whose registration has been terminated, or signing a declaration or statement that was prepared by an unregistered entity who was not working under the supervision or control of a registered agent.)

Other changes to the TASA

The other changes to the TASA contained in the Bill include amendments which:

  • update and modernise the objects clause of the TASA — from the first day of the first quarter after Royal Assent
  • create financial independence for the Board from the ATO by establishing a special account to enable a special appropriation to be made for the Board — from 1 July 2024
  • require tax practitioners to not employ or use a disqualified entity with the Board’s approval, or enter an arrangement with a disqualified entity — from the first day of the first quarter after Royal Assent
  • convert to an annual registration period and reducing the maximum time for the Board to determine the outcome of an application to four months — from 1 July 2024
  • enable the Minister to supplement the existing Code — from the first day of the first quarter after Royal Assent.

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ATO’s administrative treatment — Bendel case — UPEs not Div 7A loans

Posted on by Vic Stevens

The ATO has released its interim Decision Impact Statement (the interim DIS) in relation to the Tribunal decision in Bendel v FCT [2023] AATA 3074 (Bendel). Bendel concerned whether a private company’s failure to call for payment of entitlements to income of a trust was the provision of ‘financial accommodation’ and, therefore, a loan for Div 7A purposes (s. 109D of the ITAA 1936). The interim DIS sets out the ATO’s administrative treatment pending the outcome of the Commissioner’s appeal against the Tribunal’s decision.

The Primary Issue in the Bendel decision

The Primary Issue considered by the Tribunal was whether the Company made a loan — within the meaning of s. 109D(3) — to the Trust during each of the 2014 to 2017 income years on account of the Company’s unpaid present entitlements (UPEs) to trust income of the previous year.

The Tribunal decided that the Company did not make a loan to the trustee of the Trust.

Therefore there was no deemed dividend paid by the Company to the Trust under s. 109D(1).

The Tribunal reasoned that a ‘loan’ did not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) were created but not satisfied and remained unpaid. The balance of an UPE of a corporate beneficiary, whether held on a separate trust or otherwise, was not a loan to the trustee of the Trust.

Commissioner’s appeal

On 26 October 2023, the Commissioner lodged a notice of appeal to the Federal Court against the Tribunal’s decision in respect of the Primary Issue.

The ATO’s view of the Tribunal’s decision

Until the appeal process is finalised, the Commissioner does not intend to review the current ATO views relating to private company entitlements to trust income. These views are set out in TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?

Note: in addition to the application of s. 109D, the basis on which private company beneficiaries deal with UPEs may have implications under other rules, such as s. 100A.

Administrative treatment

The interim DIS sets out the ATO’s administrative treatment pending the outcome of the appeal process.

The ATO will administer the law in accordance with the published views in TD 2022/11.

The Commissioner does not propose to finalise objection decisions in relation to past year assessments where the decision turns on whether or not a UPE was a s. 109D(3) loan.

However, if a decision is required to be made (e.g. because a taxpayer gives notice requiring the Commissioner to make an objection decision), any objection decisions made will be based on the ATO’s existing view of the law.

More information

Excerpt of s. 109D of the ITAA 1936

109D(1)   Loans treated as dividends in year of making.

A private company is taken to pay a dividend to an entity at the end of one of the private company’s years of income (the current year ) if:

(a) the private company makes a loan to the entity during the current year; and

(b) the loan is not fully repaid before the lodgment day for the current year; and

…

109D(3)   What is a loan?

In this Division, loan includes:

(a) an advance of money; and

(b) a provision of credit or any other form of financial accommodation; and

(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

[emphasis added]

The Commissioner’s views in TD 2022/11

TD 2022/11 describes when a private company provides financial accommodation where it is made presently entitled to income of a trust and either:

  • that entitlement remains unpaid, or
  • the trustee satisfies the present entitlement by setting aside an amount from the main trust fund and holding it on a new separate trust (sub-trust) for the exclusive benefit of the private company beneficiary.

Ruling

The phrase ‘financial accommodation’ in s. 109D(3)(b) has a wide meaning. It extends to cases where an entity with a trust entitlement has knowledge of an amount that it can demand and does not call for payment.

Circumstance one — where there is a UPE

A private company beneficiary with a UPE, by arrangement, understanding or acquiescence, consents to the trustee retaining that amount to continue using it for trust purposes if the company:

  • has knowledge of an amount that it can demand immediate payment of from the trustee, and
  • does not demand payment.

This constitutes the provision of financial accommodation to the trustee. As a result, the private company beneficiary makes a loan to the trustee under the extended definition of a ‘loan’ in s. 109D(3).

Circumstance two — where present entitlements are satisfied by sub-trust

The amount set aside by the trustee ceases to be an asset of the main trust and forms the corpus of the sub-trust (the sub-trust fund). The private company beneficiary has a new right to call for payment of the sub-trust fund and can call the sub-trust to an end. A choice by the private company not to exercise that right does not constitute financial accommodation in favour of the trustee in its capacity as trustee of the sub-trust, because the sub-trust fund is held for the private company beneficiary’s sole benefit.

However, the situation is different if the private company beneficiary by arrangement, understanding or acquiescence, consents to the sub-trustee allowing those funds to be used by or for the benefit of the private company beneficiary’s shareholder or their associate where:

  • all or part of the sub-trust fund is used by or for the benefit of that entity, and
  • the private company beneficiary has knowledge of this use.

This constitutes the provision by the private company beneficiary of financial accommodation to the entity using or benefiting from the use of the sub-trust fund under s. 109D(3)(b). As a result, the private company beneficiary makes a loan to the entity using the sub-trust fund under the extended definition of a ‘loan’ in s. 109D(3).

The Bendel case

The Bendel Group of entities

Mr Bendel controlled the Bendel Group of entities, which included the following:

Screenshot 2023 11 16 132538

The Commissioner issued amended assessments on the basis that the UPEs to prior year trust income were loans within the meaning of s. 109D(3), made by the Company to the Trust. The loans were taken to be dividends under s. 109D(1).

The Primary Issue — the Tribunal’s reasons

The Tribunal did not accept the contention (of both parties) that a separate trust arose in any conventional sense that had the effect of discharging or replacing the obligation to pay entitlements to income. The Company’s entitlements to be paid its share of the Trust’s income continued to exist.

The Tribunal found that the balance of the outstanding UPEs, whether held on a separate trust or otherwise, were not loans to the Trustee within the meaning of s. 109D(3).

The Tribunal based this conclusion on the following:

  • the policy intent of Div 7A to tax shareholders/associates who access company profits without bearing the tax that would arise had the company paid a dividend in the usual way
  • statutory construction principles — potentially competing provisions be interpreted in a manner which ‘gives effect to harmonious goals’
  • there being no tiebreaker provision which mandates which of two competing assessing provisions would apply — if the UPE is treated as a loan to the trustee per s. 109D(3) there is a possibility two people would be taxed on the same UPE, one through Div 6 of the ITAA 1936 and the other through Div 7A
  • the Commissioner’s discretion under s. 109RB is only available to taxpayers if there was an honest mistake or inadvertent omission — no discretion is available to relieve inappropriate double taxing
  • Subdivision EA (being specific) is the lead provision to bring UPEs into the scope of Div 7A. It requires two features: an entitlement to trust income vested in a corporate beneficiary and a contemporaneous loan to a shareholder
  • the lack of clarity as to the nature of an UPE and the separate trust concept
  • the operation of Subdiv EA which taxes the shareholder as if the company had lent money directly to that shareholder, bringing the loan from the trust to the shareholder/associate within the scope of Div 7A
  • there being no provision in either of the Assessment Acts that expressly allows assessment of two people arising out of the same circumstance with one of those people potentially not enjoying any benefit of the corporate profits that are the underlying cause of the assessment.

Other issues considered by the Tribunal

Apart from the Primary Issue, the Tribunal considered three other issues — summary below.

Whether s. 6-25 of the ITAA 1997 prevents a deemed dividend from being included in the Trust’s assessable income or, alternatively, the taxpyaer’s assessable incomes on the basis that the same amount has already been included in assessable income.

Consistent with its conclusion for the Primary Issue, the Tribunal found it unnecessary to decide this issue. Nonetheless, it observed that any deemed dividend would not be the ‘same amount’ as the amount previously included in the Company’s assessable income in respect of the UPE.

Whether the Tribunal will exercise the s. 109RB discretion (subject to the answers to the preceding issues).

The Tribunal found that loans (within the ordinary meaning of that term) of $41,252 and $9,431 had been made by the Company to the Trust. It considered no basis had been advanced for the exercise of the s. 109RB discretion in respect of those amounts.

Under s. 109RB the Commissioner may exercise a discretion to disregard the deemed payment of a dividend or that a deemed dividend may be franked.

Whether penalties have been imposed correctly and, if so, whether the Tribunal will remit them.

Based on the Tribunal’s decision regarding the application of section 109D to the UPEs, this issue was only relevant to the $41,252 and $9,431 ordinary loans. The Tribunal observed that ‘Mr Bendel is a registered tax agent to whom the outcome of retaining amounts belonging to a company should have been obvious’. It considered penalties respect of those amounts should be recalculated at the same rate and not remitted.

When does s. 100A apply?

Section 100A of the ITAA 1936 applies where:

  • there is a presently entitled beneficiary and the beneficiary’s present entitlement to income of the trust estate has the relevant connection with a reimbursement agreement
  • the reimbursement agreement provides for a benefit to a person other than the beneficiary
  • a purpose of one or more of the parties to the agreement is that a person would be liable to pay less income tax in an income year,

AND

  • the exclusion for agreements entered into in the course of ordinary family or commercial dealings does not apply.

note iconNote

Section 100A effectively has an unlimited period of review — i.e. the Commissioner has an unlimited period in which to issue an assessment under the provision.

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Findings in the ATO’s Next 5,000 report

Posted on by Vic Stevens

The ATO has released its report for the Next 5,000 tax performance program, which looks at the tax obligations of privately owned and wealthy groups.

The Next 5,000 program began on 1 July 2019. It engages with taxpayers on a one-to-one basis, through streamlined assurance reviews. The findings in the report are based on the outcomes of 1,078 reviews covering 7,198 transactions, activities and events.

The data and findings in the report are current as at 31 August 2023.

Advisers to private groups should take heed of the common errors and tax risks raised in the report when reviewing their clients’ tax affairs – including the observation that poor governance and documentation processes is correlated to compliance errors. 

The below is a short summary of key findings. For more detail refer here.

Key observations

Key observations include that:

  • A high proportion have governance processes and procedures, but most are not documented.
  • Clearly documented roles and responsibilities lead to good tax governance.
  • Documentation of the tax return preparation, review process and identification of material transactions helps groups to recognise tax risks and issues to avoid errors.
  • Private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.

There is a correlation between no documented tax governance processes and procedures, and

  • disclosure errors
  • late lodgment
  • no lodgment of accompanying schedules to the income tax return.

Warning Fade VariationATO recommendation

Documenting tax return procedures, including a tax return review process, which could also include a lodgment calendar.

Common tax issues

The common issues where the ATO was unable to obtain assurance include the following.

Business as usual — expenditure

The ATO was not able to obtain assurance in relation to tax deductions in certain circumstances due to a lack of governance processes, procedures and poor recording keeping. Certain expenditure could not be substantiated and a nexus between the expense and assessable income could not be evidenced. A high proportion of these expenses are related party transactions where the reported income derived by a related party was less than the deductions claimed by the other related party.

Warning Fade VariationATO recommendation

Having clear processes and procedures setting out record keeping requirements for related party transactions.

Intra-group transactions — loans or payments to shareholders and their associates

The ATO found a correlation between poor record keeping, lack of documented governance processes and procedures and not taking enough steps to satisfy Div 7A rules. In these reviews, the ATO identified no written loan agreements or minimum yearly repayments and a lack of appropriate record keeping.

Warning Fade VariationATO recommendation

    • review the group’s Div 7A compliance
    • create a Div 7A annual end of year checklist to ensure accurate and consistent reporting of these loans in ledger accounts, financial statements and tax returns.

Sale of significant assets

The ATO was unable to obtain assurance over a range of property disposals for the following reasons:

  • Insufficient evidence supporting the valuation of capital proceeds and elements of the cost base.
  • Miscalculation of cost base including amounts omitted or inclusion of amounts that do not form part of the cost base such as development costs.
  • Timing of disclosure of CGT events resulting in the capital gain being reported in the wrong year.
  • Mischaracterisations of the sale of property as revenue or capital.
  • Incomplete documentation provided to the tax agent resulting in miscalculation of the CGT event.

Warning Fade VariationATO recommendation

Implementing processes and procedures to identify material transactions and ensure that these transactions are communicated to the tax agent where applicable.

Trust distributions

The ATO was unable to obtain assurance over trust distributions where there were concerns over beneficiary entitlement to trust distributions, such as distributions paid to the incorrect beneficiary and s. 100A.

In relation to family trusts the ATO was unable to obtain assurance in the following circumstances:

  • distributions made outside of the family group
  • inconsistency of documentation regarding individuals set out in the family trust deed and the interposed entity election forms.

In some cases a lack of governance processes and procedures resulted in omitted trust distributions for some beneficiaries.

Related party transactions

The ATO was unable to obtain assurance over revenue recognition relating to related party transactions. A lack of governance processes and procedures potentially resulted in poor record keeping. Some examples include:

  • No documented management service agreement.
  • Omitted or understated income where incomplete records were provided.
  • Aggregate of related party deductions claimed by one related party exceeded income returned by the other related party.
  • No formal lease agreement between related parties.
  • Unable to assure related party rent as no lease agreement in place and no rental valuation conducted.

GST

From the GST integrated streamline assurance reviews undertaken to date, ATO observations include:

  • Significant omissions or errors at BAS disclosure labels typically relate to export sales, input taxed supplies, related party recharges and GST-free items.
  • A strong correlation between the BAS disclosure errors and a lack of or insufficient governance processes.
  • Sales reported in BAS were materially higher than sales reported in income tax returns and insufficient explanations provided for the variance.
  • Incorrect reporting of GST on related party transactions and charges such as management fees

Tax risks flagged to market

The most common tax risks flagged to market arising for review as part of streamlined assurance reviews include those related to:

  • cross-border related party financing arrangements and transactions — PCG 2017/4
  • Div 7A — unpaid present entitlements and amounts held on sub-trusts — the provision of ‘financial accommodation’ — TD 2022/11
  • simplified transfer pricing record-keeping options — PCG 2017/2
  • tax loss or net capital loss — record retention — TD 2007/2
  • long term construction contracts — TR 2018/3

About the Next 5,000 groups

Within the Next 5,000 sub-population there are about 7,899 private groups with net wealth of over $50 million. These groups hold around $1 trillion in net assets. Most are well established, multigenerational businesses.

A typical Next 5,000 group:

Picture1

The industries in which the Next 5,000 groups operate:

Picture2

For more information about the Next 5,000 demographic, refer here.

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Draft legislation released — tax adviser misconduct reforms

Posted on by Vic Stevens

On 20 September 2023 the Government released for consultation a package of exposure draft legislation (the EDs) in relation to the tax adviser misconduct reforms initially announced on 6 August.

The four EDs can be accessed here:

Consultation closes on 4 October 2023.

1. Proposed reform of promoter penalty laws

Proposal to increase maximum penalties

The proposed maximum penalty is the greater of:

(i) three times the benefits received or receivable by the entity or its associates — directly or indirectly — in respect of the scheme, or

(ii) for a body corporate or significant global entity (SGE) — 10 per cent of its aggregated turnover for the most recent income year to end before the entity engaged in the relevant conduct — capped at 5 million penalty units (currently equal to $782,500,000), or

(iii) per the following table:

Table 1

* Based on the current value of a penalty unit ($313 from 1 July 2023).

Key differences to current law:

  • extending the body corporate maximum penalties to SGEs
  • for (i) — increasing and changing twice the consideration received/receivable to three times the benefits received/receivable
  • introducing new (ii) — for a body corporate/SGE with aggregated turnover over $156,500,000 (based on current penalty unit value), (ii) will provide the maximum penalty applicable
  • for (iii) — the penalty for a body corporate/SGE has doubled from 25,000 penalty units, currently $7,825,000 (no change for an individual).

Proposal to expand the scope of the promoter penalty laws

An entity will be a ‘promoter’ of a tax exploitation scheme if it, or an associate, receives a benefit in respect of the scheme — currently the rules look at whether the entity or an associate receives consideration. A benefit will be more broadly defined than consideration, and includes less obvious, intangible or disguised benefits, such as increasing client base.

The meaning of a ‘tax exploitation scheme’ will be expanded to cover schemes that would breach, or would breach, the multinational anti-avoidance law or diverted profit tax laws.

The limb of the promoter penalty rules that currently covers the misrepresentation of a scheme’s conformance with a product ruling will be expanded to cover all types of rulings — private, public and oral rulings.

Proposal to increase the time limit for the ATO to bring proceedings

The time limit for the ATO to bring Federal Court proceedings on promoter penalties will be increased from four years to six years after the conduct occurred.

There is no time limit where the scheme involves tax evasion.

Proposed commencement date

The later of:

  • 1 July 2024
  • The first 1 January, 1 April, 1 July or 1 October after the date of Royal Assent.

2. Proposed reform of whistleblower protections laws

The tax law secrecy rules in Div 355 of Schedule 1 to the TAA provide that it is an offence for an ATO offcer to disclose ‘protected information’. There are exceptions for certain disclosures made to eligible recipients, which currently include:

  • the Commissioner to assist the Commissioner with their functions or duties under the tax law
  • a legal practitioner for the purposes of obtaining legal advice or representation about disclosures made to the Commissioner or an eligible recipient.

The Government proposes to include in the list of disclosures qualifying for protection a disclosure made to the Commissioner or to the Tax Practitioners Board (TPB) to assist the TPB to perform its functions or duties under the Tax Agent Services Act 2009 (TASA).

A disclosure will also qualify for protection if made to certain entities (e.g. professional associations and unions) for the purposes of obtaining assistance in relation to a disclosure, or to a medical practitioner or psychologist.

Proposed commencement date

The later of:

  • 1 July 2024
  • The first 1 January, 1 April, 1 July or 1 October after the day of Royal Assent.

3. Proposed TPB reforms

The final report of the independent Review of the Tax Practitioners Board was released on 27 November 2020. The ED proposes to implement three of the recommendations in the report by amending the TASA and introducing the Tax Agent Services Amendment (Register Information) Regulations 2023 (Regulations).

The Register

The proposed amendments to the Regulations to ensure:

  • additional information is published on the Register, making information about the conduct of registered and formerly registered tax professionals transparent to the public
  • further detail is given about the how long certain information must be kept on the Register, securing the availability of that information to the public
  • greater transparency of accountable individuals who form the sufficient number of tax practitioners within a registered company or partnership.

Timeframe for investigations

The Government proposes to extend the period of time that the TPB has in which to conclude investigations into potential breaches of the TASA from six months to 24 months. The timeframe can be extended if the TPB is satisfied that for reasons beyond its control, a decision cannot be made in 24 months.

The proposed amendment also creates a new option for the TPB following the conclusion of an investigation, by allowing it not to pursue administrative sanctions or civil penalties, and instead to publish the findings of the investigation on the Register.

The TPB’s delegation powers

The amendments propose to permit delegation by the TPB and enables the decision to terminate registration due to death or surrender to be delegated widely to ensure more timely decision-making and better use of resources.

Proposed commencement date

The later of:

  • 1 July 2024
  • The first 1 January, 1 April, 1 July or 1 October after the day of Royal Assent.

In some cases the proposed changes will apply to investigations commenced on or after 1 July 2022.

4. Proposed information sharing reforms

It is proposed that the ATO and TPB will be able to share protected information with Treasury about misconduct arising out of suspected breaches of confidence by intermediaries engaging with the Commonwealth.

Currently, the ATO and TPB can share protected information with a professional association in relation to suspected misconduct by members where the disclosure relates to the administration of the tax law. It is proposed that the ATO and TPB will be able to share protected information with prescribed disciplinary bodies where they reasonably believe a person’s actions may constitute a breach of the body’s code of conduct or professional standards.

Further, the Treasury will be able to on-disclose protected information to the Treasurer or Finance Minister.

Proposed commencement date

In relation to disclosures of information made on or after the day after Royal Assent.

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Intergenerational Report: Implications for the tax system

Posted on by Vic Stevens

The 2023 Intergenerational Report provides a 40-year projection of the outlook of the economy and the Government’s budget to 2062–63.

The five major forces that will shape the Australian economy over the coming decades are population ageing, expanded use of digital and data technology, climate change and the net zero transformation, rising demand for care and support services and increased geopolitical risk and fragmentation.

The economy in 40 years

It is projected that the economy will be around two and a half times larger but it will grow at a slower rate than in the past, at an average of 2.2 per cent a year. Real incomes will be around 50 per cent higher.

Population in 40 years

Australia’s population is projected to grow more slowly at an average of 1.1 per cent per year, compared to 1.4 per cent over the past 40 years. It is projected to reach 40.5 million.

The population will continue to age — the number of people aged 65 and over will more than double and the number aged 85 and over will more than triple, while the number of centenarians will increase six-fold.

Participation in 40 years

As the population continues to age, the overall participation rate is projected to decline from 66.6 per cent to 63.8 per cent.

The gender gap in participation is expected to continue to narrow.

Productivity in 40 years

Productivity growth is assumed to grow at 1.2 per cent a year, around the average of the past 20 years.

Changing industrial base over the next 40 years

The ageing population will reinforce the trend towards a services-based economy, with the care and support sector potentially doubling.

Digitalisation will change how we work, raising productivity, improving workplace safety and providing agility.

The net zero transformation will see global demand for some exports decline, while creating new markets and opportunities. Critical minerals could become key exports as the world transitions to net zero. Australia is already the world’s largest producer of lithium, supplying more than half of all global production. Global demand for lithium could be more than eight times higher in 40 years time.

Climate change will have profound impacts on the economy and society. It will affect where and how Australians choose to live and work, food and energy security and our environment.

The budget in 40 years

Long-term spending pressures

The five main spending pressures are health, aged care, the NDIS, defence and debt interest payments. They are projected to rise from around one-third to one-half of all government spending.

Total government spending is projected to rise by 3.8 percentage points of GDP, with the ageing population causing around 40 per cent of the increase.

Despite the ageing population, spending on age and service pensions is projected to fall as a share of GDP, with superannuation increasingly funding retirements.

Changing revenue base

Tax as a share of the economy is assumed to be constant over the long run.

Structural changes to the economy will put pressure on the revenue base. Reliance on the following is expected to decrease:

  • revenue from fuel and tobacco excise — due to the decarbonisation of the transport industry and changing consumer preferences
  • emissions-intensive commodities — due to declining global demand.

Non-tax receipts are projected to decline as a share of the economy, reflecting lower earnings from the Australian Government Future Fund as assets are anticipated to be drawn down to fund public superannuation liabilities.

The budget balance

The underlying cash balance was in surplus in 2022–23 for the first time since 2007–08, but projected to return to deficit for the remainder of the projection period, reaching 2.6 per cent of GDP in 2062–63. Gross debt as a share of GDP is projected to decline over the coming decades.

Growing spending pressures are projected to result in deficits remaining, with gross debt projected to reach 32.1 per cent of GDP by 2062–63.

The tax system over the next 40 years

Tax receipts were expected to comprise 92.5 per cent of total receipts in 2022–23 — this is projected to rise to 93.9 per cent by 2062–63.

Tax projections in the Intergenerational Report reflect the assumption that tax as a share of the economy remains constant at 24.4 per cent of GPD — this is a feature of every intergenerational report.

Structural changes in the economy will narrow the tax base

Changing consumer preferences, rapid technological advances, efforts to decarbonise and a more complex global strategic outlook are projected to directly impact the tax system.

In particular:

  • tax receipts from traditional sources, such as fuel excise and tobacco excise, are expected to decline over time
  • global demand for bulk commodities, and reliance on them as a source of company tax revenue, is expected to fall
  • personal income tax receipts are projected to increase due to income and wages growth and population growth.

Total tax projections

After falling to a recent low of 21.8 per cent of GDP in 2019–20, the tax-to-GDP ration is now forecast to reach 23.9 per cent in 2023–24, and 24.4 per cent in 2033–34.

Chart 1

Chart 2

A significant difference between Australia and most other OECD countries is that Australia’s tax mix does not include social security contributions (similar in many respects to compulsory superannuation contributions).

Personal income tax is projected to increase from 13.5 per cent of GDP in 2033–34 to 14.3 per cent in 2062–63.

Composition of taxes

Longer-run economic trends will influence the composition of tax receipts. These include increased take up of electric vehicles and reduced smoking rates.

In the absence of policy change, the following changes over the next 40 years are projected:

  • personal income tax receipts to grow from 50.5 per cent of total tax receipts to 58.4 per cent
  • company tax receipts to fall from 23.5 per cent of total tax receipts to 18 per cent
  • GST receipts to stay broadly level, from 13.9 per cent to 14 per cent
  • other indirect taxes to decline from 8.6 per cent to 5.6 per cent.

Chart 3

 

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Proposed reforms to address tax adviser misconduct

Posted on by Vic Stevens

The Albanese Government has released its plans for what it calls the ‘biggest crackdown on tax adviser misconduct in Australian history’, to address tax adviser misconduct and perceived shortcomings in regulatory frameworks in the wake of the PwC tax leaks scandal.

The Government will introduce legislation later this year.

The Government’s proposed reforms

The proposed reforms focus on three priority areas:

  • Strengthening the integrity of the tax system
  • Increasing the powers of the regulators
  • Strengthening regulatory arrangements to ensure they are fit for purpose.

1.             Strengthening the integrity of the tax system

The Government proposes to reform elements of the promoter penalty laws.

Background

The promoter penalty laws — found in Div 290 of Schedule 1 to the TAA — provide that an entity must not engage in conduct that results in:

  • that or another entity being a promoter of a tax exploitation scheme, or
  • a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling.

Exclusions and exceptions include:

  • employees or other entities that have only minor involvement
  • conduct that occurred by reasonable mistake or accident
  • something outside an entity’s control and the entity took reasonable precautions.

Proposal — increasing maximum penalties

To increase maximum penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to over $780 million.

Current law

The ATO must apply to the Federal Court of Australia to impose a civil penalty. (The ATO may also consider various forms of corrective action.)

From 1 July 2023, a penalty unit is equal to $313 (previously $275 from 1 January to 30 June 2023).

Currently the maximum penalty is the greater of:

  • twice the consideration received or receivable by the entity or its associates — directly or indirectly — in respect of the scheme, or
  • per the following table

Table

While the media release does not provide details of the proposed new penalty regime, it is clear that the number of penalty units imposed will increase 100-fold for a body corporate, which is $782,300,000 at the current penalty unit value (i.e. the ‘over $780 million’ per the media release). The announcement is silent as to how much — and whether — the maximum penalty for individuals will increase.

Proposal — expanding the scope

To expand their scope so they are easier for the ATO to apply to advisers and firms who promote tax avoidance.

Current law

An entity is a promoter of a tax exploitation scheme if:

  • the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and
  • the entity or an associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and
  • having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.

An entity is not a promoter of a scheme merely because it provides advice about the scheme.

An employee is not taken to have had a substantial role in respect of the marketing or encouragement merely because they distributed information or material prepared by another entity.

It is currently unclear as to which elements will be amended to expand the scope of the promoter penalty regime.

Proposal — increasing time limit

To increase the time limit for the ATO to bring Federal Court proceedings on promoter penalties from four years to six years after the conduct occurred.

Current law

The Commissioner must apply to the Federal Court no later than four years after the entity last engaged in the relevant conduct. However, there is no time limit where the scheme involves tax evasion.

2.             Increasing the powers of the regulators

The below is a summary of the proposed reforms (what we know so far) compared to the current rules:

Proposal — tax secrecy laws

To remove limitations in the tax secrecy laws that were a barrier to regulators acting in response to PwC’s breach of confidence.

Current law

The tax law secrecy rules in Div 355 of Schedule 1 to the TAA provide that it is an offence for an ATO officer to disclose ‘protected information’. There are existing exceptions for certain disclosures made to a law enforcement agency, court or tribunal for the purposes of law enforcement.

Proposal — referral of ethical misconduct

To enable the ATO and Tax Practitioners Board (TPB) to refer ethical misconduct by advisers — including but not limited to confidentiality breaches — to professional associations for disciplinary action.

Current law

Where the TPB finds that a practitioner’s conduct breaches the Tax Agent Services Act 2009 (TASA), the TPB is required to notify any recognised professional association of which the practitioner is a member.

Proposal — whistleblower protection

To protect whistleblowers when they provide the TPB with evidence of tax agent misconduct.

Current law

There are existing whistleblower protection laws for eligible disclosures under Part IVD of the TAA. To qualify for protection the disclosure must be made to an eligible recipient, which includes the ATO and certain entities associated with the entity the subject of the disclosure, but does not include the TPB.

Proposal — more time for TPB investigations

To give the TPB more time — up to 24 months — to complete complex investigations.

Current law

The TPB has the power to investigate breaches of the Code of Professional Conduct (which is codified in the TASA) but it must make a decision about the outcome of an investigation within six months after the investigation commences.

Proposal — improving public register

To improve the TPB’s public register of practitioners, so that people have more transparency over agent and firm misconduct.

Current law

The register discloses any conditions of registration, period of and reasons for suspension, sanctions imposed, and date of and reason for termination. The TASA requires the TPB to maintain a register. Regulations prescribe the details disclosed.

3.             Strengthening regulatory arrangements

Treasury will be co-ordinating a whole of Government response to the PwC matter and the systemic issues raised. This work will deliver options to Government progressively over the next two years.

Consultation on the following options will begin in the coming months:

  • implementing remaining recommendations from the independent review of the TPB, including strengthening the range of sanctions available to the TPB (see the final report of Treasury’s Review of the Tax Practitioners Board)
  • a Treasury review of the promoter penalty laws to ensure that they address the types of promoter activity prevalent today — including schemes that are bespoke, complex, and/or operate across jurisdictional boundaries
  • a Treasury review of emerging fraud and threats to clamp down on systemic abuse of our tax system perpetrated by tax agents and other bad actors
  • a Treasury and Attorney‑General’s Department joint review of the use of legal professional privilege in Commonwealth investigations, with options for Government to respond to concerns that some claims of privilege are being used to obstruct or frustrate investigations
  • a Treasury examination of the regulation of consulting, accounting and auditing firms to consider whether reforms are needed. This work will require collaboration with states and territories, given cross‑jurisdictional regulation of partnerships, as well as engagement with ongoing Parliamentary committee inquiries
  • a Treasury review of the compulsory information gathering powers of the ATO to ensure it has the right tools to perform its role effectively and enable it to assist law enforcement agencies to investigate serious criminal offences perpetrated against the tax and superannuation systems
  • a Treasury review of the secrecy provisions that apply to the ATO and TPB to consider whether there are further circumstances in which it is in the broad public interest for information obtained by these regulators to be shared with other regulatory agencies
  • a Department of Finance review into the use of confidentiality arrangements across all Government agencies to ensure they are fit for purpose, legally binding and enforceable. The review will also identify opportunities to strengthen the management of conflicts of interest in contracts
  • a Department of Finance review to explore options to increase the transparency and visibility of where Commonwealth contracts have been terminated for material breach.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 14 locations across Australia.

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The new-look ATO Charter

Posted on by Vic Stevens

The ATO has launched its refreshed ATO Charter — previously known as the Taxpayers’ Charter. The ATO Charter explains what people can expect when they interact with the ATO, the ATO’s commitments to them, what the ATO asks of them, and steps people can take if they are not satisfied.

The community consultation leading to the revision of the Charter was ‘inaccessible, dense and did not reference the ATO’s support for people with vulnerabilities or those impacted by difficult times’.

The refreshed Charter has been streamlined but contains links to detailed information on specific topics. The PDF version — as a chapter of the ATO’s ‘Commitments and reporting’ document — is around five pages long.

The new Charter also contains a specific commitment for ‘support and assistance’ in dealing with vulnerabilities and crises, and makes more prominent information about the steps people can take if they are not satisfied.

Note that ATO interactions with tax agents — through which almost two-thirds of individuals lodge — and other professional intermediaries are not comprehensively covered in the Charter, although there is a commitment that the ATO will work with taxpayers’ representatives.

Further, to reflect the ATO’s digital strategy, the Charter commits to providing services digitally except where an alternative approach is more appropriate, and there is a commitment to ensure cyber security over taxpayers’ digital data.

The web-based ATO Charter is available here — at Our Charter. It has been translated into 25 languages and there is also an ‘easier to read’ version. In addition, a downloadable three-page PDF pamphlet is available here.

This article summarises the contents of the new Charter.

Note: the below summary uses the terminology in the Charter — i.e. ‘we’/’us’ refers to the ATO and ‘you’ refers to the taxpayer.

About our Charter

We want to ensure that every time you work with us your experience is ‘easy and professional’.

The Charter:

  • explains what you can expect when they interact with us
  • applies to everyone who works with us
  • is based on laws, codes and principles we both must follow.

There are also steps you can take if you disagree with a decision or believe we have not followed the Charter.

Our commitment to you

Fair and reasonable treatment

Our relationship with you is based on mutual trust and respect. We are committed to being fair, ethical and accountable in everything we do.

We will:

  • treat you with courtesy, consideration and respect
  • act with honesty and integrity
  • be impartial and act in good faith
  • treat you as being honest unless we have reason to think otherwise and give you an opportunity to explain
  • work with people you have chosen to represent you, such as a professional advisor.

Professional service

We know your rights and obligations under the law can be complex. We aim to provide you with reliable, accessible and useful information and service to help you understand your rights and meet your obligations.

We will:

  • be responsive and provide timely, accurate and easy-to-understand information
  • work with the community to design our products and services to be easy-to-use and inclusive
  • provide our services digitally except where an alternative approach is more appropriate.

Support and assistance

We understand people may need help in different ways, at different times. We know it may be harder for you to meet your obligations if you are experiencing vulnerability, difficult times or are impacted by crisis events. While we can’t remove your obligations in most cases, there may be ways we can assist you to meet them.

We will:

  • listen to your circumstances and take them into account where we can
  • provide support during crisis events and difficult times
  • provide assistance if you need help understanding or accessing our services.

Security of your data and privacy

We take the responsibility to protect your information and data very seriously. We know how important the privacy and security of your personal information is in the modern digital world.

We will:

Keep you informed

We are committed to being transparent and accountable in our interactions with you and the community.

We will:

  • explain our decisions
  • keep you informed of our progress
  • communicate and explain your rights, obligations and review options
  • give you access to your information, and information that helps us make decisions, where appropriate.

What we ask of you

You will have a range of obligations under the law depending on your circumstances.

  • Treat us with courtesy, consideration and respect.
  • Be truthful and act within the law.
  • Respond to our queries on time and provide us with all relevant information. We may ask you questions or gather more information to ensure what we understand is correct and current.
  • Let us know if someone is representing you. You are still responsible for ensuring the information given to us is accurate.
  • Meet your obligations including lodging and paying on time. If you can’t, let us know as early as possible before the due date so we can support you.
  • Keep good records and provide them to us when needed.
  • Take care to keep your identity information safe and let us know if your details change.

Steps to take if you would like a decision reviewed

If you believe we have made a mistake in our decisions, we will:

  • work with you to address your concerns as quickly and simply as possible
  • help you understand how it applies to your circumstances
  • outline your options including legal review rights and how to make a complaint.

As a first step, discuss your concerns with us. You can also request to have many of our decisions reviewed by an independent officer who was not involved in the original decision.

If you disagree with our internal review, you can ask for an external review. In most cases, you need to have requested an internal review with us and be dissatisfied with the outcome before seeking an external review.

Depending on the type of decision you are objecting to, you may have a variety of options for external review such as the courts or tribunals.

Steps to take if you are not satisfied with our service

There are several steps you can take if we have not met your expectations, or you think we have not followed our Charter:

  • As a first step, discuss your concerns with an ATO officer who will try to resolve your issue.
  • If you’re not satisfied, you may ask to talk to a manager.
  • If this still does not address your concerns, you can provide feedback to improve our processes or lodge a formal complaint.

We treat all complaints seriously and aim to resolve them quickly and fairly.

Making a complaint will not affect your relationship with us.

If you are not satisfied after making a complaint with us, you can contact the Inspector-General of Taxation and Taxation Ombudsman for an independent investigation.

You can also apply for compensation from us if you:

  • believe our actions gave rise to a legal liability
  • have financial losses caused by our defective administration.

About the former Taxpayers’ Charter

The previous Taxpayers’ Charter was introduced in July 1997 and was one of the first ‘service’ charters introduced by a Commonwealth agency. It set out the way the ATO was to conduct itself when dealing with taxpayers. It consisted of two overview booklet and ten supporting booklets. It explained 13 Charter principles (taxpayer rights) and outlined six taxpayer obligations.

The original Charter gave a commitment to be independently reviewed every three years. The inaugural review was delayed to incorporate the impact of tax reform (A New Tax System). A revised Charter was released in November 2003.

The Charter has undergone a number of internal and external reviews over the years. Interested readers may refer to the Inspector-General of Taxation’s thought-leadership paper A brief history of the Taxpayers’ Charter (released in November 2021) for a detailed account of the history and development of the Charter, including review findings and recommendations.

The most recent ATO review of the Charter commenced in July 2021 with a public consultation period in September-October 2022.

Taxpayers’ rights and obligations as set out in the former Taxpayers’ Charter are below.

Your rights

You can expect us to:

  • treat you fairly and reasonably
  • treat you as being honest unless you act otherwise
  • offer you professional service and assistance
  • accept you can be represented by a person of your choice and get advice
  • respect your privacy
  • keep the information we hold about you confidential
  • give you access to information we hold about you
  • help you to get things right
  • explain the decisions we make about you
  • respect your right to a review
  • respect your right to make a complaint
  • make it easier for you to comply
  • be accountable.

Your obligations — what we expect of you

We expect you to:

  • Be truthful
  • Keep the required records
  • Take reasonable care
  • Lodge by the due date
  • Pay by the due date
  • Be cooperative

ATO service commitments

While not forming part of the Charter, the ATO’s service commitments are relevant to this topic and also to the current Tax Time. Detailed information is available here.

The ATO’s 2023–24 service commitments are as follows:

Table 1

The ATO’s part year performance against its service commitments for 2022–23 is published here.

Tax time tools and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 17 locations across Australia.

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Small Business Energy Incentive draft legislation released

Posted on by Vic Stevens

The Government has now released exposure draft legislation to implement the Small Business Energy Incentive (SBEI) first announced on 30 April 2023.

The SBEI is a temporary measure to support small businesses (with aggregated annual turnover of less than $50 million) in improving their energy efficient and save on energy bills. The incentive will take the form of a bonus deduction equal to 20 per cent of eligible expenditure, capped at a $20,000 deduction ($100,000 expenditure). The bonus deduction will only apply to eligible expenditure incurred from 1 July 2023 to 30 June 2024. While the legislation is still in exposure draft form, if and when it is enacted it will have retrospective application from 1 July 2023.

Note: all examples in this article are taken or adapted from the draft explanatory materials.

The draft legislation proposes to amend the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997). This table sets out a summary of the key elements of the SBEI.

Table 1

Eligible entities

An entity will be eligible for the bonus deduction if, in the income year in which the asset is first used or installed, or the improvement cost is incurred, it is:

  • a ‘small business entity’ under s. 328-110 of the ITAA 1997 — i.e. an entity that carries on business with an aggregated annual turnover of less than $10 million, or
  • an entity that would meet the definition of an SBE under s. 328-110 of the ITAA 1997 if the reference to $10 million was replaced by a reference to $50 million.

Eligible expenditure

The bonus deduction will be calculated based on eligible incurred expenditure which is:

  • for an eligible depreciating asset first used or installed or an eligible improvement to a depreciating asset
  • incurred between 1 July 2023 and 30 June 2024 (the bonus period)
  • deductible under another provision of the tax law.

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Depreciating assets

Expenditure on a depreciating asset is eligible for the bonus deduction in any of the following situations.

1.         Assets that use electricity instead of a fossil fuel

An asset is eligible for the bonus deduction if there is a new reasonably comparable asset that uses a fossil fuel available in the market, and the asset instead uses electricity.

Table 2

An asset will not qualify for the bonus deduction if the only reasonably comparable asset that uses a fossil fuel is a second-hand asset.

2.         Assets that use electricity more efficiently

If the asset is replacing another depreciating asset, it must be more energy efficient than the asset it is replacing.

If the asset is not replacing another asset, then it must be more energy efficient than a new reasonably comparable asset available in the market at the time it is first used or installed ready for use for any purpose. The comparable asset cannot be a second-hand asset.

Table 3

3.         Assets that facilitate energy storage, efficiency or demand management

Demand management and enabling assets may be eligible for the bonus deduction:

  • an asset that allows another asset to be more energy efficient (as long as the other asset is not an excluded asset)
  • an asset that enables the storage of electricity, or the storage of energy that is generated from a renewable source — e.g. a battery that stores electricity or a thermal storage system that can store heat or cold from a renewable source, such as a solar thermal hot water system
  • an asset that allows energy to be consumed at a different time — e.g. a time-shifting device that allows electric appliances to be operated at off-peak hours
  • an asset that enables energy use to be monitored — e.g. a data logging device attached to a regular utility meter that enables a business to better measure their energy consumption.

Improvements to existing depreciating assets

Expenditure on an improvement to a depreciating asset is eligible in the following circumstances.

1.         Improvements enabling electricity use

An improvement that allows an asset to only use electricity, or to use energy generated from a renewable source may be eligible for the bonus deduction if, prior to the improvement, the asset could use energy from a fossil fuel.

Example: an electric motor that replaces a diesel engine in an asset, allowing that asset to only use electricity.

2.         Improvements to energy efficiency

An improvement that allows the asset to be more energy efficient may be eligible for the bonus deduction, provided the asset being improved uses electricity or energy generated from a renewable source.

Example: a variable speed drive fitted to an existing electric motor.

3.         Improvements facilitating energy storage, demand management or monitoring

An improvement that allows for energy use by an asset to be monitored, reduced at specific times, or confined to specific times may be eligible for the bonus deduction, provided the asset being improved uses electricity or energy generated from a renewable source.

Example: a switchboard-mounted device that enables the shifting of loads from peak times to off-peak times.

Eligible cost for assets (first element of cost)

For assets first used or installed for any purpose during the bonus period, expenditure that is included in the first element of cost may be eligible for the bonus deduction to the extent the asset is used for a taxable purpose.

This means that, if an entity first uses or installs an asset before 1 July 2023, the entity cannot claim a bonus deduction for the first element of cost of the asset. This is the case even if the entity does not use the asset for a taxable purpose until after 1 July 2023.

Eligible cost for improvements (second element of cost)

Expenditure on the part of the second element of cost of an asset that is incurred during the bonus period may be eligible for the bonus deduction. The time that the improvement or the asset being improved is used or installed is not relevant.

The second element of cost of an asset can only be claimed if it allows the asset to be more energy efficient, able to store energy, monitor energy use, use energy at a different time, or enable the asset to run solely on electricity or renewable energy.

The cost of an improvement to an asset can be claimed for assets first used or installed before or during the bonus period. This means that if an entity first uses or installs an asset during the bonus period, and also improves the asset during the bonus period, it can claim the bonus deduction for the first element of cost of the asset and for the cost of the improvement.

Table 4

Cost must be able to be deducted under another provision

The entity must be able to deduct the eligible expenditure under another provision of the taxation law, regardless of which income year or income years in which they claim the deduction.

Generally, the cost of an asset can only be deducted to the extent that that asset is used for a taxable purpose.

Therefore, if expenditure is for a mix of private and business use, the bonus deduction will only apply to the proportion of the expenditure that is for a taxable purpose.

The bonus deduction will be considered a specific deduction under Div 25 of the ITAA 1997.

note iconNote

The proposed amendments include a clarification that the following existing provisions of the ITAA 1997 which prohibit various double deductions will not prevent a taxpayer from claiming the bonus deduction:

      • 8-10 — which specifies that when multiple provisions allow for deductions, the taxpayer can deduct only under the provision that is most appropriate
      • 40-215 — which provides that each element of the cost of a depreciating asset is reduced by any portion of that element of cost that is deducted, can be deducted, or will be taken into account when working out the amount that can be deducted, other than under Divs 40, 41 or 328
      • 355-715 — which specifies that where a taxpayer is entitled to a notional deduction under the R&D regime and another deduction, then the taxpayer is only entitled to the notional R&D deduction, and not the other deduction.

Excluded assets and expenditures

Ineligible assets and expenditures are:

  • assets, and expenditure on assets, that can use a fossil fuel
  • assets which have the sole or predominant purpose of generating electricity
  • capital works
  • motor vehicles (including hybrid and electric vehicles) and expenditure on motor vehicles
  • assets and expenditure on an asset where expenditure on the asset is allocated to a software development pool
  • financing costs, including interest, payments in the nature of interest and expenses of borrowing.

Assets that can use a fossil fuel

If an asset can use a fossil fuel, then that asset and any expenditure on that asset is not eligible for the bonus deduction, unless that use is merely incidental.

This is the case even if, in practice, the asset predominantly or solely uses electricity, or other energy that is generated from a renewable source.

The only exception to this exclusion is an improvement that allows an asset to only use electricity, or other energy that is generated from a renewable source.

Table 5

Balancing adjustment events

An entity cannot claim the bonus deduction for the cost of a depreciating asset, or an improvement to a depreciating asset, if any balancing adjustment event occurs to the asset — for example the entity sells the asset — while the entity holds it during the bonus period (i.e. 1 July 2023 to 30 June 2024), unless the balancing adjustment event is an involuntary disposal.

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Calculating and claiming the bonus deduction

The amount of the bonus deduction is calculated as 20 per cent of the total amount of eligible expenditure, up to a maximum bonus deduction of $20,000 across the bonus period.

This means that total expenditure eligible for the bonus deduction is effectively $100,000 over the bonus period.

Not Yet Law 2Implications

An SBE taxpayer may be eligible to claim an immediate deduction for an asset costing under $1,000 under the instant asset write-off. Regardless of the method of depreciation deduction — i.e. whether immediate or over time — the bonus deduction in respect of a depreciating asset is calculated based on the asset’s cost.

Timing of claiming the bonus deduction

For depreciating assets first used or installed during the bonus period, entities must claim the bonus deduction in the income year in which the asset is first used or installed.

For improvements made to existing assets, entities must claim the bonus deduction in the income year in which the improvement cost is incurred.

For most taxpayers this will be the 2023–24 income year.

Early and late balancers may claim the bonus deduction across more than one income year — provided the eligible asset was first used or installed, or the improvement cost was incurred, during the bonus period. The $20,000 cap is a limit on the total bonus deduction that may be claimed, even if it is claimed across multiple income years.

Other implications

It is assumed that the entity will continue to hold the asset throughout its effective life; and:

  • if the bonus deduction is for the cost of an asset, the entity will use it for a taxable purpose to the same extent that it does in the income year it first uses or installs the asset for a taxable purpose, or
  • if the bonus deduction is for expenditure on an improvement, the entity will use it for a taxable purpose to the same extent that it does in the income year in which the expenditure is incurred.

The bonus deduction does not affect any other deductions.

The requirement that expenditure is deductible under a taxation provision means that there are certain exclusions to eligible expenditure. For example, if a business is registered for GST, the bonus deduction is calculated on the amount of expenditure less the GST amount claimable as an input tax credit. The GST component of expenditure that is claimed as an input tax credit is not deductible.

Tax time tools and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 17 locations across Australia.

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ATO’s taxation statistics for 2020–21

Posted on by Vic Stevens

The ATO recently released its Taxation statistics 2020–21. This annual publication shows statistics from lodged tax returns and schedules for the relevant income year.

The publication covers:

  • individuals
  • companies
  • superannuation funds
  • partnerships
  • trusts
  • industry benchmarks.

The publication also covers the 2021–22 year relating to GST, FBT and excise and fuel schemes.

This article presents a selection of the statistics available in relation to individuals.

Individuals

Lodgment trends

For 2020–21, 63.7 per cent of individual tax returns were lodged by an agent, 35.8 per cent were lodged through myTax and 0.6 per cent were by other means of self-lodgment.

Chart 4: Individuals — top 10 postcodes, by average taxable income

Chart 1

Chart 5: individuals — top 10 occupations, by average taxable income

Chart 2

Table 5: Individuals — Selected income items, 2019–20 to 2020–21 income years
(A selection of items only — refer to ATO statistics for the full list of income items)

Table 1

Table 6: Individuals — Selected deductions, 2019–20 to 2020–21 income years
(A selection of items only — refer to ATO statistics for the full list of deduction items)

Table 2

Chart 10: Individuals — rental income and deductions, 2016–17 to 2020–21 income years

Chart 3

Chart 12: Individuals — median superannuation balance, by age and sex, 2020–21 financial year

Chart 4

Other statistics

Other 2020–21 statistics can be found at the following links:

Companies

Superannuation funds

Partnerships

Trusts

Industry benchmarks

GST

Excise and fuel schemes

FBT

Tax time tools and training

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Small business technology boost and training boost now enacted — what it means for 30 June 2023

Posted on by Vic Stevens

The Treasury Laws Amendment (2022 Measures No. 4) Act 2023 passed both Houses of Parliament on Thursday 22 June 2023 and received Royal Assent on Friday 23 June 2023.

The Act introduces the technology investment boost and the skills and training boost for small businesses (with aggregated annual turnover of less than $50 million). Both boosts allow eligible businesses to claim a ‘bonus’ tax deduction equal to 20 per cent of qualifying expenditure. This article outlines how the rules for both boosts work, and the practical implications for this final week of the 2022–23 financial year.

The Act amends the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997).

The following table is a handy summary:

Table 1 Blog

Small business skills and training boost

The skills and training boost provides a bonus deduction for small businesses that incur eligible expenditure on external training for their employees between 7.30 pm (AEDT) on 29 March 2022 and 30 June 2024.

The bonus deduction is calculated as 20 per cent of the amount of expenditure that is both eligible for the bonus deduction and deductible under another taxation law provision.

Eligible entities

An entity will be eligible for the bonus deduction if, in the income year the expenditure is incurred, it is:

  • a ‘small business entity’ under s. 328-110 of the ITAA 1997 — i.e. an entity that carries on business with an aggregated annual turnover of less than $10 million
  • an entity that would meet the definition of an SBE under s. 328-110 of the ITAA 1997 if the reference to $10 million was replaced by a reference to $50 million.

Eligible expenditure

The bonus deduction will be calculated based on eligible incurred expenditure which meets the following criteria:

  • the expenditure must be for training employees, either in-person in Australia, or online
  • the expenditure must be charged, directly or indirectly, by a registered training provider and be for training within the scope of the provider’s registration
  • the registered training provider must not be the small business or an associate of the small business
  • the expenditure must already be deductible under the taxation law
  • the expenditure must be incurred within a specified period — between 7.30 pm (by legal time in the ACT) on 29 March 2022 and 30 June 2024
  • the expenditure must be for the provision of training, where the enrolment or arrangement with the registered training provider for the provision of the training occurs at or after 7.30 pm (by legal time in the ACT) on 29 March 2022. That is, payment made for an invoice received within the eligible timeframe is not eligible if the training was delivered prior to that timeframe.

The Explanatory Memorandum notes that the cost of in-house or on-the-job training is not eligible expenditure for the purpose of the bonus deduction.

The training provider must be registered with at least one of the following government authorities: Australian Skills Quality Authority (ASQA) (within the meaning of the National Vocational Education and Training Regulator Act 2011); Tertiary Education Quality and Standards Agency (TEQSA) (within the meaning of the Tertiary Education Quality and Standards Agency Act 2011); Victorian Registration and Qualifications Authority (within the meaning of the Education and Training Reform Act 2006 (Vic)); or Training Accreditation Council of Western Australia (within the meaning of the Vocational Education and Training Act 1996 (WA)).

Expenditure for training persons other than employees is not eligible — i.e. the bonus deduction is not available for the training of non-employee business owners such as sole traders, partners in a partnership and independent contractors.

Relevant time periods

Table 2

Calculating and claiming the bonus deduction

The amount of the bonus deduction is calculated as 20 per cent of the total amount of eligible expenditure. Unlike the technology investment boost, there is no cap on the bonus dedduction.

Tax return disclosures

The ATO’s 2023 tax return stationery includes new disclosures for the skills and training boost:

Table 3

Web Buttons (3)

Summary of implications for 30 June 2023

The skills and training boost runs until 2023–24. An eligible entity will be able to claim the bonus deduction next year if they do not manage to incur the expenditure by 30 June 2023.

The expenditure may be incurred in a different year to the year in which the training is delivered. The bonus deduction is calculated in relation to the year in which the expenditure is incurred. There is no requirement that the training must have been delivered by the end of the income year in which the bonus deduction is claimed, i.e. if expenditure is incurred on 29 June 2023 but the training is provided on 3 July 2023, the boost is deductible in 2022–23. However the boost cannot be claimed where the training was provided before 7.30 pm (by legal time in the ACT) on 29 March 2022 even if the expenditure was not incurred until after that time.

The bonus deduction has no effect on the year in which the expenditure is deductible under another provision of the law. For example, a deduction under s. 8-1 may be claimable in 2021–22 while the boost is claimed in 2022–23.

If an eligible entity incurred qualifying expenditure in 2021–22, there is no need to amend the 2021–22 tax return — the bonus deduction is only to be claimed in the 2022–23 tax return.

Table 4

Table 5

Small business technology investment boost

The technology investment boost provides eligible businesses with access to a bonus deduction equal to 20 per cent of their eligible expenditure incurred on expenses and depreciating assets for the purposes of their digital operations or digitising their operations between 7.30 pm (AEDT) on 29 March 2022 and 30 June 2023.

To be eligible for the bonus deduction:

  • the expenditure must be eligible for a deduction under another provision of the taxation law
  • the expenditure must be incurred between 7.30 pm (by legal time in the ACT) on 29 March 2022 and 30 June 2023
  • if the expenditure is on a depreciating asset — the asset must be first used or installed ready for use by 30 June 2023.

In respect of each of the 2021–22 and 2022–23 income years, eligible businesses may claim a bonus deduction equal to the lower of:

  • 20 per cent of eligible expenditure incurred in that income year
  • $20,000.

Eligible entities

An entity will be eligible for the bonus deduction if, in the income year the expenditure is incurred, it is either:

  • a ‘small business entity’ under s. 328-110 of the ITAA 1997 — i.e. an entity that carries on business with an aggregated annual turnover of less than $10 million, or
  • an entity that would meet the definition of an SBE under s. 328-110 of the ITAA 1997 if the reference to $10 million was replaced by a reference to $50 million.

Eligible expenditure

To be eligible for the bonus deduction, expenditure must be incurred wholly or substantially for the purposes of an entity’s digital operations or digitising the entity’s operations. That is, the eligible expenditure must have a direct link to the entity’s digital operations for its business.

According to the Explanatory Memorandum, expenditure on digital operations or digitising operations may include, but is not limited to, business expenditure on:

  • digital enabling items — computer and telecommunications hardware and equipment, software, internet costs, systems and services that form and facilitate the use of computer networks
  • digital media and marketing — audio and visual content that can be created, accessed, stored or viewed on digital devices, including web page design
  • e-commerce — goods and services supporting digitally ordered or platform enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud‑based services, and advice on digital operations or digitising operations, such as advice about digital tools to support business continuity and growth, or
  • cyber security – cyber security systems, backup management and monitoring services.

note iconNote

To claim the bonus deduction for an amount of expenditure, the entity must be able to deduct the eligible expenditure under another provision of the taxation law, regardless of which income year they claim the deduction.

Depreciating assets

An entity can claim the bonus deduction for expenditure on a depreciating asset only if the asset is first used, or installed ready for use, before 1 July 2023. This rule does not apply to expenses incurred in the development of in-house software allocated to a software development pool, consistent with current pooling rules.

An entity cannot claim the bonus deduction for expenditure on a depreciating asset if any balancing adjustment event occurs to the asset while the entity holds it during the relevant time period, unless the balancing adjustment event is an involuntary disposal. This means, for example, that an entity cannot claim the bonus deduction if it sells the asset within the relevant time period.

Exclusions

Some types of expenditure are ineligible for the bonus deduction even where they would otherwise meet the requirements. These are:

  • salary and wage costs
  • capital works costs which can be deducted under Div 43 of the ITAA 1997
  • financing costs
  • training and education costs
  • expenditure that forms part of, or is included in, the cost of trading stock.

Relevant time periods

Table 6

Calculating and claiming the bonus deduction

The amount of the bonus deduction is calculated as 20 per cent of the total amount of eligible expenditure, up to a maximum bonus deduction of $20,000 per time period (i.e. income year).

This means that total expenditure eligible for the bonus deduction is effectively $100,000 over each time period, with a maximum bonus deduction of $20,000 per time period and an overall maximum total bonus deduction of $40,000.

Table 7

Claiming the bonus deduction for depreciating assets

For depreciating assets, the bonus deduction is equal to 20 per cent of the cost (within the meaning of Div 40 of the ITAA 1997) of an eligible depreciating asset that is used for a taxable purpose. This means that regardless of the method of deduction that the entity takes (i.e. whether immediate or over time), the bonus deduction in respect of a depreciating asset is calculated based on the asset’s cost.

When calculating the bonus deduction for expenditure on a depreciating asset, it is assumed that:

  • the entity will continue to hold the asset throughout its effective life
  • the entity will use the asset for a taxable purpose to the same extent that it does in the income year it first uses or installs the asset.

note iconNote

The temporary full expensing rules for Div 40 taxpayers and the uncapped instant asset write-off for SBEs, which both provide an immediate write-off for the cost of acquiring eligible depreciating assets in the year incurred, apply for 2022–23.

Table 8

Tax return disclosures

The ATO’s 2023 tax return stationery includes new disclosures for the technology investment boost:

Table 9

Summary of implications for 30 June 2023

The technology investment boost ends on 30 June 2023 (unlike the skills and training boost which runs for another year). Taxpayers with intentions to invest in the digitalisation of their business will only be able to benefit from the boost if they incur the expenditure by 30 June 2023 — i.e. the end of this week.

In addition, if the expenditure is incurred in the acquisition of a depreciable asset (other than in-house software), the asset must be first used, or installed ready for use, before 1 July 2023. This means that the business cannot place an order this week and take delivery next week, i.e. in July — the expenditure would not be eligible for the boost.

The bonus deduction has no effect on the year in which the expenditure is deductible under another provision of the law. For example, a deduction under s. 8-1 may be claimable in 2021–22 while the boost is claimed in 2022–23.

If an eligible entity incurred qualifying expenditure in 2021–22, there is no need to amend the 2021–22 tax return — the bonus deduction is only to be claimed in the 2022–23 tax return.

Tax time tools and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 17 locations across Australia.

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