FBT Guidance on Exempt Vehicle Travel

Earlier this year the ATO released draft guidance (it has since been finalised) on an FBT exemption for certain vehicle travel.

Two publications reported my views on this development.

Accountants Daily – https://www.accountantsdaily.com.au/tax-compliance/11501-proposed-fbt-guidance-welcomed

My Business – https://www.mybusiness.com.au/finance/4136-ato-clarifies-position-on-fbt-claims

If you have any questions about this exemption, please don’t hesitate to contact me.

Simon

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2018 FBT update and FBT on Motor Vehicles

In April of this year I wrote an article for Tax & Super Australia’s ‘The Taxpayer’ journal about the most important changes in Fringe Benefits Tax over the previous year. The piece was titled “5 Things That Happened in FBT While You Weren’t Looking”. If you would like a pdf copy of this article, please get in contact with me. I would be happy to share a copy.

Around that time I also recorded two podcasts on the topic. These can be found here – https://www.taxandsuperaustralia.com.au/TSA/Products_Services/Professional_Development/Podcast/TSA/Publications/Tax_Wrap_podcast.aspx. Look for episodes 163 and 164.

If you have any questions about FBT, please don’t hesitate to contact me.

Simon

What tax should the Federal Government reform and why?

That was the question that the Institute of Public Accountants asked me and three others for their ‘Public Accountant’ journal. My response was as follows:

“In my opinion, the CGT discount.

A good tax is one that is fair – imposing a higher burden on those with greater means to pay, efficient – imposing minimal distortions to the operation of the free market and simple – imposing minimal costs (in terms of time and advisor fees) on taxpayers. The CGT discount (and in particular the level it is set at) may be simple, but it is also too generous and, as a result, fails the first two of those tests miserably.

Capital gains are disproportionately made by wealthier Australians (who are more likely to have surplus funds to invest) and therefore they receive a disproportionate share of the benefits of the discount. This is illustrated by the fact that the two electorates that benefited most from the discount encompass Point Piper in Sydney and Toorak in Melbourne. I think that government funds could be better spent.

Furthermore, the CGT discount encourages taxpayers to structure their affairs in a way that favours capital investment over actions or investments that lead to other forms of income. When combined with negative gearing, this is a key driver of Australia’s red-hot property market. While there are good reasons to encourage investment, I don’t believe they are sufficient to justify a 50% discount after only 12 months.

How would I reform the CGT discount? There are a number of good options but one to consider would be to bring in a rough approximation of indexation. Apply the discount to capital gains at the rate of 5% per full year that the CGT asset is held, capped at 50% after 10 years. I believe would strike the right balance between encouraging investment without distorting the market too much or providing a free kick to those who need it least.”

If you’re interested to see a pdf of the article (and what the other three people said), I’d be happy to share a copy with you. Just send me a message.

Simon

P.S. Please feel free to share your thoughts on the topic in the comments section below. I’d be curious to hear from any readers.

Getting the small business CGT concessions right

A while back (apologies for not updating this blog) I recorded a podcast with Tax & Super Australia on the small business CGT concessions.

You can listen to the podcast here – https://www.taxandsuperaustralia.com.au/TSA/Products_Services/Professional_Development/Podcast/TSA/Publications/Tax_Wrap_podcast.aspx. Look for episode 154 entitled ‘Untangling the small business CGT concessions’.

I also wrote an accompanying article that looks at the topics discussed in more detail. That article was published in the June 2017 edition of The Taxpayer. It is titled “11 tips and traps for navigating the small business CGT concessions”.

I’d be happy to share a pdf copy of the article if you are interested. Just send me a message.

Simon

 

2018 FBT: Half Yearly Update

With the 2018 FBT year already more than half over, it is time to review some of the most significant areas of FBT changes over the period 1 April 2017 to 30 September 2017.

 

Draft Tax Ruling on employees’ travel expenses

The Commissioner has issued Draft Taxation Ruling TR 2017/D6 which sets out the ATO’s views on general principles for determining whether an employee can deduct travel expenses under s 8-1 of the ITAA 1997. When the final ruling is issued, it is proposed to apply both before and after its date of issue.

 

A travel expense is an expense relating to:

  • Transport by airline, train, car, bus or other vehicle, or
  • Accommodation, meal and incidental expenses of an employee when they travel away from home for work.

 

The draft ruling sets out general principals as well as particular issues relating to (ordinary home to work travel, special demands travel, co-existing work locations travel and relocation travel.

The ruling contains many examples to illustrate how to determine the deductibility of travel expenses in a range of situations.

 

FBT technical discussion paper on taxis

The ATO has issued a technical discussion paper TDP 2017/2 on the definition of “taxi” under the FBT Act. under s 58Z of the Act, taxi travel undertaken by an employee to or from work or due to illness is exempt. At present a “taxi” only covers vehicles licensed by the relevant state or territory to operate as a taxi. The ATO is reviewing this definition in light of the Uber B.V. v FC of T decision (which dealt with the definition of taxi in the context of GST).

 

New occupational clothing guidelines

The government has issued new approved occupational clothing guidelines, replacing the 2006 version. These set out the criteria that designs of non-compulsory uniforms must meet if the designs are to be entered on the Register of Approved Occupational Clothing which is maintained by AusIndustry. One of the ways to ensure that employee expenditure on uniforms is eligible as a tax deduction is for the design to be entered on this Register.

Draft ruling on employee remuneration trusts

The ATO has issued Draft Taxation Ruling TR 2017/D5 which sets its views on how the taxation laws apply to an employee remuneration trust (ERT) arrangement that operates outside of Div 83A of the ITAA 1997.

 

An ERT arrangement involves a trust being established to facilitate the provision of payments and/or other benefits to employees. The ruling considers the consequences for the employer, particularly when contributions will be deductible. It also deals with the consequences for employees in terms of when they may be assessed on contributions or deemed dividends.

 

The draft ruling replaces Draft Taxation Ruling TR 2014/D1. When the final ruling is issued, it is proposed to apply both before and after its date of issue.

 

 

FBT car parking threshold for 2017/18

The ATO released Taxation Determination TD 2017/14, which states that the car parking threshold for the FBT year commencing on 1 April 2017 is $8.66. This is up from $8.48 for the previous FBT.

 

ATO guidance withdrawn

The ATO has withdrawn numerous Tax Rulings, Determinations and Interpretative Decisions of relevance to FBT. These include:

  • ATO ID 2002/616 dealing with deductibility of accommodation expenses for a person who lives a long distance from their work place, and
  • ATO ID 2002/807 dealing with deductions on meal expenses while on overnight business travel.
  • ATO ID 2001/120 Fringe benefits tax “otherwise deductible’” rule
  • ATO ID 2010/178 Deductibility of income protection premiums.
  • ATO ID 2002/616 dealing with deductibility of accommodation expenses for a person who lives a long distance from their work place, and
  • ATO ID 2002/807 dealing with deductions on meal expenses while on overnight business travel.
  • Various Tax Determinations (TDs) setting out rates and thresholds for the 2012 FBT year
  • IT 112 Income tax: Deductibility of travelling expenses between residence and place of employment or business.
  • IT 113 Income tax: Computer consultant — travelling expenses between home and place of employment.
  • MT 2030 Fringe benefits tax: living-away-from-home allowance benefits.
  • TD 93/113 Income tax: are the costs incurred by teachers when travelling between their home and their regular school to attend Parent and Teacher meetings, sports and other school functions allowable as a deduction under subsection 51(1) of the Income Tax Assessment Act 1936?
  • TD 93/174 Income tax: does the receipt of a travel allowance automatically entitle an employee to a deduction for travel expenses under section 8-1of the Income Tax Assessment Act 1997?
  • TD 96/7 Fringe benefits tax: is fringe benefits tax (FBT) payable on meals and accommodation provided to employees who work at remote construction sites, where the accommodation is not the usual place of residence of the employee?

 

Class rulings issued

The ATO has issued numerous class rulings. I suggest you visit law.ato.gov.au to view the full list.

Taxing Issues for Departing Taxpayers

The following article originally appeared in the November 2016 edition of The Taxpayer (professional journal of Tax & Super Australia https://www.taxandsuperaustralia.com.au/TSA/Products_Services/Publications/The_Taxpayer/TSA/Publications/The_Taxpayer.aspx)

 

Simon Dorevitch explains the potential tax issues that taxpayers encounter when relocating overseas.

It is estimated that approximately 5% of Australian citizens live outside of Australia, with
Europe and Asia the most popular destinations. If your client has made the decision to relocate to another country (whether permanently or for an extended period), they should be aware of two potential tax issues:
1. When a taxpayer becomes a non-resident of Australia, they are deemed to have sold
their non-Australian assets for market value (CGT event I1). However, such taxpayers
may make an election to disregard any capital gain and thereby defer any tax payable.

2. Thanks to recent changes, Australians living abroad must now report their income
and make repayments towards their HELP (university) and TSL (apprenticeship) debts
if their income exceeds a certain threshold. These changes have effectively brought the
repayment obligations of Australians living overseas in line with those living in Australia.

 

A SILENT TAXING POINT: CGT EVENT I1

Generally, the assessable income of taxpayers who are tax residents of Australia includes
income from all sources, whether in or out of Australia. In contrast, the assessable income of foreign residents generally only includes income with an Australian source.
In the context of CGT, this means that foreign residents disregard capital gains or losses that happen in relation to a CGT asset that is not taxable Australian property (TAP)
Broadly, TAP includes:

• taxable Australian real property (TARP) – eg land or buildings situated in Australia
(including a lease of land if the land is situated in Australia). It can also include
mining rights.

• indirect Australian real property Interests – ie a membership interest in another entity,
where the interest is a non-portfolio interest (10% or more) and the entity passes the
principal asset test (market value of TARP assets exceeds market value of non-TARP
assets)

• A CGT asset used in carrying on a business through an Australian permanent establishment, and

• An option or right to acquire one of the above assets.

Where a taxpayer ceases to be an Australian resident those assets that are not TAP are taken outside the remit of the Australian tax system. As you might imagine, the government does not like this, so CGT Events I1 and I2 were included in the legislation to tax these assets before they fell out of Treasury’s grip.

 

WHEN DOES CGT EVENT I1 HAPPEN?
CGT event I1 happens when an individual or company stops being an Australian resident. For an individual taxpayer, this will occur when they no longer satisfy any of the four tests of residency – the resides test, the domicile test, the 183-day test and the superannuation test.

In certain situations, it may be difficult to pinpoint precisely when a taxpayer ceases to
be a resident (or even if they ceased being a resident at all). Where such timing could have a significant impact on the taxpayer’s liability it may be prudent to seek a private ruling from the ATO.

WHAT ARE THE CONSEQUENCES OF CGT EVENT I1 HAPPENING?

The taxpayer is deemed to have disposed of their non-TAP assets, and also their indirect
Australian real property interests, for their market value at the time. Therefore, they make a capital gain if the market value is more than their cost base and a capital loss if the market value is less than the reduced cost base.

There are, however, exceptions:
• A capital gain or loss is disregarded if theasset was acquired before 20 September 1985 (ie before the introduction of CGT).
• If the taxpayer is an individual, they may choose to disregard the capital gain or
loss. This choice is evidenced by how the taxpayer prepares their tax return (ie whether
the gain is included or excluded). Note that the choice is all in or all out – it cannot be
made per CGT asset.

 

The ATO has published a fact sheet that contains a rough “rule of thumb” to assist
emigrating taxpayers. Below is an extract from this fact sheet:

If you go overseas temporarily and do not set up a permanent home in another
country…then you may continue to be treated as an Australian resident for tax
purposes.

If you leave Australia permanently…then you will generally not be considered an Australian resident for tax purposes, from the date of departure.

 

WHAT ARE THE CONSEQUENCES OF MAKING THIS CHOICE?

If a taxpayer makes a choice to disregard the capital gain, the assets are taken to be TAP until the taxpayer disposes of the asset or becomes an Australian resident once more. Effectively, the assets are kept within the Australian tax system.
Note, however, that this may be overridden by a Double Taxation Agreement (DTA).

How the ATO will become aware of a foreign resident disposing of non-TAP assets is unclear, though it is noted that data-sharing between tax authorities has increased in recent years.
WHEN SHOULD THE CHOICE TO DISREGARD CGT EVENT I1 BE MADE?

In some cases the taxpayer will simply not have the cash to fund the CGT liability (since, being a deemed disposal, they have not actually received any capital proceeds). In those situations the choice to disregard any capital gain is clear.

In other cases, knowing whether it is in a taxpayer’s interests to make the choice requires a consideration of numerous factors and, ideally, a well-functioning crystal ball! The time between the CGT event and the lodging of the return is an important consideration (see table).

Keep in mind also that non-residents are subject to non-resident rates of tax and no longer have access to the CGT discount. This makes it more likely that the taxpayer will face higher taxation on the future capital gain if a choice is made to disregard the deemed gain.

It may be more favourable to make the choice where

 

It may be less favourable to make the choice where

 

The taxpayer’s taxable income is higher than it is expected to be in the year of disposal (since CGT is applied at marginal tax rates)

 

The taxpayer’s taxable income is lower than it is expected to be in the year of disposal (since CGT is applied at marginal tax rates)

 

The asset is expected to fall in value (and therefore the capital gain in the future will be lower)

 

The asset is expected to rise in value (and therefore the capital gain in the future will be greater)

 

Being able to defer payment to a later date is important

 

The taxpayer intends to return to Australia (and the market value is expected to rise whilst they are away)
The subsequent disposal will not be taxable in Australia (e.g. because of a DTA)  

Keep in mind also that non-residents are subject to non-resident rates of tax and no longer have access to the CGT discount. This makes it more likely that the taxpayer will face higher taxation on the future capital gain if a choice is made to disregard the deemed gain.

What if the taxpayer becomes a resident again?

On becoming a resident, a taxpayer is deemed to have acquired their non-TAP assets for market value. Therefore, a former resident, having not made the choice to disregard a capital gain from CGT event I1, who returns to Australia (and becomes a resident once more) receives an uplift in the cost base of their non-TAP assets. For CGT discount purposes, the date of regaining residency (and not the original date of actual acquisition) is used to determine whether the asset has been held for 12 months.

Example

In June 2016 James decides he has had enough of Australia and emigrates to France, vowing never to return. He is considered to have terminated his Australian residency at this time. Upon departure James owns the following assets:

·         A home in Toorak

·         An investment property in the United States

·         50% of the shares in Gemba Pty Ltd, a company whose major asset is a farm in NSW

When James’ Australian residency ends, CGT Event I1 happens. He is deemed to have disposed of his investment property and shares for their market value, triggering a capital gain.

James decides not to make the choice to disregard the gain. However, having been out of work since August 2015, James taxable income in the 2016 financial year is very low and therefore low marginal tax rates apply to the capital gain.

Five years later, with his favourite Australian sporting team competing for their fourth-straight premiership, James decides he misses Australia too much and returns permanently. He is deemed to have reacquired his investment property for its market value when he becomes an Australian resident once more. Any increases in value that occurred whilst he was in France will not be subject to Australian tax.

 

 

HELP Debts

In November 2015, the government passed legislation closing a loophole which enabled university graduates living overseas to avoid making student loan repayments. From 1 July 2017, the HELP (Higher Education Loan Program) and TSL (Trade Support Loan) repayment obligations for overseas residents will be brought in line with those who remain in Australia.

From 1 January 2016

Taxpayers with an existing HELP or TSL debt who leave Australia and intend to be overseas for more than six months in any 12-month period will need to need to notify the ATO within seven days of leaving Australia. Those who already live overseas will need to update their details no later than 1 July 2017.

It does not matter whether the taxpayer is overseas for work, study or travel.

Taxpayers should notify the ATO by updating their contact details, including international residential and email addresses, using the ATO’s online services via the myGov website. This means that, if they haven’t already, such taxpayers will need to register for a myGov account. The ATO should also be informed if there are any further changes to a taxpayer’s contact details whilst they reside overseas.

From 1 July 2017

Taxpayers who are living overseas and are not Australian residents for tax purposes will need to self-assess the world-wide income they have received in the 2016-17 financial year and submit details to the ATO via myGov. Foreign income will be translated to Australian dollars using the average exchange rate for the financial year.

They should do this, even if their income is below the threshold (or if they have not worked at all). Income details should be submitted by 31 October each year.

The ATO have indicated that, at this stage, their first priority is to educate taxpayers and encourage self-compliance. However, they have also confirmed that individuals who do not comply with their obligations will potentially be subject to the same range of penalties that apply under broader taxation law.

Taxpayers who remain Australian residents despite being overseas will continue to file tax returns and will therefore not need to report income via myGov.

If the taxpayer’s income for repayment purposes exceeds the minimum repayment threshold, they will be required to make compulsory repayments towards their debt. Non-resident taxpayers will make repayments via myGov.

The repayment income threshold for the 2016-17 financial year is;

Repayment income Repayment rate
Below $54,869 Nil
$54,869 – $61,119 4.0%
$61,120 – $67,368 4.5%
$67,369 – $70,909 5.0%
$70,910 – $76,222 5.5%
$76,223 – $82,550 6.0%
$82,551 – $86,894 6.5%
$86,895 – $95,626 7.0%
$95,627 – $101,899 7.5%
$101,900 and above 8.0%

These rates are identical to those that apply to taxpayers who remain in Australia. As with resident taxpayers, non-resident taxpayers may also make voluntary repayments.

 

 

 

 

 

 

 

 

Small Business Restructure Rollover

The following article originally appeared on the WTS Australia website in March 2016.

 

Introduction

Roll-over relief was previously available for transfers of a CGT asset, or all the assets of a business, from a sole trader or partnership, to a wholly-owned company. The small business restructure roll-over supplements these existing roll-overs by also allowing small business owners to defer gains or losses that they would otherwise make from transfers of business assets from one entity to another as part of a genuine restructure.

It is intended that the roll-over will facilitate flexibility for owners of small business entities by allowing them to restructure their businesses via a change of legal structure. This is in recognition of the fact that the most appropriate structure for a small business may change over time and that restructuring may lead to benefits, both for the small business itself and for the economy as a whole.

The roll-over will apply to transfers of CGT assets, depreciating assets, trading stock or revenue assets on or after 1 July 2016.

 

Availability of the roll-over

The roll-over is available if an asset is transferred to one or more entities and;

  1. The transaction is, or is part of, a genuine restructure of an ongoing business; and
  2. Each party to the transfer is a small business entity (SBE) or alternatively an affiliate of, connected to, or a partner in, an SBE; and
  3. The transaction does not have the effect of materially changing the ultimate economic ownership of the asset; and
  4. The asset is a CGT asset and is, at the time of the transfer, an active asset of the relevant SBE; and
  5. The transferor and transferee(s) are Australian residents; and
  6. The transferor and transferee(s) choose to apply the roll-over.

 

Genuine restructure – safe harbour

The requirement that the transaction be part of a ‘genuine’ restructure is intended to deny the roll-over to artificial or inappropriately tax-driven schemes. Whether a restructure is ‘genuine’ is a question of fact, to be determined having regard to all of the facts and circumstances surrounding the restructure.

To provide certainty, a small business will be taken to satisfy the requirement of a genuine restructure where, for three years following the roll-over;

  • There is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;
  • Those significant assets continue to be active assets; and
  • There is no significant or material use of those significant assets for private purposes.

If a business does not meet the requirements of the safe harbour, it can still access the roll-over by satisfying the general principle that the transaction is, or is part of a genuine restructure.

 

Small business entity

An entity is a small business entity if it meets the requirements under Subdivision 328-C ITAA 1997. Broadly, this requires the entity to carry on a business and have a turnover, when combined with affiliates and connected entities, of less than $2m. Previously the bill also required the taxpayer to satisfy the maximum net asset value test. This requirement has been removed.

 

Ultimate economic ownership and discretionary trusts

Ultimate economic owners are individuals who, directly or indirectly, beneficially own an asset. Where a non-fixed (e.g. discretionary) trust is involved in the transfer, the requirement will be satisfied where the trust has made a family trust election (FTE) and, the ultimate economic owners of the asset, just before and just after the transfer, are members the trust’s family group.  Before making an FTE consideration should be given to the fact that it effectively limits the beneficiaries eligible to receive distributions to those within the family group.

 

Active asset

The meaning of active asset is given in Subdivision 152-A ITAA 1997. Broadly, an asset is active if it is used, or held ready for use, in the course of carrying on a business or if it is an intangible asset inherently connected with a business. Loans to shareholders of a company are not active assets and therefore the roll-over cannot be used to circumvent the operation of Division 7A.

 

Consequences of the roll-over

 

Consequences for the transferor

The small business restructure roll-over is intended to be tax-neutral with no direct income tax consequences to the transferor. For example, the transfer of an asset by a company to a shareholder will not trigger a capital gains tax liability nor an assessable dividend under section 44 or Division 7A ITAA 1936.

 

Consequences for the transferee

Broadly, the transferee is taken to have acquired each asset for an amount equal to the transferor’s roll-over cost just before the transfer. This is the transferor’s cost such that the transfer would result in no gain or loss for the transferor.

CGT assets are deemed to have been acquired for an amount equal to the cost base of the asset. Pre-CGT assets will retain their pre-CGT status in the hands of the transferee. However, the time period for eligibility for the CGT discount will recommence from the time of the transfer. For the purposes of determining eligibility for the small business 15-year exemption, the transferee will be taken as having acquired the asset when the transferor acquired it.

The transferee of trading stock will inherit the transferor’s cost and other attributes just before the transfer. Therefore, the asset’s roll-over cost will be an amount equal to the cost of the item for the transferor, or, if the transferor held the item as trading stock at the start of the income year, the value of the item for the transferor.

The roll-over cost of revenue assets is the amount that would result in the transferor not making a profit or loss on the transfer.

Where deprecating assets are transferred the transferee can deduct the decline in value of the depreciating asset using the same method and effective life (or remaining effective life) as the transferor was using.

 

New membership interests issued as consideration for the transfer

Where membership interests (e.g. shares or units) are issued in consideration for the transfer of a roll-over asset or assets, the cost base of those new membership interests is worked out as follows:

The sum of the roll-over costs, less any liabilities that the transferee undertakes to discharge in respect of those assets  

/

 

 

The number or membership interests

 

 

Membership interests affected by transfers

Where an asset transfer is made at other than market value, decreases and increases in the market value of any interests that are held in the transferor and transferee can result. An integrity concern can arise where the transfer of value from an entity could result in the creation of tax losses on later disposal of the membership interests. A ‘loss denial’ rule is intended to address these concerns. This rule states that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made subsequent to the roll-over will be disregarded, except to the extent that the taxpayer can demonstrate that the loss is reasonably attributed to something other than the roll-over transaction.

 

Comment

The small business restructure roll-over is a generous addition to Australia’s income tax laws. It presents opportunities for small business owners to tax-effectively restructure their affairs.

However, taxpayers should bear in mind the limitations of the roll-over. Specifically, the roll-over;

  • Will not affect a tax liability arising under another Commonwealth tax (for example fringe benefits tax or goods and services tax) or a liability for stamp duty under State legislation
  • Does not prevent the general anti-avoidance provisions of Part IVA from applying
  • Does not extend to exempt entities or a complying superannuation entity.
  • Does not extend non-active assets such as investment assets or Division 7A loans.

Small business owners should contact us to discuss the costs and benefits of a restructure in light of these new amendments.