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.

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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.

 

New ATO draft ruling on company tax residence – TR 2017/D2

The following article originally appeared on the A&A/FTI Tax website: http://fti.tax/insights/new-ato-draft-ruling-on-company/

 

On 15 March 2017, the Commissioner of Taxation released Draft Taxation Ruling TR 2017/D2 and withdrew Taxation Ruling 2004/15. These moves came in response to the High Court’s 2016 decision in Bywater Investments.[1] This decision, and the tax rulings, concerned the residence of companies not incorporated in Australia.

Under s 6(1) ITAA 1936 a company, not incorporated in Australia, is resident if it carries on business in Australia and has either its central management and control in Australia or its voting power controlled by Australian resident shareholders.

Bywater Investments

Bywater concerned a foreign-incorporated company that held meetings of its Board of Directors outside of Australia. The taxpayer argued that the court was bound to find that central management and control (CM&C) was exercised abroad. The High Court rejected this approach and held that the location of CM&C of a company was not to be determined by its formal structure, but was rather a question of fact.

The Court found that, as a matter of fact, the real business of the appellant was conducted by an individual from Sydney (Mr Vander Gould), without the involvement of the foreign directors. The directors had abrogated their decision making in favour of Mr Gould and only met to rubber-stamp decisions made by him in Australia.

The situation in Bywater was contrasted with that in Esquire Nominees[2]. In Esquire, a firm of Australian accountants exerted significant influence over the directors. Nevertheless, it was found that CM&C was exercised by the directors, as they would not have acted on the accountants’ instructions had these instructions been improper or inadvisable.

TR 2017/D12 – Income Tax: Foreign Incorporated Companies: Central Management and Control test of residency

This ruling sets out the Commissioner’s preliminary but considered view on how to apply the CM&C test of company residency, following the Bywater decision.

The ruling states that;

“If a company has its central management and control in Australia, and it carries on business, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for any part of the actual trading or investment operations from which its profits are made to take place in Australia.”

Authority for this proposition can be found in Malayan Shipping.[3]

This position represents a significant change from the view expressed in TR 2004/15 which was that other acts of carrying on a business generally need to exist before the CM&C test is satisfied. TR 2004/15 had argued that only where a company’s business is management of its investment assets and where it undertakes only minor operational activities, will both tests (carrying on a business and CM&C) be satisfied by the same set of facts.

Like TR 2004/15, the draft ruling states that CM&C involves the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. This is to be contrasted with day-to-day conduct and management of operational activities. The new ruling adds, in a reference to Bywater, that decision making involves active consideration and does not include the mere implementation of, or rubberstamping of decisions made by others.

Previously, the Commissioner’s view was that CM&C is usually exercised by the company’s board and therefore the place where the board meets is highly relevant in determining where CM&C is located. The new ruling however downgrades the actions of directors to a “useful starting point” and states that “there is no presumption that the directors exercise central management and control unless proved otherwise”. All relevant facts must be considered.

It follows that mere legal power or authority to manage a company is not sufficient to establish exercise of CM&C, particularly where this authority is not used. Furthermore, legal authority is not necessary for a person to exercise CM&C – if an outsider dictates or controls the decisions made by the directors, the outsider will exercise CM&C of the company. The key questions are whether the people with formal decision-making authority actively consider whether to do what they are told or advised to do and make a decision in the best interests of the company and whether they would refuse to follow advice or directions that are improper or inadvisable.

Practical considerations

A common issue is how much influence/control an Australian parent can have over an overseas subsidiary before that subsidiary becomes a resident. To demonstrate that the parent is merely influential and does not itself exercise CM&C, it may be advisable that;

  • The directors of the company have the required skills, experience and qualifications to perform their duties and sufficient knowledge of the business to make informed decisions;
  • The directors actively consider all information and advice before making decisions in the best interests of the company;
  • The directors meet frequently enough to actually exercise CM&C. Ideally these meetings would take place outside of Australia; and
  • Board minutes record, not only what decisions were made, but why the directors made them to evidence that decisions were actually made at the meetings.

The ruling, when finalised, is proposed to apply from 15 March 2017.

[1] Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589

[2] Esquire Nominees Ltd v. FCT [1973] 129 CLR 177

[3] Malayan Shipping Co Ltd v Federal Commissioner of Taxation [1946] 71 CLR 156

2017-18 Federal Budget – Tax Measures Affecting Property

 

Treasurer Scott Morrison handed down the 2017-18 Federal Budget on 9 May 2017. Many of the announced measures impact investment in Australia’s property market. These measures are broad-ranging and may apply to both residents and non-residents, younger- and older-Australians alike.

 

Foreign resident capital gains withholding regime

 

Date of application: 1 July 2017

 

The foreign resident capital gains withholding regime is to be extended;

  • Currently, the regime applies to Australian real property and related interests valued at $2m or more. This threshold will be reduced to $750,000
  • Currently, the standard withholding rate is 10%. This will be increased to 12.5%

 

First home buyers accessing their super

 

Date of application: 1 July 2017

 

Individuals will be able to make voluntary contributions into superannuation of up to $15,000 per year and $30,000 in total. These contributions are to be used for a first home deposit.

 

These contributions must be made within an individual’s existing contributions caps. The total concessional contributions that an individual may make in 2017-18 is $25,000.

 

Concessional contributions will be taxed at 15%, along with associated deemed earnings. Upon withdrawal, concessional contributions will be taxable at the member’s marginal tax rate, less a 30% tax offset.

 

The ATO will be responsible for ensuring that people purchase their first home after they withdraw from superannuation.

 

Over 65s may contribute proceeds from downsizing into super

 

Date of application: 1 July 2018

 

A person aged 65 or older will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their principal residence. The residence must have been owned by the individual as their main residence for 10 years or more.

 

This contribution;

  • Is excluded from the $1.6m balance test for making non-concessional contributions
  • Is exempt from the age and work tests

 

These contributions are available to both members of a couple for the same home.

 


 

Depreciation – rental properties

 

Date of application: 1 July 2017, though existing investments will be grandfathered

 

Under the current law, a purchaser of a residential property is able to allocate a portion of the purchase price to plant and equipment (broadly items that can be easily removed from a property, such as dishwashers and ceiling fans). The purchaser can then claim depreciation on the cost allocated to the plant and equipment.

 

From 1 July 2017, depreciation deductions on plant and equipment for owners of residential real estate will only be available to the party who incurred the cost, not to subsequent purchasers. The cost to subsequent purchasers will be reflected in the cost base of the property and therefore taken into taken into account for CGT purposes when the property is sold.

 

Where plant and equipment forms part of a residential property on 9 May 2017, the existing deduction rules will continue until the asset is sold or written off.

 

Rental property inspection expenses

 

Date of application: 1 July 2017

 

Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017. However, taxpayers may continue to claim deductions for amounts paid to real estate agents or property managers to provide these services.

 

CGT main residence exemption

 

Date of application: 9 May 2017, but grandfathering provisions apply until 30 June 2019

 

Currently, foreign and temporary resident individuals are able to claim the main residence exemption from CGT. From 9 May 2017, they will no longer be able to access this exemption. However, properties already held by this date will be able claim the exemption until 30 June 2019

 

Vacant housing charge

 

Date of application: 9 May 2017

 

An annual charge will be imposed on foreign owners of residential property which is neither occupied nor generally available for rent for at least 6 months of the year.

 

The annual levy will be equivalent to the relevant foreign investment application fee imposed on the property when it was acquired by the foreign investor and will therefore be at least $5,000. A property costing between $1m and $2m will incur a charge of $10,000, while a property costing between $2m and $3m will incur a charge of $20,000.

 

The measure will apply to persons who make a foreign investment application for residential property from 9 May 2017.

 


 

CGT discount increased for affordable housing

 

Date of application 1 January 2018

 

A 60% (rather than 50%) CGT discount will apply for Australian resident individuals to gains on disposals of qualifying affordable housing.

 

To access the 60% discount;

  • The housing must be provided to low to moderate income tenants
  • The rent charged must be at a discount to the apparent market rate
  • The property must be held for a minimum of three years
  • The property must be managed by a registered community housing provider

 

The higher discount will be pro-rated for periods where the property is not used for affordable housing purposes.

 

Managed Investment Trusts – affordable housing

 

Date of application: 1 July 2017

 

Under current law, investments in residential property are not eligible for the Managed Investment Trust (MIT) tax concessions. However, from 1 July 2017, MITs will be able to acquire, construct or redevelop affordable housing.

 

To qualify for concessional tax treatment, the affordable housing must;

  • Be available for rent for at least 10 years
  • Be provided to low to moderate income tenants
  • Be rented at a discounted rate
  • Represent 80% or more of the MIT’s assessable income. The remaining funds must be derived from other eligible investment activities permitted under existing MIT rules.

 

Purchasers of new residential properties to remit GST

 

Date of application: 1 July 2018

 

Purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement of the property from 1 July 2018. Under current law, GST is included in the purchase price and the developer remits the GST to the ATO.

 

Purchasers who use conveyancing services should experience minimal impact from these changes.

 

Capping foreign ownership in new housing developments

 

Date of application: 9 May 2017

 

A new condition will be applied to New Dwelling Exemption Certificates where the application is made after 9 May 2017 – foreign ownership in the new housing development must not exceed 50%. These certificates allow the sale of new dwellings in a specified development to foreign residents without each foreign purchaser seeking their own foreign investment approval.

2017 FBT update

The following update originally appeared on the A&A/FTI tax website. It can be viewed http://fti.tax/insights/aa-2017-fringe-benefits-tax-update/.

 

Fringe Benefits Tax Update

In Brief

 

>>                    Many FBT rates remain the same, while others rates and thresholds have changed, effective 1 April 2016. The FBT rate and gross-up rates will revert to their previous rates from 1 April 2017.

 

>>                           Since 1 April 2016, it has been easier for employers to provide work-related portable electronic devices to their employees without incurring an FBT liability. Employers are no longer required to consider the functions of these devices.

 

>>                           Important changes to salary packaged entertainment benefits apply from 1 April 2016. These changes affect how these benefits are valued and reported for payment summary purposes. A new cap has also been introduced for concessionally-taxed employers.

 

>>                           Effective from 1 April 2016, the government has restricted the methods available to value car expense payment fringe benefits. The one-third method will no longer be accepted.

 

>>                           The ATO has released guidance, clarifying the FBT treatment of various matters. These include customer loyalty programs, Uber travel and overpaid salary.

 

 

 

Key takeaway – Providing non-salary benefits to employees can be tax effective way of rewarding and retaining employees. However, the FBT rules are often highly complex. A&A Tax Legal Consulting can help you to comply with the laws and reduce your liability as much as possible.

 

With the end of the 2017 FBT year approaching and FBT returns due for lodgement on 25 June (and payment on 28 May) it is time to review some of the most significant areas of FBT change over the past year or so.

Key FBT rates and thresholds

The following rates and thresholds apply for the FBT year 1 April 2016 to 31 March 2017 (2017 FBT year):

FBT rate 49% (no change)
   
Type 1 gross-up rate 2.1463 (no change)
   
Type 2 gross-up rate 1.9608 (no change)
   
Gross up rate for payment summary purposes 1.9608 (no change)
   
Car parking threshold $8.48 (up from $8.37)
   
Motor vehicle (other than cars) cents per kilometre rates 0-2,500cc – 52c (up from 51c)

Over 2,500cc – 63c (up from 61c)

Motorcycles – 16c (up from 15c)

   
Statutory benchmark interest rate 5.65% (no change)
   
Capping of concessional FBT treatment for certain employers Public benevolent institutions and health promotion charities – FBT exemption capped at $31,177 (no change)

Public hospitals, non-profit hospitals and public ambulance services – FBT exemption capped at $17,667 (no change)

Rebatable employers (certain registered charities, non-government and non-profit organisations) – FBT rebate capped at $31,177 (no change)

Note: While the above caps have not changed, a separate $5,000 cap for salary packaged meal entertainment and entertainment facility leasing expenses has ben introduced, effective from 1 April 2016.

   
Reasonable food and drink amounts for employees living away from home in Australia One adult – $242 per week (up from $241)

Two adults – $363 per week (up from $362)

   

Changes that came in to effect on 1 April 2016 (i.e. the 2017 FBT year)

FBT exemption for work-related electronic devices

Since 1 April 2016 (i.e. the 2017 FBT year) small businesses (i.e. those with an aggregated turnover of less than $2m) have been able to more easily provide their employees with multiple portable electronic devices (for example a laptop, tablet or mobile phone) without incurring an FBT liability.

Before this change, an exemption was generally only available for the first of multiple portable electronic devices where they performed substantially identical functions. This restriction has been removed so small business employers no longer need to determine whether, for example, a tablet and laptop have sufficiently different functions for the exemption to apply.

Note that the requirement that these items be primarily for work-related purposes remains in place.

Salary packaged entertainment

Valuing Salary Packaged Entertainment

From 1 April 2016, all employers must value salary packaged meal entertainment and entertainment facility leasing expenses (entertainment benefits) under the actual method. It will no longer be permitted to use the 50-50 split or 12-week register methods. This change means that salary-packaged meal entertainment will generally be unable to access the minor benefits or business premises exemptions.

This changes does not apply to the valuation of non-salary packaged entertainment benefits.


 

Reportable Fringe Benefits

From 1 April 2016, all salary packaged entertainment benefits are reportable on an employee’s payment summary, if that employee’s reporting threshold is exceeded. This change does not apply to non-salary packaged entertainment benefits, which continue to be non-reportable.

$5,000 Entertainment Cap

By way of background, public benevolent institutions, health promotion charities and public and not-for-profit hospitals can provide their employees with benefits (up to a cap) without triggering any FBT liability. Furthermore, rebatable not-for-profit organisations (such as sporting clubs and trade unions) can provide their employees with benefits and (up to a cap) and receive a rebate that almost halves the FBT payable.

Prior to 1 April 2016, salary sacrificed entertainment benefits were excluded from the relevant cap. From 1 April 2016, however, entertainment benefits will be counted when calculating whether an employee exceeds their exemption or rebate cap. Where the relevant cap has been exceeded, the excess amount is reduced by the lesser of $5,000 and the grossed-up amount of salary packaged entertainment benefits.

This change does not apply to non-salary packaged entertainment benefits, which continue to be excluded from the caps.

Reimbursing car expenses

Where an employer pays or reimburses car expenses in respect of a car that the employee owns or leases a car expense payment benefit arises. The value of this benefit may be reduced to the extent that the employee could have obtained a ‘once-only’ tax deduction had they incurred the costs themselves. This is known as the ‘otherwise deductible’ amount.

From 1 April 2016, the one-third method for calculating the otherwise deductible amount has been removed. Employers must either apply the logbook method or the declaration method. This change follows changes to rules regarding claiming car expenses for individual taxpayers.

Large Car Fleets

From 1 April 2016, a concession was made available to certain employers who maintain a fleet of 20 or more cars. Such employers often find it difficult to obtain valid logbook data from all drivers. Where the employer has a valid logbook for at least 75% of the fleet, they are now permitted to calculate the average business use percentage of those logbooks and apply that percentage to the entire fleet. Previously employers would be required to apply the Statutory Formula Method to those cars without a valid logbook.

There are a number of conditions (in addition to the size of the fleet and the 75% requirement) that must be met before the concession is available. For example, the cars must have a value less than the luxury car threshold at the time of acquisition, the make and model must be chosen by the employer and the vehicles must be ‘tools of trade’. This last condition precludes cars provided under a salary sacrifice arrangement from accessing the concession.


 

Other Important Matters

Customer Loyalty Programs

The ATO has clarified the circumstances where an employee receiving benefits under a customer loyalty program (e.g. Frequent Flyer) is more likely to result in an FBT exposure for the employer. They have also indicated that this will be an area of increasing focus in coming years.

Broadly, a fringe benefit may arise where an employee accrues points in relation to business expenditure and later redeems these points for a flight or gift that is applied for personal use. The ATO has stated that the risk of FBT exposure is greater where the points accrued are in excess of 250,000 per annum, the employer participated in or facilitated the arrangement and/or there is no commercial purpose to the arrangement.

Workplace Travel Using Uber

An FBT exemption applies to taxi travel that begins or ends at the employee’s place of work. For the purposes of this exemption, taxi travel is defined as travel “in a motor vehicle that is licensed to operate as a taxi”.

The ATO has confirmed that travel that begins or ends at an employee’s place of work in an Uber will not qualify for the exemption since, at present, no state or territory has licensed Uber to operate as a taxi.

FBT Treatment of Overpaid Salary

The ATO has clarified when the payment of additional salary (for example due to an administrative error) may give rise to a fringe benefit. A loan fringe benefit would arise if the employee is given additional time to repay the excess salary. If this obligation is later waived, a debt waiver benefit may arise. A number of exemptions are potentially available, including where the taxable value of the benefit is less than $300.

ATO 2017 Audit Focus

The ATO have indicated that they will be focused on identifying taxpayers who have an obligation to lodge an FBT return but fail to do so. To that end they will be reviewing income tax returns for disclosures (e.g. motor vehicle expenses, contractor expenses, employee contributions and superannuation) that suggest a potential FBT exposure. The ATO may contact the taxpayer or their agents for further information.

The ATO will also be directing audit resources towards Living Away From Home Allowance benefits, as there is concern that some employers are not correctly implementing the changes that were introduced from 1 October 2012.

Changes to Key FBT Rates from 1 April 2017 (i.e. the 2018 FBT year)

FBT rate 47% (down from 49%)
   
Type 1 gross-up rate 2.0802 (down from 2.1463)
   
Type 2 gross-up rate 1.8868 (up from 1.9608)
   
Gross up rate for payment summary purposes 1.8868 (up from 1.9608)

These changes reflect the removal of the 2% Temporary Budget Repair Levy from 1 July 2017.