Australia to Introduce a Diverted Profits Tax

On 29 November 2016, the Turnbull Government released draft legislation and a draft explanatory memorandum (EM) for the proposed Diverted Profits Tax (DPT) which was first announced in the 2016-17 Federal Budget. It is the latest in a suite of measures to combat multinational tax avoidance that includes the Multinational Anti-Avoidance Law (MAAL) which came into effect on 11 December 2015.

The DPT, colloquially known as the Google Tax, is modelled after a similar tax in the UK. Following the introduction of a DPT in the UK, Google agreed to pay the UK government £130 million while Amazon announced that it would start booking British retail sales in the UK, rather than in Luxembourg.

In Brief

The DPT will apply in respect of significant global entities operating in Australia, where it is reasonable to conclude that profits have been artificially diverted from Australia. Where the DPT applies, tax will be payable on the diverted profits at the rate of 40 per cent.

When will the DPT apply?

The DPT will apply to an entity if, broadly:

  • It is reasonable to conclude that a scheme (or any part of a scheme) was carried out for a principal purpose of, or for more than one principal purpose that includes, enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit. Note that the ‘principal purpose’ threshold is lower than the ‘sole or dominant purpose’ threshold that applies for Part IVA anti-avoidance purposes;
  • The relevant taxpayer is a significant global entity (i.e. it has annual global income of $1 billion or more) for the income year in which it would obtain the tax benefit;
  • A foreign entity that is an associate of the relevant taxpayer entered into, carried out or is otherwise connected to the scheme or part of it. Therefore, the DPT will not apply to a scheme with which only Australian entities are connected; and
  • The relevant taxpayer obtains a tax benefit (as defined for Part IVA purposes) in connection with the scheme.

However, the DPT will not apply if it is reasonable to conclude that one or more of the following tests apply to the relevant taxpayer:

  • The $25 million turnover test

This test applies where it is reasonable to conclude that the Australian turnover of the relevant taxpayer and other Australian entities that are members of the same global group does not exceed $25 million. Note that the $25 million turnover test will not apply if it is reasonable to conclude that sales have been artificially booked outside Australia.

  • The sufficient foreign tax test

This test applies where it is reasonable to conclude that, in relation to the scheme, the increase in foreign tax liability is equal to or exceeds 80% of the corresponding reduction in the Australian tax liability. To work out the amount of the increased foreign tax liability, it is necessary to consider any specific tax relief provided by a foreign country to relation to the scheme.

We note that a number of OECD countries and Singapore currently have a corporate tax rate that is equal to or less than 24% (i.e. 80% of Australia’s 30% rate). These include the United Kingdom, Ireland, Poland and Switzerland. If President-Elect Trump’s tax plan is enacted, this list would also include the United States.

  • The sufficient economic substance test

This test applies where it is reasonable to conclude that the income derived, received or made as a result of the scheme reasonably reflects the economic substance of the entity’s activities in connection with the scheme. Therefore, if a multinational entity structures its affairs in a way that reasonably reflects their economic substance, the DPT will not apply. For the purposes of applying this test, consideration should be given to the OECD transfer pricing guidelines.

If the DPT applies

If the DPT applies to a taxpayer, the Commissioner may make a DPT assessment and issue it to the relevant taxpayer. Tax is payable on the amount of diverted profits at a rate of 40 per cent. Furthermore, the DPT due and payable will not be reduced by the amount of foreign tax paid on the diverted profits. The DPT assessment will also include an interest charge.

The assessment and review process

If the Commissioner considers that a taxpayer is in scope of the DPT, he may make a DPT assessment at any time within 7 years of first serving a notice of assessment on the taxpayer for an income year. In practice, the Commissioner would only do this after communication with the relevant taxpayer had failed to reach an agreement about the correct amount of tax that should be paid.

The relevant taxpayer must then pay the amount set out in the DPT assessment no later than 21 days after the Commissioner gives the notice of assessment.

If the Commissioner gives an entity a notice of a DPT assessment, a period of review will generally apply. This review period gives the taxpayer the opportunity to provide additional documents and information relating to the DPT assessment to the Commissioner. This review period will typically end 12 months after the DPT assessment is given but can be shortened (for example if the taxpayer considers that it has provided the Commissioner with all relevant information and documents) or extended (for example where the entity provides information close to the end of the 12 month period and the Commissioner needs additional time to properly examine the material).

As a result of receiving additional information, the Commissioner may conclude that the DPT assessment is excessive or that the liability should be increased. He may then make an amended DPT assessment. Where an amended DPT assessment is made, interest will be payable (by the Commissioner on the refund where the liability is reduced or by the taxpayer on the additional amount payable where the liability is increased).

Objections to DPT assessments

The relevant taxpayer may object to the DPT assessment by appealing to the Federal Court within 30 days of the end of the period of review. However, any information or documents that were not provided to the Commissioner during the period of review, or that the Commissioner did not already have prior to the period of review, will not be admissible without either the Commissioner’s consent or the leave of the court.

Comments

It is intended that the new law will encourage greater compliance by large multinational enterprises with their tax obligations in Australia as well as greater openness and cooperation with the Commissioner. I applaud these aims and broadly welcomes the government’s efforts to address the issue of multinational tax avoidance.

I, note, however, the following concerns;

  • Critical to the operation of the proposed DPT is the sufficient economic substance test. The EM provides two examples and a brief description of this test. However, given the importance of this test and the complexities of applying it in practice, it is hoped that further guidance will be issued before the law is enacted. In time, it will be interesting to see how the ATO and the courts interpret and apply this test.
  • Treasury is accepting submissions on the proposed legislation until 23 December 2016. This will not leave much time between when this complex legislation is finally enacted and when it commences on 1 July 2017.

 

Disclaimer

  1. The article does not constitute advice and is intended to be a general overview only. While I have attempted to ensure the accuracy of the article I do not give any assurances. Please seek your own professional advice.
  2. The views in the article are mine alone and do not necessarily represent those of my employer or anybody else.

“Hotel, Motel, Holiday Inn” – Deriving Rent and the small business CGT concessions

The following article appeared in the December edition of ‘The Taxpayer’ by Tax & Superannuation Australia. Unfortunately I cannot upload a PDF or link to the article so the unformated text below will have to suffice. Please contact me if you would like to discuss anything in this article.

 

“Hotel, Motel, Holiday Inn”[1] – Deriving Rent and Accessing the Small Business CGT Concessions

Simon Dorevitch examines the pitfalls of satisfying the active asset test for assets which are used to derive rent.

Back to basics: The active asset test

To access the small business CGT concessions, certain conditions must first be satisfied. One such condition is that the CGT asset satisfies the active asset test. Satisfying this test requires the asset to be an active asset of the taxpayer for the lesser of 7.5 years and half of the relevant ownership period.

A CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business by the taxpayer, their affiliate or an entity connected with them (relevant entities).

However, certain assets are specifically excluded from being an active asset. One such exclusion applies to assets whose main use by the taxpayer is to derive rent, unless the main use for deriving rent was only temporary. When determining the main use of the asset, the taxpayer is instructed to disregard any personal use or enjoyment of the asset by them and to treat any use by their affiliate or entity connected with them as their own use.

Carrying on a business

To qualify as an active asset, a tangible CGT asset must be used or held ready for use in the course of carrying on a business by the taxpayer or a relevant entity. There is no conclusive test for determining whether a business is being carried on. However, in Tax Ruling TR 97/11, the ATO has enumerated several indicators of a business that may be relevant, including;

  • The size, scale and permanency of the activity
  • Repetition and regularity of the activity
  • Whether the activity is planned, organised and carried on in a systematic and businesslike manner
  • The expectation, and likelihood, of a profit

It is highly likely that the operator of a hotel would be conducting a business. In contrast, most residential rental activities are a form of investment and do not amount to carrying on a business. However, the following examples indicate that it is possible to conduct a rental property business.

Example 1 – Taxpayer was conducting rental property business[2]

The taxpayers owned eight houses and three apartment blocks (each comprising six residential units), making a total of 26 properties. They actively managed the properties, devoting a significant amount of time (an average of 25 hours per week) to them. The ATO concluded that the taxpayers were carrying on a business.

Example 2 – Taxpayer was conducting rental property business [3]

The taxpayer owned nine rental properties. Although they were managed by an agent, the taxpayer spent considerable time undertaking tasks in connection with the properties. Despite finding that the taxpayer’s methods were unsophisticated and un-business-like, the AAT concluded that the taxpayer was carrying on a business.

TIP – PASSIVE ASSETS USED IN THE BUSINESS OF AN AFFILIATE OR CONNECTED ENTITY

The Small Business CGT Concessions may still be available where the taxpayer (i.e. owner of the asset) is not carrying on a business. This would be the case, for example, where the CGT asset is used in a business carried on by the taxpayer’s affiliate or connected entity and this other entity is a ‘small business entity’ (broadly one with a turnover less than $2m).

Deriving rent

An asset whose main use by the taxpayer is to derive rent cannot be an active asset (unless this main use was only temporary).

It has been argued that this exception does not apply to properties where the taxpayer carries on a business of leasing properties, but rather only to passive investment assets. The AAT rejected this argument, stating clearly that it does not matter if the taxpayer is in the business of leasing properties or not. [4]

There is no statutory definition of rent that is relevant in this context so the term takes on its common law meaning.

Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner (such as room cleaning, provision of meals, supply of linen and shared amenities) and the length of the arrangement.

Example 3 – Payments for use of a commercial storage facility were not rent[5]

Christine carries on a business of providing commercial storage space. Each space is available for hire periods of 1 week or more. She provides office facilities, on-site security, cleaning and various items of equipment for sale or loan. The agreements provide that in certain circumstances Christine can relocate the client to another space or enter the space without consent and that the client cannot assign the rights under the agreement. Having regard to all the circumstances, the ATO concluded that the amounts received by Christine were not rent.

Example 4 – Payments for occupancy of boarding house were not rent[6]

David operates an 8-bedroom boarding house. The average length of stay is 4-6 weeks. Visitors are required to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities and provides cleaning and maintenance, linen and towels and common areas such as a lounge room, kitchen and recreation area. The ATO concluded that the amounts received by David were not rent.

Example 5 – Payments for occupancy of holiday apartments were not rent[7]

Linda owns a complex of 6 holiday apartments, advertised collectively as a motel. Each is booked for periods not exceeding 1 month, with most bookings being for less than 1 week. Guests do not have exclusive possession of their apartment, but rather only a right to occupy on certain conditions. Clean linen, meal facilities and cleaning are provided to guests. The ATO found that Linda’s income was not rent.

Example 6 – Payments for short stays in a caravan park were not rent[8]

The taxpayer owned and operated a caravan park that consisted of fully-furnished self-contained cabins, caravans set up on blocks and sites for guests with their own caravans. Guests also had access to a shared amenities block. The ATO ruled that short-term guests (those staying less than 3 months) did not pay rent while long-term guests (3 months or longer) did.

Example 7 – Payments for occupancy of mobile home park were rent[9]

The taxpayer owned and operated a mobile home park that consisted of 77 sites and a ‘community hall’ with shared facilities such as a kitchen, toilet and recreation area. In reaching the conclusion that the payments for use of the park were rent, the AAT found that the following factors were relevant; the park owner agreed to give vacant possession to a resident on a certain date, the resident was granted exclusive possession and had the right of quiet enjoyment, and the residential site was occupied as the resident’s ‘principal place of residence’.

Example 8 – Payments for short stays in holiday unit were rent[10]

The taxpayer owned a holiday home that was used to provide short term tourist accommodation (i.e. stays of about one to two weeks). Crockery, cutlery and linen were provided but cleaning was done only after the occupants departed. The AAT found there to be little doubt that the occupants regarded themselves as having rented the unit for the period of their stay and as having exclusive possession. Therefore, the payments did constitute rent.

What is the main use?

Where a CGT asset is used partly to derive rent and partly in the business of the taxpayer or relevant entity, it will be necessary to determine the ‘main use’ of the asset. This is because an asset whose main use by the taxpayer is to derive rent cannot be an active asset (unless the main use for deriving rent was only temporary).

The term main use is not defined in Division 152 (which contains the small business CGT reliefs). Tax Determination TD 2006/78 states that no single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of factors such as;

  • The comparative areas of use of the premises,
  • The comparative times of use of the asset and, most importantly.
  • The comparative level of income derived from the different uses of the asset.

Example 9 – Mixed use[11]

Mick owns land on which there are several industrial sheds. He uses one shed (45% of the land area) to conduct a motorcycle repair business and leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the repair business is 80% of the total income, while the income derived from leasing the other sheds is only 20% of the income. Having regard to all the circumstances, the ATO considers that the main use of Mick’s land is not to derive rent.

Example 10 – Mixed use[12]

The taxpayer owned a shopping centre. Most the shops (constituting 73% of the floor space) were rented by unrelated shopkeepers but some (27% of the floor space) were used by the taxpayer to conduct business. Despite this, the ATO ruled that the main use of the shopping centre was not to derive rent because the majority (63%) of the income generated from the asset was from the business and only 27% was generated from rent.

In a recent AAT case[13], the taxpayer argued that the word ‘use’ in ‘main use’ could include non-physical uses such as holding a property for the purposes of capital appreciation. This argument was rejected, with the AAT finding that the concept of use was a reference only to physical use.

Treat use by affiliate/connected entity as taxpayer’s own

When determining the main use of the asset the taxpayer is instructed to treat any use by a relevant entity as their own use.

Example 11 – Use by affiliate[14]

John rents 80% of a property to his affiliate Peter and uses the remaining 20% in his business. Peter uses 60% of the area rented to him in his business and rents the remaining 40% to an unrelated party. 32% of the property (80% x 40%) is being treated as being used to derive rent. However, the remaining 68% is either actually used in John’s business (20%) or is treated as being used in his business (48%, being 80% x 60%). Therefore, the main use of the property is not to derive rent.

 

Ignore private use

When determining the main use of the asset the taxpayer is also instructed to disregard their own personal use or enjoyment of the asset. This point can be illustrated by the following example;

Example 12 – Private use disregarded[15]

Neil rents 60% of a property to his affiliate Andrea, uses 15% in his business and the remaining 25% for his own personal use.  Because personal use by the owner or relevant entity is ignored in determining the property’s main use, the above proportions must be adjusted. Following the adjustments Neil rents 80% (60% x (100/75)) of the property to Andrea and uses 20% (15% x 100/75) in his business.

Is the main use only temporary?

Finally, a CGT asset whose main use is to derive rent will not be precluded from being an active asset if this main use is only temporary. There is scarce guidance regarding what is  considered temporary in this context. However, in the context of whether a share in a company or interest in a trust is an active asset, an example in the explanatory memorandum[16] indicates that a failure to satisfy the 80% look-through test for two weeks would be of a temporary nature only and therefore would not prevent the share or interest from being an active asset.

 

As always I would like to remind readers that

  1. The article does not constitute advice and is not intended to be comprehensive. While I have attempted to ensure the accuracy of the article I do not give any assurances. Please seek your own professional advice.
  2. The views in the article are mine alone and do not necessarily represent those of my employer or Tax  & Superannuation Australia

[1] Rapper’s Delight by Sugar Hill Gang, 1979

[2] ATO’s Guide for rental property owners (NAT 1729-06.2016)

[3] YPFD and Commissioner of Taxation [20-14] AATA 9

[4] Jakjoy Pty Ltd v FACT [2013] AATA 526

[5] Example 2 of Tax Determination TD 2006/78

[6] Example 3 of Tax Determination TD 2006/78

[7] Example 4 of Tax Determination TD 2006/78

[8] PBR 1012886042948

[9] Tingari Village North Pty Ltd and Commissioner of Taxation [2010] AATA 233

[10] Carson and Commissioner of Taxation [2008] AATA 156

[11] Example 5 of Tax Determination TD 2006/78

[12] PBR 70707

[13] The Executors of the Estate of the late Peter Fowler v FCT [2016] AATA 416

[14] Example 2.13 of Explanatory Memorandum to Tax Laws Amendment (2009 Measures No. 2) Act 2009

[15] Example 2.14 of Explanatory Memorandum to Tax Laws Amendment (2009 Measures No. 2) Act 2009

[16] Example 1.12 of Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 7) Act 2007

 

Bywater Investments – Reconsidering Central Management and Control

On 16 November 2016, the High Court unanimously dismissed appeals by four companies (the appellants), ruling that they were Australian residents for income tax purposes.

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. The focus of Bywater was on where the central management and control of the company was located.

The appellants sought to rely on the precedent set by Esquire Nominees[1]. In Esquire, a firm of Australian accountants exerted significant influence over the company. Nevertheless, it was found that central management and control of the company resided with the Board of Directors who met outside of Australia.

In Bywater (as in Esquire) the meetings of the directors were held abroad and the appellants argued that the court was bound to find that the central management and control was therefore exercised abroad. The High Court rejected this approach and held that, as a matter of long-established principal, the location of central management and control of a company was not to be determined by its formal structure, but was rather a question of fact.

In Esquire the court found that the accountants, while influential, had no power to control the directors as, had the accountants instructed he directors to do something that was improper or inadvisable, the directors would not have acted on the instruction. This is to be contrasted with the situation in Bywater. While the appellants characterised the role of Mr Vander Gould, a Sydney accountant, as an adviser, the court accepted that the real business of the appellants was conducted by Mr Gould from Sydney, without the involvement of the directors. The fact that the directors were located abroad was insufficient where the directors had abrogated their decision making in favour of Gould and only met to rubber-stamp decisions made by him in Australia.

Bywater is a reminder that courts will generally emphasise substance over form. It also holds a lesson for companies that seek to avoid the second test of residency by appointing foreign directors and for Australian parent companies that exercise influence over offshore subsidiaries – while parties in Australia may exert significant influence, if central management and control is to be situated abroad, the overseas directors must be seen to be independent and not merely rubber stamps.

[1] Bywater Investments & Ors v FCT (2016) HCA 45

 

The view expressed in this article are mine alone and do not represent my employer or anyone else. The article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. You should seek legal or other professional advice before acting or relying on the article.

 

Taxing issues for departing taxpayers

The following article originally appeared in the November 2016 issue of The Taxpayer. This is the monthly journal of Tax & Super Australia (formerly Taxpayers Australia).

taxing-issues-for-departing-taxpayers

If you have any questions abou the issues raised in the article, please don’t hesitate to leave a comment, send me an email or contact me via LinkedIn.

There are a number of excellent articles in the magazine and I encourage you to get hold of a copy.

I will be contributing regularly to The Taxpayer. My next article will appear in December and will be on rental income and the small business CGT concessions.

Simon

Australia’s national innovation agenda – what does it mean in terms of business and tax incentives?

The following article originally appeared in the December 2015 edition of WTS Tax News Australia. I encourage you to read it and other useful articles in previous editions at the WTS Australia website.  The article should be read in conjunction with the disclaimers published on this website and the WTS Australia website. 

Prime Minister Malcolm Turnbull and Innovation Minister Christopher Pyne recently announced the flagship National Science and Innovation Agenda (Agenda), which is made up of a suite of business and
tax initiatives targeting innovation.
The Agenda, which is made up of a suite of proposed initiatives, represents perhaps the most significant policy announcement thus far of the new Turnbull Government. This article will briefly outline the initiatives that are of most relevance to entrepreneurs and investors.
Increasing access to company losses
Currently, in order to claim prior year tax losses, companies must satisfy either the ‘same business test’ or ‘continuity of ownership test’. The government proposes to relax the same business test, replacing it with a ‘predominantly similar business test’ that companies will be able to satisfy where their business, while not the same, uses similar assets and generates assets from similar sources. It is hoped that this will allow loss making companies to pivot and seek out new business opportunities to return to profitability. Legislation is expected to be introduced in the first half of 2016 and will apply to losses made in the current and future income years.
Insolvency reform
The government is proposing to change insolvency laws by reducing the bankruptcy period from three years to one, introducing a safe harbour for directors from personal liability for insolvent trading if they appoint a restructuring adviser and by making ‘ipso facto’ clauses unenforceable if a company is undertaking a restructure. An ipso facto clause allows contracts to be terminated solely due to an insolvency event. The government will release a proposal paper in the first half of 2016 with a view to the introduction of legislation in mid-2017.
Reforms to employee share schemes (ESS)
Earlier this year the government introduced tax concessions for ESS interests issued by start-ups (broadly those companies with an aggregated turnover not exceeding $50 million and incorporated for less than 10 years). Now it intends to pass a new law to limit the potential for disclosure documents given to employees under an ESS plan to be made available to the public (and therefore competitors). While ASIC has already published class orders providing partial relief from disclosure requirements, these do not apply in all circumstances. The legislation is expected to be introduced in the first half of 2016.
Intangible asset depreciation
Businesses will be provided the option to self-assess the effective life of acquired intangible assets (currently fixed by statute), thereby bringing the treatment of statutory intangible assets in line with tangible assets. It is hoped that this will decrease the cost of investment in these assets and enable smaller innovative companies to better market their intellectual property. The new arrangements will apply to intangible assets acquired from 1 July 2016
Tax incentives for early stage investors
New tax concessions will be provided for investors in unlisted companies that: undertake an eligible business (to be determined), were incorporated in the last three years and have expenditure and income of less than $1 million and $200,000 respectively. Where the investment qualifies, the investor will be eligible for a 20% non-refundable tax offset on investments, capped at $200,000 per investor per year, and a 10 year exemption on capital gains tax, provided investments are held for three years. The scheme is modelled on the UK’s Seed Enterprise Investment Scheme. The new arrangements are expected to apply from 1 July 2016.
Making it easier to access crowd-sourced equity funding (CSEF)
New laws will be introduced to enable companies to access crowd-sourced equity funding. Unlisted Australian public companies with turnover and gross assets of less than $5 million will be able to raise funds online (up to $5 million per year) from a large number of individuals. Companies that become public to access CSEF will receive up to a five year exemption from obligations to hold Annual General Meetings, produce audited financial statements and provide an annual report to shareholders. It is hoped that this will provide small innovative businesses with a more diverse range of funding options.
New arrangements for early stage venture capital limited partnerships
(ESVCLPs)
ESVCLPs are tax-effective investment vehicles in innovative companies at the early & growth stages of the start-up life-cycle. Under new arrangements, partners in new ESVCLPs will receive a 10% non-refundable tax offset on capital invested during the year. Furthermore, the maximum fund size for new ESVCLPs will be
doubled to $200 million and ESVCLPs will no longer be required to divest from a company when its value exceeds $250 million. It is hoped that this will make ESVCLPs more competitive internationally and attract greater levels of venture capital investment. The new arrangements are expected to commence from 1 July 2016.

 

WTS Comment

The proposed measures are encouraging but, as they say, the devil is in the detail.   At the time of writing, the Exposure Draft to the regulation to the CSEF regime (Corporations Amendment (Crowd-sourced Funding) Regulation 2015) only contemplates ‘ordinary shares’ and not other types of share instruments.   This may present a limitation for new economy innovation projects.  WTS will continue to provide updates as more information becomes available.

To read more about the Agenda business and tax incentives click here. (Tax News Australia 2015/6).

 

Contractors and employees – Beyond the common law distinction

It is so important for employers/principals to get the distinction between employee and contractor correct. Misclassifying a worker can have severe consequences, not least because if you get it wrong for one area (e.g. PAYG withholding) it is likely that you will be wrong for another (e.g. super guarantee or payroll tax).

However, each area of the law is a little different and it is important to look at each separately. That is what this article is about – a very brief look at the different and/or expanded definition of employee (compared to the common law meaning) under different state and federal taxes.

Starting Position – The Ordinary Meaning (Common Law Definition) of Employee

The key question is – is it a contract of services or a contract for services? The key factors to consider are;

Control Own account Results
Delegation Risk Tools
Business expenses Uniform Other

These questions have been considered in numerous cases. However I would like to focus on other areas in this article.

PAYG Withholding

PAYG withholding obligations extend to;

  • Directors fees
  • Payments to members of parliament, the defence or police forces
  • Payments to religious practitioners
  • Return to work payments
  • Payments covered by voluntary agreements to withhold
  • Payments to labour hire firms

If you’d like to go straight to the source and see the complete list, refer to Subdiv 12-B of Schedule 1 to the Taxation Administration Act 1953.

Superannuation Guarantee

The expanded definition of employee for SGC purposes, found in section 12 of the SGAA 1992 expands the definition of employee to

  • Directors
  • Members of parliament, local councils, the police or defence forces
  • Performing artists
  • A person who works under a contract that is wholly or principally for their labour
    • Renumerated (wholly or principally) for their personal labour and skills
    • Must perform the work personally (cannot delegate)
    • Is not paid to achieve a result

Paragraph 15 of SGR 2005/1 (SGR is a superannuation ruling issued by the ATO) states “where an individual performs a work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party, either at common law or under the extended definition of employee”.

However, this isn’t necessarily the end of the matter. For example, in Roy Morgan Research some of the contractors were engaged through an interposed entity. This didn’t stop the court from determining that SG did apply to the workers. Another example is the AAT case of SR & K Hall Family Trust v FC of T.

The key issue is whether the business is engaging the individual or the interposed entity . If it is truly the individual that is being engaged then the fact that the payments are directed to the interposed entity may not be sufficient to prevent SG obligations from arising.

Payroll Tax (Victoria)

There are provisions in state and territory legislation which deem payments to certain contractors to be liable for payroll tax. Generally, the aim is to impose payroll tax where a contractor works exclusively or primarily for one business and the contract is for their labour.

In Victoria section 34 of the Payroll Tax Act 2007 says that a person who performs work under a ‘relevant contract’ is taken to be an employee. Section 32 defines relevant contracts widely. It includes a contract where a person, in the course of carrying on a business, supplies services for or in relation to the performance of work. However, there are numerous exceptions such as;

  1. Where the supply of services are ancillary to the supply of goods
  2. Where the contractor ordinarily provides the same services to the public generally and   the services are not ordinarily required by the payer
  3. Where the services are ordinarily required for less than 180 days
  4. The services are provided for 90 days or less
  5. The Commissioner is satisfied that the services are performed by a person who ordinarily performs services of that kind to the public generally in that financial year.

Where an agreement is made with an interposed entity and the effect of the arrangement is to reduce or avoid payroll tax then the Commissioner has the power (in section 47) to disregard the agreement and determine that the payments made are taken to be wages.

Remember that whilst payroll tax legislation has been harmonised there are still differences between the states and these should not be forgotten.

WorkSafe (Victoria)

Remuneration includes payments made to a natural person performing work which is not part of a business conducted by the person and a person supplying services, unless an exception applies. The exceptions are very similar to the payroll tax act.

There are special rules dealing with particular industries e.g. owner drivers, outworkers, municipal councillors, jockeys, taxi drivers, door to door salespeople, timber contractors, students on work experience, parliamentarians, judges and religious leaders.

FBT

For FBT to apply benefits must be provided to an employee or their associate. FBT does not have its own definition of employee, it refers you to the PAYG withholding rules.

ABN/GST

Employees are not eligible for an ABN but independent contractors are. However, just because a worker has an ABN doesn’t mean they are an independent contractors.

Employees cannot be registered for GST but independent contractors may be.

Want to go deeper?

ATO/SRO guidance

Recent and important cases

  • ACE Insurance Ltd v Trifunovski [2013] FCAFC
  • Dominic B Fishing Pty Ltd v Commissioner of Taxation [2014] AATA 205
  • FC of T v De Luxe Red and Yellow Cabs Co-Operative [1998] FCAFC
  • Floorplan Pty Ltd v Commissioner of Taxation [2013] AATA 637
  • Hollis v Vabu [20001] HCA 44
  • On Call Interpreters and Translators Agency Pty Ltd v FCT (No 3) [2011] FCA 366
  • Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52
  • Xvqy v Commissioner of Taxation [2014] AATA 319

What expatriate employees should consider salary-sacrificing

A number of my clients have brought over employees from overseas. They want to know if there is anything they can do to pay these employees in a tax-effective manner.

Since October 2012 it has been far more difficult for these employees to be paid a living away from home allowance in a tax-effective manner. This is because, in order to access favourable tax treatment, the employee must now, amongst other requirements, maintain a home in Australia at which they usually reside.

However there are still a number of other tax-effective benefits that such employees can receive. This article will outline some of these benefits which an employer could consider providing.

EXEMPT BENEFITS

Relocation consultant costs

A relocation consultant may provide services such as obtaining removalist quotes, finding accommodation, negotiating leases, providing information about transportation to the new location and providing information about education and community services at the new location.

The costs of such a consultant would be exempt from FBT if they were incurred solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties

Removal and/or storage of household effects

This exemption covers transport, packing, unpacking and insurance of tangible personal property.

To be exempt from FBT, the costs must occur within 12 months of commencing duties at the new place of employment and must arise solely because the employee is relocating, whether temporarily or permanently, their place of residence in order to perform their employment duties.

Sale or acquisition of dwelling as a result of relocation

This exemption covers things like stamp duty, advertising, legal fees, agent’s services, discharge of a mortgage, borrowing expenses and other similar matters. However it would not include loan repayments, loan service fees, insurance or rates.

To be exempt, the sale of the old dwelling must be within two years of the employee commencing duties and the purchase of the new dwelling must be within four years. Furthermore, the costs must arise solely because the employee is required to change their usual place of residence to perform employment duties.

Connection or re-connection of certain utilities

This covers connection and re-connection of telephone and re-connection of gas or electricity.

These costs must be incurred within 12 months of the employee changing their residence. Furthermore, they must be incurred solely because the employee is required to live away from home or change their usual place of residence in order to perform their employment duties

Relocation transport

This exemption covers transport incurred solely because the employee is required to live away from their usual place of residence to perform their employment duties. It also extends to meals and accommodation on the journey (e.g. stopovers) as well as accident insurance, airport or departure taxes, passenger movement charge, a passport, a visa or a vaccination or any similar matter such as residency application costs and immigration agent fees.

This exemption can be very broad. It covers both the trip to Australia and the return journey. It would also cover a trip to visit Australia in order to find suitable accommodation before the secondment and/or a visit back to the employee’s usual residence to arrange the removal of tenants, making repairs or having utilities reconnected before the employee returns.

Compassionate travel

This exemption is for employees who, unfortunately, have a close relative (a parent, parent-in-law, spouse or child) who is seriously ill or has passed away. The transport, as well as meals and accommodation on the journey, incurred solely because to visit the relative or attend their funeral is exempt from FBT. The exemption applies to employees who are travelling or living away from home in the course of performing their employment duties.

BENEFITS ELIGIBLE FOR A REDUCTION IN TAXABLE VALUE (i.e. LESS FBT WILL BE PAYABLE)

‘Overseas employees’

The following two concessions apply only to overseas employees. This is a defined term that includes somebody whose usual place of residence is outside of Australia but is temporarily posted to Australia for work. It could also include Australian employees posted overseas. In order to access the concessions the overseas posting must be for a period of not less than 28 days

Crucially the benefits are only subject to a reduction in taxable value where they are either;

  • Provided under an industrial agreement i.e. a registered Australian workplace agreement, an award or legislation or
  • It is customary in the employer’s industry to provide the same kind of benefit in similar circumstances. The ATO’s view is that such benefits do not need to be provided to a majority of employees in the industry but nor can it be ‘rare or unusual’.

Holiday transport for overseas employees

This exemption covers transport to the holiday destination, as well as accommodation and meals on route, for the employee, their spouse and children. It also covers accident insurance, airport or departure taxes, passport costs, visa fees, vaccinations or other similar costs in connection with the transport.

Other requirements include; the employee must be on holiday and not performing their employment duties and the holiday must be for three or more days. Note also that remote area holiday transport falls under a different provision.

If the travel is the most direct practicable route between the overseas employment place and the employee’s home country then the taxable value is reduced by 50%. If the travel does not meet the above conditions (e.g. it is not a trip home) then it is reduced by the lesser of 50% and the benchmark travel amount – broadly the usual cost of return travel between the overseas employment place and the employee’s usual place of residence (e.g. a return economy air fare).

Education of children of ‘overseas employees’

This includes school, college or university fees, additional tuition costs and other costs (e.g. a car fringe benefit) that are in respect of the full-time education of the employee’s child. The child must be under 25 years and if the the benefit is a property (e.g. a computer) or residual fringe benefit it must be solely for their education.

The taxable value is reduced to the extent that it relates to the period of the overseas posting or the academic period.

Like the exemption for holiday transport the education of children must be provided under an industrial agreement or is customary in the industry.

Temporary accommodation relating to relocation and temporary accommodation meals

This covers temporary accommodation and leasing of furniture and household goods in relation to such accommodation. Temporary accommodation may be a hotel, motel or guesthouse. It must be paid solely because the employee is required to change their usual place of residence to perform their employment duties

The temporary accommodation can be at the former locality because the employee’s home becomes unavailable or unsuitable (e.g. due to furniture removal, storage or other arrangements). In this case the taxable value is reduced to extent that it is attributable to the 21 day period leading up to the employee commencing work at the new locality

The temporary accommodation can also be at the new locality. To be eligible the employee must commence sustained and reasonable efforts to find long-term accommodation as soon as reasonably practicable. A reduction in taxable value is not available if the employee does not occupy a long-term home within four months of commencing work or does not give their employer a declaration that they are making sustained and reasonable efforts to purchase or lease long-term accommodation

Meals consumed at time when employee and their family were in temporary accommodation are only subject to FBT on the first $2 of each meal (adults and children 12 or over) or the first $1 (children under 12).

Disclaimer

This article is intended to be a general introduction to the topic for information purposes only. It does not constitute advice. I strongly urge you to seek professional advice that is tailored to your personal circumstances.