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.

 

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“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

 

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).

 

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.

A Beginner’s Introduction to Superannuation in Australia

Superannuation is a way to save for retirement. Money is contributed to a superannuation fund (fund), either by a member of the fund or their employer. The fund then invests these contributions and, hopefully, the balance of the fund’s assets accumulates over time. Once a fund member retires or reaches a certain age they can access this money without incurring penalties.

Employer Contributions

Employers are required to contribute 9.5% of an employee’s salary into the employee’s nominated fund. This is known as Superannuation Guarantee (SG). These contributions are taxed in the fund at the rate of 15%, rather than in the employee’s own name at their personal tax rate. Employers are entitled to claim a tax-deduction for these contributions.

An employee may agree to sacrifice additional amounts of salary in order to receive greater superannuation contributions. To be effective, the agreement should be entered into before the employee’s services are provided.

Personal Contributions

A fund member may contribute their own money to their superannuation fund. In certain cases they will be entitled to a tax-deduction for the contribution. Broadly, a deduction is available to people who receive less than 10% of their income from employment activities. Examples of such people are the self-employed and those who receive more than 90% of their income from investments.

If the member is between 65 and 75 years of age they must be gainfully employed on at least a part time basis (this is known as satisfying the ‘work-test’). Once the member is 75 or older they can no longer make personal contributions to their fund.

Contributions Caps

The maximum amount that can be contributed to superannuation in a given year depends on the type of contribution and the age of the member.

The concessional contributions cap is $30,000 or $35,000 for those aged 49 years or over on 30 June 2015. Concessional contributions are also known as before-tax contributions. Examples of concessional contributions are employer contributions (whether SG or salary-sacrifice) and personal contributions where the member is entitled to claim a tax deduction.

The non-concessional contributions cap is $180,000, regardless of the age of the member. However, under a ‘bring-forward’ rule, three years worth of caps (i.e. $540,000) may be utilised in the one income year.

These caps are indexed periodically.

Excess Contributions Tax

There may be additional tax for those who exceed their contributions caps.

If the concessional, or before-tax, contributions cap is exceeded any contributions made above the cap, along with an interest charge, is included in the member’s assessable income. Members can choose to withdraw some of their excess concessional contributions to pay the additional tax.

If the non-concessional, or after tax, contributions cap is exceeded the member can choose to withdraw the excess non-concessional contributions, plus the earnings on those contributions. The earnings are then included in the member’s assessable income. If the member does not chose to withdraw the excess contributions they will be taxed at the top marginal tax rate.

Tax in the Superfund

Generally, the income of a superannuation fund is taxed at 15%. However, after-tax (non-concessional) contributions are not subject to any further tax in the fund. Furthermore, non-complying funds and special types of income are taxed at 47%.

Withdrawing the money

Generally, super cannot be accessed (without incurring severe penalties) until the member reaches their ‘preservation age’ (between 55 and 60, depending on their date of birth). Those under 65 who have not permanently retired may only be permitted to withdraw a portion of their entitlement each year. Superannuation may also be permitted to be withdrawn in cases of sever financial hardship, compassionate grounds, family law disputes and temporary residents departing Australia.

Superannuation for those on high-incomes

An employer’s SG obligations are limited to 9.5% of $50,810 per quarter. Therefore, an employee on an annual salary of $300,000 would be entitled to contributions of $19,308 (being 9.5% of $203,240) rather than $28,500 (being 9.5% of $300,000). This ‘maximum contributions base’ is indexed annually.

Taxpayer’s on higher-income levels may also subject to an additional charge, known as Division 293 tax. Division 293 tax is calculated by adding the value of before-tax (concessional) contributions to the taxpayer’s income. The portion of contributions above a $300,000 threshold is subject to 15% tax, in addition to the tax that applies to the superannuation fund.

Superannuation for those on low-incomes

Individuals on low-incomes may be eligible for a government contribution to help them boost their superannuation savings.

Those earning $37,000 or less may receive a low Income superannuation contribution (LISC) of up to $500 directly into their superannuation fund.

Those earning $50,454 or less may receive a government co-contribution. The federal government will add 50c to every dollar of after-tax (non-concessional) contributions made to the fund, up to a maximum amount of $500.

Disclaimer

This information is intended to be an introductory guide for general information purposes only. It does not constitute advice. Readers are strongly advised to seek professional advice that is tailored to their particular circumstances.

The Employee Share Scheme rules have changed. Should you be taking advantage of the new concessions?

Recruiting and retaining high-quality staff is essential to the success of almost any business. Research suggests that companies in which employees have an ownership interest are more productive than those that do not. In this article I ask – do the new employee share scheme rules provide an opportunity for the savvy employer?

Background

An ESS is a scheme under which shares, stapled securities or rights (e.g. options) to acquire them (ESS interests) in a company are provided to an employee or their associate in relation to the employee’s employment. If these ESS interests are provided at a discount to market value the discount is taxable in the hands of the employee.

Recently the laws surrounding the taxation of ESS interests have changed. These changes apply to ESS interests acquired on or after 1 July 2015. The intention of the new law is to make employee share schemes easier, cheaper and more attractive and by doing so;

  • Facilitate better alignment of interests between employers and their employees, thereby leading to more productive relationships, higher productivity and reduced staff turnover.
  • Allow Australian businesses to be more competitive in recruiting and retaining talented employees in the international labour market and
  • Stimulate the growth of start-ups (which are often cash-strapped)

As an employer, now is a good time to consider whether an employee share scheme should be part of your organisation’s remuneration mix.

The previous state of play (i.e. prior to 1 July 2015)

The default position is that the discount is assessable in full in the year that the ESS interests are granted. However, if conditions are met, one of two concessions may be available;

  • A $1,000 reduction or
  • Deferral of the taxing point.

In my experience schemes that defer the taxing point are typically the most attractive and so the remaining of the article will focus on them. Deferral will be available when all of the following apply;

  • The employee has a genuine risk of losing the interests (e.g. by failing to meet performance criteria or being required to continue employment for a certain period)
  • The scheme is made broadly available – i.e. it is available to at least 75% of Australian employees with at least three years of service
  • After acquiring the ESS interest the employee does not hold an interest in the company of more than 5%.

Note that the second requirement only applies to shares and therefore employers who wish to target key personnel are advised to issue rights (i.e. options), rather than shares.

Where such conditions are met no tax will be payable until the earliest of one of the following times;

  • When the employee ceases employment
  • When the risk of forfeiture has been removed and there are no genuine restrictions on the disposal or exercise of the interest and
  • Seven years after acquisition

What has changed?

The new legislation introduces a number of significant changes;

  • The maximum period of deferral has been extended to fifteen years
  • In the case of rights the deferred taxing point is extended, from when the right can be exercised, to when it is actually exercised
  • The maximum level of ownership has been increased to 10%
  • Access to deferred taxation will be available in a broader range of situations
  • The circumstances where employees are entitled to a refund of tax previously paid on forfeited ESS interests has been broadened
  • New valuation rules have been introduced

The additional concessions for ‘start-ups’

The new rules also introduce further concessions for small start-up companies. Both ‘small’ and ‘start-up’ are defined very broadly and many employers will qualify. Under the concession an employee does not need to include a discount on ESS interests in their assessable income if certain conditions, beyond the general conditions that apply to all ESS concessions, are satisfied;

  • The employer must be an Australian company, it, and all companies in the group, must have been incorporated for less than ten years, it must not be listed on an exchange and the combined turnover of the group must not exceed $50m.
  • The employee must hold the interests for three years or until they cease employment
  • If the scheme relates to rights, the exercise price (i.e. strike price) must be at least equal to the market value of the share at the grant date and
  • If the scheme relates to shares, it must be made broadly available (see above) and the discount cannot be more than 15%

For capital gains tax purposes shares are deemed to have been acquired for their market value and rights for the employee’s cost of acquiring them. Furthermore, the exercise price of rights will form part of the cost base of the resulting shares. When a resulting share has been sold the tax on any gain can be halved if the rights were acquired more than 12 months earlier.

New valuation rules

Calculating the assessable discount requires the employer to determine the market value of the company, possibly at multiple points in time during the year. In the case of unlisted companies this can place a prohibitive administrative burden on the employer.

The regulations to the 97 Act contain safe harbour valuation methodologies. However, these are highly complex and, having not been updated since the 1990s, are based on outdated estimates.

New valuation methodologies have recently been issued by the Commissioner. It is expected that these will be simpler and will result in the value of most options being lower than the previous regulations.

Example

Employer Pty Ltd was established on 1 July 2007. On 1 July 2015 it was not listed, had a turnover of $40m and was not part of a corporate group.

At this time Employer granted, for no consideration, 10,000 options to Bob, an important employee. In three years time, if Bob continues to work for Employer, he may exercise the options for $2 each, being the market value of a share in Employer at 1 July 2015.

On 1 July 2018, with the value of Employer’s shares being $5 each, Bob does in fact exercise all of his options. Immediately afterwards he sells the shares. Effectively, Bob has made a gain of $30,000 but he will not be taxed on this gain under the employee share scheme rules. Instead he will make a capital gain of $15,000, being half of $50,000 proceeds less an exercise price of $20,000.

Conclusion

Recent changes have made issuing ESS interests to employees more attractive, particularly for options. I would encourage all employers to consider if an employee share scheme is consistent with their overall business strategy and their strategy for retaining and recruiting key staff. If so it may be a good idea to include them in your remuneration mix.

Of course not all employee share schemes are created equal and, if you are considering implementing an employee share scheme, I recommend you contact a professional adviser for assistance in formulating the ideal scheme for your business.

Disclaimer

This post is intended to be a broad overview for information purposes only. It does not constitute advice. I urge you to seek professional advice that is tailored to your personal circumstances.

ESS