Taxing Issues for Departing Taxpayers

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

 

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

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

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

 

A SILENT TAXING POINT: CGT EVENT I1

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

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

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

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

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

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

 

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

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

WHAT ARE THE CONSEQUENCES OF CGT EVENT I1 HAPPENING?

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

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

 

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

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

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

 

WHAT ARE THE CONSEQUENCES OF MAKING THIS CHOICE?

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

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

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

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

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

It may be more favourable to make the choice where

 

It may be less favourable to make the choice where

 

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

 

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

 

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

 

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

 

Being able to defer payment to a later date is important

 

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

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

What if the taxpayer becomes a resident again?

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

Example

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

·         A home in Toorak

·         An investment property in the United States

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

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

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

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

 

 

HELP Debts

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

From 1 January 2016

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

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

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

From 1 July 2017

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

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

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

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

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

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

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

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

 

 

 

 

 

 

 

 

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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.

 

“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

Small Business CGT Concessions: Small Business Entity Test – Part 1

In this post we’ll start to cover how a taxpayer can satisfy the small business entity test. This test was introduced for CGT events happening from the 1 July 2007 onwards as an alternative to the maximum net asset value test. It is a lot easier to apply and therefore taxpayers would normally look to this first before the net asset test.

To be a ‘small business entity’ the taxpayer must carry on a business and satisfy the $2m aggregated turnover test.

Carrying on a business

Whether or not a business is being carried on will normally be quite obvious and I don’t intend to talk about it here at great length (though it could make an interesting post for another time). However, if you are unsure whether or not a business is carried on I would suggest looking at the table at paragraph 18 in Tax Ruling TR 97/11 as a starting point.

It is quite common (at least amongst my clients) for one entity to own most of the assets while another entity (an affiliate or connected entity) runs the business. In the past this caused problems but under the current rules the small business entity test will still be satisfied where:

  • The entity that carries on the business is a small business entity and is connected to or is an affiliate of the taxpayer (i.e. the asset holding entity)
  • The taxpayer does not carry on a business itself (other than in partnership) and
  • The asset is used in the business carried on by the taxpayer’s affiliate or connected entity

 $2m aggregated turnover test

This test looks at whether the taxpayer, together with any connected entities and affiliates (a detailed explanation of what these terms mean will come in my next post) had, or is expected to have, a turnover of $2m or less. The test can be satisfied by looking at:

  • Actual turnover in the prior income year
  • Actual turnover in the current income year (i.e the year in which the CGT event happened) or
  • Estimated turnover in the current income year (obviously determined before the year is over).

Only one of these three needs to be satisfied.

 Turnover

Turnover is the GST-exclusive amount of income derived in the ordinary course of business, excluding from dealings with connected entities and affiliates (to avoid double-counting). It would typically include sales and interest from business bank accounts but wouldn’t include capital gains, dividends and passive rental income.

Some other points to note;

The method of determining turnover you choose must be used for all other connected entities and affiliates. You can’t choose a different method for each entity.

If using the estimated turnover method (i.e. at the start of the income year it appears likely that the aggregated turnover will be less than $2m) the onus is on the taxpayer to prove that the estimate is sound. The Explanatory Memorandum lists factors to consider when making this estimate.

The taxpayer cannot use the estimated turnover test if they carried on a business in the previous two income years and in both those years turnover exceeded $2m.

If the business was carried on for only part of the income year the taxpayer should use a reasonable estimate of what the turnover would have been if it were carried on for the entire year.

In my next post I’ll go into some detail about the aggregated part of the aggregated turnover test. That is, what are connected entities, what are affiliates, what gets included and what gets excluded.

 Image

My favourite type of turnover – an apple turnover

Small Business CGT Concessions – Intro to the Basic Conditions

In order to access any of the concessions, the taxpayer must first satisfy the basic conditions set out in Subdivision 152-A. Some conditions require further tests to be passed but all, at a minimum, require these basic conditions to be met;

  1. A CGT event must happen in relation to a CGT event (except K7) of the taxpayer and this CGT event must result in a capital gain (so is not relevant to assets acquired before 20 September 1985).
  1. The  taxpayer satisfies at least one of the following;
  1. The taxpayer is a ‘small business entity’
  2. The taxpayer satisfies the ‘maximum net asset value test’
  3. The taxpayer is a partner in a partnership that is a small business entity and the CGT asset is an interest in an asset of the partnership or
  4.  The conditions in s 152-10(1A) or (1B) are met. I’ll explain these later.
  5. If the CGT asset is a share in a company or an interest in a trust then further conditions to do with ‘CGT concession stakeholders’ are met.

In my next post we’ll start to get stuck in to the details, first looking at how a taxpayer can be a ‘small business entity’. Spoiler alert – it’s all about having turnover of less than $2m but as you’d expect there’s a bit more too it than that.

Cheers,

Simon