Extension of the instant asset write-off rules
The Government has announced some changes will be made to the provisions allowing for the immediate expensing of depreciating assets that were introduced as part of the recent Federal Budget.
First, the rules will be amended to enable businesses with an aggregated annual turnover of more than $5 billion (the current maximum threshold) to access the measures if they can satisfy an alternative test. Entities can pass this test if:
- They have less than $5 billion in total statutory and ordinary income (i.e. not including turnover from associated entities) in either the 2019 or 2020 income year; and
- They have incurred more than $100 million in expenditure on tangible depreciating assets between the 2017 and 2019 income years.
This will allow some Australian businesses who are connected with large global groups to access the measure.
The other change that was announced was that businesses will be allowed to opt out of using the new instant asset write-off rules and accelerated depreciation rules. At the moment the rules apply automatically if certain conditions are met.
These are just announcements at the moment and are not yet law. The finer details of the amendments will probably not be known until legislation is introduced to parliament.
Extended December JobKeeper deadlines
The ATO has extended the JobKeeper monthly business declaration deadline for the month of December until 28 January 2021 (from 14 Jan 2021). This applies to the JobKeeper fortnights ending on 6 December 2020 and 20 December 2020.
The deadline for meeting the minimum wage condition for the JobKeeper fortnight ending on 3 January 2021 has been extended to Monday, 4 January 2021.
Last chance to access COVID-19 early access to super
31 December 2020 is the last day you can apply to access your superannuation early under the COVID-19 early access measures. The ATO has warned that those wanting to access their superannuation pre-Christmas will need to complete the application by 11 December 2020.
The ability to access up to $10,000 of your super is available to those that have been made redundant, have had their working hours reduced by more than 20%, and have been adversely financially impacted by COVID-19. If you are not in financial hardship you should not access your superannuation. The application process through myGov is a self-assessment process that you are responsible for. Penalties of up to $12,000 may apply for providing false or misleading information.
From the ATO
2021 company PAYG instalment error
The ATO has advised that it is aware of an error in respect of PAYG instalments for the 2021 year. The error has resulted in the instalments being calculated for companies eligible for the lower tax rate using the former rate of 27.5% and not the correct rate of 26%.
For clients who have lodged their activity statements and paid an amount based on the incorrect instalment calculation, the ATO indicates they will refund the overpaid amounts without any further action required from the client.
Clients who are yet to lodge will have a choice between lodging based on the current instalment calculation on the activity statement in which case the ATO will refund excess amounts as outlined above, or making a variation which will not trigger a refund process.
Transfer pricing and JobKeeper payments
The ATO has provided some guidance in relation to correctly managing the interaction between JobKeeper payments and a taxpayer’s transfer pricing position. The ATO indicates that it will be actively reviewing arrangements where the JobKeeper payment results in a change to an amount paid or received by the Australian entity or is shown to effectively shift the benefit of the government assistance to offshore related parties.
A relatively simple example outlining the ATO’s concerns in this area involves an assumed arm’s length arrangement where an Australian subsidiary of a multinational group provides services to its offshore related party. The subsidiary charges the full cost of providing the services plus a profit mark-up of 10% under the arrangement. The ATO indicates in these circumstances that JobKeeper payments received should not result in a reduction of the price of the service provided to the offshore related party (i.e. artificially reducing the subsidiary’s income).
Commissioner’s discretion to retain tax refunds
A draft practice statement has been released providing guidance on when ATO officers may consider utilising the expanded powers of the Commissioner to retain tax refunds as a result of legislative changes aimed at combating illegal pheonixing activity.
The key point to note is that the Commissioner’s discretion extends beyond taxpayers potentially engaged in phoenixing activity and may be applied to taxpayers identified as engaging in other “high-risk” behaviour.
The changes came into law on 1 April 2020 and during the first year of operation the Commissioner has indicated he will not be dedicating resources to investigating whether there is other high-risk behaviour that justifies the exercise of the discretion.
A list of behaviours that are to be considered by ATO officers as “high risk” is provided in the practice statement, including the following:
- Poor past and current compliance with taxation and superannuation obligations, including registration, lodgment, accuracy of reporting, record keeping and making on-time payments;
- Poor behaviours and governance in managing tax and superannuation risks;
- The number of, and the circumstances around, any bankruptcies or insolvencies;
- Tax-related penalties and sanctions imposed, such as a taxpayer being subject to director penalty notices or having committed an offence in failing to give security as required by the ATO;
- Connection with advisers who are subject to disciplinary actions or sanctions relating to taxation and superannuation laws, such as penalties relating to promoting or implementing schemes;
- Past information provided which reasonably indicates fraud or evasion, intentional disregard or recklessness as to the operation of a taxation law; or
- The likelihood of participation in or promotion of aggressive tax planning arrangements, schemes to obtain a tax benefit (tax avoidance schemes), fraud or evasion or criminal activity.
While practitioners hopefully won’t be dealing with many clients who fall within the last few items above, the guidance in the practice statement indicates that there is an increased risk of refunds being retained by the ATO where clients have a poor compliance history and other current outstanding lodgements. This means that there should be even greater incentive for clients to lodge documents and pay amounts owing to the ATO on time.
Remission of additional super guarantee charge amounts
The ATO has finalised two draft practice statements (PS LA 2019/1 and PS LA 2020/1) concerned with remitting super guarantee penalties for failing to lodge a super guarantee charge (SGC) statement on time. The draft documents have been combined into PS LA 2020/4.
The penalty, known as the Part 7 penalty, is not a penalty on the employer for failing to meet their SG obligations (this is the payment of the SGC itself) but rather it is a penalty imposed on the employer for not promptly disclosing to the Commissioner that they have a super guarantee shortfall.
The Part 7 penalty is automatically imposed on employers by law (Section 59(1) SGAA), with the penalty imposed being equal to double the SGC payable by the employer for the quarter (that is, 200% of the SGC).
The practice statement confirms that in cases where a SGC assessment is made after 7 September 2020 (the end of the SG amnesty) and the SGC relates to a quarter that was covered by the SG amnesty (i.e., 1 July 1992 to 31 March 2018), ATO officers cannot remit the Part 7 penalty below 100% of the SGC unless:
- The employer voluntarily came forward to lodge an SG statement prior to being notified of any ATO compliance action; or
- Exceptional circumstances prevented the employer from lodging an SG statement either
- During the SG amnesty period (24 May 2018 to 7 September 2020); or
- Before the employer was notified of any ATO compliance action.
In making a decision to remit part of the penalty (i.e. subject to the above restrictions), the practice statement indicates it will be considered appropriate where education is considered a more effective option to positively influence behaviour of the taxpayer.
In its guidance the ATO indicates that employers should only be considered for penalty relief where they have a turnover of less than $50 million and they:
- Took voluntary action to comply with their obligation to lodge SG statements;
- Do not have a history of lodging SG statements late;
- Have lodged no more than four SG statements after the lodgment due date in the present case;
- Have no previous SG audits where they were found to have not met their SG obligations; and
- Have not previously been provided with penalty relief.
These conditions appear to indicate that the remission of the Part 7 penalty will only be exercised in limited circumstances involving employers with no previous compliance issues who have taken some corrective action within a short period.
Allowances and benefits for Government employees posted overseas
The ATO has released a draft determination setting out the tax treatment of certain allowances and benefits provided to government workers who are posted overseas. The guidance specifically relates to individuals posted overseas for greater than six months, staying in settled accommodation provided by a government agency while posted overseas and who remain a tax resident of Australia while overseas.
The determination considers each potential allowance or benefit in detail (including descriptions of each). A summary of the treatment of various types of benefits is as follows
- Cost of living adjustment (COLA) and child supplement: where employees meet the criteria of receiving a living away from home allowance (LAFHA) the COLA is dealt with under the FBT rules as a LAFHA fringe benefit. Alternatively, it should be an assessable allowance and subject to PAYG.
- Education assistance, health provisions and ‘regional leave airfares’: these are treated as expense payment fringe benefits.
- Location allowance and transfer allowance: these are assessable allowances and subject to PAYG.
- Cost of posting allowance (COPA): where employees meet the criteria of receiving a LAFHA the COLA is dealt with under the FBT rules as a LAFHA fringe benefit. Alternatively, it should be an assessable allowance and subject to PAYG.
The summary table in the ruling also provides guidance on whether the payments need to be reported on a PAYG payment summary or income statement.
Residency and the tie-breaker tests in double tax agreements
The ATO has set out its view on the Pike case which involved the application of the tie-breaker tests for determining residency in the double tax agreement (DTA) between Australia and Thailand.
The first-instance judge in the Federal Court initially held that the taxpayer was a resident of Australia for certain income years. In some years he was treated as a resident under the ordinary concepts test and in some later years he was also treated as a resident under the domicile test. The Federal Court held that the taxpayer was treated solely as a resident of Thailand for the purpose of the DTA because:
- He had a permanent home in neither Australia nor Thailand;
- He had a habitual abode in both countries; and
- His closer personal and economic relations were with Thailand.
Both parties appealed certain aspects of the decision to the Full Federal Court. Key aspects of the court decision and the ATO’s response are as follows:
1. When considering the tie-breaker tests in the DTA, rented accommodation can constitute someone’s permanent home. However, in this case the court held that the taxpayer did not have a permanent home in either country.
2. In determining whether someone has a habitual abode in one or more countries you don’t simply look at the amount of time spent in each country. In this case the Federal Court emphasised that the taxpayer’s life had two aspects. One aspect was working in Thailand and occupying premises there as a home. The other was living in Australia with his family for as long as possible.
3. The first-instance judge held that the taxpayer’s personal relations were closer to Australia but his economic relations were closer to Thailand. Overall, the judge concluded that the taxpayer’s personal and economic relations were closer to Thailand than Australia in the relevant years. The Full Federal Court noted that the DTA does not place greater weight on personal factors over economic factors. The ATO’s view is that where personal and economic factors lay with both countries, the factors of more significance to the taxpayer have greater weight. That is, the ATO’s approach is to look at what the taxpayer considers to be more important (i.e. their economic connections such as assets / work etc or their personal connections such as family etc).
Testing the boundaries of work related expenses
This case involved an Australian Navy employee’s claim for deductions for work-related clothing and other work-related expenses which were denied by the ATO – largely on the basis that the costs claimed were not sufficiently connected with deriving the taxpayer’s employment income.
The claims in question related to the purchase of fitness equipment that was taken with the taxpayer when they were at sea with the Navy, and used by both the taxpayer and other Naval employees, ostensibly in connection with a subordinate role as a ‘Fitness Leader’ on board.
In disallowing the deductions, the ATO contended that the equipment acquired was not necessary for the performance of the taxpayer’s duties and thus could not be considered to be connected with deriving his assessable income from those duties.
At the Tribunal, evidence was sought on this point from the Department of Defence indicating that tools and other equipment are generally provided by the Navy and in the unusual circumstances that something is not available a member may purchase an item if authorised and be reimbursed for it. The suggestion was that the taxpayer was exercising his own discretion for the benefit of the Navy but not necessarily in connection with deriving his own assessable income.
On this point it was concluded that the taxpayer was paid only as an electronics technician (his primary role with the Navy) but not as a military ‘Fitness Leader’. To that extent, the purchase of the equipment was not to benefit his own derivation of assessable income, in that he would have still been paid the same income had he not purchased the equipment.
The case confirms that in claiming deductions for work-related expenses, it is a necessary condition that the expenditure incurred sufficiently relates to the activities through which the income is being derived by the taxpayer in question and that the connection needs to be quite specific and strong.
Progress of the JobMaker Hiring Credit scheme
The legislation enabling the creation of legislative instruments setting out the rules for the JobMaker scheme (the Economic Recovery Package (JobMaker Hiring Credit) Amendment Bill 2020) has now been passed by Parliament.
However, at the time of writing the Treasurer and Commissioner of Taxation had not yet released the final legislation instruments containing details of how the scheme will operate. Presumably the final instrument issued by the Treasurer will be somewhat similar to the draft document released by Treasury for public comment (see the link here) although it remains to be seen what amendments will be made.
While it is not expected that employers will start making claims for JobMaker credits until February 2021, the first deadline for enrolling in the scheme is 6 January 2021. Practitioners should start considering which clients could potentially access credits under the scheme for the first JobKeeper period which runs from 7 October 2020 to 6 January 2021 so that they can enrol prior to this deadline.
While the Commissioner has the power to extend this deadline, we haven’t seen anything yet to indicate that the ATO has provided an extension.
Tax-free State government COVID-19 support payments
State and Territory based grants paid to businesses in response to COVID-19 will generally be taxable. The general rule in this area is that grants provided by the government to an entity that carries on a business will generally be assessable to a client as ordinary income or statutory income. Even if they are not ordinary income, government grants are generally assessable income under Section 15-10 ITAA 1997 if they are received in connection with carrying on a business.
This legislation amends the income tax law to make payments received by eligible businesses under certain grant programs administered by State or Territory Governments non-assessable non-exempt (NANE) income so that these payments are not subject to income tax. However, only grants that meet certain conditions will be exempt from tax.
There has been some confusion in this area since the announcement of the changes to the legislation. At a high level the amendments ensure that to be eligible for the concessional tax treatment an entity must:
- Carry on a business and have an aggregated turnover of less than $50 million;
- Receive a payment made under a grant program administered by a State or Territory government (or a State or Territory authority) that is declared to be an eligible grant program by the Minister (the Treasurer); and
- The payment was received in the 2020-21 financial year.
The amendments provide some further guidance on which grants may be covered by providing that the Minister must, by legislative instrument, declare a grant program to be an eligible grant program if the Minister is satisfied that:
- The program was first publicly announced on or after 13 September 2020 by the relevant State, Territory or authority (this allows the Victorian grant announced on that date to be included);
- The program is responding the economic impacts of the Coronavirus;
- The program is directed at supporting businesses subject to certain restrictions regarding their operations (including being subject to a public health directive that applies to the geographical area in which they operate); and
- The State, Territory or authority has requested the Minister to make this declaration.