Where we've been to where we're going - Tony Greco, GM Technical Policy, IPA From where we have been to where we are heading to
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Where we’ve been to where
we’re going
Tony Greco,
GM Technical Policy, IPA
1
From where we have been to where we
are heading to
1. Introduction
2. COVID stimulus & Budget measures
3. Possible reforms
4. Headwinds
5. Tax Cases
6. Questions
2
Introduction
• Accounting profession pivotal role
• Government chose in the main to use the tax system to provide
economic support in response to the extraordinary and unprecedented
impact of the COVID pandemic
• ATO acted quickly to implement administrative systems and associated
guidance to facilitate CF & JK
• Compliance not dead
• Trusted role strengthen opportunity to do more
• COVID put a lot of proposed changes& consultation on hold
• Federal Government Macro settings
• No budget repair until unemployment below target figure
• Trillion-dollar debt
• PM recent address to the Nation
3
COVID – Support Package
Safety Blankets
• Cashflow boost
• JK Ver 1 & 2 wage subsidy
• Bank loan repayment deferrals
• Rental concessions
• Temporary moratorium on insolvent trading laws for directors
• Insolvency- viability reviews
• State based grants/payroll tax etc.
4
COVID Stimulus payments
Cashflow Boost
Sole trader – tax free NANE
Partnership – tax free NANE
Company – unfranked dividend if paid out
Discretionary trust – tax free NANE
Unit Trust – tax free NANE (there is an exception to the CGT event E4 for NANE income in s104-
71 so no cost base adjustment
State Business Grants
• Amendment to income tax laws to make regulations to ensure that specified state and territory
COVID-19 business support grant payments are NANE income
• Eligibility for this treatment will be limited to grants announced on or after 13 September 2020
and for payments made between 13 September 2020 and 30 June 2021
ATO guidance – Government grants and payments during COVID-19
5
COVID Stimulus payments
JobKeeper
Do we take into account in determining the entity’s aggregated turnover ?
• ‘ordinary income that the entity derives … in the ordinary course of
carrying on a business’ (s 328-120).
JobKeeper payments (although they are ordinary income they are not
earned in the ordinary course of business)
6
COVID Stimulus payments – strict interpretation
questioned by IGT
Inspector General Report – ATO’s administration of JobKeeper and
Cashflow boost for new businesses
• Legislative framework had some integrity measures to ensure inactive
entities established or revived solely to access JK or CFB would be
excluded
• ATO took narrow interpretation of integrity measures particularly for new
businesses
• Sale or supply by a new business had not been reported in the BAS
before 12 March 2020 even were the businesses were actively trading
prior to this date
7
COVID Stimulus payments – strict interpretation
questioned by IGT
• ATO has accepted that meaning of “taxable supply” as modified by JK and
CFB was broader than normal definition – can include input taxed supplies
and GST-free supplies
• JK and CFB - a taxable supply(modified meaning) includes where an entity
makes or acquires a financial supply i.e. opening a bank account
• Although a taxable supply must be made for consideration, the
consideration might not be received in the same tax period in which the
taxable supply is made
• Notification by requisite time other than the lodgement of a BAS
8
COVID Stimulus payments – strict interpretation
questioned by IGT
Inspector General Report – ATO’s administration of JobKeeper and
Cashflow boost for new businesses (Cont’d)
• ATO will review earlier decisions
• Still need to show that new business was carrying on an enterprise that
made taxable supplies using modified definition and satisfy remaining
eligibility criteria
• Will not identify all potential affected taxpayers
9
COVID Stimulus payments
JobKeeper AAT decision on backdated ABNs
• On 21 December 2020, the Administrative Appeals Tribunal (AAT) handed
down its decision in Apted and Federal Commissioner of Taxation.
AAT decision
• The AAT held that the applicant did meet the requirement to have an ABN
on 12 March 2020, in circumstances where the ABR Registrar decided to
reactivate a previously cancelled Australian business number (ABN) after
12 March 2020 and backdated the reactivation to have effect on or before
12 March 2020.
ATO
• lodged an appeal with the Federal Court of Australia concerning this
decision.
10Federal Budget – full expensing measure
Recent legislative amendments contained in Schedule 1 to the Treasury Laws Amendment
(2020 Measures No. 6) Act 2020 (the amendments).
The amendments provide businesses with flexibility to choose whether to apply the new full
expensing of depreciating assets (FEDA) measure on an asset-by-asset basis.
• However, this flexibility is not available to small business entities (SBE). By the operation of
the law, SBEs are required to fully expense their general small business pool (pool)
balances on 30 June 2021 and cannot choose not to write off the pool balance
• The practical effect of all these rules is that an SBE is required to fully deduct their pool
balance on 30 June 2021, whereas larger businesses have the flexibility to choose not to
apply full expensing on an asset-by-asset basis
• This will be particularly problematic for trusts that are commonly used in the SME sector.
Full expensing may result in a loss being made by a trust, resulting in the trust having no
distributable income
• inability of the trustee to distribute any franking credits attached to dividends received
by the trust to beneficiaries, or fully utilise the franking credits
• FDT if company has paid out dividends during the year
11
Federal Budget – full expensing measure
A similar issue arose when the instant asset write-off (IAW) was increased from $30,000 to
$150,000.
• Broadly, S.328-210 requires a taxpayer that is claiming its depreciation deductions under
Subdivision 328-D of the ITAA 1997 to claim an outright deduction where its general pool
balance as at the end of 30 June 2020 is less than the IAW threshold (i.e., $150,000 for the
year ended 30 June 2020). The change in the IAW threshold is directly linked to outright
deductions for the balance of a general pool (i.e., where the balance is less than the IAW
threshold)
• It can result in some anomalous outcomes that can be detrimental to taxpayers by making
them worse off over time. This can happen as a result of the individual tax-free threshold and
were applicable, the Low Income Tax Offset and the Low and Middle Income Tax Offset. This
can negate any tax ‘saving’ in the 2020 income year.
• Understandably, taxpayers may feel disadvantaged through no fault of their own. This scenario
is commonplace among many SBE taxpayers, where they had no willingness or financial
capacity to acquire any depreciating assets from 12 March 2020 onwards. However, due to the
lifting of the IAW threshold from $30,000 to $150,000, they are forced to claim a significant tax
deduction in respect to their general pool balance in the 2020 income year.
• Without the lifting of the IAW, the deductions would have otherwise been spread over a
number of income years (which could have resulted in a better tax outcome for the taxpayer).
12Federal Budget – $10M to $50M
As part of the 2020–21 Budget, the government announced an extension to certain
small business concessions (which were previously available to small business entities
with an aggregated turnover of $10 million) to those that have an aggregated turnover
of less than $50 million per annum.
• The tax concessions will apply from 1 July 2020 or 1 July 2021, and the Fringe
Benefits Tax (FBT) related exemptions will apply for eligible businesses in respect of
benefits provided on or after 1 April 2021
From 1 April 2021 the following FBT exemptions will be extended to newly eligible
businesses:
• car parking benefits provided to employees will be exempt from FBT if the parking is
not provided in a commercial car park
• multiple work-related portable electronic devices provided to employees will be
exempt from FBT – even if the devices have substantially identical functions.
13
FBT – COVID impacts
Not business as usual 2020 returns
• Entertainment review options – actual versus 50/50
• Car fringe benefits – operating and statutory
• Car parking benefits
• Review COVID support provided to employees and ATO guidance
• Emergency assistance exemption (see next slide)
14FBT – COVID impacts
Emergency assistance exemption if:
• benefit is emergency assistance to provide immediate relief, and
• employee is, or is at risk of being, adversely affected by COVID-19
• Accommodation, food and transport for stranded employees
• Emergency health care to employee affected by COVID-19:
• only applies to health care treatment provided by an employee on your premises at or
adjacent to an employee's worksite
• items provided to employees to protect them from COVID-19
• Work-related preventative health care
• COVID-19 testing
15
COVID-19 and car fringe benefits
Car Park
• If, on a particular day, a business’s office is closed due to COVID-19 and therefore the work car park is
also closed, the employer will not have provided a car parking benefit as there will be no car space
available for use by an employee for more than four hours between 7.00am and 7.00pm on that day.
• The time during which the work car park is closed will not form part of the availability periods used
to calculate the taxable value of a car space under the statutory method.
Closure of nearby commercial parking stations
• If all of the commercial parking stations within a one kilometre radius of a business premises are
closed on a particular day due to COVID-19, there will be no car parking benefits provided.
Reduced rates at commercial parking stations
• May not have provided a car parking fringe benefit (the lowest fee charged by all of the commercial
parking stations within a one kilometre radius of a business premises for all-day parking was less than
$9.15 ). For example, this may occur where all of the commercial parking stations have discounted
their all-day parking rate due to COVID-19.
Cars and Fringe benefits
• During a period of COVID-19 restrictions, a car that has been provided to an employee is not taken to
be available for the employee’s private use if all the following apply:
• the car is returned to the business premises
• the employee cannot gain access to the car
• the employee has relinquished an entitlement to use the car for private purposes.
ATO Factsheet - COVID-19 and car fringe benefits
16PS LA 2001/6: Home office running expenses
What are the acceptable methods of calculating home office expenses:
1. Actual Expenses Method
• Keeping records and written evidence to determine the work-related
portion of actual expenses incurred (Diary actual hours spent/log
book).
2. Fixed Rate Method
• Use a rate of 52 cents per hour (effective from 1 July 2018).
• Noting that this only relates to lighting, heating, cooling, cleaning costs,
and decline in value of home office items such as furniture. (see over)
• The Actual Expenses Method would need to be used for any other
costs (e.g. phone and internet expenses).
17
Home office expenses – fixed rate method
Which expenses are INCLUDED in 52 cent method* Which expense are EXCLUDED from 52 cent method
• Heating/ Cooling • Phone expenses
• Lighting • Internet expenses
• Running electrical items (electricity generally) • Computer consumables
• Cleaning • Stationery
• Decline in value of furniture • Decline in value on computers, laptops or
other equipment
* NB The fixed rate is based on average energy costs and the value of common furniture items used in home
business areas.
18Home office expenses you can and can’t claim
Expenses Home is principal Home not principal You work at home but no
workplace with dedicated workplace but has dedicated work area
work area dedicated work area
1. Running expenses Yes Yes No – see Note 1
(excluding any below)
2. Work-related phone and Yes Yes Yes
internet expenses
3. Decline in value of a Yes Yes Yes
computer
(work related portion)
4. Decline in value of office Yes Yes Yes
equipment
(work related portion)
5. Occupancy expenses Yes No No
Note 1: Generally, an employee who works at home and who does not have a dedicated work area, will not be entitled to claim running expenses, or their claim for running
expenses will be minimal. This is because they can only claim the additional running expenses incurred as a result of working from home.
19
New alternative treatment (temporary now extended
to end of June 2021)
20New shortcut method: PCG 2020/3
TOPIC RESPONSE
Authority: Practical Compliance Guideline PCG 2020/3: Claiming deductions for additional
running expenses incurred whilst working from home due to COVID-19.
1. What is the Rate? 80 cents per hour
2. What is the period? 1 March 2020 to 30 June 2020 (and beyond to 30 June 2021)
3. What running expenses • Electricity (eg lighting, cooling/heating, electronic items used for work) & Gas
does this cover? • Decline in value of capital items such as home office furniture (and repairs)
• Cleaning expenses
• Phone expenses
• Internet expenses
• Computer consumables
• Stationery; and
• Decline in value of a computer, laptop or similar device.
• NB Taxpayers only have to have some of those expense categories to qualify.
21
New shortcut method: PCG 2020/3
TOPIC RESPONSE
4. Who is eligible? • Persons working from home to fulfil their employment duties, or to run their
business during the period from 1 March to 30 June 2020; and
• Incurring additional running expenses due to working from home.
• Covers persons working from home whether as a result of COVID-19 or not.
• Includes any business owner who now carries on their business from their home.
• NB Persons who are on leave or stood down are not eligible during that period.
5. What is the record- • A record of the hours worked at home.
keeping requirements? • Eg timesheets, rosters, a diary or similar document that sets out the hours worked.
6. How to disclose on • Must include the notation ‘COVID-hourly rate’ next to their deduction for home
income tax return? office expenses in their 2019-20 tax return.
22New shortcut method: PCG 2020/3
TOPIC RESPONSE
7. How does it compare to The existing 52 cent per hour fixed rate covers home office electricity, gas, cleaning
the existing methods? and decline in value of home office furniture. It does not cover other expenses; such
as computer consumables, stationery, phone, internet, decline in value of computer,
laptop or similar devices.
As such, a record of the hours worked at home, along with full written evidence to
substantiate those expenses that are not covered by the current fixed rate per hour
must still be kept when using this methodology.
The shortcut method of 80 cents per hour:
• captures all relevant expenses in a simplified manner.
• However, where this method is claimed, a taxpayer cannot claim a further
deduction for any of the listed expenses.
• It does not cover occupancy expenses.
23
New shortcut method: PCG 2020/3
TOPIC RESPONSE
7. How does it compare Multiple people living in the same house can claim this shortcut method rate.
to the existing methods? For example, a couple living together could each individually claim the 80 cents
(Continued) per hour rate, where they are both working from home.
The requirement to have a dedicated work from home area has also been
removed.
This new shortcut arrangement does not prohibit people from making a working
from home claim under existing arrangements.
Claims for working from home expenses prior to 1 March 2020, cannot be
calculated using the shortcut method, and must use the pre-existing working from
home approach and requirements instead for that period.
24Steps – New shortcut method
1. Keep receipts of all expenses.
2. Calculate how many hours you worked from home.
3. Claim a deduction of 80c x number of hours worked from home.
4. Do not claim any further deductions for running expenses or
purchases.
• If you use the shortcut method to claim a deduction for your
additional running expenses, you cannot claim a further deduction
for any of the expenses listed above.
5. Include ‘COVID-hourly rate’ as a notation in your 2020 tax return.
25
Possible Reforms
1. Black Economy Measures
• Limit on cash payments of $10K – not proceeding
• Third party platforms reporting regime – proposed to apply from 1 July
2022 and 1 July 2023
• From 1 July 2021, ABN holders with an income tax return obligation will
be required to lodge an income tax return
• From 1 July 2022, ABN holders will need to confirm the accuracy of their
details on the ABR annually
2. Small Business CGT concessions
3. Expand education deductions
4. Small business tax offset
5. Div 7A – proposed to apply from the first income year commencing on or
after royal assent of enabling legislation
26Expansion of Education Deduction
Should the tax system play a greater role to encourage the retraining and
reskilling of individuals is the question being asked
• The requirement for a tax deduction is limited to expenses in gaining or
producing assessable income.
• This limits deductions to an individual’s current employment activities that
either maintains or improves the specific skills required for that
employment or leads to an increased income in the individual’s current
employment.
27
Expansion of Education Deduction
• We see this proposal working hand in hand with one of the other 2020-21 Federal Budget announcements -
the exemption for FBT employer-provided education
• exempt from FBT, employer-provided retraining and reskilling benefits to redundant, or soon to be
redundant, employees where the benefit may not relate to their current employment
• Regardless of whether the Government proceeds with this proposal, it is an opportunity to remove the current
rule which requires individuals to reduce their self-education deduction by $250
• The concept is outdated and does not serve any useful purpose. Most individuals allocate costs that are
not deductible against this arbitrary threshold, so its removal eliminates some unnecessary compliance
• Safeguarding the tax system – integrity measures required to minimise opportunities for tax misuse
and abuse
• Also need to ensure that individuals do not take advantage of the relaxation of the tax rules to engage in
lifestyle or personal choices subsidised by the taxpayer
• A shared risk approach with the individual who proposes to take advantage of the concession is
warranted
• One option is quarantining half the upfront deduction until the individual earns income from an activity
associated with the retraining. This ensures that taxpayers do not wear the entire cost of education outlay
in cases where the retraining does not result in the furtherance of a new activity
28Small Business CGT concession
Originally meant to provide security in retirement for small-business owners
or encourage growth
• Sheltered capital gains ballooned to $6.2 billion in 2015–16, with some
claims rising to $80 million per claim.
• Claims above $6 million more than doubled between 2013–14 and 2015–
16, with the total value of those claims rising from $180 million to $400
million.
Reform Pathway
• collapsing the 15-year exemption, active asset reduction and retirement
exemption, and replacing them with one CGT exemption subject to a cap.
• eligibility turnover threshold to be raised from $2 million to $10 million,
and to repeal the maximum net asset value test.
29
Small Business CGT concession
30• SMSF Auditor independence revised guidelines – reciprocal audit
arrangements, providing other services
• Retirement incomes review
• Single touch payroll
• Micro employers STP version 1 – exception for micro employers
experiencing exceptional circumstances
• Closely held
• STP stage 2 – January 2022
• TPB Review
• Independence/Governance
• Annual registration
Headwinds • Penalties
• Education requirements
• 120 hours CPD requirement
• Fit and proper tests
• Modernising client verification
• Modernising Business Registers (MBR) Program & Director Identification
Numbers (DINs)
• Tax gaps – ATO to resume focus on high gap sectors – SME’s and
Individuals
• NSW – replace stamp duty with a broad-based property tax
31
Vacant Land – denial of holding costs
Anecdotally we believe a lot of professionals have not fully understood
these new provisions as the term “vacant land” congers an image that it
will only apply to land without any structures on it, which is unfortunately
not the case.
The new law has far-reaching consequences and catches taxpayers and
circumstances which were not the obvious target
3233
Tax Cases 2020
• Lambourne v FC T - the words “necessarily incurred” under s 8-1(1)(a), to
be entitled to a work-related deduction
• Eichmann v FCT – what constitutes an “active asset” for the small business
CGT concessions (vacant land with a shed sensible outcome)
• Greig v Commissioner Taxation – income versus capital (share trader held
to be on revenue account – applied industry skill and experience)
• FCT v Pike – concept of residency based on ordinary concepts
• San Remo Heights Pty Ltd v FCT - This case illustrates how broad the
enterprise definition can be and that it is harder for a company to prove that
it is not carrying on an enterprise, as opposed to an individual in the same
circumstances
34QUESTIONS? 35
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