Talking Tax – Issue 115

SMSF investing in cryptocurrencies

The ATO has released an online publication in relation to self-managed superannuation funds (SMSF) investing in cryptocurrencies.

Although the ATO has indicated that SMSF’s are not prohibited from investing in cryptocurrencies, it notes that the relevant investment must:

  • be allowed for under the fund’s trust deed
  • be in accordance with the fund’s investment strategy and
  • comply with regulatory requirements under Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations concerning investment restrictions.

Importantly, practitioners should ensure that the terms of the fund’s trust deed allow for investment in cryptocurrencies. This may necessitate amendments to the current deed.

With reference to TD 2014/25 and TD 2014/26, the ATO outlines that the tax consequences of SMSF’s investing in cryptocurrencies will depend on the particular circumstances and that SMSF’s must keep records in relation to their cryptocurrency transactions.

The ATO’s online publication also covers the following topics:

  • Level of Risk – SMSF trustees and members should consider the level of risk involved when investing in cryptocurrencies. This is a valid concern, given the lack of understanding about cryptocurrencies, the volatility of the markets, lack of regulation and risks associated with cybercrimes and hacking of exchanges. It is also relevant in terms of determining whether an SMSF can borrow to invest in cryptocurrency while avoiding non-arm’s length income (NALI) consequences.
  • Ownership and separation of assets – SMSFs must have clear ownership of a cryptocurrency investment, separate from the personal or business investments of trustees and members. Again, this is a valid concern given that there may be difficulties in accurately establishing an account with some exchanges in the name of an SMSF.
  • Valuation – cryptocurrency investment portfolios must be valued in accordance with ATO guidelines. As exchanges often do not provide a direct AUD conversion rate, this may require additional steps.
  • Related-party transactions – as cryptocurrencies are not ‘listed securities’, they cannot be acquired from a related party.
  • Sole-purpose test – the ATO notes that an SMSF must be maintained for the sole purpose of providing retirement benefits to trustees and members, or to their dependants if a member or trustee dies before retirement. This test may be failed where trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements. This is of particular concern in the context of ‘utility’ tokens that have a personal application which may not align with the sole-purpose test.
  • Pension or benefit payments – the ATO notes that certain pension payments must be made by an SMSF in cash.

Case law

Past non-compliance history of tax lodgements might be considered in current tax lodgement claims

In MMFT and FCT [2018] AATA 772, the taxpayer failed to discharge his burden of proving that default tax assessments issued by the Commissioner of Taxation (Commissioner) were excessive. Moreover, the Administrative Appeals Tribunal (AAT) accepted the imposition of a 75% penalty by the Commissioner for the taxpayer’s failure to lodge income tax returns.

The default assessments issued to the taxpayer related primarily to personal services income (PSI), and the denial of deductions for motor vehicle expenses, phone/internet expenses and work-related travel expenses.

While this case highlights the importance of consistent and contemporaneous documentation and records, the facts of the case raise some more interesting questions. For example, while the taxpayer referred to himself as a ‘PAYG contractor’, the AAT noted that there was no such thing and that either the taxpayer was employed or alternatively provided his services as a contractor. Further, while the taxpayer provided the AAT with a PAYG payment summary which appeared (at least on its face) to be regular, it did not match the PAYG records of the purported employer.

Despite repeated requests from the ATO, the taxpayer failed to lodge his income tax returns for the 2008, 2009 and 2010 income years. As such, the ATO issued default assessments to the taxpayer and sought to impose administrative penalties of 75%.

The taxpayer objected to the default assessments, however, that objection was ultimately denied in full by the Commissioner.

The issue before the AAT was whether the taxpayer had discharged his onus of proving that the default assessments were excessive and, if so, whether the taxpayer was able to prove the actual amount of income on which he should have been assessed. The second issue before the AAT was whether the administrative penalty for failure to lodge tax returns for the three income years should be remitted (in full or part).

The AAT noted that it is important that a taxpayer seeking review of an ATO decision regarding an assessment understands that in discharging his or her onus of proof, they must, by evidence, establish their true income tax liability – which the taxpayer failed to do. In this regard, the AAT noted that it is not sufficient for a taxpayer to show that the Commissioner arrived at his assessment via an incorrect methodology or assumptions.

On the second issue, the AAT noted the taxpayer’s non-compliance history in its finding that the penalty of 75% imposed by the Commissioner for a failure to lodge was not excessive.

2008 Income Year

In the 2008 income year, the taxpayer derived rental income as well as income from consulting services through his private company AA Consulting. The taxpayer did not dispute the treatment of the consulting income as his PSI.

However, the taxpayer contended that a significant portion of the consulting income was derived by him as a ‘PAYG contractor’. Presumably, the taxpayer contended that amounts had been withheld under the PAYG system in respect of the consulting income he derived.

In support of his contention, the taxpayer produced an original PAYG Payment Summary as well as evidence of superannuation contributions being made on his behalf.

However, the AAT found that:

  • there was no such thing as a ‘PAYG contractor’, and that either the taxpayer was employed or alternatively provided his services as a contractor and
  • while the PAYG payment summary appeared (at least on its face) to be regular, it did not match the PAYG records of the purported employer.

The taxpayer also claimed air travel, phone/internet expenses and motor vehicle expenses for which he failed to produce sufficient evidence. In relation to the air travel expenses, the taxpayer only produced evidence of frequent flyer records which the AAT held to be insufficient.

2009 and 2010 Income Year

The primary dispute in the 2009 and 2010 income years related to expenses claimed by the taxpayer.

Again, the taxpayer failed to produce sufficient evidence. Further, the AAT noted that the taxpayers identical claim of $3750 in each income year for motor vehicle expenses was unlikely to be correct.

ATO updates

Income Tax Employment Termination Payments (12 month rule) Determination 2018

On 28 March 2018, the Commissioner of Taxation registered the Income Tax Employment Termination Payments (12 month rule) Determination 2018 (Determination) using his power in section 82-130(7) of the Income Tax Assessment Act 1997. The Determination extends the tax law definition of employment termination payments (ETP) which are subject to concessional tax treatment by removing the requirement that the payment is made within 12 months of the person’s termination of employment, in certain circumstances.

The effect of the Determination is that a payment received more than 12 months after termination of a person’s employment is an ETP if the delay in the payment was due to the commencement of legal action concerning either or both:

  • the person’s entitlement to the payment; or
  • the amount of the person’s entitlement.

To apply, the legal action must have commenced within 12 months of the termination of a person’s employment.

The Determination also treats a payment as an ETP if it is received more than 12 months after the termination of a person’s employment, and it was made by a liquidator, receiver or trustee in bankruptcy of the entity that would ordinarily need to make the payment.

The Determination applies to payments received from 29 March 2018.

OECD releases 14 additional country profiles containing key aspects of transfer pricing legislation

OECD has published transfer pricing country profiles for 14 countries including Australia to reflect their current transfer pricing legislation and practices.

Transfer pricing profiles focus on the key transfer pricing principles in the domestic legislation of the particular country including:

  • the arm’s length principle
  • safe harbours
  • transfer pricing methods and criteria used
  • specific guidance on commodity transactions
  • controlled transactions involving intangibles
  • cost distribution agreements
  • other implementation measures

The information contained in the profiles is intended to clearly reflect each country’s legislation and indicates to what extent each country’s rules follow the OECD transfer pricing guidelines.

Legislation and Government policy

Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018

On 28 March 2018, the Government introduced Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (Bill). Among other things, the measures contained in the Bill address the following three proposed changes:

  • toughening the multinational anti-avoidance law (MAAL)
  • improving the integrity of the small business CGT concessions (SBCGT Concessions) and
  • amendments to the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) concessions.

SBCGT Concessions

As part of its 2017-18 Budget, on 9 May 2017, the Government announced proposed amendments to the tax law which would limit the application of the SBCGT Concessions.

In keeping with its promise, on 8 February 2018, the Government released exposure draft legislation and explanatory material for public consultation (Exposure Draft). HW article contains a detailed analysis and commentary on the Exposure Draft.

The Bill now contains the first iteration of the proposed amendments to the SBCGT Concessions introduced to Parliament.

The two key differences between the Exposure Draft and the Bill are as follows:

  • the removal of the proposed requirement that the Object Entity must carry on a business at the relevant time and
  • changes to a proposed exclusion regarding when cash and financial instruments would be regarded as active assets.

Under the Bill, the existing basic conditions for relief set out in subsection 152-10(1) of the Income Tax Assessment Act 1997 will remain unchanged. However, for capital gains relating to shares in a company or interests in a trust, the Bill proposes significant amendments.

The table below provides a comparison between the current SBCGT rules and the changes proposed in the Bill.

Current SBCGT Rules Proposed new SBCGT Rules
The current SBCGT Concession rules apply the following additional basic conditions for capital gains relating to shares in a company or interests in a trust (Object Entity):

  • if the relevant taxpayer is an individual, either the taxpayer or their spouse must be a ‘CGT concession stakeholder’ in the Object Entity or
  • if the relevant taxpayer is a company or trust, CGT concession stakeholders in the Object Entity must together hold (directly or indirectly) at least 90% of the interests in the taxpayer.
The Bill proposes that additional basic conditions will apply for capital gains relating to shares in a company or interests in a trust as follows:

  • either the taxpayer must be a CGT concession stakeholder in the Object Entity, or CGT concession stakeholders in the Object Entity must hold at least 90% of the interests in the taxpayer
  • unless the taxpayer satisfies the maximum net asset value test (MNAVT), the taxpayer must have carried on a business just prior to the CGT event
  • the Object Entity must either be a CGT small business entity for the income year or satisfy the MNAVT and
  • the shares or interests in the Object Entity must satisfy a modified active asset test.

MAAL

In the 2017-18 Budget, the Government announced amendments to the MAAL as part of a package of measures to improve the integrity of the tax system.

Specifically, the integrity issue concerned whether the MAAL would apply if a foreign entity restructured so that its supplies to Australian customers were made through an Australian trust or partnership. The announced amendments to the MAAL in the Bill are intended to address this integrity issue.

The table below provides a comparison between the current law and the changes proposed in the Bill.

Current law New law
The supplies and income of Australian entities controlled by foreign entities are generally not relevant when determining if a foreign entity has made supplies or received income for the purposes of applying MAAL. Supplies made by a trust or partnership to Australian customers and income received from these supplies are treated as being made or received by a foreign entity if the trust or partnership satisfies certain conditions. The trust or partnership satisfies these conditions if it:

  • has at least one ‘foreign entity participant’ and
  • at the time the supply is made:
    • is connected with the foreign entity within the meaning of section 328-125 of the ITAA 1997 or
    • would be an affiliate of the foreign entity if the trust or partnership was an individual or a company within the meaning of section 328-130 of the ITAA 1997 or
    • is part of a global group that also includes the foreign entity within the meaning of Part IVA.

Effectively, a trust or partnership has a ‘foreign entity participant’ if some or all of its income could be distributed offshore to an entity that is a non-resident (including through interposed entities).

However, the trust or partnership must also make at least one supply in a year of income to an Australian customer that results in income being derived by the trust or partnership. This condition is intended to ensure that the extension proposed by the Bill only applies in circumstances where it would be relevant. For this exclusion to apply, it will not be relevant whether the income from the supply is derived in a different year of income for the year in which the supply is made.

Where the proposed new conditions apply, the supplies and income of a trust or partnership will be treated as the supplies and income of a foreign entity under the MAAL. However, this does not automatically mean that the general anti-avoidance (GAAR) rules will apply.

This is because the extension proposed by the Bill applies only for the purpose of determining if the conditions in subsection 177DA(1) of the Income Tax Assessment Act 1936 are satisfied. That is, it has no effect on the operation of the taxation law for other purposes, including when determining if a tax benefit arises for the purposes of the other subsections in section 177DA and Part IVA generally.

VCLP and ESVCLP

As part of the 2016-17 Budget, the Government announced reforms to the tax incentives for venture capital investors in relation to investments in financial technology (Fintech).

VCLPs and ESVCLPs are investment vehicles that can provide tax exemptions and concessions for those investing in Australian companies.

Broadly, the tax benefits for VCLPs and ESVCLPs are:

  • flow-through tax treatment for the partnership (ie partners are taxed according to their separate individual tax status)
  • exemption for foreign investors from tax on their share of the profits made by the partnership (provided that certain conditions are met) and
  • fund managers are able to claim their ‘carried interest’ (ie management fee) on capital account, rather than revenue account.

Limited partners in an ESVCLP also receive a non-refundable carry forward tax offset of up to 10% cent of their eligible contributions. Further, both resident and non-resident limited partners in an ESVCLP are exempt from tax on their share of the profits made by the partnership (provided that certain conditions are met).

The tax incentive available for investors using VCLPs and ESVCLPs are intended to encourage investment in innovative, early stage, Australian companies.

For the purposes of the concessions, finance (to the extent it consists of banking, providing capital, leasing, factoring or securitisation), insurance and making investments for the purposes of (broadly) deriving passive income are ‘ineligible activities’ pursuant to subsections 118-425(13) and 118-427(14) of the Income Tax Assessment Act 1997. Pursuant to subsections 118-425(3) and 118-427(4) of that Act, an investment in an entity is not an eligible venture capital investment if its predominant activities include ineligible activities.

Stakeholders have raised concerns that access by the Fintech sector to venture capital investment is currently restricted due to uncertainty about whether such investments are eligible venture capital investments (ie eligible for the concessions).

The announced amendments to the concessions in the Bill are intended to address this issue.

The table below provides a comparison between the current law and the changes proposed in the Bill.

Current Law New Law
Finance, insurance and making investments are ineligible activities. An investment in an entity that predominantly carries on such activities is generally not an eligible venture capital investment. Activities that:

  • consist of developing technology in relation to finance, insurance or making investments (for example for use in a new product or service)
  • are ancillary or incidental to developing technology in relation to finance, insurance or making investments or
  • are covered by a private or public finding from Innovation and Science Australia that it is a substantially novel application of technology

are not ineligible activities.

An investment in an entity that predominantly carries on such activities may be an eligible venture capital investment.

The amendments proposed by the Bill are intended to provide certainty to stakeholders that access by the Fintech sector to the concessions will not be restricted were the appropriate criteria is met.

Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth)

On 29 March 2018, the Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Act) received Royal Assent.

The Act contains changes relating to the following matters:

  • regulatory reform
  • extending tax relief for merging superannuation funds
  • SuperStream gateway network governance funding
  • transfer of functions relating to early release of superannuation benefits on compassionate grounds and
  • payment of GST on taxable supplies of certain real property.

Of significant note in these amendments are the changes to the way GST is reported and paid to the ATO where there are supplies of new residential premises or potential residential land. Broadly, the GST changes shift the reporting and payment obligation from the supplier to the purchaser, so that the purchaser will need to make the relevant GST payments on the supply to the ATO.

Currently, supplies of new residential premises are subject to GST and the obligation is on the supplier to remit GST to the ATO. According to the Explanatory Memorandum for the Bill, one of the main forms of GST non-compliance on supplies of new-residential premises is where developers supplying properties have collected GST from purchasers but proceed to dissolve their business before their Business Activity Statement (BAS) is due.

As such, the Act introduces amendments to address (among other matters) this non-compliance. Under the new law, from 1 July 2018, there will be obligations for both the recipient (Purchaser) of a supply and the supplier (Vendor).

Key GST changes under the new rules:

  • the Purchaser is required to make a payment to the ATO of the GST that applies on the supply
  • the Purchaser must withhold an amount if it is the recipient of the taxable supply
  • where there are multiple purchasers and a purchase is made as tenants in common, each Purchaser is required to make payment (as a joint obligation) in proportion to their interest in the property
  • the Vendor will be required to provide the Purchaser with a specific type of notification (relating to GST on the supply) before making the supply (failure to do so can result in the imposition of up to 100 penalty units) and
  • the Vendor will be entitled to a credit for the amount of any payment made to the ATO by the Purchaser.

Relevant matters

Under the changes, there are a variety of commercial considerations that Vendors and Purchasers should take into account, including:

  • GST attribution rules and timing around BAS reporting, particularly when payments are made in instalments
  • whilst the amount of GST to be paid is usually 1/11th of the contract price of the supply, pursuant to the changes, where supplies are made under the margin scheme, a statutory rate of 7% (or greater amount as determined by the Minister in a legislative instrument, but no more than 9%) must be withheld by the Purchaser and paid to the ATO and
  • contracts entered into prior to 1 July 2018 will not be impacted by the new rules so long as they are completed prior to 1 July 2020 (providing a two year transitional period for pre-existing contracts).

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