Thinking | 25 July 2018
Talking Tax – Issue 126
Assessing the risk: allocation of profits within professional firms
In Talking Tax Issue 121, we discussed the suspension of the ATO guidelines on the allocation of profits within professional firms and the use of Everett Assignments (Guidelines). While the suspension of the Guidelines remains in place, the ATO has (through a further update to its website) sought to provide certainty to taxpayers who have entered into arrangements prior to 14 December 2017 (ie when the Guidelines were first suspended). Specifically, the ATO has stated that:
- taxpayers who have entered into arrangements prior to 14 December 2017 which comply with the suspended guidelines, and do not exhibit any of the high risk factors which are outlined on its website, can continue to rely on the suspended guidelines for the year ending 30 June 2018 and
- where a taxpayer’s arrangement was already in place before 14 December 2017 without high risk factors, and they meet one of the three benchmarks previously published, the arrangement will be considered a lower risk for the year ending 30 June 2018.
The ATO has also encouraged engagement from taxpayers that are contemplating new arrangements, or who have concerns or uncertainty regarding their current arrangements.
While the announcements will provide relief for some taxpayers for the year ending 30 June 2018, the continued suspension of the guidelines leaves many taxpayers uncertain about their position; particularly as many were expecting that the suspension would have been lifted, or new guidelines provided, by 30 June 2018.
No penalties for returns or statements for ‘eligible clients’ who have made an inadvertent error by failing to take reasonable care or have not taken a reasonably arguable position
The ATO has announced that it will change the manner in which it will apply penalty relief for eligible individuals, and entities with a turnover of less than $10 million.
Eligible entities are:
- small businesses
- self-managed superannuation funds
- strata title bodies
- not-for-profits and
The ATO has stated that penalties will not be applied where a taxpayer has made an inadvertent error by failing to take reasonable care, or because they have not taken a reasonably arguable position. Further, where the ATO finds an inadvertent error in a tax return they will fix the error and contact taxpayer to inform them of the error.
Taxpayers cannot make an application for this new penalty relief, although it appears that it will automatically be applied by the ATO to eligible taxpayers during an audit. Where an audit includes periods prior to 1 July 2018, the ATO has stated that it will apply penalty relief for those periods.
However, a ‘reset period’ will apply with the result that taxpayers will only be eligible for penalty relief once every three years.
NSW foreign surcharges and discretionary trusts: Commissioner’s Practice Note No CPN 004
On 5 July 2018, the Commissioner of Revenue NSW (Commissioner) released Commissioner’s Practice Note No CPN 004 (Practice Note) outlining how surcharge purchaser duty and surcharge land tax (Foreign Surcharges) will be applied in certain situations where residential land is held by a discretionary trust.
The Foreign Surcharges apply to the acquiring and holding of residential land in NSW by foreign persons. In the case of surcharge purchaser duty, the base rate is currently 7%, while the surcharge land tax rate is an additional 2%. The surcharge rate may apply to discretionary trusts where they are deemed to be a ‘foreign person’.
Broadly, the Practice Note provides:
- Where there are no existing potential beneficiaries who are foreign persons, the Foreign Surcharges will not apply.
- Where any one of the potential beneficiaries of a discretionary trust is a foreign person, the trustee may be liable for the Foreign Surcharges as beneficiaries under a discretionary trust are deemed to have a maximum entitlement to the income and capital of the trust, which the trustee may exercise in their favour.
- Examples to demonstrate how the Commissioner will treat the discretionary trust when the class of potential beneficiaries is broad, including to prescribe that the Commissioner may treat a trust as having no existing foreign beneficiaries in circumstances where the class includes spouses and grandchildren and such persons have the potential to be foreign spouses and grandchildren. However, this example is provided in the context that the trust is formed when the children are under 10. The Commissioner may take a different view if, when the trust is formed, the children are older or the first marriage has broken down. In relation to the land tax surcharge, where the specified beneficiaries of the discretionary trust are permanent residents but not ordinarily resident in Australia for more than 200 days in a land tax year, the trust will be subject to the surcharge the following year.
- In order to be exempt from the Foreign Surcharges, the trust deeds of discretionary trusts must be amended to prevent foreign persons from becoming potential beneficiaries of the trust, such as by prescribing foreign persons as an excluded class of beneficiary. Such amendments must be irrevocable. It is not sufficient that named beneficiaries merely be prevented from receiving distributions.
The Practice Note also expands on Revenue Ruling GO10 Version 2, which grants the Commissioner discretion to retrospectively approve trust deed amendments which remove the trustee’s power to make distributions to a person who is deemed a ‘foreign person’ for the purposes of the foreign surcharges.
Legislation and government policy
Board of Taxation reviews residency test for individuals
On 9 July 2018, the Board of Taxation released a report submitted to the Minister of Revenue and Financial Services following the self-initiated review of the current individual tax residency rules originally commenced in May 2016 (Report).
The Report explores the legal rules that apply to determine the residency status of individuals for income tax purposes. In preparing the Report, the Board considered a number of factors including whether the existing rules introduced in 1930:
- are sufficiently robust to meet the requirements of the modern workforce and
- address the policy criteria of simplicity, efficiency, equity (fairness) and integrity
In summary, the Report concludes that the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation. Among other things, this conclusion reflects the complexity faced by taxpayers seeking to apply the current rules.
Broadly, the Report notes that the Board identified a number of concerns with the current regime, including:
- the existence of integrity risks where high wealth individuals manipulate the residency rules to become ‘residents of nowhere’ and
- the general mismatch of the current rules (stemming from principles introduced many decades ago) with the modern remuneration environment.
The recommendation proposed by the Report is to replace the current rules with:
- a clear a policy statement, such as an objects clause that outlines policy objectives (i.e. equity, efficiency, simplicity and integrity)
- a definition for ‘resident’ that:
- includes a primary ‘days count’ bright line test that automatically determines residency and
- where the primary test is not satisfied, provides an additional test which takes into account the individual circumstances of taxpayers, and which leverages some existing case law and international practices.
- a rule that maintains Australian residency unless tax residency is proveably established in another jurisdiction and
- a more effective rule for the Government’s position regarding public services.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has asked the Board to consult further on key recommendations, including how Australia could draw on residency tests used in other countries. The Board will be undertaking this consultation in the coming months.
Research and Development Tax Incentive Amendments
The Commonwealth Treasury has introduced exposure draft legislation (the Treasury Laws Amendment (Research and Development Incentive) Bill 2018 (Cth)(Exposure Draft)), supporting explanatory materials and an associated consultation paper to reform to the Research and Development Tax Incentive (R&DTI). The introduction of this Exposure Draft comes further to the Government’s announcements on 8 May 2018 to reform the R&DTI system to better target the program and improve its integrity and fiscal affordability in response to the recommendations of the 2016 Review of the R&D Tax Incentive.
Broadly, the Exposure Draft proposes the following:
- increasing the R&D expenditure threshold from $100 million to $150 million and making the threshold a permanent feature of the law
- making the R&D tax offset equal to an entity’s corporate tax rate plus a 13.5% premium (i.e. if the corporate tax rate is 30%, the R&D tax offset rate would be 43.5%)
- capping the total amount that is refunded via the R&D tax offset at $4 million per annum and
- increasing the targeting of the incentive to larger R&D entities with high levels of R&D intensity.
The Government has stated that it welcomes stakeholder feedback and notes that the consultation period for the Exposure Draft runs from 29 June 2018 up to 26 July 2018.
GST on Low Value Goods form 1 July 2018
From 1 July 2018, where a non-resident supplier sells goods valued at less than AUD $1,000 (Low Value Goods) to an Australian consumer (being Australian residents that are either not registered for Australian GST or do not acquire the goods for the purpose of an enterprise that the entity carries on), these will be subject to Australian GST (subject to the supplier meeting the GST registration threshold requirements).
If you or your clients make supplies that fall within the scope of the changes discussed below, it would be useful to review existing agreements to ensure they still work as originally intended. It is also prudent to flag these changes with non-resident suppliers to ensure that they are also compliant with the GST changes.
These changes will impact parties dealing with cross border supplies to Australian consumers, (which may include goods such as clothing, cosmetics, books and electronic appliances).
Specifically, the changes to the Australian GST rules amend the ‘connected with Australia’ rules to:
- treat the operator of an electronic distribution platform as the supplier of Low Value Goods (where the goods are purchased through the platform and delivered to Australia with the assistance of supplier or operator)
- treat re-deliverers as the suppliers of Low Value Goods where goods are delivered outside Australia and the re-deliverer then facilitates their delivery to Australia (i.e. as part of shopping or mailbox service)
- treat non-resident merchants as the suppliers of Low Value Goods
- allow non-resident suppliers of Low Value Goods to elect to be ‘limited registration’ entities
- have exceptions, such as that a supply of Low Value Goods will not be connected with Australia if, after taking reasonable steps, the supplier reasonably believes that the goods would be a taxable importation and
- impose a reverse charge on certain Australian companies who are registered for GST if their acquisition of low value goods is not fully creditable (i.e. if the acquisition relates to private use or to making an input taxed supply).
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