Thinking | 9 November 2018
Talking Tax – Issue 141
ATO extends data matching program to eliminate incorrect reporting for share owners
On 30 October 2018, the ATO announced it is extending its data matching program, focussing on share data. The latest data matching protocol will see the ATO continue to receive data from ASIC, including details of the price, quantity and time of individual trades dating back to 2014. The ATO will use sophisticated technology to match the data against information reported in tax returns and other ATO records.
This data matching protocol will allow the ATO to better check if there are errors in tax reporting for over five million Australian adults who own shares. The ATO also intends to make the information available to taxpayers as part of the tax return prefill service in the future.
The ATO sets out the basic rules for preventing errors in reporting for taxpayers that buy and sell shares:
- Keep good records of the share purchase and sale prices, as well as the cost of brokerage fees.
- Declare capital gains.
- If the taxpayer has made a capital loss, remember the loss cannot be claimed as a deduction in the tax return, but can be offset against any current or future capital gains.
Interaction between transfer pricing regime and debt and equity rules
On 31 October 2018, the ATO released Draft Tax Determination TD 2018/D6 (Determination) on the interaction between Australia’s transfer pricing regime and the debt and equity rules.
Australia’s transfer pricing regime aims to combat multinational tax avoidance by ensuring the right amount of Australian tax is paid on international non-arm’s length dealings, and the debt and equity rules classify financing arrangements as debt or equity for certain tax purposes.
The Determination confirms that the debt and equity rules cannot limit the operation of the transfer pricing rules. This is consistent with previous ATO guidance in relation to the former transfer pricing rules.
The Determination clarifies that where a tax benefit arises in a cross-border arrangement because parties did not deal with each other at arm’s length, the income tax law, including the debt and equity rules, applies on the basis of the arm’s length conditions that would have operated had the parties been independent parties. It means that non-arm’s length transactions involving debt or equity interests cannot be used to manipulate tax outcomes.
Transfer pricing rules
The object of Subdivision 815-B of the Income Tax Assessment Act 1997 (Cth) is to ensure an entity’s tax position in relation to its cross-border dealings is determined on the basis of conditions that might be expected to operate between entities dealing wholly independently with one another in comparable circumstances.
The subdivision applies to an entity’s cross-border dealings where the conditions that operate between the entity and another entity in their commercial or financial relations are not arm’s length dealings, and that difference results in a ‘transfer pricing’ benefit for the entity.
Where an entity receives a transfer pricing benefit, the arm’s length conditions are substituted for the actual conditions for the purposes of calculating the entity’s tax liabilities.
Interaction between transfer pricing rules and debt and equity rules
Subdivision 815-B negates a transfer pricing benefit that an entity gets if a scheme that is a finance arrangement is an equity or debt interest under actual conditions but would give rise to a debt or equity interest had arm’s length conditions operated.
Clarity on employee remuneration trusts
On 31 October 2018, the ATO issued Taxation Ruling TR 2018/7 (Ruling) on employee remuneration trust (ERT) arrangements that operate outside the employee share scheme rules in Division 83A of the Income Tax Assessment Act 1997 (Cth) (ITTA 97). These arrangements involve a trust established to facilitate the provision of benefits, such as payments, to employees. The benefits are provided at the direction of, or by arrangement with, the employer. The Ruling explains the tax consequences for the employer, employee and trustees, including the potential application of Division 7A where the employer is a private company.
One key point made in the Ruling is that employer contributions are not deductible unless the following requirements are met:
- the contribution is an irrevocable payment of cash made while the employer carries on a business for the purpose of gaining or producing assessable income;
- the employer reasonably expects the business to benefit from the contribution via an improvement in employee performance i.e. morale, loyalty or efficiency; and
- the contribution is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period (no more than 5 years).
The ATO states that it will not apply compliance resources to further investigate whether a period is “relatively short” if the evidence indicates that the contribution will be permanent and entirely dissipated within 5 years and the arrangement is not part of an anti-avoidance scheme.
A contribution will be non-deductable if it:
- is intended to be for the benefit of the owners, controllers or shareholders of an employer or their associates; and
- secures a capital advantage for the employer.
A contribution will be assessable to an employee if it:
- has the character of ordinary income;
- is applied or dealt with on the employee’s behalf or as the employee directs; and
- is not excluded from the operation of section 6-5 of the ITAA 97.
The Ruling is to take effect for years of income commencing both before and after its date of issue.
CGT consequences of granting certain rights to assets
On 31 October 2018, the ATO issued Taxation Determination TD 2018/15 (Determination) on the CGT consequences of granting an easement, profit a prendre or a licence over an asset. In the Commissioner’s view, CGT event D1 (creating contractual or other rights) rather than CGT event A1 (disposing of an asset) occurs if such a right is granted over an asset. The consequences of CGT event D1 being the relevant CGT event are that:
- in determining the capital gain or loss that arises from the grant over the asset, no part of the asset’s cost base is taken into consideration;
- any capital gain from the grant cannot be disregarded because the asset was acquired prior to 20 September 1985;
- any capital gain from the grant is not a discount capital gain; and
- no exemption is available under Division 118 if the grant relates to a main residence because CGT event D1 is not one of the events listed under subsection 118-110(2)
The category for the particular arrangement will depend on the intentions of the parties as determined from the particular terms of the arrangement and other relevant circumstances.
The Determination will apply to years of income commencing both before and after its date of issue.
Reporting on the provision of courier or cleaning services
This is an important update if you or your clients run a business providing courier or cleaning services.
On 31 October 2018, the ATO released Law Companion Ruling LCR 2018/8 (Ruling) setting out the ATO’s view of the expansion of the taxable payments reporting system in relation to recent legislative amendments requiring entities that provide courier or cleaning services to report details of transactions where they pay contractors to provide courier or cleaning services (Relevant Services) for them.
Suppliers of Relevant Services must report any payments made to contractors if:
- the supplier has an ABN;
- the payment is wholly or partly for providing that service on their behalf; and
- a reporting exemption does not apply to them.
Payments that do not require reporting
The following payments do not need to be reported when lodging a taxable payments annual report:
- payments for materials only;
- invoices unpaid at the end of the income year;
- PAYG withholding payments, such as those made to employees or under a voluntary agreement to withhold;
- payments within consolidated groups; and
- payments made by individuals for private or domestic reasons.
The Ruling is to take effect from 1 July 2018.
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