Talking Tax – Issue 186
By Andrew O'Bryan, Adam Dimac and Bradley White
Division 7A minimum yearly repayment relief - too little too late?
After weeks of waiting with bated breath, we have finally had word from the ATO about relief for taxpayers from the need to make annual repayments of complying Division 7A loans. For many it will be a case of too little too late.
Our detailed article can be found here.
Allocating profits within professional firms
The ATO has recently updated its website guidance on the allocation of profits within professional firms: ‘Assessing the Risk: Allocation of profits within professional firms guidelines’.
Unfortunately, despite the end of another financial year, no new guidelines have been published.
The updated website guidance provides that taxpayers that have entered into arrangements prior to 14 December 2017 can continue to rely on the suspended guidelines for the 2020 income year, provided that the arrangement:
- complies with the suspended guidelines;
- is commercially driven; and
- does not exhibit any ‘high risk factors’:
Professional firms considering a restructure, or concerned about the operation of their current structure, should seek suitable advice before engaging with the ATO.
Is Bitcoin a Foreign Currency?
In a recent decision, Deputy President Bernard J McCabe of the Administrative Appeals Tribunal confirmed that bitcoin is not a foreign currency for the purposes of Division 775 the 1997 Act.
This decision affirms the views that we, and others, have held for some time that subject to law reform, the rules governing the treatment of foreign currency gains and losses for tax purposes set out in Division 775 of the Income Tax Assessment Act 1997 (1997 Act) will not apply to most cryptocurrencies.
Practically, this means that where cryptocurrencies are held on revenue account, gains and losses are still assessable or deductible (as the case may be), without regard to the CGT discount or to the ‘personal use asset’ exemption. Alternatively, if cryptocurrencies are held on capital account, the capital gains and losses are dealt with under the CGT provisions in Part 3.1 of the 1997 Act.
It remains to be seen whether this decision will be appealed. Our detailed article can be found here.
State Revenue Legislation Further Amendment Act 2020 (NSW)
The State Revenue Further Amendment Act 2020 (NSW) (Act) was granted royal assent on 24 June 2020. This amendment impacts the Duties Act 1997 (NSW), the Land Tax Act 1956 (NSW) and the Land Tax Management Act 1956 (NSW).
Most notably, the Act implements changes that provide that a trustee of a discretionary trust holding NSW residential property will be deemed a foreign trustee if the terms of the trust do not prevent a foreign person from ever being or becoming a beneficiary (any exclusionary terms must be irrevocable).
Effectively, a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person, and intends to never distribute to a foreign person.
Our detailed article on the impact of the changes for discretionary changes can be found here, and a discussion of the others amendments implemented by the Act can be found below.
The Duties Act
- Section 104JA is inserted which provides that the trustee of a discretionary trust is taken to be a foreign trustee unless the trust prevents a foreign person from being a beneficiary of the trust. It also outlines circumstances where a discretionary trust will be taken as preventing a foreign person from being a beneficiary.
- Subsection 104ZQ(3) sets out additional stamping approval available to the Chief Commissioner. It allows stamping or endorsement by means of a single unique transaction identifier or a single endorsement to indicate payment of both purchaser duty and surcharge purchaser duty.
- Subsection 107(c) is added which sets out additional circumstances in which dealing with options to purchase dutiable property will attract duties. For example, if A enters into an arrangement with B to relinquish the rights under a call option that required B to sell dutiable property to A, and a call option to require B to instead sell that property to a third person C is granted, A is treated to have assigned that option to C.
- Section 146 has been amended by replacing the reference to threshold value with unencumbered value. Section 146A has been repealed. The result of this is that whether an entity is a landholder under section 146 is now calculated by reference to the unencumbered value of the land, instead of the threshold value.
- Section 147A is inserted which provides more guidance on what land includes, such as anything affixed to the land (whether or not a fixture). It also sets out some exceptions.
- Section 154 has been substituted. The new section extends liability for the duty payable by a person when the person acquires an interest in a landholder so that the landholder will be jointly liable, and to provide for that liability of the landholder to be a charge on the land in respect of which a caveat can be registered.
The Land Tax Act
- Section 5D has been added which, similarly to 104JA, provides that a trustee of a discretionary trust is taken to be a foreign person (and therefore liable for surcharge land tax) if the terms of the trust do not prevent a foreign person from being a beneficiary.
The Land Tax Management Act
- Schedule 2 Part 34 has been inserted providing transitional arrangements for section 5D of the Land Tax Act. These include exemptions and refunds where amendments have been made to the terms of the discretionary trust preventing a foreign from being a beneficiary before the end of 2019. It also includes an exemption where section 5D would otherwise apply to a trustee of a discretionary trust arising under a will.
Treasury Laws Amendment (2019 Measures No 3) Act 2020
The Treasury Laws Amendment (2019 Measures No 3) Act 2020 received royal assent on 22 June 2020 and impacts a number of areas including testamentary trusts; FBT; financial advisers; super; financial services, consumer credit, product grants and benefits.
Most notably, the Act implements changes to the taxation of testamentary trusts which were announced as part of the 2018-19 Federal budget.
From 1 July 2019, the benefit of adult marginal tax rates applying to distributions from Testamentary Trusts to minor beneficiaries will only be available for income generated from the assets placed in the Testamentary Trust by the deceased or the proceeds of the disposal or investment of those assets.
Our article regarding the Federal Budget announcement can be found here, and a discussion of the legislative changes can be found below.
Before the amendment, section 102AG(2)(a) of the Income Tax Assessment Act 1936 provided that income of a trust estate would be excepted income in relation to a beneficiary to the extent that the amount is assessable income of a trust estate that resulted from:
(a) a will, codicil or and order of the court that varied either of those; or
(b) an intestacy or an order that modified the application, in relation to the estate of a deceased person, of the law relating to the distribution of the estates of persons who die without a will.
The amendment, inserted as section 102AG(2AA) provides two additional requirements:
(a) The assessable income is derived by the trustee of the trust estate from property; and
(b) The property satisfies any of the following requirements:
(i) The property was transferred to the trustee of the trust estate to benefit the beneficiary from the estate of the deceased person, as a result of the will, codicil, intestacy or order of a court mentioned in (2)(a).
(ii) The property represents accumulations of income or capital from property that satisfies the requirements of (b)(i);
(iii) The property represents accumulations of income or capital from property that satisfies the requirement in (b)(ii), or (because of a previous operation of this subparagraph) the requirement in this subparagraph.
Working from home during COVID-19 - the shortcut method for calculating ‘office expenses’
Many of us have recently been directed work from home as part of the response to COVID-19.
In response, the ATO has announced a shortcut method, requiring minimal record keeping, for calculating deductible home office expenses. Broadly, the ATO will allow a deduction of 80 cents for each hour of work from home from 1 March to 30 June 2020 provided that an individual:
- is working from home to fulfil employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls; and
- has incurred additional running expenses as a result of working from home.
The shortcut method doesn’t require an individual to have a dedicated work area, such as a private study.
This is an important concession, as using any of the other methods which are available (ie the Fixed Rate Method or the Actual Cost Method) requires.
For anyone seeking to use the Fixed Rate Method or the Actual Cost Method, there are threshold questions which must be answered before claiming a deduction, including whether you have a dedicated work area.
McAteer and FCT [2020] AATA 1795 - Working from home, when can you claim deductions?
In this case, a taxpayer was partially successful in claiming deductions for occupancy expenses (eg mortgage payments, council rates and insurance) that related to his use of a study exclusively for work.
The taxpayer worked in an IT role at Westpac and, as part of his employment, was required 1 week out of every 4 to be on call 24/7. Effectively, the taxpayer was required by his employment contract to be able to work from his home when rostered on duty after hours.
To be able to claim a deduction for occupancy expenses the taxpayer needed to show that:
(a) the outgoing was incurred in gaining or producing assessable income as per the first limb section 8-1 of the Income Tax Assessment Act 1997 (1997 Act). The second limb didn’t apply as the taxpayer was an employee and therefore not carrying on a business ;
(b) that working from home was not simply as a matter of mere convenience; and
(c) that the area subject to the claim was a dedicated work area, and only available incidentally for domestic use.
The Tribunal accepted that the taxpayer’s study/lab was a dedicated workspace, and that use of the space incidentally as an entrance to the home did not rob it of this characteristic.
The Tribunal also found that during the 24/7 on call period it was not practical for the taxpayer to be located at his office, and it was an implicit requirement of his employment that he uses his home to store equipment so that he is able to perform his duties. Accordingly, it was found that being ready to work from home during the call period was not a mere convenience for the taxpayer.
However, the taxpayer was unsuccessful in his claim for occupancy expenses related to use of his family room and dining room. In this regard, the Tribunal noted that the taxpayer did not meet the onus of proof of showing that this space was dedicated exclusively to his work.
Treasury laws amendment (2020 Measures No 3) - Broadening and extending COVID-19 relief measures
The Treasury Laws Amendment (2020 Measures No 3) Act was enacted on 19 June 2020 and works to implement changes to extend the instant asset write off and broaden the cash flow boost payment.
Instant asset write off
The act provides the legislative basis for the 6 month extension of the instant asset write-off threshold until 31 December 2020 (previously announced by the Commonwealth Government on June 6). The extension means that eligible businesses, those with an aggregate turnover for the income year of less than $500m, can immediately deduct the cost of depreciating assets, provided they were purchased for less than $150,000 and are used or installed and ready for use prior to 31 December 2020.
Cash flow boost and personal services income
The breadth of the cash flow boost has been extended so that the legislation no longer draws a distinction between amounts paid as salary/wages, and amounts attributed to individuals under the personal services income provisions.
The result of this is that withholding obligations that are triggered in relation to personal services income are now treated the same as the withholding obligations for wages.
Contact
Andrew O’Bryan
Consultant
Andrew specialises in taxation law. He is a CPA Australia Fellow and Chairman of its Taxation Centre of Excellence.
Adam Dimac
Special Counsel
Adam is an experienced tax lawyer, advising on a range of matters, including Division 7A, CGT and corporate restructuring.
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