Thinking | 19 August 2020

Talking Tax – Issue 189

By Rachel O'Donnell, Todd Bromwich and Teresa-Fara De Dominicis

Further modifications to JobKeeper and TD 2020/D1 clarifies the application of the at-risk rule

On 7 August 2020 the Government announced further modifications to the JobKeeper scheme, which would make it accessible to more businesses and their employees. These changes are covered in detail in our article Jobkeeper 2.1.

Additionally, on 27 July 2020 the ATO released draft Taxation Determination TD 2020/D1 (Draft Determination). This Draft Determination clarifies whether a research and development entity will trigger the ‘at-risk rule’ as a consequence of receiving payments under the JobKeeper scheme.

Expenditure can only be claimed for the Research and Development (R&D) tax offset when the taxpayer can notionally deduct it under Division 355 of the Income Tax Assessment Act 1997 (1997 Act). 

The ‘at-risk rule’ in section 355-405 of the 1997 Act denies or reduces this notional deduction if the taxpayer or its associate(s) had received, or could reasonably be expected to receive, consideration:

  • as a direct or indirect result of expenditure being incurred; and
  • regardless of the results of the activities on which you incur the expenditure.

The table below summarises the Australian Taxation Office’s (ATO’s) view of the application of the at-risk rule to Jobkeeper payments received by R&D entities:

If you receive payments…Then…
For paid employees wholly engaged in R&D activities
  • the at-risk rule is triggered; and
  • taxpayer’s notional deduction is reduced by $1500, as they cannot notionally deduct the component of the employee’s wage that represents the $1500 JobKeeper payment.
  • For paid employees partially engaged in R&D activities
  • the at-risk rule is triggered; and
  • notional deduction is reduced by a portion of the JobKeeper payment in proportion with the employee’s activities that relate to R&D (for example, the proportion of the time the employee spends on R&D activities during that fortnight – if the employee spends 75% of their time on R&D activities, the notional deduction is reduced by $1125).
  • As a business with an ‘eligible business participant’
  • the at-risk rule is not triggered; and
  • no reduction in notional deduction.
  • As expenditure incurred in carrying out R&D activities that cannot be notionally deducted does not give rise to a tax offset under section 355-100 of the 1997 Act, no extra income tax is payable under the R&D clawback rules.

    Superannuation Guarantee Amnesty ends 7 September grab a chair before the music stops

    The Superannuation Guarantee Amnesty comes to an end on 7 September 2020, taking with it the generous concessions provided to those who voluntarily disclose superannuation guarantee shortfalls.

    Understandably, employers may be hesitant to dredge up issues that have not (yet) been raised by the ATO, particularly in the current economic climate. However, employers with historical non-compliance face a substantial risk of audit by the ATO.

    The amnesty will be followed by increased compliance activity from the ATO, aided by the wide roll-out of Single Touch Payroll and the ATO’s increased data matching and analysis activities (hint: this process has already begun!).

    For more details, click through to our article: 'The last days of Rome: super guarantee amnesty ends 7 September'.

    Remission of additional superannuation guarantee charge

    The ATO has released draft Law Administration Practice Statement PSLA 2020/D1 which provides draft guidelines to ATO officers for decisions regarding the remission of additional super guarantee charge imposed under Part 7 of the Superannuation Guarantee (Administration) Act 1992 (SGAA) (Part 7 penalties). Once finalised, PSLA 2020/D1 will apply from 8 September 2020, following the conclusion of the Superannuation Guarantee Amnesty.

    Part 7 penalties apply where an employer fails to lodge a superannuation guarantee statement by its lodgment due date.  These penalties are imposed at an amount equal to 200% of the employer’s super guarantee charge liability. However, the ATO has a general discretion to remit Part 7 penalties wholly or in part.

    PSLA 2020/D1 provides ATO officers with a four-step process that must be followed in determining whether to exercise that discretion:

    1. set a base penalty based on the employer’s attempt to comply with their obligations; 
    2. determine whether there is a penalty uplift for poor compliance history; 
    3. identify other mitigating facts and circumstances; and
    4. identify any exceptional circumstances that prevented lodgment of a superannuation guarantee statement prior to notice of ATO compliance action.

    Additionally, as noted in our article on the Superannuation Guarantee Amnesty, where the liabilities relate to pre-1 April 2018 quarters and were not voluntarily disclosed, the ATO is generally prohibited from remitting Part 7 penalties below 100%.

    NSW build-to-rent land tax and duty concessions

    The New South Wales Government recently announced a package of new tax concessions aimed at encouraging investment in NSW’s build-to-rent (BTR) sector.

    The State Revenue Legislation Amendment (COVID-19 Housing Response) Bill 2020 (Bill) proposes to amend the Duties Act 1997, the Land Tax Act 1956 and the Land Tax Management Act 1956.

    The proposed amendments will provide for the following concessions:

    • For the purposes of assessing land tax, the taxable value of land for certain BTR properties constructed on or after 1 July 2020 will be reduced by 50%.
    • Australian corporations will be entitled to claim a refund of land tax surcharges imposed from the 2021 land tax year.
    • Surcharge purchaser duty and surcharge land tax will not apply to land on which BTR properties are or will be constructed.

    The Bill also amends the Payroll Tax Act 2007 to provide that certain wages paid or payable to employees funded by the Commonwealth government’s ‘Aged Care Retention Grant Opportunity’ program are exempt from payroll tax in NSW.

    Land Tax concessions 

    The Bill provides two land tax concessions for BTR properties.  Once claimed, these concessions will continue to apply until the end of the 2040 land tax year, provided the property remains eligible.

    50% reduction

    Land tax is generally imposed at a rate of up to 2% on the taxable value of the land held by an entity. An additional 2% land tax surcharge is imposed on residential land owned by ‘foreign persons’.

    For the purposes of calculating land tax, the taxable value of eligible BTR land will be reduced by 50%. In order to be eligible for this reduction:

    • a building must be situated on the land;
    • construction of the building must have commenced on or after 1 July 2020;
    • an application for the reduction must be made by the owner; and
    • the Chief Commissioner of State Revenue must be satisfied the BTR building is used and occupied in accordance with the Treasurer’s BTR guidelines, which are yet to be released (Guidelines).

    The landholder can only make an application for the 50% reduction once the BTR property has been constructed on the land (in other words, the reduction will not be available at any time during construction or prior to that time).

    The Guidelines will be released in due course, and – in accordance with the bill – include circumstances in which a building is taken to be a BTR property, such as:

    • the planning or development standards that must be complied with;
    • the minimum lease conditions that must be offered to tenants;
    • the minimum scale of a building to qualify; and
    • the nature of the ownership and management of the BTR property.

    The Bill includes a claw-back of the land tax concession if the land is subdivided, or ownership of the land is otherwise divided, within 15 years after the first year in which the concession was claimed. 

    Refund of surcharge land tax

    ‘Australian corporations’ will be entitled to claim a refund of part or all of the 2% land tax surcharge imposed from the 2021 land tax year if the Chief Commissioner is satisfied that:

    • they are entitled to the 50% reduction in the taxable value of the relevant land; and
    • the BTR building was constructed by the corporation or a related body corporate.

    An application for a refund must be made within 12 months of the landholder becoming entitled to the refund and within 10 years of the relevant land tax year.

    The Chief Commissioner may also provide an exemption from the surcharge if the Chief Commissioner is of the opinion that the landholder is likely to become entitled to this concession.

    As with the 50% taxable value reduction, a claw-back of the surcharge applies if the land is subdivided, or ownership of the land is otherwise divided, within 15 years of the landholder surcharge refund/exemption first applying to the taxpayer.

    Stamp duty surcharge concession

    Surcharge purchaser duty of 8% will generally apply to acquisitions of residential land in New South Wales by ‘foreign persons’. 

    Under the amendments proposed by the Bill, a refund of surcharge purchaser duty may be claimed in relation to contracts entered into on or after 1 July 2020 if the Chief Commissioner is satisfied that:

    • the acquirer is an ‘Australian corporation’;
    • the corporation or a related body corporate has constructed a BTR property on the land; and
    • the corporation has become entitled to the 50% reduction in the taxable value (for land tax purposes, as outlined above) of the relevant land.

    The Chief Commissioner may also provide an exemption from the surcharge if the Chief Commissioner is of the opinion that the acquirer is likely to become entitled to this refund (of the full amount of surcharge purchaser duty). As with the Land Tax amendments, an application for a refund must be made within 12 months of the landholder becoming entitled to the refund and within 10 years of the relevant transfer of land.

    Context is everything: ATO Decision Impact Statement released for SWPD v FCoT

    In SWPD v Federal Commissioner of Taxation [2020] AATA 555, the Administrative Appeals Tribunal (AAT) held that the Taxpayer carried on a forestry business on its land despite having no harvest and no sales in 24 years!

    The ATO has now issued a Decision Impact Statement for this decision. It contains no ground-breaking new statements, but stressed that the facts of the case are extreme and would not ordinarily result in a finding that a taxpayer is carrying on a business

    The AAT decision

    In 1992 the Taxpayer bought an almost 350 hectare property for $180,000 from a forestry operation and sold it in 2016 for $2.75 million. The land was predominantly covered by native forest and has been used by the previous owner for some selective logging and replanting.

    During the period of ownership, the Taxpayer’s main activities were to maintain roads and fences, clear fallen logs, eradicate gorse weed and establish a new access road. There was no new planting of trees and no harvests carried out.

    The Taxpayer also allowed his neighbour to graze his cattle on the property for about $2000 per year for as long as there was sufficient rains to support it.

    The AAT ultimately found in favour of the taxpayer, finding that the taxpayer was carrying on a business throughout the period he owned the property, despite the fact there was not a single harvest of trees and therefore no sales during the 24-year ownership period. Accordingly, the Taxpayer was able to apply the small business CGT concessions to the capital gain realised on the sale of the land.

    Relevantly the AAT noted the following:

    • The Taxpayer was able to demonstrate that he had a profit-making purpose when he entered into the transaction. He genuinely believed he could make a significant profit on an eventual harvest of the trees, but this was stymied by prolonged drought.
    • The Taxpayer’s conduct, including the limited amount of work undertaken, was entirely consistent with accepted and common practice in the forestry industry - the forestry operation was in its ‘sit and watch the trees grow’ phase.

    The Decision Impact Statement

    The ATO accepts the outcome and that it was open to the AAT to come to this decision on the facts, but makes the point of stressing that the facts of the case are extreme. Ordinarily, where a taxpayer’s activities are so limited over a prolonged period of time, it is highly unlikely that they will be found to be carrying on a business.

    The Statement notes that the ATO will continue to carefully examine cases where there is little evidence of relevant activities being carried on by the taxpayer. The absence of appropriate record keeping is also a matter of concern in this regard.

    Appeal update: the Eichmann saga continues

    In what will be welcome news to many tax practitioners, the Taxpayer in FCT v Eichmann [2019] FCA 2155 has now lodged an appeal with the Full Federal Court.  Read on for a summary of the Federal Court decision.

    In 2019, the Federal Court held that a property used to store materials, tools and other equipment was not an active asset used in the Taxpayer’s business, and accordingly the small business CGT concessions could not apply.

    In coming to this decision, the Court held among other things:

    • The asset does not need to be an integral part of the business, but it is not enough for the asset to be merely used in some way by a taxpayer that carries on a business.
    • The use of the asset must have a ‘direct functional relevance’ to the carrying on of the business.
    • The whole (or predominantly the whole) of the asset must be used in carrying on the business.

    The Court determined that using the property to store materials, tools and other equipment did not satisfy these requirements; the services were provided on worksites and the use of the property for these purposes was merely preparatory to the Taxpayer undertaking these activities.

    Critics of the decision (and they are many) have argued that the Eichmann decision unduly narrowed the active asset test and imposed an additional hurdle to accessing the small business CGT concessions. The appeal will be closely followed - watch this space!

    The new Environmental Tax Ruling the key changes points

    Subsection 40-755(1) of the 1997 Act provides an immediate deduction for expenditure incurred for the sole or dominant purpose of carrying on ‘environmental protection activities’. Broadly, environmental protection activities in this context include preventing, fighting or remedying pollution caused by your income-generating activities, or treating, cleaning up, removing or storing waste resulting from those activities.

    On 15 July 2020, the ATO released Tax Ruling TR 2020/02 (Ruling) which provides its views on:

    • the meaning of the terms ‘pollution’ and ‘waste’ and when a taxpayer’s activities will constitute ‘environmental protection activities’;
    • when expenditure is incurred for the 'sole or dominant purpose' of carrying on those activities;
    • limits on the amount that may be deducted; and
    • assessability of recouped expenditure incurred in carrying on environmental protection activities.

    Taxpayers that incur expenditure in preventing, fighting or remedying pollution (and their advisors) should consider this new Ruling.

    Contact

    Rachel O’Donnell

    Rachel has over 15 years of experience advising on tax law and specialises in stamp duties, land tax and...

    Todd Bromwich

    Todd is a member of Hall & Wilcox’s Tax team, practising predominantly in taxation advisory and disputes, with...

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