Thinking | 4 November 2016
Talking Tax – Issue 56
Legislation and Government updates
Superannuation reform package - tranche 3 released
Public consultation is welcomed on the third tranche of exposure draft legislation and explanatory material for the superannuation reform package. This tranche proposes to:
- lower the annual non-concessional contributions cap to $100,000
- restrict eligibility to make non-concessional contributions to individuals with superannuation balances below $1.6 million.
The measures form part of the Government’s broader superannuation reform package originally announced in the 2016-17 Budget which aims to improve the sustainability and integrity of the superannuation system. Specifically, the goal of the measures is to ensure that superannuation is being used for its primary purpose of saving for retirement and not for tax minimisation. As such, this tranche of reforms introduces further reductions on the non-concessional annual caps and restricts their use to individuals with balances below the transfer balance caps.
For example, the new laws reduce the annual non-concessional contributions cap from six times the annual concessional contributions cap ($180,000) to four times ($100,000).
By restricting eligibility to make non-concessional contributions to individuals with superannuation balances below $1.6 million, the measures are intended to primarily affect individuals with high superannuation balances.
They apply from 1 July 2017.
Consultation paper on employee share schemes released
The Treasury has released a consultation paper relating to proposed measures to amend the Corporations Act 2001 to promote the use of employee share schemes by making them easier to facilitate and implement.
The proposal is part of the government’s National Innovation and Science Agenda and includes specific measures that would allow disclosure documents for certain start-up companies not to be made publicly available when they are lodged with ASIC.
The Treasury is calling for submissions which can be made until 7 December 2016.
Country by Country (CbC) reporting
Guidance on CbC reporting exemption released
A significant global entity (either an Australian based group, or Australian subsidiary that is part of a global group, with annual global income of A$1 billion or more) that has CbC reporting obligations may request an exemption from some or all of its obligations. The exemption may be granted for one or more of the CbC report, the master file and the local file.
Additional guidance has been published by the ATO to help taxpayers understand what information and documentation is necessary in making an exemption application.
Factors that will be relevant in granting an exemption include:
- whether you are subject to a risk review or audit (or similar)
- whether you have any international related party dealings or only low risk dealings
- whether the global parent entity is subject to such reporting in its country of tax residence
- whether the global parent has been granted an exemption and the reasons for the exemption.
If you would like to make an application for an exemption, the ATO recommends you should do so as soon as possible to allow time for the ATO to consider the application and make a decision.
5 more countries sign on for CbC reporting
Brazil, Guernsey, Jersey, the Isle of Man and Latvia have all signed the OECD’s Multilateral Competent Authority Agreement requiring them to participate in the automatic exchange of CbC reports. Practically, this means if you are part of a multinational group that is a significant global entity and there is a group member in one of these countries, you may need to file a CbC report providing information about the location of the economic activity within the group.
This brings the total to 49 countries who have signed up for CbC reporting and is another step forward for the OECD in its bid to combat multinational tax avoidance.
ATO releases Tax Determination on employee share schemes - TD 2016/17
The ATO released Taxation Determination TD 2016/17, titled “Income tax: in what circumstances does a contractual right, which is subject to the satisfaction of a condition, become a right to acquire a beneficial interest in a share for the purposes of subsection 83A-340(1) of the Income Tax Assessment Act 1997?”.
This Determination was previously issued as TD 2016/D3 and applies to schemes begun, or to be carried out, on or after 9 September 2015.
The Determination sets out the circumstances in which an ‘indeterminate right’ arises under subsection 83A-340(1) for the purposes of the employee share scheme provisions and provides examples where it may apply.
Subsection 83A-340(1) applies where:
- a right is acquired under a contract
- at the time of acquisition, the right is not a right to acquire a beneficial interest in a share
- at a later time, due to a condition in the contract being satisfied, the right becomes another right
- at that later time, the right is a right to acquire a beneficial interest in a share.
The subsection operates so that a beneficial interest in a right, that later becomes a right to acquire a definite number of shares, is treated as having always been a right to acquire those shares. This will qualify the rights as “employee share scheme interests”.
The Determination notes that in order to be a beneficial interest in a right, the interest must be a contractual right subject to a condition precedent found in the contract as opposed to a condition precedent to the formation of the contract. Further, the satisfaction of the condition precedent must directly cause the employee to have a right to acquire a share. It is not enough that there is a distant causal connection.
The effect of the subsection is that an employee share scheme right may be acquired at the time of the contract and not at the later time when the condition is met. Practically, a taxing point may arise to an employee earlier than expected.
Draft ATO guidelines on fixed trusts - PCG 2016/D16
The ATO has released a draft guideline on what factors the Commissioner will consider when deciding whether to exercise the discretion available to him under Income Tax Assessment Act 1936 to treat an entitlement under a fixed tryst (eg a unit trust) as being a fixed entitlement for the purpose of the trust loss provisions. The fixed entitlement concept is central to the trust loss provisions, being used to determine whether a trust is a fixed trust, whether it has maintained ownership and control, and for tracing and direct and indirect entitlements, for example, to franking credits.
A trust will be a fixed trust where the beneficiaries hold fixed entitlements to all of the income and capital of the trust.
Under the legislation, entitlements will be fixed where:
- the interest is vested and indefeasible
- the interest is capable of measurement
- the interest cannot be defeated by the actions of one or more persons or by the occurrence of subsequent events.
However, in practice it may be difficult for many trusts to satisfy the definition of ‘fixed trust’, so the Commissioner’s discretion is important.
In deciding whether to exercise his discretion, the Commissioner will consider the following factors:
- the circumstances in which the interest is capable of not vesting or being defeated
- the likelihood of the interest not vesting or being defeated
- the nature of the trust
- any other relevant factors, such as the purpose for which the discretion is being used (including whether it is used to obtain a tax benefit).
The guidelines also provide a list of examples and whether they will have a favourable, unfavourable or neutral impact on the Commissioner’s decision to exercise his discretion.
Once finalised, the guideline should give taxpayers greater certainty about when the Commissioner will exercise the discretion. For taxpayers who have elected to apply the AMIT regime, these guidelines will not be relevant as an AMIT is deemed to be a fixed trust for the purpose of the trust loss provisions. It may, however, be relevant in the period prior to an AMIT election being made.
Fringe benefit tax (FBT) safe harbour for fleets of cars
The ATO has developed a safe harbour for certain car fringe benefits which allows taxpayers to make use of more efficient tax calculations in certain situations. The safe harbour guidelines are specified in PCG 2016/10 ‘Fleet Cars: simplified approach for calculating car fringe benefits’.
The safe harbour applies to fleets of 20 or more ‘tool of trade’ cars and aims to simplify the approach when working out the business use percentage in relation to car fringe benefits. To utilise the fleet’s average business percentage, a fleet must have:
- 20 ‘tool of trade’ cars or more, which are not already part of salary packing arrangements and are below the applicable luxury car tax limit in the year acquired
- a mandatory logbook policy with valid logbooks for at least 75% of cars.
The simplified approach can be used for a period of five years in respect of the fleet, provided that there are no material changes in circumstances.
This should reduce the record keeping burden for businesses by allowing them to use the ‘average business use percentage’ when using the operating cost method. It will also give fleet owners more simplicity and certainty for their fringe benefits tax calculations.
The Commissioner commenced proceedings claiming penalties imposed on two directors (the taxpayers) for amounts of PAYG tax withheld by their company from payments made to its employees that were not paid to the respondent. The company is now in liquidation. The taxpayer challenged the ATO’s imposition of the penalties.
The trial judge dismissed the challenge on the basis that the directors’ defence had little chance of success. The taxpayers appealed to the Supreme Court to overturn the lower court decision and grant them an opportunity to plead their case at trial.
The PAYG provisions in the Taxation Administration Act 1953 (Cth) (Act) oblige companies to withhold certain amounts from various payments they make to employees. The Act provides that penalties can be imposed on directors where the directors fail to ensure that a company meets its PAYG obligations by paying the correct amount to the ATO by the due date. The Act also provides that penalties can be remitted where directors take all reasonable steps to ensure compliance with their obligations before the company goes into administration or is wound up.
Alternatively, a penalty may be remitted where there are no reasonable steps that could have been taken to ensure these things happened.
The directors in this case argued that the penalties should be remitted on the basis that they had taken all reasonable steps available to them to ensure compliance, but that ultimately there were very limited available steps.
The court held that in order to establish such a defence, the directors needed to show that each option had been addressed by taking reasonable steps to bring it about or declining to do anything on the basis that there were no such steps that could have been taken. The directors pointed to their efforts to refinance, increase their limits on their debtor factoring facilities and the eventual liquidation of their company.
The court found that while there was some question of the adequacy of evidence and efforts, there was enough to suggest that a proper enquiry is appropriate and held that the taxpayers should have the opportunity to present their defence.
This case is a good reminder to directors of their duties under the tax legislation which may result in penalties being imposed on them personally in respect of unpaid PAYG (and superannuation).
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