HCM NEWS. Welcome to the first issue of HCM NEWS. Re-characterisation of income from trading businesses

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1 APRIL 2017 Welcome to the first issue of Following the merger of our firm in late January we again take this opportunity to thank our clients and providers for the support shown since the recent merger. We will be moving our offices into Melbourne s CBD at the end of April and will forward relevant details to all clients and suppliers in due course. We will also be looking forward to welcoming you to a function in mid June, with invitations being forwarded in the coming weeks. The entire team has settled down after the merger and is collectively looking forward to our upcoming move. Changes to tax legislation continue unabated and many of these are covered off in this issue. Should further clarification be required on any points raised please contact your taxation / accounting services director or forward an to hcm@hallchadwickmelb.com.au In the coming months we will report in far more detail both the Prime Global senior partners conference which will be held in the USA, mid-june in Pasadena, California and the recent trip Peter Pryn and I undertook to India. Please enjoy this issue. David Lissauer. Re-characterisation of income from trading businesses The ATO has released Taxpayer Alert TA 2017/1 to say it is reviewing arrangements that try to fragment integrated trading businesses to re-characterise trading income as more favourably taxed passive income. The ATO is concerned with cases where a single business is divided in a contrived way into separate businesses. The business income expected to be subject to company tax is artificially diverted into a trust and, on distribution from the trust, that income is ultimately subject to no tax or to a lesser rate than the corporate rate of tax. The ATO explains that stapled structures are one mechanism being used in these arrangements, but the review will not be limited to arrangements involving stapled structures. Taxpayer Alert 2014/1 deals with similar arrangements where trusts mischaracterise property development receipts as concessionally taxed capital gains to obtain a lower tax rate. ATO priority on settling cases but not at any cost The ATO has advised that it places a high priority on resolving tax disputes early, including through reaching settlements where appropriate, but that it will not settle disputes at any cost. It says the sensible use of settlements is part of its commitment to earlier and more effective dispute resolution. In this regard, the ATO has advised that in , it settled 1,362 cases (31% more than in the previous year) and that the increased number of settlements can be attributed entirely to settlements finalised as part of Project DO IT (Disclose Offshore Income Today). The ATO s stated policy of placing a high priority on resolving disputes early, including through settlements where appropriate is something that should be kept in mind in any dispute with the Commissioner, whether large or small. A settlement may provide a great opportunity to finalise a difficult or long running dispute. 1

2 Depreciating assets: composite items Draft Taxation Ruling TR 2017/D1 sets out the Commissioner of Taxation s views on how to determine if an entire composite item is a depreciating asset or whether its component parts are separate depreciating assets. The draft ruling says that a composite item is an asset made up of a number of components that can exist separately. Whether one or more of the item s components can be considered separate depreciating assets is a question of fact and degree to be determined in the particular circumstances. For a component of a composite item to be considered a depreciating asset, the component must be separately identifible as having commercial and economic value. The draft ruling usefully lists the main principles to take into account when determining whether a composite item is a single depreciating asset or is made up of multiple depreciating assets. Tax risk management and governance review guide released The ATO has released a tax risk management and governance review guide to help businesses develop and test their governance and internal control frameworks, and demonstrate the effectiveness of their internal controls to reviewers and stakeholders. The guide sets out principles for board-level and managerial-level responsibilities, and gives examples of evidence that a business can provide to demonstrate the design and operational effectiveness of its control framework for tax risk. The guide was developed primarily for large and complex corporations, tax consolidated groups and foreign multinational corporations conducting business in Australia, but the ATO says the principles can be applied to a corporation of any size if tailored appropriately. Personal services income diverted to SMSFs: ATO extends offer ATO warning: research and development claims in building and construction industry under scrutiny The ATO and the Department of Industry, Innovation and Science have released Taxpayer Alert TA 2017/2 and TA 2017/3 as a warning to businesses that are not being careful enough in their claims or seeking to deliberately exploit the research and development (R&D) Tax Incentive program. The alerts relate to particular issues identified in the building and construction industry, where specifically excluded expenditure is being claimed as R&D expenses. The alerts provide clarification for a wide range of businesses who had been incorrectly claiming ordinary business activities against the R&D tax incentive. Since April 2016, the ATO has been reviewing arrangements where individuals divert personal services income (PSI) to a self managed super fund (SMSF). The arrangements, described in Taxpayer Alert TA 2016/6, involve individuals (typically SMSF members at or approaching retirement age) performing services for a client but not directly receiving consideration for the services. Instead, the client sends the consideration for the services to a company, trust or other non-individual entity. The ATO has previously asked taxpayers to help identify and resolve these issues before 31 January 2016, offering to remit the related penalties. That offer has now been extended to 30 April

3 Overtime meal expenses disallowed because no allowance received A taxpayer has failed in claiming deductions for overtime meal expenses before the Administrative Appeals Tribunal (AAT). The AAT denied his appeal because he was not paid an allowance under an industrial agreement. The AAT noted that whether overtime meal expenses are deductible according to the tax law depends on whether the taxpayer receives a food or drink allowance under an industrial instrument. The AAT agreed with the Commissioner of Taxation that the taxpayer had not received an allowance of this kind and, in fact, had not received any allowance at all. No deduction for carried-forward company losses The Administrative Appeals Tribunal (AAT) has ruled that a company was not entitled to deductions for carried-forward losses of over $25 million that it incurred in the 1990 to 1995 income years. The AAT found that the company did not satisfy the continuity of ownership and same business tests that applied in relation to the 1996 to 2003 income years, when it sought to recoup the losses. In relation to the continuity of ownership test, the AAT found that the interests the relevant shareholders held during the loss years were different from their interests recoupment years. The AAT noted that the taxpayer company was obligated to keep appropriate records, even though 25 years had passed since the first claimed loss year (1990). The Tribunal also found that the company had clearly not met the requirements of the same business test for the different years in question. This decision illustrates the need for companies to keep appropriate ownership records yearby-year to support any future carried-forward loss claims. Ride-sharing drivers must register for GST In a recent decision, the Federal Court has held that the UberX service supplied by Uber s drivers constitutes the supply of taxi travel for the purposes of GST. The ATO has now advised that people who work as drivers providing ride-sharing (or ride sourcing) services must: keep records; have an Australian Business Number (ABN); register for GST; pay GST on the full fare they receive from passengers; lodge activity statements; and include income from ride-sharing services in their tax returns. If you work as a ride-sharing driver, you are also entitled to claim income tax deductions and GST credits on expenses apportioned to the services you have supplied. You must register for GST if you earn any income by driving for a ride-sharing service. The usual $75,000 GST registration threshold does not apply for these activities. Taxation determination on deductions for bad debts: trust beneficiaries and UPEs In a new tax determination, the ATO states that a beneficiary is not entitled to a bad debt deduction for an amount of unpaid present entitlement (UPE) that the beneficiary purports to write off as a bad debt. It says this is because the amount of UPE is not included in the beneficiary s assessable income. Instead, the entitlement is used to determine how much net income of the trust is included in the beneficiary s assessable income. This means that the the debt amount cannot be included in the taxpayer s income in that year or in an earlier income year, which is a requirement for writing off a bad debt. 3

4 New ATO data-matching program: ride sourcing The ATO has announced a new data-matching program involving ride-sourcing providers. Under the program, the ATO will acquire data to identify individuals who may be engaged in providing ride-sourcing services during the and financial years. Details of all payments made to ride-sourcing providers from accounts held by a ride-sourcing facilitator will be requested from the facilitator s financial institution for the and financial years. The ATO estimates that up to 74,000 individuals (ride-sourcing drivers) offer, or have offered, the services. If you work as a driver for Uber or a similar ride-sourcing facilitator, the money you make is assessable income that needs to be included in your tax return. Please contact your accounting services / Tax Director who will be happy to assist with any queries you may have. Tax offset for spouse super contributions: changes from 1 July 2017 The ATO has reminded taxpayers that that the assessable income threshold for claiming a tax offset for contributions made to a spouse s eligible superannuation fund will increase to $40,000 from 1 July 2017 (the current threshold is $13,800). The current 18% tax offset of up to $540 will remain in place. However, a taxpayer will not be entitled to the tax offset when their spouse who receives the contribution has exceeded the non-concessional contributions cap for the relevant year or has a total superannuation balance equal to or more than the general transfer balance cap immediately before the start of the financial year when the contribution was made. The general transfer balance cap is $1.6 million for the year. The offset will still reduce for spouse incomes above $37,000 and completely phase out at incomes above $40,000. Intangible capital improvements made to a pre-cgt asset The ATO has issued Taxation Determination TD 2017/1. It provides that for the purposes of the separate asset rules in the Income Tax Assessment Act 1997 (ITAA 1997), some intangible capital improvements can be considered separate capital gains tax (CGT) assets from the pre-cgt asset to which the improvements are made, if the improvement cost base is more than the improvement threshold for the income year when CGT event happened, and it is more than 5% of the capital proceeds from the event. This determination updates CGT Determination No 5 to apply to the ITAA 1997 provisions, without changing the CGT determination s substance. Please contact your accounting services / Tax Director who will be happy to assist with any queries you may have. No deduction or capital loss for apparent guarantee liability The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the guarantee deed that put into question whether the trusts were genuinely subject to a guarantee obligation including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted. 4

5 Taxpayer denied deduction for work expenses of $60,000 The Administrative Appeals Tribunal (AAT) has confirmed that a mechanical engineer with a PhD qualification was not entitled to deductions for various work-related expenses totally approximately $60,000. The expense claims in question (for vehicle, selfeducation and other work expenses), were denied because the taxpayer was unable to establish the required connection between the outgoing amounts and the derivation of his assessable income as a mechanical engineer. Furthermore, in relation to a range of miscellaneous expenses (such as mobile phone and internet charges, professional membership fees, conference fees and depreciation), the AAT found that most of the deductions were not substantiated with sufficient (or any) evidence. The AAT did not exercise its discretion to allow these deductions on the basis of the nature and quality of any other evidence regarding the taxpayer s incurring the expenses. This case clearly shows the importance of properly substantiating any claims you make for work-related expense deductions. Overseas income not exempt from Australian income tax The Administrative Appeals Tribunal (AAT) has agreed with the ATO s decision that income a taxpayer earned when working for the United States Army was not exempt from Australian income tax. The taxpayer, who was a mechanic and electrician, played a critical role in plant construction in Afghanistan. While the project the taxpayer worked on met the legal definition of an eligible project, the AAT decided that the exemption he had claimed under section 23AF of the Income Tax Assessment Act 1936 did not apply because the project was not one that the Trade Minister had approved in writing, and there was no evidence that the Trade Minister considered it in the national interest. Taxation ruling on commercial website deductibility A new taxation ruling from the ATO sets out the tax deductibility of expenditure incurred in acquiring, developing, maintaining or modifying a commercial website for use in carrying on a business. Broadly, the ruling explains that acquiring or developing a commercial website for a new or existing business is considered to be a capital expense, and is therefore not deductible. On the other hand, maintaining a website, including remedying software faults, is generally a revenue expense, so may be deductible. Onus on taxpayers to show no fraud or evasion: Full Federal Court Several taxpayers have been unsuccessful in their appeals to the Full Federal Court in which they challenged tax assessments that dramatically increased their assessable income for certain income years. In each case, the Court confirmed that where the Commissioner of Taxation has issued an amended or default assessment out of time on the grounds of taxpayer fraud or evasion, the taxpayer bears the responsibility of proving that such fraud or evasion does not exist. 5

6 Disclaimer of trust interest: unsuccessful appeal A beneficiary of two trusts whose assessable income was increased from some $70,000 to some $13 million in light of her entitlement to distributions from the trusts has been unsuccessful in claiming on appeal that she had disclaimed her interests in the trusts. Instead, the AAT found that she could not argue she had disclaimed her interests in the distributions. This finding was on the basis that she did not bring up having made disclaimers when she originally objected to amended assessments that the Commissioner of Taxation issued in Additionally, in any event, the AAT found that the disclaimers were legally ineffective because of the significant period of time between the distributions being made (in 2006 and 2007) and the disclaimers being made (in 2015). Any attempt to disclaim an interest in a trust for tax purposes must be legally valid first and the key consideration is that there must not have been behaviour that indicates implied acceptance of the interest. In this case, the taxpayer s behaviour was problematic because she did not act until well after she received the distributions and they were assessed as part of her income. Super reforms: $1.6 million transfer balance cap and death benefit pensions Where a taxpayer has amounts remaining in superannuation when they die, their death creates a compulsory cashing requirement for the superannuation provider. This means the superannuation provider must cash the superannuation interests to the deceased person s beneficiaries as soon as possible. The ATO has released a Draft Law Companion Guideline to explain the treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap that will apply from 1 July The Draft Guideline provides that where a deceased member s superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit will arise in the dependant beneficiary s transfer balance account. The amount and timing of the transfer balance credit will depend on whether the recipient is a reversionary or non-reversionary beneficiary. To reduce an excess transfer balance, you may be able to fully or partially convert a death benefit or super income stream into a super lump sum. ATO targets restaurants and cafés, hair and beauty businesses in cash economy crackdown The ATO will visit more than 400 businesses across Perth and Canberra in April as part of a campaign to help small businesses stay on top of their tax affairs. The primary focus is on businesses operating in the cash and hidden economies. ATO officers will be visiting restaurants and cafés, hair and beauty and other small businesses in these cities to make sure their registration details are up to date. These businesses represent the greatest areas of risk and highest numbers of reports to the ATO from across the country, and the visits are part of the ATO s ongoing program of compliance work. 6

7 Alternative assessments not tentative: Federal Court The Federal Court has found that a company s tax assessments were not tentative or provisional, and therefore were valid. For the 2011 to 2014 income years, the Commissioner of Taxation had notified the taxpayer, which was the trustee of a discretionary trust, that it was liable to pay tax assessed in two different amounts calculated by two different methods. The Commissioner explained to the taxpayer in writing how the two assessments applied. The taxpayer argued that the assessments were tentative because, for each year, they imposed two separate and different income tax liabilities on its single trustee capacity. The Court denied this claim, agreeing with the ATO that a trustee s liability to pay income tax is of a representative character and the relevant tax law provisions allow for a trustee s liability to multiple assessments regarding different beneficiaries entitlements to a share of the net trust income. Accordingly, in effect the Court found that the primary and alternative assessments were comparable to assessments issued to two or more taxpayers in relation to the same income in the same income year, and were not liable to be set aside as tentative or provisional. ATO develops work-related expenses risk profiles The ATO has developed work-related expenses risk profiles to help it identify how work-related expense deduction amounts compare for similar taxpayers. The ATO said improvements in data analytics and modelling have allowed it to create a risk profile for tax agents practices based on comparing their clients work-related expenses claims with those made by similar taxpayers. The ATO has said it will share these risk profiles with some tax professionals where their clients claims appear higher than expected. The ATO s increasing capacity to monitor the often difficult issue of work-related expenses claims means taxpayers and tax professionals need to take care when preparing returns. GST on low-value imported goods A Bill introduced into Parliament in February proposes to make Australian goods and services tax (GST) payable on supplies of items worth less than A$1,000 (known as low value goods ) that consumers import into Australia with the assistance of the vendor who sells the items. For example, GST would apply when you buy items worth less than $1,000 online from an overseas store and the seller arranges to post them to you in Australia. Under the proposed measures, sellers, operators of electronic distribution platforms or redeliverers (such as parcel-forwarding services) would be responsible for paying GST on these types of transactions. The GST could also be imposed on the end consumer by reverse charge if they claim to be a business (so the overseas supplier charges no GST) but in fact use the goods for private purposes. If the Bill is passed, the measures would come into force on 1 July The ATO has also released a Draft Law Companion Guideline that discusses how to calculate the GST payable on a supply of low-value goods, the rules to prevent double taxation of goods and how the rules interact with other rules for supplies connected with Australia. 7

8 Administration penalties of 75% for failing to lodge FBT returns The AAT has confirmed that 75% administrative penalties were rightfully imposed on several companies for their failure to lodge FBT returns over a four-year period. The AAT found that the Commissioner of Taxation was obliged to impose a 75% administrative penalty because the FBT returns were not lodged, and that the safe harbour provisions did not apply to such an administrative penalty. The AAT also found that it was not appropriate to exercise its discretion to remit the penalties in part or whole under the circumstances. The AAT relied on the criteria in Practice Statement Law Administration PS LA 2014/4 in arriving at its decision. Taxpayer failed to prove that payments were loans In a recent case, the Full Federal Court has found that several taxpayer companies had not discharged the onus of proving that assessments the Commissioner of Taxation issued to them were excessive. The amended assessments took into account income of some $4 million that the Australian companies received from overseas sources. The taxpayers had claimed that the payments were loans. In allowing the Commissioner s appeal, the Court majority held that it would not be appropriate to find that the taxpayers had provided the required proof that the payments were genuine loans; in fact, they had made inconsistent or alternative arguments about the nature of the payments. Time extension to review objection decisions disallowed again! The Administrative Appeals Tribunal (AAT) has refused to allow a taxpayer extra time to apply for review of a decision made by the Commissioner of Taxation. The taxpayer had previously made the same application for an extension, seven years after the Commissioner s decision, but both the AAT and the Federal Court refused it. In this later case, the AAT found that the taxpayer s application should not be allowed because he had still not adequately explained why it took him seven years to ask for an extension and a decision review. This decision illustrates that a taxpayer can continue to apply to the AAT for extension of time to apply for review of the Commissioner s decision disallowing an objection, even after being previously rebuffed. The additional application must include new claims and the taxpayer s case must have merit. No deduction or capital loss for apparent guarantee liability The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the guarantee deed that put into question whether the trusts were genuinely subject to a guarantee obligation including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted. 8

9 Hall Chadwick Melbourne s new office fit-out As you are aware we are relocating to Melbourne s CBD next month (May 2017). These photos show the fit-out is well underway at our new premises at Level Collins Street. We look forward to welcoming you to our new offices. Harsh reminder from ASIC on new accounting standards ASIC has issued a reminder that three new accounting standards coming into effect over the next two years will have the greatest impact on financial reporting since the adoption of the International Financial Reporting Standards (IFRS). The three major accounting standards being introduced are AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases. The first two will apply from 1 January 2018 and the third will apply from 1 January 2019; however, early adoption is permitted. The three new standards will significantly affect the reporting of revenue, the values of financial instruments, loan loss provisions and the impact of lease arrangements. We remind directors and management of the importance of planning for the new standards and informing investors and other financial report users of the impact on reported results, ASIC commissioner John Price said. Given the extent of the changes to financial reporting, it is important to determine the extent of any impact now and to put in place implementation plans for these new standards. Public disclosure on the impact of the standards and timely implementation is important for investors and to retain market confidence. According to ASIC, the new standards will have the greatest impact on financial reporting since the IFRS were adopted in 2005, and for some companies the impact could be even more significant than was the case with the adoption of the IFRS. ASIC released an accompanying list of matters that preparers of financial reports should consider. These include required system changes, business impacts, impacts on compliance with financial requirements, disclosures required in financial reports prior to the effective dates of the standards, possible continuous disclosure obligations, and the impact on any fundraising or other transaction documents. Peter Pryn, Director 9

10 Hall Chadwick Melbourne Services Directory Accountancy Services Maintenance of accounting records. Financial statement preparation. Statutory financial statements. Provision of financial statements with variance to budget. Maintenance of detailed fixed asset registers. Audit Services Audit of all business entities. Audit of superannuation funds. Audit of solicitor & estate agent trust accounts. Audit of travel agents for IATA purposes. Management & internal control audits to review operations. GST review audits. Audits conforming to current Export Development Grant requirements (EDG). Sarbanes Oxley Compliance. Succession Arrangements & Planning Estate & succession planning. Co-operation with clients solicitors in preparation & updating of wills. Administration of deceased estates. Superannuation Advice For all superannuation matters including: Setting up self managed super funds. Transition to retirement matters. Pension funds. All financial planning advice about superannuation is provided through the SMSF Advisers Network Pty Ltd the Australian Financial Services Licence of the National Tax and Accountants Association Ltd. (NTAA). Back Office Support For local operations of international businesses. Bookkeeping and administrative functions. Advice / support for business structure and registrations. Payroll services. Insolvency & Business Recovery Pre-lending and security reviews Investigating accountants reports Workouts Formal appointments, including: o Receiverships o Voluntary Administrations o Agent for the Mortgagee in Possession o Bankruptcies and Personal Insolvency Agreements o Liquidations Forensic Accounting Review & investigation of businesses. Valuations. Matrimonial & business disputes. Quantification of loss. Due diligence. Business Management Services Our innovative services include: Business planning. Budgeting & cash flow projections. Development & regular monitoring of Key Performance Indicators (K.P.I s). Regular review of management information & analysis of variations to budget. Applications for finance. Valuations of businesses & companies. Corporate Secretarial Services Provision of shelf companies. Maintenance of company secretarial requirements. Preparation & filing of annual corporate documentation. Provision of Registered Office. Company search information. Registration of business & domain names. Taxation Advice & information in relation to changes in federal & state tax laws. Advice in relation to international tax. Complete taxation compliance service including the preparation & lodgement of returns for Income Tax, Fringe Benefits, Payroll Tax, Land Tax, GST, PAYG, WorkCover & other returns as required by federal & state law. Advice on tax implications of the purchase, sale or exchange of any assets. Review of contracts, business agreements & other proposals in terms of tax implications. Strategies Provision of management & consulting services to medium large business, both public & private across a wide variety of industry groups, including: Healthcare Retail Transport Real Estate Import Hospitality Financial Liability limited by a scheme approved under Professional Standards Legislation. S.L.A. Partners Pty Ltd ABN

11 Hall Chadwick Melbourne Directors David Fairfull Drew Townsend David Lissauer Robert Lissauer Mark Lipson David Ross John Christopoulos Peter Pryn Buck Xiao Craig de Vries Hall Chadwick Melbourne publishes HCM News, Newsletters, eupdates and bulletins as a service to our valued clients and trust these are of benefit to you. If you think this (or any of our publications) may be useful to others please provide their details to our office. Important: Certain articles in HCM News Report are provided by Thomson Reuters and other contributors as a service for clients of Hall Chadwick Melbourne. This is not advice. Clients should not act solely on the basis of the material contained in HCM News. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas. HCM News is issued as a helpful guide to clients and for their general information. S.L.A. Partners Pty Ltd ABN Liability limited by a scheme approved under Professional Standards Legislation. Hall Chadwick Melbourne Level St Kilda Road Melbourne VIC 3004 T: F: E: hcm@hallchadwickmelb.com.au W: Melbourne Insolvency Level Bourke Street Melbourne VIC 3000 Tel: melbourne@hallchadwick.com.au Please note, from 1st May 2017, both offices of Hall Chadwick in Melbourne will be located at the following address. Level Collins Street Melbourne VIC 3000 BOURKE ST WILLIAM ST 440 COLLINS ST MARKET ST QUEEN ST ELIZABETH ST SWANSTON ST ST KILDA RD RUSSELL ST Telephone numbers will remain the same. KING ST MELBOURNE SYDNEY PERTH BRISBANE DARWIN GOLD COAST PENRITH 11